Alleged Partnership of Ashbaugh and Hall

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE )
)
Alleged partnership of PHILLIP ) Case No. 04-04184
ASHBAUGH and DAVID LEO )
HALL, d/b/a MERIDIAN DRY )
CLEANERS, )
)
Debtor. ) MEMORANDUM OF DECISION
)
________________________________ )
INTRODUCTION
The question before the Court in this chapter 11 case is whether the
employment of the law firm of Elam & Burke, P.A. (“EB”), by the debtor in
possession may properly be approved under § 327(a). The U. S. Trustee (“UST”)
says no. The matter was taken under advisement at the conclusion of a hearing on
December 20, subject to post-hearing submissions that have now been filed.
The Court concludes the UST is correct. This Decision constitutes the
Court’s factual findings and legal conclusions. Fed. R. Bankr. P. 9014, 7052.
BACKGROUND AND FACTS
To answer the question, some background about the parties, their
relationships and disputes, and their choice of counsel must be provided.
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 1 of 14

1 The Court takes judicial notice of the pleadings of record in Case No. 03-02882, as
well as those in the instant case. Fed. R. Evid. 201.
MEMORANDUM OF DECISION - 2
A voluntary petition for chapter 11 relief was filed on November 22, 2004
by the debtor as above identified, i.e., the “Alleged Partnership of Phillip
Ashbaugh and David Leo Hall, d/b/a M eridian Dry Cleaners” (hereafter “Debtor”).
See Doc. No. 1. The petition was signed by Jennifer Miller, as the personal
representative of an unnamed “deceased alleged Partner.” Id. It is uncontested, as
later submissions assert, that the deceased alleged partner is Phillip Ashbaugh.
The other alleged partner, David Leo Hall, previously commenced a chapter
13 case, which was disclosed on the petition herein. See Doc. No. 1 at 2
(referencing Case No. 03-02882 as one filed by a partner or affiliate of Debtor).1
Hall did not sign the petition in Debtor’s case. However, he did sign the statement
of financial affairs and the declaration regarding Debtor’s schedules. See Doc. No.
4. He also signed a “Consent to Filing” of Debtor’s petition. Doc. No. 5.
Hall was represented in his prior chapter 13 case by attorney Kelly Beeman.
Beeman continues to represent Hall and has attended hearings on Hall’s behalf in
Debtor’s case.
Even though his filing was made as an individual chapter 13 debtor, Hall
indicated that the estate of Phillip Ashbaugh was a “partner” with an interest
“assumed to be 50%.” See Case No. 03-02882, Doc. No. 12 at statement of
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 2 of 14

2 This question states “If the debtor is a partnership, list the nature and percentage of
partnership interest of each member of the partnership.” Hall answered the question even though
his filing was made as an individual (as all chapter 13 cases m ust be, see § 109 (e)).
3 While the Ashbaugh estate might have been a chapter 13 “co-debtor,” see § 1301, that
entity was not and could not be a “joint debtor.” See § 302 (authorizing a filing as joint debtors
only for an individual and that individual’s spouse); Fitzgerald v. Hudson (In re Clem), 82
I.B.C.R . 205, 20 6 (Bankr. D. Idaho 1982).
MEMORANDUM OF DECISION - 3
financial affairs, question 21.2 In response to the requirement to list his “Interests
in partnerships or joint ventures,” Hall stated “Value included in real property” and
listed a current market value of that interest at “$0.00." Id. at schedule B. He also
indicated that the “estate of Phillip Ashbaugh” was a co-debtor in regard to an
obligation due Jerry Mortensen. Id. at schedule H.3 Hall did not otherwise list the
Ashbaugh estate as a creditor. Id. at schedule F.
In February, 2004, Hall converted his chapter 13 case to a chapter 11. Case
No. 03-02882, Doc. No. 33. Thereafter, he asked the Court for approval of his
employment of counsel, Dennis Sallaz, for the purpose of representing him, as a
debtor in possession, in a lawsuit against (a) the estate of Phillip Ashbaugh, (b)
that estate’s attorney, (c) Miller as its personal representative, (d) another
individual and (e) a notary public. Id., Doc. No. 50.
In May, 2004, Miller -- appearing in Hall’s case through EB -- asked the
Court for an extension of time to object to Hall’s discharge and/or dischargeability
of debt, and sought to conduct Rule 2004 examinations of Hall and another
individual. Id., Doc. Nos. 61, 62, 63. Miller alleged, among other things, that
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 3 of 14

