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IN RE THOMAS CONSOLIDATED INDUSTRIES

March 3, 2003

IN RE: THOMAS CONSOLIDATED INDUSTRIES, INC., DEBTOR, LOUIS W. LEVIT, AS TRUSTEE OF THE ESTATE OF THOMAS CONSOLIDATED INDUSTRIES, INC., PLAINTIFF-APPELLANT,
v.
JUERGEN HERBST, ET AL., DEFENDANTS-APPELLEES.



The opinion of the court was delivered by: Robert W. Gettleman, United States District Judge

MEMORANDUM OPINION AND ORDER

This matter is before the court on appeal from a dismissal for want of prosecution by the bankruptcy court. For the reasons stated herein, the judgment of the bankruptcy court is reversed and remanded for action consistent with this opinion.

FACTS

On April 23, 1999, Thomas Consolidated Industries, Inc. ("TCI") filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. On July 23, 1999, the Chapter 11 case was convened to a Chapter 7 case, and Louis W. Levit ("the Trustee") was appointed to serve as trustee the following day. After conversion, the bankruptcy case was dismissed on or about December 28, 1999, upon a finding of no assets by the Trustee.

Thereafter, the Trustee became aware of a pending chancery case involving fraud and contract claims brought by TCI and its principal, Robert Thomas ("Robert"), against Juergen Herbst, Trudy Herbst, Standard Die Mold of Palatine, Gerald I. McCullough, the Allen J. Herbst Trust, and the Erich F. Herbst Trust (together, the "Herbst defendants"), as well as Ed Cogana and Fred Pollak (together, the "Cogana defendants").

The pending chancery case was dismissed on May 11, 2000, for want of prosecution after counsel of record for TCI and Robert withdrew and no new attorney filed a supplemental appearance. Shortly thereafter, on May 25, 2000, Robert, who is a licensed attorney, sought to vacate the dismissal and enter his own appearance on behalf of himself and TCI. The court permitted Robert to appear on his own behalf. In light the Herbst defendants' contention that Robert would be a material witness on behalf of TCI at trial, however, the court asked the parties to brief whether Robert should be disqualified from representing TCI.

On August 4, 2000, after considering the motions and oral arguments of the parties relating to Robert's disqualification, the chancery court ruled that Robert could not appear on behalf of TCI, and ordered that TCI had thirty days to retain counsel. After TCI failed to retain counsel, the chancery court ordered that its previous dismissal of TCI's action should stand and declared TCI's motion to vacate a nullity.

In the meantime, on May 16, 2000, TCI's bankruptcy case was reopened. After the chancery case was dismissed for want of prosecution, the Trustee requested that Robert be permitted to prosecute the Herbst-Cogana litigation as an adversary proceeding in the bankruptcy court. With the bankruptcy court's approval, the estate brought the instant adversary action against the Herbst and Cogana defendants, with Robert acting as primary counsel for the estate.

After filing an amended complaint on June 6, 2001, the Cogana defendants filed a motion to strike the amended complaint or, in the alternative, to dismiss with prejudice. This motion was adopted by the Herbst defendants, who also filed their own Fed.R.Civ.P. 12(b)(5) motion to dismiss for insufficient service of process. The Herbst defendants' 12(b)(5) motion was granted, after which the estate filed a second amended complaint. Shortly thereafter, the Herbst defendants filed a motion to disqualify Robert from representing the estate on the basis of Ill. R. Prof. Conduct 3.7, which was granted by the bankruptcy court on February 26, 2002. According to the bankruptcy judge:

I think it's clear that [Robert] is pursuing this matter more as a party than as an objective attorney, and that's probably not in the best interest of the lawsuit and all the people involved. And I will give the trustee 30 days in which he can try to find another attorney besides his own firm to proceed in this matter. After that, I would expect things to go forward either on a motion to dismiss or with the trustee's office saying they want to carry the ball.
On March 11, 2002, the Trustee filed a motion to reconsider Robert's disqualification, which was denied on March 20, 2002. The Trustee filed a notice of appeal on April 2, 2002; that appeal was subsequently dismissed because the disqualification order, by itself, was not a final judgment or collateral order subject to immediate appeal.

On August 19, 2002, the Trustee filed a motion before the bankruptcy court to modify the disqualification order, asserting that Local Rule of Professional Conduct 83.53.7 of the Northern District of Illinois ("LR83.53.7") bars a testifying attorney only from acting as an advocate at trial or in evidentiary proceedings, rather than at all phases of the trial.*fn1 At an August 19, 2002, status hearing, counsel for the Herbst defendants' stated;

[T]he Trustee has waived the right to raise this local rule because it was not presented in response to any of the motions except for the motion presented before the district court which, again, was denied. Also, as a side note, the Illinois Rules of Professional Conduct preclude both [Robert] and the trustee from requesting that this court modify the order to allow [Robert] to represent the estate in all matters other than the trial. It is true that the local rule says what it does, but the Illinois rule that says that a lawyer shall withdraw from representation applies to [Robert] here because he's a licensed attorney in Illinois.
After denying that he had failed to raise LR83.53.7 in his March 11, 2002, motion to reconsider, the Trustee responded:
I will also make clear that if the order is modified so as to conform with the local rules of the court of which this court is a unit that I will not have to retain other counsel and will go ahead. If not, as I said before, I will not be able to prepare for trial.
In denying the motion to reconsider, the court explained:
I don't think the local rule says that's the only disqualification appropriate under the ethical standards that exist. I simply don't think that [Robert] should be involved in this lawsuit. So the motion is denied.
After confirming the Trustee's inability to retain counsel in light of the disqualification order, the bankruptcy court dismissed the ...

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