Tally One, Inc.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 11-31985DM
TALLY ONE, INC., 	)
)
Debtor. 	) Chapter 11
___________________________________)
MEMORANDUM DECISION REGARDING DISPUTED TRUSTEE ELECTION
The court is faced with a disputed election of a permanent
trustee by creditors. 	The conduct of the voting creditors and for
whom they voted is not at issue. 	Rather, the court must decide
whether the conduct of the former counsel for the unsecured
creditors’ committee in the solicitation process so violated the
Federal Rules of Bankruptcy Procedure that the election should be
invalidated. 	While the court concludes that invalidation of the
election is not necessary, it also is concerned about the
appropriateness of future representation of the trustee by that
counsel, given the nature of his involvement in the process.
Although the elected trustee has not yet requested employment of
any professionals, the court puts him on notice that it is not
inclined to authorize the employment of that counsel.
A. 	Applicable Law
Section 702 of the Bankruptcy Code permits a non-insider
-1-
Signed and Filed: February 28, 2012
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
Entered on Docket
February 29, 2012
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 1 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
creditor holding “an allowable, undisputed, fixed, liquidated,
unsecured claim” and not having a materially adverse interest to
the interests of other creditors to vote for a candidate for
trustee at the section 341 creditors’ meeting. 	Federal Rules of
Bankruptcy Procedure 2003 and 2006 govern election procedures; 	in
particular, Rule 2006 regulates the solicitation and voting of
proxies in such elections.
Rule 2006(d) flatly prohibits a solicitation of a proxy “by
or on behalf of an attorney at law.” 	Rule 2006(b)(2) defines the
solicitation of proxies as “any communication, other than one from
an attorney to a regular client who owns a claim or from an
attorney to the owner of a claim who has requested the attorney to
represent the owner, by which a creditor is asked, directly or
indirectly, to give a proxy after or in contemplation of the
filing of a petition by or against the debtor.” 	The Advisory
Committee Note to Rule 2006 sets forth the intent behind this
prohibition:
Creditor control was a basic feature of the Act and is
continued, in part, by the Code. 	Creditor democracy is
perverted and the congressional objective frustrated,
however, if control of administration falls into the
hands of persons whose principal interest is not in what
the estate can be made to yield to the unsecured
creditors but in what it can yield to those involved in
its administration or in other ulterior objectives.
. . . The purpose of the rule is to protect creditors
against loss of control of administration of their
debtors’ estates to holders of proxies having interests
that differ from those of the creditors.
***
Solicitation by an attorney of a proxy from a creditor
who was not a client prior to the solicitation is
objectionable not only as unethical conduct as
recognized by such cases as In the Matter of Darland
Company, 184 F. Supp. 760 (S.D. Iowa 1960), but also and
more importantly because the practice carries a
substantial risk that administration will fall into the
-2-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 2 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
hands of those whose interest is in obtaining fees from
the estate rather than securing dividends for creditors.
Advisory Committee Notes to Rule 2006 (emphasis added). 	See also
In re Eddie Haggar Ltd., Inc., 190 B.R. 281, 284 (“the regulations
discourage the election of a trustee by creditor’s attorneys”).
Rule 2006(e)(5) requires an attorney who solicits or forwards
proxies to submit “at any time before voting commences” or at “any
other time as the court may direct” a verified statement that no
consideration has been paid or promised the solicitor or
forwarder. 	The verified statement must disclose whether any
agreement exists between the solicitor or forwarder and any other
entity for, inter alia, the employment of any person as an
attorney for the estate. 	The Advisory Committee emphasizes that
“provisions requiring these statements implement the policy of the
Code expressed in § 504 as well as the policy of this rule to
deter the acquisition of proxies for the purpose of obtaining a
share in the outlays for administration.”
Subsection (f) governs enforcement of Rule 2006. 	The court
may determine whether “there has been a failure to comply” with
Rule 2006 or whether there has been “any other impropriety in
connection with the solicitation or voting of a proxy.” 	Upon a
finding of noncompliance with the rule or of impropriety in
solicitation, the court may reject a proxy, vacate an order
entered in consequence of the voting of a proxy which should have
been rejected, “or take any other appropriate action.”
