Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-06083/USCOURTS-ca8-04-06083-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

---

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

________

04-6083NE

________

In re: *

*

Big Mac Marine, Inc., *

*

Debtor. *

*

William L. Needler, *

 * Appeal from the United States

Claimant-Appellant, * Bankruptcy Court for the

 * District of Nebraska

v. *

*

Charles E. Rendlen, III; *

*

U.S. Trustee - Appellee *

*

Pinnacle Bank, *

*

Creditor-Appellee. *

________

Submitted: June 1, 2005

 Filed: June 20, 2005

________

Before KRESSEL, Chief Judge, DREHER, and SCHERMER, Bankruptcy Judges.

________

DREHER, Bankruptcy Judge.

Appellate Case: 04-6083 Page: 1 Date Filed: 06/20/2005 Entry ID: 1917487
1The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for

the District of Nebraska.

2

This is an appeal from an order of the bankruptcy court1 denying a motion to

vacate an order which denied Debtor, Big Mac Marine, Inc.’s, application to retain

William Needler and Associates, Ltd. and William Needler (Needler) as attorney for

Debtor, and further denied Needler's application for attorney’s fees and expenses.

While the facts are somewhat complicated, and made more so by Needler's creation

of an at times unclear record, the legal issue is straightforward. The bankruptcy court

determined that Needler was disqualified from serving as attorney for Debtor because

Needler had been approved to represent the debtors in another pending Chapter 11

case in the District and it therefore denied the application for attorney’s fees and

expenses. The bankruptcy court was unquestionably correct in so holding and we

affirm.

PROCEDURAL HISTORY

1. Big Mac Marine, Inc. and Its Bankruptcy Case

Debtor was a family business engaged in selling boats and other marine

equipment at retail. When it began operations in the early 1990s it was owned by

Edward and Shirley Schmidt (the Schmidts). Its office and showroom were located

in Ogallala, Nebraska. Pinnacle Bank of Ogallala, Nebraska (the Bank) lent money to

Debtor, which the Schmidts personally guaranteed. In 2000, the Schmidts sold the

family business to their son, Greg, but they remained responsible on their personal

guarantees. The details of the arrangement for sale between the Schmidts and Greg

were not fully developed in the record. At some point, however, the Schmidts claimed

to have taken back the stock in the company and become its sole owners.

Appellate Case: 04-6083 Page: 2 Date Filed: 06/20/2005 Entry ID: 1917487
3

Debtor filed a Chapter 11 petition for bankruptcy relief on April 14, 2003.

According to the schedules filed in Debtor’s Chapter 11 case, the Schmidts were the

largest creditor in the case, holding a noncontingent, undisputed and liquidated

secured debt of $596,127.27, secured by Debtor's inventory. The schedules indicated

that this debt arose when the Schmidts “paid off” Debtor's loans to the Bank on July

19, 2002. Apparently on this date, and perhaps earlier, the Schmidts had been

required to perform on their guarantees to the Bank. As a result of this transaction,

they claimed that they became secured creditors of Debtor, but they offered no written

documentation to support that contention. In fact, Edward Schmidt testified that there

was no documentation to support their claim to a secured status. In spite of this lack

of documentation and this admission, the Schmidts persisted in claiming that they held

a security interest in most of the assets of the company. The only other secured

creditor listed in Schedule D of Debtor's bankruptcy filing was the Bank, which the

schedules listed as being owed approximately $370,000 secured by the real estate, a

pickup, and certain rental boats. 

At the same time that it filed its petition, Debtor filed a proposed Plan of

Reorganization in which it proposed to treat the claim of the Schmidts as an allowed

secured claim secured by Debtor's inventory which it stated they "owned." The Plan

noted that the payments to the Bank made by the Schmidts would be avoided in the

Schmidts' Chapter 11 case. The plan also proposed to sell the inventory free and clear

of liens and deliver the proceeds to the Schmidts. The Schmidts would be paid over

time for any deficiency. In the Plan Debtors also proposed to treat the Bank as a

creditor secured only by real estate, a pickup truck and rental boats owned by Debtor.

