UNITED STATES BANKRUPTCY COURT: DISTRICT OF COLORADO

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

The Honorable Michael E. Romero

In re:         Case Nos. 09-27906, 09-27901, 09-28000

7677 EAST BERRY AVENUE

ASSOCIATES, L.P., ET AL.        Jointly Administered under

Case No. 09-28000-MER

Debtors.          Chapter 11

ORDER

This matter is before the Court on the Application to Employ Brownstein Hyatt Farber

Schreck, LLP as Counsel for Debtor in Possession (the “Application”) filed by each of the three

jointly administered debtors, 7677 East Berry Avenue Associates, L.P. (“7677”), Everest

Holdings, LLC (“Everest Holdings”), and EDC Denver I, LLC (“EDC Denver”) (collectively,

the “Debtors”) and the objection to the Application filed by NexBank, SBB (“NexBank”). The

Court has considered the pleadings, exhibits, and testimony, as well as the legal arguments

presented by the parties, and hereby makes the following findings of fact and conclusions of law.

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and (b) and

157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) as it concerns the

administration of the estate.

BACKGROUND FACTS

A.  The Jointly Administered Case

7677, a Delaware limited partnership, develops and operates a luxury residential, retail,

and entertainment development in Greenwood Village, Colorado (the “Project”). The Project

includes two residential condominium towers, The Landmark (which opened in 2004) and The

Meridian (which opened in 2007). Neither tower is fully occupied and sales efforts for both

towers are ongoing.

EDC Denver is the general partner of 7677 and Everest Holdings is the sole member of

EDC Denver. Mr. Zach Davidson (“Davidson”) is the manager of both EDC Denver and Everest

Holdings. EDC Denver and Everest Holdings are “sole purpose” entities and do not conduct any

business other than holding the positions described above relating to the Project.

B.  The Debtors’ Debt Structure

1.  7677

All of the assets in the jointly administered cases are held by 7677. Schedule A filed in

the 7677 case lists the Landmark and Meridian residential real property with a value of

$118,869,600.00 and the Landmark retail shops with a value of $36,950,000.00. All of the real

property is subject to the secured claim of Hypo Real Estate Capital Corp. (“Hypo”) in the

amount of $90,662,942.69 and numerous mechanic’s liens totaling $3,173,089.14. The total

value of the real property is listed as $155,713,000.00, with total secured debt of

$100,621,886.15. 7677 also owns personal property, including cash, utility deposits, retail

accounts receivable, a sales tax rebate agreement with the City of Greenwood Village, office

equipment and furnishings, and customer deposits. The total value of the personal property is

listed as $12,545,722.28.

7677 lists total unsecured debt of $15,673,330.01. NexBank is its largest unsecured

creditor, holding a claim in the amount of $11,769,314.02 based on a loan dated March 6, 2008.

This debt constitutes approximately seventy-five percent (75%) of the total claims by unsecured

creditors. According to Schedule H, filed in each of the Debtors’ jointly administered cases,

7677, Everest Holdings, EDC Denver, 7677 Limited Interest Holder, LLC and Davidson are all

codebtors on the debt to NexBank. EDC Denver is also a codebtor with 7677 with respect to

all creditors of 7677 by virtue of its capacity as general partner of that entity.

2.  EDC Denver

EDC Denver has no income, no real property and no personal property (other than its

general partnership interest in 7677). NexBank is listed as a secured creditor holding two

claims, one in the amount of $18,100,000.00 and the other in the amount of $8,000,000.00.

EDC Denver’s unsecured debt is $116,825,001.35 (including the debts to NexBank and Hypo).

3.  Everest Holdings

Everest Holdings has no income, no real property and no personal property (other than its

100% membership interest in EDC Denver). NexBank is listed as a secured creditor holding

two claims, one in the amount of $18,100,000.00 and the other in the amount of

$8,000,000.00. Everest Holdings has no unsecured debt.

C.  Relationship between the Debtors and Everest Marin

Across the street from the Project is a development known as The European Village. The

European Village is an asset of Everest Marin, L.P. (“Everest Marin”). EDC Marin I, LLC

(“EDC Marin”) is the general partner of Everest Marin. The European Village is managed on a

day-to-day basis by Everest Development Company (“Everest Development”), whose chief

executive officer is Davidson. Everest Marin, EDC Marin and Everest Development are not in

bankruptcy.

BHFS described the relationship between the Project and The European Village as

follows:

[7677’s] primary assets are the planned communities known as the Landmark and

Meridian Tower Residences (“Landmark”). Everest Marin’s primary assets are the

European Village Brownstones and Manor Homes (“European Village”). The

Landmark and European Village are related developments and have entered into

various agreements with respect to operation and development of the properties,

sales of residences, and the lease of retail and other space. BHFS has been primary

counsel with respect to the two developments, including financing and related

litigation, and is familiar with [7677’s] business and Everest Marin’s business.

