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Rmb Fasteners, Ltd., A Hong Kong Limited Liability Company v. Heads & Threads International

January 25, 2012

RMB FASTENERS, LTD., A HONG KONG LIMITED LIABILITY COMPANY, PLAINTIFF,
v.
HEADS & THREADS INTERNATIONAL, LLC, A DELAWARE LIMITED LIABILITY COMPANY, CAPITAL PARTNERS, INC., A CONNECTICUT CORPORATION,
JPMORGAN CHASE BANK, N.A., A NATIONAL BANKING ASSOCIATION, PATRICK D. CAVANAUGH, AS ASSIGNEE FOR THE BENEFIT OF THE CREDITORS OF HEADS & THREADS INTERNATIONAL, LLC,
AND MICHAEL WRENN, AN INDIVIDUAL.
DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Relying on assurances that Defendant Heads & Threads International ("HTI") was solvent, Plaintiff RMB Fasteners supplied HTI with inventory. Shortly thereafter, HTI entered into an "assignment for the benefit of creditors" for the purpose of liquidating all its assets and distributing the proceeds to HTI's creditors. In this action, Plaintiff demands return of the inventory, claiming that HTI had no intention of paying for the goods and is instead selling the merchandise at fire-sale prices to raise money to satisfy other creditors. The immediate issue before the court is representation: RMB has moved to disqualify the Proskauer Rose law firm from representing both HTI and Patrick Cavanaugh, who is acting as assignee for the benefit of HTI's creditors. For the following reasons, the motion to disqualify is denied.

BACKGROUND

Plaintiff RMB is a Hong Kong limited liability company engaged in the business of manufacturing and exporting fasteners and fastener-related items. (First Am. Verified Compl. for Injunctive and Other Relief (hereinafter "Compl.") ¶ 2.) Defendant HTI is a Delaware limited liability company and global importer and distributor of industrial and construction fasteners and related products. (Compl. ¶¶ 3, 12.) Since approximately September 2006, HTI has been a regular purchaser of RMB products. (Compl. ¶ 13.) On March 15, 2011, HTI, facing insolvency, discontinued its business and completed a Trust Agreement and Assignment for the Benefit of Creditors ("ABC"). (ABC, Ex. A toPl.'s Supplemental Brief in Supp. of its Mot. to Disqualify Counsel for Defendants HTI and Cavanaugh (hereinafter "Pl.'s Supp. Brief").) Pursuant to the agreement, HTI transferred all its assets to Defendant Cavanaugh as trustee-assignee, whose duty is to oversee the "orderly liquidation of the assets and property of HTI, and the distribution of the proceeds there from to creditors of HTI in accordance with applicable law." (ABC ¶ 1.) Among the powers and duties HTI assigned to Cavanaugh is the power "[t]o settle any and all claims against or in favor of HTI, with full power to compromise, or in the discretion of the Trustee-Assignee, to sue or be sued, and to prosecute or defend any claim or claims of any nature whatsoever existing against or in favor of HTI." (ABC ¶ 3(j).)

On March 25, 2011, RMB filed the instant complaint against a number of Defendants: HTI; Cavanaugh, not individually but solely in his capacity as assignee for the benefit of creditors of HTI; Capital Partners, Inc., one of HTI's primary investors; JPMorgan Chase Bank, one of HTI's creditors; and Michael Wrenn, HTI's President and CEO. (Compl. ¶¶ 3-7, 16, 20.) RMB claims that in reliance on false assurances of HTI's solvency, RMB supplied HTI with more than $2,560,000 in goods. (Compl. ¶ 157.) RMB alleges that HTI solicited this transaction without any intention to pay for the goods, but rather with the intent of liquidating the goods to pay a debt owed to Defendant Chase. (Compl. ¶¶ 155-56.) The law firm Proskauer Rose LLP ("Proskauer") is currently serving as counsel for HTI and Cavanaugh, as Trustee-Assignee.

On April 22, 2011, Plaintiff moved the court to disqualify Proskauer as counsel for Cavanaugh. This motion was orally presented on April 27, 2011, whereupon this court directed the parties to submit simultaneous briefs providing any authority regarding this matter. The motion is now fully briefed and before this court.

DISCUSSION

Because "disqualification of counsel deprives a party of the representation of their choosing," attorney disqualification is "a 'drastic measure which courts should hesitate to impose except when absolutely necessary.'" Mercury Vapor Processing Techs., Inc. v. Vill. of Riverdale, 545 F. Supp. 2d 783, 787 (N.D. Ill. 2008) (quoting Owen v. Wangerin, 985 F.2d 312, 317 (7th Cir. 1993)). Additionally, motions to disqualify counsel "'should be viewed with extreme caution for they can be misused as techniques of harassment.'" Id. (quoting Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 722 (7th Cir. 1982)).As such, "'the moving party bears a heavy burden of proving facts required for disqualification.'" Commonwealth Ins. Co. v. Stone Container Corp., 178 F. Supp. 2d 938, 943 (N.D. Ill. 2001) (quoting Evans v. Arteck Sys. Corp., 715 F.2d 788, 794 (2d Cir. 1983)).

This court has generally adopted the American Bar Association's Model Rulesof Professional Conduct ("ABA Model Rules") as its rules of professional conduct. See L.R. 83.50.*fn1 Relevant to this motion, ABA Model Rule 1.7 provides, in relevant part:

[A] lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

ABA MODEL RULES OF PROF'L CONDUCT R. 1.7(a).

Acknowledging the lack of case law on the particular issue of dual representation of a debtor-assignor and an trustee-assignee pursuant to an ABC, Plaintiff urges this court to apply rules governing the appointment of a bankruptcy trustee and the employment of its counsel. The Bankruptcy Code allows a trustee to employ attorneys who "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." 11 U.S.C. ยง 327(a). The Code, in turn, defines a "disinterested person" 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 ...


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