This case comes courtesy of an email from Jennifer Gronwaldt of the Media Relations firm of Hellerman Baretz Communications LLC, apparently sent to other bankruptcy blogs as something of a press release (it apparently worked!).

The case is In re Cygnus Oil and Gas Corp., f/k/a Coffee Exchange, Inc., f/k/a Touchstone Resources, LLC, Case No. 07-32417 (Bankr. S.D. Texas).  The issue is whether the law firm of Bracewell & Giuliani is "disinterested" pursuant to §101(14) and §327 of the Code, notwithstanding the fact that a member of the firm was a shareholder of the debtor, held an unsecured claim against the debtor, and served as a director until about three months before filing.

Sounds like an easy call, right?  No….  Judge Marvin Igsur, in this opinion, ruled that the firm was disinterested in spite of the lawyer’s interest —

Rules of statutory interpretation direct the Court to “presume that a legislature says in a statute what it means and means in a statute what it says there.”  Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992)). On examination of § 101(14), this Court, in accordance with the majority of circuits addressing this issue, finds that no per se rule of disqualification exists under the Bankruptcy Code. “Person” is defined in § 101(41) as including an “individual, partnership, and corporation.” 11 U.S.C. § 101(41). The Code is unambiguous. Section 101(14) by its plain language applies to any “person.” “Person” specifically refers to Bracewell. McBride is the equity holder and was the Cygnus director—not Bracewell. Had Congress intended to impute a single member’s disqualification to her entire firm, it would have done so. See In re Timber Creek, Inc., 187 B.R. at 243 (citing In re Creative Rest. Mgmt., 139 B.R. 902 at 913); BFP v. Resolution Trust Corp., 511 U.S. 531, 537 (1993). Accordingly, the Court finds that based on a plain reading of the statute, Bracewell is not disqualified by §§ 101(14)(A) or (B).

The Court has examined this issue and determined per se imputation under § 101(14) does not exist. In this proceeding, the standard for disqualifying Bracewell is whether by an indirect interest, the firm has an interest “materially adverse” to Cygnus. There was no evidence presented that McBride’s involvement with Cygnus will cause or has caused Bracewell to have a materially adverse interest. The trustee’s argument was based purely on a per se imputation rule. Accordingly, the Court finds that there is no evidence that Bracewell has a direct or indirect interest materially adverse to Cygnus. Bracewell is a “disinterested person” under § 101(14).

Jennifer Gronwaldt provides the following commentary touting Houston as a debtor-friendly venue for Chapter 11 cases –  

When large companies file Chapter 11 bankruptcy petitions, they often look to Delaware or New York for venue. However, venue in Delaware and New York may be harsher on professionals than a Texas venue. In April, Cygnus Oil and Gas Corporation filed its petition in the Houston Division of the United States Bankruptcy Court for the Southern District of Texas. While the case is ongoing, a significant ruling should have bankruptcy lawyers taking note. …  This decision is directly opposite the decision rendered in the Delaware Bankruptcy Court in In re Essential Therapeutics, Inc., 295 B.R. 203 (Bankr. D. Del. 2003), where the bankruptcy court expressed concerns that under the “current climate of distrust of officers and directors,” the officers of debtors may be subjected to interrogation based on their role in debtors thereby rendering it “impossible” for a firm in which an officer was a member to “adequately represent the Debtors’ interests. . .” The Cygnus decision also runs contrary to In re Vebeliunas, 231 B.R. 181 (Bankr. S.D.N.Y. 1999), which adopts the "general rule" that "when one member of a firm is disqualified, all members of that firm must be disqualified." 

Bob Lawless adds his comments at the Credit Slips Blog, agreeing with the analysis –

I have not thought deeply about this issue, and those of you who know me will not be surprised by that. But, on balance, Judge Isgur’s ruling strikes me as the better reading of the statute. It allows for a more nuanced and contextualized determination of disinterestedness in individual cases. Judge Isgur’s ruling was in line with the decisions of most every other court that has considered the issue. Importantly, Judge Isgur’s ruling directly contradicts the ruling of another bankruptcy court — the U.S. Bankruptcy Court for the District of Delaware, which is the forum of choice for many corporations filing bankruptcy. In the case of In re Essential Therapeutics, 295 B.R. 203 (Bankr. D. Del. 2003), that court ruled that the disqualification of one attorney extended to the entire firm.