Empire State Conglomerates, Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
:
EMPIRE STATE CONGLOMERATES, 	: 	Chapter 7
INC. 	: 	Case No. 15-10061 (SMB)
:
Debtor. 	:
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MEMORANDUM DECISION DENYING MOTION
TO DISQUALIFY THE TRUSTEE AND HER COUNSEL
A P P E A R A N C E S:
ZINKER & HERZBERG, LLP
Counsel for Paul A. Peterson
300 Rabro Drive, Suite 114
Hauppauge, NY 11788
Jeffrey Herzberg, Esq.
Of Counsel
TARTER KRINSKY & DROGIN LLP
Counsel for the Chapter 7 Trustee
1350 Broadway, 11th Floor
New York, NY 10018
Deborah J. Piazza, Esq.
Robert A. Wolf, Esq.
Jill Makower, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Paul A. Peterson (“Peterson”), a former officer and shareholder of the debtor Empire
State Conglomerates, Inc. (“Empire”), has moved to disqualify the chapter 7 trustee, Deborah J.
Piazza, Esq. (the “Trustee”) and her counsel, Tarter Krinsky & Drogin LLP (“Tarter”), and
invalidate certain settlement agreements entered into by the Trustee. (Motion to Disqualify
Chapter 7 Trustee and Her Counsel, dated Sept. 22, 2015 (the “Motion”) (ECF Doc. # 49).) The
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catalyst for the Motion was Tarter’s hiring of five attorneys who had previously worked at
another law firm, Todtman, Nachamie, Spizz & Johns, P.C. (“Todtman”). Todtman represented
the Official Committee of Unsecured Creditors (the “Committee”) in an earlier bankruptcy case,
In re 87-10 51st Avenue Owners Corp., No. 09-45657 (ESS) (Bankr. E.D.N.Y.). That case
involved contentious proceedings between the Committee on the one hand and Empire and
Peterson on the other.
For the reasons that follow, the Motion is denied.
BACKGROUND
A. 	The 87-10 51st Avenue Owners Corp. Bankruptcy Case and Related Litigation
At the beginning of this story, 87-10 51st Avenue Owners Corp. (the “Co-op”) was a
residential co-op in which Empire owned the shares and held the proprietary leases relating to
eighty-one apartments or units. On July 5, 2009, the Co-op filed a chapter 11 case in the United
States Bankruptcy Court for the Eastern District of New York (the “Co-op Bankruptcy Case”).
Peterson was a member of the Co-op’s board of directors as well as a shareholder and officer.
Following its appointment, the Committee filed an application to employ Todtman. (Application
for an Order Authorizing the Official Committee of Unsecured Creditors to Retain Todtman,
Nachamie, Spizz & Johns, P.C. as Counsel, dated Sept. 22, 2009 (E.D.N.Y. ECF Doc. # 84).)1
Alex Spizz (“Spizz”) was a member of Todtman at the time and signed an affidavit in support of
the application. Bankruptcy Judge Stong approved the application on October 23, 2009. (Order
1 	References herein to E.D.N.Y. ECF Doc. # ___ refer to the docket of the Co-op Bankruptcy Case, Case No.
09-45657 (ESS), in the United States Bankruptcy Court for the Eastern District of New York. References herein to
NYSCEF Doc. # ___ refer to the docket of Empire State Conglomerates, Inc. v. 87-10 51st Avenue Owners Corp.,
No. 653618/2014 in the New York State Supreme Court, New York County. Other ECF Doc. #s refer to the instant
case, Case No. 15-10061 (SMB).
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Authorizing the Official Committee of Unsecured Creditors to Retain Todtman, Nachamie, Spizz
& Johns, P.C., dated Oct. 23, 2009 (E.D.N.Y. ECF Doc. # 99).)
On May 25, 2011, Todtman filed a motion on behalf of the Committee seeking leave to
prosecute, and if appropriate, settle certain causes of action against “Empire and others” due to
the Co-op’s apparent unwillingness to do so. (Motion of the Official Committee of Unsecured
Creditors Pursuant to 11 U.S.C. §§ 105(a), 1103(c) and 1109(b) for Entry of an Order Granting
Leave, Standing and Authority to Prosecute and, If Appropriate, Settle Causes of Action On
Behalf of the Debtor’s Estate, dated May 25, 2011 (“Standing Motion”), at ¶¶ 25-26, 36
(E.D.N.Y. ECF Doc. # 276-1).) The Standing Motion charged that Robert Clausell and Nicholas
Dovas, officers of the Co-op, had caused the Co-op to borrow nearly $8 million and lend the
funds to Empire to enable it to buy eighty-one units in the Co-op. (Standing Motion at ¶¶ 8-10.)
In exchange, the Co-op received unsecured fixed interest rate promissory notes. (Standing
Motion at ¶ 13.) The Committee contended that the transaction was a constructive fraudulent
transfer, and sought leave to pursue the claim and impose a constructive trust on the co-op unit
shares. (Standing Motion at ¶ 25-26.)
