I.G. Petroleum, L.L.C. v. Fenasci (In Re West Delta Oil Co.)

United States Court of Appeals
Fifth Circuit
F I L E D
In the United States Court of Appeals
December 1, 2005
For the Fifth Circuit
Charles R. Fulbruge III
_________________________ Clerk
No. 04-30848
_________________________
IN THE MATTER OF: WEST DELTA OIL COMPANY, INC.,
Debtor.
I.G. PETROLEUM, L.L.C.,
Appellant,
versus
MICHAEL A. FENASCI; PERRIN BUTLER,
Appellees.
_________________________
Appeal from the United States District Court
For the Eastern District of Louisiana
(USDC No. 2:03-CV-3330-J)
_________________________
Before HIGGINBOTHAM, BARKSDALE, and CLEMENT, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
We review today an award of attorney’s fees to special
counsel in a bankruptcy proceeding who allegedly acted to acquire
the assets of the debtor to the debtor’s detriment. In awarding
fees, the bankruptcy court, upheld by the district court, found
no conflict of interest. We reverse.
I
Ninety-five percent of West Delta Oil Company’s shares were
held by James Ingersoll, Jr. and DKCCB Trust, in equal parts;
Donald Muller, president of West Delta, held the remaining five
percent. West Delta hired as counsel Ronald J. Hof, who filed a
petition for relief under Chapter 11 of the Bankruptcy Code on
January 26, 1999. There was bad-blood between Muller and
Ingersoll. Muller had accused Ingersoll of various acts of
mismanagement and, with a voting proxy from DKCCB, voted him out of
office (president and chief operating officer) eleven days before
West Delta filed for bankruptcy. Ingersoll moved to dismiss the
petition and, on April 6, 1999, West Delta retained Michael Fenasci
and Perrin Butler as special counsel to deal with that motion and
other issues relating to Ingersoll. Butler and Fenasci persuaded
the bankruptcy court to deny the Motion to Dismiss.1
West Delta filed under Chapter 11 but made no effort to
reorganize. A year later, on January 31, 2000, West Delta filed a
plan to liquidate. Under the plan, all of its assets were to be
transferred to Crescent Oil, an entity wholly owned by Donald
Muller, in exchange for payments over a five-year period by
Crescent Oil to West Delta’s creditors. On February 14, an outside
bidder, I.G. Petroleum (“I.G.”), filed a competing liquidating plan
to pay the creditors over four years in exchange for all of West
Delta’s assets. On February 18, 2000, a second outside bidder,
Source Energy, filed a competing liquidating plan, but it was later
withdrawn.
1
See In re W. Delta Oil Co., No. Civ. A. 99-1995, 2000 WL 108919 (E.D. La.
Jan. 28, 2000) (unpublished).
2
Meanwhile, the Chapter 11 proceedings intensified On February
9, 2000, Fenasci, as counsel for West Delta and its Board of
Directors, by letter to David Waguespack, counsel for I.G.,
threatened a RICO suit and pursuit of Rule 11 sanctions for
supposed allegations made in a Motion to Terminate Use of Property
filed by I.G. Fenasci claimed that the motion had misrepresented
West Delta’s operations and financial position to creditors and
wrongfully implicated Muller in mismanagement. On February 16 and
17, Butler, as counsel for West Delta and its Board of Directors,
sent letters threatening legal action to persons employed by Texaco
and Conoco, and allegedly working on behalf of Source Energy. The
letters also inquired as to whether Texaco and Conoco were involved
in efforts to take over West Delta, and whether these companies
approved of their employees’ actions with respect to West Delta.