Post-petition, BHFS will continue to represent Everest Marin and EDC Marin, LLC,

(except in respect of Everest Marin’s claims or other relationships with the Debtor).

D.  Nexbank Objection

NexBank objects to BHFS being employed as counsel for all three Debtors, arguing the

multiple representation goes against Tenth Circuit case law. As set forth in more detail below,

NexBank also objects to BHFS’s transfer of its $662,843.93 pre-petition claim for legal fees

incurred by 7677 to Everest Marin in exchange for a Promissory Note and Deed of Trust. This

transfer, argues NexBank, merely switches BHFS from being a direct creditor to being an

indirect creditor (a creditor of a creditor). NexBank contends the appropriate course of action

would have been for BHFS to waive the pre-petition claim or simply not to serve as Debtors’

counsel. NexBank suggests it is unclear or unknown whether the Debtors may have claims

against Everest Marin, which confusion is compounded by the fact that BHFS will continue to

represent Everest Marin (in matters unrelated to the bankruptcy) and that Everest Marin’s real

estate development is related to the Debtors’ real estate development. NexBank also questions

whether certain pre-petition payments totaling approximately $170,000.00 from 7677 to BHFS

constitute avoidable preferences. Further, NexBank raised concerns regarding BHFS’s prior

representation of several creditors in this case, including Everest Marin, Rike Palese and CB

Richard Ellis, Inc. (“CBRE”). Based on the above stated facts, NexBank asserts BHFS has not

shown it is qualified to serve as Debtors’ counsel under 11 U.S.C. § 327.

DISCUSSION

An important preliminary comment is necessary in this case. This Court is not implying

it has any concern regarding the quality of services provided by BHFS. At the time of the

hearing in this matter, the Debtors were just thirty days into this case and much had already been

accomplished, to the credit of BHFS. Accomplishments, however, cannot wash a professional

clean of any adverse interest or make an otherwise interested person disinterested. Thus, the

Court’s discussion below is not affected by, nor is it a reflection upon, the services rendered thus

far.

A.  Statutory Requirements for Employment – Section 327

“An analysis of the issue of employment of bankruptcy counsel must begin with the

premise that debtors should be free to select counsel of their choice. However, ‘[t]his general

principal [sic] is tempered by ethical restraints placed upon attorneys by the Rules and the Code.

It is also modified and controlled by statutory restrictions contained in the Bankruptcy Code

which prohibit the attorney from representing an interest materially adverse to the estate.’”

“A bankruptcy court has the authority and the responsibility to only approve employment of

professionals who meet the minimum requirements set forth in § 327(a), independent of

objections. . . . An applicant under § 327(a) has the burden of establishing by application and

accompanying affidavit that its chosen professional is qualified.”

Section 327 states in relevant part:

(a) Except as otherwise provided in this section, the trustee, with the court’s

approval, may employ one or more attorneys, accountants, appraisers, auctioneers,

or other professional persons, 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.

Subsection (a) thus sets forth two requirements: (1) counsel must “not hold or represent an

interest adverse to the estate” and (2) must be a “disinterested person.”  “Together, the statutory

requirements of disinterestedness and no interest adverse to the estate ‘serve the important policy

of ensuring that all professionals appointed pursuant to section 327(a) tender undivided loyalty

and provide untainted advice and assistance in furtherance of their fiduciary responsibilities.’”

Code sections 327(c), 327(e), and 1107(b) contain limited exceptions to the general

rule set forth in § 327(a). The discussion below focuses on the two requirements in § 327(a),

including the exceptions where relevant. These two requirements will be discussed separately,

although “[t]here is, indisputably, some overlap between the section 327(a) standard and section

101(14)(E) disinterest requirement.” The overlap has been described as follows:

It is well-recognized that the meaning of the phrase “interest materially adverse” in

the definition of a disinterested person overlaps with that of “interest adverse”  in the

first prong of § 327(a) and, together, they form one hallmark with which to evaluate

whether professionals seeking court-approved retention (or to remain retained by the

estate) meet the absence of adversity requirements embodied in the Bankruptcy

Code.

1.  Section 327(a) – “Hold or Represent an Interest Adverse to the Estate”

The phrase “hold or represent an interest adverse to the estate” is not defined in the

Bankruptcy Code. The bankruptcy court for the District of Utah broke down this phrase and set

forth its own definitions of “hold an interest adverse to the estate,” and “represent an adverse

interest.” 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.” Courts in this Circuit have adopted the

Roberts definitions, as have numerous other courts.

In addition, the Second Circuit Court of Appeals pointed out the language of §  327(a) is

in the present tense and noted “‘Congress’ use of a verb tense is significant in construing

statutes.’” The Second Circuit concluded “counsel will be disqualified under section 327(a)

only if it presently ‘hold[s] or represent[s] an interest adverse to the estate,’  notwithstanding any

interests it may have held or represented in the past.”