The Plan proposed to pay the claim of the Bank over time in two separate secured

classes at 6% and 61⁄2% interest respectively. Unsecured creditors would receive a

10% dividend.

Appellate Case: 04-6083 Page: 3 Date Filed: 06/20/2005 Entry ID: 1917487
4

2. The Schmidts' Chapter 11 Case

The Schmidts had their own financial problems. On July 31, 2002, about nine

months before Debtor filed, the Schmidts had filed their own Chapter 11 joint

bankruptcy petition. In that Chapter 11 case, Needler was approved by the

bankruptcy court as debtors' counsel to represent the Schmidts in performing their

duties as Chapter 11 debtors. The Bank was the major creditor in the Schmidts'

Chapter 11 case. In the Schmidts' Chapter 11 case, the Bank asserted that it was

owed approximately $1.6 million and was secured. During the course of the Schmidts'

Chapter 11 case the Schmidts challenged the Bank's right to claim any security interest

in their property. 

3. Debtor's Attempted Retention of Needler in This Chapter 11 Case

On April 14, 2003, Debtor filed an Application to retain Needler as counsel for

the estate pursuant to section 327 of the Bankruptcy Code. In that Application,

Debtor stated that to the best of its knowledge this representation did not create a

conflict of interest. With the Application, Needler filed a Sworn Declaration in which

he stated that he was disinterested and represented no interest adverse to the estate.

He did, however, disclose that he represented the Schmidts in their personal Chapter

11 case and that they were the 100% shareholders of Debtor. He further disclosed that

the Schmidts were creditors of Debtor, and that they became such as a result of

transfers to the Bank which occurred on March 31, 2001, and July 19, 2002. Needler

referenced the fact that the Schmidts would seek to reverse those transactions by filing

an adversary proceeding in their own case. 

Both the United States Trustee and the Bank objected to the retention of Needler

as counsel for Debtor. Both asserted that Needler was not disinterested and that he

represented interests adverse to the estate. After a hearing, the bankruptcy court

issued an order denying the application to employ Needler as counsel for the Debtor.

Appellate Case: 04-6083 Page: 4 Date Filed: 06/20/2005 Entry ID: 1917487
5

In its order dated July 10, 2003, the bankruptcy court held that Needler’s

representation of the Schmidts in their own Chapter 11 disqualified him from

representing Debtor in this case. The bankruptcy court noted that the Schmidts were

Debtor's sole shareholders, the Bank was a creditor in both cases, and that, given the

circumstances, Needler could not represent both sets of debtors without having

conflicting allegiances. The resolution of the Bank’s claims would need to be

addressed in both cases and would place Needler in an inevitable conflict position.

The bankruptcy court further cited the fact that Debtor had already filed a Plan which

questionably preferred the Schmidts over other creditors. The bankruptcy court

further said that “[i]f the Schmidt adversary proceeding against Pinnacle Bank is

completed and if the Schmidts withdraw any claims they have in the Big Mac Marine

case, then it would appear that Mr. Needler would not have a conflict of interest. Until

that time, he is prohibited from representing Big Mac Marine, Inc.” Needler appealed

the July 10, 2003 order to the District Court which found that it lacked jurisdiction of

the appeal because, given the quoted language, the order was not a final one. Big Mac

Marine, Inc. v. Jensen, 305 B.R. 309 (D. Neb. 2004). Needler’s further appeal to the

Eighth Circuit Court of Appeals was dismissed when he failed to timely file his brief

or further prosecute the appeal.

Other counsel was retained to represent the Debtor and the case went forward.

Eventually, the Schmidts withdrew their claims in the case and a Plan was filed which

treated the Schmidts as equity holders and not as creditors. The case later converted,

however, after confirmation of that plan was denied. Nevertheless, the adversary

proceeding in the Schmidts' Chapter 11 case in which they sought to challenge the

validity of the Bank's claims remained pending and is apparently ongoing.