4 The Co urt ob served in its Supplement to O rder T erminating Autom atic Stay that Hall
claimed at least a one-half interest in that real property, but “further asserts that he should be
found to hold the entire fee interest in the property, and he anticipates a lawsuit to establish his
ownership.” Id., Doc. No. 78 at 2 n.3.
MEMORANDUM OF DECISION - 4
“there is considerable conflict as to the ownership of property and the dissolution
of the partnership between [Hall] and the deceased, Mr. Phillip Ashbaugh.” Id.,
Doc. No. 61 at 2.
In June, Miller moved the Court for relief from stay in order to proceed
with a state court action to wind up the partnership. Id., Doc. Nos. 65, 66, 67.
This request was granted in August. Id., Doc. No. 87.
Hall’s chapter 11 case was dismissed, without opposition, in October, 2004.
Part of the reason Hall did not contest dismissal was the fact that creditors Jerry
and Lorraine Mortensen had by then obtained relief from stay. Id., Doc. No. 34,
35, 45, 72, 73, 78. That relief related to certain real property in Meridian, Idaho
where the business “Meridian Dry Cleaners” operates, with Hall as its day-to-day
manager.4 This stay relief obviously had a significant impact on Hall’s ability to
reorganize in chapter 11.
Following dismissal, activities continued in the state court action, with Hall
and the Ashbaugh estate represented by their separate counsel. Additionally, the
Mortensens scheduled a trustee’s sale on the deed of trust on the Meridian property
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 4 of 14

5 The M ortensens’ motion for stay relief in the present chapter 11 case was also heard
and taken under advisement. It is addressed by a separate Decision also issued this date.
6 The Application states it is made by “Jennifer Miller, the personal representative of the
Estate of Phillip Ashbaugh, as Applicant for the debtor in possession.” Doc. No. 6 at 1. Whether
Miller wants to employ (or, rather, continue her employment of) EB does not require a § 327(a)
ruling; that section addresses only approval of employment of professionals by the trustee or
debtor in possession. Consistent with the request urged at hearing, the Court treats the
Application as that of Debtor not M iller.
MEMORANDUM OF DECISION - 5
for November 23, 2004. See Doc. No. 2 at 3. That sale was stayed by the
November 22 filing of the instant case.5
A. The Application
On December 8, 2004, Debtor filed an application seeking Court approval
of its employment of EB as counsel in this chapter 11 case. Doc. No. 6
(“Application”).6 The Application notes that EB has and does represent Miller and
the estate of Phillip Ashbaugh, but alleges this creates no disqualification. Id. at 2,
¶ 3. It further states that EB “does not represent or hold any interest adverse to
debtor in possession, except as noted below in paragraph 5 through 8 and as
waived by Consent to Representation signed by Jennifer Miller.” Id.
In the referenced paragraphs, the Application acknowledges that Miller and
the Ashbaugh estate have claims against Hall, and Hall has claims against the
Ashbaugh estate and Miller. Id. at 2, ¶ 5. In furtherance of the request of Debtor
for approval of EB’s employment, Miller and the Ashbaugh estate “waive any
claim against the alleged partnership and its property until such time as the
legitimate claims of creditors are paid . . ..” Id. at 3, ¶ 7. See also Doc. No. 7.
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 5 of 14

7 The statement of financial affairs requires disclosure of any payments to counsel for
assistance with the debtor’s bankruptcy and, here, the answer given was “none.” See Doc. No. 4
at statement of affairs, question 9.
8 The disclosure was due within fifteen days of the petition’s filing on Novem ber 22.
See Rule 2016(b). No request for extension was made. The disclosure was filed on December
28. See Doc. No. 14.
MEMORANDUM OF DECISION - 6
The Application asserts that Miller paid EB for the preparation of the
bankruptcy pleadings and papers, and the filing fees for the case. EB advised the
Court at hearing that this was incorrect, and that a third party had advanced the
filing fees, and nothing had been paid EB for work on the bankruptcy case.7
There was no Rule 2016(b) disclosure filed at the time of hearing on the
Application. That disclosure, filed late,8 asserts that no attorneys’ fees were paid
and that the filing fee of $839.00 was paid by someone “other” than Debtor,
though it does not specify the party as required. See Doc. No. 14; see also
Procedural Form No. B 203. The Rule 2014(a) statement asserted that Boyd
Lowder, Miller’s father, paid it. Doc. No. 7 at 2.
At the December 20 hearing, EB indicated that its direction in the case as
Debtor’s counsel would come from Hall, as Debtor’s “managing partner” and that,
while EB would also continue to be Miller’s and the Ashbaugh estate’s lawyer, it
had the approval and consent of those clients to the requested representation of the
Debtor partnership.
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 6 of 14