The Court subsequently confirmed the Co-op’s plan of reorganization (the “Co-op Plan”).
(Findings of Fact and Conclusions of Law Relating to, and Order (this “Order”) Confirming,
Joint Plan of Reorganization for 87-10 51st Avenue Owners Corp. (the “Debtor”) Filed by 87-
10 51st Avenue Owners Corp., NCB, FSB (“NCB”) and the Official Committee of Unsecured
Creditors (the “Committee”) Under Chapter 11 of the Bankruptcy Code, dated Sept. 22, 2011
(E.D.N.Y. ECF Doc. # 343).) Among other things, the Co-op Plan provided for the continuation
of the Committee post-confirmation, and, thereafter, the court entered a consent order granting
the relief sought in the Standing Motion. (Consent Order Granting the Official Committee of
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Unsecured Creditors Leave, Standing and Authority to Prosecute Claims Against Empire State
Conglomerates, Inc. and Others, and If Appropriate to Settle Causes of Action on Behalf of the
Debtor’s Estate, dated Mar. 22, 2012 (“Standing Order”), at 2 (E.D.N.Y. ECF Doc. # 485).)
Thus, the Committee had the authority to “pursue claims against [Empire] and others in
connection with the transfer of 81 apartment units . . . to Empire described . . . in the [Standing
Motion].” (Standing Order at 1.)
In the meantime, on December 15, 2011, the Committee filed a motion signed by Spizz
seeking to expunge Empire’s administrative claim. (Objection to Claim of Empire State
Conglomerates, Inc. Pursuant to Rule 3007 of the Federal Rules of Bankruptcy Procedure, dated
Dec. 13, 2011 (“Administrative Claim Objection”) (E.D.N.Y. ECF Doc. # 392).) The
Administrative Claim Objection argued that Empire’s claim was based on pre-petition payments
made in anticipation of the Co-op’s chapter 11 case, rather than post-petition transactions. (Id. at
3.) A February 26, 2013 docket entry indicates that the Administrative Claim Objection was
ultimately settled. (Text Order, entered Feb. 26, 2013 (E.D.N.Y. ECF) (indicating that the
Administrative Claim Objection was “Settled - MARKED OFF, IT IS SO ORDERED BY
s/Elizabeth S. Stong.”).) The Co-op Bankruptcy Case docket does not reflect any further dispute
regarding Empire’s claim in that case.
In addition, on December 27, 2011 and January 6, 2012, the Committee filed two motions
that implicated Empire.2 The first (the Motion to Compel) alleged that the Co-op had interfered
2 	Motion Seeking to Compel Debtor to Comply with the Terms of Confirmed Plan of Reorganization, dated
Dec. 23, 2011 (“Motion to Compel”) (ECF Doc # 397); Emergency Motion of the Official Committee of Unsecured
Creditors for Entry of an Order (I) Advancing the Hearing Date for the Committee’s Motion (ECF No. 397) Filed
on December 28, 2011 Seeking an Order Compelling the Debtor to Comply with the Terms of the Plan of
Reorganization, (II) Authorizing J&C Lamb Management Corp. as Outside Property Manager Under the Plan to
Send, on Behalf of the Board of Directors, Notice to All Rental Tenants of Empire State Conglomerates, Inc. That
All Rental Payments Due are to be Payable to the Reorganized Debtor c/o J&C Lamb Management Corp., (III)
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with or failed to comply with a number of provisions of the Co-op Plan, including the failure to
collect required payments from Empire, interference with the outside property manager
authorized by the Co-op Plan, and failure to execute a mortgage in favor of unsecured creditors.
(Affidavit of Alex Spizz in Support of the Motion to Compel, dated Dec. 23, 2011, at ¶¶ 11, 13-15
(E.D.N.Y. ECF Doc. # 397-1).) The Motion to Compel sought (i) authority to execute and file a
mortgage on behalf of the Co-op, (ii) an injunction prohibiting the Co-op from interfering with
the outside property manager, and (iii) an injunction prohibiting the Co-op from making
disbursements unless authorized by the outside property manager. (Id. at 5.)
The second motion (the Emergency Motion) alleged that Empire had failed to make
payments owed to the Co-op (over $300,000 was allegedly past due at the time of the motion),
and the Co-op had failed to take action to collect the amounts owed. The Emergency Motion and
Spizz’s supporting affidavit further alleged that “there is evidence that the [Co-op], its Board of
Directors and Clausell have removed books, records, computers and other financial information
from the [Co-op]’s offices and secreted those records to two (2) apartments owned by Empire so
that they would not be available to the [outside property manager].” (Affidavit of Alex Spizz
Pursuant Local Rule 9077-1, dated Jan. 6, 2012 (“Spizz Affidavit”), at ¶ 3 (E.D.N.Y. ECF Doc. #
404-3); see also Emergency Motion at ¶ 13.) The Emergency Motion requested, among other
things, an order directing the Co-op, its directors, its employees, Clausell, and Empire to turn
over all of the Co-op’s books and records. (Emergency Motion at ¶ 12.)
