Atlantic Facilities, L.L.C.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
ATLANTIC FACILITIES, L.L.C.
DEBTOR
CASE NO.
10-01347-8-SWH
ORDER REGARDING MOTION TO RECONSIDER ORDER
The matter before the court is the motion to reconsider filed by the bankruptcy administrator.
A hearing took place in Raleigh, North Carolina on April 27, 2010.
Atlantic Facilities, L.L.C. filed a petition for relief under chapter 11 of the Bankruptcy Code
on February 22, 2010. On March 25, 2010, the debtor filed an application to employ Trawick H.
Stubbs, Jr. and Stubbs & Perdue, P.A. (collectively, "Stubbs & Perdue") as counsel for the debtor.
No objections were filed, and the court entered an order approving the employment of Stubbs &
Perdue on April 6, 2010. On April 12, 2010, the bankruptcy administrator filed the present motion
to reconsider the court's order employing Stubbs & Perdue pursuant to Federal Rule of Bankruptcy
Procedure 9024.
The bankruptcy administrator raises three primary points of contention regarding the
employment of Stubbs & Perdue as chapter 11 debtor's counsel. 	First, Russell Maynard, the
principal of the debtor, who is represented by the firm individually on "matters unrelated to the
SO ORDERED.
SIGNED this 30 day of April, 2010.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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debtor," is also the guarantor of all of the debtor's loans. The bankruptcy administrator contends that
this creates a potential conflict because it will be in the best interests of the debtor to seek to cram
down its real estate loans to reduce negative equity, while Mr. Maynard will want the debtor to pay
all that it can on those claims, as he will be personally liable on any balance. Counsel for the debtor
counters that the debtor's and Mr. Maynard's interests are aligned in this case because (a) the case
involves only one owner and one guarantor, (b) all of the loans are guaranteed, leaving no unsecured
debt, and (c) only one loan is a candidate for cramdown and, in that case, the value is not disputed.
Second, the debtor received pre-petition planning advice from Stubbs & Perdue, which
included the recommendation of merging several of Mr. Maynard's entities into one, Atlantic
Facilities, LLC. The bankruptcy administrator is concerned with the propriety of this merger, given
that it occurred within 90 days of filing the petition. 	Counsel for the debtor maintains that the
merger was effected for purposes of administrative convenience, involving only the properties that
the debtor sought to keep in its efforts toward a successful reorganization.
Third, Stubbs & Perdue also represents Millwork Specialties, Inc. in its chapter 11
bankruptcy case, and Atlantic Facilities made several payments to Millwork for trade debts within
90 days of commencing the present case. The bankruptcy administrator contends that an actual
conflict exists because Atlantic Facilities has a duty to investigate these transfers, and will need to
seek avoidance of the transfers if preferential in nature. 	For this reason, the bankruptcy
administrator maintains that the court should disapprove the employment of Stubbs & Perdue
pursuant to § 327 of the Bankruptcy Code. According to counsel for the debtor, these payments
were made in the ordinary course of business, and neither this nor any of the bankruptcy
administrator's other contentions serve to defeat Stubbs & Perdue's disinterestedness under § 327.
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1Although this section refers to the "trustee's duties," those duties also apply to debtors in possession. 11 U.S.C.
§ 1107(a).
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Section 327(a) provides that "the trustee, with the court's approval, may employ one or more
attorneys . . . 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).1 Section 101(14) defines "disinterested person," in pertinent part, as one who "is
not a creditor." 11 U.S.C. § 101(14)(A). Further, under § 327(c), "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 an 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). The court must therefore determine whether Stubbs & Perdue has an interest adverse to the
estate or an actual conflict based upon the bankruptcy administrator's contentions, such that the firm
would be precluded from serving as debtor's counsel.
As to the guarantor issue, the court acknowledges that the representation of both a debtor and
the guarantor of the debt does not create a per se conflict. Rather, a factual inquiry is necessary to
examine the propriety of the arrangement. 	In the present case, the court finds that the dual
representation of the debtor and guarantor does not create a conflict because there is no unsecured
debt, only one claim is intended for cramdown and valuation will not be disputed, and all of the real
estate debts are guaranteed. As a result, the guarantor is unlikely to favor one property over another,
or otherwise act against the debtor's best interests, and the guarantor relationship does not provide
cause to disturb the court's prior order allowing employment of Stubbs & Perdue.
The court further finds that the pre-petition merger of entities does not create an adverse
interest at this point, but rather a potential savings to creditors and administrative efficiency through
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the combined filing. Further, the creditors' cash collateral is currently held in separate accounts for
each bank and each development. 	Although one of the creditors appeared at the hearing and
reiterated concerns with the propriety of the transaction as previously raised at a cash collateral
hearing, it appears that these concerns are still under investigation and have not yet given rise to a
legal theory that would cast the merger in an improper light.
As to the representation of both the debtor and Millwork Specialties, however, the court finds
that a classic conflict of interest is presented in light of the need to investigate the pre-petition
payments of trade debts. The court agrees with the bankruptcy administrator that Stubbs & Perdue
could not bring an action on behalf of Atlantic for avoidance of preferential transfers and
simultaneously represent Millwork. Accordingly, Atlantic is directed to engage special counsel to
investigate whether its pre-petition trade debt payments to Millwork constitute an avoidable
preference. Should special counsel determine that a cause of action exists against Millwork, Stubbs
& Perdue may not represent either Atlantic or Millwork with respect to that particular action;
instead, special counsel must handle any such action. Subject to these conditions, Stubbs & Perdue
may continue representing Atlantic Facilities as chapter 11 debtor's counsel.
Based on the foregoing, the motion to reconsider is DENIED.
SO ORDERED.
END OF DOCUMENT
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