Philadelphia Newspapers, LLC

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re: : Chapter 11
PHILADELPHIA NEWSPAPERS, LLC, :
ET AL.,
: Case No. 09-11204 (JKF)
Debtors. Jointly Administered
________________________________ :
MEMORANDUM OPINION
SUPPORTING APRIL 20, 2009 RULING,
WHICH DENIED DEBTORS’ APPLICATION TO EMPLOY
ELLIOTT GREENLEAF & SIEDZIKOWSKI, P.C
WITHOUT PREJUDICE
BY: JEAN K. FITZSIMON
United States Bankruptcy Judge
The Debtors seek to employ Elliott Greenleaf & Siedzikowski, P.C. (“Elliott
Greenleaf” or the “Firm”) as special counsel to investigate certain pre-petition
activity and potential causes of action therefrom. Objections were filed to the
Application to Employ (the “Application”) by the Official Committee of Unsecured
Creditors (the “Committee”) and jointly by the Steering Group of Prepetition
Secured Lenders and Citizens Bank of Pennsylvania, as Agent for the1
Prepetition Secured Lenders (collectively, the “Secured Lenders”). A hearing was
held on this matter on April 20, 2009 (the “April Hearing”). At the conclusion of
The Steering Group m em bers are: Angelo Gordon & Co., L.P.; CIT Syndicated Loan Group;
1
Eaton Vance Managem ent; GECC; McDonnell Investm ent m anagem ent; and W ells Fargo. See Joint
Objection of the Steering Group of Prepetition Secured Lenders and Citizens Bank of Pennsylvania, as
agent for the Prepetition Secured Lenders, to Application (Docket entry no. 378) at 2 n.1.
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the April Hearing, the Court, for reasons stated on the record, denied the
Application without prejudice. The Debtors appealed that ruling on April 30,
2009. This Memorandum Opinion and Order memorializes the April 20th ruling
and further expounds on the Court’s rationale for denying the Debtors’ Application
without prejudice. The discussion below represents the Court’s findings of fact2
and conclusions of law.3
I. BACKGROUND
The Bankruptcy and Application to Employ
The Debtors, who own and operate various print and on-line sources of media,
including the Philadelphia Inquirer and the Philadelphia Daily News, filed for Chapter 11
bankruptcy protection on February 22, 2009 (“Petition Date”). On March 2, 2009, the4
Committee was appointed by the United States Trustee. Docket entry no. 88. On5
March 16, 2009, the Court approved the Debtors’ applications to employ Dilworth
Paxson LLP and Proskauer Rose LLP as co-counsel for the Debtors. See Docket
entries nos. 204 and 206.
Local Rule 8001-1 (b) provides: Opinion in Support of Order. The bankruptcy judge whose order
2
is the subject of an appeal m ay, within 15 days of the filing of the notice of appeal, file a written opinion in
support of the order or a written supplem ental opinion that am plifies any earlier written opinion or recorded
oral bench ruling or opinion. L.B.R. 8001-1(b)(2005).
W hile it is, of course, a m atter for the district court to determ ine, the Court notes that
3
determ ination of a request to appoint special counsel generally is not considered a final, appealable order.
See e.g. In re Devlieg, Inc., 56 F.3d 32 (7th Cir. 1995); In re W estwood Shake & Shingle, Inc., 971 F.2d
387 (9th Cir. 1992); In re Nucor, Inc., 118 B.R. 786,788 (D. Col. 1990) (collecting cases).
Eight cases are being jointly adm inistered under case num ber 09-11204.
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Eckert Seam ans Cherin & Mellott, LLC and O’Melveny & Myers LLP are co-counsel for the
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Com m ittee. Docket entries nos. 328 and 329.
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Debtor Philadelphia Newspapers, LLC, is the borrower under the Prepetition
Credit Agreement with the Prepetition Agent and the Prepetition Senior Lenders. See
Docket entry no. 353 at 2. Approximately $295 million is owed under the Prepetition
Credit Agreement. Id. Debtors Philadelphia Direct, LLC; Philly Online, LLC; PMH
Holdings; Broad Street Publishing, LLC; Philadelphia Media, LLC; and Broad Street
Video, LLC, guaranteed the obligations under the Prepetition Credit Agreement. Id.