Appellate Case: 04-6083 Page: 5 Date Filed: 06/20/2005 Entry ID: 1917487
2

In his brief appellant also raised a number of other issues. None of these

claims were raised before the bankruptcy court and, other than mentioning them,

Needler did not argue or provide any support in his briefs for any of them. 

Accordingly, we will not address those issues. See First Bank Investors' Trust v.

Tarkio Coll., 129 F.3d 471, 476-77 (8th Cir. 1997) 

6

4. The Order Refusing to Vacate the Order Denying the Application for Retention

and Further Denying Fees

On October 29, 2004, Needler filed a motion seeking to have the bankruptcy

court vacate its order of July 10, 2003, denying his application to be retained as

counsel for Debtor, and he applied for approximately $28,000 in attorneys fees and

expenses that had been incurred on Debtor's behalf prior to the July 10, 2003

disqualification order. Again the Bank and the United States Trustee objected, and

again, after a hearing on the motion and application, the bankruptcy court issued an

order dated December 17, 2004, denying Needler's motion and application. The

bankruptcy court held that Needler was disqualified to represent the Debtor because

of the conflicts of interest in representing the debtors in the two Chapter 11 cases.

The bankruptcy court rejected his argument that the conflict that existed had

evaporated when the Plan treating the Schimdts as equity holders only had been filed

and they did not object to that treatment at the confirmation hearing, and disagreed

that the order should be vacated and his employment authorized as originally

requested. Having refused to vacate the prior order, the bankruptcy court went on to

deny the application for fees and expenses because Needler had never been approved

by court order to represent Debtor. 

The appeal in this case is from this December 17, 2004 order. Appellant asserts

that the bankruptcy court incorrectly decided that he held an interest adverse to the

estate and incorrectly failed to award him his fees under Section 330(a) of the

Bankruptcy Code.2

Appellate Case: 04-6083 Page: 6 Date Filed: 06/20/2005 Entry ID: 1917487
7

DECISION

1. Standard of Review

We review findings of fact for clear error and legal conclusions de novo.

Waterman v. Ditto (In re Waterman), 248 B.R. 567, 570 (B.A.P. 8th Cir. 2000). We

review the decision of a bankruptcy court concerning professional employment or fees

for abuse of discretion. Walton v. LaBarge (In re Clark), 223 F. 3rd 859, 862 (8th Cir.

2000). "An abuse of discretion occurs when the reviewing court 'has a definite and

firm conviction that the lower court made a clear error of judgment or exceeded the

bounds of permissible choice in the circumstances.'" Pruss v. Pelofsky (In re Sauer),

222 B.R. 604, 608 (B.A.P. 8th Cir. 1998)(quoting United States v. Ortiz, 804 F.2d

1161, 1164 n.2 (10th Cir. 1986)).

2. Denial of Application For Retention

Section 327(a) provides that:

the trustee, with the court’s approval, may employ one or more

attorneys, accountants, appraisers, auctioneers, or other professional

persons, 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.

11 U.S.C. § 327(a)(2004).

Section 327(c) provides that:

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.

11 U.S.C. § 327(c)(2004).

Appellate Case: 04-6083 Page: 7 Date Filed: 06/20/2005 Entry ID: 1917487
8

The burden of proof was on Needler to establish that he was both disinterested and

did not represent an interest adverse to the estate. Interwest Bus. Equip., Inc. v.

United States Trustee (In re Interwest Bus. Equip., Inc.), 23 F.3d 311, 318 (10th Cir.

1994); In re Huntco Inc., 288 B.R. 229, 232 (Bankr. E.D. Mo. 2002).

The bankruptcy court did not abuse its discretion in finding that Appellant was

disqualified. At the time he applied to represent Debtor in this case he represented an

interest adverse to the estate. While section 327(c) cautions that the mere

representation of a creditor in a case is not per se disqualifying, in this case both the

United States Trustee and a creditor objected to the retention of Needler on the

grounds that he was concurrently representing a creditor, the Schmidts, and that there

was an actual conflict of interest. See 11 U.S.C. § 327(c)(2004). In this case, the

conflict was manifest. At the same time that he proposed to represent this Debtor in

this case he was representing the Schmidts who claimed to be the largest creditor in

the case. They claimed to be secured but their interest was admittedly undocumented.