Compelling the Debtor, Its Board of Directors, Its Officers, Employees and Robert Valdes Clausell to Turnover Any
and All Books Records and Computers of the Debtor to J&C Lamb Management Corp., and (IV) Enjoin Robert
Valdes Clausell and the Debtor from Disbursing and Transferring Funds of the Debtor Including, but Not Limited
to, the Proceeds from the Nextel Settlement, filed Jan. 6, 2012 (“Emergency Motion”) (ECF Doc. # 404).
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The relief sought by the Committee in the Motion to Compel was granted on consent, and
required the Co-op to execute a subordinated mortgage and lien subordination agreement,
cooperate with the outside property manager, and refrain from making payments of any kind
without advance authorization from the outside property manager. (Order Pursuant to 11 U.S.C.
§§ 105(a) and 1142(b) to Compel Debtor to Comply with the Terms of Confirmed Plan of
Reorganization, dated Jan. 24, 2012 (E.D.N.Y. ECF Doc. # 433).) The Court also signed a
consent order which denied, without prejudice, the Emergency Motion, but also directed the Co-
op, its board of directors, its officers, its employees, and Clausell to turn over the Co-op’s books
and records to the outside property manager. (Consent Order Directing Debtor to Turn Over
Books, Records, and Computers, dated Jan. 27, 2012, at 2 (E.D.N.Y. ECF Doc. # 440).)
B. 	The 2012 Settlement Agreement
On May 25, 2012, Empire, the Co-op, the Co-op board, the Committee and others entered
into an agreement (the “2012 Settlement Agreement”) settling the claims inter se.3 The 2012
Settlement Agreement provided, inter alia, that Empire would transfer its ownership interest in
seventy-nine units to a new entity created by the Co-op. (Id. at ¶ 2.) Empire would place the
shares associated with the other two units (the “Retained Units”) in escrow, sell the Retained
Units “as soon as practicable,” retain up to $350,000 from the sales proceeds, and distribute the
proceeds in accordance with the agreement. (Id. at ¶ 3.) Finally, the Co-op’s board resigned and
new board elections would be scheduled. (Id. at ¶¶ 4-5.)
The 2012 Settlement Agreement also contained mutual releases. Except for the
obligations under the 2012 Settlement Agreement itself, the Committee and the Co-op, among
3 	A copy of the 2012 Settlement Agreement is annexed to the Motion as Exhibit D.
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others, released Empire and its “officers, managers, directors, employees, members, partners,
representatives, attorneys, predecessors, successors and assigns” (except for Clausell) from “any
and all claims,” including the claims that the Standing Order had authorized the Committee to
pursue. (Id. at ¶ 7.) The Committee, Empire and the Co-op’s board granted a similar release to
the Co-op and its officers and directors, (id. at ¶ 8), and Empire, the Co-op and the Committee
likewise released the members of the Co-op’s board. (Id. at ¶ 9.) Thus, the 2012 Settlement
Agreement resolved, released and discharged the Co-op’s, the Committee’s and Empire’s claims
against each other as well as the Co-op’s officers, directors and board members. Judge Stong
approved the 2012 Settlement Agreement, (Order Approving Stipulation of Settlement Among
the Official Committee of Unsecured Creditors, the Debtor, NCB, FSB, the Shareholders and
Empire State Conglomerates, Inc., dated June 29, 2012 (“2012 Settlement Order”), at 1
(E.D.N.Y. ECF Doc # 566), and entered a final decree closing the case on November 4, 2013.
See Clausell v. 87-10 51st Ave. Owners Corp., No. 14 Civ. 02691 (RJD), 2014 WL 5591064, at
*2 (E.D.N.Y. Nov. 3, 2014) (affirming denial of motion to reopen the Co-op Bankruptcy Case).
The respite was temporary, and new litigation ensued. On November 21, 2014, Empire
filed a suit (the “Empire Action”) against the Co-op, Jacinto Chua, and Joel E. Miller, Esq. in the
New York State Supreme Court, New York County. (Empire State Conglomerates, Inc. v. 87-10
51st Avenue Owners Corp., No. 653618/2014, RJI filed Nov. 21, 2014 (N.Y. Sup.).) The thrust
of the complaint was that the defendants breached the 2012 Settlement Agreement by charging
Empire and similarly situated shareholders for amounts payable by, 87-10 Operating LLC, the
transferee of the seventy-nine units and failed to credit Empire for over $50,000 in payments.
(Verified Complaint, dated Nov. 20, 2014, at ¶¶ 9-10 (“Complaint”) (NYSCEF Doc. # 1).)
