Douglas F Vaughan

1 Over a dozen self represented creditors who are
noteholders filed objections to these employment applications.
The Court had reviewed all the objections and discussed them at
the preliminary hearing that the Court conducted on these
applications on April 5, 2010 (minutes – doc 175). 	The Court
finds that the objections raised by the parties that appeared at
the final hearing sufficiently represent the objections raised by
the noteholders, almost none of whom appeared at either hearing.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
DOUGLAS F. VAUGHAN,
Debtor. 	No. 11-10-10763 SA
MEMORANDUM OPINION IN SUPPORT OF
ORDER APPROVING IN PART APPLICATION OF DEBTOR IN POSSESSION
FOR EMPLOYMENT OF GORENCE & OLIVEROS, P.C.
AND OF SAUL EWING, LLP AS SPECIAL COUNSEL
Debtor’s Application to Employ and Compensate Robert Gorence
and Gorence & Oliveros, PC as Special Counsel (doc 24) and
Debtor’s Application to Employ and Compensate Charles N. Curlett,
Jr. and Saul Ewing, LLP as Special Counsel (doc 25), together
with the objections to both those applications, came before the
Court for a final hearing on April 21, 2010. 	The Court heard
presentations from self represented movant Douglas F. Vaughan the
Debtor in Possession and from objecting parties the United States
Trustee Office (Ronald E. Andazola), the Official Committee of
Noteholders (George M. Moore), BBVA Compass Bank (Samuel I.
Roybal), Bank of Oklahoma (Michelle K. Ostrye) and the Official
Committee of Noteholders in the companion case of The Vaughan
Company, Realtors No. 10-10759 (William F. Davis). 1 	The Court
also heard from Christopher Bauman, representing Bob Turner whose
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2 The Court makes no decision in this opinion on whether the
remains of the $200,000 check constitute property of the estate.
Both Special Counsel made clear that they have no intention of
doing anything with those funds other than holding them until a
further order of this Court.
3 The practice in this District is to permit counsel and
other professionals to begin representation of the estate upon
the filing of an employment application, with the understanding
that if the employment is subsequently not permitted by the
Court, no compensation will be permitted.
Page 2 of 	13
$200,000 check provided the funding for the prepetition
representation of Mr. Vaughan and the remains of which,
approximately $162,000, were proposed by Debtor to fund Special
Counsel for postpetition work. 2 	In addition, Mr. Gorence
attended the hearing for himself and his firm (“Gorence”), as did
Mr. Curlett (by telephone) for himself and his firm (“Curlett”).
The Court has also reviewed the papers filed by Debtor and all
objecting parties, as well as the docket and selected papers and
orders from Securities and Exchange Commission v. Vaughan et al.,
Civ. No. 10-00263 MCA/WPL, United States District Court for the
District of New Mexico (“SEC Case”). 	The Court finds good cause
to grant the Applications, but, given the developments described
below, only for the purpose of allowing the applicants to
conclude their representations and file fee applications, if they
wish to do so. 3
Debtor sought to employ both counsel to represent him and
the estate in connection with the investigations being conducted
by the SEC and the New Mexico Securities Division and to defend
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4 The Court notes that both applications were filed on March
2, 2010, slightly over a week after the date of the filing of the
petition on February 22, 2010. 	The standard rule, long
established in the case law, is that postpetition employment by
the estate can be retroactively permitted, but only as far back
as the date of the filing of the employment application. 	See
Land v. First Nat’l Bank of Alamosa (In re Land), 943 F.2d 1265,
1267-68 (10 th Cir. 1991)(“[N]unc pro tunc approval is only
appropriate in the most extraordinary circumstances.”); In re
Potter, 377 B.R. 305, 308 (Bankr. D. N.M. 2007)(“It is not
inappropriate to approve the employment effective as of the date
of the filing of the Application to Employ. 	See In re Bartmann,
320 B.R. 725, 735 n. 8 (Bankr. N.D. Okla. 2004) (noting that,
‘[g]enerally, approval of employment of professionals is granted
as of the date the application was filed, rather than the date
(continued...)
Page 3 of 	13
against the SEC Case. 	The applications were filed pursuant to
section 327(e), which provides as follows:
The trustee, 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.
By the time of the preliminary hearing Curlett, with the
approval of the Debtor, no longer sought to be employed for any
further work, but only to be able to file a fee application for
the work done on the petition date and for a short period
thereafter. 	Debtor’s Reply to Objections to Debtor’s Application
to Employ and Compensate Charles N. Curlett, Jr. and Saul Ewing,
LLP as Special Counsel and Debtor’s Application to Employ and
Compensate Robert Gorence and Gorence and Oliveros, PC as Special
Counsel (doc 136), at 2. 4 	Similarly, Gorence has now moved in
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4(...continued)
the professional first rendered services to the debtor ...’)”);
In re Melton, 353 B.R. 901, 906 (Bankr. D. Idaho 2006)(Approving
employment of debtor’s attorney from date application was filed,
not from petition date.) 	In consequence, there may well be even
less incentive for special counsel to bother with filing fee
applications, thereby mooting the brouhaha occasioned by the
filing of these applications.
