“The court need not inquire into whether the confidential information was actually revealed or whether the attorney would be likely to use the information to the disadvantage of the former client.”
How later courts described this case
- “The court need not inquire into whether the confidential information was actually revealed or whether the attorney would be likely to use the information to the disadvantage of the former client.”
- “Doubts as to whether a substantial relationship exists should be resolved in favor of disqualification."
- relying on definitions provided by In re Roberts, 46 B.R. 815 (Bankr. D. Utah 1985), aff’d in part and rev’d in part on other grounds, 75 B.R. 402 (D. Utah 1987) (en banc)
- holding the imputation of conflicts rules of the KRPC apply to nonlawyer staff
Written by the judges who cited it.
The opinion
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| Mitchell L. Herren
United States Bankruptcy Judge
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE:
Samys OC, LLC, Case No. 24-11166
Debtor. Chapter 11
IN RE:
S&O Investments, Inc., Case No. 24-11167
Debtor. Chapter 11
IN RE:
American Warrior Construction, Case No. 24-11168
Inc., Chapter 11
Debtor.
Memorandum Opinion and Order
Denying Applications for Engagement of Counsel
Debtors in the above-captioned cases all seek to employ Hinkle Law Firm,
LLC (“Hinkle’” or the law firm) as legal counsel in their Chapter 11 bankruptcy
cases. Objections were filed to those applications, focusing on the adequacy of the
law firm’s required disclosures, alleged representation of adverse interests between
the Debtors and the resulting conflicts of interest they could cause for the law firm,
an alleged lack of the law firm’s disinterestedness resulting from these adverse
interests and from the law firm being paid its fees in these three cases by another
debtor in a related case, and an alleged conflict of interest the law firm has because
one of its attorneys, before becoming an attorney, used to work for legal counsel
currently representing one of the Debtors’ major creditors.
Certainly, each Debtor needs qualified counsel to lead their reorganization
efforts. The Court has no doubt the counsel proposed by each Debtor is
professionally qualified. But being qualified under the Bankruptcy Code is a
separate issue, and after holding an evidentiary hearing the Court concludes, based
on the specific facts of these cases, that the single law firm proposed as counsel does
not meet the qualifications required by 11 U.S.C. § 3271 or the conflict-of-interest
standards of the Kansas Rules of Professional Conduct. The Court therefore denies
the Applications for Engagement of Counsel.2
1 Future statutory references are to the Bankruptcy Code, title 11, unless otherwise specified.
2 Nicholas Grillot and Lora Smith appeared for the debtors. John Nemecek appeared for the U.S.
Trustee. Eric Lomas, Ben Jackson, and R. Joseph Naus appeared for Cairo of Western Kansas, LLC.
Counsel for Dream First Bank and the Small Business Administration appeared, but did not
participate in the evidentiary hearing.
I. Findings of Fact
a. The Parties
There are multiple entities and individuals involved in or in the periphery of
the current dispute, many with similar names. A brief overview of the landscape is
necessary.
Amro Samy is the operator and manager of Samys OC, LLC, which has been
operating for about ten years. Mr. Samy purports to own 51% of Samys OC, LLC.
Samys OC, LLC operates four restaurants, employing around 280 to 290 individuals
in four Kansas cities. A different entity named Cairo of Western Kansas, LLC
(“Cairo”) is the other co-owner of Samys OC, LLC. Cairo was itself created by Cecil
O’Brate, who was the entity’s principal and 100% owner. Mr. O’Brate passed away
in January 2024, and Cairo is now owned by Mr. O’Brate’s estate. H.J. Swender, Jr.
has been the manager of Cairo since November 2019.
Mr. Samy is also the purported 51% owner of S&O Investments, Inc., with
Cairo owning the remainder of this entity as well. S&O Investments, Inc. owns and
operates six duplexes in Garden City, Kansas, and owns two pieces of undeveloped
real property. Mr. Samy manages the six duplexes.
Another entity at issue is American Warrior Construction, Inc. This entity is
100% controlled by Mr. Samy, as either he or a trust in his name own all the shares
of that entity and he is the president. American Warrior Construction, Inc. is no
longer operating, other than receiving minimal income from a lease of certain
equipment. In the past, American Warrior Construction, Inc. developed and acted
as a general contractor on many projects throughout the state of Kansas, including
the restaurants now operated by Samys OC, LLC and the duplexes now managed by
S&O Investments, Inc.
And finally, another entity associated with Mr. O’Brate is Debt Recovery
Services, Inc. This entity is a creditor only of Mr. Samy and Mr. Samy’s spouse,
Darla Samy.
There are many more entities jointly owned by Mr. Samy and Mr. O’Brate’s
estate, in varying percentages, but they are not directly relevant to the matters
currently before the Court. As discussed in more detail below, Samys OC, LLC,
S&O Investments, Inc., American Warrior Construction, Inc., and Amro and Darla
Samy are all Debtors in this Court.
b. Prebankruptcy Disputes and Litigation
As often happens in litigation between business partners, the perspective of
what occurred to sour Mr. Samy and Mr. O’Brate’s business relationship differs.
Only a brief overview of their prepetition falling out, and the litigation following, is
required here. Mr. Samy contends he and Mr. O’Brate agreed in 2019 that Mr.
Samy would buy Mr. O’Brate’s ownership of Samys OC, LLC, but when the time
came, Mr. O’Brate began “moving the goalposts.” Mr. Samy alleges that eventually
Mr. O’Brate and Mr. Swender began orchestrating a plan for Mr. O’Brate to take
over Mr. Samy’s share of the businesses and push Mr. Samy out entirely. Mr.
O’Brate alleges it was Mr. Samy who would never complete their agreement
regarding ownership of the businesses, and when Mr. O’Brate and Mr. Swender
began reviewing financial information for those businesses in 2019, they discovered
false or fraudulent transactions between Mr. Samy and American Warrior
Construction, Inc.
In April 2020, Cairo filed the first suit between the parties in state court.
Over the next several years, the litigation between the parties grew in state court,
as listed here:
Date Relevant Parties3 Claims Case Number
Filed
4/20/2020 Cairo v. Amro Samy, Breach of fiduciary duty, fraud, 2020-cv-0042
American Warrior negligent misrepresentation, (the “Unified
Construction, Inc., (Nominal conversion, civil conspiracy, gross case”)
Defendant) Samys OC, LLC, mismanagement, and waste of
(Nominal Defendant) S&O corporate assets.
Investments, Inc.
4/24/2020 Amro Samy, Samys OC, LLC Ownership and management of 2020-cv-0044
v. Cairo one of the Samys OC, LLC (the
restaurants. “Franchise
case”)
7/6/2020 Cairo v. Amro Samy, Negligence, breach of implied 2020-cv-0069
American Warrior warranty, misrepresentation, (the “Heritage
Construction, Inc. breach of fiduciary duty. case”)
6/18/2021 American Warrior Breach of contract, foreclosure of 2021-cv-0076
Construction, Inc. v. Stone mechanic’s lien, unjust (the
Development, Inc. enrichment “Mechanic’s
Lien case”)
7/11/2022 Debt Recovery Services, Inc. Loan default, breach of guaranty, 2022-cv-0081
(as Successor by Assignment counterclaims for wrongful set off (the “Pinnacle
to original Plaintiff First and willful conversion, third party case”)
National Bank of Syracuse) petition for indemnity, third party
v. Amro Samy, Darla Samy counterclaims for breach of
contract, breach of fiduciary duty,
Third Party claims involving and promissory estoppel.
Pinnacle Development, LLC
5/18/2023 Amro Samy v. H.J. Swender, Breach of fiduciary duty, breach of 2023-cv-0048
Jr., Cairo good faith and fair dealing, breach
of good faith, loyalty, and care.
6/9/2023 Cairo v. Amro Samy Breach of contract, breach of 2023-cv-0058
fiduciary duties.
3 In many of the cases listed on this table, additional parties beyond the individuals and entities
listed are or were involved. Because those additional parties are immaterial to the issues discussed
in this Memorandum Opinion, for sake of brevity, these additional parties or their claims are not
listed or discussed.
