IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS (Eastern Division) ) ) ) ) ) )

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS (Eastern Division) In re: MODERN CONTINENTAL CONSTRUCTION CO., INC., Debtor. ) ) ) ) ) ) Chapter 11 Case No (WCH) OBJECTION OF NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURG, PA TO THE APPLICATION BY DEBTOR AND DEBTOR-IN-POSSESSION TO RETAIN HINCKLEY, ALLEN, & SNYDER, LLP AS SPECIAL COUNSEL National Union Fire Insurance Company of Pittsburgh, Pa. ( National Union ), by and through its counsel, respectfully submits its objection (the Objection ) to the Application by Debtor and Debtor-in-Possession to Retain Hinckley, Allen, & Snyder, LLP ( Hinckley ) as Special Counsel (the Application ). In support of its Objection, National Union states as follows: I. INTRODUCTION An attorney may be employed for a specified special purpose pursuant to 11 U.S.C. 327(e) so long as the attorney does not hold or represent any adverse interest to the debtor or the estate with respect to the matter to be employed. National Union objects for, inter alia, the following reasons: (1) the Debtor has failed to articulate a specified special purpose as required by 327(e); (2) Hinckley s representation is not in the best interests of the estate; (3) Hinckley represents an adverse interest; and (4) appointing Hinckley abridges National Union s contractual right to defend its insured. These reasons necessitate that the Court deny the Debtor s Application. 46,377,627v2 BOS 1

2 II. DISCUSSION A. National Union has Standing to Object. Prudential concerns of standing require that the party be within the zone of interest of the Bankruptcy Code. Baron & Budd, P.C. v. Unsecured Asbestos Claimants Comm., 321 B.R. 147, 158 (D.N.J. 2005). Under the Bankruptcy Code, a party in interest may appear and be heard on any issue in a case under the Bankruptcy Code. 11 U.S.C. 1109(b) (West 2008). The term party in interest must be construed broadly. In re Marcus Hook Dev. Park., Inc., 153 B.R. 693, 700 (Bankr. W.D. Pa. 1993). A party has standing when the party demonstrates actual or imminent injury-in-fact, establishes a causal connection, and shows a substantial likelihood that requested relief will remedy the alleged injury. In re Mid-Valley, Inc., 305 B.R. 425, 431 (Bankr. W.D. Pa. 2004). Here, granting the Application would place National Union in imminent pecuniary harm because National Union s policy rights will be directly affected. See In re Congoleum, Corp., 362 B.R. 167, (Bankr. D.N.J. 2007) (stating parties with potential responsibility to pay claims against debtors have standing to participate in bankruptcy cases); Baron & Budd, P.C., 321 B.R. at (stating an injury-in-fact can be a pecuniary interest directly or adversely affected). The Debtor s Application has caused this imminent injury-in-fact and denial of it will remedy this harm. Thus, National Union is a party in interest and has standing to object. B. Factual Background On June 23, 2008, Modern Continental Construction Co., Inc. ( Debtor ) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. 101 et seq in the United States Bankruptcy Court for the District of Massachusetts. 46,377,627v2 BOS 2

3 Debtor is a closely-held Massachusetts corporation in the business of providing general contractor services for heavy civil and other types of construction projects. Debtor is a general contractor on the Central Artery/Tunnel project (otherwise known as the Big Dig ). National Union issued a Commercial General Liability insurance policy (the Policy ) in connection with the Big Dig naming the Massachusetts Highway Department as insured and providing coverage for certain contractors, including Debtor. A copy of the Policy is attached hereto as Exhibit A. National Union has also provided the Debtor with workers compensation insurance related to the Big Dig. National Union is currently providing the defense for a variety of claims arising out of an accident at the Big Dig. A list of the claimants is attached hereto as Exhibit B. National Union has already assumed the defense of the Debtor in these cases and retained panel counsel (the National Union Litigation ). On July 2, 2008, Debtor filed its Application to appoint Hinckley as special counsel in connection with the prosecution of certain litigation currently pending before various state and federal courts (the Modern Litigation ). (See Application, pg. 1) (Docket No. 75). On July 8, 2008, Paul F. O Donnell, III ( O Donnell ), of Hinckley, filed his Supplemental Affidavit in Support of the Application by Debtor and Debtor-in-Possession to Retain Hinckley, Allen, & Snyder LLP as Special Counsel (the Supplemental Affidavit ). (Docket No. 111). In his Supplemental Affidavit, O Donnell states that Hinckley has monitored and will continue to monitor the proceedings in certain litigation for which National Union has assumed the defense, most notably Angel Del Valle and Raquel Ibarra Mora, Co-administrators of the Estate of Milena Del Valle, and Angel Del Valle, individually, v. Bechtel Corp., et al., Civil Action No BLS2 (the Del Valle Litigation ). The Del Valle Litigation is by all accounts the most complex litigation pending. In the Supplemental Affidavit, and at the hearing on the Motion to 46,377,627v2 BOS 3