Empire also alleged that the Co-op and its managing agents had failed to provide access to the
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Co-op’s books and records. (Id. at ¶¶ 11-12.) The First Cause of Action asserted a claim for
breach of contract and breach of fiduciary duty relating to the inspection of the Co-op’s books
and records. The Second Cause of Action referred to fraud but did not specify the fraud other
than a general allegation that the defendants intentionally refused to abide by the Cooperative
Conversion Offering Plan, Empire’s proprietary leases, the bylaws, the Co-op’s certificate of
incorporation and the 2012 Settlement Agreement. Peterson verified the Complaint.
C. 	The Empire Bankruptcy Case
On January 13, 2015, Empire filed its chapter 11 petition in this Court. (Voluntary
Petition, dated Jan. 13, 2015 (ECF Doc. # 1).) By order dated March 26, 2015, the case was
converted to chapter 7, (Reply to the Opposition to the Motion to Remove Trustee and the
Vacatur and Expungement of the Order Authorizing Employment of Attorneys for Trustee, dated
Oct. 14, 2015 (“Reply”), at Ex. D (ECF Doc. # 54)), and the United States Trustee appointed
Piazza, a partner at Tarter, as interim chapter 7 trustee. (Notice of Appointment of Trustee
Deborah J. Piazza, Esq., dated Mar. 27, 2015 (ECF Doc. # 27).) Piazza subsequently became
permanent trustee by operation of law. See 11 U.S.C. § 702(d).
Approximately two weeks later, Spizz became a partner at Tarter, and several other
attorneys formerly with Todtman also joined Tarter. (Affirmation in Opposition to Motion of
Paul A. Peterson to Disqualify Chapter 7 Trustee and Her Counsel, dated Oct. 12, 2015, at ¶ 18
(ECF Doc. # 51).) Soon thereafter, the Trustee filed an application to retain Tarter as her
counsel, (Application for an Order Authorizing the Retention of Tarter Krinsky & Drogin LLP as
Counsel to the Trustee, dated Apr. 14, 2015 (“Tarter Retention Application”) (ECF Doc # 31)),
and the Court granted the motion the next day. (Order Authorizing Retention of Tarter Krinsky
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& Drogin LLP as Counsel to the Trustee Pursuant to 11 U.S.C. § 327 and Federal Rule of
Bankruptcy Procedure 2014, dated Apr. 17, 2015 (ECF Doc. # 32).)
The Tarter Retention Application did not disclose the involvement of Spizz or Todtman
in the Co-op Bankruptcy Case. A few days later, however, Tarter partner Robert A. Wolf, Esq.
filed a Supplemental Affirmation of Disclosure with Respect to the Trustee’s Retention of Tarter
Krinsky & Drogin LLP as Counsel to the Trustee, dated Apr. 22, 2015 (“Supplemental
Disclosure”) (ECF Doc. # 33), which disclosed that “several attorneys” from Todtman had
joined Tarter, Todtman had previously represented the Committee in the Co-op Bankruptcy
Case, and the Co-op was an unsecured creditor based upon alleged arrearages owed by the
Debtor. Wolf stated that he had spoken with Spizz regarding Todtman’s involvement in the Co-
op Bankruptcy Case, had reviewed Todtman’s involvement in the Co-op Bankruptcy Case, and
had concluded that Todtman’s representation of the Committee “did not involve issues or
positions that would be adverse to the interests of the Trustee or the Debtor’s estate in the instant
bankruptcy case.” (Supplemental Disclosure at ¶ 3.)
1. 	The Trustee’s Settlement of the Empire Action
On June 2, 2015, the Trustee entered into a stipulation withdrawing with prejudice
Empire’s claims against Miller in the Empire Action. (Stipulation of Discontinuance as Against
Defendant Joel E. Miller, dated June 2, 2015 (“Miller Stipulation”) (NYSCEF Doc. # 10).) In
mid-September, she entered into a stipulation with the Co-op, 87-10 Operating LLC, and
National Cooperative Bank/NCB, FSB, a secured creditor, to settle the Empire Action (the
“Empire Action Stipulation”).4 Under the settlement, the Co-op agreed to pay $10,000 to the
4 	The Empire Action Stipulation is annexed as Exhibit A to the Chapter 7 Trustee’s Motion Pursuant to Rule
9019 of the Federal Rules of Bankruptcy Procedure Approving Stipulation and Order Between Deborah J. Piazza,
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Trustee, and the Trustee agreed to sell Empire’s interests in the Retained Units, distribute the
proceeds of the sale in a specified manner and release the Co-op and its current board members,
its attorneys and current agents. The Trustee thereafter filed a stipulation discontinuing the
Empire Action without prejudice, (Stipulation of Discontinuance Without Prejudice, dated Nov.
19, 2015 (NYSCEF Doc. # 12)), and filed the Approval Motion seeking approval of the Empire
Action Stipulation on the same day.
2. 	Peterson’s Opposition and Motion
Four days after the Trustee’s execution of the Empire Action Stipulation, Peterson filed
the instant Motion to remove the Trustee, disqualify her counsel and invalidate any agreements
she entered into relating to the Empire Action. In the main, the Motion argued that Tarter and/or
former attorneys from Todtman who are now employed by Tarter had represented the Committee
in the Co-op Bankruptcy Case, (Motion at ¶¶ 6, 9), the Trustee and Tarter were not
“disinterested” within the meaning of Bankruptcy Code Section 327, (Motion at ¶¶ 9, 20), and
the Tarter Retention Application failed to disclose conflicts or potential conflicts of interest.
