## Facts

- Anthony Baker was the chief executive officer of White Glove, Inc. (Inc) and White Glove Enterprises (Enterprises), affiliated entities that operated car washes.
- Baker owned the land on which Inc’s car washes were located and served as Inc’s landlord.
- Inc and Enterprises each filed separate Chapter 11 bankruptcy cases.
- Both debtors applied for orders authorizing the retention of Robert Cohen’s law firm (Cohen) as bankruptcy counsel.
- Cohen had previously represented Inc, Enterprises, and Baker in various legal matters before the bankruptcy filings.
- Baker also wanted Cohen to represent Baker’s personal interests in connection with the bankruptcy proceedings.
- Inc owed Cohen approximately $39,000 in unpaid prepetition legal fees.
- At Cohen’s request, Baker personally guaranteed payment of Inc’s $39,000 obligation to Cohen.
- Inc’s application to retain Cohen did not disclose Baker’s guaranty arrangement.
- The bankruptcy trustee and the unsecured-creditors committee objected to the debtors’ applications to retain Cohen.
- The objectors argued that Cohen was not disinterested because of Cohen’s ties to Baker, because Cohen held a prepetition claim against Inc, and because Inc and Enterprises had claims against each other and had recently transferred money between themselves.
- Baker argued, among other things, that the debtors might propose a joint plan of reorganization and that using one law firm would be desirable.

## Issues

1. Whether a law firm may be retained as Chapter 11 counsel under 11 U.S.C. § 327(a) when it is owed significant prepetition fees by the debtor and has represented (and may continue to represent) the debtor’s chief executive officer and other interests connected to the case.
2. Whether the same firm may represent two affiliated Chapter 11 debtors when there are potential inter-company claims and recent transfers that could place the estates in conflict.
3. Whether failure to disclose an insider guaranty of debtor’s counsel fees in the retention materials is a basis to deny the retention application.

## Decision

- The court sustained the objections to Cohen’s retention applications and declined to approve Cohen’s employment as requested.
- The court treated Cohen’s unpaid prepetition fees as a disqualifying interest because Cohen was a creditor of Inc, calling into question Cohen’s status as a “disinterested person.”
- The court found Cohen’s relationship with Baker—including Baker’s desire for personal representation in matters connected to the cases—created a conflict risk inconsistent with representing the estate’s interests alone.
- The court viewed Baker’s guaranty of Inc’s legal-fee debt as a material connection that needed to be disclosed and weighed against approving retention where it could affect counsel’s loyalties.
- The court also considered the prospect of disputes between Inc and Enterprises (including claims and transfers between them) as a conflict problem for one firm representing both estates.

## Legal Principles

- Under 11 U.S.C. § 327(a), a debtor in possession may employ counsel only if the professional is disinterested and does not hold or represent an interest adverse to the estate.
- A professional owed substantial prepetition fees is a creditor of the debtor and may fail the disinterestedness requirement for estate employment.
- Concurrent or proposed representation of a debtor’s principal (especially a controlling insider and landlord) can create divided duties that conflict with counsel’s obligation to act for the estate.
- Joint representation of affiliated debtors is not appropriate where the estates may have claims against each other or where inter-company transfers create a realistic chance of estate-to-estate disputes.
- Retention disclosures must be complete and candid; fee-related arrangements and financial ties to insiders—such as a guaranty—are information the court and parties in interest are entitled to evaluate when deciding whether employment is proper.

## Conclusion

In *In re White Glove, Inc.*, the bankruptcy court declined to approve Robert Cohen’s firm as counsel for White Glove, Inc. and its affiliate because the firm’s prepetition fee claim against Inc, its ties to the CEO (who also sought personal representation), the undisclosed insider guaranty of the firm’s fees, and the possibility of conflicts between the two estates prevented the showing required for retention under § 327(a) and the related disclosure rules.


In re White Glove, Inc., 1998 WL 226781 (1998)