4 Modify the Automatic Stay related to the Del Valle Litigation, Hinckley conceded that it would not participate in the Del Valle Litigation. It follows then, Hinckley s services are not necessary in the National Union Litigation in its entirety. Most importantly, Hinckley s services are prohibited under the relevant policies. The Supplemental Affidavit also reaffirms that Hinckley will seek compensation for the Modern Litigation. III. LEGAL ARGUMENT The trustee may employ for a specified special purpose, an attorney that has represented the debtor, if it is 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. 11 U.S.C. 327(e) (West 2008). 1 The debtor has the burden of proof to show that the proposed employment is proper. In re Running Horse, LLC, 371 B.R. 446, 451 (Bankr. E.D. Cal. 2007). In this case however, the Debtor has fallen woefully short of establishing any of the elements required to maintain Hinckley as special counsel. Debtor has not identified a specified special purpose, nor has Debtor established that appointing Hinckley is in the best interest of the estate. Further, Hinckley holds an adverse interest, and granting the Application abridges National Union s contractual right to defend the Debtor. Accordingly, the Application should be denied. A. The Debtor has Failed to Articulate Special Counsel s Specified Special Purpose Within the Meaning of 327(e). The Debtor has failed to specify a special purpose. Section 327(e) allows employment of an attorney who previously represented the debtor for a specified special purpose. In re Malden Mills Indus. Inc., 281 B.R. 493, 500 (Bankr. D. Mass. 2002) (emphasis added). Failure to 1 In a Chapter 11 proceeding, a Debtor-in-possession enjoys the rights of a trustee including the trustee s right to employ special counsel. In re Molten Metal Tech., Inc., 289 B.R. 505, 510, n.10 (Bankr. D. Mass. 2003); In re Running Horse, LLC, 371 B.R. 446, 450 (Bankr. E.D. Cal. 2007). 46,377,627v2 BOS 4

5 adequately set forth a special purpose for employment is fatal to a debtor s claim that an attorney should be approved under 327(e). In re Running Horse, LLC, 371 B.R. at 452 (stating that before either the best interest of the estate or the adverse interest tests can be analyzed, the court must closely scrutinize the proposed special purpose). A specified special purpose, as contemplated by 327(e) would be a situation in which it is advisable to retain an attorney who has been employed by the debtor to handle a specific legal action for which that attorney may be particularly suited (e.g., securities litigation, personal injury lawsuits, labor negotiations, etc.). In re Camann, No JMD, 2000 WL , at *5 (Bankr. D.N.H. May 2, 2000). The special purpose must be explicitly defined or described in the application seeking employment. In re Running Horse, LLC, 371 B.R. at 451; In re Camann, 2000 WL , at *5. The scope of special counsel s employment must be just that specific or special. In re Running Horse, LLC, 371 B.R. at 452. Here, Debtor has failed to articulate any special purpose. The Debtor has requested to retain Hinckley as special counsel in connection with: (Application, pg. 1). (a) the prosecution of certain litigation currently pending before various state and federal courts both in the Commonwealth of Massachusetts and in other jurisdictions (collectively, the Modern Litigation ), (b) any issues incident to, or related to, the Modern Litigation, including alternative dispute proceedings, (c) general corporate matters, (d) general employment matters, (e) general construction matters and (f) criminal defense matters First, Debtor has made no showing that Hinckley is specifically suited to handle any of these general matters. These proffered purposes are lacking the special and particular skill required for retention of special counsel under 327(e). In re Running Horse, LLC, 371 B.R. at 452. The Debtor has done nothing more than set forth general all encompassing litigation matters -- a basis wholly improper for retention of special counsel. In re Camann, 2000 WL 46,377,627v2 BOS 5

