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ii. American International Refinery, Inc. v. Adams & Reese, LLC (In re American International Refinery, Inc.), 676 F.3d 455 (5th Cir. 2012)
Issue: Whether a creditor's payment of the bankruptcy retainer of debtors' counsel created a disqualifying interest.
Holding: The Court held, as a matter of first impression, that under the totality of circumstances approach, a creditor's payment of the bankruptcy retainer of debtors' counsel did not create a disqualifying interest. The Court first addressed whether A&R had a disqualifying interest. After reciting the standards for finding an "adverse interest" and determining whether counsel is "disinterested," the Court noted that the standards for finding a conflict are strict. The Court then stated: "The most troubling aspect of A&R's relationship to GCA is obviously GCA's payment of the bankruptcy retainer. Courts have taken two approaches when deciding if payment of a bankruptcy retainer by a third-party is a disqualifying interest. Some courts have found that payment of a retainer by a third party is a per se disqualification, while other courts have held that the totality of the circumstances surrounding the retainer payment must be scrutinized before deciding if a disqualifying conflict exists." The Court here concluded that the totality of circumstances approach was the approach most consistent with the Court's decision in West Delta; the court thus adopted that approach for deciding whether third-party payment of a retainer creates a disqualifying interest. The court then examined the totality of the circumstances here. The Court rejected the trustee's argument that A&R's assistance in drafting the pre-petition lock-up agreement with GCA showed that A&R had loyalty to GCA. The court noted that "[i]t is common for a law firm to help its client negotiate a pre-petition agreement with a creditor and the bankruptcy process encourages such voluntary settlements." The Court also rejected the trustee's argument that GCA payment of A&R retainer meant A&R was loyal to GCA. The court noted that while there was some evidence showing that A&R discussed submitting plans that were favorable to GCA, this could also have simply meant that A&R knew any plan would have to be supported by GCA to succeed. The Court found that the bankruptcy court had not erred in finding that the record "more fairly supported this legitimate inference." The trustee also argued that A&R divided loyalty was evidenced by its decision not to litigate GCA's claim. The Court rejected this argument, too, stating that "[a]lthough there are grounds for questioning A&R's decision on this point, the testimony at trial indicated that A&R considered whether to dispute these claims and decided that the costs of litigation were not in the best interests of the estate." Lastly, the trustee presented evidence that A&R had drafted a motion for relief from stay on behalf of GCA. "The bankruptcy court found, however, that this letter did not evidence any favoritism or loyalty to GCA. Instead, the bankruptcy court credited testimony from Dean Ferguson, who was A&R's lead attorney on the bankruptcy, that A&R prepared the draft as part of a strategy to help overcome a stalemate in negotiations between GCA and the Equity Committee." The Court concluded that although the circumstances were odd, the bankruptcy court's findings on this point were not clearly erroneous. In short, the Court affirmed the bankruptcy court's findings that A&R did not have an adverse interest to the debtor and was disinterested. Next, the court addressed the trustee's argument that A&R's had a disqualifying interest because of its prior representation of the debtor in connection with the dividend assignment agreement with GCA. The Court stated, "[w]e agree ... that earlier legal work can
©2014 William L. Norton III
