In Re: Marvel Ent , 140 F.3d 463 ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
3-25-1998
In Re: Marvel Ent
Precedential or Non-Precedential:
Docket 98-7001
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Recommended Citation
"In Re: Marvel Ent" (1998). 1998 Decisions. Paper 59.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/59
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Filed March 25, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 98-7001, 98-7040 and 98-7041
IN RE: MARVEL ENTERTAINMENT GROUP, INC.; ASHER
CANDY COMPANY; FLEER CORPORATION; FRANK H.
FLEER CORPORATION; HEROES WORLD DISTRIBUTION,
INC.; MALIBU COMICS ENTERTAINMENT INC.; MARVEL
CHARACTERS, INC.; MARVEL DIRECT MARKETING INC.;
SKYBOX INTERNATIONAL, INC.; SPECIAL COUNSEL TO
DEBTORS; BOARD OF DIRECTORS OF MARVEL; HIGH
RIVER LIMITED PARTNERSHIP and WESTGATE
INTERNATIONAL, L.P.;
IN RE: JOHN J. GIBBONS, ESQ., Trustee for the Estate
in Bankruptcy of the Debtors;
MARVEL ENTERTAINMENT GROUP, INC.; ASHER CANDY
COMPANY; FLEER CORPORATION; FRANK H. FLEER
CORPORATION; MALIBU COMICS ENTERTAINMENT, INC.;
MARVEL CHARACTERS, INC.; MARVEL DIRECT
MARKETING INC.; SKYBOX INTERNATIONAL, INC.; HIGH
RIVER LIMITED PARTNERSHIP and WESTGATE
INTERNATIONAL, L.P.,
Appellants in No. 98-7001;
JOHN J. GIBBONS, ESQ., Trustee for the Estate in
Bankruptcy of the Debtors,
Petitioner in No. 98-7040,
Appellant in No. 98-7041;
On Appeal from the United States District Court
for the District of Delaware
(D.C. 97-cv-00638)
Argued: March 10, 1998
Before: GREENBERG, SCIRICA and ALDISERT,
Circuit Judges,
(Filed: March 25, 1998)
Edward S. Weisfelner (argued)
John P. Biedermann
BERLACK, ISRAELS & LIBERMAN
120 West 45th Street
New York, NY 10036
Stephen W. Spence
Steven K. Kortanek
PHILLIPS, GOLDMAN & SPENCE
1200 North Broom Street
Bank of Delaware Building
Wilmington, DE 19806
ATTORNEYS FOR APPELLANTS/
RESPONDENTS/APPELLEES
High River Limited Partnership,
Westgate International, L. P.
Francis J. Menton, Jr.
WILLKIE, FARR & GALLAGHER
153 East 53rd Street
One Citicorp Center
New York, NY 10022
ATTORNEY FOR APPELLEE
Creditors Committee
John S. Koppel (argued)
William Kanter
United States Department of Justice
Civil Division, Appellate Staff
601 D Street, N.W.
Washington, DC 20530-0001
2
Anthony J. Ciccone, Jr.
Suite 780
Executive Offices of United States
Trustees
901 E Street, N.W.
Washington, DC 20530
ATTORNEYS FOR APPELLEE
U.S. Trustee
Douglas S. Liebhafsky (argued)
WACHTELL, LIPTON, ROSEN &
KATZ
51 West 52nd Street
New York, NY 10019
ATTORNEY FOR APPELLEES
Goldman Sachs Credit Partners,
Morgan Stanley Emerging Markets,
Lazard Freres & Co., Long Term
Credit Bank of Japan, Whipporwill
Assoc., Van Kampen America,
Canadian Imperial Bank of
Commerce, Merrill, Lynch, Pierce,
Fenner & Smith, Inc., Bankers
Trust Co., Dickstein & Co., L.P.,
Dickstein Int'l Ltd., Lehman
Commercial Paper, Inc., Sumitomo
Bank, Ltd., Amroc Inv. Inc., M. D.
Sass, Bank of Montreal,
Chancellor Capital, Ceres Finance
Ltd., Captiva, Value Partners,
Banko Central Hispanamerico, IBJ
Schroder Bank, Instituto Bancario
San Paulo, Morgan Guaranty
Trust Co. of New York, Scoggin
Capital, Foothill Capital
Corporation, CPR (USA)
3
CAROSELLI, SPAGNOLLI &
BEACHLER
312 Boulevard of the Allies
8th Floor
Pittsburgh, PA 15222
ATTORNEYS FOR APPELLEE
Merrill, Lynch, Pierce, Fenner &
Smith, Inc.
David B. Stratton
PEPPER, HAMILTON & SCHEETZ
1201 Market Street
Suite 1600
Wilmington, DE 19801-1163
ATTORNEY FOR APPELLEE
Toy Biz Inc.
Gary Schildhorn
Steven D. Usdin
ADELMAN, LAVINE, GOLD & LEVIN
1900 Two Penn Center
Philadelphia, PA 19102
ATTORNEYS FOR APPELLEE/
RESPONDENT
Official Committee of Equity
Security Holders
John J. Gibbons (argued)
GIBBONS, DEL DEO, DOLAN,
GRIFFINGER & VECCHIONE
One Riverfront Plaza
Newark, NJ 07102-5497
PRO SE PETITIONER/APPELLANT
Joanne B. Wills (argued)
Mindy Friedman
KLEHR, HARRISON, HARVEY,
BRANZBURG & ELLERS
919 Market Street, Suite 1000
Wilmington, DE 19801-3062
4
James E. Spiotto
Ann E. Acker
Mark D. Rasmussen
Timothy T. Finley
CHAPMAN & CUTLER
111 West Monroe Street
Chicago, IL 60603
ATTORNEYS FOR RESPONDENT/
APPELLEE
LaSalle National Bank
Roderick R. McKelvie, Honorable
UNITED STATES DISTRICT COURT
District of Delaware
844 King Street
Wilmington, DE 19801
NOMINAL RESPONDENT
OPINION OF THE COURT
ALDISERT, Circuit Judge.
These expedited and consolidated appeals require us to
decide if the district court properly exercised its discretion
by appointing a trustee in the bankruptcy of Marvel
Entertainment Group, Inc., because of the extreme
acrimony between the debtor-in-possession and the
creditors. If we affirm the appointment, we must then
decide if the court acted within its proper discretionary
power by denying the motion of the trustee, John J.
