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Problem 2

Nuances to Serving as General Bankruptcy Counsel for a Debtor-In-Possession Under Chapter 11 of the Bankruptcy Code

Steven National is the President and sole shareholder of National Payroll, a payroll processing company that has clients all over America. Tommy Miami is the president and sole shareholder of Miami Payroll, a start-up payroll processing company that has numerous clients in Miami-Dade County, Florida. One day, Miami approached National and inquired whether National was interested in purchasing Miami. Miami bragged to National about how successful his company has become and presented National with its financial information showing that, as of the time of their meeting, Miami had equity of over $1,000,000.

Relying upon Miami’s representations and the financials provided, National purchased Miami’s stock for $1,000,000. Two weeks after closing this transaction, an employee of Miami, Amy Whistleblower, sent an e-mail to Steven National stating that prior to the closing, Tommy Miami used over $1,500,000 of monies set aside to pay Miami’s customer’s payroll withholding taxes for Miami’s operations and that Miami not only does not have any equity, but it has a $1,500,000 shortfall in the withholding account. Scared that Miami did not have the safeguards in place to prevent any future withdrawals from the customer’s withholding accounts, National immediately shut down Miami and consulted with Bankruptcy Attorney as to what to do next.

During the consultation, Bankruptcy Attorney realized that certain facts existed where a creditor of Miami’s could make a claim that National was the alter ego of Miami. National’s board knew that it would have a difficult time raising or borrowing money in the future so long as this contingent liability existed. For this reason, Bankruptcy Attorney advised National that it may need to file a Chapter 11 in order to cleanse its balance sheet.

(Each question is mutually exclusive from the other)

Question 1

Assume that, as of the petition date, Miami Payroll’s creditors are owed $1,500,000 and that Miami Payroll has three contingent assets: (1) a $1,500,000 director and officer claim against Tommy Miami; (2) a $500,000 director and officer policy that possibly would cover Tommy Miami’s actions; and (3) a $1,500,000 claim against National for alter ego/successor liability. Can Bankruptcy Attorney represent Miami Payroll in a liquidating chapter 11 case and National Payroll in a reorganization chapter 11 case since there is a possibility that Miami Payroll’s assets alone could satisfy its creditors?

Question 2

Assume that National Payroll had a senior secured creditor with a blanket lien on all its assets and that Bankruptcy Attorney has represented the senior secured creditor in the past. Further assume that Bankruptcy Attorney decides to file a chapter 11 for only National Payroll and that, as of the petition date, Bankruptcy Attorney has no outstanding or open matters with the senior secured creditor. Can Bankruptcy Attorney represent the Debtor? If the answer is yes, are there instances where she would be prohibited from
representing the Debtor?

Question 3

Assume that National Payroll files a chapter 11 petition. Prior to the petition date, National Payroll defaulted on a loan and its senior secured creditor was actively pursuing collection efforts. The Bankruptcy Court approved the employment of Bankruptcy Attorney in the National Payroll case. Assume that, six months later, to avoid liability on a personal guaranty of a National Payroll secured debt, Bankruptcy Attorney files an individual chapter 11 petition on behalf of Steven National. The individual case is assigned to a different bankruptcy judge. Prior to Steven National’s petition date, and without court approval, National Payroll provided Bankruptcy Attorney with a $50,000 retainer to fund Steven National’s individual case. Bankruptcy Attorney does not disclose in the individual case her current representation of National Payroll or the true source of the $50,000 retainer. Likewise, Bankruptcy Attorney does not amend or supplement the record in the corporate case to disclose her concurrent representation of Steven National. Another few months pass and Bankruptcy Attorney files interim applications for compensation in both the corporate case and the individual case. The
U.S. Trustee objects to both applications on the grounds that Bankruptcy Attorney is no longer disinterested. Outcome?