6/16/2023 Cairo v. Amro Samy, Breach of fiduciary duties, 2023-cv-0061
American Warrior conversion, civil conspiracy,
Construction, Inc., (Nominal unjust enrichment, gross
Defendant) Samys OC, LLC mismanagement, waste of
corporate assets.
7/3/2023 Samys OC, LLC v. H.J. Breach of fiduciary duty, 2023-cv-0070
Swender, Jr., Cairo conversion, tortious interference.
10/5/2023 Cairo v. Amro Samy, Breach of fiduciary duties. 2023-cv-0110
(Nominal Defendant) Samys
OC, LLC
The state court litigation in the above table was all removed to federal court and
each case has been referred to this Bankruptcy Court for resolution.
The facts underlying much of the above litigation are not relevant to the
matter currently under consideration, but some of the procedural aspects are. For
example, because some of the claims made in the Unified case (2020-cv-0042) were
derivative, Cairo named Samys OC, LLC and S&O Investments, Inc. as nominal
defendants in that case. In June 2020, there was a failed mediation in the Unified
case, and in September 2022, the Unified case, the Franchise case, and the
Mechanic’s Lien case were consolidated into one matter in state court. In the
Pinnacle case, on October 24, 2024, summary judgment was granted to First
National Bank of Syracuse (now known as Dream First Bank) against Amro and
Darla Samy on the Bank’s claims, and against the Samys on the Samys’
counterclaims. Then on December 3, 2024, judgment was granted to Mr. Samy
against Pinnacle Development, LLC. At some point, date unknown, First National
Bank of Syracuse/Dream First Bank assigned its judgment to Debt Recovery
Services, Inc.4
c. Debtors’ Bankruptcy Petitions and the Applications to Employ
In early November 2024, Debt Recovery Services, Inc. succeeded at attempts
to garnish against accounts of Amro and Darla Samy and sought to obtain charging
orders against them stemming from the judgment it obtained in the Pinnacle case.
As a result, Debtors filed Chapter 11 bankruptcy petitions on November 14, 2024.
Each Debtor entity at issue (Samys OC, LLC, S&O Investments, Inc., and American
Warrior Construction, Inc., hereinafter the “Debtor Entities”) and the individuals
Amro and Darla Samy filed separate petitions. All were “quick files” due to the
garnishments, and few supporting documents accompanied the petitions. Mr. Samy
as either managing member or president, signed the petitions of each Debtor
Entity.
In each of the four cases, the Hinkle Law Firm filed Applications for
Engagement of Counsel that are nearly identical in substance.5 At the hearing,
Hinkle withdrew the Application for Engagement of Counsel in the Samys’
4 Debt Recovery Services, Inc. is also the plaintiff in the first federal lawsuit between the parties,
filed on August 12, 2024. Another joint entity between Mr. Samy and Mr. O’Brate entered into a loan
agreement with Commerce Bank, for which both gave individual guarantees. At some point the loan
went into default, and in November 2023, Commerce Bank accelerated the loan. In May 2024,
Commerce Bank assigned the loan to Debt Recovery Services, Inc. Debt Recovery Services, Inc. then
released the personal guaranty of Mr. O’Brate and filed a federal complaint against Amro Samy,
alleging breach of his commercial guaranty (the “Federal Court litigation”). Mr. Samy filed a third-
party complaint against Cairo, alleging breach of the operating agreement and breach of fiduciary
duty, and seeking indemnification. This Federal Court litigation is ongoing but is currently stayed
due to the bankruptcy filing of Mr. Samy.
5 Case No. 24-11166, Doc. 8; Case No. 24-11167, Doc. 8; Case No. 24-11168, Doc. 8; Case No. 24-
11169, Doc. 8.
individual case,6 and only the Applications in the Debtor Entity cases remain
(hereinafter, the “Applications to Employ”).7
The Applications to Employ seek employment of counsel in the bankruptcy
cases under § 327 and disclose “a pre-petition retainer from Debtor in the sum of
$50,000.00 for potential fees and expenses.”8 The Applications to Employ disclose
the firm’s prior relationship with the Samys (described as a “prior relationship . . .
representing [the Samys] . . . on a variety of matters from corporate formation,
employment-law issues, debt collection, and other business and litigation-related
matters”), but confirm Debtors did not owe any outstanding fees to Hinkle on the
petition date.9 The Applications to Employ also include a statement the law firm
had “no connection” with any creditors “or with any other party in interest herein,
their attorneys, or accountants, except as otherwise set forth above and disclosed in
the attached affidavit.”10
The Affidavits attached to the Applications to Employ affirmatively state
Hinkle is disinterested and the attorneys who will appear “do not hold or represent
an adverse interest to the estate.”11 Regarding simultaneous representation of the
three Debtor Entities and the individual Samys, the Affidavits mention the
6 A Notice of Substitution of Counsel has been filed in the Samys’ individual case, Case No. 24-11169,
Doc. 118, along with a Disclosure of Compensation, Doc. 119, and an Application for Engagement of
Counsel, Doc. 122.
7 Because the Applications to Employ are substantively the same, in this discussion the Court will
cite only to the Application to Employ in Case No. 24-11166.
8 Case No. 24-11166, Doc. 8 p. 4 ¶ 13. Of the prepetition retainer of $50,000, the total of $17,689 was
used prior to filing, with the remainder held in trust. Id.
9 Id. p. 3-4 ¶ 10.
10 Id. p. 3 ¶ 9.
11 Id. Ex. A ¶ 5.
simultaneous representation, but do not elaborate.12 The Affidavits then generically
state Hinkle has no disqualifying connections: “The members of the Law Firm do
not have any connections with the Debtor, creditors, any party in interest, their
respective attorneys and accountants, the U.S. Trustee, or any person employed in
the office of the U.S. Trustee.”13 Neither the Applications to Employ, nor the
attached Affidavits disclose any connections between the Debtors, nor do they
address that any Debtor is a creditor of another Debtor.
The Applications to Employ also state that an associate at the law firm
“served as a file clerk for the law firm representing Cairo.”14 The Applications to
Employ go on to state the “associate attorney served in that capacity before going to
law school and did not obtain any information or knowledge that would negatively
impact Cairo’s position. Additionally, it is not anticipated that the associate
attorney will do any work on this Case.”15
After objections to the Applications to Employ were filed by both the U.S.
Trustee and Cairo, Hinkle filed a Supplemental Rule 2016 Disclosure Statement
addressing the $50,000 retainer. That Supplemental Statement indicates the
retainer was paid by Amro Samy to retain the law firm for the three Debtor Entities
and the Samys individually. The Supplemental Statement does not specify which
12 Id. Ex. A ¶ 3 (“[In addition to Samys OC, LLC,] Hinkle Law Firm, LLC also seeks to represent the
Samys, along with two other related entities, American Warrior Construction, Inc., and S & O
Investments, Inc., in companion Chapter 11 proceedings and seeks employment as counsel for the
Samys, American Warrior Construction, Inc., and S & O Investments, Inc. in addition to [Samys OC,
LLC].”).
13 Id. Ex. A ¶ 6.
14 Id. p. 4 ¶ 11.
15 Id.
Debtor incurred what portion of the retainer amount that was used to pay the firm
prepetition.
After the evidentiary hearing on the Applications to Employ, Hinkle filed
Amended Affidavits.16 The Amended Affidavits supplement the Applications to
Employ regarding the $50,000 retainer, stating the funds were wired to the law
firm from First State Bank of Healy via conduit through First National Bank of
Hutchinson. Mr. Samy drew the funds from a line of credit he maintains at First
State Bank of Healy. The Amended Affidavits also expand on the circumstances
surrounding the associate at Hinkle who previously worked for the law firm
representing Cairo, discussed in more detail below.
16 Amended Affidavits were filed by both Mr. Grilllot and Ms. Smith of the law firm. The Court will
hereafter refer to both Amended Affidavits jointly, as the “Amended Affidavits.” Like above, the
Court will cite to the Amended Affidavits filed in Case No. 24-11166 for ease. Any additional
information detailed in the Amended Affidavits was also testified to at the evidentiary hearing.
