United States Court of Appeals, Tenth Circuit
United States Court of Appeals, Tenth Circuit
3d 311
62 USLW 2754, Bankr. L. Rep. P 75,887
Noel S. Hyde (Steven F. Allred of Nielsen & Senior, with him on the
brief), Salt Lake City, UT, for debtors/plaintiffs-appellants.
Anastasia M. Petrou, Atty. Advisor (Martha L. Davis, Gen. Counsel, with
her on the brief), Washington, DC; (David D. Bird, U.S. Trustee, and M.
John Straley, Asst. U.S. Trustee, also on the brief), Salt Lake City, UT, for
defendant-appellee.
Before BRORBY, McWILLIAMS and EBEL, Circuit Judges.
BRORBY, Circuit Judge.
In these appeals from three related Chapter 11 cases, we are asked to secondguess the bankruptcy court's decision to deny approval of employment of each
debtor in possession's choice of attorney on the basis of actual conflict of
interest.
BACKGROUND
2
Mr. Slingerland controls each of the corporations. While Mr. Slingerland is the
sole shareholder of Retail and Interwest, the identity of the ownership interests
in Green Street is unclear. Green Street is a social club; in other words, a private
bar. Under a lucrative management contract, Retail receives a commission of
fifteen percent of Green Street's gross revenues plus Green Street makes
Retail's lease payments in the amount of $1,000 a month. Interwest has an
unrelated sales and service business.
In response to original applications for one law firm to jointly represent all four
estates, the bankruptcy court set a hearing to examine concerns about
representing four interrelated debtors in possession.1 The court encouraged the
original proposed counsel to examine whether Mr. Slingerland had claims
against the corporations he controlled. At the hearing, original counsel
acknowledged the court-prompted investigation had revealed "contingent"
claims Mr. Slingerland held against the other debtor corporations, and
indicated he would withdraw the applications for his firm to represent the three
corporate debtors in possession. Mr. Noel S. Hyde, of Nielsen & Senior, then
announced the three corporate debtors in possession would seek court approval
to employ his firm. In support of his firm's intention to represent the three
debtors in possession, Mr. Hyde stated his "preliminary investigation" revealed
only a single intercompany debt of $9,000, and he opined that, in view of the
size of the other debts,2 the single claim was not significant. The bankruptcy
judge declined to consider the matter until the necessary applications and
supporting affidavits were filed. See Fed.R.Bankr.P. 2014(a).
Nearly one month later, the applications to employ Neilsen & Senior and their
affidavits were filed, revealing three substantial intercompany debts but little
else. Although each debtor in possession owed at least one of the other estates
an unsecured debt, the affidavits did not state the validity or amount of
intercompany debts had been examined. The applications did not explain any
differences or similarities in the body of creditors for each estate. The affidavits
did not state whether an investigation ruled out the other estates as targets of
the trustee's avoiding powers. The affidavits also revealed Green Street had
fully paid Retail on its management contract and intended to continue the
contract. Certificates of service for each application show they were mailed
only to the U.S. trustee.3 Mr. Hyde had previously requested the court's
decision be made on the applications and affidavits, without a hearing.4
On appeal, Appellants contend the district court erred in affirming because the
bankruptcy court (1) decided the applications under the wrong subsection of 11
U.S.C.A. Sec. 327, (2) exceeded its authority, and (3) erroneously found there
was an actual conflict in representing the three estates.5
10
Under the rationale of Lewis v. B.F. Goodrich Co., 850 F.2d 641, 645 (10th
Cir.1988), a premature notice of appeal is effective where appellant obtains a
subsequent final adjudication of the matter before the appeal is considered on
its merits. Accordingly, in the case of In re Durability, Inc., 893 F.2d 264 (10th
Cir.1990), we declined to summarily dismiss a prematurely filed appeal and
instead granted an appellant thirty days to obtain the necessary leave to obtain a
Rule 54(b) entry of final judgment8 or to file a notice that the bankruptcy court
had finally disposed of the remainder of the case.
