Law Firm Disqualified For Concurrent Conflict Of Interest
In re Meridian Auto. Sys., 340 B.R. 740 (Bankr. D. Del. April 17, 2006) (Judge Mary F. Walrath)
A law firm that pre-petition represented a holder of first and second lien secured debt cannot thereafter represent an informal committee of first lien lenders when the debtor seeks bankruptcy protection. The committee representation is, by its nature, adverse to the interests of holders of other tranches of debt, and the representation therefore is prohibited by Model Rule of Professional Conduct 1.9(a).
In this case, Stanfield Capital Partners held pre-petition secured debt of the Debtors, some of which was secured by a first lien on the Debtors’ assets and some by a second lien. Pre-petition, Stanfield retained Milbank, Tweed, Hadley & McCloy LLP to provide advice with respect to that debt, and as to the intercreditor agreement between the first and second lien lenders. Milbank provided an analysis identifying provisions of the intercreditor agreement that might affect the second lien lenders’ plan to provide additional financing to the Debtors secured by first-priority liens in accounts receivable. Just prior to the petition date, the Debtors obtained a DIP credit financing facility (the Take Out Facility”) to pay off first lien debt in full. However, some first lien lenders also had second lien debt, and were excluded from an informal committee of first lien credit holders (the “FLC”). Stanfield was not part of the FLC. The FLC then hired Milbank with respect to intercreditor issues that might arise if the Court did not approve the Take Out Facility.
Although the Take Out Facility was approved, the Debtors could not meet certain conditions, and had to seek additional financing that left both tranches of indebtedness intact. Milbank stayed on as counsel to the FLC. Stanfield thereafter sought to disqualify Milbank as counsel to the FLC.
Stanfield asserted that it never terminated the relationship with Milbank, which therefore prohibited Milbank from acting as counsel to the FLC by Model Rule of Professional Conduct (“Model Rule”) 1.7(a). However, the Court determined that the relationship had in fact been terminated, and found that Model Rule 1.7 was not implicated.
Alternatively, Stanfield argued that the representation violated Model Rule 1.9(a), concerning obligations and duties to former clients. While Milbank conceded that the interests of Stanfield and the FLC are adverse, it denied that they concern “the same or a substantially related matter” within the meaning of Model Rule 1.9(a). The Court disagreed, finding that the ultimate purpose of the Stanfield retention was to protect Stanfield’s second lien position. Moreover, the evidence showed that Milbank viewed the scope of its retention at that time as addressing the range of intercreditor issues.
Although Milbank could have represented the FLC if it had obtained the informed consent of Stanfield, confirmed in writing, Milbank did not have such consent. Milbank contended that it was sufficient that it had advised Stanfield that Milbank was getting “a lot of calls” about other representations. However, the Court found that such disclosure was insufficient to identify the types of representations that it might undertake.
The Court also found that Stanfield did not – and could not – waive its right to seek disqualification by waiting to do so. Although the Court found that Stanfield did not wait long to bring the motion, it emphasized that, in any event, the conflict belonged to Milbank, and Milbank needed to address it. The burden was not on the former client to ferret it out and seek relief.
Because of Milbank’s violation of Model Rule 1.9 and its “dogged refusal to acknowledge the same,” the Court disqualified Milbank from representing the FLC, even though such disqualification came at a critical period during the case – negotiation of the plan.
