Opinion ID: 198785
Heading Depth: 2
Heading Rank: 2

Heading: The Alleged Concealment of Conflicts of Interest

Text: 34 We next consider whether Pearson established a colorable claim that appellees may have concealed a conflict of interest from the bankruptcy court. '[F]raud on the court' occurs where it can be demonstrated, clearly and convincingly, that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter. Aoude, 892 F.2d at 1118, quoted in Fernandez v. Leonard, 963 F.2d 459, 462 (1st Cir. 1992); Pearson, 210 B.R. at 501 (Fraud on the court is an intentional deflecting of the Court from knowing all the facts necessary to make an appropriate judicial decision on the matter before it.) (citing In re Tri-Cran, 98 B.R. 609, 615-16 (Bankr. D. Mass. 1989)). 35 Pearson alleged as follows: Attorney Gannon knew that the Wadleigh Firm had represented Pearson, both before and after his chapter 7 petition was filed, despite an irreconcilable conflict of interest, and that if the conflict were disclosed Pearson would realize that he had a potentially lucrative malpractice claim against the Wadleigh Firm. Rather than assume the risk that Pearson might retain other counsel, who could discover the conflict, Gannon continued to represent Pearson. Then, in October 1995, Gannon sought appointment as special counsel to the chapter 7 estate, with a view to negotiating a settlement which would release the Wadleigh Firm from any liability, either to Pearson or the chapter 7 estate, arising out of the BWI matter. When First Bank objected to the Gannon appointment, Gannon ostensibly withdrew as special counsel but continued to participate in the settlement negotiations. 36 Notwithstanding these allegations, the bankruptcy court ruled that since Gannon was not representing the chapter 7 estate, Bankruptcy Rule 2014 did not require him to make any such disclosure. See Pearson, 210 B.R. at 503. The record on appeal itself plainly demonstrates, however, that (i) Pearson met the applicable colorable claim standard, and (ii) the bankruptcy court erred in failing to consider whether to exercise its discretion to authorize discovery and/or an evidentiary hearing. 37 To begin with, Gannon failed to disclose the conflict of interest existing at the time he commenced his representation of Pearson qua chapter 7 debtor. See Rome v. Braunstein, 19 F.3d 54, 57 (1st Cir. 1994). Instead, he submitted the verified statement required under Fed. R. Bankr. P. 2014, which unequivocally asserted that there were no conflicts of interest which would prevent him from representing Pearson in the chapter 7 proceeding. 38 The appellees respond that Rome is inapposite, since it merely held that counsel representing a debtor estate must disclose such conflicts of interest. Their contention is without merit. Although Rome involved conflicts of interest by counsel employed to represent the debtor estate, neither Rome nor Bankruptcy Rule 2014 remotely suggests that conventional conflict-of-interest rules are inapplicable to other counsel in bankruptcy proceedings. Here, Attorney Gannon made an affirmative misrepresentation to the court, which did not comport with his duty of candor. See, e.g., NHRPC 3.3(a)(1), comment (There are circumstances where failure to make a disclosure is the equivalent of an affirmative misrepresentation.); In re Tri-Cran, 98 B.R. at 616 ('Since attorneys are officers of the court, their conduct, if dishonest, would constitute fraud on the court.') (citation omitted); cf. Burns v. Windsor Ins. Co., 31 F.3d 1092, 1095 (11th Cir. 1994) (Every lawyer is an officer of the court . . . [and] he always has a duty of candor to the tribunal.); United States v. Shaffer Equip. Co., 11 F.3d 450, 457 (4th Cir. 1993) ([A] general duty of candor to the court exists in connection with an attorney's role as an officer of the court.); cf. also Erickson v. Newmar Corp., 87 F.3d 298, 303 (9th Cir. 1996) ([I]t is th[e] court which is authorized to supervise the conduct of the members of its bar . . . [and has] a responsibility to maintain public confidence in the legal profession.). 39 The record plainly reflects that Attorney Gannon did not simply remain silent, but instead submitted the verified statement required by Bankruptcy Rule 2014, asserting without qualification that he had no connections with any Pearson creditors. Furthermore, not only was the verified statement demonstrably false, but Gannon submitted chapter 7 asset schedules which failed to list potential conflict-of-interest claims against himself and the Wadleigh Firm. Whatever the precise dimensions of the duties of disclosure imposed upon counsel under the Rules of Bankruptcy Procedure, we cannot envision that they offer comfort for affirmative misrepresentations to the court itself. 