On April 8, 2009, the Debtors filed the Application seeking “an order pursuant to6
section 327(e) of the Bankruptcy Code authorizing [the Debtors] to employ and retain
Elliott Greenleaf as their special counsel as of the Petition Date to perform specific non-
bankruptcy related legal services that they will require during the course of the Chapter
11 cases.” Application (Docket entry no. 323) at ¶ 6. The Application proposes that7
the Firm render the following specific, limited services:
1. Investigation of certain incident(s) involving the
unauthorized recording of confidential pre-petition
meeting(s) between the Debtors and their senior secured
lenders;
2. Advice regarding potential causes of action to be pursued
in connection with such unauthorized recording; and
3. Pursuit of any non-bankruptcy litigation or other legal
action in connection with such unauthorized recording(s) and
in connection with the possible improper use and disclosure
of such unauthorized recording(s) to others.
The Debtors previously filed an Application to Em ploy the Firm on February 27, 2007 (see
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docket entry no. 86), but withdrew that Application on March 5, 2009. See docket entry no. 108.
The Court notes that the Application requests nunc pro tunc approval to the Petition Date, but
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fails to dem onstrate any cause therefor. As the Application was denied, this issue was not addressed in
the April Ruling. No evidence to support such a request was presented at the April Hearing.
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Id. ¶ 9. Exhibit A to the Application is a Declaration by Mark J. Schwemler, a
shareholder at Elliott Greenleaf, attesting to, among other things, the proposition that
the Firm has no interest adverse to the Debtors. Docket entry no. 323-1.
Responses to the Application
Three responses were filed to the Application. The Committee objects to the
Application, suggesting that “granting the Application is likely to further inflame
passions and incur substantial costs,” and therefore that a “dispassionate third
party” such as the Committee is in the best position to perform the investigation.
Committee Brief, Docket entry no. 374 at 2. The Committee argues that the
statute of limitations is not about to run on the potential action of the Debtors and
that pursuing the matter at this time will detract the Debtors attention from the
central purpose of their Chapter 11 case. Id. at 5. Further, the Committee
asserts that because it is already investigating the validity of the Secured
Lenders’ liens pursuant to the current cash collateral stipulation, and because
investigating the alleged unauthorized recordings falls squarely within the
Committee’s duties pursuant to section 1103(c) of the Code, money should not
be wasted on employing an additional law firm. The United States Trustee also
responded to the Application, stating that while she has no comment on the need
for an investigation, she would request some additional information and a budget
if the Elliott Greenleaf firm were to be retained. Docket entry no. 376.
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Lastly, the Secured Lenders submitted a joint objection to the Application.
This objection argues that the Debtors have failed to satisfy the legal standard set
forth by § 327(e), which requires that the Debtors make a showing that
employment of special counsel is in the best interests of the estate. The Secured
Lenders further argue: (1) that the investigation is a “fishing expedition” by the
Debtors; and (2) that the potential damages will not exceed $10,000 under the
Pennsylvania statute and applicable caselaw. Docket entry no. 378 at 10, 15-17.
The Debtors’ Reply
On April 17, 2009, the Debtors submitted an Omnibus Reply Brief in
support of their Application. The Reply Brief argues, among other things, that
negotiations between the Debtors and the Secured Lenders broke down after the
recording incident that is the proposed subject of the Firm’s investigation. Docket
entry no. 383 at 4. The Reply further asserts that the retention of Elliott Greenleaf
is for a special purpose and that the Debtors “seek . . . to obtain and discover
further facts which may have a significant impact on the outcome of these
bankruptcy cases, whether resulting in monetary recovery or equitable
subordination.” Docket entry no. 383 at 8-9.