Gibbons, to appoint the law firm of Gibbons, Del Deo,
Dolan, Griffinger & Vecchione, P.C. ("the Firm") as counsel
to the trustee. The district court determined that the Firm's
prior unrelated representation of Chase Manhattan Bank, a
creditor in the bankruptcy, disqualified it from serving as
trustee's counsel. We will affirm the appointment of the
trustee and reverse the order denying Gibbons's motion for
an order authorizing employment of the Firm as his
counsel. Because our legal analysis necessarily involves a
review of the district court's factual findings, we must first
set out the adjudicative facts in some detail.
5
I.
Marvel and various corporate affiliates filed chapter 11
petitions on December 27, 1996 and continued to run
Marvel as debtor-in-possession. 11 U.S.C. SS 1107-1108.
Approximately 1,700 creditors held $1 billion in claims
against the Marvel estate.
Both before and after the filing of the petitions, Westgate
International, L.P. and High River Limited Partnership, each
controlled by Carl Icahn, (the "Icahn interests"), purchased
at a discount a substantial number of pre-petition debt
claims and bonds which had been issued by several holding
companies owning all or substantially all of Marvel's stock.
These holding companies, under the control of Ronald
Perelman, had pledged their Marvel stock as security for
the bonds. Two groups loomed large in the bankruptcy
proceedings: one was an Official Bondholders' Committee
and an indenture trustee, LaSalle National Bank, chosen to
act primarily on behalf of the Icahn interests; the other,
various creditors of Marvel, known as "the Lenders," who
held over $600 million in debt claims at the time of the
filings, secured by all of Marvel's assets.
From the start of the proceedings, disputes arose among
the various parties, especially between the Icahn interests
and the Lenders. The Icahn interests opposed an initial
bankruptcy financing plan submitted by the Perelman
holding companies, under which the holding companies
would have infused $100 million into Marvel in return for
priority recognition of the Lenders' debt claims. The Icahn
interests contended that the Perelman-controlled Marvel
debtors were favoring their "lender accomplices" to ensure
that "Perelman re-acquires control of Marvel, without
competitive bidding, for an obscenely low price."
Notwithstanding the Icahn interests' objections, the
bankruptcy court approved the financing plan.
From January through June of 1997, tension arose
between the Lenders and the Icahn interests. The Icahn
interests fought to take control of the Marvel board of
directors. Substantial litigation went forward. On January
13, 1997, the Icahn interests moved the bankruptcy court
to lift the automatic bankruptcy stay, 11 U.S.C. S 362(a)(3),
6
so they could foreclose on the holding companies' defaulted
bonds and vote the pledged stock. Marvel sought a
temporary restraining order from the bankruptcy court to
enjoin the Icahn interests from voting the stock and
replacing Marvel's board of directors. The bankruptcy court
issued the order on March 24, 1997. On the same day, the
Lenders moved the bankruptcy court for an order
appointing a responsible officer to take control of the
bankruptcy, or in the alternative a trustee. That same
month, the Icahn interests took significant steps toward
gaining control of Marvel. They offered to infuse $365
million into Marvel, partially for operation of its business
but mostly to repay $300 million of its secured debt, in
return for "exclusive" control of Marvel's operations.
Through their agent Chase Manhattan Bank, the Lenders
vigorously opposed this plan, explaining that the Icahn
interests had presented no "concrete turnaround strategy
. . . or a management team capable of executing one."
On May 14, 1997, the district court vacated the
bankruptcy court's temporary restraining order, permitting
the Icahn interests to vote the pledged stock. In re Marvel
Entertainment Group, Inc., 209 B.R. 832, 840 (D. Del.
1997). With the lifting of the restraining order, the litigation
ended and the inevitable took place--on June 20, 1997, the
Icahn interests took control of Marvel. Thus, an anomaly
arose. The Icahn interests began to wear two hats--one as
creditors of the holding companies that controlled Marvel;
the other as the debtor-in-possession of Marvel.
Settlement negotiations proceeded throughout the
summer of 1997. The new Icahn-controlled debtor-in-
possession proposed a settlement in which the Icahn
interests would control a newly-organized Marvel company
merged with its affiliate Toy Biz, and would purchase the
Lenders' claims at a substantial discount. To consummate
the settlement, it was necessary to obtain the approval of
two-thirds of all creditors as required under the
Bankruptcy Code, 11 U.S.C. S 1126(c). The Lenders were
not successful in obtaining this approval.
The parties tried again. Another proposed settlement was
attempted by the Icahn interests, this time with Chase
directly as one of the Lenders. The terms were similar to
7
those contained in the first effort, but this time Chase was
required to sell its claims to the Icahn interests for even
less than what was offered under the former proposal.
Moreover, the settlement proposal required the creditors to
support the Icahn interests' control of all Marvel entities
and to agree to place High River's and Westgate's debt
claims into a priority secured position. The necessary two-
thirds approval not forthcoming, the settlement
negotiations collapsed in October 1997.
On October 30, 1997, the Icahn-controlled debtor-in-
possession commenced adverse litigation in the district
court against the Perelman holding companies, the Lenders
and other creditors in the Marvel bankruptcy (the
"Perelman litigation"). It asserted 19 causes of action
alleging breach of fiduciary duty, fraudulent conveyance,
preferential transfer and breach of contract. The complaint
sought to void the Lenders' claims or to subordinate them
to the claims of High River and Westgate. The complaint
described an alleged conspiracy between Toy Biz, the
former Marvel board and the Lenders to "sabotage" the new
Icahn-controlled debtor-in-possession's reorganization
efforts. At the same time, the Icahn interests moved the
district court for an order withdrawing the chapter 11
petitions and all related matters in the bankruptcy court
and removing them to the district court to be heard in
conjunction with the Perelman litigation. The Lenders
opposed this withdrawal and renewed their motion before
the bankruptcy court for the appointment of a trustee.