While it is not bound by this precedent, this Court agrees with the Second Circuit’s

conclusion. Thus the Court must consider whether counsel presently “holds” or “represents”

interests adverse to the estate, including scrutinizing BHFS’s pre-petition debt and representation

of related entities and creditors in this case. In this regard, the bankruptcy court for the Northern

District of Oklahoma has stated,

In determining whether a professional has or represents an “adverse interest,”  one

court observed: “[I]f it is plausible that the representation of another interest may

cause the debtor’s attorneys to act any differently than they would without that other

representation, then they have a conflict and an interest adverse to the estate.” In re

The Leslie Fay Cos., 175 B.R. 525, 533 (Bankr. S.D. N.Y. 1994). 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.” In re BH & P, Inc., 103 B.R. 556,

563 (Bankr. D. N.J. 1989), aff’d in pertinent part, 119 B.R. 35 (D. N.J. 1990). “As

a general principle, professional persons employed by the trustee should be free of

any conflicting interest which might, in the view of the trustee or the bankruptcy

court, 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.” In re Amdura Corp., 121 B.R. 862, 865 (Bankr. D. Colo. 1990), quoting

Collier on Bankruptcy ¶ 327.03 (1985).

2.  Section 327(a) – “Disinterested Person”

The term “disinterested person” is defined in the Bankruptcy Code as one who:

(A) is not a creditor, an equity security holder, or an insider;

(B) is not and was not, within 2 years before the date of the filing of the petition, 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.

The Second Circuit found the “disinterested” requirement implicates “only the personal

interests”  of the professional in question, requiring the professional actually to “have” such an

interest. Further:

If “to have” and “to represent” were identical considerations, the trustee never could

hire counsel to bring claims against a class of creditors because, once retained, such

counsel would “represent,” and therefore “have,” an interest materially adverse to

the interest of a class of creditors, i.e., the estate’s interests against the creditors. The

anomalous result would be that all such counsel automatically would be “interested”

and thus disqualified.

In addition, § 101(14) provides not only may disinterestedness be defeated by an interest

materially adverse for one of the specific reasons delineated in the statute, but also “for any other

reason.”  Therefore, former subsection (E), now subsection (C), “commonly referred to as the

‘catch-all clause,’ is broad enough to exclude an attorney with some interest or relationship that

‘would even faintly color the independence and impartial attitude required by the Code and

Bankruptcy Rules.’” Federal Rule of Bankruptcy Procedure 2014 adds a disclosure

requirement to enforce § 327’s disinterestedness standard.

Finally, while it is not directly on point with the facts of this case, the decision in In re

EZ Links Golf, LLC contains a helpful discussion of payment of an attorney’s retainer by a third

party in the context of the “disinterestedness” requirement:

As for the payment of a retainer by a third party, the majority of courts do not find

that it is a per se rule for disqualification or to deem the professional not

disinterested. E.g., In re Rabex Amuru of North Carolina, Inc., 198 B.R. 892 (Bankr.

M.D. N.C. 1996); In re Lotus Properties LP, 200 B.R. 388 (Bankr. C.D. Cal. 1996).

“Instead, disinterestedness in this context depends upon the identity and status of the

payor, the relationship of the payor to the debtor and to other parties in interest and

the circumstances surrounding the payment of the retainer.” Rabex at 896. The court

in the Lotus Properties case adopted a five part test set forth in In re Kelton, 109

B.R. 641, 658 (Bankr. D. Vt. 1989). The test to serve as counsel who has received

payments from the debtor’s insiders requires:

(1) the arrangement must be fully disclosed to the debtor/client and the third party

payor/insider;

(2) the debtor must expressly consent to the arrangement;

(3) the third party payor/insider must retain independent legal counsel and must

understand that the attorney’s duty of undivided loyalty is owed exclusively to the

debtor/client;

(4) the factual and legal relationship between the third party payor/insider, the

debtor, the respective attorneys, and their contractual arrangement concerning the

fees, must be fully disclosed to the Court at the outset of the debtor’s bankruptcy

representation;

(5) the debtor’s attorney/applicant must demonstrate and represent to the Court’s

satisfaction the absence of facts which would otherwise create non-disinterestedness,

actual conflict, or impermissible potential for a conflict of interest.

Id. at 393. As can be seen from the discussion of the relevant case law above, there is

no bright line or per se rule this Court can use regarding the two requirements in § 327(a). The

propriety of employment under § 327 must be examined on a case by case basis.

