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Prepetition Representation Of Both LLC And Its Sole Member Did Not Disqualify Law Firm From Representing Sole Member In Post-Petition Adversary Proceeding

Stanziale v. MILK072011, LLC (In re Golden Guernsey Dairy, LLC), Adv. No. 14-50953 (KG), 2015 WL 3669932 (Bankr. D. Del. June 12, 2015)

In this Opinion, Delaware Bankruptcy Court Judge Kevin Gross refused to disqualify a law firm under Model Rules of Professional Conduct (“MRPC”) 1.7 and 1.9 from representing the sole member of an LLC in an adversary proceeding where it previously represented both the member company and the LLC in pre-petition unrelated matters.

Golden Guernsey Dairy LLC (the “Debtor”) was a dairy manufacturing business acquired by OpenGate Capital (“OpenGate”) in 2011.  OpenGate formed and controlled “MILK” as the sole member of the Debtor.  The law firm of Clark Hill (the “Firm”) represented OpenGate on several matters as well as the Debtor in connection with its acquisition, but ceased charging legal services to the Debtor in October 2012.  The Firm, however, continued to provide the Debtor legal advice, including an e-mail dated January 3, 2013, providing information about the Debtor’s potential liability arising from the Wisconsin Worker Adjustment and Retraining Notification Act (the “WARN Act”).  On January 7, 2013, the Debtor retained a different law firm to represent it in the bankruptcy proceedings, and filed its voluntary Chapter 7 petition the following day.  The Firm provided no additional legal services to the Debtor after January 7, 2013.  However, it was retained by MILK and one other defendant when the Chapter 7 Trustee sued for breach of fiduciary duty and violations of the WARN Act in connection with the Debtor’s abrupt closing and bankruptcy filing.  The Trustee sought to disqualify the Firm from representing the defendants based on its previous representation of both the Debtor and OpenGate.

MRPC 1.7, applicable by D. Del. L.R. 83.6(d), prohibits representation of a client where there is a concurrent conflict of interest.  Here, the Court found that no such concurrent conflict existed for at least three reasons: (i) the Firm ceased representing the Debtor on January 7, 2013, even without an official termination letter; (ii) there was no evidence that the Debtor had expectations of the Firm’s continuing representation; and (iii) the Firm’s pre-petition representation of both the Debtor and OpenGate did not violate MRPC 1.7 because the parties were not adverse at that time.

MRPC 1.9 limits when a lawyer can represent a client in a matter materially adverse to the interests of a former client where the matters are the same or substantially related.  The important determinations are whether the attorney has “chang[ed] sides” in the same matter and has access to confidential information from the prior representation that would materially advance its current client’s position.  Op. at 8-9.  At issue was whether the Firm’s WARN Act e-mail to the Debtor four days prior to the Chapter 7 filing prevented the Firm from representing the defendants in a proceeding adverse to the Debtor regarding the alleged WARN Act violation.  The Court held that it was “simply not convinced that the Debtor had any expectation that information provided to [the Firm] in the course of its representation of the Debtor would be kept confidential from OpenGate.”  Op. at 10.  Indeed, OpenGate, due to its status as ultimate owner of the Debtor, was copied on most e-mail communications between the Firm and the Debtor, including the WARN Act e-mail.  The Court reasoned further that “[t]he MILK Defendants [were] essentially proxies for OpenGate” and that the Firm was not in possession of the sort of confidential information that MRPC 1.9 was meant to protect.  Id.  As such, the Firm could not be regarded as “changing sides” and the Court ruled that disqualification was not warranted.