On February 29, the bankruptcy court expanded Fenasci’s scope
of employment, authorizing him to handle certain matters pertaining
to I.G. Those matters included the plan filed by I.G. to take over
West Delta. Subsequently, on March 10, 2000, West Delta filed an
amended plan providing for payment in full of all creditors and no
payment to the equity holders. In its disclosure, West Delta
described the funding mechanism for its plan as follows:
In order to fund the Plan, West Delta has negotiated an
agreement with Crescent Oil Company, Inc. (hereinafter
“Crescent”) to take over operations of the West Delta
Field and to provide funding to pay all creditor’s claims
in full. Crescent presently has a line of credit with
Hibernia National Bank in the amount of $960,000.00 to be
used to pay all creditor’s claims except the claims of
3
Donald A. Muller, who has agreed to subordinate his
claims to all other claims. The line of credit is
secured by certificates of deposit totaling $960,000.00,
which have been pledged by a group of investors. The
investors will receive a working interest in the West
Delta wells as consideration for the investment. Debtor
estimates the total amount of claims to be paid under the
plan to be approximately $800,000.00.
On March 30, I.G. amended its plan to provide that it would pay all
creditors in full and would pay $400,000 in equity for West Delta’s
assets.
At a hearing on West Delta’s disclosure statement held before
the bankruptcy court on April 20, 2000, Hof declined to disclose
the identity of the investors who were investing money in the new
plan. Hof argued that such information was not necessary because
the investors would not be officers of the reorganized company in
the event that the plan was confirmed, and the creditors would all
be paid in full. When pressed to point to some evidence that the
line of credit at Hibernia National Bank was actually established
and available, Hof noted that he did not have a written document,
but he could “certainly have it” and that the bank had “agreed to
it.”2
At a deposition taken on July 14, 2000, Muller testified that
he had been negotiating with Burrwood Oil to provide capital to
Crescent in the form of collateral that would be used to secure a
loan from Hibernia National Bank. He stated that the negotiations
2
At the hearing, David Waguespack, counsel for I.G., said that he believed
DKCCB Trust may be the elusive investor behind the Crescent bid.
4
were ongoing, that his contact at Burrwood Oil was a man named
Chris Ezell, and that he had met no one else involved with
Burrwood. He averred that during the course of negotiations, he
had contacted Hibernia National Bank and been informed that
Burrwood had “[a]lmost a million dollars” in an account there.
When asked if Burrwood had committed to put up the money for
Crescent, Muller responded that the negotiations with Burrwood were
almost complete, and that a commitment would be available in time
for confirmation of the plan. Muller stated that the final detail
to be negotiated was the amount of working interest the investors
would receive in the West Delta well.
On July 24, 2000, West Delta withdrew its plan and I.G. filed
an amended plan increasing the amount to be paid in equity from
$400,000 to $510,000. I.G.’s plan was confirmed on July 28, 2000.
In connection with the withdrawal of the West Delta plan, Charles
Rohm, the Treasurer for West Delta, sent a letter to Hof stating:
Regarding our telephone conversation of this afternoon,
be advised that the final negotiation of the terms and
conditions attendant to our letter of credit have proven
to be so egregious as to cause a impasse with no further
chance of consummating this trade. Also, our attempts to
secure additional funding have proved less successful
than anticipated. Therefore, after careful study of
[I.G.’s] third plan of reorganization, The Board of
Directors of West Delta has decided to withdraw its plan
of reorganization and fully support [I.G.’s] plan.
Please advise counsel for [I.G.] and the court as soon as
possible.
On September 1, 2000, Butler submitted his first application
for compensation, requesting total attorney’s fees in the amount of
5
$37,002 for services rendered to West Delta from March 15, 1999 to
June 27, 2000.3 Fenasci filed his second application for
compensation on the same day, requesting attorney’s fees in the
amount of $38,369 for services rendered from February 8, 2000
through July 13, 2000. Fenasci had filed his first application for
compensation on February 7, 2000, in which he claimed $34,465.50 in
attorney’s fees for services provided to West Delta from March 15,
1999 through January 24, 2000. Butler’s billing statement
indicated that his work focused on opposing Ingersoll’s Motion to
Dismiss; dealing with a creditor’s claim by Marvin’s Engine; and
opposing Ingersoll’s Motion to Appoint a Trustee in place of the
debtor. Fenasci’s billing statements indicated that his work
centered on opposing a Motion to Terminate Use of Property of
Estate Out of Ordinary Course of Business; opposing the Motion to
Appoint Trustee; opposing the Motion to Dismiss; and dealing with
a creditor’s claim by Marvin’s Engine.