Other than minor typographical errors that are corrected in Ms. Smith’s Amended Affidavit,
the differences between the Amended Affidavits from each attorney are subtle. See Case No. 24-
11166 Doc. 105 (Amended Affidavit of Nicholas R. Grillot), Doc. 108 (Amended Affidavit of Lora J.
Smith). For example, Mr. Grillot’s Amended Affidavit states: “During her employment at [Jackson
Legal Group], Stevens was exposed to pleadings and files related to [the Unified case]. She was also
exposed to litigation in which American Warrior, Inc., owned by Cecil O’Brate, had brought third-
party claims against several parties, including Black Stone Minerals Company, L.P. and Entech
Enterprises, LLC who were represented by the Hinkle Law Firm, LLC.” Id. Doc. 105 p. 5 ¶ 33. Ms.
Smith’s Amended Affidavit includes only the second half of that statement, as follows: “During her
employment at [Jackson Legal Group], Stevens was exposed to litigation in which American Warrior,
Inc., owned by Cecil O’Brate, had brought third-party claims against several parties, including Black
Stone Minerals Company, L.P. and Entech Enterprises, LLC who were represented by the Hinkle
Law Firm, LLC.” Id. Doc. 108 p. 5 ¶ 33. The Amended Affidavit from Ms. Smith then has an
additional paragraph that states: “[Jackson Legal Group] has since supplied evidence that Stevens
was exposed to pleadings and files related to [the Unified case] during her employment at [Jackson
Legal Group].” Id. Doc. 108 p. 6 ¶ 40. The Amended Affidavit from Ms. Smith also indicates Ms.
Smith “did not personally participate in the inquiry to Stevens” but “inquired of co-counsel, Nicholas
Grillot, if the potential conflict with Stevens had been cleared” and had been advised of the details
contained within the Amended Affidavit as to Ms. Stevens. Id. Doc. 108 p. 5 ¶ 38.
d. Debtors’ Intercompany Transfers
About a month after the initial petitions and Applications to Employ were
filed, on December 13, 2024, all Debtors filed their Schedules, Statement of
Financial Affairs, and related documents.17 The following transfers between the
Debtor Entities were disclosed:
During the one-year period prior to filing its petition, Samys OC, LLC made
payments of $92,949.34 to American Warrior Construction, Inc.18
S&O Investments, Inc. disclosed a general unsecured claim held by American
Warrior Construction, Inc. of $207,176.72.19 During the one-year period
preceding its bankruptcy petition, S&O Investments, Inc. made $70,624.17 in
payments to American Warrior Construction, Inc.20
Samys OC, LLC and S&O Investments, Inc. did not disclose any money owed to the
other and disclosed no payments to the other in the year leading up to the
bankruptcy petitions.21
17 Additional Amended Schedules were filed on January 23, 2025, in the Individual Samys’ case but
none of the amendments therein are pertinent to the matters now under consideration.
18 Case No. 24-11166, Doc. 69 p. 67 (Statement of Financial Affairs ¶ 4.2) and p. 102 (Samys OC,
LLC Vendor QuickReport January 1, 2023 through December 10, 2024 to “American Warrior
Construction Company”).
19 Case No. 24-11167, Doc. 59 p. 17 (Schedule E/F ¶ 3.2).
20 Id. p. 25 (Statement of Financial Affairs ¶ 4.2) and p. 27 (S & O Investments Inc. Vendor
QuickReport January 1, 2023 through December 10, 2024 to “American Warrior Construction”).
21 The Schedules and Statement of Financial Affairs also show multiple transfers between a Debtor
Entity and the Samys individually.
Regarding Samys OC, LLC, the following transfers are disclosed: Samys OC, LLC owes the
Samys $440,898.26, Case No. 24-11169, Doc 66 p. 8 (Schedule A/B ¶ 30), and Samys OC, LLC is
owed $341,632.64 from Mr. Samy, Case No. 24-11166, Doc. 69 p. 6 (Schedule A/B ¶ 71). The Schedule
E/F of Samys OC, LLC also states Mr. Samy has a general unsecured claim against Samys OC, LLC
in an unknown amount, Id. Doc. 69 p. 48 (Schedule E/F ¶ 3.247). In the one-year prepetition, Mr.
Samy transferred $915,898.26 to Samys OC, LLC, Case No 24-11169, Doc. 66 p. 44 (Statement of
Financial Affairs ¶ 7) and p. 46 (Samys OC LLC Transactions by Account As of December 13, 2024
for “2801- N/P Samy”). During the one-year period prior to filing its petition, Samys OC, LLC
disclosed payments of $475,000 to Mr. Samy, Case No. 24-11166, Doc. 69 p. 67 (Statement of
Financial Affairs ¶ 4.1) and p. 104 (Samys OC, LLC Vendor QuickReport January 1, 2023 through
December 10, 2024 to Amro Samy).
The intercompany or interdebtor transfers were not disclosed within the
Applications to Employ or their attached Affidavits. Each was discussed at the
evidentiary hearing, however, and they are disclosed in the Amended Affidavits
filed post-hearing.
As noted, Mr. Samy testified about the above transactions. First, as to any
alleged loan or payment made thereon, there are no loan documents memorializing
the loans, nor any assets pledged as security for the loans.
Regarding the payments made from Samys OC, LLC to American Warrior
Construction, Inc., Mr. Samy testified the payments were for repair and
construction work on the four Samys OC, LLC restaurant locations. He also
contends payments were made from Samys OC, LLC to American Warrior
Construction, Inc. for the share of the entity’s payment of premiums for a life
insurance policy assigned to Dream First Bank as collateral for the debt of Samys
OC, LLC, S&O Investments, Inc., and American Warrior Construction, Inc.22 Mr.
Regarding American Warrior Construction, Inc., the following transfers are disclosed: The
Schedules of the Samys state American Warrior Construction, Inc. owes the Samys $506,868.25,
Case No. 24-11169, Doc. 66 p. 8 (Schedule A/B ¶ 30). The Schedules of American Warrior
Construction, Inc. disclose Mr. Samy has a general unsecured claim, but for $522,143.25, Case No.
24-11168, Doc. 58 p. 15 (Schedule E/F ¶ 3.14). In the one-year prepetition period, Mr. Samy
transferred $560,000 to American Warrior Construction, Inc., Case No. 24-11169, Doc. 66 p. 44
(Statement of Financial Affairs ¶ 7) and p. 45 (American Warrior Construction Inc. Transactions by
Account As of December 13, 2024 for “N/P Samy”). In the one-year prepetition, American Warrior
Construction, Inc. transferred $100,000 to Mr. Samy, 24-11168 Doc. 28 p. 22 (Statement of Financial
Affairs ¶ 4.1).
22 Cairo contends American Warrior Construction, Inc. should solely be paying the life insurance
premiums, and disputes Ms. Samy’s contention he had an agreement with Mr. O’Brate for the
payment of the premium to be split amongst all the loans held by Mr. Samy and Mr. O’Brate. Cairo
also challenges Debtors’ Exhibit 14, purporting to show all intercompany payments between the
Debtor Entities; namely that the memorandum information included within that Exhibit describing
the payment was added as preparation for the evidentiary hearing, not contemporaneously in the
QuickBooks program. The Court need not resolve either dispute. Debtors admit and acknowledge the
intercompany transfers occurred. For the purposes of this hearing, that is sufficient.
Samy testified that although Samys OC, LLC did not owe any money to American
Warrior Construction, Inc. on the petition date, American Warrior Construction,
Inc. had loaned money to Samys OC, LLC in the past, last occurring in 2018.
Regarding the claim between S&O Investments, Inc. and American Warrior
Construction, Inc., Mr. Samy testified S&O Investments, Inc. owed American
Warrior Construction, Inc. for work performed on the duplexes. He testified the
payments made were for that work and for miscellaneous repair work.
After filing their petitions, each Debtor filed a motion for procedural
consolidation and joint administration of the three Debtor Entities and the
individual case of the Samys. In those motions, it states:
[B]ecause Debtors have many of the same debts, own property that is
pledged as collateral for other debts, and rely on each other’s income to
pay regular expenses; the Debtors and Debtors’ counsel believe that
there will be no conflicts for the joint representation by Hinkle Law Firm
LLC of all entities. Additionally, because they share some of similar
assets and some of the same debts, there were loans and obligations that
were owed between some of the Debtors. However, Debtors have agreed
to forgo any collection on any such debt and waive recovery on those
prepetition obligations to the extent it is necessary to obtain joint
administration.23
Cairo objected to the motions for joint administration, which remain pending,
although Hinkle indicated the motion would be withdrawn in the Samys’ individual
case.