3.  Section 327(a) and (c) – “Actual Conflict”

Although counsel may have “represented an interest adverse to the estate”  within the

meaning of §  327(a), § 327(c) provides one of the above-mentioned limited exceptions by stating

an attorney will not be disqualified based solely on prior representation of a creditor, unless there

is an actual conflict, in which case disqualification is mandatory. Under this provision, the

existence of inter-debtor claims does not create a per se prohibition of counsel representing both

estates. However, the Bankruptcy Appellate Panel for the Tenth Circuit has noted:

Subsection (c) addresses the situation where dual representation of the trustee, or

debtor in possession, and a creditor is the sole reason advanced for disqualification

and the professional is otherwise qualified; it does not end all inquiry simply because

[the attorney] represented both the Trustee and [the creditor].

In addition, the Tenth Circuit has stated:

Although it is not a model of clarity, subsection (c) as it is currently worded is

intended to allow joint representation of a trustee and of a creditor of the estate, if

there is no apparent conflict of interest. Even then, if another creditor or the U.S.

trustee objects, the bankruptcy judge can disqualify a professional solely on the basis

of simultaneous representation, if it finds the joint representation creates an actual

conflict.

The Code does not define the term “actual conflict of interest,” and courts have addressed

the issue on a case by case basis, and have been given discretion in deciding whether an actual

conflict exists. The Bankruptcy Court for the Northern District of Oklahoma adopted the

reasoning of the bankruptcy court in the BH & P, Inc. case, concluding an actual conflict exists

where there is “an active competition between two interests, in which one interest can only be

served at the expense of the other.”

B.  Non-Statutory Guidance – “The Appearance of Impropriety”

In addition to the specific guidelines set forth in §§ 327 and 101(14), courts considering

whether attorneys may be employed by a bankruptcy estate have evaluated other factors.

Although courts have used a variety of descriptions for those factors not delineated in the Code,

such factors may be generalized as the avoidance of “the appearance of impropriety.”

Disallowing employment due to the “appearance of impropriety” stems from language

contained in Canon 9 of the Model Code of Professional Responsibility formerly promulgated by

the American Bar Association. Canon 9 required attorneys to “avoid even the appearance of

impropriety.”  The ABA Model Code has since been replaced by the ABA Rules of Professional

Conduct, which expressly eliminated the “appearance of impropriety” standard. However,

courts have continued to use the term and the concept in determining whether attorneys should

be employed in bankruptcy cases. Moreover, some courts have looked to state law ethics rules

in examining attorney applications, although such rules are not definitive.

Application of this concept has varied in courts throughout the country. The Third

Circuit Court of Appeals has held the appearance of impropriety alone does not justify

disqualification of counsel. Other courts, however, have taken a more strict approach. On the

other end of the spectrum, federal courts in California have found the appearance of impropriety

concept to be of little or no import when examining employment issues.

In the Tenth Circuit, although the Bankruptcy Appellate Panel did not expand on what is

meant by the appearance of impropriety, it did note, “[w]hile representation of a creditor is not a

per se bar to employment by the trustee under § 327(c), an actual conflict of interest or the

appearance of impropriety remain as independent grounds for disqualification.” The Cook

Court also concluded a potential conflict could form the basis for disqualification. Similarly,

another division of this Court has noted “the opportunity for at least the appearance of

impropriety is greatly multiplied when the attorney is also representing an individual and an

interested corporate entity who are the guarantors for the debtor’s primary secured debt.”

“The Tenth Circuit recognizes that bankruptcy courts have broad discretion and power to

ensure that professionals are disinterested and do not represent interests adverse to the estate, and

recognizes that potential conflicts are a sufficient basis for disqualifying them.”  Thus, while

avoidance of the appearance of impropriety should be a component of evaluating the

employment of counsel, a bankruptcy court must use its discretion to determine whether such an

appearance is fatal.

In exercising its discretion on this issue, the Court recognizes it is possible in countless

cases an attorney could hold some relationship which could be seen as creating such an

appearance of impropriety. For example, it could be argued if an attorney or a member of his

firm held a personal account at a creditor bank, an appearance of impropriety existed. Such an

interpretation would lead to absurd and damaging results, because some de minimus or tangential

relationship could disqualify nearly any attorney in any case. At the other end of the spectrum,

and indeed closer in nature to the case at bar, lies the situation where substantial or unclear

relationships between parties, unorthodox payments, or other significant factors create a genuine

appearance of impropriety, casting a pall over the integrity of the bankruptcy system. It is this

Court’s job to find the balance point between the two extremes.

Thus, this Court does not adopt any per se rule that any appearance of impropriety is a

bar to employment, but must examine the particular circumstances of each case. In the case at

bar, therefore, this Court must evaluate the evidence presented to determine whether all the facts

presented create an “appearance of impropriety” sufficient to prevent the attorneys’  employment.

C.  Application of the Statutory Law to the Facts in These Cases

1.  Multiple representation of the three Debtors

Steven C. Demby (“Demby”), a member of BHFS’s real estate practice group, testified

BHFS started representing the Debtors in the middle of 2006. At that time, the Debtors were

also working with the law firm of Isaacson Rosenbaum, P.C. (“Isaacson”). Mr. Demby testified

BHFS has done extensive work for the Debtors in regard to the Project, including (1) the Hypo

Real Estate loan transaction, (2) municipal finance, (3) tax incremental financing (“TIF”), (4)

master, residential and retail declarations, and (5) contracts and disputes with potential buyers.