(Motion at ¶ 14.) In arguing that the Trustee and Tarter were not disinterested, the Motion
pointed to allegations that Spizz and the Committee had made in the Co-op Bankruptcy Case in
support of the Standing Motion and the Emergency Motion and predicted that he would be a
witness in the Empire Action. (Motion at ¶¶ 12, 13.) The Motion also charged that the Trustee’s
application to retain Tarter as her counsel did not disclose Tarter’s relationship to Todtman and
Spizz and their connection to the Co-op Bankruptcy Case. (Motion at ¶¶ 14-15.) Finally, the
Motion maintained that the Trustee had refused his invitation to prosecute the valuable claims on
as Chapter 7 Trustee and 87-10 51st Avenue Owners Corp., 87-10 Operating LLC and National Cooperative
Bank/NCB, FSB, dated Nov. 19, 2015 (“Approval Motion”) (ECF Doc. # 58).
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behalf of the estate in the Empire Action and subsequently reneged on an agreement to sell the
estate’s rights in the Empire Action to Peterson for $10,000. (Motion at ¶ 16.)
The Trustee’s response argued that the disinterestedness test focused on the present, and
Peterson had not identified any existing interests that Tarter held or represented that would
mandate disqualification. (Chapter 7 Trustee’s and Tarter Krinsky & Drogin LLP’s
Memorandum of Law in Opposition to Motion of Paul A. Peterson to Disqualify Chapter 7
Trustee and Her Counsel, dated Oct. 12, 2015, at 3-7 (ECF Doc. # 52).) In addition, Tarter never
represented a creditor in the Empire case. (Id. at 6.) Finally, Peterson’s accusation that the
Trustee had failed to disclose the Todtman/Spizz connection ignored the Supplemental
Disclosure. (Id. at 7-8.)
Peterson doubled-down in his Reply, and added new charges. He criticized the Trustee’s
attorney for making the “unfounded allegation” that Empire had never sold its interests in the
Retained Units, (Reply at ¶ 3), even though he admitted the “unfounded allegation” in his
opposition to the motion to convert the case. (See Declaration of Paul Peterson In Opposition
To the Motion for an Order Modifying the Automatic Stay and Converting the Chapter 11 Case
to a Case Under Chapter 7, dated Mar. 19, 2015, at ¶ 9 (ECF Doc. # 24) (stating that Empire
filed the chapter 11 case to avoid a sheriff’s sale and permit Empire to sell the Retained Units in
a commercially reasonable manner).) He reiterated the acrimonious relationship between Empire
and the Co-op in the latter’s bankruptcy case and referred to the “threatening and unsubstantiated
allegations” directed at Empire and its management in that case. (Reply at ¶ 4.) He again
referred to the “unfounded allegations” by Spizz in the Co-op Case, the absence of any proffer
by Spizz, Todtman or Tarter that they “do not hold an economic interest that would create an
actual or potential conflict with the Estate,” and their predisposition of bias against the Empire
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estate. (Id. at ¶ 10.) The Reply also raised the issue of the Miller Stipulation as further proof of
the Trustee’s and Tarter’s lack of disinterestedness, (id. at ¶ 6), arguing that the Trustee had no
right to compromise the estate’s claims against Miller without Court approval, which she never
sought. (Id. at ¶¶ 7-9.)
Finally, forced to acknowledge his erroneous statement that the Trustee had not disclosed
Todtman’s connection to the Co-op Bankruptcy Case, Peterson contended that the Supplemental
Disclosure did not count because the Court had already authorized the retention without it. (Id.
at ¶¶ 11, 15.) Moreover, the Supplemental Disclosure was a “white wash” because it did not
reveal the accusations that Spizz and Todtman had made against Empire in the Co-op
Bankruptcy Case, the authority granted to the Committee to sue Empire and the “underpinnings”
of the dispute between Empire and Todtman. (Id. at ¶ 12.) Lastly, he complained that Tarter had
not laid out the conflicts investigation that it had performed prior to the submission of the Tarter
Retention Application, and “believed” that before Todtman attorneys joined Tarter, they
discussed Todtman’s current and recent cases. (Id. at ¶ 14.)
DISCUSSION
A. 	Peterson’s Motion to Disqualify Tarter
The Bankruptcy Code permits a trustee to employ professional persons “that do not hold
or represent an interest adverse to the estate, and that are disinterested persons.” 11 U.S.C.
