W.F. DEVELOPMENT CORPORATION, ET AL., PETITIONERS V. OFFICE OF THE UNITED STATES TRUSTEE No. 90-1043 In The Supreme Court Of The United States October Term, 1990 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Fifth Circuit Brief For The Respondent In Opposition TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statement Argument Conclusion OPINIONS BELOW The decision of the court of appeals, Pet. App. A1-A5, is reported at 905 F.2d 883. The decisions of the district court, Pet. App. C1-C15, and the bankruptcy court, Pet. App. D1-D3, E1-E2, are unreported. JURISDICTION The judgment of the court of appeals was entered on July 13, 1990. A petition for rehearing was denied on August 24, 1990. Pet. App. B1-B2. The petition for a writ of certiorari was filed on November 21, 1990. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). QUESTION PRESENTED Petitioners -- limited partnerships and their common general partner -- were debtors in cases under Chapter 11 of the Bankruptcy Code, 11 U.S.C. 1101 et seq. The question presented is whether counsel should have been disqualified from representing all of the debtors on the ground that the debtors' partnership relations result in a disqualifying conflict of interest under 11 U.S.C. 101(13) and 327(a). STATEMENT 1. The commencement of a case under the Bankruptcy Code (Code) creates an estate in which all property rights of the debtor vest. 11 U.S.C. 541. In a case under Chapter 11 of the Code, the debtor remains in possession of the estate and operates the business as it attempts to restructure its affairs and formulate a plan for reorganization. 11 U.S.C. 1108, 1121. The debtor may be removed from possession of the estate and a trustee may be appointed upon demonstrating cause. 11 U.S.C. 1104. If a trustee is not appointed, the "debtor in possession" has virtually the same rights and fiduciary obligations as a trustee serving in the case. 11 U.S.C. 1107(a). To assist in carrying out its duties, the debtor in possession may employ professionals "that do not hold or represent an interest adverse to the estate and that are disinterested persons." 11 U.S.C. 327(a). The debtor must submit a formal application to the bankruptcy court and must disclose any conflicts of interest in order to ensure that the estate does not employ professionals with divided loyalties. "Disinterested person" is defined in 11 U.S.C. 101(13). Subparagraphs (A) through (D) of that provision set forth specific categories of persons who are not "disinterested." /1/ In addition, subparagraph (E) of Section 101(13) broadly provides that a professional is not "disinterested" if he has any interests that are "materially adverse" to those of the bankruptcy estate or any class of creditors or equity holders due to "any direct or indirect relationship to, connection with, or interest in, the debtor * * * or for any other reason." 11 U.S.C. 101(13)(E). 2. This case involves four debtors: W.F. Development Corporation (WF); Golf Hills Apartments, Ltd. (Golf Hills); Westover Valley, Ltd. (Westover); and Lackland Court Apartments, Ltd. (Lackland). Golf Hills, Westover, and Lackland were Texas limited partnerships that shared a common general partner -- WF. Pet. App. C2. In late 1987, each of the limited partnerships filed for bankruptcy under Chapter 11, and each applied for permission to employ St. Clair Newbern, III (Newbern) as counsel. Id. at C2-C3. Respondent did not object to the applications, and the court initially approved them. Id. at A2. Subsequently, in December 1987, WF filed for bankruptcy protection, and it, too, requested permission to employ Newbern as counsel. Pet. App. A2. Respondent objected to Newbern's employment, and the bankruptcy court conducted three separate hearings concerning that objection. Id. at A2, C4. At the conclusion of the third hearing, the bankruptcy court disqualified Newbern from representing WF pursuant to Sections 105 and 327 of the Code. Pet. App. C4, D1-D2. The bankruptcy court also disqualified Newbern from representing Golf Hills, Westover, and Lackland and, pursuant to 11 U.S.C. 328, ordered Newbern to disgorge all fees and retainers that he had received. Pet. App. D1-D2. 