The primary secured creditor identified for each Debtor Entity is Dream First
Bank. Samys OC, LLC owes Dream First Bank $8,340,638.78, S&O Investments,
Inc. owes Dream First Bank $1,988,673.73, and American Warrior Construction,
23 24-11166, Doc. 23 p. 5-6 ¶ 12.
Inc. owes Dream First Bank $251,000.66.24 Each Debtor Entity pledged all their
assets as collateral to Dream First Bank25 and Mr. Samy personally guaranteed all
this debt.26 Cairo also guaranteed the debt of Samys OC, LLC and S&O
Investments, Inc.
e. Hinkle Law Firm Associate Attorney
Beginning in May 2019 and continuing through January 2021, Makaela
Stevens, a college student at the time, worked for Jackson Legal Group during her
breaks from school. Jackson Legal Group is a law firm consisting of two attorneys:
Ashley Jackson and Ben Jackson. Mr. Jackson began representing Mr. O’Brate, or
his entities, in 2015.
While Ms. Stevens was employed at Jackson Legal Group, she was present
for attorney-client privileged discussions between the Jacksons and their clients.
When she worked there that firm’s clients included Mr. O’Brate, Cairo, and three
O’Brate entities involved in oil and gas production.
Over the summer of 2020, Ms. Stevens was present for conversations between
Mr. Swender and Mr. Jackson regarding Cairo and its litigation with Mr. Samy or
his entities. Both the Unified case and the Franchise case had just been filed in
state court a couple of months prior to Ms. Stevens’s summer employment, and both
24 All numbers are approximate and calculated as of the petition date.
25 The loans are cross-collateralized and contain cross-default provisions. As noted above, Mr. Samy
testified Dream First Bank required a $10,000,000 term-life insurance policy on his life as security
for the debt owed by the Debtor Entities. The termination of the policy for non-payment is a default
under the loan documents with Dream First Bank.
26 Mr. Samy not only guaranteed the debts of the Debtor Entities to Dream First Bank, he also
guaranteed debts of other entities in which he has an ownership interest. The total debt Mr. Samy
guaranteed to Dream First Bank is $21,553,788.24.
Mr. Swender and Mr. Jackson testified Ms. Stevens was extensively involved in
strategy meetings and all aspects of the litigation then ongoing between Cairo, Mr.
Samy, and American Warrior Construction, Inc. Although she was still a college
student and had not yet begun law school, Mr. Jackson said his firm made an effort
to expose Ms. Stevens to as much of their practice as possible, including client
strategy meetings, to assist her in deciding if a career in law was something she
desired to pursue. Mr. Swender interacted with her often via email and in person
and considered her a part of his legal team. Ms. Stevens helped the lawyers and
client prepare for the mediation that occurred in the summer of 2020 in the Unified
case (which involved Mr. Samy, American Warrior Construction, Inc., Samys OC,
LLC, and S&O Investments, Inc.), attended the mediation, and was present for
conversations with the client and mediator.27
Ms. Stevens attended law school and was hired by Hinkle as a summer intern
for the summer of 2023. At the time, the law firm represented two entities in state
court litigation against certain O’Brate entities involved in oil and gas production,
which the parties refer to as the Foundation litigation. Prior to Ms. Stevens
27 In addition to the testimony of Mr. Jackson and Mr. Swender, the Court admitted into evidence
from Cairo showing Ms. Stevens was: involved in preparation for the mediation of the Unified case,
see Cairo Ex. F p. 49 (email from Ms. Jackson to Ms. Stevens, dated June 2, 2020); included on the
email submission of Cairo’s confidential mediation statement, Id. p. 53 (email from Mr. Jackson,
dated June 5, 2020); invited to attend a mediation strategy meeting (email from Mr. Jackson to Ms.
Stevens and others, dated June 6, 2020); and traveled with Mr. Jackson to the mediation, Id. p. 50
(email from Mr. Jackson to Mr. Swender and others, dated June 3, 2020). Ms. Stevens also made
several spreadsheets to be used by Jackson Legal Group: a spreadsheet of information related to Mr.
Samy and American Warrior Construction, Inc., Id. p. 51 (email from Ms. Jackson to Mr. Jackson,
Ms. Stevens and others, dated June 3, 2020); a spreadsheet related to “Bank Statements OC,” Id. p.
55 (emails between Ms. Stevens and Mr. Jackson, dated June 17, 2020); a “2019 P&L Summary” that
Jackson Legal Group considered using in its mediation, Id. p. 52 (email from Ms. Stevens to Ms.
Jackson, dated June 4, 2020); and a “Samys OC Payments Spreadsheet,” Id. p. 56 (email from Ms.
Stevens to the Jacksons, dated June 23, 2020).
beginning work with Hinkle, that law firm, the Jackson Legal Group, Mr. O’Brate,
individually and on behalf of his oil and gas businesses involved, and Mr. Swender,
“individually and on behalf of the O’Brate L.L.C. entities,” signed a “Waiver of
Conflict of Interest.”28
The signed waiver explicitly waived any potential conflict of interest incurred
by Hinkle in the Foundation litigation via the hiring of Ms. Stevens. In addition,
and relevant here, in the explanatory section of the letter, the following agreement
was set forth:
In addition to the above, Hinkle acknowledges that, during her time at
Jackson Legal, Ms. Stevens may have been involved in client discussions
related to the following (the “O’Brate Parties”):
Cecil O'Brate
. . .
Cairo of Western Kansas, LLC
. . .
Because of this, during Ms. Stevens’ employment at Hinkle, Hinkle
agrees that prior to undertaking representation in manner [sic] where
it will be adverse to one of the O'Brate Parties and which pertains to
issues for which Ms. Stevens obtained knowledge during her time at
Jackson Legal that would potentially be prejudicial to such O’Brate
Parties, Hinkle will obtain a waiver of conflicts from such O’Brate
Parties. It is further provided, though, that all parties to this waiver
agree nothing about Ms. Stevens’ employment at Hinkle precludes,
prevents, or serves to disqualify either firm from future representation
of matters involving the O’Brate Parties if the matter pertains to issues
for which Ms. Stevens, during her time at Jackson Legal, obtained no
knowledge that would potentially be prejudicial to such O'Brate Parties
in the matter, or if Ms. Stevens is no longer employed at Hinkle at the
time of such representation.29
28 Debtors’ Ex. 1. Cairo also submitted the Letter Agreement as an Exhibit and it was admitted into
evidence as Cairo’s Exhibit A as well. For ease, the Court cites Debtors’ Exhibit in this Memorandum
Opinion.
29 Debtors’ Ex. 1 p. 2.
The parties refer to this as the “Letter Agreement.”
Ms. Stevens became a licensed attorney and was ultimately hired by Hinkle
for full-time employment as an associate attorney in August 2024, where she
remains employed by the firm.
Counsel for Hinkle testified that when he became aware of the Letter
Agreement, he questioned Ms. Stevens about whether she had any knowledge of
issues for which the law firm would be representing the Samys and their entities.
Although counsel for Hinkle testified Ms. Stevens reported she had no knowledge
regarding the Samys or their entities, the testimony of Mr. Jackson and Mr.
Swender showed she was exposed to legal matters with Cairo against Mr. Samy and
the Debtor Entities.30 Neither prior to filing its Applications to Employ, nor at any
time since, has Hinkle attempted to obtain a waiver of conflicts from Cairo due to
the law firm’s employment of Ms. Stevens, other than the prior waiver related to
the Foundation litigation.
II. Conclusions of Law
a. Jurisdiction
This is a core proceeding regarding administration of these Debtors’
bankruptcy estates, arising under title 11, over which this Court has subject matter
jurisdiction.31 Venue is proper in this District.32
30 Ms. Stevens did not attend or testify at the hearing, and Debtors did not offer evidence to refute
the detailed testimony and evidence offered by Cairo of Ms. Stevens’s involvement in and exposure to
confidential matters concerning Cairo in its litigation with Mr. Samy and his entities.