I.G. filed objections to the applications for compensation,
grounding its argument in part on its discovery that Butler and
Fenasci were two of the investors behind Burrwood Oil. At his
deposition, which was introduced into evidence at the bankruptcy
court’s September 22, 2000 hearing on the applications, Butler
claimed that sometime in May, April, or June of 1999, he floated
3
Earlier, on February 17, 2000, the bankruptcy court had imposed a March
30, 2000 deadline for all administrative claims to be filed.
6
the idea of putting up money as a passive investor in order to help
Muller secure financing for Crescent. He claimed that no documents
were ever signed, and that he just wanted to “be there as
insurance” if Muller needed him in order to go forward with the
plan. Nonetheless, Butler and Fenasci hired Robert Haik, a lawyer,
to negotiate with Muller and then employed a second negotiator,
Chris Ezell, who Muller later said was his contact at Burrwood Oil,
when Haik fell ill. He also met with a Hibernia National Bank
officer and inquired as to whether a pledge of an unencumbered
piece of property worth $500,000 would be sufficient as security
for a proposed loan to Crescent. He was informed that such a
pledge would be sufficient.
In his deposition, also offered into evidence at the September
22 hearing, Fenasci denied the existence of any signed documents
evidencing an agreement between Burrwood and Crescent. He alleged
that no agreements were ever reached to post collateral or assist
in the provision of financing. Fenasci did state that he was part
of a “loose association” of people who were “merely waiting” and
ready should an offer to deal be extended. He asserted that he had
no role in the negotiation of terms, as this was handled entirely
by Haik and Ezell. He claimed that the negotiations were “all
talk” and that no deal was ever made. He asserted that no
certificates of deposit were pledged in conjunction with the West
Delta Plan. He did concede that there was a bank account at
Hibernia National Bank in the name of Burrwood, which was the name
7
used by the “loose association” of people, and that he had $150,000
on deposit with the bank. He related that Butler discussed
pledging a $500,000 piece of unencumbered property. However, no
pledge was ever made because West Delta never applied for the loan,
and no agreement for financing was ever reached.
At the hearing on the applications held on September 22, 2000
before the bankruptcy court, Hof claimed that he did not know who
the Burrwood investors were, at least not at the time the hearing
on the disclosures was held. He testified that he included in the
West Delta disclosure the statement that “Crescent had a line of
credit for $960,000” based on information provided by West Delta
management. He also stated with respect to West Delta’s plan to
liquidate to Crescent:
The only thing that had to be worked out was the terms
and conditions with the [Burrwood] investors. Basically,
there was [sic] investors putting up collateral to
support the Hibernia line of credit to Crescent. And
that agreement between the investors and Crescent is what
eventually broke down before confirmation and caused us
to withdraw our plan and support the [I.G.] plan.
On March 8, 2001, the bankruptcy court entered an order
holding that Fenasci and Butler’s failure to disclose their
participation in Burrwood did not warrant rejection of their fee
applications. The court recounted that
[a]t one time, Burrwood Oil company was negotiating to
provide collateral to secure a loan to West Delta. Mr.
Fenasci and Mr. Butler agreed, at some time that cannot
be fixed with any degree of accuracy, to participate as
passive investors with other investors in Burrwood Oil.