9 The UST sees the fee arrangement as raising additional disqualifying issues. Given the
Court’s decision on the Application, these additional issues need not be addressed.
MEMORANDUM OF DECISION - 7
B. The Stipulation
A “Stipulation and Agreement for Payment of Professional Fees” was filed
on December 28, simultaneously with the Rule 2016(b) disclosure. See Doc. No.
16 (“Stipulation”). It asserts a management structure different from that discussed
on December 20: “Decisions for the operation of the Debtor will be joint. In this
regard Miller and Hall will confer with Counsel in the conduct of the business and
the progress of this bankruptcy proceeding.” Doc. No. 16 at 2. Hall and Miller
essentially agree to stay the resolution of their disputes inter se until all other
creditors of Debtor have been paid.
The Stipulation also indicates that “Hall and Miller agree to pay fees to
Counsel personally and have negotiated a total cap of $5,000.00 in fees and costs
to be split equally between the parties.” Doc. No. 16 at 2.9
DISCUSSION AND DISPOSITION
The UST contends that Debtor’s employment of EB contravenes § 327(a)
which requires that the estate’s professionals “not hold or represent an interest
adverse to the estate” and be “disinterested persons.” The UST does not contend
that EB is not disinterested, a term defined in § 101(14). Rather, the UST argues
that EB represents an interest adverse to the estate, that of Miller and the
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 7 of 14

MEMORANDUM OF DECISION - 8
Ashbaugh estate, and is therefore disqualified from employment as Debtor’s counsel.
EB argues that, whatever merit there might be to the UST’s objections to
approval of employment under the strictures of § 327(a) and the case law, the
Court should nevertheless allow EB to serve in the role of Debtor’s counsel. EB
contends that, unless this occurs, Debtor’s prospects for reorganization may be
dimmed or extinguished. See Doc. No. 7 at 2. It views the waiver of conflict by
and between Miller and Hall and the payment arrangement reached as sufficient
solutions to any adversity. Id.
It has not been established that, if Debtor is required to have disinterested
and impartial bankruptcy counsel (i.e., ones who do not represent other interested
parties or creditors), it will necessarily be unable to proceed with the case. But
even if this were established, it makes no difference. The determination of
whether counsel’s employment should be approved is not driven by the arguments
EB and its client(s) have suggested. Rather, the determination is driven, as it must
be, by the settled law regarding § 327(a).
This Court has repeatedly addressed the precise issue presented here:
whether a proposed professional’s representation of a creditor, equity holder or
other interested party constitutes representation of an adverse interest within the
prohibition of § 327(a). See, e.g., In re Thompson, No. 00-00013, 2000 WL
33716961 (Bankr. D. Idaho Mar. 1, 2000); In re MDR, Inc., No. 98-30401, 1999
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 8 of 14

10 In addition to the many opinions cited and analyzed in this Court’s prior decisions,
many others address the same issues. Two of those follow.
In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998), discusses
disqualifying adverse interests and relationships, including those “ho wever slight, ‘that would
even faintly color the independence and impartial attitude required by the Code and Bankruptcy
Rules.’” Id. at 33. It notes that a “professional has a disabling conflict if it has ‘either a
meaningful incentive to act contrary to the best interests of the estate and its sundry creditors – an
incentive sufficient to place those parties at more than acceptable risk – or the reasonable
perception of one.’” Id.
In re TMA Assocs., Ltd., 129 B.R. 643 (Bankr. D. Colo. 1991), observed that general
partners are individually liable for partnership debts and are contingent obligors of the partnersh ip
debtor and parties with contingent claims against one ano ther. Id. at 646. It found that the dual
representation of partner and partnership always raises at least the potential for conflict and, given
the strict obligations ow ed a debtor and estate, disqualification is appropriate under § 327(a) “to
prevent even the appearance of conflict, irrespective of the integrity of the person or firm under
consideration.” Id. at 647.
11 Litigants have the burden of identifying and addressing prior precedent relevant to
their requested relief. See Fed. R. Bankr. P. 9011(b)(2) (signing and submission of pleading
constitutes a certification that to the best of the signer’s information and belief, formed after
reasonable inquiry, the legal contentions therein are warranted by existing law or a nonfrivolous
argument for extension, modification or reversal of existing law). This Court has further
observed that, for several prudential reasons, it does not “lightly disregard” its prior decisions and
departs from them only for compelling reasons, and that the burden is on the party requesting
(continued...)
MEMORANDUM OF DECISION - 9
WL 33486707 (Bankr. D. Idaho Aug. 3, 1999); In re Dugger, 99.1 I.B.C.R. 30
(Bankr. D. Idaho 1999); In re Leypoldt, 95 I.B.C.R. 220 (Bankr. D. Idaho 1995);
In re Bliss Valley Foods, Inc., 88 I.B.C.R. 281 (Bankr. D. Idaho 1988), and 89
I.B.C.R. 4 (Bankr D. Idaho 1989) (denying motion to alter or amend).10
While each case, including the present one, must be evaluated on its own
facts, the Idaho authorities, and those of other jurisdictions cited in the Idaho cases,
stand opposed to the proposition advanced by Debtor and EB here. And they are
unrebutted.11
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 9 of 14

