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HERBERT A. ROSS
U.S. Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKA
605 West 4th Avenue, Room 138, Anchorage, AK 99501-2296 (Phone 907/271-2655)

In re	Case No. K-91-00686-HAR
	Chapter 11
ALASKA TOWBOAT CORPORATION,
an Alaska Corporation,	MEMORANDUM RE EMPLOYMENT OF
	PRESTON THORGRIMSON AS
Debtor(s)	ATTORNEYS FOR THE DIP

A hearing was held on October 4, 1991 concerning the employment of Preston Thorgrimson Shidler Gates & Ellis (PTSG&E) as attorneys for the debtor-in-possession (the DIP), Alaska Towboat Corporation.

1. BACKGROUND - Klawock Timber Alaska, Inc. (KTAI) is a 50% shareholder of the debtor. PTSG&E's application for employment discloses that PTSG&E also represents KTAI in a civil suit brought by Security Pacific Bank and Weyerhaeuser against KTAI and Greg Head, an officer and shareholder of KTAI in the United States District Court in Alaska. This suit has not relation to the debtor. KTAI has filed counter-claims against Weyerhaeuser and Security Pacific.

   2 ABR 167
     PTSG&E is not general counsel for KTAI, however. PTSG&E's relationship with both KTAI and debtor began this year in connection with some admiralty defense work PTSG&E is doing independently for KTAI and the debtor.

     PTSG&E had received a $20,000 retainer for this bankruptcy case on August 2, 1991. The petition in this case was filed on August 9, 1991. PTSG&E discloses the money was actually paid by KTAI. District Judge Holland has temporarily barred PTSG&E from using the funds since it may be the collateral of Weyerhaeuser.

     In addition to KTAI being a 50% shareholder of the debtor, Greg Head is an officer of the debtor and of KTAI. Brian Tytler is controller of both KTAI and debtor. KTAI is the largest creditor, having an unsecured claim of about $911,000 for loans to the debtor. The debtor's operations were essentially bankrolled by KTAI. Its principal business was hauling logs for KTAI, but since KTAI is dormant right now, the DIP is not performing any work for KTAI. The debtor lists an executory contract to haul logs for KTAI in its schedules.

     PTSG&E claims to have no actual conflict and will not represent KTAI's interests in this bankruptcy. Both Weyerhaeuser and the United States Trustee have objected to the employment of PTSG&E. PTSG&E argues that if it cannot represent the DIP, the DIP will be unable to employ adequate counsel since it has net worth but no cash. The chapter 11 was filed, according to PTSG&E to

   2 ABR 168 forestall, a prejudgment attachment against various vessels in a state court action in Juneau against both KTAI and debtor. PTSG&E does not represent either KTAI or debtor in that state court action.

     The schedules do not indicate debtor and KTAI are jointly liable on any claims.

     2. DISCUSSION - Although it is a close question, I will approve the employment of PTSG&E provided they have made full disclosure of all potential conflicts and provided that they waive any retainer from KTAI.

11 USC з 327(a) and (c) provide:

Employment of professional persons

(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 [11 USC зз 101 et seq.]. Х Х Х

(c) In a case under chapter 7, 12, or 11 of this title, a person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.

The definition of "disinterestedness" is found in 11 USC з 101(14) (1991 Supp):

(14) "disinterested person" means person that-

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

     (B) is not and was not an investment banker for any outstanding security of the debtor;

     (C) has not been, within three years before the date of the filing of the petition, an investment banker for a security of the debtor, or an attorney for such an investment banker in connection with the offer, sale, or issuance of a security of the debtor;

     (D) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor or of an investment banker specified in subparagraph (B) or (C) of this paragraph; and

     (E) 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 an investment banker specified in subparagraph (B) or (C) of this paragraph, or for any other reason;

The U.S. Trustee argues that because KTAI owns 50% of the shares of the debtor, and PTSG&E represents KTAI and Greg Head in a U.S. District Court lawsuit in Alaska by Weyerhaeuser (a creditor of debtor) and Security Pacific Bank there is an actual or apparent conflict, or at least an unseemly appearance of conflict that requires disallowance of the PTSG&E application for employment.