5 The reasons given were that Mr. Vaughan currently could
not afford to compensate Gorence and that there was a “high
improbability” of being compensated from the estate. 	Debtor
probably should have filed some sort of amendment to the Gorence
application to provide formal notice in the bankruptcy case of
the changed circumstances, but the Court can make this ruling
without that.
Page 4 of 	13
the SEC Case to withdraw from the representation of Mr. Vaughan.
Motion for Leave to Withdraw as Counsel (doc 21) and Amended
Motion for Leave to Withdraw as Counsel (doc 22), both filed
April 22, 2010. 5
Many of the objections recite that there cannot be any
benefit to the estate from these employments, and therefore there
is no point in approving them. 	The United States Trustee argues
that the duties proposed for the special counsel duplicate or
consist of that the primary counsel for the chapter 11 debtor
should do, and therefore special counsel should be subject to the
stricter requirements of section 327(a) with its
disinterestedness requirement, or should not be employed at all.
Bank of Oklahoma further argues that there is a per se rule
against the employments, citing In re Tashof, 33 B.R. 225 (Bankr.
D. Md. 1983).
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6 The Court makes this observation notwithstanding the work
of counsel for the debtor in possession in the companion case of
In re The Vaughan Company, Realtors, Inc., No. 10-10759, who
negotiated with the United States Security and Exchange
Commission to free up assets for that estate.
Page 5 of 	13
Taking the United States Trustee’s particular objection
first, the Court notes that dealing with an SEC inquiry, even if
it does involve potentially making assets available to the
estate, is certainly not within the routine purview of chapter 11
debtor in possession representations, at least in this district. 6
Thus that argument must be overruled. 	In re French, 139 B.R.
485, 489 (Bankr. D. S.D. 1992) (“In this case, providing a
criminal defense is, in fact, for a purpose other than ‘to
represent the trustee in conducting the case’; therefore, the
first requirement of section 327(e) is met.”).
On the more general question of benefit to the estate,
raised by a majority of objectors, whether a professional’s
services benefit the bankruptcy estate is the threshold inquiry
that must be made before a consideration of the reasonableness of
the services. 	Rubner & Kutner v. U.S. Trustee (In re Lederman
Enterprises, Inc.), 997 F.2d 1321, 1323 (10 th Cir. 1993). 	Thus
ordinarily services rendered to the debtor for his personal
benefit will not benefit the estate, and so would not be
compensable from the estate. 	Lewis v. Fitzgerald, 295 F.2d 877,
878-79 (10 th Cir. 1961), cert. denied 369 U.S. 828 (1962)
(decided under prior law):
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7 The divisive issues among the panel were whether the law
firm applying for compensation, a criminal defense firm hired by
the debtor to obtain his release from prison, had adequate
warning that it might not get paid, and whether the employment
(continued...)
Page 6 of 	13
Under plain terms of the statute only one attorney’s
fee may be allowed as compensation for services
rendered to the bankrupt. 	And it is to compensate for
professional services rendered in connection with the
preservation of the estate. 	The granting or denial of
a discharge is personal to the bankrupt. 	It has
nothing to do with the preservation of the estate. 	And
therefore professional services of an attorney in
representing the bankrupt in resisting objections to
the granting of a discharge are not services which are
compensable out the bankrupt estate.
(Citation omitted.) 	Accord, In re Epstein, 39 B.R. 938 (Bankr.
D. N.M. 1984).
The critical factor in making the decision on compensation
therefore is benefit to the estate, so that if it is clear from
the outset that practically speaking there can be no benefit to
the estate, the Court ought not to permit the employment. 	On the
other hand, if it is possible that special counsel might benefit
(or might have benefitted) the estate, it should not rule out the
employment but rather allow special counsel to perform the
services and then apply for compensation, with the decision on
compensation made at the time of the fee application rather than
earlier on at the employment stage. 	This is what the bankruptcy
court did in Ferrara & Hantman v. Alvarez (In re Engel), 124 F.3d
567 (3 rd Cir. 1997), a decision upheld by a (divided) Third
Circuit panel. 7
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7(...continued)
order by its terms implied at least some payment. 	Neither of
these issues arises in the current circumstances of this case.