3. WF and the limited partnerships appealed to the United States District Court for the Northern District of Texas. The district court affirmed the bankruptcy court's order disqualifying Newbern, stating that "it is clearly a conflict of interest for an attorney to represent both general and limited partners in the same bankruptcy proceeding." Pet. App. C9. /2/ 4. The court of appeals affirmed, holding that because "limited and general partners * * * hold materially adverse positions," the "potential for conflict will always exist" if the same attorney represents both interests. Pet. App. A3-A4. Thus, the court adopted a "clear rule" that "(w)hen one attorney represents both limited and general partners in bankruptcy, there will always be a potential for conflict and disqualification is proper." Id. at A3. ARGUMENT Because the limited partnership bankruptcy cases have been dismissed and the WF case has been converted to a case under Chapter 7 of the Code, this matter is not justiciable. Moreover, the decision here does not conflict with any decision of this Court or of any court of appeals. Further review therefore is not warranted. 1. The bankruptcy cases of all of the limited partnership debtors have been dismissed. /3/ Therefore, the limited partnerships' applications to employ Newbern as counsel no longer present an "actual, ongoing" controversy. Lewis v. Continental Bank Corp., 110 S. Ct. 1249, 1253 (1990); Deakins v. Monaghan, 484 U.S. 193, 199 (1988). Although WF's bankruptcy case is still pending, it was converted to a liquidation case under Chapter 7 of the Code on January 4, 1989. The disqualification order challenged by WF was issued pursuant to WF's application to employ counsel in its capacity as a debtor in possession under Chapter 11 of the Code. Since WF's bankrupty case has been converted to one under Chapter 7, WF is no longer a debtor in possession and is therefore not empowered to employ counsel on behalf of the bankruptcy estate. Thus, the bankruptcy court's order of disqualification has no continuing effect on WF or the Chapter 7 estate. Although the bankruptcy court's disgorgement order still has a continuing effect on Newbern, Newbern merely represented WF and the limited partnership debtors in their appeals; he did not appeal the bankruptcy court's order on his own behalf. Cf. Torres v. Oakland Scavenger Co., 487 U.S. 312 (1988) (failure to file notice of appeal in accordance with specificity requirement of Fed. R. App. P. 3(c) is jurisdictional defect); FTC v. Amy Travel Serv., Inc., 894 F.2d 879, 880-881 (7th Cir.) (Fed. R. App. P. 3(c) requires that attorney be named in notice of appeal from order imposing Rule 11 sanctions), cert. denied, 110 S. Ct. 366 (1989). Because Newbern was not a party in any of the previous appeals in the courts below, he is not a petitioner in this case. Cf. Bender v. Williamsport Area School Dist., 475 U.S. 534, 543-549 (1986) (standing to appeal in official capacity as school board member does not confer standing to appeal in individual capacity); Sup. Ct. R. 12.2 (only "(p)arties" may join in a petition for writ of certiorari filed by another party). /4/ 2. Even if this case were justiciable, review by this Court would not be warranted. There is no conflict among the circuits on the question whether counsel may simultaneously represent limited partnerships and their general partner in bankruptcy. /5/ In fact, the Fifth Circuit is the only court of appeals to have addressed that question. /6/ All of the allegedly conflicting cases cited by petitioners are readily distinguishable. The First and Eighth Circuit cases cited by petitioners involve an attorney's retention of a security interest in the debtor's property to ensure payment of his fees. See In re Martin, 817 F.2d 175 (1st Cir. 1987); In re Pierce, 809 F.2d 1356 (8th Cir. 1987). A per se rule disqualifying any attorney who takes a security interest in the property of the debtor, regardless of the nature of the interest, would be more difficult to justify than the per se rule at issue here. The former rule would make it difficult for some debtors to retain competent counsel, since debtors might not have sufficient funds to pay the case retainer that virtually all attorneys would require in the absence of a security interest. In re Martin, 817 F.2d at 181. In contrast, the per se rule adopted in this case does not impair a debtor's ability to obtain legal services. The rule at issue here only prohibits a general partner in bankruptcy from employing the particular attorney(s) who represent related limited partnership interests; it does