Fred C. Arko

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
FRED C. ARKO, JR., No. 03-13010
Debtor(s).
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Amended Memorandum re Claim Estimation
_________________
Chapter 11 debtor Fred Arko has three principal creditors: Robert Freeman, who obtained a $9
million judgment against Arko and his business associate; the associate, who has settled with Freeman;
and the law firm of Hanson, Bridgett, Marcus, Vlahos & Rudy, who unsuccessfully represented Arko and
his associate in the Freeman lawsuit.
Arko has proposed a Chapter 11 plan which was initially opposed by all three of these creditors.
Freeman has withdrawn his opposition, leaving Arko’s associate and their former law firm standing in
the way of confirmation. The plan is probably not confirmable over their objections if they have valid
claims. Arko has objected to their claims. It therefore falls to the court to adjudicate the claims to
determine if the plan should be confirmed.
The Hanson firm filed a claim for about $635,000.00 in unpaid legal fees. Arko has objected,
arguing that the firm was guilty of professional negligence and is indebted to him in an amount in excess
of that amount. Since the Hanson firm waived its right to a jury trial by filing a proof of claim, the court
initially set a trial date to adjudicate it. However, the Hanson firm thereafter sought to have the matter
adjudicated in state court and Arko readily agreed, leaving the court itself as the only one who wanted to
have the matter quickly and finally decided. The court reluctantly agreed, and ordered that instead of
Entered on Docket
April 12, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 03-13010 Doc# 384 Filed: 04/12/06 Entered: 04/12/06 15:12:09 Page 1 of
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1A creditor is normally not permitted to vote on a Chapter 11 plan if an objection to its claim is
pending. However, the court may estimate the claim for confirmation purposes notwithstanding the
objection. FRBP 3018(a); In re Corey, 892 F.2d 829, 834 (9th Cir. 1989); In re Orosco, 77 B.R. 246,
250-51 (Bkrtcy.N.D.Cal.1987)
2There is no set procedure or set of rules for estimating a claim. 9 Collier on Bankruptcy (15th
Ed. Rev.) ¶ 3018.01[5], p. 3018-10. The court has considerable flexibility where estimation is only for
confirmation purposes. In re Stone Hedge Properties, 191 B.R. 59, 64 (Bkrtcy.M.D.Pa.1995); In re
Roman Catholic Archbishop of Portland In Oregon, – B.R. – (Bkrtcy.D.Ore.2006).
3The facts of the underlying case need not be discussed in detail, but essentially what happened is
that Arko and his partner refused to give their consent to assignment of a lease to Freeman because they
felt his balance sheet was not strong enough. Included on the balance sheet were shares of stock in a
closely-held corporation which Freeman would have to surrender in order to assume the lease. Freeman
had placed a value of $4.2 million on this stock, although the basis for this valuation was tenuous and the
stock was probably worth a lot less, if there was any market for it at all. If Arko and his partner had
argued that the stock was worth anything, it would have undermined their argument that Freeman was not
financially sound.
4The court itself did not really buy the argument, and probably would have found no negligence if
it was adjudicating the claim rather than estimating it. However, the court believes that a lay jury might
find otherwise and there would be evidence to support such a finding.
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adjudicating the claim it would estimate it for purposes of plan confirmation.1
After reviewing declarations from the witnesses to be called at trial and hearing some live
testimony from the principal witnesses, the court determines that the claim of the Hanson firm should be
allowed at zero. Two separate methods of analysis lead the court to this result.2
First, while the court did not find Arko’s allegations of professional negligence very compelling,
they were supported by testimony of a competent expert and there is enough evidence to have the issue
submitted to a jury. The court estimates that there is about a 20% chance that a jury could find the
Hanson firm was negligent in failing to argue forcefully for a $4.2 million setoff against Freeman’s
damages either during trial or, more likely, in post-trial motions.3,4 If a jury made such a finding, it
would probably take the $4.2 million figure and deduct the $635,000.00 in unpaid legal bills, netting out
at about $3.5 million. Twenty percent of this amount is $700,000, which more than the Hanson claim.
Hence, an analysis of the merit of the claims and the probability of success leads the court to a
Case: 03-13010 Doc# 384 Filed: 04/12/06 Entered: 04/12/06 15:12:09 Page 2 of
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5The risks have become all too real, with Arko facing vigorous opposition to his plan from his
former joint defendants, who have made a separate peace with Freeman.
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conclusion that the Hanson claim should be estimated at essentially zero.
The court reaches the same conclusion through an entirely different analysis. The Hanson firm
admits that it negligently violated Rule 3-310(C)(1) of the California Rules of Professional Conduct by
obtaining consent from Arko to represent him and his partner by giving him only oral, and not written,
disclosure of the potential risks inherent in the dual representation.5 The rule is inflexible, and violation
results in the forfeiture of fees. Asbestos Claims Facility v. Berry & Berry (1990) 219 Cal.App.3d 9,
26-27; Bletcher & Collins, P.C., v. Northwest Airlines, Inc., 858 F.Supp. 1442, 1445-47
(C.D.Cal.1994).
For the foregoing reasons, the court will assume, for purposes of confirmation of Arko’s plan,
that the Hanson firm has no allowable claim in this case. While the court will not order the Hanson firm
to desist in its repeated calls for denial of confirmation or conversion of the case, it does suggest that
these protestations will carry no weight with the court unless and until it actually obtains a judgment
against Arko. If this seems harsh to the Hanson firm, it may wish to remember that the court was able
and willing to promptly adjudicate its claim and it was the Hanson firm itself which sought to have its
claim heard in another forum.
Counsel for Arko shall submit an appropriate form of order. The order shall recite that it has no
preclusive effect in any other litigation, and that neither party may attempt to use it or this memorandum
to establish any fact or point of law in any other forum.
Dated: April 12, 2006
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 03-13010 Doc# 384 Filed: 04/12/06 Entered: 04/12/06 15:12:09 Page 3 of
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