6 , at *6 (stating that the debtor failed to articulate a specified special purpose where the debtor proposed to retain a law firm for a broad range of services including advising and representing the debtor concerning ownership and operations of a business, sale of business entities, and various contract disputes). Second, Debtor defines the Modern Litigation so broadly that it would encompass all of Debtor s approximately forty open general liability claims pending against it, litigation that is being defended by trial counsel appointed by National Union under the Policy. Special counsel must remember its role is just that, special counsel is not general counsel. In re Malden Mills Indus. Inc., 281 B.R. at 499. Thus, Debtor has failed to carry its burden to establish a special purpose and as such, the Application should be denied. See In re Running Horse, LLC, 371 B.R. at 451. B. Retention of Hinckley is Not in the Best Interests of the Estate. Retaining Hinckley as special counsel is not in the best interest of the estate. Special counsel must take care to ensure that they are not performing duplicative services. In re Malden Mills Indus. Inc., 281 B.R. at 498; In re Woodworkers Warehouse, Inc., 323 B.R. 403, 407 (D. Del. 2005) (stating that the purpose of 327(e) is to avoid unnecessary duplication of services at the expense of the estate). In this case, Debtor claims that retention of Hinckley as special counsel is in the best interest of the Debtor and the estate because Hinckley is familiar with Debtor s factual background and business operations. Debtor contends that Hinckley s retention would be most economical and expeditious for this reason. However, there are two reasons why Hinckley should not be retained as special counsel: 1) granting Hinckley s application would supplant already well-adjusted counsel in various other matters involving Debtor, resulting in duplicitous costs; and 2) retention of Hinckley will directly and adversely impact the creditors by imposing unnecessary costs on the estate. 46,377,627v2 BOS 6

7 First, Debtor s broad application to retain Hinckley, as written, appears to seek to displace counsel in nearly all of the National Union Litigation. The Debtor incorrectly claims that this will be most economical and expeditious. However, the folly of this claim can be clearly demonstrated by examining just a single case addressed by the Supplemental Affidavit: the Del Valle Litigation. While the Supplemental Affidavit clarifies that Hinckley will not assume the defense of the Del Valle Litigation, 2 the Supplemental Affidavit maintains that Hinckley has and will continue to monitor the proceedings. (Supplemental Affidavit, 6-8). What monitor means is still unclear and leaves open the possibility that Hinckley would interfere with defense services already being provided. Moreover, the Supplemental Affidavit still leaves open the possibility that Hinckley can interfere with, if not entirely assume, any other matter it defines as Modern Litigation which is already being dealt with by National Union. This retention therefore, would impose on the estate the precise kind of duplication of services and costs that 327(e) was designed to prohibit. In re Malden Mills Indus. Inc., 281 B.R. at 498. Second, Hinckley is not on National Union s approved counsel list. 3 An insurance policy in the bankruptcy context is considered a contract, and all rights pursuant thereto will be enforced in bankruptcy proceedings. Matter of Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993). National Union has retained trial counsel in the Del Valle Litigation as well as the National Union Litigation pursuant to the terms and provisions of applicable policies. National Union will not pay any fees or expenses associated with monitoring litigation or any other service by unapproved counsel, such as Hinckley. Thus, approving Hinckley s retention would force the 2 The fact that Hinckley s Supplemental Affidavit had to be filed at all to clarify that the Debtor s Application did not include the Del Valle Litigation in and of itself evidences the utter lack of specificity of the Application. This is but another reason to deny the Application. See In re Running Horse, LLC, 371 B.R. at Counsel of record in the Del Valle Litigation, Mullen & McGourtey, is on National Union s approved counsel list. 46,377,627v2 BOS 7