31 28 U.S.C. §§ 1334(b), 157(a), (b)(1) and (b)(2)(A), and Amended Order of Reference, D. Kan. S.O.
13-1.
32 28 U.S.C. § 1409(a).
b. Burden of Proof
As discussed below, to be employed counsel must be qualified under § 327
and Federal Rule of Bankruptcy Procedure 2014.33 The party opposing qualification
has the burden to present a prima facie case there is evidence sufficient to warrant
disqualification: a preponderance of evidence “the standards of § 327(a) and Rule
2014 have been compromised.”34 “The ultimate burden of proof, however, lies with
the attorney or firm whose disqualification is sought.”35
c. Overview of the Law and Parties’ Current Disputes
The Bankruptcy Code contains an extensive, detailed set of guidelines for the
employment and compensation of attorneys for a debtor in bankruptcy. The
overarching principle is that to be compensated, the attorney must be employed,
and to be employed, the attorney must meet a handful of requirements imposed by
the Code.36 Because of the withdrawal of Hinkle’s application for employment in the
33 In addition to being qualified under § 327 and Rule 2014, a bankruptcy court may also exercise its
discretion to best serve the objectives of the bankruptcy system in employment decisions. In re
Harold & Williams Devel. Co., 977 F.2d 906, 910 (4th Cir. 1992) (“[O]nce the trustee meets the
burden of demonstrating that an applicant for professional employment is qualified under § 327, the
discretion of the bankruptcy court must be exercised in a way that it believes best serves the
objectives of the bankruptcy system.”).
34 Manchester v. Kretchmar (In re Kretchmar), No. 16-14337-JDL, Adv. No. 17-01026-JDL, 2019 WL
2612731, at *2 (Bankr. W.D. Okla. June 25, 2019).
35 Id. See also In re Interwest Bus. Equip., Inc., 23 F.3d 311, 318 (10th Cir. 1994) (“An applicant
under § 327(a) has the burden of establishing by application and accompanying affidavit that its
chosen professional is qualified.”).
36 As noted, after employment comes the second consideration: compensation. A “professional person
employed under section 327” may be awarded “reasonable compensation” for services rendered and
“actual, necessary expenses” under § 330. Under § 331, attorneys employed under § 327 “may apply
to the court” for compensation for services rendered, but there are timing requirements. Section 331
permits the filing of an application “not more than once every 120 days after an order for relief in a
case under this title, or more often if the court permits.” This District has enacted D. Kan. LBR
2016.1 to exercise the authority given by § 331 to permit more frequent applications for
compensation. Under D. Kan. LBR 2016.1, a professional employed under § 327 in a Chapter 11 case
may file a “motion for monthly payment of fees and expenses.” The motion may request payment of
individual Samys’ case, the Court is only addressing the employment of counsel for
the three Debtor Entities.
As noted, § 327 governs employment of professionals, and it states, in
pertinent part:
(a) Except as otherwise provided in this section, the trustee,37 with the
court’s approval, may employ one or more attorneys . . . that do not hold
or represent an interest adverse to the estate, and that are disinterested
persons, to represent or assist the trustee in carrying out the trustee’s
duties under this title.
. . .
(c) In a case under chapter . . . 11 of this title, a person is not disqualified
for employment under this section solely because of such person’s
employment by or representation of a creditor, unless there is objection
by another creditor or the United States trustee, in which case the court
shall disapprove such employment if there is an actual conflict of
interest.
Therefore, under subsection (a), the attorney must have court approval for his or
her employment, must not “hold or represent an interest adverse to the estate,” and
must be disinterested. Under subsection (c), prior or current representation of a
creditor of the debtor is not a disqualifying event, even if there is an objection, as
long as there is no “actual conflict of interest.”
Only one of those statutory requirements from § 327 is a defined term:
disinterestedness. Per the Code, the term “disinterested person” is a person that
“(A) is not a creditor, an equity security holder, or an insider; (B) is not and was not
100% of fees and expenses, but no less than 10% must be held back in trust pending court approval
of an interim or final fee application. Compensation under § 330 is not currently at issue. Debtors
have filed motions for monthly compensation under D. Kan. LBR 2016.1, but those motions are being
held for decision until after the issue of employment is decided.
37 Per § 1107(a), a debtor in possession in a Chapter 11 case “shall perform all the functions and
duties” of a trustee.
. . . a director, officer, or employee of the debtor; and (C) does not have an interest
materially adverse to the interest of the estate or of any class of creditors or equity
security holders, by reason of any direct or indirect relationship to, connection with,
or interest in, the debtor, or for any other reason.”38
The mechanics of employment are then governed by Federal Rule of
Bankruptcy Procedure 2014. Per Rule 2014(a)(1), the attorney must file an
application seeking employment. As contested here, the application must “state
specific facts showing” all the attorney’s “connections” with the debtor, creditors,
and “any other party in interest.”39 The attorney must also submit a verified
statement setting forth these connections.40 Under D. Kan. LBR 2014.1, if any new
material information relating to employment is discovered, a supplemental affidavit
must be promptly filed.
In addition to the requirements imposed by the Bankruptcy Code, lawyers in
this District must also abide the Kansas Rules of Professional Conduct (“KRPC”).41
The Kansas Rules of Professional Conduct applicable to this matter include KRPC
Rule 1.9(a), which states: “A lawyer who has formerly represented a client in a
matter shall not thereafter represent another person in the same or a substantially
related matter in which that person’s interests are materially adverse to the
interests of the former client unless the former client gives informed consent,
38 § 101(14).
39 Rule 2014(a)(2).
40 Rule 2014(a)(3).
41 Under D. Kan. LBR 2090.2, Rule 83.6.1 of the United States District Court for the District of
Kansas applies to attorneys in this Court. Under Rule 83.6.1(a), the Kansas Rules of Professional
Conduct are adopted as the applicable standards of professional conduct.
confirmed in writing.” Also applicable here is KRPC Rule 1.10(a), which states:
“While lawyers are associated in a firm, none of them shall knowingly represent a
client when any one of them practicing alone would be prohibited from doing so by
Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the
prohibited lawyer and does not present a significant risk of materially limiting the
representation of the client by the remaining lawyers in the firm.”
The parties have narrowed their dispute to the adequacy of disclosures of
Hinkle under Rule 2014, adverse interests, disinterestedness, and a conflict of
interest under § 327, and a conflict of interest under the KRPC arising from Ms.
Stevens’s employment at the law firm.
d. Rule 2014 Disclosures
Initially, the U.S. Trustee and Cairo objected to the disclosures made in the
Applications to Employ and the Affidavit supporting them based on the lack of
disclosure of intercompany debt and payments. Cairo also objected based on the
lack of disclosure of the Letter Agreement and the full scope of Ms. Stevens’s
connection to Cairo and Mr. O’Brate. The Amended Affidavits summarize and
disclose the intercompany transfers disclosed in the Schedules and Statements of
Financial Affairs filed in each case and discussed at the evidentiary hearing, and
the circumstances surrounding the Letter Agreement that were testified to at
length.
At the evidentiary hearing the U.S. Trustee withdrew its objection under
Rule 2014, satisfied by the supplemented disclosure via the Amended Affidavits.
Cairo maintains its Rule 2014 objection, arguing the Amended Affidavits were not
filed until after the evidentiary hearing and were not exchanged as exhibits prior to
the hearing.
