Case KG Doc 345 Filed 10/09/15 Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. Chapter 11. Debtors.

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1 Case KG Doc 345 Filed 10/09/15 Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re Chapter 11 Haggen Holdings, LLC, et al., Case No (KG) Debtors. Hearing Date: October 15, 2015 at 2:00 pm Objections Due: October 8, 2015 at 4:00 pm, extended by agreement for the United States Trustee to October 9, 2015 at 5:00 pm Re: Docket No. 170 OBJECTION OF THE UNITED STATES TRUSTEE TO DEBTORS APPLICATION FOR ENTRY OF AN ORDER AUTHORIZING THE EMPLOYMENT AND RETENTION OF STROOCK & STROOCK & LAVAN LLP AS ATTORNEYS FOR DEBTORS AND DEBTORS IN POSSESSION NUNC PRO TUNC TO THE PETITION DATE Andrew R. Vara, Acting United States Trustee for Region Three ( United States Trustee ), by and through his undersigned attorney, hereby files this objection ( Objection ) in response to the Debtors Application for entry of an Order Authorizing the Employment and Retention of Stroock & Stroock & Lavan LLP ( Stroock ) as Counsel for the Debtors and Debtors in Possession Nunc Pro Tunc (Docket No. 170) ( Retention Application ), and in support of this Objection states as follows: Preliminary Statement The U.S. Trustee objects to the entry of an order authorizing the employment and retention of Stroock as there has been insufficient information put forward to determine that Stroock is disinterested as required by Section 327(a). Stroock disclosed that approximately 12% of its annual revenues come from its client relationship with JP Morgan Chase Bank, N.A. ( JP Morgan ). In responding to an inquiry by the U.S. Trustee, Stroock also disclosed that JP Morgan holds a significant interest in the Debtors secured credit facility, and that JP Morgan is

2 Case KG Doc 345 Filed 10/09/15 Page 2 of 9 a subtenant of the Debtors. In re Envirodyne Industries, Inc., 150 B.R (Bankr. N.D. Ill. 1993) holds that it is the Court s role to determine whether a disqualifying conflict of interest exists when proposed counsel to the debtor maintains a client relationship with a substantial party-in-interest which could impair, even unconsciously, counsel s impartiality. See 150 B.R. at The U.S. Trustee has filed this objection to fulfill his statutory duties under 28 U.S.C. 586(a)(3)(I) ( monitoring applications filed under section 327 of title 11 and, whenever the United States trustee deems it to be appropriate, filing with the court comments with respect to the approval of such applications ). Jurisdiction 1. Under (i) 28 U.S.C. 1334, (ii) applicable order(s) of the United States District Court for the District of Delaware issued pursuant to 28 U.S.C. 157(a), and (iii) 28 U.S.C. 157(b)(2), this Court has jurisdiction to hear and determine this Objection. 2. Under 28 U.S.C. 586, the United States Trustee is generally charged with monitoring the federal bankruptcy system. See United States Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.), 33 F.3d 294, (3d Cir. 1994) (noting that United States Trustee has public interest standing under 11 U.S.C. 307 which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (describing the United States Trustee as a watchdog ). 3. Under section 307 of title 11 of the United States Code (the Bankruptcy Code ), the United States Trustee has standing to be heard on the Retention Application and the issues raised in this Objection. 28 U.S.C. 586(a)(3)(I) also statutorily obligates the U.S. Trustee to file comments to applications under 11 U.S.C. 327 when appropriate. 2

3 Case KG Doc 345 Filed 10/09/15 Page 3 of 9 Background 4. Haggen Holdings, LLC and five (5) affiliates (collectively Haggen ) filed voluntary Chapter 11 petitions on September 8, 2015, and jointly administered under case number (KG). As of the Petition Date, Haggen owned and operated 164 stores through three operating companies: Haggen, Inc., Haggen Opco North, LLC ( Haggen North ) and Haggen Opco South, LLC ( Haggen South ). Declaration of Blake Barnett in Support of Chapter 11 Petitions and First Day Motions ( Barnett Declaration ) at 4 (D.I. 15). 5. On September 24, 2015, the Debtors filed the Retention Application seeking authorization to retain the Stroock firm as counsel for the Debtors, effective nunc pro tunc to the Petition Date pursuant to sections 327(a), 328(a) and 330 of the Bankruptcy Code, Rule 2014 of the Federal of Bankruptcy Procedure and Rule of Local Rules for the United States Bankruptcy Court, District of Delaware. In support of the Retention Application and attached thereto as Exhibit A, the Debtors filed the Declaration of Frank A. Merola in Support of Debtors Application o for an Order Authorizing the Employment and Retention of Stroock & Stroock & Lavan LLP as Counsel for the Debtors and Debtors in Possession Nunc Pro Tunc to the Petition Date (the Merola Declaration ). 6. In the Retention Application the Debtors assert that based on Stroock s significant experience in bankruptcy and restructuring matters the firm is well qualified to represent them in these cases. In addition, the Debtors assert that Stroock is a disinterested person within the meaning of section 101(14) of the Bankruptcy Code, and does not hold or represent an interest adverse to the Debtors estates and has no connection to the Debtors, their creditors or related parties, except as disclosed in the Merola Declaration. Retention Application, 5, 6, &19. 3