Page 7 of 	13
The facts in Tashof certainly bear a close resemblance to
the facts of this case. 	In that case, as here, the debtor in
possession applied to retain a securities law firm as special
counsel to represent the debtor in connection with an SEC
investigation. 	The court ruled that the estate had no interest
per se in whether debtor faced criminal charges, that special
counsel would result only in extra expense and in any event no
benefit for the estate, and there was nothing special counsel
could do to help administer the estate. 	Therefore the court was
compelled to deny the employment application. 	The Tashof court’s
ruling is instructive about that court’s thinking and the facts
of that case:
[I]n this case Mr. Tashof and not the estate is being
protected in the SEC proceeding. 	In this liquidating
plan, the estate per se has no interest in whether or
not Mr. Tashof faces criminal charges. 	Whether the SEC
prosecutes Mr. Tashof or whether he may engage in
further activities in the securities industry could not
matter less to the unsecured creditors. 	The only thing
that the employment of special counsel could produce
for the unsecured creditors is additional expense.
Debtors' counsel urges that employment of SEC counsel
is necessary in order to take the debtor's mind off the
threatened prosecution and to permit him to devote all
of his energies to turning the property around and
producing a return for the investors. 	This same
argument could be made if the debtor were charged with
arson. 	In considering all the equities, the court does
not find that the best interests of the estate would be
served by burdening it with the expense of special
counsel. 	Nor, can the court discern, on the status of
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Page 8 of 	13
the record at this time, any duties of the
debtor-in-possession that would be assisted by the
employment of special counsel. 	Therefore, the court
does not see the fairness in affording administrative
priority to the future charges of special counsel hired
to assist Mr. Tashof in his role as the target of an
SEC investigation.
33 B.R. at 228-29. 	Other cases take a similar if not exactly
identical approach to the question: In re Duque, 48 B.R. 965
(S.D. Fla. 1984) (reversing bankruptcy court decision to permit
criminal defense counsel to be paid from the estate); Official
Committee of Disputed Litigation Creditors v. McDonald
Investments, Inc., 42 B.R. 981 (N.D. Tex. 1984) (same, and also
forbidding use of estate funds for bail for debtor); In re United
Church of the Ministers of God, 84 B.R. 50 (Bankr. E.D. Penn.
1988) (debtor not permitted use of estate funds in connection
with federal investigation and potential defense of criminal
charges arising out of prebankruptcy activities); In re French,
139 B.R. 485 (same).
In this case, on the other hand, the Court cannot
categorically rule out the possibility that there might have been
some benefit to the estate. 	See Duque, 48 B.R. at 975 (“[T]his
Court cannot say there may never arise circumstances in which
special criminal counsel may be necessary....”). 	For example,
counsel for the Debtor in Possession in the companion case of In
re The Vaughan Company, Realtors, Inc., No. 10-10759, negotiated
with the United States Security and Exchange Commission to obtain
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8 “[T]he asset freeze described in this paragraph does not
apply to the following Debtor in Possession accounts opened by
[The Vaughan Company, Realtors, Inc.] at Bank First following the
filing of its Chapter 11 bankruptcy petition in February 2010
using funds not derived from investor proceeds raised in the
scheme alleged in the Complaint: Accounts ... (operating), ...
(payroll) and ... (tax).”
9 In the course of the hearing Bank of Oklahoma insisted on
an evidentiary hearing on the issue of what assets that had been
frozen that might be available for the estate. 	The Court denied
that request; the time to examine that issue will be if, and only
if, a fee application is filed. 	At that time the parties can
focus specifically on what assets or other benefits special
counsel may have obtained for the estate.
Page 9 of 	13
a freeing up of three checking accounts for the company. 	See SEC
Case, Order for Preliminary Injunction, Asset Freeze, and Other
Equitable Relief, filed April 15, 2010, decretal paragraph VI(A),
at 7. 8 	Doc 19. 	So while it appears likely that there has been
no benefit to the Douglas F. Vaughan estate, the Court does not
have a sufficient evidentiary predicate to make that decision at
this time. 	This factor is a crucial difference from the Tashof
situation, where apparently the court was able to say
categorically there could be and would be no benefit to the
estate. 	And in any event, per se rules in decisions such as
these unnecessarily restrict a court from considering the many
varying circumstances which may require a more flexible approach.
The Court therefore should not preclude Gorence or Curlett from
at least attempting to demonstrate benefit to the estate. 9
Consistent with the Engel case, the Court cautions special
counsel that it is entirely possible, if not likely, that no
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10 Of course, this warning is coming after both special
counsel have already stated that they will be withdrawing from
the representation.
Page 10 of 	13
compensation will be awarded. 10 	Should counsel decide to file a
fee application, they must comply with the fee application
requirements of the United States Trustee’s office. 	And should
the Court award compensation, it will at that time determine the
hourly rate at which special counsel are allowed to bill the
estate.