§ 327(a). A professional person is disinterested, inter alia, if such person “does not have an
interest materially adverse to the interest of the estate or of any class of creditors or equity
security holders, by reason of any direct or indirect relationship to, connection with, or interest
in, the debtor, or for any other reason.” 11 U.S.C. § 101(14)(C). “[C]ounsel will be disqualified
under section 327(a) only if it presently ‘hold[s] or represent[s] an interest adverse to the estate,’
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notwithstanding any interests it may have held or represented in the past.” Bank Brussels
Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, 623 (2d Cir. 1999). Additionally, a
professional person is not disqualified from employment “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). Accordingly, Bankruptcy Code § 327(c)
“prevents disqualification based solely on the professional’s prior representation of or
employment by a creditor—it ‘does not preempt the more basic requirements of subsection (a).’”
AroChem, 176 F.3d at 621 (2d Cir. 1999) (quoting In re Interwest Business Equip., 23 F.3d 311,
316 (10th Cir. 1994)).
The Bankruptcy Code does not define the phrase “hold or represent an interest adverse to
the estate,” but many courts have adopted the following definition:
(1) to possess or assert any economic interest that would tend to lessen the value of the
bankruptcy estate or that would create either an actual or potential dispute in which the
estate is a rival claimant; or (2) to possess a predisposition under circumstances that
render such a bias against the estate.
AroChem, 176 F.3d at 623 (quoting In re Roberts, 46 B.R. 815, 827 (Bankr. D. Utah 1985), aff’d
in relevant part and rev’d and remanded in part on other grounds, 75 B.R. 402 (D. Utah 1987);
accord In re Angelika Films 57th, Inc., 227 B.R. 29, 38 (Bankr. S.D.N.Y. 1998); In re Granite
Partners, L.P., 219 B.R. 22, 33 (Bankr. S.D.N.Y. 1998). The Court must make the
determination as to whether a proposed professional holds or represents an adverse interest on a
case-by-case basis giving due consideration to the totality of the circumstances. AroChem, 176
F.3d at 623; In re Belmonte, 524 B.R. 17, 27 (Bankr. E.D.N.Y. 2015); In re Project Orange
Assocs., LLC, 431 B.R. 363, 370 (Bankr. S.D.N.Y. 2010).
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The adverse interest test under Bankruptcy Code § 327(a) speaks in the present tense and
only examines present interests. 	AroChem, 176 F.3d at 623-24; In re M.F. Global Inc., 464 B.R.
594, 600 (Bankr. S.D.N.Y. 2011); Project Orange, 431 B.R. at 370. Tarter does not presently
possess any claims or interests contrary to the estate, and consequently, does not hold an adverse
interest within the meaning of § 327(a). AroChem, 176 F.3d at 623. In particular, Tarter does
not represent any parties in litigation against Empire; and to the extent that Todtman did, or
asserted possible claims against Empire in the Standing Motion, those matters were settled as
part of the 2012 Settlement Agreement.5 By the time that Tarter was appointed in this case, the
Co-op Bankruptcy Case had been closed for nearly a year and a half. Peterson has not alleged
any facts that show or imply an ongoing relationship between Spizz (or other Tarter attorneys)
and the Committee or any ongoing efforts by the Committee, Todtman, Tarter, or Spizz to pursue
claims against Empire. For the same reason, Tarter does not “have” a personal interest
materially adverse to the estate or anyone else within the meaning of Bankruptcy Code
§ 101(14)(C). See AroChem, 176 F.3d at 629.
The remaining question is whether Todtman’s prior representation of the Committee in
the Co-op Bankruptcy Case creates an actual conflict on the part of Tarter within the meaning of
Bankruptcy Code § 327(c). An actual conflict of interest is “an active competition between two
interests, in which one interest can only be served at the expense of the other.” In re Diva
Jewelry Design, Inc., 367 B.R. 463, 472 (Bankr. S.D.N.Y. 2007) (quoting In re Mercury, 280
B.R. 35, 54 (Bankr. S.D.N.Y. 2002)); see In re Granite Partners, L.P., 219 B.R. 22, 33 (Bankr.
5 	Peterson’s assertion that “[Tarter] represented the unsecured creditors committee in the [Co-op Bankruptcy
Case] that was pending before Judge Stong and was apparently a signatory to the [2012 Settlement Agreement],”
(Motion at ¶ 6), is incorrect. The 2012 Settlement Agreement was not signed by counsel for the Committee, and
Tarter was not the Committee’s counsel at any point.
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S.D.N.Y. 1998) (“An actual conflict involves the representation of ‘two presently competing and
adverse interests,’ while a potential conflict occurs where the competition ‘may become active if
certain contingencies arise.’”) (quoting In re American Printers & Lithographers, Inc., 148 B.R.
862, 866 (Bankr. N.D. Ill. 1992)).
The Court’s review has not identified, and Peterson has not established, any conflict of
interest, bias, or prejudice on the part of Spizz, the other former Todtman attorneys, or any Tarter
attorneys. The disputes between the Committee and Empire in the Co-op Bankruptcy Case were
resolved by the 2012 Settlement Agreement. The post-settlement Empire Action did not involve
the Committee, Todtman, Tarter or Spizz. And although Peterson speculates that Spizz would be
called as a fact witness in the Empire Action, which has been settled anyway, he does not explain
why. The Motion does not state that Spizz was involved in the post-settlement activities that
formed the basis of the Empire Action or identify an ambiguity in the 2012 Settlement
Agreement that might have required clarifying testimony from Spizz.
