- Category: Judge Nugent
- Published on 08 April 2009
- Written by Judge Nugent
SIGNED this 27 day of March, 2009.
ROBERT E. NUGENT
UNITED STATES CHIEF BANKRUPTCY JUDGE
Page 1 of 27
OPINION DESIGNATED FOR ON - LINE PUBLICATION
BUT NOT PRINT PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
BOOT HILL BIOFUELS, LLC ) Case No. 08-13128
) Chapter 11
This matter comes before the Court on debtor-in-possession Boot Hill Biofuels, LLC’s
application to employ the law firm of Stinson Morrison Hecker LLP as bankruptcy counsel in this
chapter 11 reorganization pursuant to 11 U.S.C. § 327(a).1 The United States Trustee and
petitioning creditor Biofuel Venture I, LLC object on grounds of conflict of interest,
1 Dkt. 21.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 2 of 27
disinterestedness and proposed retroactive effect of the employment.2 The Court convened an
evidentiary hearing on February 18, 2009 and took the application under advisement upon closing
the record.3 Debtor appeared by Paul Hoffmann and Scot Hill of Stinson Morrison Hecker, Kansas
City, Missouri. Biofuel Venture I appeared by its attorneys David Jones of Amarillo, Texas and
David Arst of Wichita, Kansas. The United States Trustee appeared by William Schantz.
A debtor-in-possession’s application to employ chapter 11 counsel under 11 U.S.C. § 327
is a core proceeding over which this Court has subject matter jurisdiction.4
I. The Employment Application
This bankruptcy case was commenced as an involuntary chapter 7 petition on December 1,
2008 by Biofuel Venture I (“BVI”), the petitioning creditor. On December 22, 2008, debtor Boot
Hill Biofuels LLC (“Debtor”), by SMH, moved to convert the case to a voluntary chapter 11; the
motion was granted and an order converting the case was entered December 23, 2008. Debtor was
ordered to file its schedules within fifteen (15) days, or by January 9, 2009. Debtor, by SMH, filed
its schedules on January 8, 2009. On January 15, 2009, Debtor filed its motion to employ Stinson
Morrison Hecker LLP (“SMH”) as Debtor’s counsel nunc pro tunc to December 1, 2008, the date
of the involuntary petition (the “Application”).5 SMH requested, and the Court granted an expedited
2 Dkt. 31 and 33.
3 All exhibits were admitted by stipulation of counsel.
4 28 U.S.C. § 157(b)(1) and (2)(A) and (O) and § 1334.
5 Dkt. 21. See 11 U.S.C. § 327(a) and Fed. R. Bankr. P. 2014(a).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 3 of 27
hearing on the Application. On January 23, 2009 the § 341 meeting was held; Jack Marvin, an
attorney with SMH in its Wichita office, appeared for Debtor at the meeting. In the interim, BVI
filed a motion to convert the case back to chapter 7 for cause, contending that there was no
reasonable likelihood of rehabilitation, loss to or diminution of the estate, and the absence of an
application to employ Debtor’s counsel.6 BVI’s motion has been set to a scheduling conference on
March 19, 2009.
In the Application, SMH disclosed that it was holding a $10,000 retainer from Debtor for
services to be performed in connection with the bankruptcy case. According to the Statement of
Financial Affairs, SMH received the retainer on December 22, 2008. SMH’s proposed
representation of Debtor includes “[r]epresentation in all phases of the bankruptcy proceedings” and
“[p]erformance of all other legal services” necessary for administration of the case and Debtor’s
reorganization. SMH also disclosed its prior connections with Debtor’s creditors or other parties-ininterest,
including ongoing, unrelated representation of (1) Debtor’s accountant, Kennedy & Coe
(“Kennedy”); (2) Debtor’s management company and an equity holder, Conestoga Energy Partners
(“Conestoga”); and (3) individual interest owners of Third Day Biofuels, LLC, an equity holder and
a noteholder of Debtor. Conestoga controls the Debtor board of directors, having the power to
appoint two directors and exercise 51% of the voting power of the Board.
SMH also disclosed that it first represented Debtor in late July of 2008. In connection with
that representation, SMH billed fees and expenses of $24,134.50. Pursuant to a letter agreement
between Debtor and BVI, BVI paid those fees and expenses on behalf of Debtor. BVI is not related
or affiliated with Debtor, but is a general unsecured creditor with a claim of $750,000. SMH left
6 Dkt. 19. See 11 U.S.C. § 1112(b)(4)(A).
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open whether BVI would be paying the fees and expenses incurred by SMH in its bankruptcy
representation of Debtor:
Whether [BVI] is obligated to pay, or will pay, any legal fees or expenses of SMH
after the filing of the involuntary Petition has not been determined.7
The United States Trustee objected to Debtor’s employment of SMH under § 327(a)
suggesting that the disclosed conflicts results in SMH not being disinterested or having an interest
adverse to the estate.8 BVI joined in the UST’s objection contending that SMH’s previous
representation of creditors of Debtor presents a disqualifying conflict of interest, that SMH is not
disinterested, and that nunc pro tunc employment in any event should not be approved absent a
showing of extraordinary circumstances.9
At the March 19, 2009 status conference, the parties announced that a “global” resolution
of their differences had been reached and that both BVI and the Trustee were willing to withdraw
their objections to SMH’s employment Application. Under the proposed resolution, an offer in
compromise will be noticed to all creditors providing for a restructuring of the debt and equity of
Boot Hill in the context of a chapter 11 plan. The withdrawal of the parties’ objections to SMH’s
Application in no way minimizes this Court’s independent duty to determine whether SMH is
legally eligible to represent the debtor in possession under § 327.10
II. The Players
Debtor is a Kansas limited liability company that was formed for the purpose of constructing
