IN RE ROCKY MOUNTAIN BREWING CO., INC., (Bankr.D.Wyo. 1997)

PETER McNIFF, United States Bankruptcy Judge.

On November 12, 1997, the court held a hearing on the United States Trustee's Motion to Disqualify Counsel. This was the second hearing at which this issue was raised and addressed. For the reasons stated on the record and in this order, the motion is denied without prejudice.

This is a chapter 11 case filed by the debtor/corporation on April 28, 1997. In the debtor's statement of affairs, it listed a $10,000 transfer to Georg Jensen made on April 28, 1997. In his attorney fee disclosure statement, Mr. Jensen stated that he had received a retainer of $10,050 "remitted from funds borrowed from equity security holders on a secured basis prior to filing the petition." In his affidavit accompanying the debtor's application to retain an attorney, Mr. Jensen stated that he had no prior connection with the debtor or any party in interest, with exceptions not applicable here. Mr. Jensen's employment as general counsel for the debtor in possession was approved by the court on April 30, 1997.

On June 19, 1997, Mr. Jensen filed a supplemental pleading and indicated that, because of a "demand" by the Assistant United States Trustee, Paul Hunter, he was disclosing further information. He stated that he had prepared the loan documents for the secured loans from. shareholders to the debtor; loans made to provide funds for Mr. Jensen's retainer in this case.

Three Security Agreement and Financing Statements evidencing the shareholder loans were filed with the Laramie County Clerk and the Secretary of State on April 28, 1997, minutes after the chapter 11 petition was filed. Mr. Hunter provided the court with copies of the filed security agreements. Mr. Jensen and the three shareholder/creditors who advanced the funds have all stated that Mr. Jensen did not represent the shareholders at any time, and that Mr. Jensen made that fact clear to the shareholders.

DISCUSSION

The U.S. Trustee argues that by preparing the loan documents, Mr. Jensen created a conflict between his representation of the shareholder/creditors and his duty to review all transfers made by the debtor for possible avoidance actions; that the activities which created the conflict were not disclosed until the U.S. Trustee forced the issue; and that the failure to disclose and the conflict are equally disqualifying. Mr. Jensen argues that there is no conflict of interest; that the security interests are not preferential transfers; and that, even if they were, the remedy is to provide information in the disclosure statement or for the court to order the appointment of a chapter 11 trustee.

The employment of attorneys by the debtor in possession is governed by 11 U.S.C. § 327. The debtor in possession may, with the court's approval, employ an attorney that does not "hold or represent an interest adverse to the estate and that is a disinterested person." The attorney is required to disclose any connections with the debtor or creditors. Fed.R.Bankr.P. 2014.

From that disclosure, the court must determine whether an actual or potential conflict of interest bars representation.

The attorney also has a responsibility to evaluate any conflicts or potential improprieties. In re Amdura, 139 B.R. 963, 978 (Bankr.D.Colo. 1992), and must do more than go through the motions of filing the necessary documents. The disclosure required includes the existence of interests which might impair the high degree of impartiality and detached judgment expected of the debtor in possession's general Counsel. (Emphasis provided). In re Prudent Holding Corp., 153 B.R. 629, 631 (Bankr.E.D.N.Y. 1993).

Under § 3 27(c), a person's representation of a creditor is not disqualifying unless there is an actual conflict of interest. An actual conflict of interest exists when there is "an active competition between two competing interests, in which one interest can only be served at the expense of the other." In re Adam Furniture Industries, Inc., 158 B.R. 291, 301 (Bankr.S.D.Ga. 1993).

Mr. Jensen had a duty to disclose, at the initial stage of this proceeding and without request from the United States Trustee, that he prepared the loan documents facilitating the transfers of the security interests. He did not. His arguments presuppose the outcome as determined by him, i.e., there is no conflict because the transfers are not avoidable. However, he ignores that it is for the court to decide whether or not there is a conflict based upon full disclosure. Now that disclosure has been more or less provided, albeit reluctantly, the issue is whether or not Mr. Jensen has a conflict of interest.

Mr. Jensen is counsel for the fiduciary of the estate. In that capacity he has an obligation to review all transfers for possible avoidance and to determine the effect of the transfers on the estate. In this case, the post-petition transfers of the security interests may or may not be avoidable under § 549. The fact that Mr. Jensen and Mr. Hunter disagree on that issue indicates, at least, that there may be an unresolved question under § 546(b)(1).

Mr. Jensen is adamant that he never represented the shareholder/creditors. The record shows otherwise, and all the disclaimers ignore the reality.

The shareholder/creditors did not state who told them to record the security agreements in order to perfect their claims. Nor have they or Mr. Jensen forthrightly stated who actually accomplished the physical filing of the security agreements, although Mr. Hunter stated that it was an employee of Mr. Jensen's office. From Larry Sorter's (one of the creditors) statements, the court clearly perceived that he has no independent legal knowledge regarding how to document or create a perfected security interest, or the proper timing thereof. It is facetious, and ignores the obvious, to argue that these creditors received no legal advice.

Most apparent however is this: if Mr. Jensen had not prepared the security agreements, none of these issues would have arisen. The shareholders should have been referred to separate and independent counsel, in which case no future decision by counsel could be compromised or called into question. As this case now progresses to confirmation, Mr. Jensen has three competing interests to consider: his own fees which are jeopardized by his failure to separate himself from the creditors; the plan of reorganization which proposes to pay these secured claims in full, even though the liens may be avoidable; and the unsecured creditors which might be benefitted by avoidance of those liens.

Mr. Jensen contends that to call this a conflict of interest ignores the reality inherent in any small corporation/chapter 11 case. Mr. Jensen's argument is beside the point. Obviously, the shareholders /creditors and the estate have some common and some conflicting interests, and the shareholders are the decision makers for the debtor in possession. However, those conflicts are separate from, and are dealt with differently than, an attorney's conflicting loyalties.

This proceeding is not about whether the debtor should "sue itself" or try to avoid the transfers, or whether the debtor in possession has made sufficient disclosure of the insider loans. This is not about the shareholders, conflicts. The question is whether counsel, in facilitating the loans and failing to disclose his actions, created conflicting loyalties.

The representation of a creditor is not disqualifying unless there is an actual conflict of interest. 11 U.S.C. § 327(c). In this case, the facts which will establish whether an actual conflict exists are still unstated. Mr. Jensen has not filed a sworn affidavit disclosing the preparation of the documents. The treatment of the insider claims and whether the estate will be harmed is unresolved. Although the court does not mean to imply that counsel can subsequently rectify a disqualifying conflict of interest, the court believes that future matters may affect the ultimate result here.

Accordingly, the United States Trustee's motion is denied without prejudice.