In re Tri-State Ethanol Company LLC, Chapter 7.

Bankr. No. 03-10194.United States Bankruptcy Court, D. South Dakota.
July 10, 2007

Jerrold L. Strasheim, Esq., Counsel for Tri-State Financial, L.L.C., Omaha, Nebraska.

Courtney R. Clayborne, Esq., Counsel for Tri-State Financial, L.L.C., Rapid City, South Dakota.

William G. Taylor, Jr., Esq., Counsel for Woods, Fuller, Shultz
Smith P.C., Sioux Falls, South Dakota.

IRVIN HOYT, Bankruptcy Judge

Dear Counsel:

The matter before the Court is the Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee filed by Tri-State Financial, L.L.C.; the Order Denying in Part Tri-State Financial, L.L.C.’s Motion to Disqualify Woods, Fuller Schultz Smith P.C. and Setting Certain Deadlines on Remaining Basis for the Motion; the Amended Memorandum Re: Several Pending Matters;
and the briefs filed by Tri-State Financial, L.L.C., and Woods, Fuller, Schultz Smith P.C. This is a core proceeding under 28 U.S.C. § 157(b)(2). This letter decision and accompanying order shall constitute the Court’s final findings and conclusions under Fed.Rs.Bankr.P. 7052 and 9014(c). As set forth below, no evidentiary hearing will be held, and the motion will be denied.

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Summary. The facts set forth in part I. of the Amended Memorandum Re: Several Pending Matters entered May 2, 2007, are incorporated by reference herein. As discussed in part II. of th Amended Memorandum, Tri-State Financial, L.L.C. (“Tri-State Financial”) was directed to file a brief on the surviving basis for its Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee.

As to Tri-State Financial’s motion to disqualify Woods Fuller as Trustee Lovald’s attorney, most of the bases for it have been resolved in the Court’s discussion above regarding the firms’ employment under § 327(e). Further, as noted above on page 18, n. 5, Tri-State Financial’s argument in paragraph 22 of the motion will be left for the District Court to consider. Tri-State Financial’s argument in paragraph 21 will be adequately addressed when Trustee Lovald’s proposed settlement with North Central is ruled upon. What is left is Tri-State Financial’s argument that Woods Fuller has violated some continuing fiduciary or professional duty to Debtor. An order will be entered setting a deadline for Tri-State Financial to provide case law support for this argument in a brief. The case law must be relevant to the present circumstances, i.e., a corporate Chapter 11 debtor converted to Chapter 7. In its brief, Tri-State Financial cannot ignore the fact that the Chapter 7 case renders Debtor defunct, Braden v. Tri-R Builders, Inc. (In re Tri-R Builders, Inc.), 86 B.R. 138, 141 (Bankr. N.D. Ind. 1986), and that Trustee Lovald is now in control since Debtor’s board of managers has been “completely ousted.” Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 352-53 (1985). Tri-State Financial also cannot ignore the fact that Trustee Lovald controls any attorney-client privilege held by Debtor. Weintraub, 471 U.S. at 352-56. Finally, Tri-State Financial cannot ignore the fact that while Trustee Lovald holds a fiduciary duty to Debtor’s equity holders as well as to the other creditors,
[o]ne of the painful facts of bankruptcy is that the interests of shareholders become

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subordinated to the interests of creditors. In cases in which it is clear that the estate is not large enough to cover any shareholder claims, the trustee’s exercise of the corporation’s attorney-client privilege will benefit only creditors, but there is nothing anomalous in this result; rather, it is in keeping with the hierarchy of interests created by the bankruptcy laws. See generally 11 U.S.C. § 726(a).
Id. at 355. Once Tri-State Financial has filed its supporting brief, Woods Fuller will be given an opportunity to file a responsive brief, and an evidentiary hearing will be set by separate order, if needed.

In re Tri-State Ethanol Co. LLC, Bankr. No. 03-10194, slip op., AMENDED MEMORANDUM RE: SEVERAL PENDING MATTERS (Bankr. D.S.D. May 2, 2007). Tri-State Financial timely filed its brief, and Woods Fuller timely filed its responsive brief.

Discussion. The case law set forth by Tri-State Financial in its brief wholly failed to reflect the facts of this case: the Chapter 7 trustee employed, under 11 U.S.C. § 327(e), a law firm that had represented a corporate debtor both pre-petition and during the corporate debtor’s chapter 11 case, before the case converted to Chapter 7, and the Chapter 7 trustee now holds and may exercise any privileges held by the corporate debtor. Tri-State Financial’s brief also failed to acknowledge and address the case law the Court set forth in its Amended Memorandum Re: Several Pending Matters entered May 2, 2007, and repeated above. Therefore, even assuming all the facts as alleged by Tri-State Financial are true, Tri-State Financial has failed to establish any legal authority for its argument that Woods Fuller must be removed as counsel for Trustee Lovald because the firm has violated some continuing fiduciary or professional duty to Debtor or those

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holding equity claims. Accordingly, no evidentiary hearing is warranted and Tri-State Financial’s Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee will be denied in all respects.[1]

An appropriate order will be entered.

[1] In its brief, Woods Fuller raised additional reasons why Tri-State Financial’s Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee should be denied, including Tri-State Financial’s lack of standing and the untimeliness of the motion. While these arguments are well taken, the Court need not address them today, since Tri-State Financial failed to establish any legal basis for its motion.