not diminish the supply of qualified attorneys willing to perform legal services for the general partner. /7/ The Second Circuit cases that petitioners cite, Pet. 23, are likewise inapposite. In re International Oil Co., 427 F.2d 186 (1970) (per curiam); Katz v. Kilsheimer, 327 F.2d 633 (1960). Both Katz and International Oil were decided prior to the enactment of the 1978 Bankruptcy Code, and neither case involved partnership debtors. The issue in both cases concerned whether the presence of interaffiliate claims between a parent corporation and its subsidiaries required the appointment of separate trustees for each of the entities. In Katz, the court decided to delay a decision on that issue pending briefing and an additional hearing on the matter. Katz, 327 F.2d at 636. In International Oil, the court concluded in a one-page, per curiam opinion that the interaffiliate claims were not "sufficient to saddle the() estates with the expense of separate trustees and trustees' attorneys at the present time." International Oil, 427 F.2d at 187. The preceding quotation is the only reference in the opinion suggesting that employment of counsel was even at issue in that case. Of the earlier Fifth Circuit cases petitioners cite, Pet. 43-50, only one concerns an issue that is even arguably similar to the issue raised here. That case is In re Consolidated Bancshares, Inc., 785 F.2d 1249 (1986). Consolidated Bancshares involved an alleged conflict of interest arising from the dual representation of a debtor corporation and one of its officers or directors. The court ordered a remand in that case in order to determine whether a conflict of interest was in fact presented. As the Fifth Circuit below explained in distinguishing Consolidated Bancshares, Pet. App. A3-A4, the earlier decision did not hold that an in-depth factual analysis is necessary in every conflict-of-interest case. Even if the Fifth Circuit's analysis of its prior decision is wrong, review by this Court is not needed to resolve such an intracircuit conflict. See Wisniewski v. United States, 353 U.S. 901, 902 (1957) (per curiam). Contrary to petitioners' argument, Pet. 51-54, the decision of the court of appeals does not conflict with this Court's decision in Woods v. City Nat'l Bank & Trust Co., 312 U.S. 262 (1941). The Court in Woods emphasized that a claimant who represents conflicting interests in a bankruptcy proceeding should be denied fees even though "fraud or unfairness were not shown to have resulted." Id. at 268. The Court did not suggest that a detailed evidentiary record must be created in every case before disqualification may be ordered where, as here, a conflict of interest is facially apparent. If anything, it suggested the contrary. 3. Petitioners misapprehend the court of appeals' rule when they suggest that it applies equally to all "jointly administered cases" /8/ involving "affiliated debtors." Pet. 7. Nothing in the court of appeals' decision supports that contention. This case presents the question of whether an attorney may simultaneously represent limited partnership debtors and a general partner debtor. The court of appeals focused solely on the special problems that partnerships present and did not suggest that its holding reached beyond the partnership context. See Pet. App. A3. In the court of appeals' view, the diverse obligations of a general partner, and the conflicts of interest that result from those obligations, justify creation of a per se rule of disqualification in this limited context. A general partner not only has an ownership interest in the limited partnership, he is personally liable to creditors for partnership debts, see Tex. Rev. Civ. Stat. Ann. art. 6132a-1, Section 4.03(b) (Vernon 1990); Tex. Rev. Civ. Stat. Ann. art. 6132b, Section 15 (Vernon 1990). /9/ When a limited partnership becomes insolvent, the general partner has an incentive to file for bankruptcy in order to place the assets of the general partner beyond the reach of the limited partnership and its limited partners and creditors. A per se disqualification rule is justified, according to the court of appeals, to avoid conflicts of interest (or appearances of conflict) that might otherwise arise from the simultaneous representation of a general partner and a partnership or its limited partners. /10/ Accordingly, decisions of district courts and bankruptcy courts have