In support of the Application, the Debtors submit (attached to the Reply
Brief) a proposed draft complaint (the “Draft Complaint”) against CIT Syndicated
Loan Group, Vincent DeVito and “John Does” (“other members of the Steering
Group”). Docket entry no. 383-1 at 4. The Draft Complaint contains the following
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causes of action: (1) Count I: (v. Defendants CIT and DeVito) violation of
Pennsylvania’s W iretapping and Electronic Surveillance Control Act (18 Pa.C.S.
§§ 5701 et seq.) (seeking statutory, actual, and punitive damages in an
unspecified amount); (2) Count II: (v. Defendants CIT and DeVito) Violation of the
Federal Electronic Communications Privacy Act (18 U.S.C. §§ 2510, et seq.)
(seeking statutory, actual, and punitive damages in an unspecified amount);
(3) Count III: (v. all Defendants) Tortious Interference with Prospective
Contractual Relations (seeking “all damages, including for Plaintiffs’ inability to
restructure their debt in a more orderly, efficient and cost-effective manner” and
punitive damages); (4) Count IV: (does not specify which Defendants) Conspiracy
(seeking “damages caused” in an unspecified amount, plus punitive damages);
and (5) Count V: (does not specify which Defendants) Request for Equitable
Relief (seeks subordination of all of Defendants’ claims). Docket entry no. 383-1.
The April 20th Hearing
At the April Hearing, Brian Tierney, the Chief Executive Officer of
Philadelphia Newspapers, LLC, testified in support of the Debtors’ Application.
Mr. Tierney first described his own background, the acquisition of the
Philadelphia Newspapers, and the financial troubles of the company. See
Transcript of the April 20, 2009 Hearing (Docket entry no. 419) (hereinafter “Tr.”)
at 6-15. Mr. Tierney then discussed briefly the fact that in 2008 the Debtors, due
mostly to a precipitous decline in advertizing revenue, defaulted on their bank
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debt. Tr. at 15-16. As a consequence of the default, the Debtors and the lenders
had a series of discussions last fall (in late 2008) regarding the possibility of the
lenders “putt[ing] in the liquidity that the business needs.” Tr. at 17. According to
Mr. Tierney, these meetings were confidential in nature. Tr. at 19.
At one such meeting, on November 17, 2008 between the Debtors and
their counsel and the senior lenders and their counsel, the following incident (the8
“Taping Incident,” as described by Mr. Tierney) took place. Approximately two
hours and 15 minutes into the meeting, upon getting up and returning to the
meeting table, Mr. Tierney noticed that Mr. DeVito, a representative of CIT
Financial (one of the lenders from the Steering Group of senior lenders), had
what appeared to be a digital recording device with a red light on at the edge of
his open computer. Tr. at 20. Mr. Tierney told Mr. DeVito that what he was doing
is illegal in Pennsylvania. Tr. at 21. Mr. Kassner (counsel for Citizens Bank),
who was sitting next to Mr. DeVito, told Mr. DeVito to turn the device off. Id.
Mr. DeVito did so. Id.
Shortly following this incident, Mr. David Neier, then one of Mr. Tierney’s
lawyers, expressed concerns regarding the incident to Mr. Fred Hodara (counsel
Mr. Tierney testified that those in attendance at the Novem ber 17, 2008 m eeting included
8
Mr. Huffard from the Blackstone Group, Bruce Shearer from Citizens Bank, Mr. Kassner (who represents
Citizens Bank), “Angelo, Gordon represented by Bradley, Patelli, CIT represented by Vincent DeVito . . . a
fellow from . . . Eaton Vance, a fellow . . . from McDonnell . . . I believe W ells Fargo Foothill was by
phone . . . our representative from Jeffries,” and him self, Richard Thayer, Scott Baker, and Mark Thom as
on behalf of the Debtors. Tr. at 18-19.