4 Case KG Doc 345 Filed 10/09/15 Page 4 of 9 Stroock s Client-Relationship with JP Morgan 7. According to the Merola Declaration, Stroock provided legal services to the Debtors in the weeks leading up to the petition date. Merola Declaration, 4. Stroock performed a routine check of its conflict database and listed connections on Schedule 2 attached to the Merola Declaration. Merola Declaration, 17. Additionally, Stroock included the additional disclosure about JP Morgan: JP Morgan Chase Bank, N.A. and/or its subsidiaries and affiliates (collectively, JP Morgan ) is a participant in the Debtors Credit Facility (as defined in the First Day Declaration). Stroock has in the past represented and continues to represent JP Morgan in various corporate, litigation, employment, tax, real estate and financial matters wholly unrelated to these Chapter 11 Cases, the Debtors and their affiliates. The total fees paid by JP Morgan to Stroock in the 2014 fiscal year represents approximately 12.37% of the total revenue generated by Stroock for that same period. Accordingly, Stroock has obtained a written waiver from JP Morgan with regard to Stroock s representation of the Debtors in connection with the Chapter 11 Cases. Merola Declaration, 19. Merola Declaration, Stroock included a standard affirmative statement of disinteresdness. 9. In response to the U.S. Trustee s informal inquiry about the Retention Application, Stroock provided additional information that, JP Morgan holds a significant portion of the secured credit facility, and JP Morgan is also a subtenant at three of the Debtors store locations. Objection A. Stroock May Not Be Qualified to Act as Attorney to the Debtors Because It Is Not Disinterested and Has Interests Adverse to the Debtors Estates. 10. Pursuant to 11 U.S.C. 327(a), a chapter 11 bankruptcy debtor may employ an attorney or other professional person only if that person does not hold or represent an interest adverse to the estate and is disinterested: 4

5 Case KG Doc 345 Filed 10/09/15 Page 5 of 9 11 U.S.C. 327(a). Except as otherwise provided in this section, the [debtor], with the court s approval, may employ one or more attorneys...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 [debtor] in carrying out the [debtor s] duties under this title. 11. The stringent requirements and standards for employment of professionals under the Bankruptcy Code and Bankruptcy Rules are designed to insure the integrity of the bankruptcy process, and the public confidence in the bankruptcy courts. In re Lee Way Holding Co., 100 B.R. 950, 961 (Bankr. S.D. Ohio 1989). 12. While the Bankruptcy Code does not define interest adverse, it does define disinterested person as one who is not a creditor... or an insider... and 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 for any other reason. See 11 U.S.C. 101(14). provides: 13. In re Envirodyne Indus., 150 B.R. 1008, 1016 (Bankr. N.D. Ill. 1993) The adverse interest and disinterested person limitations set forth in 327(a) represent the congressional intention to hold professionals performing duties for the estate to strict fiduciary standards. This section is plainly concerned with a professional s divided loyalties and ensuring that professionals employed by the estate have no conflicts of interest with the estate. If the professional sought to be employed does not satisfy one prong of this standard, the Code prohibits the court from authorizing his or her employment. Section 327 does not allow these limitations to be excused by waiver. 14. An applicant under 11 U.S.C. 327 has the burden of establishing by motion and accompanying affidavit that their chosen professional is qualified. In re BH & P, Inc., 949 F.2d 1300, 1317 (3d Cir. 1991) ( It is not... the obligation of the bankruptcy court to 5

6 Case KG Doc 345 Filed 10/09/15 Page 6 of 9 search the record for possible conflicts of interest. That obligation belongs to the party who seeks employment by the estate ). 15. Disinterestedness may be impaired or an adverse interest may exist when, counsel s interest in maintaining the client relationship with... a substantial party-in-interest, could impair [counsel s] ability to act with impartiality, even unconscious impartiality. Envirodyne, 150 B.R. at The relative size of the creditor s claim may be evaluated with the creditor s status as a major client of proposed counsel by the Court. Id. 16. Section 327 of the Bankruptcy Code prohibits the retention of a professional who represents any interest materially adverse to the estate. See 11 U.S.C. 327(a). The Debtors have not met their burden of demonstrating that Stroock is qualified to be retained as counsel to the Debtors because of its extensive client relationship with JP Morgan, a very substantial creditor and party in interest in these cases. 17. Where one member of a firm is disqualified, then the entire firm is disqualified. This Court in In re Essential Therapeutics, 295 B.R. 203 (Bankr. D. Del. 2003), held that a law firm could not be retained as attorney for the debtor because a member of the firm was an officer-insider of the Debtor. This Court further held that the disqualification of the member of the firm, on grounds that he had served as an officer of the debtors, and, this, was not disinterested, mandated disqualification of his entire firm. Id. Specifically, this Court stated We conclude that having one member s independence and disinterestedness impugned because he was an officer must equally affect the firm s independence and disinterestedness such that the firm must be disqualified under Section 327(a) of the Code. Id. at The same is true in this case. Stroock s extensive relationship with JP Morgan may prevent Stroock from serving as a professional to the Debtors under section 327(a) 6