The district court noted that the Icahn interests
instituted the Perelman litigation "by counsel who had not
previously entered an appearance in this matter. Prior to
the filing of the action, Marvel, as controlled by the Icahn
interests, had not sought approval from the bankruptcy
court to retain that counsel, nor had it sought approval to
file the action." At a conference held by the district court to
discuss its jurisdiction over the Perelman litigation, the
court "invited the parties to submit papers on the
jurisdictional issue, but made clear that it did not want to
interfere with the bankruptcy court's ability to resolve the
underlying dispute." Nonetheless, the day after the
conference the Icahn interests sent a letter to the
8
bankruptcy court which, as the district court found,
"incorrectly stated that while that motion [on jurisdiction]
was pending, the bankruptcy court was required to refrain
from taking further action." This caused the bankruptcy
court to cancel its hearing on the appointment of a trustee.
At a district court hearing on November 13, 1997, all
parties agreed to the withdrawal of the Marvel cases from
the bankruptcy court and their transfer to the district
court. The district court then heard argument on whether
a trustee should be appointed. The argument was
summarized by the court:
In opposing the motion, the Debtors accuse the
Lenders, and specifically Chase, of flip-flopping on
positions throughout the life of this proceeding,
whenever it suits their purposes. The Debtors describe
the reorganization plan of the Lenders and Toy Biz as
illegal, and claim that the Lenders have no desire that
a neutral trustee be appointed. . . . They claim that the
Lenders have put a strangle-hold on the Debtor's
financing, and that the Lenders are responsible for
failure of both the Settlement and the Second
Settlement. They also repeat many of the allegations
made in the Perelman litigation. . . .
The Creditors Committee describes the relationship
between the Icahn interests and the Lenders as having
reached an "impasse." . . .
In support of their motion, the Lenders accuse the
Icahn interests of an elaborate scheme to take over
Marvel at a discount price while diminishing the value
of the Lender's claims on the company as creditors.
They claim that the Perelman litigation is part of that
scheme, and was brought, at least in part, as a weapon
to punish the Lenders for not consummating the two
Settlements. . . . The Lenders claim that the present
board is incapable of neutrality, and is guilty of
breaching its fiduciary duties to creditors.
Appellants High River's and Westgate's Ex. C at 7-8. On
December 12, 1997, the district court granted the motion
authorizing the United States Trustee to appoint a trustee.
9
Appealing that order are Marvel and the Icahn interests
which control it.
The U.S. Trustee recommended Gibbons to serve as
trustee. Pursuant to this recommendation, Gibbons
disclosed that the Firm was representing Chase in an
unrelated matter. The representation did not involve
litigation, but only construction financing for the New
Jersey Performing Arts Center, a community organization.
The Firm's representation of Chase generated a total of
$48,000 in fees in 1997, about 0.1% of the Firm's revenue
that year. Its representation was virtually complete at the
time Gibbons was selected as trustee. In addition, Gibbons
disclosed that Chase had granted the Firm an
unconditional waiver of any conflicts which might arise
from Gibbons's service as trustee. The waiver included an
authorization permitting the Firm to represent Gibbons in
any matter adverse to Chase. The district court appointed
Gibbons as trustee on December 22, 1997 after considering
the U.S. Trustee's recommendation and reviewing Gibbons's
disclosure form.
Gibbons subsequently moved for an order authorizing
employment of the Firm as trustee's counsel. In
conjunction with this motion, Gibbons submitted an
affidavit from the Firm which was materially identical to
Gibbons's prior disclosures in its description of the Firm's
representation of Chase; it stated that the Firm had
represented Chase "from time to time," and that it currently
was representing Chase in the Arts Center financing.
In light of the Firm's relationship with Chase, the Icahn
interests filed an objection to the Firm's employment as
counsel, and LaSalle filed a preliminary statement with the
district court questioning whether the Firm was
"disinterested," as required by the Bankruptcy Code. 11
U.S.C. S 327(a). The Firm responded to this statement with
a letter indicating that it could properly serve as trustee's
counsel, documenting this claim with Chase's waiver of
conflicts and a letter mutually terminating all attorney-
client relations between Chase and the Firm.
The district court held a hearing on January 15, 1998 to
consider the Firm's employment. At that time, the Firm's
10
representation of Chase had already been terminated.
LaSalle argued that it wanted to reserve its rights to object
to the Firm's employment if a conflict involving Chase later
appeared, and stated that "[t]he appearance of a conflict of
interest . . . creates some discomfort." Similarly, the Icahn
interests said that "the termination of the [Firm's and
Chase's attorney-client] relationship does go a long ways
toward the legal issues that were presented," but that "we
still have an appearance issue . . . that could impact on
subsequent determinations by the trustee." Thus, it is clear
that LaSalle and the Icahn interests were concerned not
with an actual conflict of interest, but with the
"appearance" that the Firm would not act impartially.
On January 27, 1998, the district court denied Gibbons's
motion for an order authorizing employment of the Firm as
trustee's counsel, reasoning that the Firm's "representation
of Chase taints the image of objectivity that the trustee and
his counsel should possess." Gibbons immediatelyfiled
both this appeal challenging the district court's decision
and a petition for a writ of mandamus.1 On February 12,
1998, we granted Gibbons's motion to expedite the appeal
and petition and consolidated these cases with the Icahn
interests' prior appeal from the appointment of a trustee.
We review the district court's findings of fact for clear
error, conduct plenary review over its conclusions of law
and review its decision to appoint a trustee for abuse of
discretion. See In re Sharon Steel Corp., 871 F.2d 1217,
1222, 1225-1226 (3d Cir. 1989). The district court's
disqualification of the Firm is reviewed for an abuse of
discretion. See In re BH & P Inc., 949 F.2d 1300, 1317 (3d
Cir. 1991). "An abuse of discretion exists where the district
court's decision rests upon a clearly erroneous finding of
fact, an errant conclusion of law, or an improper
application of law to fact." ACLU v. Black Horse Pike Reg'l
Bd. of Educ., 84 F.3d 1471, 1476 (3d Cir. 1996) (internal
quotation omitted).
_________________________________________________________________
1. Because we will rule in Gibbons's favor on his direct appeal, it is
unnecessary for us to consider his petition for mandamus. See In re Ford
Motor Co., 110 F.3d 954, 964 (3d Cir. 1997). The petition therefore will
be dismissed as moot.
11
II.