8 estate to incur significant and unnecessary professional fees. This would be a substantial detriment to the creditors of the estate. C. Hinckley Holds an Adverse Interest. A chapter 11 debtor-in-possession must obtain court approval prior to employing counsel. 11 U.S.C. 327 (West 2008). An attorney seeking employment must disclose all connections with the debtor, creditor, or other party in interest. FED. R. BANKR. R (West 2008). As is the case here however, even with adequate disclosure, a conflict can be too severe to reward service. In re Colony Press, Inc., 83 B.R. 862, 868 (Bankr. D. Mass. 1988). Generally, 327(e) contains less restrictive requirements than 327(a) which governs the employment of general counsel, as there is no requirement of disinterestedness. In re Camann, 2000 WL , at *5. The Court has great discretion in this area. Id. However, in situations involving the employment of counsel on behalf of the estate, courts show an acute sensitivity to conflict issues. In re Colony Press, Inc., 83 B.R. at 867. The appropriate test when analyzing a debtor s request to employ special counsel under 327(e) is whether the potential counsel represents or holds an interest adverse to the estate. In re Hub Bus. Forms, Inc., 146 B.R. 315, 322 (Bankr. D. Mass. 1992). The attorney must not represent or hold an adverse interest to the debtor or estate in respect to the matter upon which the attorney is to be engaged. In re Camann, 2000 WL , at *5. An adverse interest has been characterized as either: 1) the possession or assertion of mutually exclusive claims to the same economic interest; or 2) the possession of a predisposition or interest under circumstances that render such a bias in favor of or against one of the entities. In re Malden Mills Indus. Inc., 281 B.R. at ,377,627v2 BOS 8

9 Here, Hinckley holds an adverse interest to the estate. Hinckley is currently representing Debtor and Debtor s sureties (the Sureties ). 4 The Sureties have issued various bonds on projects for which Debtor provided general contractor services. (Application, 18(c)). When there is a claim in connection with a bonded project, the Sureties tender the defense of that claim to the Debtor. (Application, 18(c)). The Debtor must then indemnify and defend the sureties from any such claims. (Application, 18(c)). The Debtor must pay any cost, including any legal fees which the Sureties incur in connection with the bonds. (Application, 18(c)). Hinckley has entered appearances in bond claim cases on behalf of both the Debtor and the Sureties. (Application, 18(c)). In addition, any liability of the Sureties becomes a liability of the Debtor. (Application, 18(c)). Debtor has already made clear that the interests of the Sureties and the Debtor are not always aligned: If the Sureties have other defenses relating to their roles as sureties, Hinckley Allen will not represent the Sureties in such capacity. Rather Hinckley Allen s representation in the Bond Claim Cases will be limited to issues on which the interests of the Debtor and the Sureties are aligned. (Application, 18(c)). Thus, Hinckley possesses an interest that renders a bias in favor of one entity over another -- an adverse interest. In re Malden Mills Indus. Inc., 281 B.R. at 500. The Debtor tries to negate this conflict by stating that Hinckley s representation of both the Sureties and Debtor is in the best interest of the estate. (Application, 13). This is so, claims the Debtor, because Hinckley s intimate familiarity with both the Debtor and the Sureties 4 Hinckley specifically mentions that it represents St. Paul Fire and Marine Insurance Company ( St. Paul ), as well as its parent company. (Application, 18(d)). St. Paul is one of the primary sureties. (Application, 8). This ominous disclosure includes a statement that it represents St. Paul in matters wholly unrelated to the Debtor, but it fails to provide any facts from which this Court could objectively verify there is no adverse interest present. In re Bolton-Emerson, Inc., 200 B.R. 725, 732 (D. Mass. 1996) (stating that the bankruptcy court must examine conflict issues when analyzing 327 applications). 46,377,627v2 BOS 9