As noted above, the primary purpose of Rule 2014 is disclosure: ensuring the
parties and the bankruptcy court have adequate information to assess an
application for employment of counsel. The Rule 2014 disclosure is what enables
this Court to “evaluate fully” the attorney’s employment under § 327(a).42
To fulfill the duty imposed by Rule 2014, an “attorney has a duty to fully
disclose any connections with the debtor or creditors that might create a possible
conflict, and all fee arrangements with the debtor in possession.”43 To comply with
Rule 2014, proposed counsel for the debtor maintains a “duty to disclose any actual
or potential conflicts of interest with the estate.”44 The affidavit in support of an
application to employ must contain “specific facts” that enable the Court to rule out
conflicts.45 And this Court’s Local Rule requires “prompt” supplementation after
“learning of any additional material information.”46
There is no question the original Affidavits filed with the Applications to
Employ were insufficient regarding the intercompany relationships. The Affidavits
did not address the connections between the Debtor Entities: that both Samys OC,
LLC and S&O Investments, Inc. had made prepetition payments to American
42 In re Smitty’s Truck Stop, Inc., 210 B.R. 844, 850 (10th Cir. BAP 1997).
43 Id. (citing In re Interwest Bus. Equip., Inc., 23 F.3d 311, 316 (10th Cir. 1994)). The penalty for the
failure to disclose connections can be steep: “Failure to disclose connections that have the potential
for creating a conflict warrants a denial of all compensation to debtor’s counsel.” Id.
44 Id.
45 In re Interwest Bus. Equip., Inc., 23 F.3d at 318.
46 D. Kan. LBR 2014.1(a).
Warrior Construction, Inc., or that American Warrior Construction, Inc. had a
general unsecured claim against S&O Investments, Inc. But the Court disagrees the
law firm did not adequately disclose Ms. Stevens’s presence at the firm or the
potential connection to the creditor Cairo. The firm expressly disclosed Ms.
Stevens’s employment and her prior connection with Jackson Legal Group. The
disclosure of the connection is all that is required.
Regardless, the supplemented facts provided in the Amended Affidavits
disclose all known connections between the Debtor Entities. They detail which
entity has a claim against another entity, and prepetition payments made on those
claims. Cairo argues this Court should not consider the Amended Affidavits, but the
additions were the topic of testimony at the evidentiary hearing, and Cairo had
ample opportunity to explore them. Ultimately, the Court concludes it is not
necessary to rule on whether the Amended Affidavits should be allowed due to the
Court’s rulings regarding the other challenges to the Applications to Employ, which
render the disclosure issue moot.47
e. Adverse Interests and Disinterestedness under § 327(a)
As noted above, § 327 can present multiple hurdles to employment of counsel.
Under § 327(a), Hinkle must neither hold nor represent an interest adverse to the
Debtor Entities’ bankruptcy estates and be disinterested. The basis for these
47 The Court would not typically consider the Amended Affidavits due to their failure to be
exchanged in accordance with D. Kan. LBR 9072.1 and this Court’s General Order on Dockets,
Hearings, and Trials. But again, based on the rulings below, the disclosure issue is moot.
hurdles is found in an attorney’s broad fiduciary duties on behalf of a bankruptcy
estate:
Because of the unique nature of the bankruptcy estate, the debtor in
possession is considered a fiduciary of that estate. For the same reason,
courts have imposed a fiduciary duty upon counsel for the debtor in
possession. This duty requires the attorney to exercise independent
professional judgment on behalf of the estate.48
The Court first addresses § 327(a)’s prohibition against holding or
representing an interest adverse to the Debtor Entities’ bankruptcy estates. An
“interest adverse to the estate” is not defined in the Code. Numerous bankruptcy
courts, including the Tenth Circuit BAP, have adopted the definition laid out in In
re Roberts for that phrase,49 as follows:
Roberts defined “hold an interest adverse to the estate” as follows:
(1) to possess or assert any economic interest that would
tend to lessen the value of the bankruptcy estate or that
would create either an actual or potential dispute in which
the estate is a rival claimant; or (2) to possess a
predisposition under circumstances that render such a bias
against the estate.
Roberts defined “represent an adverse interest” as “to serve as agent or
attorney for any individual or entity holding such an adverse interest.”50
This Court must therefore examine the economic interests of each Debtor Entity to
determine if that entity has an actual or potential dispute against or with another
Debtor Entity as rival claimant. A mere plausibility ‘“the representation of another
48 In re Smitty’s Truck Stop, Inc., 210 B.R. at 850-51.
49 See In re Cook, 223 B.R. 782, 789 (10th Cir. BAP 1998) (relying on definitions provided by In re
Roberts, 46 B.R. 815 (Bankr. D. Utah 1985), aff’d in part and rev’d in part on other grounds, 75 B.R.
402 (D. Utah 1987) (en banc)).
50 In re 7677 E. Berry Ave. Assocs., L.P., 419 B.R. 833, 841-42 (Bankr. D. Colo. 2009) (quoting In re
Roberts, 46 B.R. at 827).
interest may cause the debtor’s attorneys to act any differently than they would
without that other representation’” causes the conclusion there is an interest
adverse to the estate.51
Regarding disinterestedness, to be disinterested, Hinkle cannot be a creditor
and cannot “have an interest materially adverse to the interest of the estate.”52 In
the Tenth Circuit, the disinterestedness requirement excludes an attorney “with
some interest or relationship that would even faintly color the independence and
impartial attitude required by the Code and Bankruptcy Rules.”53
The Tenth Circuit in In re Interwest Business Equipment, Inc.54 affirmed the
bankruptcy court’s denial of a single firm’s application for employment of inter-
related debtors who had inter-company debt, based on facts very similar to those at
hand. In Interwest there were four bankruptcy estates at issue: one for an
individual, and then three additional for debtor entities, of which that individual
was an officer, director, or controlling shareholder.55 Like in this case, the
individual had separate counsel, but the three debtor entities were seeking
employment of a single law firm as counsel.56 There were intercompany debts
between the debtor entities for payments due between them, and two of the debtor
entities had a management contract between them.57
51 In re Git-N-Go, Inc., 321 B.R. 54, 58 (Bankr. N.D. Okla. 2004) (quoting In re The Leslie Fay Cos.,
175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994)).
52 § 101(14).
53 In re Cook, 223 B.R. at 789.
54 23 F.3d 311 (10th Cir. 1994).
55 Id. at 313.
56 Id.
57 Id. at 313-14.
The Tenth Circuit, affirming the bankruptcy court’s conclusion a single law
firm could not provide “sufficient scrutiny” of the relationships between the debtor
entities at issue to “satisfy the fiduciary duty” of the proposed counsel to each
estate,58 noted the following issues that are also relevant herein:
“A trustee must examine payments the debtor made prior to filing. The
trustee must examine the debtor’s treatment of insiders within one year
of the filing. . . . The trustee must examine claims of creditors and, if a
purpose would be served, object to allowance of claims.
[W]e find fully supported the bankruptcy judge’s conclusion ‘[i]t would
be an impossible task for applicants to undertake this multiple
representation and make decisions for one of these debtors which would
not be at the expense of another.’”59
Like the Tenth Circuit in Interwest, this Court must determine if there is “a
conflicting interest” that would affect the performance of Hinkle’s services, or
“impair the high degree of impartiality and detached judgment expected of them
during the administration of a case.”60
The claims the Debtor Entities have against the other are not small matters.
The intercompany loans between the corporate debtors create a debtor-creditor
relationship that would necessarily require the law firm to represent interests
adverse to each estate.61 The Tenth Circuit held in Interwest that the “existence of a
prepetition debt from one estate to the other” is itself a “disqualifying conflict of
58 Id. at 318.
59 Id. at 318-19.
60 In re Amdura Corp., 121 B.R. 862, 865 (Bankr. D. Colo. 1990) (internal quotation omitted).
61 See, e.g., § 547 (governing preferences), § 548 (governing fraudulent transfers), § 553 (governing
setoff), § 704(a)(5) (requiring examination of claims and “if a purpose would be served,” objection to
claims).
interest.”62 The Debtor Entities’ Schedules show Samys OC, LLC and S&O
Investments, Inc. made significant prepetition payments to American Warrior
Construction, Inc., and that American Warrior Construction, Inc. has a large
unsecured claim against S&O Investments, Inc.63 There are no loan documents
supporting the claims, and no written agreements of any kind detailing those loans
or payments thereon, so Hinkle would have to rely solely on Mr. Samy’s recollection
of the transactions. Essentially, the law firm would be required to both prosecute
and defend any claims the Debtor Entities have against one another. Such
“interlocking interests” are the type that “can only be served by utilizing separate
counsel who can fairly and fully advise each debtor as to its rights and
responsibilities.”64
Hinkle notes the intercompany debt addressed above is unsecured and states
it is the result of “ordinary course operations.”65 And the testimony at the
evidentiary hearing from Mr. Samy indicated he will argue much of the debt and
payments thereon are related to legitimate construction or repair work performed
by one Debtor Entity for another, or shared responsibilities for payment on a life
62 In re Interwest Bus. Equip., Inc., 23 F.3d at 314. That said, the Court recognizes there are no
bright line rules. See, e.g., In re 7677 E. Berry Ave. Assocs., L.P., 419 B.R. 833, 844 (Bankr. D. Colo.