Because this is an appeal from a district court exercising
original jurisdiction in bankruptcy, our jurisdiction stems
from 28 U.S.C. S 1291, not from 28 U.S.C.S 158(d). See In
re Amatex Corp., 755 F.2d 1034, 1038 (3d Cir. 1985). We
apply a broader concept of "finality" when considering
bankruptcy appeals under S 1291 than we do when
considering other civil orders under the same section. Id. at
1039. A finality determination in a bankruptcy appeal
involves consideration of such factors as "the impact of the
matter on the assets of the bankruptcy estate, the
preclusive effect of a decision on the merits, and whether
the interests of judicial economy will be furthered." BH & P,
949 F.2d at 1306 (quoting F/S Airlease II, Inc. v. Simon,
844 F.2d 99, 104 (3d Cir. 1988)). We see no reason to use
conflicting standards when a district court, as
distinguished from a bankruptcy court, has issued an order
in bankruptcy directly. See Amatex, 755 F.2d at 1039(stating in the context of S 1291 that "we have consistently
considered finality in a more pragmatic and less technical
way in bankruptcy cases").
We recognize that the Courts of Appeals are not in total
agreement on whether a district court order appointing a
bankruptcy trustee is interlocutory or final. See In re Cajun
Elec. Power Coop., Inc., 69 F.3d 746, 748 (5th Cir. 1995)
(appointment of bankruptcy trustee is an immediately
appealable final order); In re Plaza de Diego Shopping Ctr.,
Inc., 911 F.2d 820, 826 (1st Cir. 1990) (same); Committee of
Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239,
241 (4th Cir. 1987) (same). But see In re Cash Currency
Exch., Inc., 762 F.2d 542, 548 (7th Cir. 1985)
(unappealable); see also In re St. Charles Preservation
Investors, Ltd., 916 F.2d 727, 729 (D.C. Cir. 1990) (district
court order requiring confirmation of permanent trustee
unappealable). Using the liberal finality rules which apply
in bankruptcy matters of this nature, we believe that
jurisdiction is proper over the order appointing a trustee
here. In the past, we have exercised jurisdiction over a
district court order affirming a bankruptcy court order
appointing a trustee. Sharon Steel, 871 F.2d at 1222, 1225-
1226; see also Plaza de Diego, 911 F.2d at 826 ("If an
12
appeal [from appointment of trustee] were postponed until
a plan of reorganization were confirmed, there would be no
satisfactory way to vindicate the" debtor's rights.). Were we
to put off hearing an appeal of the district court's order
appointing a trustee until after the entire bankruptcy
proceeding, allowing the possibility of an order returning
this bankruptcy to its very beginning for a second round,
the concept of judicial efficiency would be effectively turned
on its head. Liberal finality considerations in orders
appointing bankruptcy trustees are necessary because
these orders cannot be meaningfully postponed to the
bankruptcy's conclusion.
Were we not to take jurisdiction at this juncture, no
meaningful review of the order appointing a trustee could
ever take place, as a practical matter. What we know as
men and women we must never forget as judges. Once
bankruptcy reorganization has been completed after
months or years and after a plan of reorganization has been
hammered out, it strains credulity to suggest that a
reviewing court would jettison years of bankruptcy
infighting, compromise and final determinations solely for
the purpose of reversing the appointment of a trustee and
have the proceedings begin again from scratch. The
practical reality is that unless an appeal can be lodged now,
there will never be a meaningful review of the order
appointing a trustee. We therefore hold that jurisdiction
over the district court's order appointing a trustee is proper
pursuant to S 1291.
We believe that the overriding interests of judicial
economy and the effective finality of the district court's
decision give us jurisdiction also over Gibbons's appeal of
the district court's order denying his motion for an order
approving employment of the Firm as his counsel. Given
that this Court has jurisdiction over the appeal of the
appointment of a trustee, considerations of efficiency favor
hearing this related appeal at the same time. Moreover,
considering LaSalle's2 concession that the only way
_________________________________________________________________
2. In addition to LaSalle, Appellees in Gibbons's appeal include the Icahn
interests, the Official Equity Security Holders' Committee and Toy Biz,
Inc. Only LaSalle and the Equity Committee filed briefs, and counsel for
LaSalle argued the case alone. We understand the arguments presented
by LaSalle to represent the Appellees' collective position.
13
Gibbons could properly continue to serve as trustee is to
divest all interest in the Firm for the duration of his
trusteeship, we perceive a most transparent effort to
remove him as trustee without resort to meeting the
burdens imposed by the Bankruptcy Code. See 11 U.S.C.
S 324(a) (trustee may only be removed "for cause"). In
addition, to delay the appeal of the order denying counsel
until all matters in the bankruptcy have been conclusively
determined is impractical, as in the situation of the order
appointing the trustee. We will not overburden the courts of
this judicial circuit by requiring the parties to conduct the
entire bankruptcy proceeding with this issue hanging
heavily over their heads when we can easily decide it now
on the facts already on record. For these reasons,
jurisdiction over Gibbons's appeal is proper pursuant to
S 1291.
We will now turn to the merits of the appeals.
III.
Under the Bankruptcy Code, the district court was
empowered to appoint a trustee:
(1) for cause, including fraud, dishonesty,
incompetence, or gross mismanagement of the affairs
of the debtor by current management, either before or
after the commencement of the case, or similar cause,
. . . or
(2) if such appointment is in the interests of creditors,
any equity security holders, and other interests of the
estate . . . .
11 U.S.C. S 1104(a). The party moving for appointment of a
trustee, in this case the Lenders, must prove the need for
a trustee under either subsection by clear and convincing
evidence. See Sharon Steel, 871 F.2d at 1226. "It is settled
that appointment of a trustee should be the exception,
rather than the rule." Id. at 1225. In the usual chapter 11
proceeding, the debtor remains in possession throughout
reorganization because "current management is generally
best suited to orchestrate the process of rehabilitation for
the benefit of creditors and other interests of the estate." In
14
re V. Savino Oil & Heating Co., 99 B.R. 518, 524 (Bankr.
E.D.N.Y. 1989). Thus, the basis for the strong presumption
against appointing an outside trustee is that there is often
no need for one: "The debtor-in-possession is afiduciary of
the creditors and, as a result, has an obligation to refrain
from acting in a manner which could damage the estate, or
hinder a successful reorganization." Petit v. New England
Mort. Servs., 182 B.R. 64, 69 (D. Me. 1995) (internal
quotations omitted). The strong presumption alsofinds its
basis in the debtor-in-possession's usual familiarity with
the business it had already been managing at the time of
the bankruptcy filing, often making it the best party to
conduct operations during the reorganization. See Sharon
Steel, 871 F.2d at 1226. The facts here, however, militate
against invoking this presumption. The Icahn interests took
control over Marvel's management six months after the
chapter 11 filing. We are not confronted with a debtor who
possesses extensive familiarity with the company's
operations. It is therefore inappropriate to suggest that the
usual presumption should be applied to a Johnny-come-
lately debtor-in-possession, especially one that is also a
substantial creditor.