If called upon to save the debtor from ceasing operations
8
as a result of a failure to file a plan, Burrwood Oil
would have posted collateral so that Crescent Oil could
obtain a line of credit of $960,000 to fund the debtor’s
plan of reorganization as described in the debtor’s
disclosure statement. These negotiations, however, never
came to fruition. Both Mr. Fenasci and Mr. Butler
testified unequivocally that no agreement ever existed
between them and Burrwood Oil, that they never signed
anything, never pledged any collateral at the bank, and
never acquired an interest in Crescent Oil. The
disclosure statement probably should have disclosed the
possible participation of Mr. Fenasci and Mr. Butler, and
it certainly would have had to have been disclosed at any
confirmation hearing on the debtor’s plan of
reorganization.4
The court concluded that this failure to disclose could be excused
for three reasons:
(1) the tentative plans by Mr. Fenasci and Mr. Butler
were never reduced to any firm agreement;
(2) the debtor’s plan (and any participation by
Burrwood Oil and/or Crescent Oil) never came on for
confirmation; and
(3) Mr. Fenasci and Mr. Butler are unfamiliar with
bankruptcy law.5
The court denied Fenasci’s and Butler’s applications for fees
earned after March 30, 2000 because of their failure to disclose
pre-petition claims against West Delta in a timely fashion. The
court then granted Fenasci’s first fee application in full and
granted him $8,075.25 on his second fee application. The court
denied Butler’s application without prejudice to allow him to
attach a list sufficiently detailing the services (and dates of
4
In re W. Delta Oil Co., No. 99-10406, at 6-7 (Bankr. E.D. La. Mar. 8,
2001) (unpublished order).
5
Id. at 7-8.
9
those services) that he provided. Upon rehearing, the bankruptcy
court granted Butler’s application for fees incurred before March
30, 2000.
I.G. appealed, and the United States District Court for the
Eastern District of Louisiana dismissed the appeal as premature.6
After the bankruptcy court clarified that its order granting fees
was final and appealable, the district court granted I.G.’s motion
for reconsideration. On March 28, 2002, the district court held
that the bankruptcy court abused its discretion by granting
untimely fee applications without applying the appropriate legal
standard for deciding whether there was cause or excusable neglect.
In addition, the district court held that the bankruptcy court
failed to inquire properly as to whether Butler and Fenasci’s
participation in Burrwood gave rise to a possible “adverse
interest” to West Delta.7 The court reversed and remanded for
further consideration.
On remand, the bankruptcy court first applied the factors set
forth by the Supreme Court in Pioneer Investment Services Co. v.
Brunswick Associates Limited Partnership8 and determined that
Butler’s and Fenasci’s fee applications were granted properly under
6
See W. Delta Oil Co. v. Hof, No. Civ. A. 01-1163, 2001 WL 1456863 (E.D.
La. Nov. 14, 2001) (unpublished).
7
W. Delta Oil Co. v. Hof, No. Civ. 01-1163, 2002 WL 506814, at *8 (E.D.
La. Mar. 28, 2002) (unpublished).
8
507 U.S. 380 (1993).
10
the excusable neglect standard.9 The court then turned to examine
whether Butler and Fenasci’s involvement with Burrwood and failure
to disclose that involvement warranted denial of their fees. The
court first determined that Butler and Fenasci’s failure to
disclose their involvement with Burrwood constituted a violation of
Federal Rule of Bankruptcy Procedure 2014(a), requiring an attorney
employed under 11 U.S.C. § 327 to file a verified statement
disclosing his “connections with the debtor, creditors,” and “any
other party in interest.” The court found that this failure to
disclose did not warrant denial of fees, however, because even if
Butler and Fenasci had disclosed their involvement with Burrwood,
the court would have found that this involvement was not adverse to
the West Delta estate.
The court observed that under § 327(e), “an attorney may
represent the debtor in bankruptcy proceedings for a specified
limited purpose, if it is in the best interest of the estate, and
if ‘such attorney does not represent or hold any interest adverse
to the debtor or to the estate with respect to the matter on which
such attorney is to be employed.’”10 The court then noted that
great latitude is allowed “‘in assessing conflict of interest
9
See In re W. Delta Oil Co., No. 99-10406, at 5-20 (Bankr. E.D. La. Oct.
7, 2003) (unpublished).
10
Id. at 24 (quoting 11 U.S.C. § 327(e)) (footnote omitted).