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for the Steering Group of lenders). Tr. at 22-23; Exhibit D-1. As a result of their9
conversation, an (undated) letter was soon emailed to Mr. Tierney from the Chief
Counsel of CIT. See Exhibit D-2. This letter from the CIT Group states that the
tape made on November 17, 2008, by Mr. DeVito “has been erased without
having made any copies or other duplications thereof.” Id. The letter further
“confirms that the CIT . . . Group has not made any other recordings of meetings,
calls or other communications . . . [and] will not record any other meetings calls or
other communications of any kind. . . .” Id.
Also submitted as relevant to the question of whether Mr. DeVito ever
taped meetings before or will ever tape them again is a deposition of Bruce
Shearer of Citizens Bank that was taken in connection to the Debtor-in-10
Possession (“DIP”) financing issue which the Senior Lenders and Debtors are
negotiating. The relevance and meaning of Mr. Shearer’s testimony was11
debated at the April Hearing. In relevant portions, Mr. Shearer said the following
regarding Mr. DeVito’s statements and actions at the November 17 meeting and
whether Mr. DeVito regularly records meetings:
Q: Tell me what happened after Mr. Tierney pointed out
there was a tape recorder on the Table.
Exhibits D1-D3 were adm itted into evidence without objection at the conclusion of the hearing.
9
Mr. Shearer’s deposition was adm itted into evidence as Exhibit D-3.
10
The next hearing on the DIP loan is scheduled for June 25, 2009.
11
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A: It was turned off.
* * *
Q: What did DeVito say?
A: He said he usually taped -- or he liked to participate
in the discussion in meetings as opposed to writing
notes, so he could refer back to the tape, and he
apologized and turned the tape recorder off.
Q: Did you say he usually taped meetings?
A: He made it appear that it was a practice of his.
Q: Did he say whether he taped any other meetings with
the debtor?
A: No, sir.
* * *
Q: In other meetings that you’ve attended, have you
observed Mr. DeVito recording the meetings?
A: No, sir.
Q: Have you ever listened to a tape that Mr. DeVito
made of one of the meetings or a recording?
A: No, sir.
* * *
Q: Have you ever heard Mr. DeVito discuss with the
bank things that he has had recorded in the past?
A: No, sir.
Q: Did you know before the meeting that Mr. DeVito was
going to record the meeting?
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A: No, sir.
Q: After the meeting was there any discussion among the
banks about the consequences of recording the meeting?
A: No, sir.
* * *
Q: It just happened, and then you just moved on and
forgot about it?
* * *
A: Correct.
Exhibit D-3, pgs. 17-20. The Debtors rely on the above to establish that further
investigation regarding other recording incidents is called for. The Secured
Lenders argue that Mr. Shearer’s interpretation of Mr. DeVito’s conversation with
him indicates only that he thought this was a practice of Mr. DeVito’s and not that
Mr. DeVito said that it was. More importantly, Mr. Shearer’s statement reflects
his memory of Mr. DeVito’s statements at the November 17 meeting, yet
Mr. Tierney did not testify that Mr. DeVito said anything; he testified only that
Mr. DeVito turned the recorder off. Tr. at 21.
Mr. Tierney also testified regarding what he considers to be Elliott
Greenleaf’s particular advantages, including its expertise in this area of the law
and reasonable billing rates. Tr. at 39-40. However, when the Committee’s
counsel cross-examined Mr. Tierney and asked whether he knew of “any reason
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the Committee or its professionals would be unable or incompetent to conduct”
the investigation into the taping incident, Mr. Tierney answered “I don’t.” Tr. at
57. Mr. Tierney went on to explain that while he is sure that Eckert Seamans –
one of the law firms representing the Committee - is competent (“a wonderful
firm”), that he fears “the issue of conflict, potential conflict” with regard to the
Committee’s counsel and otherwise prefers to go with Elliott Greenleaf, as he
knows and trusts that firm. Tr. 57-60.
