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Who Has Standing to Raise a Potential Conflict of Interest and an Objection to a Firm’s Retention?

Hofmeister v. Official Comm. of Unsecured Creditors (In re Revstone Indus., LLC), No. 13-565 (SLR), 2015 WL 5618890 (D. Del. Sept. 24, 2015)

In this Delaware District Court Memorandum affirming the decision of the Delaware Bankruptcy Court to permit the retention of counsel (“Committee Counsel”) to the Revstone debtors’ official committee of unsecured creditors (the “Committee”), the Court addressed who may object to a retention application and press an asserted conflict of interest.  In Hofmeister, Mr. Hofmeister, former founder and insider of Revstone, objected to the retention of Committee Counsel, asserting that counsel had a conflict of interest because it previously provided legal advice to Revstone in connection with the domestication of a judgment held by the chair of the Committee.  The Bankruptcy Court did not address whether Mr. Hofmeister had standing, but rather, held that Committee Counsel sufficiently disclosed the firm’s prior representation and was not disqualified from representing the Committee as the prior Revstone representation was unrelated and concluded prior to the commencement of Revstone’s bankruptcy proceedings.  On appeal, the District Court concurred with these conclusions but also held that Mr. Hofmeister had no standing to press his objection.  Importantly, Mr. Hofmeister was never a client of Committee Counsel’s firm and “failed to demonstrate that the alleged conflict would somehow prejudice his rights or otherwise call into question ‘the fair or efficient administration of justice[.]’”  Op. at 4 (quoting In re Appeal of Infotechnology, Inc., 582 A.2d 515, 221 (Del. 1990)).  Notably for the District Court, neither Revstone nor the Committee chair objected to the retention of Committee Counsel.  With these holdings, the District Court affirmed the lower court’s decision.