7 Dkt. 21, Exhibit A, ¶ 3.d. (Declaration of SMH attorney, Paul M. Hoffmann).
8 Dkt. 31.
9 Dkt. 33.
10 In re Interwest Business Equipment, Inc., 23 F.3d 311, 317 (10th Cir. 1994).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 5 of 27
an ethanol plant near Dodge City, Kansas. Gary Harshbarger has been Debtor’s president since its
inception in August of 2006.11 He has overseen the attempted construction of the ethanol plant and
the raising of capital. When Debtor was organized it raised approximately $1.6 million in capital,
mostly through western Kansas investors.12
SMH was not involved with, nor represented Debtor, at this time. Scot Hill, an attorney with
SMH was involved with other ethanol plants in his transactional law practice and sat on the board
of directors of other ethanol plants or ethanol-related industries.13 According to Harshbarger, a local
attorney provided legal services to Debtor during this start-up phase. Local counsel assisted Debtor
with conditional use permits for the ethanol plant. Hill testified that he chaired the corporate counsel
department of SMH; he described himself as a transactional lawyer, devoting much of his law
practice to mergers and acquisitions. He also represented biofuel companies and related operators.
Among SMH’s clients is Conestoga. Hill first provided legal services to Conestoga in early 2007
and is the principal attorney at SMH that represents Conestoga. Since that time, Hill continues to
provide legal services to Conestoga, mostly handling contract matters between Conestoga and other
third parties that are unrelated to Debtor. Hill was unaware of Conestoga’s interest in Debtor until
July of 2008. As discussed later in this opinion, SMH was first retained to represent Debtor in 2008,
for more complicated matters that its local counsel was not comfortable handling.
Biofuel Venture I, LLC (“BVI”) was not one of Debtor’s equity investors, but an individual
11 Harshbarger owns 15 membership units in Debtor.
12 Many of these investors have interests in other ethanol plants in Kansas, one in Garden
City (Bonanza) and one in Liberal (Arkala).
13 It was through these industry connections that Hill became acquainted with
Harshbarger and Debtor. Hill represented Conestoga Energy Partners, L.L.C. which was the
managing entity of the Bonanza and Arkala ethanol plants in southwest Kansas.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 6 of 27
by the name of Thomas Kent was.14 Kent is a lawyer in California. He is the Vice President of BVI,
a California limited liability company located in Los Angeles. Howard Nilsen is the chief financial
officer of BVI. BVI holds a construction slot note in the amount of $750,000 and is an unsecured
creditor of Debtor, as described below.
Another of Debtor’s equity investors was Conestoga Energy Partners (“Conestoga”).15 It was
described as a management company for Debtor, having been involved in the construction of the
Bonanza and Arkala ethanol plants and the managing entity of those plants as well. Conestoga
controls the board of directors of Debtor, having the power to appoint two directors to exercise 51%
of the voting power. Harshbarger referenced some form of contract or agreement entered into
between Debtor and Conestoga for development and accounting services, although that agreement
is not a part of the record before the Court. It is unclear when that contract was entered into, but it
appears that Conestoga continues to provide management or accounting services of some type to
Debtor. Since the ethanol plant has not been constructed, Debtor does not have a “physical address”
and uses Conestoga’s address for receipt of mail.
Another entity known as Third Day Biofuels, LLC (“Third Day”) is an equity interest owner
of Debtor, holding 12 units. According to the Application, SMH represents individual interest
owners of Third Day, the identities of which are not disclosed. In addition to its equity investment,
Third Day is the holder of a $400,000 construction slot note, and an unsecured creditor of Debtor,
In addition to the equity investments, Harshbarger testified that ethanol plants are financed
14 See Dkt. 13, List of Equity Security Holders. Kent owned 2 units in Debtor.
15 Conestoga owned 1 unit in Debtor. See Dkt. 13.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 7 of 27
through construction slot agreements and notes. These agreements are so named because ethanol
plant are built according to when they can fit into a “construction slot.” ICM, Inc. is an entity
located in Colwich, Kansas that is involved in constructing ethanol plants. Harshbarger described
ICM as the “engineering company” for the proposed ethanol plant. Debtor and ICM entered into
a slot agreement. Under the slot agreement, three installments of $2 million each were payable by
Debtor to ICM.16 Debtor paid the first $2 million up front to ICM. The construction orders for
ethanol plants tend to have long lead items for the equipment and materials necessary to build the
plant and require deposits. Debtor borrowed this $2 million from ICM at 15 per cent interest.17 In
exchange, ICM held a convertible note for this amount and could convert the note into an equity
interest after the ethanol plant was built.
The second installment of $2 million was accomplished with proceeds from construction slot
notes. In November 2006, Debtor issued ten slot notes to additional “investors,” the repayment of
which was due by July of 2007.18 BVI was the holder of a slot note in the amount of $750,000.
These slot note holders comprise the list of creditors holding the 20 largest unsecured claims and
total $4 million dollars.19 Other slot note holders included ICM ($2 million) and Third Day
Harshbarger testified that during 2007, prior to the downturn in the economy, the ethanol
16 The Court does not have the benefit of the construction slot agreement in the record
17 ICM effectively contributed the first $2 million under the slot agreement.
18 These ten slot notes were in addition to ICM, which also held a construction slot note
in the amount of $2 million. See Dkt. 12.
19 Dkt. 12.
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environment was changing. As a result of these economic forces, available equity and debt began
to “dry up.” Debtor was unable to pay off the slot note holders in July of 2007.20 It is unclear what
transpired over the course of 2007, but suffice it to say, commencement of construction on the
Debtor’s ethanol plant was delayed while it attempted to sort through its financial problems or raise
additional capital to fund construction. It appears that the third $2 million installment under the
ICM slot agreement has never been funded.
III. The EB-5 Immigration Program and Letter of Intent
By the summer of 2008, at least one slot note holder, BVI, was becoming increasingly
concerned about its investment with Debtor and the status of the Boot Hill ethanol plant. It appears
that BVI funded its $750,000 slot note through “immigrant investors” and the completion of the
ethanol plant project was subject to certain time constraints in order for the investors to receive
certain immigration benefits under a program known as the EB-5 Immigration Investment Program.