The district court determined that the Icahn interests
were "unable to resolve conflicts" with creditors of the
estate. On the basis of this acrimony, it ordered the
appointment of a trustee. We hold that the district court
did not abuse its discretion because (A) this acrimony rises
to the level of "cause" under S 1104(a)(1), and (B) a trustee
would serve the best interests of the parties and estate.
A.
We have not heretofore addressed the question of
whether acrimony between debtor and creditor in a
bankruptcy case may rise to the level of "cause"
necessitating the appointment of a trustee under
S 1104(a)(1). Cf. Sharon Steel, 871 F.2d at 1228 (finding
"cause" due to debtor-in-possession's gross
mismanagement of estate and internal conflicts of interest).
In Sharon Steel, we noted that the appointment of a trustee
is mandatory upon a determination of cause, but also that
"a determination of cause . . . is within the discretion of the
15
court." Id. at 1226 (quoting Dalkon Shield, 828 F.2d at
242). A review of cases from other circuits, as well as the
policies behind the appointment of a trustee, demonstrates
that the district court here properly exercised its discretion
by invoking S 1104(a)(1) to reach its conclusion.
It is significant that the language of S 1104(a)(1) does not
promulgate an exclusive list of causes for which a trustee
must be appointed, but rather provides that a trustee shall
be appointed "for cause, including fraud, dishonesty,
incompetence, or gross mismanagement . . . or similar
cause". The Court of Appeals for the Fourth Circuit has
recognized that "the concepts of incompetence, dishonesty,
gross mismanagement and even fraud all cover a wide
range of conduct," and courts must be given the discretion
necessary to determine if the debtor-in-possession's
"conduct shown rises to a level sufficient to warrant the
appointment of a trustee." Dalkon Shield, 828 F.2d at 242(internal quotation omitted). This discretionary authority is
consistent with a "policy of flexibility" permeating the
Bankruptcy Code's overall aim of protecting creditors while
giving debtors a second chance. Id. The Code itself,
therefore, does not prohibit the appointment of a trustee
based on a finding of acrimony between debtor and
creditor, parties whose interests must be balanced and
protected under the discretion of the courts.
Moreover, we are impressed by the persuasive reasoning
in In re Cajun Elec. Power Coop., Inc., 74 F.3d 599, 600 (5th
Cir.) (adopting on rehearing the opinion of dissent in 69
F.3d at 751), cert. denied, 117 S. Ct. 51 (1996), in which
the court upheld a trustee appointment based on afinding
of acrimony. In that case, the debtor-in-possession's
interests conflicted with those of its creditors to such an
extent that "the appointment of a trustee may be the only
effective way to pursue reorganization." The debtor-in-
possession was a utility cooperative whose board members
were faced with a federal agency order lowering its utility
rates. The debtor-in-possession's board members,
themselves managers or members of the debtor-in-
possession's individual member utility companies, were
required to decide whether to appeal the agency order,
seeking to maintain the high rates charged to the individual
16
member companies and thus to better enable the debtor-in-
possession to meet its debt obligations to its creditors in
bankruptcy, or to take no action and charge less to their
individual companies. Cajun Elec., 69 F.3d at 747. The
court recognized that the debtor-creditor conflict went
"beyond the `inherent' conflicts under which all healthy
cooperatives operate." Cajun Elec., 74 F.3d at 600 (adopting
dissent at 69 F.3d at 751). The extent of this conflict alone
provided sufficient cause for the appointment of a trustee
under S 1104(a)(1).
In Cajun Electric, the court recognized that all
cooperatives operate amidst certain "inherent" conflicts of
interest, but rejected the notion that its holding created a
" `per se rule' under which any cooperative seeking Chapter
11 protection would be automatically subject to the
appointment of a trustee." Id. Rather, the teachings of this
case are that a district court may find cause to appoint a
trustee for "acrimony" only on a case-by-case basis, when
the inherent conflicts extend beyond the healthy conflicts
that always exist between debtor and creditor, or as it
found in that case, when the parties "begin working at
cross-purposes".
We therefore adopt the reasoning in Cajun Electric, 74
F.3d at 600 (adopting dissent at 69 F.3d at 751), and apply
its teachings to the case at bar. Here the district court
found that "the Debtors, as controlled by the Icahn
interests, and the Lenders, take dramatically different
stances on many issues." Citing (1) the debtor-in-
possession's institution of several adversary actions, (2) the
unconsummated settlements, (3) the U.S. Trustee's opinion
"that the parties seem to be unable to reach a consensus"
and (4) its observations that "the Debtors and the Lenders
have flung accusations at each other, and have failed to
demonstrate any ability to resolve matters cooperatively,"
the district court concluded that "there is no reasonable
likelihood of any cooperation between the parties in the
near future." As in Cajun Electric, 74 F.3d at 600 (adopting
dissent at 69 F.3d at 751), the district court did not clearly
err, based on its review of these events, when it found a
deep conflict to exist between the Icahn-controlled debtor-
in-possession and the creditors in bankruptcy. Also like
17
Cajun Electric, "this is a large and messy bankruptcy that
promises to get worse without a disinterested administrator
at the helm." Id.; see also In re Colorado-Ute Elec. Assoc.,
Inc., 120 B.R. 164, 176 (Bankr. D. Colo. 1990) (finding
cause to appoint trustee under S 1104(a)(1) when the court
could not "envision a way for the current management and
board to resolve the inherent conflict between what is best
for Colorado-Ute, its creditors and the co-op members").
