In re Specialty Restaurant Group, LLC, No. 07-30779-HDH-11 (N.D. Tex. April 24, 2007). Ruling on Creditor’s Application to Disqualify Debtor’s Attorneys.

A happy client makes for a happy lawyer. A bankruptcy court in Texas has ruled that a creditor’s committee cannot disqualify attorneys representing a debtor where the client-debtor is satisfied with the legal services provided to it by that law firm. The Court ruled in favor of the debtor and its attorneys.

Background

On April 19, 2007, the Court ruled on an application for Interim and Final Orders authorizing the employment and retention of the Law Firm of Fulbright & Jaworski, LLP, nunc pro tunc.

The Committee of Unsecured Creditors filed objections to the employment of the law firm, claiming that the firm was not a disinterested party and that the firm represented an adverse interest to the bankruptcy of Specialty Restaurant Group. The Committee’s claim was based on a failure to conduct a Uniform Commercial Code (UCC) search, and a failure to commence the case within ninety days of a failed perfection of a security interest in property by Specialty Restaurant Group’s secured creditor. The Committee claimed that the firm committed legal malpractice. They also claimed that and the bankruptcy estate had a claim against the firm and sought disqualification of the law firm from representing the company.

Specialty Restaurant Group requested that the court approve Fulbright & Jaworski’s post-petition application as counsel and indicated that the company was completely satisfied with the representation by the law firm.

Texas Court Ruling

Satisfaction with the services of a law firm by the client is a pivotal inquiry in a Texas legal malpractice claim. Yaquinto v. Segerstrom, 247 F.3d 218 (5th Cir.2001). The court held that Texas courts and the Fifth Circuit have found that legal malpractice actions are "intrinsically personal,” that the client’s satisfaction with a law firm’s representation is "paramount," and the client alone can determine if its counsel has misrepresented him.

Final Ruling

The court found that for alleged pre-petition legal malpractice claims, the debtor ultimately remains the client, even where the claim becomes property of the bankruptcy estate. In re C-Power Prod., Inc., 230 B.R. 800 (Bankr. N.D. Tex. 1998). Non-bankruptcy law restricts the assignment of a Texas legal malpractice claim. Thus, it was unclear to the court that the Creditor’s Committee had standing to assert that the law firm committed pre-petition legal malpractice. Under Texas law, the client (debtor) is the “only entity that may make a claim for disqualification” of legal counsel.

While the Creditor’s Committee cited cases where law firms were found to be disqualified, including In re First Jersey Sec., Inc., 180 F.3d 504 (3rd Cir.1999), the court ruled that such cases are not outcome-determinative. The court said that, in the cases cited by the Creditor’s Committee it was clear from the beginning that the law firms were holding funds that they would eventually be required to return to the estate; the basic elements of a preference claim were obvious and not really defensible.

In the present case, there was a real disagreement as to whether the law firm was required to conduct a UCC search, given the information it had from the client, and also, whether the law firm was required to instruct the to client file within ninety days of the date the lender perfected its interest against the personalty. Counsel for the Debtor explained, at the hearing on the Motion, that the timing of the filing was driven by business realities. And, at least to date, the client appeared satisfied with the services of the law firm. Accordingly, the application of the debtor, Specialty Restaurant Group, was granted and Fulbright & Jaworski was entitled to continue its representation of the company.