Thomas Kent, on behalf of BVI and its investor-clients, sent a demand letter to Debtor in early June
of 2008, seeking repayment of the BVI $750,000 slot note and transfer of their investments to
“another” project, thereby extending the time to comply with the EB-5 Program requirements.21
The evidence presented on the EB-5 Immigration Investment Program was sketchy at best.
Neither Debtor (Harshbarger) nor Hill had working knowledge of the EB-5 Program. Debtor was
not associated with the EB-5 Program other than the BVI investors’ use of the Boot Hill name and
project to qualify their investment under the EB-5 program requirements. From the exhibits
introduced into evidence, Kent (BVI) appeared to have the most knowledge or information about
20 It appears that Debtor obtained a one-year extension, to July of 2008, on the slot notes.
21 Ex. 1.
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the Program, but he did not attend or testify at the evidentiary hearing. His absence was curious.
From what the Court can discern from its own cursory research into the EB-5 Program,
immigrant investors in a commercial enterprise receive certain immigration benefits in exchange for
their capital investment and the creation of jobs by the enterprise.22 If the immigrant investor meets
the capitalization and job creation criteria under the program, the alien investor may qualify for
permanent lawful residence in the United States. The EB-5 program derives its name from the
statute that establishes immigrant investors as the fifth preference in the “employment-based” visa
preference category.23 Apparently, these immigrant investors are subject to certain time constraints
to demonstrate that the business is up and running and has generated a certain number of jobs.
In the case at bar, when the Boot Hill ethanol plant project stalled, Kent advised Debtor that
the Boot Hill project must be merged into an alternate project and sought to utilize the Boot Hill
project name to effectuate the merger, transfer BVI’s investment, and preserve the immigration
benefits under the EB-5 program.24 Kent further advised that his law firm would perform (or
cooperate with Debtor’s counsel) the requisite legal services to accomplish this end. A second letter
was sent by Kent on July 15, 2008 again demanding repayment of the BVI slot note and use of the
Boot Hill project name to effectuate a merger and transfer of the BVI investment.25 In this letter,
22 The EB-5 program was enacted in 1990 as part of the Immigration and Nationality
Act, 8 U.S.C. § 1153(b)(5). See also, 8 U.S.C. § 1186b; 8 C.F.R. § 204.6. See generally, R.L.
Investment Ltd. Partners v. I.N.S., 86 F. Supp. 2d 1014, 1016-17 (D. Hawaii 2000), aff’d 273
F.3d 847 (9th Cir. 2001) and Spencer Enterprises, Inc. v. United States, 345 F.3d 683, 686 (9th
Cir. 2003) for a description and discussion of the EB-5 program.
23 R.L. Investment Ltd. Partners, supra at 1016-17.
24 Ex. 1.
25 Ex. 2.
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BVI offered to indemnify the Debtor board and members from any potential future liability. The
undercurrent from these communications and negotiations is that in exchange for an extension of
the repayment of BVI’s slot note, Debtor would agree to the restructuring to accommodate BVI’s
need to comply with the EB-5 program requirements.26
It was at this point that Harshbarger contacted Hill and engaged SMH to represent Debtor
in conjunction with BVI’s and Kent’s restructuring request.27 SMH’s billing statements reflect that
it first provided legal services to Debtor in conjunction with this transaction on July 29, 2008.28 Hill
testified that he believed SMH was representing only the Debtor in the transaction, not the other slot
note holders. Harshbarger testified that Kent was representing BVI. It was proposed that the
original entity, Boot Hill Biofuels, LLC (BH I) would be a “shell” entity to deal with BVI’s
immigration issue. BVI would own BH I. A new entity would be formed, BH II, and all of the
existing assets and liabilities of BH I would be transferred to BH II. According to Harshbarger, the
Debtor’s Board was adamant that the restructuring would not cost Debtor’s investors any money
and it could not be injurious to Debtor.
On or about August 19, 2008, BVI and Debtor entered into a letter of intent (LOI) setting
forth the proposed terms of the restructuring and transfer to accomplish BVI’s request.29 Paragraph
8 of the LOI provides:
BVI will pay when due all legal fees and costs incurred by Boot Hill and Boot Hill
26 In addition, there apparently was the threat of involuntary bankruptcy.
27 Harshbarger testified that when he contacted Scot Hill he knew that SMH represented
Conestoga. He saw no conflict in SMH representing both Conestoga and Debtor.
28 Ex. B-4.
29 Ex. 3.
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II in connection with the transactions contemplated by this letter of intent, including
fees and costs associated with drafting, reviewing, and finalizing the various
agreements contemplated by this letter of intent. Within five days of the date of this
letter of intent, BVI will deliver $15,000 to Boot Hill’s legal counsel as an initial
retainer to be held by Boot Hill’s legal counsel to cover legal fees and costs. This
retainer will be replaced by BVI, if and as needed.
Paragraph 8 was binding upon the parties, even if negotiations terminated. Under paragraph 3 of
the LOI, the slot note holders would agree to forbear on the slot notes for a period of one year. Kent
signed the LOI as Vice President of BVI and Harshbarger signed as president of Debtor.30 On or
about August 27, 2008, BVI sent the $15,000 retainer to SMH as referenced in the LOI.31
After the LOI was executed, the necessary documents were prepared by SMH for
execution.32 Debtor sought its investors’ and slot note holders’ written consent to transfer Debtor’s
assets and liabilities to the new entity, BH II.33 At some point in November, after the documents had
been sent to the slot note holders and investors for signature, some of them resisted and refused to
sign the consents, believing that BVI should pay value for BH I.34 Hill attempted to explain the
transactions to the slot note holders and the investors and secure their consent, but the restructuring
30 The original LOI was signed by Kansas Biofuel Venture I, LLC. The parties
subsequently substituted Biofuel Venture I, LLC. See Ex. 4.
31 Ex. A-1.
32 According to Hill, Kent requested that SMH prepare the documents.
33 See Ex. D-1, D-2, D-3, D-4, D-5, and D-6 for the documents and consents prepared by
SMH for execution by the slot note holders and investors in Debtor.