10 would provide for the most expeditious results. (Application, 13). And, admittedly for the Sureties, this may be so; however: mitigat[ing] the obvious conflict of interest issues by arguing that interests of its multiple clients are aligned with the Debtor s interest and that [Hinckley s] employment would be in the best interest of the bankruptcy estate the best interest of the estate test does not, standing alone, justify the employment of special counsel. Ironically, the same factors which appear to make [Hinckley s] employment so important at this time also tend to establish that its employment will be too closely related to conducting the case. In re Running Horse, LLC, 371 B.R. at ; see also In re Camann, 2000 WL , at *6 (stating that where the only justification for counsel s retention is that it will result in substantial economies, such a justification is insufficient where counsel may not be disinterested). Hinckley also tries to compensate for this blatant conflict by stating that when the Sureties and the Debtor s interests are not aligned, Hinckley would not represent the Sureties. (Application, 18(c)). However this ipse dixitism does not suffice in bankruptcy court. See In re Citation Corp., 493 F.3d 1313, 1321 (11th Cir. 2007) (stating the bankruptcy court, and not professionals, determine whether a conflict exists). This Court, not Hinckley, must determine whether the interests are aligned or adverse. See In re Bolton-Emerson, Inc., 200 B.R. at 732 (stating that the bankruptcy court must examine conflict concerns when analyzing 327 issues). Surely, no man ought to be the judge of his own cause. Moreover, it is the potential for conflict that is relevant. See In re Hub Bus. Forms, Inc., 146 B.R. at 323 (refusing to approve special counsel because of potential conflicts); In re Nat l Staffing Serv., LLC, No. 3:06CV2675, 2007 WL , at *2 (N.D. Ohio July 13, 2007) (citing In re Statewide Pools, Inc., 79 B.R. 312, 314 (Bankr. S.D. Ohio 1987) (stating that 327(e) involves a factual determination of actual or potential conflicts)); In re Brokers, Inc., No. 46,377,627v2 BOS 10

11 , 2005 WL , at *3 (Bankr. M.D.N.C. Jan. 14, 2005). In this case, Hinckley s representation of both the Sureties and the Debtor represents at least a potential conflict. D. Debtor s Proposed Counsel Abridges the Insurer s Right to Defend. Granting the Application would infringe on National Union s contractual right to defend. The insuring agreement explicitly states that the insurer will have the right and duty to defend (Exhibit A, 1(1)). The duty to defend gives the insurer the right to control the conduct of the litigation. Nandorf, Inc. v. CAN Ins. Co., 479 N.E.2d 988, 991 (Ill. App. Ct. 1985). An insurer also has a right to select the attorney to defend a claim. Travelers Ins. Co. v. Guidry, 444 So.2d 191, 192 (La. Ct. App. 1983); Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 539 (Mass. 2003) (stating that an insurance policy which provides that an insurer agreed to defend any claim seeking damages by extension gives the insurer the right to choose defense counsel). This is a duty to defend policy and National Union has the exclusive right to select counsel, not the Debtor. This right to select counsel stems from the fact that an insurer must eventually pay whatever sums the insured becomes legally obligated to pay. Progressive Gulf Ins. Co. v. Dickerson & Bowen, Inc., 965 So.2d 1050, 1054 (Miss. 2007); Moeller v. Am. Guar. & Liab. Ins. Co., 707 So.2d 1062, 1068 (Miss. 1996). As stated above, granting the Application would supplant already approved counsel in favor of Hinckley. National Union has not selected Hinckley for retention, and Hinckley is not on National Union s approved counsel panel. Attempting to force Hinckley upon National Union abolishes National Union s contractual right to control the conduct of the litigation and select the attorney of its choice to defend the claim. 46,377,627v2 BOS 11

12 IV. CONCLUSION Accordingly, National Union submits that the Debtor has not established a sufficient basis to retain Hinckley as special counsel under Bankruptcy Code Section 327(e). Further, any attempt to retain Hinckley in any National Union Litigation is in violation of the policy. Accordingly, National Union respectfully asks that this Honorable Court deny the Application and grant any further relief this Court deems just and proper. Respectfully Submitted, /s/ Joseph P. Davis Joseph P. Davis III (551111) James P. Ponsetto (556114) GREENBERG TRAURIG LLP One International Place Boston, Massachusetts Attorneys for NATIONAL UNION 46,377,627v2 BOS 12

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