Sea Trail Corporation

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
SEA TRAIL CORPORATION
DEBTOR
CASE NO.
11-007370-8-SWH
ORDER DENYING APPLICATION TO EMPLOY SPECIAL COUNSEL
The matter before the court is the application to employ S. Denise Watts and the law firm of
Cox & Watts, PLLC (collectively, “Cox & Watts”) as special counsel to the debtor, and an objection
thereto filed by Waccamaw Bank (“Waccamaw”) and by the Bankruptcy Administrator. A hearing
was held in Raleigh, North Carolina on November 30, 2011, and the matter was taken under
advisement at that time. For the reasons that follow, the application will be denied.
Debtor Sea Trail, a North Carolina corporation, filed a petition under chapter 11 on
September 27, 2011. On October 6, 2011, the debtor filed an application to appoint Cox & Watts
as special counsel to the debtor pursuant to 11 U.S.C. § 327(e). Waccamaw is the largest secured
creditor of the debtor, and opposes the application on grounds that it does not assert the “specified
special purpose” of the representation and, instead, applies for Cox & Watts’ appointment as general
counsel, which is not authorized by § 327(e). The Bankruptcy Administrator likewise “generally
SO ORDERED.
SIGNED this 09 day of December, 2011.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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objects to the vague nature of counsel’s employment and seeks further clarification of their role in
this case.” Bankruptcy Admin.’s Obj. to Application at ¶ 4. Waccamaw also objected on grounds
that the application failed to satisfy the “no adverse interest” requirement because of a possible
preferential transfer.
At the hearing on November 30, Ms. Watts testified that she has been the debtor’s attorney
since 2006 and that her legal services encompass a range of issues including real estate matters,
vendor contracts, leases, employee issues, and other corporate work. Sea Trail currently owes
approximately $125,000 to Cox & Watts in pre-petition fees. Ms. Watts testified that she received
a fee of $50,000 from the debtor’s operating account approximately four days prior to the debtor’s
bankruptcy filing, though this payment was not disclosed in her affidavit in support of the
application. The primary issue during the hearing was the nature of the representation Cox & Watts
sought to provide, and at the conclusion of it, the court invited the parties to submit briefs on that
issue if they so chose. Cox & Watts did provide a supplemental brief in support of its position.
DISCUSSION
Section 327(e) of the Bankruptcy Code provides that “the trustee, with the court’s approval,
may employ, for a specified special purpose, other than to represent the trustee in conducting the
case, an attorney that has represented the debtor, if in the best interest of the estate, and if such
attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to
the matter on which such attorney is to be employed.” 11 U.S.C. § 327(e). In this case, the court
must focus on four distinct elements with respect to the proposed representation: 1) the “specified
special purpose” of the representation; 2) that purpose being outside the scope of “conducting the
case;” 3) the representation being in the “best interest of the estate;” and 4) whether the attorney
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holds an interest that is adverse to the debtor or estate, with respect to the matter on which the
attorney is to be employed. There is no question but that Ms. Watts “has represented the debtor,”
and to the extent that prior representation is a statutory requirement, it is satisfied in this case.
Cox & Watts’ application states that the debtor:
desires to employ the Law Firm to act as general counsel and to represent the
Debtor’s interest in corporate, employee, labor, and other general business matters
pertaining to the daily operation of the Debtor. Due to the Law Firm’s long history
of representing the Debtor on matters of this type, Special Counsel has knowledge
and experience in dealing with these matters on behalf of the Debtor and it would be
more efficient to allow the Law Firm to continue its representation on these matters
than to have Stubbs & Perdue, P.A. take over the representation of these matters as
they arise.
Application for Employment at ¶ 4. Cox & Watts also sought authorization to file applications for
reimbursement every 60 days, rather than every 120 days as provided in the stipulations set forth in
§ 331 (with respect to professional persons employed under §§ 327 or 1103) on grounds that the 120-
day timeline would create a financial hardship.
At the hearing, the court observed that the services Cox & Watts seeks to provide as “special
counsel” appeared to be essentially identical to those it provided to the debtor before the bankruptcy
petition was filed. That is, in fact, the gist of why Cox & Watts’ continued representation could
provide across-the-board efficiencies. However, “[s]ubsection (e) ‘does not authorize the1
employment of the debtor’s attorney to represent the estate generally . . . .’” 3 Collier on Bankruptcy
¶ 327.04[9][d] at 327-54 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.) (emphasis added and
citations omitted).