34 Ex. 8.
35 It is apparent from Hill’s testimony that he had some interaction and communication
with the other slot note holders to secure their consent to the restructuring, although in the
Court’s view, these discussions did not rise to the level of SMH representing the interests of the
Case 08-13128 Doc# 46 Filed 03/27/09 Page 12 of 27
IV. BH Reddwerks, LLC
On November 13, 2008, when the consents were not forthcoming and the deadline for the
immigration credits about to expire at the end of November, BVI (by Kent) proposed an alternative
structure.36 Under this proposal, a new entity called BH Reddwerks, LLC would be set up as a
subsidiary of Debtor. It would employee the minimum 10 employees required by the EB-5 Program.
Debtor would own 51% of BH Reddwerks and an already existing entity, Reddwerks, would own
49% of BH Reddwerks. BVI would fund BH Reddwerks’ payroll and employee-related expenses
and all costs associated with BH Reddwerks’ formation.37 It appears that the BH Reddwerks
structure was designed as a stop-gap measure to “buy time” while Debtor concluded its slot
agreement with ICM and obtained consents from all its investors.
That same day, Kent filed Articles of Organization for BH Reddwerks, LLC with the Kansas
Secretary of State and notified Harshbarger and Hill of the filing.38 Hill advised Kent that he wanted
to review a draft of the anticipated operating agreement for BH Reddwerks; Kent was to prepare the
operating agreement.39 Hill prepared a consent for the Debtor’s Board to sign, authorizing BH
Reddwerks, but withheld it from distribution pending his review of the draft operating agreement.40
On November 20, 2008 Kent had Nilsen send a document titled “joint venture agreement” to Hill
other slot note holders.
36 Ex. 9.
37 Debtor wanted no liabilities associated with BH Reddwerks.
38 Ex. 10.
39 Ex. 11.
40 Ex. 13, 15 and 16.
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for his review.41 Hill reviewed and made changes to the joint venture agreement, returning it to Kent
on December 1, 2008, as an operating agreement.42 That same day, Nilsen advised Hill and Debtor
that Reddwerks’ counsel had previously revised the draft operating agreement for BH Reddwerks
sent out earlier.43 Hill and Debtor further learned that this revised operating agreement had already
been executed (without Debtor’s consent) and that BH Reddwerks had already paid the employee
payroll.44 Howard Nilsen executed the BH Reddwerks operating agreement on behalf of Debtor,
even though Nilsen was not authorized to sign the operating agreement on behalf of Debtor and was
not an officer or member of Debtor.45 Hill, on behalf of Debtor, immediately demanded that
Reddwerks be notified that the operating agreement was ineffective. On December 4, 2008,
Nilsen/BVI so notified Reddwerks, indicating that approval of the operating agreement by Debtor’s
Board was required.46
V. The Involuntary Bankruptcy
In the interim while BVI and Debtor were attempting to finalize an operating agreement for
BH Reddwerks, on November 21, BVI, through Kent, made written demand upon Debtor for
payment of its slot note; BVI advised that it was withdrawing its consent to the waiver agreement
41 Ex. 18.
42 Ex. 22.
43 Ex. 23.
44 Ex. 25.
45 Ex. 26. Nilsen acted as the chief financial officer for BVI, not Debtor. See Ex. A-1
where Nilsen, as CFO of BVI, authorized BVI’s payment of the $15,000 retainer to SMH under
46 Ex. 33.
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on its slot note because other slot note holders had refused to execute such consents and the Debtor’s
members had refused to consent to the BH II restructuring.47 Apparently, some slot note holders
refused to consent to the restructuring unless BVI waived payment of the $750,000 due BVI under
its slot note with Debtor.48 On November 24, Kent advised Debtor and Hill that BVI had retained
counsel and would be filing an involuntary bankruptcy petition.49 A week later, on December 1,
2008, BVI filed an involuntary bankruptcy petition against Debtor. Pursuant to their agreement in
the LOI, BVI has paid Debtor’s attorney fees and costs incurred by SMH from August through
November, 2008 in connection with the restructuring transaction in the approximate amount of
$24,000.50 On December 22, 2008, SMH filed a motion to convert Debtor’s bankruptcy case to one
under chapter 11. An order converting the bankruptcy case was entered on December 23, 2008.
Thereafter, SMH filed schedules on behalf of Debtor and on January 15, 2009 Debtor filed its
Application to employ SMH.
Upon the filing of the involuntary bankruptcy, BVI considered the LOI terminated and itself
relieved of its obligation to pay any further legal fees of Debtor/SMH as of December 1, 2008.51 At
that point, BVI and Debtor entered into discussions and negotiations regarding their options to
salvage the “restructuring transaction,” revision of the letter agreement, and BVI’s responsibility
47 Ex. 20.
48 Ex. 21.
50 Ex. 5, 6, 7 and 30 (August through November 2008 billing statements of SMH). There
appears to be no dispute that BVI has fulfilled its fees obligation to Debtor/SMH under the LOI,
having paid in full SMH’s fees and expenses incurred up to December, when the restructuring
transaction was deemed “dead.”
51 Ex. E-14.
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for SMH’s fees going forward from December 1, including SMH’s fees incurred in representing
Debtor in the bankruptcy.52 SMH’s attorney fees for the month of December, 2008 were
approximately $20,000 and its fees for the month of January, 2009 were approximately $25,000.53
The negotiations did not yield a firm agreement and with the case in this posture, the Debtor’s
Application to employ SMH as bankruptcy counsel came on for evidentiary hearing.54
Hill testified concerning SMH’s representation of, or connection to, three parties disclosed
in the Application: Kennedy & Coe, Conestoga, and Third Day Biofuels. Kennedy & Coe is
Debtor’s accountant. SMH previously handled a matter for Kennedy & Coe that its general counsel
was unable to handle due to a conflict. SMH’s representation was unrelated to the Boot Hill project.