11(...continued)
such departure to establish good and sufficient cause through “clear and cogent analysis.” In re
DeBoer, 99.3 I.B.C.R. 101, 103 (Bankr. D. Idaho 1999). EB did not at any time address any of
the relevant authorities.
12 EB stated that the sole reason this chapter 11 filing was made by an “alleged”
partnership was to acknowledge the Mortensens’ dispute that any partnership exists.
13 “Adverse interest” is not statutorily defined but the cases recognize that possession of
econom ic interests that would either tend to lessen the value of the ban kruptcy estate or would
create an actual or potential dispute in w hich the estate is a rival claim ant, qualify. See, e.g.,
Thompson, 2000 WL 33716961 at *4.
MEM ORANDUM OF DECISION - 10
Debtor, Miller and Hall urge the Court to conclude that Debtor is a
partnership (something critical to the defense of the Mortensens’ stay relief
motion).12 They contend that Hall and the Ashbaugh estate are the sole partners,
with each holding a 50% interest. W hile it is submitted that the partners are in
agreement and strategic alignment (as they likely now must be to defend against
the Mortensens), this clearly was not the case even as late as mid-2004 when
pleadings were filed in Hall’s bankruptcy case. Nor is there any guarantee that this
will remain so throughout the present chapter 11 case.
EB indicated at the December 20 hearing that Hall would be the managing
partner. It would not be difficult to conceive of a situation where Hall might wish
to direct Debtor’s counsel in a manner inimical to the desires of Miller. That
Debtor’s counsel represents Miller and the Ashbaugh estate in litigation against
Hall, among others, clearly presents an issue of adversity.13 Indeed, the
Application, Rule 2014(a) affidavit, and the Stipulation recognize this problem;
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 10 of 14

14 TMA Assoc., Ltd. indicates that the representation of partner as w ell as partnership
inherently raises competing interests sufficient for § 327(a) disqualification. 129 B.R. at 646-47.
The prior decisions of this Cou rt, such as Thompson, Bliss Valley Foods and MDR, concerned
corporations and their equity holders, but are not dissimilar in analysis or result. And, in addition
to the adverse and competing interests that the partnership relationship inherently generates, the
facts here, as outlined abov e, reflect other claims between these parties.
15 The Hon. Alfred C. Hagan explained in the Bliss Valley Foods decisions that the rule
(continued...)
MEM ORANDUM OF DECISION - 11
each admits that such disputes exist but submits that they will be set aside or
abated until the mutual goals are achieved.
The “clarification” in the Stipulation that decision-making will be “joint”
does not eliminate the conflicting interests between the partners; it only places
both partners at the same table, hopefully but not guaranteed to be in sync. Hall
has a lawyer (Beeman) at that table, and Miller also has a lawyer (EB). However,
EB would also be obligated to impartially and faithfully serve the interests of the
estate of Debtor and all its creditors, and that is where the problem lies.14
The fact that an adversity of interest exists is sufficient for disqualification,
and the Court need not weigh, measure or evaluate the degree of conflict. See
Dugger, 99.1 I.B.C.R. at 32; First Interstate Bank of Nevada, N.A. v. C.I.C. Inv.
Corp. (In re C.I.C. Inv. Corp.), 175 B.R. 52, 56 (9th Cir. BAP 1994)). This
extends to any argument that the Court should attempt to distinguish “actual” from
“potential” conflicts, as that is an imprecise and ultimately unnecessary exercise.
Thompson, 2000 WL 33716961 at *4 (citing Leypoldt, 95 I.B.C.R. at 223); Bliss
Valley Foods, 89 I.B.C.R. at 5.15
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 11 of 14

