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Faction turns on trustee in Eastern Livestock bankruptcy

August 25, 2012

It’s the kind of marquee case attorneys covet. In the bankruptcy game, serving as the trustee, or the trustee’s counsel, in a complex fraud case involving tens of millions of dollars provides plenty of stature and the opportunity for fat fees.

But things have suddenly taken an ugly turn for veteran Indianapolis attorney Jim Knauer and his legal advisers at Faegre Baker Daniels, who are under attack by parties that want them bounced from the massive bankruptcy case for Eastern Livestock Inc.

New Albany-based Eastern, a buyer and seller of cattle that had 18 branches in 12 states and did more than $1 billion in revenue, crashed in late 2010 after discovery of a pervasive check-kiting scheme that falsely inflated its accounts. Four executives have been convicted, including founder and former CEO Thomas “Tommy” Gibson, who was sentenced in June to 10 years in prison.

Bankruptcy Judge Basil Lorch appointed Knauer as trustee and Faegre Baker Daniels as his counsel in the days after the collapse. But a skirmish over their not disclosing a potential conflict—that they represented a bank with a financial interest in the case—blew up this month into an all-out war.

Lorch heard testimony Aug. 20 on whether to remove Knauer as trustee and Faegre Baker Daniels as his counsel and is expected to rule within days. Regardless of the outcome, Knauer and the firm find themselves in the awkward and unusual position of having to defend their ethics and professional conduct.

Knauer, who denies doing anything improper, said he’s never seen anything like this in his 41-year legal career, which included serving as receiver in four Ponzi scheme cases.

Also caught in the crosshairs is Faegre Baker Daniels partner Jim Carr, who in his 37-year legal career has represented a host of high-profile businesses, from American Trans Air to Paul Harris Stores.

Knauer and his attorneys argue that those waging the legal assault—a Virginia bank and certain cattle businesses that did business with Eastern—are not representative of creditors overall.

The difference, they say, is that most of the objectors stand to benefit financially by undercutting the trustee. For instance, Knauer said, three are livestock auction houses holding millions of dollars in Eastern property—assets he is trying to recover through lawsuits.

“The objector group is involved in sharp litigation tactics with the trustee,” Faegre Baker Daniels said in a filing. “They have started fires, yelled ‘smoke’ and pointed at the trustee.”

Knauer, a partner at Kroger Gardis & Regas, defended his work, pointing out that unsecured creditors appear on track to recover more than 40 percent of the nearly $20 million they’re owed—a robust sum for a failed business in which principals perpetrated fraud.

Those pushing for removal, however, are just as fervent, and they’ve enlisted some high-profile allies, including Kentucky Agriculture Commissioner James Comer, who publicly called for Knauer’s ouster this month.

“The disharmony created by the concerns over, and lack of confidence in, the trustee’s impartiality have run rampant in this case for long enough,” attorneys for the group seeking removal wrote.

Their case revolves around the failure of Knauer and Faegre Baker Daniels to disclose early on in “affidavits of disinterest” that each had represented San Francisco-based Wells Fargo.

That tie became an issue because Wells Fargo was a so-called participant in Fifth Third Bank’s loan to Eastern, providing $10 million. Cincinnati-based Fifth Third—the company’s largest creditor—has received overly favorable treatment in the bankruptcy, Knauer’s detractors charge. He denies that’s the case.

Knauer said he didn’t realize Wells Fargo had a connection with Eastern until after he’d submitted his affidavit. Once he found out, Knauer huddled with Faegre Baker Daniels, and they concluded amending his disclosure was unnecessary because loan participants don’t count as creditors or “parties in interest” in a bankruptcy case.

“We decided we didn’t need to amend our disclosures because Wells Fargo has no rights,” Knauer said.

Knauer and Faegre Baker Daniels, however, did go back to Wells Fargo and negotiate waivers clearing the way for them to work on the case. Even though he and the law firm did not believe there was a conflict, Knauer said, they wanted to eliminate the possibility of Wells Fargo’s raising the issue later if officials didn’t like how the case was unfolding.

In retrospect, “If we had known we were going to have this sideshow over this, we sure as hell would have disclosed it,” Knauer said. He and the law firm this month filed supplemental affidavits listing the Wells Fargo connections.

Henry Efroymson, a longtime local bankruptcy attorney who is a partner at Ice Miller, said the effort to remove the trustee and his counsel seems like a stretch given the lack of legal standing for loan participants in bankruptcy court.

He said dismissal so late in the game would throw the case into disarray. Knauer hopes to win approval of his liquidation plan by the end of the year.

“This is definitely a creative argument being made by the objector group, and the remedy they are seeking is very extreme,” said Efroymson, who has no role in the case.•

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