11
any the bankruptcy judge enters." Kham & Nate's Shoes No. 2, Inc. v. First
Bank of Whiting, 908 F.2d 1351, 1355 (7th Cir.1990) (emphasis in original).
Each of the three debtors in possession has obtained confirmation of its plan of
reorganization. Thus, by the orders of confirmation, the bankruptcy court has
finally disposed of substantially all of these Chapter 11 cases. Accordingly, we
have present jurisdiction to review the orders affirming the bankruptcy court's
order denying the applications to approve the former debtors in possession's
employment of the law firm of Neilsen & Senior.
II
12
13
(a) Except as otherwise provided in this section, the trustee, 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 trustee in carrying out the
trustee's duties under this title.
15
....
16
17
(Emphasis added.)
18
Appellants contend the district court and bankruptcy court erred by finding a
disqualifying conflict arising "solely" from joint representation of the debtors in
possession and their creditors, a situation they argue is expressly permitted
under subsection (c) of Sec. 327. Appellants contend where joint representation
of an estate and one of its creditors is at issue, the bankruptcy court must decide
the issue only under subsection (c).
19
The Appellants' conclusion reads Sec. 327(c) too broadly. The requirements of
subsection (a) are threshold requirements to be met even if subsection (c) is
implicated. Subsection (c) addresses the situation where dual representation of
a creditor and debtor is the only reason advanced for disqualification and the
professional is otherwise qualified. Although it is not a model of clarity,
subsection (c) as it is currently worded is intended to allow joint representation
of a trustee and of a creditor of the estate, if there is no apparent conflict of
interest. Even then, if another creditor or the U.S. trustee objects, the
bankruptcy judge can disqualify a professional solely on the basis of
simultaneous representation, if it finds the joint representation creates an actual
conflict.
20
Thus, Sec. 327(c) does not end all inquiry simply because intercompany debts
placed each estate, at some point, in a creditor/debtor relationship with another.
In these cases, the dual representation of a creditor was not the only reason for
concern, the bankruptcy judge was also concerned about the simultaneous
representation of three debtors in possession. Thus, the bankruptcy court was
additionally concerned with conflict between debtors in possession: with
conflict between three separate estates, each of which must be represented by
an independent fiduciary.9 In re Green Street, 132 B.R. at 462.
21
Since subsection (c) of Sec. 327 does not preempt the more basic requirements
of subsection (a), the bankruptcy and district courts properly focused on their
responsibility to approve the fiduciary's choice of professionals only when that
professional's judgment and advocacy would be unclouded by divided loyalty.
The reasons why counsel to a debtor in possession must meet the high standards
of undivided loyalty established in Sec. 327(a) are explained in In re McKinney
Ranch Assoc., 62 B.R. 249 (Bankr.C.D.Cal.1986).
22is the duty of counsel for the debtor in possession to survey the landscape in
It
search of property of the estate, defenses to claims, preferential transfers, fraudulent
conveyances and other causes of action that may yield a recovery to the estate. The
jaundiced eye and scowling mien that counsel for the debtor is required to cast upon
everyone in sight will likely not fall upon the party with whom he has a potential
conflict....
23
Id. at 254.
24
25
26
III
27
Appellants next contend the bankruptcy judge acted beyond his authority by
sua sponte raising the issue of the conflicts between the debtors in possession.
This position ignores the unique responsibilities the Bankruptcy Code imposes
on bankruptcy judges in connection with professionals employed by the estate.
28
A bankruptcy court has the authority and the responsibility to only approve
employment of professionals who meet the minimum requirements set forth in
Sec. 327(a), independent of objections. In re Granite Sheet Metal Works, Inc.,
159 B.R. 840, 846 (Bankr.S.D.Ill.1993) (court entrusted with duty to determine
qualifications of debtor's counsel independent of objection). Assuming Sec.