B. 	The Facts 1
1The following discussion constitutes the court's findings of
fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a).
-3-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 3 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
This case began in chapter 11 on May 23, 2011. 	The official
creditors committee employed Landau Gottfried and Berger LLP
(“Landau”) as its counsel; Peter J. Gurfein, a member of Landau,
acted as lead counsel. 	The case was converted to chapter 7 on
November 1, 2011, and Janina M. Hoskins was designated as interim
chapter 7 trustee. 	On October 28, 2011, Mr. Gurfein informed Ms.
Minnie Loo, an attorney with the United States Trustee (“UST”),
that members of the committee desired an election of the Chapter 7
trustee. 	Ms. Loo asked that such requests be submitted to her
promptly, in writing. 	That same day Mr. Gurfein prepared letters
from creditors and addressed to Ms. Loo requesting an election of
a chapter 7 trustee and provided those letters to members of the
committee. 	Shortly thereafter nineteen such letters were signed
by creditors and returned to Landau rather than to Ms. Loo. 	As
these letters were not themselves proxy solicitations, Rule 2006
did not apply, but they do reflect lines of communication between
individual creditors and Landau.
Then on November 17, 2011, those communications continued
when Mr. Gurfein sent a letter on Landau letterhead to various
creditors forwarding a proxy form for an election of a chapter 7
trustee. 	The letter stated that two former members of the
creditors’ committee, Steve Mayo and William Epstein, had
volunteered to cast votes for those unable to attend the
creditors’ meeting. 	A form for designating Messrs. Mayo and
Epstein as authorized agents was enclosed; the letter set forth
detailed instructions for filling out the proxy. 	The recipients
were asked to return the authorization to Landau’s office by
December 2, 2011. 	According to the letter, Landau agreed to
-4-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 4 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
circulate it “as an accommodation to certain creditors of the
former Creditors Committee. 	We do not represent you or any other
creditor.” 	(Emphasis in original).
On December 7, 2011, the UST convened the section 341
meeting. 	Mr. Epstein and Mr. Mayo, acting as president of
Shippers Choice Transportation Services, Inc., produced sufficient
votes (their own and those that they held as proxies) to request
an election of a chapter 7 trustee pursuant to section 702. 	They
nominated Kyle Everett as trustee, and all votes were cast for Mr.
Everett. 	No creditors or others present disputed or objected to
the vote. 	Neither did Ms. Hoskins.
On January 30, 2012, the UST filed a Report of Disputed
Trustee Election under Rule 2003(d), raising the issue of whether
a failure of Landau and Mr. Gurfein to comply with the proxy
solicitation requirements of Rule 2006(e)(5) invalidated the
election. 	The UST noted in its report that Mr. Gurfein had not a
filed the verified statement required by Rule 2006(e)(5). 	The UST
took no position on what the court should do about the dispute.
Rule 2003(d)(2) directs that upon report of a disputed
election, the interim trustee is to continue to serve until the
court resolves the dispute; the interim trustee becomes the
trustee if no party moves for resolution of the dispute within
fourteen days.
On February 3, without waiting for such a motion, the court
issued an order directing Mr. Gurfein to comply with Rule
2006(e)(5) or otherwise demonstrate why he was not required to do
so. 	The court also invited other parties to respond to Mr.
Gurfein’s submission. 	Mr. Gurfein filed his response and verified
-5-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 5 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
statement on February 10, 2012; the UST and the debtor filed
responses on February 17, 2012; other declarations have been filed
as well, as noted below. 	The court concludes, therefore, that
there has been substantial compliance with the procedures called
for in Rule 2003(d)(2) and that it should resolve the dispute.