Hill believes SMH has billed $13,000 in fees in connection with that matter and that $1,000-$2,000
was paid to SMH in 2008.55
Third Day is an equity investor, holding 12 units in Debtor, and is also an unsecured creditor
holding a slot note in the amount of $400,000. SMH has not represented Third Day. One of Third
Day’s equity owners is Jon Burrell. SMH represents Garmin, an entity affiliated with Burrell. Hill
stated that the representation of Garmin did not involve or relate to Debtor or the Boot Hill project.
SMH presently represents Garmin in unrelated matters.
52 Ex. E-17, Ex. E-19, Ex. F-1, Ex. F-2.
53 Ex. E-19. It is unclear whether all of these fees were incurred for SMH’s services in
connection with the bankruptcy representation.
54 It is apparent that while the bankruptcy case has proceeded forward, BVI and Debtor
continue to negotiate for the potential of BVI paying SMH’s attorney fees incurred by Debtor
after December 1, 2008. It is equally clear that as of the date of the evidentiary hearing, BVI has
not committed to indemnify Debtor for its attorney fees.
55 According to the Statement of Financial Affairs, Debtor paid $3,000 to Kennedy &
Coe on December 22, 2008.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 16 of 27
Conestoga is an equity investor in Debtor. It holds 1 unit and has power to appoint two
directors of Debtor, who in turn exercise 51% of the voting power of Debtor’s board. Conestoga
is Debtor’s management company. It is unclear whether Conestoga’s equity investment and power
on the Board is in exchange for Conestoga’s providing management services to Debtor, or whether
Debtor pays some other financial remuneration for Conestoga’s services. Hill testified that SMH
represents Conestoga on contractual matters with third parties (not Debtor). Its representation of
Conestoga is unrelated to Debtor or the Boot Hill project. SMH received approximately $30,000
in fees paid by Conestoga in 2008 related to this representation.
As SMH stated at the hearing, this is not a complex case; it involves few assets and few
creditors. Debtor’s schedules and statements reflect that this chapter 11 involves eleven unsecured
creditors holding slot notes (including BVI) in the total amount of $4 million ($750,000 held by
BVI). Debtor owns funds in accounts totaling $498,056 and some personal property of unknown
value. Debtor’s only source of income is interest income. No secured creditors or unsecured
priority claims are reported. Construction of the ethanol plant has not commenced. SMH is not
listed as a creditor of Debtor even though some $20,000 in attorney fees were incurred after the
December 1 petition date during December of 2008.
This Application presents conflict of interest and disinterestedness issues on the part of
SMH. The Court considers the Application under 11 U.S.C. § 327, which provides in relevant part:
(a) Except as otherwise provided in this section, the trustee, with the court’s
approval, may employ one or more attorneys . . . that do not hold or represent an
interest adverse to the estate, and that are disinterested persons, to represent or assist
the trustee in carrying out the trustee’s duties under this title.
* * *
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(c) In a case under chapter 7, 12, or 11 of this title, a person is not disqualified for
employment under this section 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.
The phrase “hold or represent an interest adverse to the estate” in § 327(a) is not defined by the
statute but some courts have adopted the following definition:
(1) to possess or assert any economic interest that would tend to lessen the value of the
bankruptcy estate or that would create either an actual or potential dispute in which the estate is a
rival claimant; or (2) to possess a predisposition under the circumstances that render such a bias
against the estate.56
SMH is disinterested within the meaning of § 101(14) if it:
(A) is not a creditor, an equity security holder, or an insider;
(B) is not and was not, within 2 years before the date of the filing of the petition, a
director, officer, or employee of the debtor; and
(C) does not have an interest materially adverse to the interest of the estate or of any
class of creditors or equity security holder, by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor, or for any other reason.
Only subsections (A) and (C) are implicated here. An actual conflict of interest exists in the context
of the disinterestedness requirement if there is an active competition between two interests, in which
one interest can only be served at the expense of the other.57 Whether or not the Trustee or BVI
objects, this Court can only approve employment of professionals meeting these minimum
I. SMH’s Alleged Pre-Petition Representation of BVI
The Court is firmly convinced from the evidence adduced at the hearing that SMH has no
56 In re Roberts, 46 B.R. 815, 827 (Bankr. D. Utah 1985), aff’d in part and rev’d in part
on other grounds, 75 B.R. 402 (D. Utah. 1987).
57 In re Git-N-Go, Inc., 321 B.R. 54, 58 (Bankr. N.D. Okla. 2004).
58 In re Interwest Business Equipment, Inc., 23 F.3d 311, 317 (10th Cir. 1994).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 18 of 27
attorney-client relationship with BVI and did not represent BVI’s interest in the restructuring
transaction. Notwithstanding BVI’s alleged “belief” that SMH was representing it in the
restructuring transaction, the LOI dispels any such notion. BVI’s obligation to pay for Boot Hill’s
legal costs to carry out the restructuring clearly refers to “Boot Hill’s legal counsel,” not BVI’s legal
counsel or the parties’ legal counsel.59 It was Debtor, not BVI, that contacted SMH and retained its
legal services relative to the LOI and restructuring. BVI has come forward with no evidence to
refute Harshbarger’s and Hill’s testimony concerning the events leading up to Debtor hiring SMH
in the summer of 2008. It is clear to the Court that Debtor, as an accommodation to BVI’s need to
comply with the EB-5 Program, went along with the restructuring proposal. Debtor made clear,
however, that it would not be out-of-pocket any costs or expenses associated with BVI’s request,
nor incur any liability as a result of the restructuring.60 The Court concludes that SMH did not
represent BVI pre-petition and therefore, SMH did not represent BVI, one of Debtor’s creditors, and
has no conflict of interest under § 327(c).61
BVI’s funding of Debtor’s pre-petition legal fees to effectuate the LOI and restructuring
stands on slightly different footing. Even though § 327(c) may not be implicated, SMH must still
satisfy the requirements of § 327(a). The question becomes whether SMH holds an interest adverse
to the estate or is disinterested by reason of BVI’s funding of SMH’s pre-petition attorney fees under
the LOI. The Court expressly finds that BVI’s obligation to pay SMH’s attorney fees for the