Isaacson has continued to do the leasing work for the Debtors and is employed as special counsel

in this case pursuant to § 327(e).

There is no evidence of intercompany transfers, fraudulent transfers or other causes of

action among these three Debtors. As noted above, under the Debtors’ debt structure, 7677

holds all debts, with EDC Denver and Everest Holdings liable as codebtors on the debt to

NexBank and liable on other debts, based on EDC Denver’s position as general partner of 7677

and Everest Holdings’  position as the sole member of EDC Denver. Likewise, 7677 holds all the

Debtors’  assets. EDC Denver and Everest Holdings have no income, no real property and no

personal property. Thus, in connection with its representation of all three of these Debtors, such

representation does not create an interest adverse to the estate and BHFS is disinterested.

2.  Representation of other related entities

BHFS admits “[f]rom time to time in matters wholly unrelated to the Debtor, its affiliates

or their bankruptcy cases, attorneys with BHFS have represented entities that are creditors or

affiliates of creditors of the Debtor and its affiliates . . .” Specifically, BHFS performed legal

services pre-petition to the following: 7677, EDC Denver, Everest Holdings, 7677 Limited

Interest Holder, LLC, Everest Marin, EDC Marin and Davidson.

There is an obvious danger to a firm which represents numerous entities which may

participate to some extent or another in a bankruptcy case. The key analysis, however, is

whether the past (or present) representation creates a conflict to the duty of loyalty the applicant

firm owes to the debtor in the bankruptcy case in which it seeks retention.

BHFS has represented it will not participate in any matter in which any of the Debtors or

any entity related to them may be adverse to one another. Further, with respect to those entities

which may be considered under bankruptcy or state law as an “affiliate” of any of the Debtors,

BHFS prepared an “Acknowledgment of duty of loyalty” letter wherein those entities

acknowledged BHFS’s duty of loyalty is solely to 7677 in respect of matters including both 7677

and such related entity. The letter also advises the related entities they must retain independent

counsel if they desire legal representation with respect to any issue involving 7677. The entities

executing the acknowledgment letters are: (1) Everest Marin, (2) EDC Marin, (3) 5500

Greenwood Plaza Boulevard, #230, (4) Everest Construction Company, LLC, (5) Everest

Management Company, LLC, (6) Everest Design Group, LLC, and (7) 7677 Limited Interest

Holder, LLC. Davidson, acting as Manager of each of these seven entities, signed the

acknowledgment letters on September 18, 2009. Davidson declined to obtain independent

counsel for the entities prior to signing the letters.

Notwithstanding these representations, NexBank also contends BHFS cannot meet the

requirements in § 327(a) because the Landmark and Meridian towers are competitors with the

European Village. The Landmark and The Meridian are across the street from the European

Village and they share sales and marketing efforts. The homeowners of the European Village

will be able to take advantage of the amenities at The Landmark and The Meridian. However,

BHFS argues the two are not competitors because they are different types of residences at

different price points (i.e. the average price for units at The Landmark and The Meridian is

$800,000 while the average price for units at the European Village is $1,000,000). BHFS

admitted there is a synergy between the two, but there is no financial relationship between them.

Further, the European Village has not broken ground yet. Under these circumstances, the Court

believes any concerns regarding competition are speculative at this time.

After considering evidence presented on the scope of the past and current representation

of the related entities mentioned above, the Court finds BHFS does not hold or represent an

interest adverse to the estate and BHFS is disinterested because no actual or potential conflicts,

as defined above, currently exist. However, as discussed below, continued representation of any

of these entities post-petition, particularly BHFS’s continued representation of Everest Marin

(now a creditor in the case), may create the appearance of impropriety.

3.  Representation of Davidson

Davidson is the manager of debtor EDC Denver and debtor Everest Holdings. He is also

the manager of all seven related entities mentioned above. He is most certainly the person in

control of The Landmark, The Meridian and the European Village properties. BHFS previously

represented Davidson individually, but will no longer represent Davidson post-petition. There

was no evidence as to whether Davidson, individually, signed an acknowledgment or consent

letter, however Davidson’s testimony was consistent with these letters in that he acknowledged

BHFS does not currently represent him. Davidson has not retained independent legal counsel to

represent him in these bankruptcy cases. However, because BHFS’s prior representation of

Davidson was relatively minor and BHFS will not represent him post-petition, the Court finds

BHFS does not hold or represent an interest adverse to the estate and BHFS is disinterested.