2009) (“the existence of inter-debtor claims does not create a per se prohibition of counsel
representing both estates”).
63 In addition, the claims in the Unified case include breach of contract claims by Samys OC, LLC
and S&O Investments, Inc. as nominal defendants against American Warrior Construction, Inc.
Those derivative claims are now property of the Samys OC, LLC and S&O Investments, Inc. estates.
See Delgado Oil Co. v. Torres, 785 F.2d 857, 860 (10th Cir. 1986) (“The § 541 estate, thus, includes
any right of action the debtor corporation may have to recover damages for misconduct,
mismanagement, or neglect of duty by a corporate officer or director. The trustee in bankruptcy
succeeds to that right. Its nature is derivative.”).
64 In re Interwest Bus. Equip., Inc., 23 F.3d at 314.
65 Debtor’s Brief in Support of Application to Employ Hinkle Law Firm, filed as Doc. 95 in Case No.
24-11166, at p. 14. The parties filed Trial Briefs in each Debtors’ case.
insurance premium. However, others with ownership interests in the Debtor
Entities question or dispute at least some of these claims by Mr. Samy.
Hinkle also argues the Debtor Entities’ interests are not adverse but are
aligned, given the significant overlap of creditors in each of the cases with the
majority creditor Dream First Bank, and each Debtor Entity’s desire to “marshal
their assets and pay the joint obligations owed.”66 But the merits of the transfers
and the reorganization plans of the Debtor Entities are matters for another day.
The law firm’s duty is to investigate and help each Debtor Entity maximize its
estate. Debtors’ contention in the motions for joint representation that they would
forego collection of the intercompany debt is not reassuring—each estate must do
what is best for each estate, and that decision must be reached after a full and fair
analysis. The Court concludes the Roberts definition for representation of an
adverse interest is met in these cases. Hinkle, in representing the three Debtor
Entities, would be representing adverse interests.
Hinkle proposes the use of conflict counsel for review of any claims the
Debtor Entities may have against another. Through the use of conflicts counsel:
“[I]f conflict matters—matters in which general bankruptcy counsel’s
simultaneous representation of more than one debtor would pose a
disqualifying conflict of interest—are carved out of the scope of general
bankruptcy counsel’s representation of the debtors, and are assigned to
separate independent counsel, no actual conflict of interest can arise on
the part of general bankruptcy counsel. The conflict matters are outside
the scope of its representation.”67
66 Id. p. 15.
67 In re WM Distrib., Inc., 571 B.R. 866, 873 (Bankr. D.N.M. 2017).
There are situations where the use of conflicts counsel may be appropriate,68 and
certainly the Tenth Circuit has noted the “simultaneous representation of related
estates in bankruptcy” is not “per se prohibited.”69 But the use of conflicts counsel is
not appropriate when “the adverse interests of the debtors represented by the same
general bankruptcy counsel are central to the reorganization efforts of either debtor
or to other resolutions of the chapter 11 case or where the adverse interests are so
extensive that each debtor should have its own independent general bankruptcy
counsel.”70
Here, the transfers made between the Debtor Entities are certainly central to
the related litigation involving the Debtor Entities and are extensive enough even
within the reorganization efforts of each bankruptcy estate that attempting to
“cure” the conflicts the law firm would encounter with the use of conflicts counsel
would not fix the problems identified by single representation.
In addition, Mr. Samy’s transfer of funds to Hinkle for the benefit of Samys
OC, LLC, S&O Investments, Inc., and American Warrior Construction, Inc.—i.e.,
the retainer for the payment of those three entities’ legal fees—is cause for concern.
If the transfer is avoided, the law firm or the Debtor Entities may be liable as
transferees under § 550. Again, this potential liability would cause the law firm to
hold an adverse interest to the estates of the Debtor Entities when allocating any
68 The Tenth Circuit in Interwest did not consider the use of conflicts counsel, as the issue was not
before it. As a result, the Tenth Circuit has not foreclosed the use of an independent conflict counsel
to represent a debtor in a matter for which the debtor’s general counsel would otherwise have a
conflict or hold or represent an adverse interest.
69 In re Interwest Bus. Equip., Inc, 23 F. 3d at 318-19.
70 In re WM Distrib., Inc., 571 B.R. at 873.
liability for the transfer. This is another source of the firm’s lack of
disinterestedness.
There is no doubt that Chapter 11 debtors who are business entities have
different considerations when assessing employment than an individual debtor
seeking representation in a simple reorganization or liquidation. The Code
recognizes as much, in § 1107(b), where it states: “a person is not disqualified for
employment under section 327 . . . solely because of such person’s employment by or
representation of the debtor before the commencement of the case.” But here,
despite this additional latitude given a Chapter 11 debtor, the Court concludes
Hinkle is not qualified under § 327(a) due to the central nature and extensiveness of
the adverse interests and a lack of disinterestedness.
f. Conflicts under § 327(c)
The Court next addresses the hurdle to employment of counsel of § 327(c).
Section 327(c) states “a person is not disqualified for employment under this section
solely because of such person’s employment by or representation of a creditor,
unless there is objection by another creditor or the United States trustee, in which
case the court shall disapprove such employment if there is an actual conflict of
interest.” Here, Hinkle is attempting to represent the Debtor Entities, which are
creditors of each other, and there is an objection to that representation by both the
U.S. Trustee and another creditor. Therefore, the Court must make a finding
whether the law firm will hold an actual conflict of interest through its
representation of creditors.
Conflicts of interest under § 327(c) are again not defined by the Code. Other
bankruptcy courts have concluded an ‘“actual conflict exists if there is an active
competition between two interests, in which one interest can only be served at the
expense of the other.’”71 Again, the Court need not deal in certainties: counsel
employed under § 327 must be “free of any conflicting interest which might . . .
affect the performance of their services or which might impair the high degree of
impartiality and detached judgment expected of them during the administration of
a case.”72
Again, Hinkle’s representation of the Debtor Entities would require that law
firm to simultaneously represent current creditors of each other. For example,
Samys OC, LLC and S&O Investments, Inc. may have avoidance claims against
American Warrior Construction, Inc. The law firm would have to both prosecute
and defend such claims against the other and would necessarily have an actual
conflict of interest in that representation of each bankruptcy estate. There is an
actual conflict of interest—an ‘“active competition between two interests, in which
one interest can only be served at the expense of the other’”73—under § 327(c).
Under KRPC 1.7(a), “a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest.” Hinkle has argued Mr.
Samy, as entity representative, would waive any conflict of interest that could arise
from the firm’s representation of another Debtor. Under KRPB 1.7(b)(4), an
71 In re 7677 E. Berry Ave. Assocs., L.P., 419 B.R. 833, 842 (Bankr. D. Colo. 2009) (quoting In re Git-
N-Go, Inc., 321 B.R. at 58).