Furthermore, the statements made by Spizz about Empire and its officers and directors in
the course of litigating the Co-op Bankruptcy Case involved factual allegations relating to
disputes that are no longer active. They do not evidence an unwillingness or inability on the part
of Spizz in particular, and much less Tarter in general, to dispassionately represent the Empire
estate’s interests. Additionally, even the potential for disloyalty is lacking; Peterson’s allegations
and the history of the Co-op Bankruptcy Case and related litigation present no material incentive
for Spizz (or other former Todtman attorneys) to act contrary to the estate’s interests in this Case.
Finally, Peterson has conceded his mistaken charge that the Trustee failed to disclose
Spizz’s and Todtman’s representation of the Committee in the Co-op Bankruptcy Case.
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Nevertheless, he argues that the Supplemental Disclosure was too little and too late. The United
States Trustee appointed the Trustee before Spizz and the other Todtman attorneys joined Tarter,
and the Trustee filed her application to retain Tarter a few days after they joined. By then, the
Co-op Bankruptcy Case had been closed for more than a year, and the underlying disputes that
Peterson says should have been disclosed were settled three years before the conversion of the
Empire case to chapter 7. This may explain why it did not immediately cross the Trustee’s radar.
Moreover, the Trustee initiated the Supplemental Disclosure only five days after the Court
authorized Tarter’s retention as her bankruptcy counsel and nine days after Spizz joined Tarter.
The Trustee’s actions were consistent with her disclosure obligations, and showed a good faith
attempt to correct an earlier omission.
Moreover, the timely disclosure of the connection to the Co-op Bankruptcy Case would
not have made a difference. The Supplemental Disclosure revealed that Todtman had
represented the Committee, and the Co-op was an unsecured creditor in the Empire case based
on unpaid maintenance on the Retained Units. (Supplemental Disclosure at ¶ 2.) The Co-op’s
interest as a creditor is adverse to the Empire estate. Peterson does not, however, challenge the
adequacy of that disclosure, or suggest that Todtman’s representation of a constituency that
might benefit from the payment of the Co-op’s claim (depending on the terms of the Co-op Plan)
disqualified Tarter.
Rather, he harps on the failure to disclose the long-settled disputes between the Co-op
and Empire which form no part of the Co-op’s claim for unpaid maintenance. While the
Supplemental Disclosure could have included more detail, it was not necessary to disclose the
information that Peterson claimed was missing. The animus between the Co-op and Empire no
longer exists, except in Peterson’s eyes. The material facts are that all of the disputes involving
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the Committee and Empire were settled years earlier, Todtman had not represented the
Committee for approximately seventeen months, and neither Todtman nor Tarter currently
represented anyone suing Empire or anyone that Empire was suing. Finally, Peterson’s
“undisclosed” facts are the very same facts that the Court is now reviewing to determine if Tarter
was conflicted and should not have been retained. The Court has concluded that Tarter is not
conflicted, and in light of that determination, the belated Supplemental Disclosure does not,
without more, provide a basis for disqualifying Tarter.
B. 	Peterson’s Request to Disqualify the Trustee
A court may remove a trustee for “cause.” 11 U.S.C. § 324(a). The Bankruptcy Code
does not define “cause,” but case law generally requires a showing of fraud or actual injury to a
debtor’s interests. Dieffenbach v. Haworth (In re Haworth), 356 F. App’x 529, 530 (2d Cir.
2009) (quoting In re Freeport Italian Bakery, Inc., 340 F.2d 50, 54 (2d Cir. 1965)); Surabian v.
Picard, Case No. 13 Civ. 935 (JGK), 2014 WL 917091, at *2 (S.D.N.Y. Mar. 7, 2014); In re
Belmonte, 524 B.R. 17, 28 (Bankr. E.D.N.Y. 2015); Pereira v. Foong (In re Ngan Gung
Restaurant), 254 B.R. 566, 574-75 (Bankr. S.D.N.Y. 2000). The party seeking to remove a
trustee must make a “strong showing because the effect of removal is deleterious to the
continuity of the administration of the estate.” In re Carla Leather, Inc., 44 B.R. 457, 473
(Bankr. S.D.N.Y. 1984) (internal quotation marks omitted), aff’d 50 B.R. 764 (S.D.N.Y. 1985).
Peterson does not allege that the Trustee engaged in fraudulent conduct or caused injury
to the estate. Instead, the Motion contends that the Trustee should be removed based on her
connection to Spizz and other Todtman attorneys, (Motion at ¶¶ 8, 12), the Trustee’s purported
failure to disclose Tarter’s conflict of interest, (Motion at ¶ 14), the Trustee’s decision not to sell
the estate’s rights in the Empire Action claims to Peterson, (Motion at ¶ 16), and positions taken
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by and statements made by Spizz during his representation of the Committee in the Co-op
Bankruptcy Case. (Motion at ¶¶ 6-7, 13.) Additionally, Peterson’s Reply attacks the Trustee’s
failure to seek Court approval of the Miller Stipulation. (Reply at ¶¶ 6-7.).