For the foregoing reasons, the Court will enter an order
granting the applications to act as special counsel, effective as
of the date of the filing of the applications on March 2, 2010,
in order to permit them to file fee applications for postpetition
services if they wish to do so.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	April 28, 2010
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Page 11 of 	13
Copies to:
Douglas F Vaughan
PO Box 70009
Albuquerque, NM 87197
Charles N. Curlett, Jr.
500 East Pratt Street
Baltimore, MD 21202-3133
Robert Gorence
201 12th Street NW
Albuquerque, NM 87102
United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
Susan Vandiver
PO Box 36112
Albuquerque, NM 87176
George M Moore
Moore, Berkson & Gandarilla,
P.C.
PO Box 7459
Albuquerque, NM 87194
William F. Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
Chris W Pierce
Hunt & Davis, P.C.
P.O. Box 30088
Albuquerque, NM 87190-0088
David T Thuma
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Gail Gottlieb
Sutin, Thayer & Browne
PO Box 1945
Albuquerque, NM 87103-1945
Michelle Ostrye
PO Box 1945
Albuquerque, NM 87103-1945
William L Lutz
PO Drawer 1837
Las Cruces, NM 88004-1837
Robert Greathead Sloan
Robert G. Sloan, PC
1300 Central Ave SW
Albuquerque, NM 87102-2805
Erika Poindexter
707 Broadway Blvd NE Ste 202
Albuquerque, NM 87102-4207
J Kerwin Hollowwa
PO Box 1307
Albuquerque, NM 87103-1307
Erik B Thunberg
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Allen Richard Smith
Smith & Payne, P.C.
PO Box 2100
Los Lunas, NM 87031
Walter L Reardon, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Jennie D Behles
PO Box 7070
Albuquerque, NM 87194-7070
Ross B Perkal
708 Marquette NW
Albuquerque, NM 87102-2035
F Vaughn Thomas
PO Box 21580
Albuquerque, NM 87154-1580
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Page 12 of 	13
Deron B Knoner
PO Box AA
Albuquerque, NM 87103
W. Spencer Reid
PO Box AA
Albuquerque, NM 87103
John A Bannerman
2201 San Pedro NE Bldg #2 Ste
207
Albuquerque, NM 87110-4129
William R Brummett
113 6th St NW Ste E
Albuquerque, NM 87102-3103
Robert J Muehlenweg
Rammelkamp, Muehlenweg &
Cordova, P.A.
316 Osuna Rd NE Unit 201
Albuquerque, NM 87107
Michael Wile
Michael Wile PC
2001 Mountain Rd NW
Albuquerque, NM 87104-1948
Douglas A Baker
Atkinson, Thal & Baker PC
201 Third St NW, Ste 1850
Albuquerque, NM 87102
Jenica L. Jacobi
PO Box 15698
Rio Rancho, NM 87174
Christopher M Pacheco
Lastrapes, Spangler & Pacheco,
PA
PO Box 15698
Rio Rancho, NM 87174-0698
Christopher P. Bauman
Bauman, Dow & Leon, PC
PO Box 30684
Albuquerque, NM 87190-0684
Stephen CM Long
8316 Washington St., N.E.
Albuquerque, NM 87113
Gary B Ottinger
PO Box 1782
Albuquerque, NM 87103-1782
Stephen Moffat
908 Fruit St. NW
Albuquerque, NM 87102
Philip H. Dugan
Philip H. Dugan Living Trust
123 Calle Olas Altos NE
Albuquerque, NM 87109
Michael D. Menke
PO Box 968
Sandia Park, NM 87047
Shirley McCormack
2708 Bosque del Rio Ln NW
Albuquerque, NM 87120
Jerry Theiler
Chris Theiler
11301 Oakland Ave. NE
Albuquerque, NM 87122
Steven R. Pazand
2719 Indian Farm Ln NW
Albuquerque, NM 87107
Jane Halpern
2160 Ryan Place NW
Albuquerque, NM 87107
Les Spector
77 Pancoast Blvd
Delran, NJ 08075
Richard Gnekow
Luella Gnekow
4404 Bryan NW
Albuquerque, NM 87114
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Page 13 of 	13
D.C. Durano
Durano Enterprises
PO Box 90625
Albuquerque, NM 87199
John McCormack
Debbie McCormack
5916 Legends Ave. NW
Albuquerque, NM 87121
Glenda L. Durano, Trustee
Glenda L. Durano Revocable
Living Trust
PO Box 90625
Albuquerque, NM 87199
Thomas J. McNaughton
3104 Camelback Rd. #255
Phoenix, AZ 85016
Janice B. Dorn
3104 Camelback Rd. #255
Phoenix, AZ 85016
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