15(...continued)
against adverse interest was strictly applied, and operated to assure all participants in the process
that the professionals had undivided loyalty to the estate and, derivatively, all its creditors. The
purpose of the Co de’s limitation would be thwarted by allowing counsel with multiple loyalties to
serve. Thus:
Counsel may not place themselves in a position where they may have to cho se
between conflicting duties. The creditors should not be placed in a position w here
such choices could be made to their detrim ent.
88 I.B.C.R. at 286 (footnote omitted). Judge Hagan later commented:
[T]he representation of a deb tor in a Chapter 11 proceeding is a situation which has
little similarity with any other client-professional relationship. A bankruptcy estate
is not a typical clien t. A Chapter 11 estate is not composed solely of the equity
security holders and the officers of the debtor-in-possession. The rights of creditors
must also be considered as part of the estate entity. Where loyalty is owed in
different degrees to these competing interests, or the possibility of such is present,
the relationship of client and professional cannot be approved.
89 I.B.C.R. at 5-6.
MEM ORANDUM OF DECISION - 12
The Stipulation, among other submissions, evidences Hall’s and Miller’s
waiver of conflicts. Doc. No. 16 at 1. But in addition to the competing creditor
and/or partner interests of Hall and the Ashbaugh estate, there are the interests of a
number of third-party creditors of Debtor that must be considered. See Doc. No. 4
at schedules D, F. That Hall and Miller might “consent” to EB’s dual
representation or “waive” conflicts is not a cure. Thompson, 2000 WL 33716961
at *4 (citing In re American Printers & Lithographers, Inc., 148 B.R. 862, 867
(Bankr. N.D. Ill. 1992) (other citations omitted)); MDR, Inc., 1999 WL 33486707
at *2 n.10; TMA Assoc., Ltd., 129 B.R. at 647-48.
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 12 of 14

16 In lieu of addressing the case law, Debtor made arguments amounting to an
“equitable” plea to approve EB’s employ ment notwithstanding the lack of compliance with
§ 327(a) because of the size and nature of Debtor’s case and the potential adverse consequences
of a denial of approval. However, this Court’s equitable powers are lim ited and do not amount to
a “roving com mission” to do equity, even if it w ere to agree with the suggested characterizations.
Pacific Shores Dev., LLC v. A t Home Corp. (In re At H ome Co rp.), No. 03-15769, 2004 WL
2984300, at *5 (9th Cir., Dec. 28, 2004) (citing Saxman v. Educ. Credit Mgm t. Corp. (In re
Saxman), 325 F.3d 1168, 1175 (9th Cir. 2003)).
MEM ORANDUM OF DECISION - 13
CONCLUSION
More could easily be said. But it has already been said, at length, in the
Idaho Bankruptcy Court decisions cited above. That explanation and analysis, and
the authorities there cited and relied upon, can be and are incorporated by
reference.
“The burden of proving the absence of an adverse interest, and establishing
the propriety of the suggested employment, is upon the applicant and the proposed
professional.” Thompson, 2000 WL 33716961 at *5. That burden was not carried
here.16 As a result, the Application cannot be approved.
The Court takes seriously the suggestion that enforcing § 327(a) might lead
to an inability to retain counsel, to reorganize, or to fully pay creditors from
Debtor’s perceived real estate equity. However, even if accurate, such concerns
cannot support a conclusion contrary to the statute and the law. See In re Larson,
04.1 I.B.C.R. 20, 24 (Bankr. D. Idaho 2004) (finding the argument that
disqualification of counsel would cause serious and perhaps irreparable injury to
debtor an insufficient basis to find counsel qualified when he was not).
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 13 of 14

MEM ORANDUM OF DECISION - 14
The UST’s objection will be sustained and the Application seeking approval
of Debtor’s employment of EB will be denied. The UST shall submit an
appropriate form of order.
DATED: January 6, 2005
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
Case 04-04184-TLM Doc 20 Filed 01/06/05 Entered 01/06/05 10:00:59 Desc Main
Document Page 14 of 14