Although PTSG&E represents KTAI in a law suit against it by Weyerhaeuser and Security Pacific Bank, and KTAI is an owner and a principal creditor of the debtor, PTSG&E assures the court that the two representations are totally unrelated. PTSG&E argues that the KTAI representation in U.S. District Court is unrelated to and will not affect this bankruptcy. After hearing argument, I will

   2 ABR 170 accept this representation, but if the PTSG&E disclosure proves to be incomplete, and there is a relationship that it has not foreseen which is inherent in the dual representation, its subsequent fee application will be closely scrutinized.

     The subject of attorney fees, including the issue of conflicts of interest, is the subject of an extensive presentation in the Norton, 1991 Annual Survey of Bankruptcy Law (Clark Boardman Callaghan). In particular, dealing with postpetition representation of a creditor and the debtor, see Samuel C. Batsell, "Conflicts of Interest: Pre- and Postfiling Representation of Creditors by Counsel for the Estate," 1991 Ann Surv Bankr L 51, 61-68.

     Illustrative of cases deciding the issue of whether the representation of a creditor and the debtor create a disqualifying conflict for an attorney are In re Lee Way Holding Co., 108 B.R. 950 (Bankr.S.D.Ohio 1989). In Lee Way Holding, a law firm applied to represent the debtor-in-possession, but did not disclose its prepetition relationship with a major creditor that was a party to an executory contract with the debtor. The relationship was, however, disclosed to the Unsecured Creditors Committee after the firm had received court approval for employment. The firm negotiated with respect to the executory contract both prepetition and postpetition, and represented the creditor postpetition in other respects. The court concluded there had been lack of full disclosure initially, and that the attorneys did not qualify for

   2 ABR 171 employment under 11 USC зз 327(a) and (c), Bankruptcy Rule 2014 and Ohio Bar ethical rules. They were required to disgorge $209,100 of previously approved fees.

     In contrast are cases finding under their particular facts that no conflict exists, such as In re Martin-Trigona, 760 F.2d 1334, 1343 (2nd Cir. 1985) (holding that the concurrent representation of a creditor in a defamation wholly unrelated to the bankruptcy by attorneys for a trustee was not grounds for disqualification since there was no evidence of an actual conflict) and In re Global Marine, Inc., 108 B.R. 998 (Bankr.S.D.Tex. 1987), aff'd 108 B.R. 1007 (S.D.Tex. 1988) (representation of a parent and subsidiary having intercompany claims in a consolidated bankruptcy cases did not automatically create an impermissible conflict of interest requiring disqualification of the attorney representing both where there is no actual conflict). I believe that PTSG&E's application fits within the holdings of Martin-Trigona and Global Marine.

     A final issue is the payment of the retainer by KTAI, a major shareholder and major creditor of debtor. The court in In re Huntmar Beaumeade I Ltd. Partnership, 127 B.R. 363 (Bankr.E.D.Va. 1991), held that when a creditor pays the legal fees of a debtor's attorney, the possibility that the attorney's loyalty may be divided is so significant that the attorney cannot continue to represent the debtor and the attorney is not "disinterested." In the case at bar, PTSG&E had taken a retainer from KTAI for the

2 ABR 172 bankruptcy representation of the DIP. PTSG&E has agreed (and, may be required to by Judge Holland's order) to not use that retainer. This is sufficient in this case to dispel the possible conflict which would arise from payment of PTSG&E's fees by KTAI.

The practicality of this case is that, whoever is selected to be DIP's attorney, will deal with Greg Head and Brian Tytler, officers of both KTAI and debtor. These are closely held corporations. Debtor is not in a position to retain another firm (but see Huntmar Beaumeade I Ltd. Partnership which said that was not a consideration). Although there is a possibility of a conflict, an actual problem is not apparent at this time. PTSG&E will be authorized to represent debtor provided it does not accept the retainer from KTAI or its officers.

DATED: October 4, 1991.
	BY ORDER OF THE COURT
	______________________________
	HERBERT A. ROSS
	U.S. Bankruptcy Judge

Serve:
Joan Travostino, Esq., for PTSG&E
Joe Friend, Esq., for Weyerhaeuser
U.S. Trustee	H3727