11
qualifications’” under § 327(e),11 and opined that “for purposes of
determining the qualification of an applicant under § 328(e), the
court only considers whether an applicant’s interest is ‘adverse’
with respect to ‘the matter on which such attorney is to be
employed.’”12
Turning to the scope of Butler and Fenasci’s representation of
West Delta, the court determined that their defense against
Ingersoll’s Motion to Dismiss was unrelated to their interest in
Burrwood. Further, the court found that even if the matters were
sufficiently related to merit a “broader inquiry,” there was little
evidence connecting Butler and Fenasci to Burrwood. Finally, the
court noted that Butler and Fenasci’s defense against the motion
actually benefitted the bankruptcy estate. The court next found
that although Fenasci’s representation of West Delta in a matter
relating to I.G. presented a “potential conflict of interest,” the
contingent and preliminary nature of Burrwood’s existence never
gave rise to an “actual conflict” or an “adverse interest.”13
The court concluded that any adverse interest generated by
Butler and Fenasci’s involvement with Burrwood was directed at
I.G., not the bankruptcy estate. Based on these determinations,
11
Id. at 26 (quoting In re Henlar, Ltd., No. 96-2374, 1997 WL 4567, at *3
(E.D. La. Jan. 6, 1997)).
12
Id. (quoting 11 U.S.C. § 327(e)) (emphasis added in In re W. Delta Oil
Co.).
13
Id. at 28.
12
the court held that, in its discretion, the fee applications of
Butler and Fenasci would be granted. I.G. appealed this order to
the district court, which affirmed.14 The court found that even if
the Burrwood negotiations were more than preliminary and an actual
conflict existed, these facts would not have compelled the
bankruptcy court to deny fees. Accordingly, the district court
held that the bankruptcy court did not abuse its discretion when it
granted Butler’s and Fenasci’s fee applications. I.G. timely
appealed this decision.
II
On appeal, I.G. argues that the bankruptcy and district courts
abused their discretion in determining that Butler and Fenasci’s
involvement with Burrwood and failure to disclose such involvement
did not warrant denial or reduction of their attorney’s fees. In
addition, I.G. contends that the bankruptcy and district courts
erred as a matter of law in granting Butler’s and Fenasci’s
untimely filed fee applications. Because we conclude that the
bankruptcy court abused its discretion in excusing Butler and
Fenasci’s conflict of interest, we need not reach I.G.’s second
contention.
We review a decision of the district court affirming a
decision of the bankruptcy court “by applying the same standards of
14
W. Delta Oil Co. v. Fenasci, No. Civ. A. 03-0330, 2004 WL 1770110 (E.D.
La. Aug. 6, 2004).
13
review to the bankruptcy court’s findings of fact and conclusions
of law as applied by the district court.”15 To this effect, we
review a bankruptcy court’s determination of attorney’s fees for
abuse of discretion.16 Specific findings of fact supporting the
award are reviewed for clear error, and conclusions of law are
reviewed de novo.17
As we have already discussed, 11 U.S.C. § 327(e) provides for
the employment of counsel by a bankruptcy trustee for “a specified
special purpose.”18 Counsel employed under this subsection must
“not represent or hold any interest adverse to the debtor or to the
estate with respect to the matter on which such attorney is to be
employed.”19 A court may deny compensation for services provided
by an attorney who holds such an adverse interest.
We have observed that these standards are “strict” and that
attorneys engaged in the conduct of a bankruptcy case “should be
free of the slightest personal interest which might be reflected in
their decisions concerning matters of the debtor’s estate or which
might impair the high degree of impartiality and detached judgment
15
In re Crowell, 138 F.3d 1031, 1033 (5th Cir. 1998).
16
See In re Barron, 325 F.3d 690, 692 (5th Cir. 2003).
17
Id.; see In re Tex. Securities, Inc., 218 F.3d 443, 445 (5th Cir. 2000);
In re Fender, 12 F.3d 480, 487 (5th Cir. 1994).
18
11 U.S.C. § 327(e).
19
Id.
