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Judge Gross Denies Motion to Disqualify Defendants’ Lawyers Based on Prior Representation of the Debtor

By Charlene D. Davis

On June 12, 2015,  the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an order and opinion denying a motion (the “Motion”) by Charles A. Stanziale, Jr., as Chapter 7 Trustee (the “Trustee”) of Golden Guernsey Dairy, LLC (the Debtor”) to disqualify the law firm of Clark Hill PLC (the “Firm”) from representing defendants MILK072011, LLC (“MILK”) and Andrew Nikou (together with MILK the “ MILK Defendants”) in an adversary proceeding brought by the  Trustee. Charles A. Stanziale, Jr., in his capacity as Chapter 7 Trustee of Golden Guernsey Dairy, LLC v. MILK072011 et al  Adv. Pro. No. 14-50953(KG).  The Motion had sought disqualification based on the Firm’s prior representation of the Debtor, which the Trustee maintained violated Model Rules of Professional Responsibility 1.7 and 1.9.  In denying the Motion, the Bankruptcy Court found 1) that Rule 1.7, which governs concurrent conflicts of interest, did not apply because the Firm’s representation of the MILK Defendants in the adversary proceeding was not concurrent with its prior representation of the Debtor and 2) that Rule 1.9(a), which restricts a lawyer’s ability to represent another person in a matter substantially related to a client’s matter, did not apply because the matters were not substantially related.

Prior to January 8, 2013, (the “Petition Date”) the Debtor was acquired by a private equity firm, OpenGate Capital (“OpenGate”).   OpenGate formed MILK to act as the sole member of the Debtor.  Mr. Nikou is affiliated with OpenGate, is the manager of MILK and was the manager of the Debtor.  On December 26, 2012, OpenGate, through MILK, directed the Debtor to cease operations and file a voluntary petition under Chapter 7 of the Bankruptcy Code.  On November 4, 2014, the Trustee commenced the adversary proceeding against the Defendants alleging that they breached their fiduciary duties to the Debtor and its creditors by 1) closing in a manner that caused the Debtor to violate Wisconsin’s Worker Adjustment and Retraining Act (the “WARN Act”) and 2) fraudulently transferring funds to the Internal Revenue Service.  The Firm appeared on behalf of the MILK Defendants and moved to dismiss the complaint.  The Trustee opposed dismissal and filed the Motion seeking to disqualify it because the Firm had represented the Debtor prior to the Petition Date.

On May 27, 2015, the Court heard argument and accepted 23 documents into evidence. The documents disclosed that the Firm had represented the Debtor on a number of matters prior to the Petition Date but not following it.  The Firm had billed the Debtor for some of the services and not others.  Based on the evidence and argument, the Court found that the Firm had advised the Debtor on a range of issues but none that were relevant to the causes of action in the adversary proceeding with one exception.  On January 3, 2013, the Firm had sent an email to the Debtor’s president and a partner at OpenGate outlining issues related to potential WARN Act liability but not providing any advice about what action the Debtor should or should not take.

The Court, noting that motions to disqualify are generally disfavored, easily concluded that Rule 1.7 was not a basis for disqualification because it applies to “concurrent” representations and the Firm was not currently representing both the Debtor and the Defendants.  The Court also concluded that Rule 1.9 was not a basis for disqualification because the Firm’s former representation of the Debtor was not substantially related to the Firm’s current representation of the Defendants.  The Court specifically determined that the Firm’s Warn Act email merely “provided information and limited insight” on an issue affecting both OpenGate and the Debtor, who were not adverse to one another, and did not pick sides with respect to the issues raised in the Trustee’s complaint.  In addition the Court found that the Debtor had no expectation that the Warn Act information was confidential since the email had been sent to both the Debtor and OpenGate.

A copy of the order and opinion is available here.

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