Retention of Committee Counsel Denied For Defective Disclosure Under 2014(a); Court Determines Facts Suggest Improper Solicitation Of Creditors And Urges U.S. Trustee To Review Process Of Committee Formation Meetings
In re Universal Building Products, Case No. 10-12453 (MFW), Mem. Op. (November 4, 2010)
Following a meeting to form an official committee of unsecured creditors in this case, the committee selected two law firms to act as committee co-counsel. The proposed counsel filed retention applications and initial declarations pursuant to FRBP 2014. The Debtor objected to the firms’ retention on the basis that counsel had improperly solicited creditors and proxy holders prior to the formation meeting, and failed to disclose such contacts in their respective disclosures. The U.S. Trustee asserted similar objections. Following discovery, briefing and an evidentiary hearing, Judge Mary F. Walrath concluded that the facts suggested that the firms had improperly solicited creditors for their votes at the formation meeting. The Court also found the respective disclosures filed by the firms to be deficient, and held that such deficiencies were not cured by subsequent disclosures.
In this case, the U.S. Trustee’s office convened a meeting to determine whether an official committee of unsecured creditors would be formed. A committee was formed, and at the meeting, the committee selected counsel to represent its interests. Shortly after committee counsel filed their respective retention applications and 2014 disclosures, the Debtor moved to compel discovery with respect to the applications. The Debtor specifically sought discovery regarding the committee’s retention of a Chinese language translator, Dr. Haishan Liu, and Dr. Liu’s serving as a proxy holder at the committee formation meeting for the Debtor’s largest unsecured creditor. Shortly thereafter, the U.S. Trustee filed objections to counsel’s applications on the basis that their 2014 disclosures were incomplete.
Dr. Liu was deposed and also produced documents detailing the pre-formation meeting contacts he had with proposed committee counsel. The parties briefed the solicitation and disclosure issues, and, on October 7, 2010, the Court held a hearing to consider the retention applications.
In her decision, Judge Walrath found that on the petition date, both proposed committee counsel had sent copies of the petition and 30 largest creditors to Dr. Liu and others. Each of the firms had prior relationships with Dr. Liu, including serving as committee counsel where Dr. Liu had been engaged as a translator or a representative of an Asian creditor. At the time of the bankruptcy filing, neither firm had any relationship with any of the Asian creditors on the creditor list, and Dr. Liu did not represent any of the creditors on the list at the time it was sent to him.
Nonetheless, Dr. Liu undertook extensive efforts to contact the Asian creditors and to see if they would provide him with proxies to represent their interests at the formation meeting. Dr. Liu sent the two proposed committee counsel daily emails updating them on the status of his efforts to secure representation of the Asian creditors. To the extent Dr. Liu had difficulty finding contact information for any of the Asian creditors, one of the proposed committee counsel provided some assistance in tracking down the information.
Dr. Liu also asked for and received legal advice from proposed counsel regarding potential claims that the Asian creditors might be able to assert, noting that “getting a proxy is two way traffic.” Through his efforts, Dr. Liu obtained two proxies, one of which he held himself at the formation meeting, and the other of which was held by a proxy holder located by proposed committee counsel.
At the formation meeting, the creditor for whom Dr. Liu held the proxy was appointed to the committee. During the interview and selection process for committee counsel, Dr. Liu told the other committee members that he had had prior dealings with the 3 firms who were finalists, but did not advise the other members of the email and other communications he had had with counsel prior to the formation meeting. Ultimately, the committee selected proposed counsel to be counsel to the committee, and the committee immediately sought to retain Dr. Liu as their Chinese translator.
In their respective 2014 disclosures, one proposed counsel indicated their prior contacts with Dr. Liu, including where Dr. Liu had acted as translator, or had been acting as a client’s representative on committees represented by counsel. Counsel later filed a supplemental declaration indicating other cases where they had been involved where Dr. Liu acted either as translator or creditor representative, and then filed a third declaration indicating their contacts with Dr. Liu and creditors in this case. Other proposed counsel revealed in their initial declaration nothing about their prior contacts with Dr. Liu, and then followed up with a second and then a third declaration where they too detailed additional contacts with Dr. Liu and their contacts with him and creditors in this case.
Considering all these facts, the Court noted “in fact, [proposed counsel] and Dr. Liu were acting in concert to cold-call creditors that Dr. Liu did not represent for the purpose of being retained by them to attend the Committee formation meeting and to cast a proxy in favor of [proposed counsel] for counsel.” These facts, the Court concluded “are sufficient . . . to suggest that [proposed counsel] did violate Rule 7.3 and Rule 8.4 of the Model Rules of Professional Conduct and of Delaware’s Rules of Professional Responsibility.” The Court found this conduct sufficient to deny their retention as committee counsel.
The Court also found that the disclosures filed by proposed counsel were deficient. The Court noted that the subsequent attempts to correct the deficiencies were filed only after concerns were raised about the initial declaration by the Debtor and the U.S. Trustee, and were not enough to cure the prior deficiencies. Proposed counsel “should have disclosed at the outset their efforts in support of Dr. Liu’s attempt to obtain proxies from creditors to attend the Committee formation meeting. Further, while it was not a disqualifying factor, the fact that [one of the proposed counsel] had provided legal advice to two creditors on their right to seek administrative claims is a fact that should have been revealed to the Committee and the Court.”
Finally, the Court suggested that the U.S. Trustee might want to consider how formation meetings are handled in the future. In particular, Judge Walrath will require disclosure of the practice of soliciting proxies to act at a committee formation meeting. She also urged the U.S. Trustee to keep counsel wishing to secure committee representations physically separate from creditors at the formation meeting. She also suggested that the U.S. Trustee add questions regarding whether creditors have been solicited by counsel or others to the questionnaire filled out by creditors prior to the formation meeting.
Importantly, it must be noted that Judge Walrath found nothing wrong with sending copies of the petition and list of creditors, or even an “analysis” of the case to counsel or parties with whom one has had prior dealings.