40 In a related vein, referencing the filings submitted in connection with the abortive attempt by the chapter 7 trustee in October 1995 to have Gannon appointed special counsel to litigate the chapter 7 estate's claims against First Bank, the bankruptcy court observed that appellees' willingness to make these factual disclosures belied any intent to deceive the court. See Pearson, 210 B.R. at 501 ([T]he facts of possible conflict were spread upon the record of this Court . . . .). As the record on appeal plainly reflects, however, in so doing the Wadleigh Firm assumed much less risk of exposure than would have obtained upon the filing of an accurate verified statement under Bankruptcy Rule 2014. 41 First, as the bankruptcy court itself recognized, the disclosures made by the Wadleigh Firm in 1995 were not complete in all details. Id. The motion to appoint Gannon as special counsel to the chapter 7 trustee asserted that the Wadleigh Firm represented First Bank in other cases of debt restructuring and work outs, but that it did not represent [First Bank] in connection with its administration or collection of the loan made to Bradford Woods. Although the motion to appoint Gannon as special counsel to the chapter 7 trustee acknowledged that the Wadleigh Firm incorporated Spring Pond, it failed to disclose that Pearson had alleged, in state-court complaint No. 90-E-1082, that Spring Pond was the vehicle employed to further First Bank's alleged conspiracy with the Tamposis. 42 Second, the application for the appointment of Gannon as special counsel, filed in October 1995 by the chapter 7 trustee and Gannon, represented in conclusory fashion to the bankruptcy court that Gannon's recent settlement of the chapter 7 estate's claims against the Tamposis eliminate[d] any conflict which might otherwise have prevented the Wadleigh Firm from representing the chapter 7 estate. Yet even now the Wadleigh Firm articulates no plausible explanation for ascribing such curative effect under any fair reading of the governing ethical rules, see supra Section II.A., given the fact that the Wadleigh Firm's conflicts of interest persisted after the settlement with the Tamposis. Indeed, this very point was forcefully made by none other than First Bank, in its opposition to the chapter 7 trustee's motion to appoint Attorney Gannon as special counsel to the chapter 7 estate. 43 The assessment made by the bankruptcy court -- that it was enough that appellees had spread the facts on the record -- likewise misses the mark. The motion to appoint Gannon as special counsel to the chapter 7 trustee was granted ex parte by the bankruptcy court the day after it was filed by the chapter 7 trustee. But when First Bank interposed its objection, the chapter 7 trustee and Gannon promptly requested that the bankruptcy court summarily vacate its ex parte appointment of Gannon and schedule the matter for hearing. Whereupon a compromise was reached before the hearing could be held, and Attorney Gannon then proposed that the bankruptcy court cancel the scheduled hearing as moot. Thereafter, at the hearing held to consider the newfound compromise, neither First Bank nor the chapter 7 trustee adverted to the conflict-of-interest issue, neither Attorney Gannon nor Pearson appeared, and the bankruptcy court neither focused nor ruled on the matter. 44 Moreover, even assuming Attorney Gannon had no affirmative obligation to disclose the conflict of interest at the time the chapter 7 case commenced, such a duty plainly would have arisen under the Bankruptcy Rules upon his appointment as special counsel to the chapter 7 estate. Indeed, the present record discloses additional evidence that appellees may have circumvented effective bankruptcy court oversight, thereby enabling Gannon to assume the role of de facto special counsel for the chapter 7 estate even after the bankruptcy court had vacated his ex parte appointment, and to exert influence in negotiating a release of any conflict-of-interest claims against the Wadleigh Firm: (i) a November 14, 1995, letter from First Bank's counsel to Attorney Gannon stated: As you know, the settlement we reached was conditioned, among other things, on no further resources needed to be expended preparing for the [upcoming] hearing [on Gannon's appointment as special counsel]. (emphasis added); (ii) the same letter from First Bank reminded Attorney Gannon that he had agreed to contact the bankruptcy court to withdraw the ex parte motion seeking his appointment as special counsel to the chapter 7 estate. 