The Court has already concluded that Spizz’s and Todtman’s prior participation in the
Co-op Bankruptcy Case and the belated disclosure of that connection do not supply grounds to
disqualify Tarter. As a result, there is no basis to disqualify the Trustee based on Spizz’s
membership in Tarter.
Peterson’s efforts to remove the Trustee based on the settlement of the Empire Action
lack merit, but in any event, are now moot. The Court addressed the propriety of the settlement
and the Trustee’s decision to settle with the Co-op rather than Peterson in connection with the
Approval Motion. Following an evidentiary hearing, at which Peterson’s attorney cross-
examined the Trustee, the Court overruled Peterson’s objection and approved the Trustee’s
motion.6 The Court specifically found, among other things, that paying the Co-op $10,000 was
preferable to paying Peterson $10,000. Peterson cannot complain that the price was too low
because it was the same price he offered, and he never raised his offer. Furthermore, Peterson’s
intention to continue litigating the Empire Action would mire the Trustee and the estate in
expensive and time-consuming discovery without any benefit to the estate. In short, the Trustee
appropriately exercised her business judgment in entering into the Empire Action Stipulation and
not selling her claim to Peterson for the same amount. A fortiori, the settlement does not
constitute cause for the drastic sanction of removal.
6 	The Trustee has yet to submit an order approving the settlement.
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Similarly, the Trustee’s execution of the Miller Stipulation without seeking Court
approval does not provide cause for her removal. Peterson first mentioned the Miller Stipulation
in his Reply, and the Court need not address the issue at all. See United States v. Letscher, 83 F.
Supp. 2d 367, 377 (S.D.N.Y. 1999) (“[A]rguments raised in reply papers are not properly a basis
for granting relief.”). In any event, Peterson has not shown that the Miller Stipulation injured the
estate. Miller, an attorney, had signed the 2012 Settlement Agreement in his capacity as
“counsel for Chua and additional shareholders.” (2012 Settlement Order at 16; Complaint at ¶
1.) He did not represent the Co-op at that time. The Complaint did not identify any obligation
imposed on Miller under the 2012 Settlement Agreement or describe how he participated in the
breach of that agreement or committed any of the wrongful acts alleged in the Complaint.7
Furthermore, Peterson never articulated the nature of Empire’s claims against Miller, and the
Trustee concluded that there were none. It is apparent that Empire joined Miller without any
factual basis, and the Trustee saw no reason to hold him hostage to a meritless lawsuit. While it
would have been more prudent for the Trustee to seek the Court’s approval before discontinuing
Empire’s claims against Miller with prejudice, her failure to do so under the circumstances does
not support the ultimate sanction of removal.8
Finally, the Motion includes numerous, lengthy block quotes from decisions discussing
the requirement of disinterestedness and the rules governing the Trustee’s removal. (Motion at
7 	Empire sought to sidestep this obvious deficiency by pleading that each defendant “committed the same or
similar acts attributed to the other named defendants,” and “[t]herefore, all acts alleged to have been committed by
any of the named defendants are also alleged to have been committed by all other defendants.” (Complaint at ¶ 6.)
8 	In addition, the Miller Stipulation did not harm the estate. Miller subsequently signed the Empire Action
Stipulation as attorney for the Co-op, and that stipulation released the Co-op’s attorneys. Thus, even if the Trustee
should have sought prior approval of the Miller Stipulation, and her failure to do so rendered it a nullity, Miller
received the same release under the Empire Action Stipulation, which the Court did approve.
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¶ 11.) The Motion does not allude to the facts of these cases, except as may appear in the
extracts themselves, or explain how these are germane beyond their uncontroversial statements
of law. Further, the only authority it cites from this Circuit, Momentum Mfg. Corp. v. Employee
Creditors Committee (In re Momentum Mfg. Corp.), 25 F.3d 1132 (2d Cir. 1994), did not
concern disinterestedness or the removal of the trustee, and instead, addressed the Court’s
equitable powers under Bankruptcy Code § 105(a). If Peterson is suggesting that I can or should
remove the Trustee under my equitable powers notwithstanding the absence of “cause” as
required by Bankruptcy Code § 324(a), he is mistaken. See Law v. Siegel, 134 S. Ct. 1188, 1194
(2014) (“It is hornbook law that § 105(a) does not allow the bankruptcy court to override explicit
mandates of other sections of the Bankruptcy Code.”) (internal quotation marks and citation
omitted).
CONCLUSION
The Motion is denied. The Court has considered the remaining arguments made by
Peterson and concludes that they lack merit. Submit order.
Dated: New York, New York
February 24, 2016
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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