14
expected of them during the course of administration.”20
Accordingly, we are “sensitive to preventing conflicts of interest”
and require a “‘painstaking analysis of the facts and precise
application of precedent’” when inquiring into alleged conflicts.21
If an actual conflict of interest is present, “no more need be
shown . . . to support a denial of compensation.”22
In addition, Federal Rule of Bankruptcy Procedure 2014(a)
requires any professional applying for employment to set forth “to
the best of the applicant’s knowledge” all known connections of the
applicant with the “debtor, creditors, or any other party in
interest, their respective attorneys and accountants, the United
20
In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1256 & n.6 (5th Cir.
1986) (internal quotation marks and citations omitted).
21
Id. (quoting Brennan’s v. Brennan’s Restaurant, Inc., 590 F.2d 168, 173-
74 (5th Cir. 1979)).
22
Id. (quoting Woods v. City Nat’l Bank & Trust Co. of Chicago, 312 U.S.
262, 268 (1940)). Two of our sister circuits have expressed a preference for
denying fees in the event that bankruptcy counsel is found to labor under a
conflict of interest. See In re Prince, 40 F.3d 356, 360 (11th Cir. 1994) (“When
injury to the debtor’s estate occurs . . . denial of fees is proper.”); Gray v.
English, 30 F.3d 1319, 1324 (10th Cir. 1994) (“In exercising the discretion
granted by the statute we think the court should lean strongly toward denial of
fees, and if the past benefit to the wrongdoer fiduciary can be quantified, to
require disgorgement of compensation previously paid that fiduciary even before
the conflict arose.”). This preference was couched in terms of the bankruptcy
court’s equitable power to deny fees in In re Watson Seafood & Poultry Co.:
There are compelling reasons for denying all fees when a conflict of
interest is present. Nevertheless, because the bankruptcy court is
a court of equity, the bankruptcy judge should not be bound by a
completely inflexible rule mandating denial of all fees in all
cases. The general rule should be that all fees are denied when a
conflict is present, but the court should have the ability to
deviate from that rule in those cases where the need for attorney
discipline is outweighed by the equities of the case.
40 B.R. 436, 440 (Bankr. D.N.C. 1984).
15
States trustee, or any person employed in the office of the United
States trustee.” Although this provision does not explicitly
require ongoing disclosure, “case law has uniformly held that under
Rule 2014(a), (1) full disclosure is a continuing responsibility,
and (2) an attorney is under a duty to promptly notify the court if
any potential for conflict arises.”23 “Though this provision allows
the fox to guard the proverbial hen house, counsel who fail to
disclose timely and completely their connections proceed at their
own risk because failure to disclose is sufficient grounds to
revoke an employment order and deny compensation.”24
With this backdrop, we now proceed to examine whether, given
Butler and Fenasci’s involvement with Burrwood, they were
“disinterested” in the bankruptcy proceedings or had an interest
“adverse” to the bankruptcy estate.
The Bankruptcy Code defines “disinterested person” 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,
23
In re Metropolitan Environmental, Inc., 293 B.R. 871, 887 (Bankr. N.D.
Ohio 2003) (collecting cases).
24
In re Crivello, 134 F.3d 831, 836 (7th Cir. 1998); see Rome v.
Braunstein, 19 F.3d 54, 59-60 (1st Cir. 1994) (“[A]s soon as counsel acquires
even a constructive knowledge reasonably suggesting an actual or potential
conflict, a bankruptcy court ruling should be obtained. . . . Absent the
spontaneous, timely and complete disclosure required by section 327(a) and [Rule]
2014(a), court-appointed counsel proceed at their own risk.” (internal citations
omitted)).