45 The November 14, 1995, letter from First Bank advised Gannon that the withdrawal of the ex parte motion for his appointment as special counsel to the chapter 7 trustee was a negotiated condition of the settlement, and further suggested -- in its reference to we -- that appellees may have regarded Gannon as an active participant in the settlement negotiations. 4 46 Although the November 15 motion to withdraw the ex parte motion for Gannon's appointment represented that the chapter 7 trustee and First Bank had agreed to the compromise, while noting that the compromise was acceptable to the Debtor, the term acceptable is hardly unambiguous. On the one hand, it may have meant that Gannon and Pearson simply signed off on the compromise after the chapter 7 trustee and First Bank finished negotiating its terms. On the other hand, it may have meant that Gannon exercised some undisclosed influence in proposing and/or drafting the terms of the compromise, and that he participated in negotiating those terms. 47 Attorney Gannon faxed First Bank's counsel on February 13, 1996, proposing specific language for inclusion in the settlement agreement which would preserve First Bank's allowed claims against the chapter 7 estate to the extent the chapter 7 trustee were ever to receive payment of any monies from International Explorations Ltd. (IEL), in which Pearson allegedly held a 2% interest. Appellees discount this evidence on two grounds: (i) Pearson admitted that his IEL interest was worthless, and (ii) First Bank simply requested that Gannon supply it with the name of the corporation (IEL) so that First Bank could insert the corporate name in a settlement provision previously negotiated between the chapter 7 trustee and First Bank. Neither response is conclusive. 48 First, it is not clear from the present record what motive First Bank would have had to negotiate a settlement provision which preserved an interest it considered worthless. Second, and much more importantly, Gannon did not simply provide First Bank with IEL's name; he attached the entire settlement provision to the February 13th communication, thereby suggesting that the Wadleigh Firm was not only actively proposing last-minute settlement terms, but that it was doing so to protect First Bank's interests, rather than Pearson's. 49 Finally, the release contained in the final settlement agreement itself states that the chapter 7 estate is relinquishing all BWI-related claims against First Bank, its directors and attorneys. Notwithstanding the context, however, at the time it approved the chapter 7 trustee's motion to abandon [a]ny and all conflict of interest and breach of the duty of loyalty claims relative to the Wadleigh Law Firm and its attorney William S. Gannon, if any[,] the bankruptcy court refused to determine the meaning or scope of the language employed in the final settlement release. (Emphasis added.) Instead, it simply concluded that there was no evidence of devious intent on the part of appellees. 50 The bankruptcy court found that the Wadleigh Firm and Attorney Gannon had no inkling that Pearson might have viable malpractice claims against them, and therefore they could not have anticipated that the boilerplate release provision would absolve them from any such claims. Pearson, 210 B.R. at 503. We are unable to discern the evidence upon which this finding is based. Nor are we persuaded, given the record evidence relating to the Wadleigh Firm's conflicted interests in representing Pearson, First Bank, and the Tamposis, see supra Section I (No. 90-E-1082) & Section II.A., that the proffered release, objectively viewed in context, necessarily amounted to mere boilerplate. We briefly explain. 51 The Wadleigh Firm, which served as First Bank's attorney, and Attorney Tucker, a Wadleigh Firm partner and First Bank director, had every reason and occasion to be cognizant of their conflicted interests, and, therefore, that Pearson's potential malpractice claims against all those covered by the boilerplate release, including themselves, might be barred by the release. Viewed in actual context, therefore, the terms of the boilerplate release provision itself may constitute probative evidence of a fraudulent intent which the bankruptcy court may revisit and scrutinize on remand. 52