Delaware Bankruptcy Judge Denies Unsecured Creditors Committee’s Retention Applications

Stanley Tarr

On November 4, 2010, Mary F. Walrath, United States Bankruptcy Judge for the District of Delaware, denied the applications of the official committee of unsecured creditors of Universal Building Products to retain Arent Fox LLP and Elliot Greenleaf & Siedzikowski, P.C. as counsel finding sufficient factual evidence to disqualify those firms from serving as committee counsel. The bankruptcy court denied the retention applications of those two law firms because – (1) it found that the law firms and an intermediary, Dr. Haishan Liu, were acting in concert to cold-call creditors that Dr. Liu did not represent for the purpose of being retained by the creditors to attend a committee formation meeting and to cast a proxy in favor of the two law firms for counsel; and (2) the firms did not make fulsome disclosures at the outset of their efforts in support of Dr. Liu’s attempts to obtain proxies from creditors to attend the committee formation meeting.

The bankruptcy court found that this solicitation process violated the Model Rules of Professional Conduct and Delaware Layers’ Rules of Professional Conduct.  Between August 4, 2010 (when the debtor filed for bankruptcy) and August 13, 2010 (when the committee was formed), the law firms improperly encouraged and assisted Dr. Liu to solicit unrepresented creditors.  The solicitation centered on Dr. Liu contacting foreign creditors, many of whom did not speak English, and offering to help those creditors in the bankruptcy.  The solicitation included a request for proxies so that the law firms would be retained.  Dr. Liu then expected the committee to retain him as a translator.

Further, the court found the law firms’ initial disclosures were deficient and that subsequent disclosures by the law firms (filed only after concerns about them were expressed by the Debtors and the United States Trustee and after discovery revealed what had occurred) were insufficient to cure those deficiencies.  The court held that the failure to provide complete and accurate disclosure at the outset warranted denial of the committee’s retention applications.

Finally, as a result of the law firms’ actions, the court urged the United States Trustee to (i) consider implementing procedures to reduce the likelihood of undue influence on the decision of a committee to hire professionals and (ii) consider amending the questionnaire it sends to prospective committee members to include questions regarding whether they were solicited by anyone in connection with the case.