We expressly hold that there is no per se rule by which
mere conflicts or acrimony between debtor and creditor
mandate the appointment of a trustee. In this case, rather,
we are faced with circumstances in which the Icahn
interests, themselves creditors of the Perelman holding
companies, are currently in control of the debtor at the
same time that the debtor proposes reorganization plans. In
this position, although the Icahn interests are technically
and officially fiduciaries to all creditors, they would also be
placed in an awkward position of evaluating their own
indenture and debt claims. Having found that this
unhealthy conflict of interest was manifest in the"deep-
seeded conflict and animosity" between the Icahn-controlled
debtor and the Lenders and in the lack of confidence all
creditors had in the Icahn interests' ability to act as
fiduciaries, the district court did not depart from the proper
exercise of discretion when it determined sufficient cause
existed under S 1104(a)(1) to appoint a neutral trustee to
facilitate reorganization.
We reject the Icahn interests' argument that unhappy
creditors involved in future bankruptcies could remove the
debtors-in-possession by their obstinate refusal to
cooperate. We are not impressed by this argumentum ad
terrorem. In the view we take, it is within the district court's
sound discretion to make a determination of cause, and
this requires fact-finding and application of the facts to
relevant precepts. The district court here determined that
the Icahn interests were not entirely without blame for the
breakdown of reorganization efforts with the Lenders:
"[T]here can be no question that the debtor-in-possession
has demonstrated difficulty resolving its conflicts with other
parties, such as the Lenders." The district court noted that
the Icahn-controlled debtor-in-possession instituted
18
litigation against Perelman without seeking the approval of
the bankruptcy court; moreover, the debtor-in-possession
was represented by counsel who had not previously entered
an appearance in the case. In addition, the day after the
district court "made clear that it did not want to interfere
with the bankruptcy court's ability to resolve the underlying
dispute," the Icahn interests sent a letter to the bankruptcy
court which "incorrectly stated that while that motion [on
jurisdiction] was pending, the bankruptcy court was
required to refrain from taking further action." This caused
the bankruptcy court to cancel a hearing on the
appointment of a trustee. Such actions by a debtor-in-
possession have been sufficient for other courts to find
cause for appointment of a trustee. See, e.g. , V. Savino Oil,
99 B.R. at 526 (debtor-in-possession failed to disclose to
court corporate relationship with entity uninvolved in
bankruptcy case and "made affirmative efforts to
misrepresent or conceal" material matters).
Finally, the policies behind the appointment of a trustee
support our conclusion. The appointment of a trustee is the
installation of a court officer charged with fiduciary duties.
The district court's determination that cause existed to
appoint an independent trustee based on the Icahn
interests' actions is a recognition of their failure to assume
these duties. When the chapter 11 petition was filed in this
case, the debtor-in-possession assumed the samefiduciary
duties as would an appointed trustee; the Icahn interests
later stepped into this fiduciary position when they took
control of Marvel. See 11 U.S.C. S 1107(a); United States v.
Whiting Pools, Inc., 462 U.S. 198, 200 n.3 (1983). These
obligations include "[o]pen, honest and straightforward
disclosure to the Court and creditors." See V. Savino Oil, 99
B.R. at 526. The Icahn interests' actions surrounding the
Perelman litigation fall short of this fiduciary benchmark.
Also among the fiduciary obligations of a debtor-in-
possession is the "duty to protect and conserve property in
its possession for the benefit of creditors." In re Ionosphere
Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 1990). The
intense and high-stakes bickering between the Icahn
interests and the Lenders does not instill confidence that
the Icahn interests could fairly negotiate with the creditors
to whom they owe these duties, nor that reorganization will
19
occur effectively. See, e.g., In re Bellevue Place Assocs., 171
B.R. 615, 623 (Bankr. N.D. Ill. 1994) (finding no wrongful
conduct by debtor-in-possession but an inability to control
reorganization, thus an inability to discharge fiduciary
duties, necessitating appointment of trustee "to unfreeze"
unproductive negotiations).
As one bankruptcy court has noted:
The willingness of Congress to leave a debtor-in-
possession is premised on an expectation that current
management can be depended upon to carry out the
fiduciary responsibilities of a trustee. And if the debtor-
in-possession defaults in this respect, Section
1104(a)(1) commands that the stewardship of the
reorganization effort must be turned over to an
independent trustee.
V. Savino Oil, 99 B.R. at 526. Here, the district court acted
within the proper bounds of discretion in appointing a
trustee under S 1104(a)(1) because of the Icahn interests'
contribution to the acrimony with Marvel's creditors.
B.
Unlike S 1104(a)(1), which provides for mandatory
appointment upon a specific finding of cause, S 1104(a)(2)
"envisions a flexible standard." It gives the district court
discretion to appoint a trustee "when to do so would serve
the parties' and estate's interests." Sharon Steel, 871 F.2d
at 1226. Here the court found that "deep seeded conflict
and animosity between a debtor and its creditors" is at the
heart of this bankruptcy case, thus "the selection of a plan,
whatever its details, is in the best interests of all parties,
and the best way to achieve that result is to appoint a
trustee." Even if we were of the view that the appointment
of a trustee was not mandated by the analysis required in
S 1104(a)(1), we are satisfied that the district court's
determination would come within proper exercise of
discretion under the flexible S 1104(a)(2) standard. The level
of acrimony found to exist in this case certainly makes the
appointment of a trustee in the best interests of the parties
and the estate.
20
In Petit, 182 B.R. at 70, for example, numerous discovery
disputes between the debtor-in-possession and creditors led
the bankruptcy court to appoint a trustee, a decision
upheld by the district court because this "may be the only
way that the bankruptcy court can ensure that
reorganization will proceed." The district court in that case
described the impasse reached between the parties:
The tangled history of these proceedings suggests that
"friction" will continue at an unacceptable level. While
some degree of antagonism and animosity between a
debtor and creditors can be expected in any
bankruptcy proceeding, it has reached a particular
intensity here which is complicating efforts to
"reorganize" the Debtor.
Id. The court also focused on the discretionary nature of
the appointment decision, which involves to some extent
weighing equities, stating, "the balance of interests here
weighs in favor of appointing a trustee." Id. at 71.