4.  Representation of Creditors

a.  Rike Palese

Mr. Palese is a real estate associate with 7677’s listing agent Taylor Max, LLC. Both

Taylor Max, LLC and Rike Palese are listed on 7677’s Schedule F with a claim of $286,746.66

for unreimbursed marketing costs. Mr. Palese is further listed on 7677’s Schedule G as holding

a “residential Condominium Real Estate Contract.” At the time the Verified Statement was

filed, BHFS represented all of the defendants in a Denver District Court lawsuit captioned

Yabrove v. 7677 East Berry Avenue Associates, L.P., Zach Davidson, and Rike Palese. At the

time of the hearing on October 8, 2009, the Yabrove law suit had been dismissed without

prejudice, subject to the plaintiffs being allowed to file an arbitration proceeding against the

same parties. BHFS stated they will not represent Mr. Palese in connection with any arbitration

or on any other post-petition matter. Garfield testified BHFS would advise the Debtors with

respect to Mr. Palese’s contract listed on Schedule G.

b.  CB Richard Ellis, Inc.

CB Richard Ellis, Inc. (“CBRE”), the Debtors’ former appraiser, is listed in 7677’s

Schedule F with a debt of $7.23 for “trade debt” and $7,500.00 for a “retail management fee”

and CBRE Technical Services, LLC is listed in 7677’s Schedule F with a debt of $626.10 for

“trade debt.” CBRE is also listed on 7677’s Schedule G with a “Retail Management

Agreement.”  BHFS disclosed it currently represents CBRE in matters unrelated to the

Debtors. Garfield testified BHFS will advise the Debtor with respect to CBRE’s agreement

listed on Schedule G.

c.  Other Creditors

BHFS also disclosed in the Verified Statement that it:

a) currently represents CB Richard Ellis, Inc., D.H. Ruggles & Associates, P.C.,

Denver Newspaper Agency, and Xcel Energy (or affiliates of the foregoing), which

are unsecured creditors of the Debtor, in matters unrelated to the Debtor; b) has

represented in the past Marin Metropolitan District, RPI, Red Cafe, LLC, Arapahoe

County, David Hicks & Lampert Brokerage, Inc. (or affiliates of the foregoing),

which are unsecured creditors of the Debtor, in matters unrelated to the Debtor;

c) has represented in the past FirsTier Bank, a secured creditor of the Debtor, in

matters unrelated to the Debtor; d) has represented Highland Capital Real Estate

Fund 2002-A, L.P. (or an affiliate thereof), which is an unsecured creditor of the

Debtor which holds a limited partnership interest in the limited partner of the Debtor,

in matters unrelated to the Debtor; and e) has represented Morris Ginsburg (or

affiliates of Mr. Ginsburg) and Sonal Patel (or affiliates of Mr. Patel), who are each

counterparties to contracts with the Debtor to purchase a residence at the Landmark,

in matters unrelated to the Debtor. Additionally, Gary Agron, who is a counterparty

to a contract with the Debtor to purchase a residence at the Landmark, is the father

of Adam J. Agron, a shareholder of BHFS.

In the Supplemental Verified Statement, BHFS added that it “currently represents, in matters

unrelated to the Debtors, General Electric Capital Corporation and Qwest, which are  unsecured

creditors of 7677, and has represented in the past Sprint, which is an unsecured creditor of

7677.”

As noted, although counsel may have “represented an interest adverse to the estate”

within the meaning of § 327(a), § 327(c) provides a limited exception by stating an attorney will

not be disqualified based solely on prior representation of a creditor, unless there is an actual

conflict, in which case disqualification is mandatory. With respect to the creditors mentioned

above (Palese, CBRE and others), the evidence did not reveal an actual conflict of interest exists

based on BHFS’s prior representation. BHFS stated they will not represent Mr. Palese postpetition

and will only represent CBRE and other unsecured creditors post-petition on matters

wholly unrelated to the Debtors thus avoiding an actual conflict. Therefore, there does not

appear to be “an active competition between two interests, in which one interest can only be

served at the expense of the other.” With respect to Palese, CBRE and these other creditors,

the Court finds BHFS does not hold or represent an interest adverse to the estate and BHFS is

disinterested.

5.  Potential Avoidance Actions

In the Verified Statement, the following pre-petition payments were disclosed:

BHFS received from [7677] $20,000.00 on August 12, 2009, $125,000 on August

20, 2009, and approximately $26,000 on August 28, 2009, for ongoing work related

solely to [7677]. BHFS is netting out fees and expenses for prepetition work and

will supplement this statement upon completion of such calculations. BHFS intends

to seek court approval of unpaid fees and expenses incurred during the 10 days prior

to the Petition Date, consistent with applicable law. BHFS intends to seek approval

of a retainer in accordance with applicable law and procedure.