Because of that prior representation, Cox &Watts is not disinterested, and thus cannot1
be retained as the debtor’s attorney under § 327(a).
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Cox & Watts acknowledged that it can be retained as special counsel only if the service that
it proposes to undertake constitutes a “specified special purpose,” yet seeks to establish that the
generalized services it hopes to provide can, in fact, constitute such a purpose. All of the cases
counsel cited on this point hail from the District of Delaware. See, e.g., In re Woodworkers
Warehouse, Inc., 323 B.R. 403, 405 (D. Del. 2005). In that case, the court noted the debtor’s
argument that “it is both appropriate and common in this District to appoint special counsel for these
types of services,” and then went on to cite cases that do appear to establish that district’s expansive
interpretation of the statute.
In Woodworkers, the types of services approved were not especially open-ended and instead
extended to “three tasks” that the bankruptcy court’s order “specifically and narrowly defined:” these
consisted of obtaining court approval for the use of cash collateral, selling assets, and negotiating
the debtor’s key employee retention program. 323 B.R. at 405. The specific issue in that case was
whether special counsel’s services went beyond their approved bounds and constituted representing
the debtor-in-possession in “conducting the case,” which is not at issue in this matter. However, Cox
& Watts offers these cases as persuasive authority because in them, the bankruptcy courts apparently
approved the employment of special counsel for general litigation purposes. Mem. of Law in
Support of Application for Employment at pp. 5-9 (discussing five unpublished Delaware bankruptcy
court orders and suggesting that “[i]t is in the context of these cases” that Cox & Watts’ application
should be construed).
The court is not persuaded by the examples counsel offers, and respectfully declines to follow
them. The unpublished Delaware decisions appear to go beyond the statutory bounds of “specified
special purpose,” and also to make significant inroads into “conducting the case.” Accordingly, they
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represent what the court believes to be unique and overly inclusive views of what § 327(e) allows.
The purposes for which Cox & Watts seek to be special counsel are, at present, overly general and
the first factor is not satisfied. See 3 Collier on Bankruptcy ¶ 327.04[9][b] at 327-51 (Alan N.
Resnick & Henry J. Sommer, eds., 16th ed.) (commenting on the “relatively straight-forward and
literal approach that has been adopted by courts in interpreting this (327(e)) and other requirements
of section 327”).
The second factor requires that the purpose for which counsel is retained must not extend into
“conducting the case.” The “special purpose to be served by counsel appointed under § 327(e) must
not be related to the debtor’s reorganization since this is tantamount to representing the debtor in the
conduct of the case.” In re Tidewater Mem. Hosp., Inc., 110 B.R. 221, 228 (Bankr. E.D. Va. 1989).
The court is persuaded that the services Cox & Watts seek to provide would be within the realm of
general litigation, and would not encroach into the proper realm of the debtor’s bankruptcy counsel,
such that the second factor is satisfied.
With respect to the third, the court concludes that Cox & Watts’ representation likely would
be in the best interest of the state. Waccamaw agreed that Cox & Watts’ hourly fee is reasonable,
and that counsel are familiar with the debtor’s operations and practices. Efficiencies could be
realized if Cox & Watts were to continue to provide legal services for the debtor.
The court cannot assess the fourth factor, which requires that the attorney not hold any
interest adverse to the debtor or estate with respect to the matter on which the attorney is to be
employed. If the court cannot discern the particular purpose for which special counsel will be
employed, it cannot ensure that the attorney “does not represent or hold any interest adverse to the
debtor or to the estate with respect to the matter on which such attorney is to be employed.”
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§ 327(e). Waccamaw, the debtor’s largest secured creditor, has concerns about both a payment to
counsel made during the preference period and the likelihood that ongoing legal work will deplete
the debtor’s resources. The court cannot discount these concerns, nor can it fully address them,
because the specific information required has not been provided.
Because § 327(e) requires counsel to articulate a “specified special purpose” and to establish
the lack of any adverse interest with respect to that purpose, and the application and affidavit before
the court do not satisfy those statutory requirements, the court will deny the application. The
application does satisfy the second and third factors as discussed above. This ruling is without
prejudice to Cox & Watts’ ability to file subsequent applications for employment as special counsel.
For the foregoing reasons, the application for employment of S. Denise Watts and the Law
Firm of Cox & Watts PLLC as special counsel is DENIED.
SO ORDERED.
END OF DOCUMENT
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