327(c) requires an objection from a creditor or from the U.S. trustee before the
court can examine conflicts arising from simultaneous representation of a
creditor, a conclusion we do not make, Sec. 327(a) does not include similar
language. Moreover, where the Bankruptcy Code provides for the raising of an
issue by a "party in interest,"10 such provision shall not be "construed to
preclude the court from, sua sponte, taking any action or making any
IV
30
Appellants finally contend the district court erred because there was no actual
conflict of interest. Appellants contend the confirmation of reorganization plans
is evidence there was no conflict. By this argument, Appellants are trying to
bolster their position with the benefit of hindsight to essentially argue "no
harm, no foul". However, in this case we review the applications as they were
presented to the bankruptcy court, not the quality of the unapproved
representation. See Martin, 817 F.2d at 183 (showing lack of harm from
attorney's lien after the fact does not render conflict acceptable). We also find it
is impossible to know if the terms of the confirmed plans were affected by the
joint11 representation.
31
33
The bankruptcy court and district court determined joint representation of these
entities would not yield sufficient scrutiny to satisfy the fiduciary duty of the
trustee for both estates. It was within the discretion of the bankruptcy court to
deny approval of a professional's employment and we find fully supported the
bankruptcy judge's conclusion "[i]t would be an impossible task for applicants
to undertake this multiple representation and make decisions for one of these
debtors which would not be at the expense of another." In re Green Street, 132
B.R. at 462.
34
Appellants also assert the bankruptcy court "permitted" the firm to continue
representing the debtors in possession and, as the Appellants benefited from the
time and efforts of the law firm, we should reverse the denial of the
applications. We are not persuaded by this argument. The Bankruptcy Code and
Rules do not provide authority for the court to prohibit a professional from
working for any client it chooses. Thus, there can be no question of the court
either permitting or prohibiting unapproved representation. Instead, any
professional not obtaining approval is simply considered a volunteer if it seeks
payment from the estate. 11 U.S.C.A. Sec. 330 (court may allow fees to a
professional "employed under section 327"); 2 Collier on Bankruptcy p 327.02
at 327-10 (15th ed. 1993). Cf. In re Land, 943 F.2d 1265, 1267-68 (10th
Cir.1991) (return of compensation appropriate if attorney fails to obtain court
approval of employment). If we were to reverse the denial of the applications in
these cases simply because counsel chose to take a calculated risk and continue
employment absent necessary authorization, it would effectively write Sec.
327(a) out of the Bankruptcy Code.
Conclusion
35
Because of their experience and their familiarity with the cases, bankruptcy
judges bring a unique expertise to the question of when simultaneous
representation of multiple estates and their creditors is a conflict that works to
the detriment of the estate in bankruptcy, its creditors or to the detriment of the
public confidence in the integrity of the bankruptcy system. Thus, we will not
second guess a decision not to approve professionals under Sec. 327 unless it
exhibits a clear abuse of discretion, circumstances not present in the case at
hand. By our decision today, we do not hold such simultaneous representation
of related estates in bankruptcy is per se prohibited. Instead, each such
application must be evaluated on its own merits. We AFFIRM.
36
37
(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.
40
....
41
(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. (emphasis added).
42
43
44
In re Green Street, 132 B.R. 460, 462 (Bankr.D.Utah 1991) (emphasis added).
45
In affirming the bankruptcy court, the district court held that if Nielsen and
Senior were permitted to represent the three debtors in possession in all three
proceedings, the firm would necessarily be representing parties having interests
adverse to a particular debtor estate and, additionally, would not be
"disinterested persons," as required by 11 U.S.C. Sec. 327(a), solely because of
the fact that the debtor estates had claims against each other.
46
It is apparent to me that both the bankruptcy court and the district court held
that Nielsen and Senior had an "interest adverse to the estate" and were
therefore not "disinterested persons," as those terms are used in 11 U.S.C. Sec.
327(a), solely because of the claims the debtor estates had against the others.
