Hon. Christopher S. Sontchi approved the retention application of debtors’ counsel over the objection of the U.S. Trustee, finding that counsel (1) complied with the requirements for retention of professionals under § 327 of the Bankruptcy Code and (2) did not violate its conflict waiver with the debtors’ pre-petition ABL lender.[1]
Background
On March 4, 2020, four days prior to the bankruptcy filings of Art Van Furniture, LLC and certain of its affiliates (the debtors), Benesch, Friedlander, Coplan & Aronoff LLP (Benesch) received a $250,000 retainer from the debtors for Benesch to represent the debtors in connection with their bankruptcy proceedings, as well as a specific consent (waiver) from Wells Fargo, N.A., the debtors’ pre-petition ABL lender, to solve for the fact that Benesch represented both the debtors and Wells Fargo in unrelated matters.
On the motion of the debtors, the court entered an order (interim cash-collateral order) authorizing the debtors to use cash collateral securing the debtors’ pre-petition ABL loan on March 11, 2020. The debtors submitted an application to retain Benesch as bankruptcy counsel on March 16, 2020, which disclosed that Wells Fargo was a current client of Benesch and that the wavier was in place as a result.
On March 19, 2020, Wells Fargo issued a Notice of Event of Default, pursuant to the interim cash-collateral order, which terminated the debtors’ right to use cash collateral. Benesch’s subsequent efforts to work with Wells Fargo and the unsecured creditors’ committee to develop “post-suspension restructuring alternatives” were unsuccessful. With no other alternative available, the court entered an order converting the chapter 11 cases to cases under chapter 7 at the debtors’ request.
On April 6, 2020, the U.S. Trustee filed an objection to the application, arguing that Benesch violated the waiver by working with Wells Fargo to develop “post-suspension restructuring alternatives” after the debtors’ default under the interim cash-collateral order. Benesch opposed the objection on the grounds that (1) it was compliant with the requirements for retention of professionals under Bankruptcy Code § 327, and (2) its post-default negotiation efforts and all necessary aspects of the chapter 11 proceedings fell within the scope of the waiver.
Bankruptcy Court Analysis
In overruling the objection, the court determined that (1) the U.S. Trustee failed to meet its burden of establishing that a conflict existed under Bankruptcy Code § 327, (2) Benesch did not violate the waiver, and (3) Benesch’s representation did not represent an actual or potential conflict requiring disqualification of the application.
The parties’ dispute largely centered around the fact that the waiver failed to define “the relationship between Benesch’s representation and key terms such as ‘Dispute’ and ‘Transaction.’” This ambiguity made it unclear whether Benesch’s actions were permitted under the waiver.
Through the waiver, Benesch sought Wells Fargo’s consent to represent to the debtors “in connection with a liquidation of [the debtors], including in a potential Chapter 11 Bankruptcy proceeding (‘Art Van Liquidation’).” Benesch agreed that it would not “represent [Debtors] in any subsequent Dispute with Wells Fargo arising out of the Transaction or any related transaction between [Debtor] and Wells Fargo…. [Benesch] further agree[d], if applicable, that any workout or restructuring of the Transaction or any related transactions in the context of a default by either the [debtor] or Wells Fargo, or any bankruptcy proceeding involving the [debtor] or Wells Fargo, w[ould] be considered a Dispute arising out of the Transaction.” Wells Fargo’s Conflicts Policy defines “dispute” as “[a] pending, threatened, or likely litigation, arbitration, bankruptcy, adversary proceeding, contested motion, discovery, alternative dispute resolution process or loan workout, including without limitation, any foreclosure or collection action.” It defines “transaction” as “[a]ny matter which is not a Dispute.” These definitions were expressly incorporated from Wells Fargo’s Conflicts Policy into the waiver.
The court found that Benesch’s post-default representation of the debtors was a “loan workout” and, as a result, a dispute under the waiver. These negotiation efforts, although related to the pre-petition ABL loan, “arose out of” a default under the interim cash-collateral order, which was part of the debtors’ bankruptcy. A bankruptcy, which is a category of a dispute, cannot be “the Transaction.” Therefore, because the dispute arose out of a bankruptcy order, it could not have arisen out of “the Transaction.”
Additionally, the court determined that “the Transaction” referenced in the waiver referred to the pre-petition ABL loan — not the Interim Cash Collateral Agreement. Because the debtors were in default under the pre-petition ABL loan prior to the debtors’ bankruptcy filing, the court thought it would be unlikely that the waiver would bar workout or restructuring efforts in connection with the pre-petition ABL loan in the chapter 11 cases. Wells Fargo must have anticipated that it would need to negotiate with the debtors with respect to the pre-petition ABL loan and that the debtors’ assets (i.e., cash) would be central to these negotiations. As such, it wouldn’t make sense to restrict Benesch’s ability to represent the debtors in connection with a critical component of the representation. Consequently, the court found that Benesch did not violate the waiver.
Conclusion
Despite the favorable result for Benesch, conflict waivers should be more precisely drafted to define what actions fall within the scope of a law firm’s permitted activities under such waiver.
[1] In re Art Van Furniture LLC, et al., Case No. 20-10553 (CSS) (Bankr. D. Del. July 21, 2020) [Docket No. 809].