16
connection with, or interest in, the debtor.”25 The Bankruptcy Code
does not define the phrase “represent or hold any interest adverse
to the debtor or to the estate,” and our court has not had occasion
to elaborate upon it. In In re Roberts, the United States
Bankruptcy Court for the District of Utah determined that the
nearly identical phrase in § 327(a) meant:
(1) to possess or assert any economic interest that
would tend to lessen the value of the bankruptcy
estate or that would create either an actual or
potential dispute in which the estate is a rival
claimant; or
(2) to possess a predisposition under circumstances
that render such a bias against the estate.26
This definition has been employed by at least two circuit courts,
as well as a number of district and bankruptcy courts.27 While
helpful, this definition must be employed with an eye to the
specific facts of each case, and with attention to circumstances
which may impair a professional’s ability to offer impartial,
disinterested advice to his or her client.28 Thus, both definitions
25
11 U.S.C. § 101(14)(e).
26
46 B.R. 815, 827 (Bankr. D. Utah 1985), aff’d in relevant part and rev’d
and remanded in part on other grounds, 75 B.R. 402 (D. Utah 1987).
27
See In re AroChem Corp., 176 F.3d 610, 623 (2d Cir. 1999); In re
Crivello, 134 F.3d at 835; see also In re Perry, 194 B.R. 875, 878-79 (E.D. Cal.
1996); In re Caldor, 193 B.R. 165, 171 (Bankr. S.D.N.Y. 1996); In re Red Lion,
Inc., 166 B.R. 296, 298 (S.D. Tex. 1994); In re Lee, 94 B.R. 172, 177 (Bankr.
C.D. Cal. 1988).
28
See Louisiana Rules of Professional Conduct 1.7, 1.8 (2004 ed.); In re
Prince, 40 F.3d at 360 (“The accurate measure of prejudice . . . is not what [the
attorney] actually did or did not do in handling [the debtor’s] case, but rather
whether [the attorney] could have unbiasedly made decisions in the best interest
of the client.”).
17
have as their critical element the presence of an “adverse
interest.”
Turning to the facts here, we have little difficulty reaching
the conclusion that Butler and Fenasci’s involvement with Burrwood
implicated their duty to report under Rule 2014(a) and constituted
a potential conflict with their client’s best interests. A lawyer
who simultaneously represents a debtor in a bankruptcy proceeding
and seeks to acquire a financial interest in the debtor faces
myriad quandaries, particularly in the liquidation context. In
essence, the lawyer is representing a seller (the debtor) and a
buyer (himself). Efforts to preserve and enhance the value of the
seller’s assets will work inevitably against the buyer’s interest
in purchasing at the lowest price possible. In addition, efforts
to market the seller to other potential bidders may drive up the
price, forcing buyers to increase their bids. Moreover, opting to
reorganize rather than liquidate may reduce or eliminate possible
avenues for anyone wishing to acquire specific economic interests.
In short, by operating as a potential buyer, a lawyer for a
bankruptcy estate possesses a predisposition to reduce the price of
the estate’s assets which works to the detriment of the estate, its
creditors, and its equity stakeholders.29
29
The bankruptcy court stated that the Bankruptcy Code is “not primarily
or even necessarily concerned with the protection or payment of the equity
interest in the debtor.” See In re W. Delta Oil Co., No. 99-10406, at 28-30
(Bankr. E.D. La. Oct. 7, 2003) (unpublished). At the same time, however, the
court seemed to distinguish the new equity owner (I.G.) from the old equity
owners (the shareholders of West Delta), presumably because the latter were
protected by the Bankruptcy Code. Whatever the court’s holding, it is clear that
18
We find no merit in Butler and Fenasci’s contention that they
possessed no interest adverse to West Delta because their
involvement with an inchoate entity composed of loosely affiliated
investors was merely preliminary in nature. While they failed in
their effort to acquire an interest in West Delta, this failure was
not for lack of effort. Specifically, they hired not one but two
agents to negotiate terms with Crescent. They actively made
preparations to collateralize the loan by engaging in discussions
with Hibernia National Bank officers, depositing monies, and
inquiring as to the propriety of pledging real property. When
pressed as to his source of funding prior to West Delta’s
withdrawal of its plan, Muller testified that his negotiations with
Burrwood were nearly complete, with only the question of the size
of the royalty interest left to be resolved. When West Delta
finally withdrew its plan, its treasurer cited as the reason
Burrwood’s egregious demands. Throughout this process, Butler and
Fenasci failed to disclose their participation in Burrwood to the
court or to their client. Regardless of whether they were involved
actively in the negotiation of terms or drafting of the West Delta
plan, Butler and Fenasci had a live interest in play right up to
the point at which the bankruptcy court confirmed the I.G. plan.