47
This much is certain: Neither the bankruptcy court nor the district court even
mentioned 11 U.S.C. Sec. 327(c), which, as indicated, provides that, with
certain exceptions thereto, a person is not disqualified from employment under
this section "solely because of such person's employment by or representation
of a creditor." If neither the bankruptcy court nor the district court mentioned
11 U.S.C. Sec. 327(c), I conclude, and I think reasonably so, that neither the
bankruptcy court nor the district court even considered 11 U.S.C. Sec. 327(c).
48
I would reverse and remand with direction that the bankruptcy court, in the first
instance, and then the district court, on possible review, address 11 U.S.C. Sec.
327(c). In so doing, I do not believe I am "second guessing" either the
bankruptcy court or the district court.
The record does not show the creditors were given any notice of the
applications to employ Neilsen & Senior. Only the U.S. trustee is required to
receive a copy of the application. Fed.R.Bankr.P. 2014(a), formerly Rule X1008(a)(3). Thus, we find no support for Appellants' assertion the creditors
received notice of, but did not object to, the applications. Once served with
notice, the U.S. trustee's duty is merely to monitor and to comment on
applications to the extent it "considers it to be appropriate." 28 U.S.C.A. Sec.
586(a)(3)(B)
As no hearing was required, see supra n. 1, and none was requested, we reject
Appellants' contention the bankruptcy court erred by denying the applications
without a hearing
Appellants also contend the bankruptcy court and district court failed to follow
controlling precedent; In re Roberts, 75 B.R. 402 (Bankr.D.Utah 1987). Roberts
is not controlling for several reasons. Roberts involved allowance of fees, not
approval of employment of professional persons under Sec. 327. In Roberts, the
law firm itself was an undisclosed creditor of one of the estates. Roberts also
was limited to the particular facts of that case where the district court affirmed
the denial of fees in the corporate case but reversed in the related individual
case. 75 B.R. at 413
Neither the district court nor the bankruptcy court treated this as a discretionary
appeal from an interlocutory order of the bankruptcy court as permitted by 28
U.S.C.A. Sec. 158(a)
The matter has been addressed by at least one other Circuit court. In re BH & P,
Inc., 949 F.2d 1300, 1307 (3d Cir.1991) (order disqualifying a professional
from employment under Sec. 327(a) is reviewable "final order"). However, the
granting of an application authorizing employment has been held to be a
nonreviewable as interlocutory. See, e.g., In re Westwood Shake & Shingle,
Inc., 971 F.2d 387, 389 (9th Cir.1992)
Under 11 U.S.C.A. Sec. 541 of the Bankruptcy Code, each estate is a separate
and distinct entity. In these Chapter 11 cases, the debtors in possession act as
"trustees" of the estates in bankruptcy and accordingly they may hire
professionals, with court approval, pursuant to Sec. 327. See 11 U.S.C.A. Sec.
1107. Thus, a debtor in possession is a statutory fiduciary of its own estate. 11
U.S.C.A. Secs. 1106, 1107(a). A trustee representing an estate in bankruptcy
must receive independent counsel, regardless of the estate's relationship to other
entities prior to filing. In re Amdura Corp., 121 B.R. 862, 868-69
(Bankr.D.Colo.1990). The inability to fulfill the role of independent
professional on behalf of the fiduciary of the estate constitutes an impermissible
conflict. See In re Adam Furniture Indus., Inc., 158 B.R. 291, 302
(Bankr.S.D.Ga.1993); In re Prudent Holding Corp., 153 B.R. 629, 631
(Bankr.E.D.N.Y.1993) (Sec. 327(a) is prophylactic "to insure that the
undivided loyalty and exclusive allegiance required of a fiduciary to an estate in
bankruptcy is not compromised")
10
A "party in interest" includes a creditor, 11 U.S.C.A. Sec. 1109(b), and the U.S.
trustee, 11 U.S.C.A. Sec. 307
11
12
13
Appellants do not support their assertion the debts are "valid and undisputed"
with competent evidence such as the affidavits. Further, in this context, the
issue is not whether the debts are disputed, but whether the interests of
creditors require the debts should be disputed