generally prohibited the dual representation of partners and partnerships in bankruptcy cases. /11/ 4. Petitioners characterize the court of appeals' decision as "having determined that disgorgement should be (automatically) ordered as a consequence of simultaneous representation." Pet. 58. The per se rule adopted by the court of appeals, however, concerns only disqualification; the rule does not address the separate issue of disgorgement. See Pet. App. A3. Although the court of appeals did affirm the bankruptcy court's order that Newbern disgorge his fees, that result presumably rested on the court of appeals' determination that the bankruptcy court did not abuse its considerable discretion under 11 U.S.C. 328(c). Nothing in the opinion suggests that the disgorgement order rested on a per se rule requiring that result. 5. Petitioners argue, Pet. 34-36, that the specific prohibited relationships found in Section 101(13)(A)-(D) and the per se rule found in the prior version of 11 U.S.C. 327(c), /12/ demonstrate that it is readily apparent when Congress intends to legislate per se rules of disqualification. According to petitioners, the failure explicitly to legislate the strict rule adopted by the court of appeals indicates that Congress did not intend such a rule. That argument is wide of the mark. Section 101(13)(E) expressly excludes from the category of "disinterested person(s)" professionals who have a "materially adverse" interest "by reason of any direct or indirect relationship to, connection with, or interest in, the debtor * * * or for any other reason." This extremely broad language certainly permits the court categorically to prohibit dual representation in situations where an appearance of or actual conflict of interest is likely to arise. Cf. United States Dep't of Justice v. Reporters Comm. for Freedom of the Press, 489 U.S. 749 (1989) (interpreting Exemption 7(A) of FOIA as supporting a categorical rule that rap sheets are excluded from FOIA's disclosure requirements); Fook Hong Mak v. INS, 435 F.2d 728, 730 (2d Cir. 1970) (discretionary authority does not logically foreclose the power "to determine by appropriate rulemaking that (the decisionmaker) will not use it in favor of a particular class on a case-by-case basis"). 6. Petitioners argue that "equitable principles" preclude the adoption of a per se rule here. Pet. 62. But petitioners misapprehend the reason that bankruptcy proceedings are equitable in nature. Bankruptcy courts have equity powers in order to ensure that claimants are treated fairly and that the integrity of the bankruptcy process is preserved. See Pepper v. Litton, 308 U.S. 295, 307-308 (1939). Those powers may not be invoked to authorize attorneys to represent competing interests in bankruptcy. And there is nothing "inequitable" about a rule which protects debtors, creditors, and the courts from the actual and potential conflicts that may arise from dual representation in the partnership context. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. KENNETH W. STARR Solicitor General STUART M. GERSON Assistant Attorney General BRUCE G. FORREST MICHAEL S. RAAB Attorneys MARTHA L. DAVIS General Counsel PATRICK TINKER Attorney Executive Office for United States Trustees FEBRUARY 1991 /1/ Such persons (including creditors and insiders) will often also have interests "adverse to the estate" -- independent grounds for disqualification under Section 327(a). /2/ The opinions of the district court and the court of appeals generally describe the limited partnership debtors as "limited partners" of WF. /3/ The government has been advised that Golf Hills' bankruptcy case was dismissed on May 23, 1988; Westover's case was dismissed on October 6, 1988; and Lackland's case was dismissed on February 1, 1989. /4/ WF and the limited partnerships may not challenge the bankruptcy court's disgorgement order because that order -- which would require return of monies that they had previously been paid to Newbern -- does not adversely affect any of their protected legal interests. /5/ There is also no circuit conflict concerning the simultaneous representation of limited and general partners in bankruptcy -- a situation which the facts of this case did not present, but which the per se rule adoptd by the court of appeals nevertheless addresses in dictum. /6/ Cf. In re Georgetown of Kettering, Ltd., 750 F.2d 536 (6th Cir. 1984) (counsel represented limited partnership and general partner, but court disqualified employment and denied compensation on the ground that counsel also represented a creditor of debtors). /7/ The other Eighth Circuit case cited by petitioner, In re Daig Corp., 799 F.2d 1251 (1986), has no relevance to this case. In Daig Corp., the court concluded that a professional consulting firm holding a warrant to purchase common stock of the debtor was not a "disinterested person" because the holder of a stock purchase warrant is an "equity security holder" within the meaning of 11 U.S.C. 101(13)(A). 