II. STANDARD ON APPOINTMENT OF SPECIAL COUNSEL
PURSUANT TO 11 U.S.C § 327(e)
Section 327 of the Code outlines a debtor’s rights with regard to
employment of professionals. Under section 327(a), a debtor may retain general
counsel who is “disinterested.” Section 327(e) of the Code – under which the
Debtors here seek to employ Elliott Greenleaf – creates a limited exception to the
“disinterested” test under § 327(a). Pursuant to § 327(e):
[a debtor] with the court's approval, may employ, for a
specified special purpose, other than to represent the
trustee in conducting the case, an attorney that has
represented the debtor, if in the best interest of the
estate, and if such attorney does not represent or hold
any interest adverse to the debtor or to the estate with
respect to the matter on which such attorney is to be
employed.
11 U.S.C.§ 327(e). This section “will most likely be used when the debtor is
involved in complex litigation, and changing attorneys in the middle of the case
after the bankruptcy case has commenced would be detrimental to the progress
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of that other litigation.” 3 Collier on Bankruptcy (15 Ed. Rev. 2006) ¶ 327.04[9][d];
see also In re J.S. II, L.L.C., 371 B.R. 311,318 (Bankr. N.D. Ill. 2007). In
examining whether to appoint special counsel, a court “may look at the totality of
the circumstances, including the role of counsel prior to the filing and the actual
services performed . . .” Id.; see also In re Engel, 124 F.3d 567, 575 (3rd Cir.
1997) (determination of special counsel application is “well within the discretion of
the court”).
Under section 327(e), an attorney or law firm is properly employed as
special counsel once it is demonstrated that each of the following criteria is met:
(1) employment may only be authorized for a “specified, special purpose” other
than “conducting the case.” The special purpose must be unrelated to the
debtor’s reorganization and must be “explicitly defined or described in the
application seeking approval of the attorney’s employment;” (2) the firm holds no
adverse interest to the debtor; and (3) the employment of the firm is in the best
interest of the estate. In re Running Horse, L.L.C., 371 B.R. 446, 451 (Bankr.
E.D. Ca. 2007); see also In re Duque, 48 B.R. 965, 971 (D.C. Fla. 1984)
(outlining a similar four-part test that includes the factor that an attorney or firm
must have previously represented the debtor). It is the debtor’s burden to show
that the proposed employment of special counsel is proper. In re Running Horse,
L.L.C., 371 B.R. 446, 451 (Bankr. E.D. Ca. 2007) (citing In re Big Mac Marine,
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Inc., 326 B.R. 150, 154 (8th Cir. BAP)). W hile the Application fails to satisfy the
first element, the Debtors sufficiently clarified the purpose at the April Hearing.
They also established that the Firm does not hold an adverse interest to the
Debtors.
W ith regard to element three above – what exactly constitutes the “best
interest of the estate,” the Third Circuit has stated: “[t]he attorney's employment
must be in the best interest of the estate, which means property of estate is
threatened and the need for services is real. Employment cannot be based on
some ‘hypothetical or speculative benefit.’” In re Engel, 124 F.3d 567, 575 (3rd
Cir. 1997) (citing In re Duque, 48 B.R. 965 (D.C. Fla. 1984)) (additional citations
omitted). See also In re J.S. II, L.L.C., 371 B.R. 311, 320 (Bankr. N.D. Ill. 2007).