the Bankruptcy Code protects the equity holders of debtors, even though creditors
are paid first. Here, because under all of the proposed liquidation plans all
of the creditors were to have been paid fully, the bankruptcy court should have
been concerned with maximizing the payment to the equity holders. Thus, a
reduction in price of the estate would improperly harm West Delta’s equity
stakeholders - Ingersoll, DKCCB, and Muller.
19
The bankruptcy court’s determination that there was little
evidence to connect Butler and Fenasci to Burrwood, and that this
interest was so contingent as to constitute no interest at all,
ignores the reality that both Butler and Fenasci testified to
taking affirmative steps in an effort to acquire a valuable
financial stake in their client. The ultimate success of these
efforts is irrelevant--the active pursuit of success is sufficient
to give rise to an adverse interest here. The bankruptcy court’s
determination to the contrary was clearly erroneous.
Nor can we accept Butler and Fenasci’s contention that, given
the supposed narrow scope of their engagement by West Delta, their
involvement with Burrwood was not adverse to West Delta’s discrete
interests. As we have noted, special counsel employed under §
327(e) need only avoid possessing interests “adverse to the debtor
or to the estate with respect to the matter on which such attorney
is to be employed.”30 As we have recounted, Butler and Fenasci
represented West Delta in opposing a motion to dismiss and a motion
to appoint a trustee filed by Ingersoll. But they did more that
cannot be viewed properly as beyond the scope of their engagement
or a different “matter.” After working on these motions, Butler
and Fenasci, purporting to represent West Delta, wrote letters to
potential bidders threatening legal action, including Rule 11
sanctions and RICO. In essence, the lawyers were hampering a
30
11 U.S.C. § 327(e) (emphasis added).
20
process - competitive bidding - designed to help the estate while
enhancing their investment opportunity. These later actions
redefined the scope of their employment as representation of West
Delta in the general liquidation process;31 and their interests
there were clearly adverse to those of West Delta. Moreover, such
redefinition of scope was made manifest in Fenasci’s case when the
court expanded his engagement to include representation of matters
relating to I.G.; it can hardly be gainsaid that the “matter” on
which Fenasci was employed included his clandestine efforts to
acquire a stake in West Delta, and at a discount, since
Burrwood/Crescent offered substantially less money than I.G.
We conclude that Butler and Fenasci were obligated to report
their involvement in Burrwood to the bankruptcy court pursuant to
Rule 2014(a). We also conclude that their interest in acquiring a
financial stake in West Delta through Burrwood was adverse to West
Delta. It created incentives to lessen the value of the bankruptcy
estate, incentives that were acted upon when they attempted to
chill the bidding process for the assets.
We hold that the bankruptcy court abused its discretion in
awarding fees to Butler and Fenasci. Butler and Fenasci had an
interest adverse to that of the estate with respect to matters on
which they were employed, and in their efforts to promote that
interest they violated their duty to their client. There are
31
Indeed, Butler’s and Fenasci’s original applications for fees claimed
time spent in these later actions.
21
sufficient grounds on which to deny attorney’s fees.32 The
bankruptcy court’s exercise of discretion was flawed by legal error
- the conclusion that Butler and Fenasci had no interest adverse to
that of the estate with respect to matters on which they were
employed. The court, had it viewed the conflict properly, should
not have allowed attorney’s fees to Butler or Fenasci.
III
The judgment of the district court awarding attorney’s fees is
REVERSED.
32
It is irrelevant that no evidence exists pointing to actual prejudice
to the estate. As the Supreme Court has made perfectly clear, such evidence is
not required because of difficulty of proof and because the problem is not just
“actual evil results” but the “tendency to evil in other cases.” Woods v. City
Nat’l Bank & Trust Co., 312 U.S. 262, 268 (1940).
22