Mr. Gurfein’s statement reflects that he has not received,
been promised, or entered into any agreement for compensation or
employment in connection with the proxies. 	It does disclose that
he had “discussed with Mr. Everett his retention of [Landau] as
counsel to the Trustee in the Chapter 7 case.” 	In reply, the UST
filed a “comment” suggesting that Mr. Gurfein’s disclosure was
incomplete. 	In particular, the UST provided a December 8 e-mail
to the UST’s office from Ms. Hoskins stating:
Good morning: As we discussed, I reviewed my notes this
morning. I spoke to Mr. Gerfein [sic] on the afternoon of
October 31st regarding the general status of the case.
During the telephone discussion he was very upfront and
advised me that his client wanted their own Trustee in the
case and would elect Kyle Everett with DSI.
He also advised me that if I was interested in putting my
name with the creditors so that they would have other options
to consider as Trustee, I needed to be aware that Kyle was
going to retain his firm as counsel for the Chapter 7 Trustee
and that he would want me (my written notes say "expect") to
retain his firm as well. I told him that I normally use my
own professionals.
That afternoon, my telephone records indicate that I called
Julie [Glosson, an attorney with the UST] and she returned my
call around 3:00 p.m. 	I did not sent [sic] an email to Julie
regarding my two issues- 1) could counsel for the Committee
represent the Chapter 7 Trustee and 2) the agreement between
counsel for the Committee and the proposed Trustee- Everett
regarding retention.
[Omitted sentence.]
I certainly took Mr. Gerfein's [sic] comments to mean that he
expected any Chapter 7 Trustee appointed to the case, and
presented to the Committee/his clients, would retain his
-6-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 6 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
firm. I did not submit any information or contact any
unsecured creditors or parties in interest in the case in
order to be considered as Chapter 7 Trustee.
Ms. Hoskins filed her own declaration confirming the contents
of this e-mail. 	In response to Mr. Gurfein’s statement and in
light of Ms. Hoskins’ e-mail, Debtor’s counsel filed a reply
contending that Mr. Gurfein acted as a solicitor in violation of
Rule 2006(d) and that the election should thus be overturned.
In response to the UST’s comment, both Mr. Gurfein and Mr.
Everett filed declarations stating that no agreement existed
between them as to the retention of Landau as counsel for the
trustee. 	Mr. Everett’s declaration reflects that Mr. Gurfein
contacted him in August 2011 -- prior to the filing of a motion to
convert -- to ascertain whether Mr. Everett would be interested in
serving as trustee. 	Mr. Gurfein offered to serve as counsel if
Mr. Everett were elected. 	Mr. Everett made no commitment to hire
Mr. Gurfein and his firm, although “I did say that I would
consider his retention in light of his experience and extensive
knowledge of this case.”
C. 	Analysis
The facts of this case are similar to those of Eddie Haggar.
There, the law firm which had represented the chapter 11 unsecured
creditors’ committee “represented[ed] and assist[ed] a creditor in
its effort to solicit proxies.” 	The court found that this
“limited role” did not constitute solicitation that was prohibited
by Rule 2006(d). 	Eddie Haggar, 190 B.R. at 284-85. 	The Eddie
Haggar court did not provide the details of this assistance, but
did state that the firm “represented” the creditor. 	In contrast,
-7-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 7 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
neither Landau nor Mr. Gurfein “represented” Mr. Mayo’s company,
Mr. Epstein or any other creditor.
Here, Mr. Gurfein sent a letter requesting that proxies be
returned to Landau by a certain date; he also stated that Landau
not represent any creditor. 	That letter is a “communication . . .
by which a creditor is asked, directly or indirectly, to give a
proxy[.].” 	As Landau specifically disclaimed that it was
representing any creditor, it did not send the letter as attorney
for a client who owned a claim. 	As such, Mr. Gurfein and Landau
engaged in a solicitation prohibited by Rule 2006(d). 	But whether
a solicitor or a forwarder, the duties and the consequences are
much the same. 	At a minimum, Mr. Gurfein was required to file a
Rule 2016(e) verified statement. 	He did not do so until ordered
by the court. 	That statement, which should have been filed prior
to the vote, should have informed the creditors that Landau
expected to be employed as Mr. Everett’s counsel if creditors
successfully voted to replace Ms. Hoskins with Mr. Everett.
