Federal Judge Vacates Joint Counsel Approval in Bankruptcy Over Landlord-Tenant Rent Conflict

PHILADELPHIA (LN) — U.S. District Judge Christopher Henry ruled that Dilworth Paxson LLP could not represent both Whitehall Trust and Saucon Trust (the "Trust Debtors") and Whitehall Manor, Inc. and Saucon Valley Manor, Inc. (the "Manor Debtors") because their interests were directly adverse.

The Trust Debtors own the real estate leased to the Manor Debtors, who operate personal care homes. The only source of income for the Trust Debtors is rent from the Manor Debtors, creating divergent financial incentives: the Trusts need maximum rent to pay their own debts, while the Manor Debtors need to minimize rent to remain profitable.

Lehigh Valley 1, a mortgage holder, objected to the joint representation, arguing the conflict barred Dilworth Paxson from representing all four entities.

Judge Henry pointed to a specific dispute over whether Section 365(d)(3) of the Bankruptcy Code applied to the leases. The provision requires tenant debtors to make timely rent payments on non-residential leases until a plan is confirmed.

Lehigh argued the leases were non-residential, triggering the immediate rent obligation. The Manor Debtors argued the leases were residential, which would exempt them from that specific requirement.

Judge Henry noted that Dilworth Paxson had argued on behalf of all debtors that the leases were residential, a position that benefited the Manor Debtors but harmed the Trust Debtors.

"How could the same law firm properly advise both the Trust Debtors and the Manor Debtors and manage their competing interests regarding the applicability of section 365(d)(3) and all the questions that may accompany it?" Henry wrote.

The ruling also addressed the debtors' claim that they operated as a single business enterprise, which they argued negated the conflict. Henry rejected this, citing contradictory representations made in prior foreclosure proceedings where they claimed the entities were separate and distinct.

Judge Henry also noted that the Trust Debtors had failed to pay their mortgage for almost five years due to a lack of rent, undermining the debtors' assertion that shifting money between entities caused no harm to creditors.

"The same law firm cannot properly advise both the Trust Debtors and the Manor Debtors as to how the leases between the Debtors should be treated in the bankruptcies," Henry wrote.

The judge ordered that the Trust Debtors and the Manor Debtors must obtain separate counsel in the bankruptcy proceedings.