72 Id. at 843 (internal quotations omitted) (emphasis added).
73 Id. at 842 (quoting In re Git-N-Go, Inc., 321 B.R. at 58).
impacted client can give informed consent and waive the conflict. But under KRPC
1.7(b)(3), even a waiver is not acceptable when the concurrent representation
involves assertion of claims “by one client against another client” in the “same
litigation or other proceeding.” Therefore, under KRPB 1.7, one firm cannot
represent one client (a Debtor Entity) in a claim against another client (another
Debtor Entity) in the same proceeding, regardless of a waiver.74
Further, the Court cannot ignore the law firm’s entanglement with Mr. Samy
related to all the Debtor Entities’ estates. Mr. Samy, a creditor of some of the
Debtor Entities, testified he had confidential communications with the law firm
about the claims against each of the Debtor Entities. Mr. Samy also testified he
believed those communications to be protected by his attorney-client privilege, and
the law firm should not use information from those communications against the
Samys individually. The Samys are now former clients of Hinkle, but current
creditors against some of the Debtor Entities Hinkle seeks to represent. As detailed
above, there were multiple debts and transfers between the Debtor Entities and the
Samys individually, including the Debtor Entities (in particular, Samys OC, LLC
and American Warrior Construction, Inc.) owing money to the Samys and the
Samys owing money or transferring money to the Debtor Entities (Mr. Samy owes
74 Cairo argues Hinkle also has a conflict of interest under KRPC 1.7 due to its prior representation
of the Samys, because the firm cannot convert the Samys from current clients to former clients by
terminating the relationship in order avoid the absolute prohibition under KRPC 1.7 resulting from
a concurrent conflict, citing Matter of Hodge, 407 P.3d 613 (Kan. 2017). The holding of Hodge is not
quite that severe, as that case actually holds a lawyer cannot convert a client from a current client to
a former client to fall outside the requirements of KRPC 1.7 with a “unilateral (and failed) attempt to
terminate the attorney-client relationship.” Id. at 644 (emphasis added). Here, the termination of the
attorney-client relationship between the law firm and the Samys is not unilateral and was not a
failed attempt.
Samys OC, LLC, received money from Samys OC, LLC, and transferred money
prepetition to American Warrior Construction, Inc.).75 This is another complicating
factor supporting the Court’s exercise of its discretion to deny the Applications to
Employ.
g. Conflict of Interest under the KRPC
The remaining issue raised by Cairo is Hinkle’s alleged conflict of interest
under the Kansas Rules of Professional Conduct due to the firm’s employment of
Ms. Stevens. The text of KRPC 1.9(a) is set out above, but as applied to this
situation it would read:
A lawyer [the Hinkle Law Firm, through Ms. Stevens] who has formerly
represented a client [Cairo] in a matter [the state court litigation
between Cairo and American Warrior Construction, Inc., with Samys
OC, LLC and S&O Investments, Inc. named as nominal defendants—
i.e, the Unified case] shall not thereafter represent another person [the
Debtor Entities] in the same or substantially related matter in which
that person’s [the Debtor Entities’] interests are materially adverse to
the interests of the former client [Cairo] unless the former client [Cairo]
gives informed consent, confirmed in writing.
KRPC 1.9(a) applies because of KRPC 1.10(a), which dictates when lawyers are
associated at a firm (here, Hinkle), none of them may represent a client when any
one of them (here, allegedly Ms. Stevens) would be prohibited from doing so under
KRPC 1.9.
Cairo established at the hearing that Ms. Stevens obtained “material and
confidential” information from Cairo.76 The testimony from Mr. Swender and Mr.
75 See supra note 21.
76 See Koch v. Koch Indus., 798 F. Supp. 1525, 1537 (D. Kan. 1992) (“Doubts as to whether a
substantial relationship exists should be resolved in favor of disqualification.").
Jackson detailed above established Ms. Stevens was present and involved while
attorney-client privileged information was discussed. Ms. Stevens helped prepare
for the mediation in the Unified case, attended that mediation with Mr. Jackson
and Mr. Swender, and was present for discussions with the mediator about the
position held by Cairo in that litigation. The fact Ms. Stevens was not a lawyer at
the time is immaterial.77 The fact Ms. Stevens does not remember any confidential
information is also immaterial.78
It is also clear the Debtor Entities and Cairo have materially adverse
interests. The remaining question is whether the state court litigation in which Ms.
Stevens obtained privileged information is “substantially related” to the bankruptcy
cases of the Debtor Entities. Comment 3 to KRPC 1.9 defines “substantially related”
as follows:
“Matters are “substantially related” for purposes of this Rule if they
involve the same transaction or legal dispute or if there otherwise is a
substantial risk that confidential factual information as would normally
have been obtained in the prior representation would materially
advance the client’s position in the subsequent matter. . . . Information
that has been disclosed to the public or to other parties adverse to the
former client ordinarily will not be disqualifying. Information acquired
in a prior representation may have been rendered obsolete by the
passage of time, a circumstance that may be relevant in determining
whether two representations are substantially related. In the case of an
organizational client, general knowledge of the client’s policies and
practices ordinarily will not preclude a subsequent representation; on
the other hand, knowledge of specific facts gained in a prior
77 Zimmerman v. Mahaska Bottling Co., 19 P.3d 784, 817 (Kan. 2001) (holding the imputation of
conflicts rules of the KRPC apply to nonlawyer staff). Hinkle agreed at the evidentiary hearing on
this matter that Ms. Stevens is subject to the Kansas Rules of Professional Conduct.
78 Koch, 798 F. Supp. at 1537 (“The court need not inquire into whether the confidential information
was actually revealed or whether the attorney would be likely to use the information to the
disadvantage of the former client.”).
representation that are relevant to the matter in question ordinarily will
preclude such a representation.”
The exact extent of the litigation of claims that will be required between the
Debtor Entities and Cairo is of course unknown. But even at this early stage in the
bankruptcy cases of the Debtor Entities the Court is aware there will be numerous
claims made between them, some likely stemming from that very same state court
litigation (the Unified case) for which Ms. Stevens prepared for and attended a
mediation. Hinkle argues the reorganization process is different than the adversary
process, wherein the Unified case will ultimately be concluded, but that is threading
too thin a needle. The resolution of claims is the very epitome of the reorganization
process: assessing those claims, objecting to the claims, making a plan for the
payment of claims. The litigation of the claims these parties have against each other
is vital—and “substantially related”—to reorganization of the Debtor Entities.
Hinkle also points out the Model Rules of the American Bar Association
permit a screening remedy that could cure this conflict,79 and the Letter Agreement
itself contemplated a screening remedy.80 The law firm asserts it would use
screening to ensure Ms. Stevens is completely closed off from the representation of
the Debtor Entities. But Hinkle also recognizes the KRPC do not permit such a
79 See American Bar Association Model Rules of Professional Conduct, Model Rule 1.10 (permitting
screening in described situations when prescribed procedural requirements are met).
80 Debtors’ Ex. 1 p. 2 (describing the “safeguards” the law firm would employ to screen Ms. Stevens
from the Foundation litigation).
screening remedy,81 and as noted above, it is the KRPC that govern attorneys
practicing in this Court.82
There is no evidence Ms. Stevens or Hinkle breached any confidence of any of
the O’Brate entities. The Jackson Legal Group admirably gave a college student an
opportunity to explore the legal world before deciding to commit to law school.
Given the timing of Ms. Stevens’s employment as an attorney by Hinkle years later
and the quick-file nature of the bankruptcies of the Debtor Entities, it is
understandable how this situation developed. At the hearing, Cairo made it clear it
is not accusing Hinkle or Ms. Stevens of any intent to harm Cairo’s interests.
Likewise, this Court makes no such finding. However, the Court concludes KPRC
1.9 and 1.10, as applied to the facts of this case, create a situation that would
prohibit Hinkle from prospectively representing the Debtor Entities in these
bankruptcies.
III. Conclusion
This Court “has an independent duty to inquire into the qualifications of
counsel for debtor in possession.”83 Although it appears there was only a short time
frame in which to explore the potential problems with a single law firm as counsel,
the weight of the record clearly shows Hinkle has not carried its burden to show it is
81 See Zimmerman, 19 P.3d at 793 (“Screening devices, however, are prohibited under the KRPC.
There is no provision or exception which allows them for lawyers.”)
82 D. Kan. LBR 2090.2; D. Kan. Rule 83.6.1.
83 In re Git-N-Go, Inc., 321 B.R. 54, 59 (Bankr. N.D. Okla. 2004); In re Interwest Bus. Equip., Inc., 23
F.3d 311, 317 (10th Cir. 1994) (“a bankruptcy court has the authority and responsibility to only
approve employment of professionals who meet the minimum requirements set forth in § 327(a),
independent of objections”).
qualified under § 327 or free from conflicts under the KRPC. As a result, the
Applications to Employ are denied.
It is so Ordered.
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