Notwithstanding Mr. Gurfein’s noncompliance with Rule 2006,
the court will not invalidate the election, as the votes
themselves were not tainted by Mr. Gurfein’s failure to disclose.
The creditors have been active in the case, and the court does not
want to disregard their votes and participation. 	“Bankruptcy Rule
2006 was not intended to restrict the scope of the [c]ourt’s
discretion in determining proxy disputes. 	The [c]ourt’s paramount
consideration is the welfare of the estate.” 	Id. 	Invalidating
their votes and participation in the process does not advance the
welfare of the estate.
The court, however, is concerned that Mr. Gurfein’s
-8-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 8 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
participation in the proxy process runs afoul of the intent behind
Rule 2006(d): 	preventing the solicitation of trustee votes by
attorneys who have a vested interest in being retained as counsel.
While the court finds that there was no “agreement” in the
contractual sense for Mr. Everett to hire Landau, there certainly
appears to be an implied understanding to that effect. 	This is
demonstrated by the fact that Mr. Gurfein chose to inform Ms.
Hoskins of his communications with Mr. Everett about representing
him and the chapter 7 estate. 	Whether the comment was gratuitous
or calculated to intimidate Ms. Hoskins, it demonstrates more of
an understanding with Mr. Everett than paragraph 18 of Mr.
Gurfein’s verified statement reflects and should have been fully
disclosed by Mr. Gurfein prior to the election.
The Advisory Committee Notes to Rule 2006 stress that the
courts are to exercise their discretion in arriving at results
consistent with the policy objectives of the Bankruptcy Code and
the concomitant rules. 	To that end, the court must balance two
strong but sometimes competing policies: the freedom of parties
(here the trustee) to select counsel of their choice against the
transparency and bona fides of the electoral process in bankruptcy
trustee elections. 	In this case the latter can be protected by
limiting the former. 	To that end, the court will permit the votes
to stand and confirm Mr. Everett as the chapter 7 trustee, but is
not inclined to approve any employment of Landau as counsel for
Mr. Everett or the estate (a matter not presently before the
court, but likely to arise if nothing is said). 	The court does
not take this position lightly. 	It has high regard for Mr.
Gurfein and for Landau, and it by no means suggests that they
-9-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 9 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
acted other than in good faith. 	Still, the need for things to
look right as well as be right prevails here. 	The integrity of
the bankruptcy system demands as much.
The court is concurrently entering an order confirming Mr.
Everett’s selection as Chapter 7 trustee for the reasons set forth
in this Memorandum Decision.
* * * END OF MEMORANDUM DECISION * * *
-10-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 10 of
11

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
COURT SERVICE LIST
Tally One, Inc.
C/o Jack Pearlstein
2651 North Cabrillo Highway
Half Moon Bay, CA 94019
Maria Guadalupe Diaz de lemus
1131 Main St., #138
Half Moon Bay, CA 94019-2194
William Epstein
41 Nace Ave.
Piedmont, CA 94611-4325
Daniel Kapler
227 Loma Verde Dr.
San Lorenzo, CA 94580-1785
Timothy Oldham
P.O. Box 370864
Montara, CA 94037-0864
Adan Rivera
P.O. Box 2387
Richmond, CA 94802
Shippers Choice Transportation Services, Inc.
385 East Penny Rd.
Wenatchee, WA 98801
W.F. Griffin, Inc.
C/o Ronald Caird
P.O. Box 6354
Santa Barbara, CA 93160-6354
Arthur Weil
671 Oak Grove Ave., #K
Menlo Park, CA 94025
Michael St. James, Esq.
155 Montgomery St., Ste. 1004
San Francisco, CA 94104
A. Kyle Everett
c/o DSI San Francisco
235 Pine St., Ste 1150
San Francisco, CA 94104-2750
-11-
Case: 11-31985 Doc# 329 Filed: 02/28/12 Entered: 02/29/12 16:09:08 Page 11 of
11