It should be noted that Engel is not directly a case concerning the appointment of
special counsel. Rather, the issue on appeal in Engel was whether appointment
of special counsel under § 327 of the Code necessarily means that the counsel
has a right to be paid from estate funds under § 330. The Third Circuit held that it
does not. 124 F.3d at 571. However, in analyzing this question, the Court had
the opportunity to discuss whether special counsel had benefitted the estate by
performing services to the debtor. 124 F.3d 575. W hile it is true that an analysis
after the appointment of special counsel (and when considering whether to award
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fees), as in Engel, is not precisely the same question as the analysis prior to the
appointment of counsel (the question posed here), there is no indication that the
definition of “best interest of the estate” put forth by the Third Circuit in the Engel
decision should not apply in both circumstances.12
The Debtors cite the case of In re Covenant Financial Group of America,
Inc., 243 B.R. 450 (Bankr. N.D. Ala. 1999), in alleged distinction to Engel. The
Debtors assert that Covenant Financial is an example of a case in which a court
“permitted retention of special counsel even when the ultimate financial recovery
or benefit to the estate was unknown, but the prospect of such a benefit
warranted approving retention.” Debtors’ Brief, docket no. 383, at 11. In
Covenant Financial, a legal malpractice lawyer was permitted to be retained as
special counsel where there was “no reasonable expectation that the trustee
[would] be able to find another attorney to prosecute the lawsuit, and certainly
. . . not . . . one willing to work on a contingency fee basis.” Id. at 454. And while
it may be true, as the Debtors point out, that the ultimate financial benefit to the
estate of the lawsuit was unknown, the Covenant court points out, in analyzing
the best interest of the estate, that “the lawsuit . . . is the only asset of the
The Debtors’ attem pt to distinguish Engel as a case sim ply addressing the question of whether
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“bankruptcy estate m oneys m ay be used to pay for crim inal counsel for the debtor” is unavailing. Debtors’
Brief at 11. W hile Engel does prim arily deal with the question of whether a crim inal special counsel was
entitled to paym ent from the bankruptcy estate, the Debtors present no reason to distinguish the law set
forth and relied on in Engel m erely because the facts are distinguishable from the case at bar.
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bankruptcy estate from which a dividend to unsecured creditors may be realized.”
Id. at 457 n.9. Therefore, in Covenant Financial a determination was made that
the need for special counsel was not hypothetical or speculative. Rather, under
the circumstances, appointment of special counsel was in the best interest of the
estate.
III. APPLICATION OF THE STANDARD
TO THE FACTS OF THIS CASE
The Debtors have not met their burden of showing that retaining the
services of the Firm currently is in the best interest of the estate. 11 U.S.C.
§ 327(e). The Third Circuit tells us that “best interest of the estate” means that
there is a true, current need for the counsel and a benefit to be derived from the
retention at the time sought. The Debtors simply have not demonstrated that this
is the case here. W hile the Court certainly is troubled by the fact that one of the
members of the Steering Group apparently recorded a meeting with the Debtors
without permission (and, as discussed below, agrees with the Debtors that the
incident warrants further investigation in connection with the claim asserted by
that party in this case), it must be remembered that, for all the paper filed and in-
court testimony taken, all that has been produced is evidence that the single
Taping Incident occurred. This does not rise to a showing that there is a current13
The Court has carefully reviewed the Shearer Deposition, on which the Debtors heavily rely to
13
(continued...)
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need for counsel to investigate non-bankruptcy claims arising from this incident or
even suggest any likely benefit from their pursuit in light of CIT’s unequivocal
denial of any other recordings.
Though the Taping Incident merits investigation from the standpoint of a
potential impact on the bankruptcy claim of CIT, so far the Debtors’ mere
assertion of potential general and broad non-bankruptcy claims (such as the
tortious interference with contract count named in the Draft Complaint) do not
establish even a potential benefit to the estate in pursuing those causes of action
at this time. The Debtors specifically propose to employ Elliott Greenleaf to
handle the “[p]ursuit of . . . non-bankruptcy litigation” in connection with the
Taping Incident. Application at 4. In other words, investigation of the Taping
Incident for purposes of pursuing non-bankruptcy claims does not now warrant
full-time, separate special counsel. The Debtors have not proven that a
significant and meaningful threat exists to the estate from the Taping Incident or
that it is in the best interest of the estate to deploy time, money, and attention in
this way. There is no evidence presented that these claims are time-sensitive. In
the absence of consent from the Secured Lenders or an order from the court
(...continued)13
argue that Mr. DeVito has a practice of recording m eetings. However, the deposition, is clear that
Mr. Shearer has no knowledge of Mr. DeVito recording other m eetings with the Debtors, of possessing
any additional recordings, or of using the recording m ade. Also, as noted above, Mr. Tierney did not
testify that Mr. DeVito said “he usually taped” m eetings at the Novem ber 17 m eeting or, indeed, that
Mr. DeVito said anything after he inquired about the recorder. Exhibit D-3.