59 Ex. 3, ¶ 8.
60 Ex. 3, ¶¶ 6-8.
61 In re Glenn Electric Sales Corp., 89 B.R. 410, 415 (Bankr. N.J.), aff’d 99 B.R. 596
(D.N.J. 1988) (Debtor’s sole shareholder’s payment of counsel’s retainer does not equate to
representation of the shareholder). As the bankruptcy court noted in Glenn, third party payment
to a lawyer to represent a different person is not uncommon. 89 B.R. at 416.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 19 of 27
restructuring transaction was discharged on the date of the involuntary petition. It is undisputed that
BVI fully paid the pre-petition LOI attorney fees incurred August through November and no
obligation to pay Debtor’s legal fees under the LOI remains outstanding. At the point BVI filed the
involuntary petition, the LOI was effectively terminated. These facts are distinguishable from the
cases cited by SMH.62 This is not a situation where a third party is paying the debtor’s counsel’s
attorney fees in the chapter 11 bankruptcy, a situation that may or may not preclude employment.63
Under the circumstances here, the Court concludes that SMH is disinterested and holds or represents
no interest adverse to the estate, by reason of BVI’s funding SMH’s pre-petition attorney fees
pursuant to the LOI agreement, particularly where SMH has fully disclosed BVI’s pre-petition
compensation of SMH in the amount of $24,134.50 and makes no claim that BVI is still indebted
to it under the LOI.64
II. SMH’s Representation of Conestoga and Kennedy & Coe65
62 See In re Missouri Min., Inc., 186 B.R. 946 (Bankr. W.D. Mo. 1995) (chapter 11
debtor’s principal who was also a creditor, advanced $15,000 retainer to counsel for filing of
bankruptcy); In re Lan Dan Enterprises, Inc., 221 B.R. 93 (Bankr. S.D.N.Y. 1998) (law firm that
was compensated from debtor’s principal was not precluded from being employed as special
counsel in chapter 11 debtor’s landlord-tenant dispute)
63 Some courts hold that third party payment of attorney fees of debtor’s counsel does
not disqualify counsel per se from employment. See e.g., In re Missouri Min., Inc., supra; In re
Kelton Motors, Inc., 109 B.R. 641, 657-58 (Bankr. D. Vt. 1989) (refusing to extend § 327(a)
disinterested standard to an attorney paid by an insider-interested party to represent the debtor
and citing conditions that should guide the court’s determination); In re Olson, 36 B.R. 74 (D.
Neb. 1983) (articulating four factors to determine whether a third party’s payment of debtor’s
counsel is a basis for disqualification).
64 Dkt. 21, Exhibit A.
65 From the evidence produced at the hearing, no representation of creditor Third Day
Biofuels by SMH was shown. The remote connection to Third Day, by SMH’s representation of
one of its owners and/or Garmin is insufficient in the absence of any evidence that SMH’s
representation was in any way related to the Boot Hill ethanol plant project or posed a conflict of
Case 08-13128 Doc# 46 Filed 03/27/09 Page 20 of 27
The Court next addresses whether SMH’s former and/or ongoing representation of Kennedy
& Coe and Conestoga on matters unrelated to the Boot Hill ethanol plant project disqualifies SMH
from employment as Debtor’s bankruptcy council. From the testimony presented at the hearing,
SMH’s representation of Kennedy & Coe was limited to a previous single matter that Kennedy &
Coe’s general counsel was unable to handle due to a conflict. The matter in question was unrelated
to Boot Hill, the LOI, or the bankruptcy. Kennedy & Coe is not a creditor, equity security holder,
or an insider of Debtor. It has served as Debtor’s accountant. Under these circumstances, the Court
concludes that SMH’s previous representation of Kennedy & Coe on an unrelated matter is not
adverse to the estate and does not make SMH not disinterested. SMH is not disqualified from
employment be reason of its previous representation of Kennedy & Coe.
This leaves Conestoga. Conestoga is an equity security holder, holding a 1 unit membership
in Debtor, and is the managing entity of Debtor. Perhaps more significantly, Conestoga controls the
the Board of Directors of Debtor by its control of two board positions having 51% voting power.
SMH represents Conestoga on an ongoing basis. Hill testified that this representation involves
review or drafting of contracts between Conestoga and third parties. SMH’s representation of
Conestoga does not relate to the Boot Hill ethanol project. The question is whether SMH’s dual
representation of Conestoga and Debtor offends the adverse interest and disinterestedness
requirements of § 327(a).
Conestoga controls the Debtor’s Board because it has the ability to designate two members
that would control 51% of the voting power. In addition, Conestoga’s status as the managing
company for Debtor indicates it wields considerable influence and control over Debtor. A person
interest or an interest adverse to the estate.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 21 of 27
who is a director or managing agent of the debtor is an “insider.”66 SMH in essence, represents both
the insider, Conestoga, and the Debtor, albeit not in this controversy. This fact places SMH’s
disinterestedness in doubt.67 Subsection (C) of the disinterested definition is a catch-all clause that
is broad enough to exclude employment of an attorney with some relationship that may color the
attorney’s independence and impartiality required by the Bankruptcy Code.68
While SMH’s representation of Conestoga on unrelated matters may not be representation
of an interest adverse to the estate, its representation of Conestoga has the potential to become
adverse, and an actual conflict of interest, if for instance, Conestoga’s management of Debtor is
called into question, a contract dispute arises over Conestoga’ management services provided to
Debtor, or the member interests of Debtor are adverse to the estate. Such a representation would
be a conflict of interest under Rule 1.7(a)(2) of the Kansas Rules of Professional Conduct (“KRPC”).
