Kimbro Stephens Insurance Trust, et al. v. James E. Smith, Jr., et al.

Petitioners served as equity holders of a Chapter 11 debtor-in-possession and terminated its counsel of record for cause prior to trial in an adversary proceeding against the debtor. Petitioners had an agreement with Respondents to allow intervention by one of its principals; however, as trial opened, upon motion for intervention, Respondents opposed the motion, and as a result, the bankruptcy court denied intervention. Petitioners immediately terminated Respondents for breaching their agreement, however the court said Petitioners could not terminate their counsel and, instead, allowed Respondents to conduct the trial against the instructions and directions of Petitioners, as the debtor-in-possession. The trial ultimately resulted in judgment against the debtor. Petitioners sued Respondents in State Court for misrepresentation and malpractice, but the Arkansas Court of Appeals held that Petitioners did not have a right to fire counsel; and therefore, as a matter of law, Petitioners could not detrimentally rely on Respondents’ misrepresentations and, thus, did not have standing to sue Respondents. THE QUESTIONS PRESENTED ARE:

1. Whether a client has a right to discharge a lawyer at any time, whether in Arkansas state court or in Federal Court, with or without cause, subject to liability for payment for the lawyer’s services.

2. Whether a Chapter 11 debtor-in-possession has the fundamental right to terminate its appointed counsel, with or without cause, or whether a debtorin-possession forfeits the right to terminate appointed counsel without bankruptcy approval.