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authorizing such use of the Secured Lenders’ cash collateral or some other
source of funds, moreover, the Debtors have no resources to fund such an
investigation; the Committee, on the other hand, is authorized to use the Secured
Lenders’ Cash Collateral to conduct its duties.
An additional reason that the Court believes the Committee’s handling the
investigation at this time is more appropriate is so the Secured Lenders and the
Debtors can focus on the more important business of the DIP financing and use
of cash collateral. Currently, those issues, much more central to the success of
this Chapter 11 bankruptcy case than the retention of special counsel, are
unresolved. The Debtors and Secured Lenders must focus on moving this case
forward and providing liquidity to these cash-strapped Debtors. This is in the best
interest of the estate. Indeed, in the absence of financing, there will be no
Debtors to pursue these claims.
At this point, the Court finds that the Debtors have not met their burden
with respect to § 327(e). Therefore, the Application is denied. However, because
the Court is not convinced that an investigation into the Taping Incident by special
counsel will never be called for, the Application is denied without prejudice. If, at
a later point, and probably based on facts established by the Committee, as it has
agreed to share the results of its investigation with the Debtors, the Debtors are
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able to make a showing sufficient to satisfy the requirements in the Third Circuit
for retaining special counsel, the Debtors may present the Application again.
IV. AUTHORITY OF THE COMMITTEE
OF UNSECURED CREDITORS TO INVESTIGATE
It is possible (though the Court makes no prejudgment) that the Taping
Incident could lead to bankruptcy causes of action against CIT. Because of this
possibility, at the April Hearing the Court asked the Committee to investigate the
Taping Incident. Tr. at 96. Pursuant to 11 U.S.C. § 1103(c)(2), included in the
duties of Creditors Committee is the duty to “investigate the acts, conduct, assets,
liabilities, and financial condition of the debtor . . . and any other matter relevant
to the case or to the formulation of a plan.” The investigation of the Taping
Incident falls squarely within the parameters of that provision. Further, the
Committee’s counsel has been given the right to challenge the validity, priority,
and extent of the Secured Lenders’ liens (and a sum of money has been carved
out for this investigation), a right the Debtors have waived. See Sixth Interim
Cash Collateral Order, docket entry no. 443 at 3. Determining whether and to
what extent a creditor’s claim should be subordinated and what may be setoff
against such claim is work that the Committee can readily do at the same time.
Four factors remain relevant to the Court’s decision to ask the Committee
to pursue the investigation. First, the Committee offered to take up this task. See
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Committee’s Objection, docket entry no. 374. Second, the Debtor does not per
se have an objection to the Committee investigating the Taping Incident; “the
Debtors have no objection to the Committee evaluating and investigating any
aspect of the Recording Incident,” and have vowed to cooperate with the
Committee. Debtors’ Reply Brief, docket entry no. 383 at 12; Tr. at 95. Third, the
Court does not doubt that the Committee’s counsel is competent to conduct a
thorough and fair investigation into this matter, an investigation which will
ultimately shed light on the question of whether further claims – perhaps the non-
bankruptcy claims the Debtors seek to pursue – potentially have merit. Fourth,
no evidence has been presented that the statute of limitations is in danger of
running with regard to the causes of actions the Debtors seek to pursue. See
e.g. Bristow v. Clevenger, 80 F.Supp. 2d 421, 428 (M.D. Pa. 2000) (citing two
year statute of limitations for 19 Pa. § 5725).