That Rule provides:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest. A concurrent conflict of
interest exists if: . . . (2) there is a substantial risk that the representation of one or
more clients will be materially limited by the lawyer’s responsibilities to another
66 11 U.S.C. § 101(31)(B) and (F). In re Interwest Business Equipment, Inc., 23 F.3d
311, 316-318 (10th Cir. 1994) (proposed employment of law firm to represent three interelated
debtors with inter-company debts and where one of the debtors Retail Systems, Inc. had a
management contract to manage debtor Green Street; Retail was an insider of Green Street)
67 In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992) (attorney for closely held
family corporation [debtor in possession] that concurrently represented debtor’s sole shareholder
in divorce action, was not disinterested where impropriety and mismanagement of the debtor by
shareholder was alleged).
68 See In re Cook, 223 B.R. 782, 789 (10th Cir. BAP 1988) (Discussing the disinterested
requirement under former subsection (E) of § 101(14), now codified as subsection (C)); In re
Git-N-Go, Inc., 321 B.R. 54 (Bankr. N.D. Okla. 2004).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 22 of 27
client, a former client . . .69
KRPC 1.13(e) permits a lawyer to concurrently represent a limited liability company and any of its
directors, members or other constituents, but such dual representation is subject to Rule 1.7. Here,
it appears that SMH’s recent dealings with Conestoga are unrelated to its representation of and
duties to Boot Hill, but the Court must still determine whether there is a “substantial risk” that the
Conestoga representation might materially limit SMH’s representation of the Debtor. As the Tenth
Circuit stated in Interwest, debtors’ counsel must cast a “jaundiced eye and scowling mien” over all
of the debtor’s transactions without compromising its undivided loyalty to the debtor and estate.70
In this case, however, it appears unlikely that such a conflict will arise. Both BVI and the
United States Trustee have indicated a desire to withdraw their objections to SMH’s employment.
Moreover, the parties have announced a settlement of the substantive differences in the case and
state that an amended plan and disclosure statement will shortly be proposed that restructures the
debtor’s business and effectively treats BVI’s claims. This Court acknowledges the Tenth Circuit’s
strongly-phrased admonition concerning the fiduciary duty of debtor’s counsel in the Interwest case.
It is equally cognizant that its independent duty to vet the disinterestedness of counsel trumps even
the withdrawal of the objections of the parties in interest. However, the Court also has the discretion
69 KRPC 1.7, 2008 Kan. Ct. R. Annot. 459. Subsection (b) of KRPC 1.7 permits the dual
representation if it does not involve the assertion of a claim by one client against the other client
in the same litigation, each client consents in writing to the dual representation, the
representation is not prohibited by law, and the lawyer reasonably believes that he will be able to
provide competent and diligent representation to each client. 2008 Kan. Ct. R. Annot. 460. But
see, In re Git-N-Go, Inc., 321 B.R. at 60. (Written conflict waivers from the debtor in possession
and its holding company owning 87% of debtor’s stock, did not eliminate adverse interests and
support counsel’s employment as debtor’s counsel).
70 See Interwest Business Equipment, Inc., supra at 316, quoting In re McKinney Ranch
Assoc., 62 B.R. 249 (Bankr. C.D. Cal. 1986); In re Git-N-Go, 321 B.R. at 59-60.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 23 of 27
to evaluate whether this dual representation amounts to “an active competition between two
interests, in which one interest can only be served at the expense of the other.” At this time, it does
In so holding, this Court notes that the present facts present many fewer concerns than those
in Interwest where counsel sought compensation for representing three interrelated debtors with
inter-company debt and management contracts. Similarly, this dual representation appears benign
when compared to the contemplated representation in In re Git-N-Go, Inc. where one firm sought
to represent the debtor as well as its parent company that held most of debtor’s capital stock and a
significant unsecured claim. In addition, the same firm had been intimately involved in a
transactions between these entities and among them and their lender. Here, where the Conestoga
representation is unrelated to the debtor’s effort to reorganize, and in the absence of any other
conflicting joint representation by SMH, the Court concludes that SMH is not at this time
disqualified under § 327(a) on account of its dealings with Conestoga, at least to the extent that they
have been disclosed.
If, however, this Court perceives that a conflict is developing or has developed, SMH’s
appointment may be terminated and its compensation revisited. Several courts faced with similar
circumstances have chosen to “wait and see” whether potential conflicts ripen into actual ones
before requiring estates to take the expensive step of being separately represented.71 Given that the
active parties in this case have stated that the underlying issues in this matter will be resolved in an
71 See In re O.P.M. Leasing Services, 16 B.R. 932, 936 (Bankr. S.D.N.Y. 1982)
(trustee’s representation of two related estates in adversary approved on “wait and see” basis); In
re Global Marine, Inc., 108 B.R. 998, 1002 (Bankr. S.D. Tex. 1987) (approving representation
of multiple related debtors by single firm).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 24 of 27
agreed plan that will shortly be filed, the Court sees little likelihood of an actual conflict developing.
The Court and the parties have multiple means to address that eventuality, should it develop.
III. SMH as an Involuntary Gap Creditor of the Estate
In its Application, SMH makes no disclosure regarding fees it incurred during the gap
period.72 Section 502(f) provides that claims arising in the ordinary course of the debtor’s business
after the commencement date but before the order for relief are allowed as though they had arisen
before the petition date. Such claims can never be administrative expenses because they are
specifically excluded by the language of § 503(b). Yet they are accorded a third priority, junior to
that of administrative expenses and domestic support orders by § 507(a)(3). At the evidentiary
hearing, SMH disclosed that it incurred some $20,000 in fees on behalf of Debtor in the month of
December. Some of these fees were incurred in reviewing and responding to the involuntary
petition.73 These fees were not scheduled on Debtor’s Schedules E or F filed January 8, 2009. The
question then becomes whether the existence of any SMH gap claim for outstanding fees for the
72 The gap period is the period between the filing of the involuntary petition and the
entry of the order for relief. In re Geothermal Resources Intern., Inc., 93 F.3d 648, 651 n. 1 (9th
Cir. 1996). See also, In re EWC, Inc., 138 B.R. 276, 279-80 (Bankr. W.D. Okla. 1992) (Counsel
who failed to disclose his pre-petition representation and receipt of fees of debtor and sole
shareholder violated disclosure requirements of Fed. R. Bankr. P. 2014(a) and alone warranted
disqualification of professional and denial of compensation); In re Cook, 223 B.R. 782, 790 (10th
Cir. BAP 1998) (Rule 2014(a)’s disclosure requirements, which enforce the disinterestedness
requirement, are not discretionary)
73 Allowing these fees as a gap claim would require a finding that they were incurred in
the “ordinary course” of this business. See In re Hanson Industries, Inc., 90 B.R. 405, 414
(Bankr. D. Minn. 1988) (Defunct debtors’ attorneys fees incurred in defending involuntary
proceeding not “gap” claims as not in “ordinary course”). For the present purpose, the Court
assumes that SMH’s fees support a gap claim.