7 Case KG Doc 345 Filed 10/09/15 Page 7 of 9 of the Bankruptcy Code, as more than just an individual member of the firm is implicated by the disclosures made at this juncture. 19. The Debtors have not met their burden of demonstrating that Stroock is qualified to act as an attorney in this case under 11 U.S.C. 327(a). B. Stroock May Not Be Qualified to Act as Attorney to the Debtors Because It May Have Interests Adverse to the Debtors Estates. 20. As noted by the court in Hansen, Jones & Leta, P.C. v. Segal, 220 B.R. 434, (D. Utah 1998), the interests of the debtor, secured creditors, unsecured creditors and equity security holders seldom align[] in a bankruptcy proceeding, and are instead inherently different and competing. 21. According to the Merola Declaration, 12.37% of Stroock s annual revenues in the firm s fiscal 2014 were derived from its representation of JP Morgan. This represents approximately 1/8th of the firm revenues (100 / 8 = 12.5). JP Morgan holds a significant portion of the secured credit facility that the Debtors are borrowers under in these cases. JP Morgan is also a subtenant of the Debtors in some locations. This creates an inherent tension for Stroock, as the Debtors could face an adversarial relationship with JP Morgan on a number of fronts including DIP Financing and rejection damages claims, among others. In the event of such a confrontation it may be difficult for Stroock to be impartial, as a substantial portion of its annual revenues come from servicing JP Morgan as a client. The U.S. Trustee routinely sees concurrent representations where proposed counsel represents a creditor that accounts for 1-2% of counsel s annual revenues. It is very uncommon to see any relationship where that number exceeds 10%, and there has not been a sufficient demonstration that it will not be problematic under the facts and circumstances of these cases. 7

8 Case KG Doc 345 Filed 10/09/15 Page 8 of One of the Debtors duties, with the assistance of their professionals, includes reviewing and examining claims asserted against the Debtors estates, and payments to creditors prior to the filing and bringing such actions as may be necessary or appropriate. Based on the posture of this case it is possible that the estates may have claims against JP Morgan. Therefore, the law firm and its owners may have interests adverse to the Debtors estates, which would disqualify them from being retained as attorney to the Debtors pursuant to section 327(a) of the Bankruptcy Code. Conclusion 23. As detailed above, based on the information above, the Debtors have not met their burden of demonstrating that Stroock is qualified to act as an attorney in this case under 11 U.S.C. 327(a). 24. The United States Trustee leaves the Debtors to their burden and reserves any and all rights, remedies and obligations to, inter alia, complement, supplement, augment, alter and/or modify this Objection, file an appropriate Motion and/or conduct any and all discovery as may be deemed necessary or as may be required and to assert such other grounds as may become apparent upon further factual discovery. [Remainder of page left blank intentionally] 8

9 Case KG Doc 345 Filed 10/09/15 Page 9 of 9 WHEREFORE, the United States Trustee requests that this Court issue an order denying Retention Application, and/or granting such other relief as this Court deems appropriate, fair and just. Dated: October 9, 2015 Wilmington, Delaware Respectfully submitted, ANDREW R. VARA ACTING UNITED STATES TRUSTEE By: /s/ Timothy J. Fox. Timothy J. Fox, Jr. David L. Buchbinder Trial Attorneys United States Department of Justice Office of the United States Trustee J. Caleb Boggs Federal Building 844 King Street, Suite 2207, Lockbox 35 Wilmington, Delaware Phone: (302) Fax: (302)

10 Case KG Doc Filed 10/09/15 Page 1 of 1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re Chapter 11 Haggen Holdings, LLC, et al., Case No (KG) Debtors. Hearing Date: October 15, 2015 at 2:00 pm Objections Due: October 8, 2015 at 4:00 pm, extended by agreement for the United States Trustee to October 9, 2015 at 5:00 pm Re: Docket No. 170 CERTIFICATE OF SERVICE IT IS HEREBY CERTIFIED that on October 9, 2015, the Objection of the United States Trustee To Debtors Application For Entry Of An Order Authorizing The Employment and Retention of Stroock & Stroock & Lavan LLP as Attorneys for Debtors and Debtors In Possession Nunc Pro Tunc to the Petition Date was served electronically through the Court s ECF system upon those who have entered an appearance in this proceeding, and through electronic mail on the parties listed below: Via Young Conaway Stargatt & Taylor, LLP Matthew B. Lunn Robert F. Poppiti, Jr. Rodney Square 1000 North King Street Wilmington, DE mlunn@ycst.com RPoppiti@ycst.com Stroock & Stroock & Lavan LLP Frank A. Merola Sayan Bhattacharyya Matthew G. Garofalo 180 Maiden Lane New York, New York fmerola@stroock.com sbhattacharyya@stroock.com mgarofalo@stroock.com /s/ Timothy J. Fox. Timothy J. Fox, Jr. Trial Attorney United States Department of Justice Office of the United States Trustee J. Caleb Boggs Federal Building 844 King Street, Suite 2207, Lockbox 35 Wilmington, Delaware 19801