Although the Debtors, as mentioned, do not object to the Committee
conducting an investigation of its own, they do object to the Committee
conducting an investigation instead of Elliott Greenleaf. The Debtors appear to
have two objections to the appointment of the Committee to conduct this
investigation, neither of which has merit. First, while mention of this issue was
not made in their brief or by the Debtors’ counsel at the April Hearing, Mr. Tierney
indicated at the April Hearing that he objects to the Committee’s counsel’s
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investigation into the Taping Incident due to a potential conflict of interest. Tr. at14
57-59. The Court raises this issue only to put it to rest; no conflict of interest
exists among the Committee, Committee counsel, and the Debtors on this
issue.15
In fact, the interests of these two parties are actually in line here, namely
fully and completely to investigate this incident, to determine whether further
action is called for, and, in the end, to recover as much money for the estate as
possible. The Committee and the Debtors each would benefit by subordinating or
reducing the debt of a secured creditor. When, as here, an “identity of interests”
exists there is no conflict and retention – or appointment to conduct an
investigation in this case – is proper. In re AroChem Corp., 176 F.3d 610, 627
(2nd Cir. 1999). See also In re Buffalo Coal Co., 2008 W L 1925152 (Bankr. W .
Va. Apr. 30, 2008) (appointing former counsel for the Committee of Unsecured
Creditors as special counsel to pursue causes of action against one of the former
creditors on the Committee in case converted from Chapter 11 to Chapter 7 and
holding that no conflict or appearance of impropriety existed); see also 11 U.S.C.
The Debtors indicate that this is an issue on appeal. See docket entry no. 444.
14
Upon careful review of Mr. Tierney’s testim ony on this point, it is apparent that Mr. Tierney is
15
concerned about a conflict of interest due to the fact that he m istakenly believes that counsel for the
Com m ittee will som ehow be representing the Debtors in the investigation of the Taping Incident. Tr. 57-
60. It is the Com m ittee, however, on whose behalf counsel will conduct the investigation. The Com m ittee
has agreed to share the results of its investigation with the Debtors, which can draw their own legal
conclusions therefrom .
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§ 327(c) (“a person is not disqualified for employment . . . solely because of such
person’s employment by or representation of a creditor, unless there is objection
by another creditor or the United States trustee, in which case the court shall
disapprove such employment if there is an actual conflict of interest”) (emphasis
added). Here, no objection by a creditor and no actual conflict have been
presented.
The Debtors’ second objection to the Court’s allowing the Committee to
investigate the Taping Incident is that “because any claims arising from the
Recording Incident belong to the Debtors, the Debtors’ assessment and
consideration of any such claims must be protected by privileged communications
with counsel.” Debtors’ Reply Brief, Docket entry no. 383 at 12. The Debtors,
however, do not even explain, much less demonstrate, nor can the Court fathom,
precisely how the Committee’s investigation of the Taping Incident will jeopardize
the Debtors’ privileged communications with their counsel. The Committee has
not been asked to pursue the legal ramifications of the Taping Incident. Nor will
such an investigation into facts threaten in any way the Debtors’ ownership of any
legal claims arising from the investigation. W hen the Committee shares the
results of its investigation with the Debtors, Debtors and their counsel will be free
to confer confidentially and draw their own legal conclusions. Thus, this objection
by the Debtors is without merit.
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V. CONCLUSION
In exercising its discretion in reviewing employment applications, the court
should ultimately consider “the protection of the interests of the bankruptcy estate
and its creditors, and the efficient, expeditious, and economical resolution of the
bankruptcy proceeding.” In re Computer Learning Centers, Inc., 272 B.R. 897,
903 (Bankr. E.D. Va. 2001). See also In re AroChem Corp., 176 F.3d 610, 621
(2nd Cir. 1999). Here, such consideration points to a denial, without prejudice, of
the Application to Employ Elliott Greenleaf & Siedzikowski, P.C. At this time, the
Debtors have failed to show that employment of Elliott Greenleaf is in the best
interest of the estate. It is possible that investigation of the underlying Taping
Incident by the Committee of Unsecured Creditors will yield additional information
that may warrant a different result upon the renewal of the Debtors’ Application.
However, at this time, the protection of the interests of this bankruptcy estate call
for the assets, attention, and time of the Debtors and Secured Lenders to be
spent on financing and plan formulation.
Dated: May 15, 2009. ______________________________
JEAN K. FITZSIMON
United States Bankruptcy Judge
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