Case 08-13128 Doc# 46 Filed 03/27/09 Page 25 of 27
month of December precludes SMH’s employment as bankruptcy counsel for Debtor.74
By definition, a creditor cannot be a “disinterested person.”75 A creditor is defined as a
person who “has a claim against the debtor that arose at the time of or before the order for relief
concerning the debtor.”76 Here, BVI petitioned for involuntary bankruptcy on December 1, 2008.
Debtor’s motion to convert to a voluntary chapter 11 reorganization was granted December 23,
2008. The order for relief was effectively entered December 23, 2008.77 To the extent SMH’s
December fees make SMH an involuntary gap creditor under § 502, SMH is not disinterested as
required for employment under § 327(a).78 SMH can only cure this deficiency by amending or
clarifying its disclosure concerning these fees and waiving any claim against the estate for
compensation for services rendered between December 1, 2008 and December 23, 2008. Otherwise,
74 SMH’s omission of these gap fees from its Application is troubling. This Court would
be justified in denying SMH’s Application on the basis of this non-disclosure alone, if it were so
inclined. See In re EWC, Inc., 138 B.R. 276, 280 (Bankr. W.D. Okla. 1992) (There must be strict
compliance with the disclosure requirements; violation of the disclosure rules alone is sufficient
to disqualify a professional and deny compensation.).
75 11 U.S.C. § 101(14)(A).
76 11 U.S.C. § 101(10)(A). See also, 11 U.S.C. § 101(5), defining a “claim.”
77 See Dkt. 7.
78 See U.S. Trustee v. Price Waterhouse, 19 F.3d 138 (3rd Cir. 1994) (Chapter 11 debtors
in possession could not employ as accountant and financial advisor the accounting firm that had
performed prepetition services for debtor and for which debtor owed over $800,000; accounting
firm was not disinterested); In re Roberts, 75 B.R. 402 (D. Utah 1987) (a law firm which is a
pre-petition creditor does not meet the disinterested criteria); In re Estes, 57 B.R. 158 (Bankr.
N.D. Ala. 1986) (law firm was not disinterested and the court’s approval of law firm’s
application for employment in chapter 11 was revoked upon discovery of law firm’s prepepetion
debt owed by debtor). See also 11 U.S.C. § 1107(b) which states: “Notwithstanding
section 327(a) of this title, a person is not disqualified for employment under section 327 of this
title by a debtor in possession solely because of such person’s employment by or representation
of the debtor before the commencement of the case.”
Case 08-13128 Doc# 46 Filed 03/27/09 Page 26 of 27
SMH must be disqualified as a creditor.79
IV. Nunc pro tunc Employment of SMH
The Court will deny SMH’s request that its employment be approved retroactively to
December 1, 2008, the date of the involuntary petition. First, the Court has determined above that
SMH cannot receive and must waive its claim to fees for the gap period in order to be deemed
disinterested. Second, as to the period from December 23, 2008 to January 15, 2009, SMH has made
no showing of the “extraordinary circumstances” necessary to support a nunc pro tunc
appointment.80 Here, SMH received a $10,000 retainer on December 22, 2008, the day it filed the
conversion papers. There is no evidence or suggestion that it made an effort to timely file the
Application that was thwarted by some intervening cause. Nor is there a suggestion of excusable
neglect. There is no doubt that the firm worked diligently for the debtor during this period and the
Court recognizes that sometimes the winter holidays upset a law firm’s workflow. At the same time,
nothing prevented SMH from filing an Application immediately after the new year or, if its
employment arrangement with Debtor were somehow in doubt, requesting an interim appointment
to protect its interests. In the absence of any extraordinary circumstances, the Court may only allow
the appointment effective the date of SMH’s Application, or January 15, 2009.
79 See In re EWC, Inc., 138 B.R. 276, 281 (Bankr. W.D. Okla. 1992) (Bankruptcy court
does not have the discretionary authority to allow employment of a professional who does not
meet the statutory eligibility criteria; such employment is void ab initio); In re Albrecht, 245
B.R. 666 (10th Cir. BAP 2000), aff’d 233 F.3d 1258 (10th Cir. 2000) (A professional’s lack of
disinterestedness is a mandatory ground for denial of his or her employment); In re Interwest
Business Equipment, Inc., 23 F.3d at 316 (The requirements of § 327(a) are threshold
requirements to be met.)
80 See In re Land, 943 F.2d 1265, 1267-68 (10th Cir. 1991); In re Franklin Sav. Corp.,
181 B.R. 88 (Bankr. D. Kan. 1005); In re Bartmann, 320 B.R. 725 (Bankr. N.D. Okla. 2004).
Case 08-13128 Doc# 46 Filed 03/27/09 Page 27 of 27
The Court concludes that in this factual setting and these circumstances, SMH is
disinterested and that its delayed application for employment may be approved effective January 15,
2009. The Application for approval of SMH’s employment as debtor’s bankruptcy counsel is
therefore APPROVED, conditioned, however, on SMH’s waiver of any claim against the estate for
fees it incurred between December 1 and December 23, 2008.
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