Similarly in this case, the district court's lengthy account
of this complex bankruptcy case, in which "the parties are
sharply divided on many issues, and are presently
incapable of resolving them," supported its exercise of
discretion to appoint a trustee, exactly as the court had
done in Petit. See id. at 70 ("deep-seeded conflict and
animosity between a debtor and its creditors provides a
basis for the appointment of a trustee"); see also Colorado-
Ute, 120 B.R. at 176 (appointment of trustee in interests of
parties where "serious conflicts . . . between and among the
debtor, its board and creditors [made] the prospect for
gridlock seem more probable than the ability to rehabilitate
the debtor"); In re The Bible Speaks, 74 B.R. 511, 512
(Bankr. D. Mass. 1987) (appointing trustee when"friction
[had] developed between the Debtor and the Creditors'
Committee which threaten[ed] to engulf this estate in costly
and legalistic bickering over the entire range of the
reorganization process").
We also reject the Icahn interests' arguments that the
district court must apply a strict cost-benefit analysis when
deciding to appoint a trustee. This is a case of profound
financial magnitude, involving approximately $1 billion in
21
claims against the estate. See In re Sharon Steel Corp., 86
B.R. 455, 466 (W.D. Pa. 1988) ("In a case of this
magnitude, the cost of having a trustee in place is
insignificant when compared with the other costs of
administration and when compared with the enormous
benefit to be achieved by the establishment of trust and
confidence in . . . management.").
Neither did the court abuse its discretion by deciding not
to appoint an examiner in the trustee's stead: "I'm just not
convinced that an examiner is going to get done what needs
to get done here. I think we need a decision-maker to come
in and make some decisions." See Petit, 182 B.R. at 72 ("it
would be more efficient and less costly simply to appoint a
trustee now . . . since a trustee has the power to perform
all of the functions of an examiner"). Under the Bankruptcy
Code, a trustee is given all the powers of an examiner to
analyze and report on the interests of the parties and
actions of the debtor, but is also given the power to act on
behalf of the estate, including the filing of a reorganization
plan. 11 U.S.C. SS 1106(a)(5), (b). An examiner is not a
substitute for a trustee. The district court need not have
favored the appointment of an examiner here, especially
after finding that a trustee is the more appropriate position.
See In re Patton's Busy Bee Disposal Serv., Inc., 182 B.R.
681, 685 (Bankr. W.D.N.Y. 1995) ("The position of examiner
is not a device to circumvent the appointment of a
trustee.").
Whether viewed from S 1104(a)(1) or (a)(2), the district
court acted within appropriate bounds of discretion in
appointing a trustee to act as a neutral and efficient
fiduciary in this complicated bankruptcy under the
circumstances of the strife-ridden history presented here.
IV.
Having concluded that the district court was within its
discretion in ordering the appointment of a trustee, we turn
now to Gibbons's appeal. Gibbons argues that the district
court erred when it disapproved the employment of the
Firm as trustee's counsel.
22
The Bankruptcy Code allows the trustee of a bankruptcy
estate to employ attorneys to assist him in his duties. 11
U.S.C. S 327(a). In determining the standards under which
an attorney may serve in this capacity, we must, of course,
begin with the language of the statute. Section 327(a) first
provides that the trustee may employ attorneys "that do not
hold or represent an interest adverse to the estate." See
also S 327(c) (district court shall disapprove trustee's
employment of an attorney who has represented a creditor
"if there is an actual conflict of interest"). Section 327(a)
also requires that the attorney be a "disinterested
person[ ]." A "disinterested person" is defined, in relevant
part, as a person who:
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 an investment banker specified in
subparagraph (B) or (C) of this paragraph, or for any
other reason.
11 U.S.C. S 101(14)(E). A plain reading of this section
suggests that one is a "disinterested person" only if he has
an interest that is materially adverse to a party in interest
in the bankruptcy. The interest in question may be
materially adverse either for one of the specific reasons
delineated in the statute or "for any other reason."
We conclude that in considering Gibbons's motion for an
order authorizing employment of the Firm as trustee's
counsel, the district court applied an incorrect legal
standard under SS 327(a) and 101(14)(E), and even under
the proper standard its denial of the motion was not a
permissible exercise of discretion.
A.
We previously interpreted the standards applicable to
employment of trustee's counsel under SS 327(a) and
101(14)(E) in BH & P, 949 F.2d 1300. Insofar as both
parties have somewhat misread BH & P, and urge upon us
such conflicting interpretations of it, we have studied our
previous decision in great detail and today expressly
23
reiterate its holding: (1) Section 327(a), as well as S 327(c),
imposes a per se disqualification as trustee's counsel of any
attorney who has an actual conflict of interest; (2) the
district court may within its discretion--pursuant to
S 327(a) and consistent with S 327(c)--disqualify an
attorney who has a potential conflict of interest and (3) the
district court may not disqualify an attorney on the
appearance of conflict alone.
In BH & P, an S corporation and both of its principal
shareholders each filed for bankruptcy. The cases were
consolidated and a single trustee and law firm were
appointed to represent all three estates. Id. at 1303. After
the corporation filed a fraud and breach of fiduciary duty
suit against the shareholders, the corporation's primary
secured lender alleged that the trustee and the lawfirm
had a conflict of interest. Id. at 1304. The district court
disqualified the trustee and the law firm from serving the
shareholders' estates, and we affirmed.
In reiterating BH & P's precise rule on attorney
disqualification under S 327(a), we focus only on that
section of BH & P which discussed the standards for
attorney disqualification. In Part IV of the opinion, we said:
While the bankruptcy court recognized that by the
terms of section 327(c) "disapproval of employment is
mandatory where there is an actual conflict," it does
not follow "that there is no discretion [under section
327(a)] to disapprove employment when the conflict is
`potential' ". The court then held that
[t]he court should generally disapprove employment
of a professional with a potential conflict, with
certain possible exceptions. First of all, . . . there
may occasionally be large cases where every
competent professional in a particular field is already
employed by a creditor or a party in interest . . . .
The other exception is where the possibility that
the potential conflict will become actual is remote,
and the reasons for employing the professional in
question are particularly compelling. This court will
not attempt here to define the parameters of this
exception, which necessarily will depend upon the
24
facts of a particular case. I will, however, note that
even in such situations, employment of a
professional with a potential conflict is disfavored.
We do not find error in the bankruptcy court's
articulation of the standard governing conflict of
interest applicable to professionals. . . . As we have
said, denomination of a conflict as "potential" or
"actual" and the decision concerning whether to
disqualify a professional based upon that
determination in situations not yet rising to the level of
an actual conflict are matters committed to the
bankruptcy court's sound exercise of discretion.
Id., 949 F.2d at 1316-1317 (citations omitted).