The Schmidts were also the sole shareholders of Debtor. As their counsel in their

Chapter 11, Needler owed a duty to pursue the Schmidts' legitimate claims. But, if

employed as counsel for this Chapter 11 Debtor, he would also have an obligation to

represent all Debtor's creditors and to objectively analyze the validity of the Schmidts'

claims to secured status, or indeed to being a creditor at all. Not only was the conflict

actual, it had manifested itself when, on behalf of Debtor, Needler filed a Plan which

purported to treat the Schmidts as secured creditors even though their secured status

was highly doubtful, thus favoring them over other creditors. On the one hand,

Needler was attempting to assert the validity of the Schmidts' purported security

interest in Debtor's property, and on the other hand, as Debtor's counsel, he would

have been obligated to, or at the very least explain his failure to, object to the

Schmidts' claim to secured status. Multiple representation in these two cases was out

of the question. See, e.g. In re R & R Assoc. of Hampton, 402 F.3d 257, 266 (1st

Cir. 2005); Interwest Bus. Equip., 23 F. 3d at 316; In re Wheatfield Business Park,

LLC, 286 B.R. 412, 417-18 (Bankr. C.D. Cal. 2002).

Appellate Case: 04-6083 Page: 8 Date Filed: 06/20/2005 Entry ID: 1917487
9

Needler argues that the quoted language in the bankruptcy court’s order of July

10, 2003, required the court to reconsider its prior decision not to allow the retention

and to vacate the order once the actual conflict went away. This is simply incorrect.

First, the proceeding against the Bank was still ongoing and had not been dismissed

at the time the bankruptcy court entered its order. Thus, the qualifications the court

set for dissipation of the conflict had not occurred. Second, Appellant misconstrues

what the bankruptcy court said. We do not read the quoted language to mean that if

the actual conflict dissipated in the future, the bankruptcy court would change its mind

about the existence of a conflict during the interim period. Rather, what the

bankruptcy court was saying was that, if in the future the Schmidts ceased to be

creditors, then the conflict would cease at that point and Needler would not necessarily

be disqualified from representing Debtor in the future. The quoted language says

nothing about past representation. Indeed, that is apparently exactly how the

bankruptcy court construed its own order of July 10, 2003, when it ruled on December

17, 2004. See Apex Oil Co., Inc. v. Sparks (In re Apex Oil Co., Inc.), 406 F.3d 538,

542 (8th Cir. 2005)(citing In re Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 6

F.3d 1184, 1194 (7th Cir. 1993))(The bankruptcy court is in the best position to

interpret its own orders.).

3. Denial of Application For Fees and Expenses

Section 330 of the Bankruptcy Code allows the court to award compensation

only to professionals "employed under section 327 or 1103." 11 U.S.C. 330(a)(1).

No order was ever issued authorizing Needler to be employed to represent the Debtor

under section 327 or 1103 of the Bankruptcy Code. See, e.g. In re Albrecht, 233

F.3d 1258, 1260-61 (10th Cir. 2000); In re Milwaukee Engraving Co., 219 F.3d 635,

637 (7th Cir. 2000). Thus, Needler was not entitled to attorneys fees or expenses

under 11 U.S.C. § 330. 

Appellate Case: 04-6083 Page: 9 Date Filed: 06/20/2005 Entry ID: 1917487
10

Accordingly, we AFFIRM the bankruptcy court's order of December 17, 2004,

denying Needler's motion to vacate the order denying his application for retention

under section 327 of the Bankruptcy Code and further denying Needler's application

for allowance of fees and expenses under section 330 of the Bankruptcy Code. 

____________________________

Appellate Case: 04-6083 Page: 10 Date Filed: 06/20/2005 Entry ID: 1917487