In the Supplemental Verified Statement, the disclosure was modified as follows:

BHFS received $26,431.01 on August 28, 2009, such that BHFS received a total of

$171,431.01 from August 12 through August 28, 2009, for work performed

pre-petition and for a retainer. BHFS billed [7677] $129,292.39 for work performed

in July and August 2009. As a result, as of the Petition Date, BHFS held a retainer

of $41,695.97. Post-petition, BHFS provided $15,000 of that retainer to PGP

Valuation, Inc. (“PGP”), 7677’s appraiser as part of a $24,000 retainer; 7677 filed

a motion to approve PGP’s retainer, which motion is pending. BHFS now holds a

retainer of 26,695.97. 7677 intends to file a motion to approve BHFS’s retainer in

the near future.

NexBank argues these pre-petition payments from 7677 to BHFS may constitute

preferences. The Debtor contends it is solvent and therefore preference actions would not be

appropriate under § 547. Based on the record as it presently exists, a successful preference

action against BHFS appears questionable. However, this is an observation and not a finding.

Unlike the situation detailed in the case of In re Pillowtex, Inc., herein, NexBank failed to show

“a facially plausible claim of a substantial preference.” For purposes of this Order, the general

allegations of possible preferences are not enough to prohibit BHFS’s employment.

NexBank also suggested there may be other transactions with Davidson individually

wherein BHFS would have to investigate for potential avoidance actions. The potential

avoidance action against Everest Marin was raised in response to the Debtors’ disclosure that

7677 made payments to Everest Marin totaling $216,000.00 in the 90 days prior to the

bankruptcy petition. In testimony before this Court, Daniel Garfield of BHFS affirmatively

indicated the firm would investigate all preferences, or would hire special counsel to conduct

such a review if affiliates, etc., are involved. This representation, as well as the existence of a

creditors’  committee to monitor these types of issues, satisfies the Court’s concerns.

6.  Pre-Petition Sale of BHFS’s Account Receivable

7677 listed Everest Marin as an unsecured creditor on Schedule F in the amount of

$662,843.93 for “Legal fees owed to Brownstein Hyatt Farber Schreck, LLP August 6, 2009.”

BHFS further explained this transaction in the Verified Statement as follows:

As of August 6, 2009, the Debtor owed BHFS $662,843.93 (the “Pre-Petition Debt”)

for fees and expenses related to legal representation on various matters. On or about

August 6, 2009, BHFS, pursuant to a bill of sale, sold its receivable from the Debtor

to Everest Marin, and Everest Marin is now a creditor of the Debtor with respect to

this receivable. In return, Everest executed a promissory note for the amount of the

receivable payable to BHFS. The note is secured by a second deed of trust, security

agreement, financing statement and assignment of rents and leases on the European

Village. BHFS will not represent Everest Marin with respect to collection of the

receivable now owed to Everest Marin by the Debtor or otherwise in this case.

NexBank questions why Everest Marin would enter into such a transaction. Accordingly,

it examined Davidson regarding paragraph four of the Consent of the General Partner of Everest

Marin, L.P., a Colorado Limited Partnership (the “Consent”):

WHEREAS, the Company [Everest Marin] has determined it to be in their best

interest to continue receiving the Services [BHFS’s services] and BHFS has

conditioned the provision of such future Services on the Company’s acquisition of

the accounts receivable held by BHFS in connection with the legal services rendered

by BHFS on behalf of East Berry [7677]

Davidson testified he signed the Consent in part so Everest Marin would continue to receive the

services of BHFS and in part because 7677’s success will have a positive effect on the European

Village development.

The transaction was described as “ingenious” by counsel for the Creditor’s Committee,

who did not object to BHFS’s employment. NexBank, however, criticized the transaction as

violating the spirit of the Bankruptcy Code and threatening the integrity of the entire bankruptcy

system. Such divergent opinions leave this Court asking several questions. Was this a

legitimate, original, and clever way to avoid being defined a “creditor” under §  327(a)? Was this

an invalid and manipulative way to circumvent the clear requirements of the Bankruptcy Code?

Does it fall somewhere in between?

There are some troubling facts regarding this transaction. First, BHFS declined to waive

its pre-petition fee as is the usual course of action in this and many districts. The Court

recognizes the pre-petition fees in this case are quite substantial, more so than in a typical

Chapter 11 case in this District, and thus, the decision not to waive the fee is understandable.

However, the effect of this transfer is that 7677 now owes a debt to Everest Marin who, as a

result of the transfer, is the second largest unsecured creditor in 7677’s case. Had BHFS waived

its pre-petition fee, the Debtor would have less unsecured debt. On the flip side, if this

transaction had not been consummated and another firm chosen to serve as Debtors’  counsel, the

Debtor would still owe the $662,843.93 debt to BHFS.

Second, while not precisely the same, the sale of the BHFS receivable can be equated to

an entity or principal paying the post-petition fees and costs for a debtor affiliate’s bankruptcy

counsel, the situation analyzed in cases such as In re EZ Links Golf, LLC and In re Lotus

Properties LP. In those cases retention of independent legal counsel by the payor party to

advise them of the wisdom and legality of the proposed transaction was an important factor to be

considered, and in Lotus, the retention of independent counsel was mandatory.