This passage clearly indicates that S 327(a) allows
disqualification of attorneys only if they have an actual or
a potential conflict of interest. In addition, the first sentence
of the passage cuts against the trustee's contention, in light
of S 327(c), that the Firm may only be disqualified based on
an actual conflict.
We reiterate the teachings of BH & P: Section 327(a)
presents a per se bar to the appointment of a lawfirm with
an actual conflict, and gives the district court wide
discretion in deciding whether to approve the appointment
of a law firm with a potential conflict. Therefore, the district
court erred when it held that it could disqualify as
disinterested any person who "in the slightest degree might
have some interest or relationship that would even faintly
color the independence and impartial attitude required by
the Code and the Bankruptcy Rules." App. at 39 (quoting
BH & P, 949 F.2d at 1308, in turn quoting isolated
language from the district court opinion in that case, not
our discussion of the standards for attorney
disqualification). Following this faulty reasoning, LaSalle
contends that section 327(a), as interpreted in BH & P,
allows disqualification of a law firm for a mere "appearance
of impropriety." We disagree with this contention.
To be sure, BH & P, 949 F.2d at 1313, does contain a
reference to the "appearance of conflict." For several
reasons, however, we find this reference to be"a marginal
comment [which] will not bear the heavy weight [LaSalle
25
has] placed on it." See Rivet v. Regions Bank, 66 U.S.L.W.
4132, 4134 (U.S. Feb. 24, 1998) (declining to credit a
previous footnote that was not essential to the decision in
the previous case). First, part IV of BH & P, which interprets
section 327(a) and from which we quoted extensively above,
makes no mention whatsoever of appearances of conflict.
Part IV mentions only actual and potential conflicts.
Second, we do not believe that BH & P's discussion of
S 101(14)(E)'s disinterest requirement, as applied to the
disqualification of a trustee, mandates a conclusion that
apparent conflicts alone allow a finding of
disinterestedness. In this context, we said in BH & P that
"[i]n some circumstances, the potential for conflict and the
appearance of conflict may, without more, justify removing
a trustee from service." Id. at 1313. At the risk of parsing
language too finely, the conjunctive reference to potential
conflict and appearance of conflict indicates that the two
together, but not appearance alone, can justify
disqualification. This conclusion is supported by the next
passage of our opinion, where we note that "it must be
made clear that `[h]orrible imaginings alone cannot be
allowed to carry the day. Not every conceivable conflict
must result in sending [the trustee] away to lick his
wounds.' " Id. (quoting In re Martin, 817 F.2d 175, 183 (1st
Cir. 1987)). To allow disqualification merely on the
"appearance of impropriety" indeed would allow"horrible
imaginings alone" to carry the day. Finally, in BH & P we
affirmed the district court's determination that the
attorneys in that case had an "actual conflict of interest."
Id. at 1315, 1317. In light of this determination, we do not
find BH & P's transitory reference to the appearance of
conflict to be controlling. We therefore reject LaSalle's
invitation to read an appearance of conflict disqualification
into S 327(a). Section 327(a) permitted the district court to
disqualify the Firm only if it had an actual or potential
conflict of interest.
B.
Even applying the proper standard, the district court's
disqualification of the Firm would amount to an abuse of
discretion. The Firm's conflict here is not potential or
26
actual. LaSalle acknowledges as much when it states that
its concern is "the ability of [the Firm] to act with total
objectivity and avoid even the appearance of `possible
unfairness and partiality.' " LaSalle's Br. at 28 (quoting the
district court's opinion). The Firm has never represented
Chase on a matter related to this bankruptcy and severed
all attorney-client relations with Chase in anticipation of its
selection as trustee's counsel. If we were to uphold the
district court's order under these circumstances, it is with
the utmost difficulty that we could imagine how a law firm
with any prior relationship to a secured creditor could ever
serve as trustee's counsel. Such a result would be
tantamount to a per se rule, which we refused to adopt in
BH & P.
The district court's exercise of its discretion is further
called into question by the anomalous situation in which it
approved Gibbons's appointment as the trustee in this
case, and then disapproved the employment of the Firm, in
which he is the first named partner, as trustee's counsel.
Sauce for the goose, then, is not sauce for the gander. The
disclosures in reference to both Gibbons's appointment and
the Firm's employment are the same. They revealed the
Firm's representation of Chase and that Chase had granted
the Firm an unconditional waiver of conflicts. Also, unlike
when the court approved Gibbons's appointment as trustee,
while the motion for approval of the Firm's employment as
counsel was pending, Chase and the Firm terminated their
attorney-client relationship. Given these facts, a logical
basis for this inconsistency is evanescent, if not
infinitesimal. There is an irreconcilable conflict with
dictates of good reason in the notion that Gibbons, as the
head of the Firm, is eligible to serve as trustee, but the
Firm is ineligible to serve as his counsel.
This anomaly is particularly troubling and augments the
primary reason why we reverse the district court's denial of
the trustee's motion. We reverse the district court because
it utilized a faulty premise in reaching its conclusion. It
applied the incorrect legal standard and thus strayed
beyond an appropriate exercise of discretion by
disqualifying the Firm under S 327(a) based solely on the
appearance of conflict. The trustee was within his rights
27
and prerogative to select the Firm as his counsel. To deny
the trustee's choice was to commit reversible error.
* * * * * * * * *
In sum, we have jurisdiction under 28 U.S.C. S 1291 to
review the district court's orders authorizing appointment of
the bankruptcy trustee and disapproving the Firm as
trustee's counsel. The district court properly exercised its
discretion in appointing a trustee under either 11 U.S.C.
S 1104(a)(1) or (a)(2) because "cause" includes the acrimony
found here between the Icahn-controlled debtor-in-
possession and the creditors and because on these facts
the appointment of a trustee was in the best interests of the
parties and the bankruptcy estate. Therefore, its order
appointing a trustee will be affirmed.
The district court exceeded permissible bounds of
discretion, however, when it applied an inappropriate legal
precept to deny Gibbons's motion for an order authorizing
employment of the Firm as trustee's counsel. The Firm does
not have an actual or potential conflict of interest and may
not be disqualified under 11 U.S.C. SS 327(a) and
101(14)(E). The district court's order will be reversed, and
the case will be remanded with directions that the district
court enter an order approving the Firm's employment.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
28