799 F.2d at 1253. /8/ Contrary to petitioners' suggestions, Pet. 7, there is no indication that the four bankruptcy cases at issue here were ordered to be jointly administered. See Bankruptcy Rules 1015 and 2009. /9/ Under 11 U.S.C. 723, a trustee or debtor in possession for a limited partnership has the right to proceed against a general partner for a deficiency in the assets of the limited partnership. Although a partnership's claim under Section 723 may be directly asserted only in Chapter 7 cases, Section 723 also has a impact on Chapter 11 cases because creditors in a Chapter 11 case are entitled to payments that at least equal what they would be entitled to receive in a Chapter 7 case. See 11 U.S.C. 1129(a)(7)(A)(ii). Moreover, some state, including Texas, permit creditors to sue a general partner directly for any limited partnership debts without first exhausting the limited partnership's assets. See Foster v. Daon Corp., 713 F.2d 148, 151 (5th Cir. 1983). /10/ Because the conflict identified by the court of appeals is between the limited partnerships and the general partner, Pet. App. A3-A4, only the general partner needs separate counsel. Petitioners are therefore incorrect in suggesting, Pet. 32, that each limited partner and limited partnership would necessarily need separate counsel. The court of appeals' per se rule is not necessarily transferrable from limited partnership bankruptcies to corporate bankruptcies. Unlike the general partner, a shareholder is not personally liable for the debts of his corporation unless he enters into an agreement to guarantee the debts. Therefore, simultaneous representation of a general partner and a limited partnership (or limited partner) creates difficulties that are not present in many corporate bankruptcies. /11/ See, e.g., In re Downtown Inv. Club III, 89 Bankr. 59 (Bankr. 9th Cir. 1988) (prohibiting dual representation of limited partnership and its general partner, but finding it unnecessary to adopt a per se rule); In re Hathaway Ranch Partnership, 116 Bankr. 208 (Bankr. C.D. Cal. 1990) (prohibiting dual representation of limited partnership and the genera partner of its general partner, but finding it unnecessary to adopt a per se rule); In re Kuykendahl Place Associates, Ltd., 112 Bankr. 847 (Bankr. S.D. Tex. 1989) (prohibiting dual representation of limited partnership debtor and the general partner of its sole limited partner, where the general partner guaranteed the debts of the limited partnership); In re McKinney Ranch Associates, 62 Bankr. 249 (Bankr. C.D. Cal. 1986) (per se prohibition of dual representation of limited partnership and its general partners); see also In re Kendavis Indus. Int'l, Inc., 91 Bankr. 742 (Bankr. N.D. Tex. 1988) (advocating, in dicta, a per se rule against dual representation of partnership entities); cf. In re Vanderbilt Associates, Ltd., 117 Bankr. 678 (D. Utah 1990) (permitting dual representation of two limited partnerships having the same general partner where the general partner was not a debtor in bankruptcy). But cf. In re Waterfall Village of Atlanta, Ltd., 103 Bankr. 340, 345-346 (Bankr. N.D. Ga. 1989) (permitting representation of limited partnership debtor in bankruptcy proceeding by attorney who represented -- in unrelated matters -- corporation that wholly owned the joint venture partner of the sole general partner). /12/ Prior to its amendment in 1984, 11 U.S.C. 327(c) (1982) prohibited employment of counsel by a trustee or debtor in possession if such counsel also represented a creditor of the debtor. Section 327(c) no longer prohibits representation solely because counsel represents a creditor, but provides that such dual representation is prohibited if another creditor objects to the representation and there is an actual conflict of interest.