Here, in connection with the sale of the receivable in question, the Bill of Sale,

Promissory Note, and Deed of Trust were drafted by BHFS and presented to Everest Marin

for execution. Neither the amount of the receivable, the interest rate, nor any other term set forth

in these documents was negotiated or contested by Everest Marin. The unrebutted testimony

shows BHFS advised Everest Marin, through Davidson, to retain independent counsel to review

the documents before signing. Davidson claims to have understood the terms and affect of the

documents and thus did not need independent counsel. The Court finds Mr. Davidson is well-educated (he has a Bachelor of Science degree in corporate finance, as well as a Master of

Business Administration in corporate finance) and is a sophisticated businessman (particularly in

real estate), but he is not an attorney.

While the Lotus factors appear inflexible, this Court notes the court in the case from

which the Lotus Court derived its test observed its list was not exhaustive, nor was every

condition to be satisfied in every situation. Rather the list was to serve as a guide. Herein,

while independent counsel is important, failure to secure such assistance by Everest Marin or

Davidson is not fatal in and of itself.

Perhaps the most important factor considered by this Court in connection with this

transaction is the independent ability of Everest Marin to pay the obligation it undertook with

BHFS. While Everest Marin does not have any current cash flow, the uncontroverted testimony

of Davidson established Everest Marin’s real property assets contain equity sufficient to pay the

BHFS obligation. Thus, the payment of the BHFS obligation is not dependent on Everest

Marin being paid anything by the Debtors in the instant bankruptcy cases.

As a result, while suspicious at first glance, for purposes of § 327(a), the transaction

seems to have accomplished its goal of removing BHFS as a creditor in this case and shifting the

risk of nonpayment from BHFS to Everest Marin. At present, therefore, the transaction puts

BHFS in a situation wherein it is not dependent upon the success of the Debtors for payment of

this obligation and thus it does not have an adverse interest to the Debtors.

D.  The Appearance of Impropriety and the Facts of this Case

The most subjective, and perhaps the most difficult, issue to address in situations of this

type is the amorphous “appearance of impropriety” concept. While individual factors, in and of

themselves, may not lead to a conclusion that a firm’s representation of a debtor creates such an

appearance, the cumulative effect of these individual factors together can paint a factual picture

that leads to the inescapable conclusion that the proposed representation is inappropriate.

In this case, the transaction with Everest Marin, while legal and as noted above, within

the parameters of the Bankruptcy Code, creates an appearance of “gaming the system.”  Further,

the continued representation of certain entities related to the Debtors gives rise to numerous

problems. As noted by BHFS, “[p]ost-petition, BHFS will continue to represent Everest

Marin . . . (except in respect of Everest Marin’s claims or other relationships with the

Debtor).”  There was no testimony as to the particular matters wherein BHFS would continue

to represent Everest Marin. It is difficult for the Court to imagine what would be wholly

separate and independent from the Debtors’ business given the Project and European Village are

“complimentary” developments, share office space, marketing efforts, and amenities, and that

Davidson controls both developments. Additionally, as noted above, the “Acknowledgment of

duty of loyalty”  letter was signed by Davidson, on behalf of Everest Marin, without independent

legal counsel. If the two developments were both in the same stage of development, this Court

would have been extremely hesitant to allow the employment for both the Debtors and Everest

Marin to proceed without further clarification. However, because it is likely the within Chapter

11 cases will be concluded before the European Village development will be constructed, the

“competition” issue appears to be a more theoretical than a present reality.

Finally, while the existence of a creditors’ committee does not eliminate or minimize the

duties incumbent upon debtor’s counsel to investigate and pursue claims against any individual

or entity which will benefit all creditors, the cooperation of such a committee with debtor’s

counsel may assist in identifying any situations in which special counsel should be retained for

analysis or litigation purposes. This gives the Court some comfort any potential prejudice to

creditors will be minimized, if not eliminated entirely.

In connection with its request to represent the three Debtors in this jointly administered

case, along with its prior and current representation of certain creditors, BFHS is walking on the

edge of a sword. After considering all the evidence before it and considering the arguments

presented, and being mindful of the underlying premise that the debtor’s choice of counsel is

important, the Court will approve the retention of BHFS as counsel for the Debtors in this jointly

administered case. However, if facts come to light in the future which should have been

identified as part of this process and which would have resulted in a different finding, this Court

will not hesitate to revisit this employment order and any compensation rulings which it may

enter in the future.

CONCLUSION

THEREFORE, IT IS ORDERED the Application to Employ Brownstein Hyatt Farber

Schreck, LLP as Counsel for Debtor in Possession filed by each of the three jointly administered

Debtors is GRANTED.

Dated November 19, 2009     BY THE COURT:

Michael E. Romero

U.S. Bankruptcy Judge

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