In re AOV Industries, Inc. (797 F.2d 1004, 1986)

Opinion for the Court filed by Circuit Judge MIKVA.

Opinion concurring in part and dissenting in part filed by Circuit Judge STARR.

MIKVA, Circuit Judge:

This is the second in a series of appeals brought to this court involving the bankruptcy of AOV Industries. In our original decision, we dismissed the challenges of appellant Hubert Bruce to the AOV Reorganization Plan (“the Plan”), finding that his claims were moot because the Plan had been substantially consummated. In re AOV Industries, 792 F.2d 1140 (D.C.Cir.1986) (“AOV I”). Our holding made it unnecessary to consider appellant’s allegations of a conflict of interest; we specifically advised the parties, however, that this issue would be squarely presented here.

This second appeal concerns a challenge to the fee award granted by the bankruptcy court to the law firm of White & Case (“W & C” or “the law firm”), counsel in bankruptcy to AOV. The third appeal, challenging a different fee award, is resolved in a companion opinion released today. In re AOV Industries, 798 F.2d 491 (D.C.Cir., 1986).

The question before us is whether the bankruptcy court’s award of $1.27 million in fees to White & Case, and the district court’s affirmance of that award, were proper. Bruce claims that the award should be eliminated or reduced because the law firm had a conflict of interest in representing AOV, and that it thus could not carry out its duty of zealous representation. While we are not prepared to conclude that W & C’s fees must be reduced, we hold that the factual findings made in support of the award were clearly erroneous. There is strong evidence that while it was representing AOV, W & C also was performing work for one of AOV’s major creditors. Because it is difficult to tell from the record how significant the overlap was, or whether the work was done “in connection with” the bankruptcy proceedings as prohibited by statute, we vacate that part of the district court’s decision that relates to the W & C fee award, and remand with instructions to reconsider the evidence of a conflict of interest.

I.

The underlying facts of this case are presented in AOV I. Here we only discuss the events directly relevant to this appeal.

AOV Industries was established in 1976 by Hubert Bruce and others for the purpose of selling coal in this country and overseas. Although the business was profitable, a shortage of capital led AOV to sell a 50% interest in the company to one of its major creditors, H.C. Sleigh Netherlands (“Sleigh”), in 1981. By the middle of 1981, Sleigh had made a series of changes that gave it a dominant role in managing AOV.

In the course of acquiring its interest in AOV, Sleigh was occasionally represented by White & Case. The nature and timing of this representation is a matter of controversy, but it is undisputed that the law firm performed three tasks for Sleigh. First, W & C prepared and filed the required “Hart-Scott-Rodino” premerger notification with the Justice Department and the Federal Trade Commission. See 15 U.S.C. § 18a (1982). W & C claims, and Bruce does not contest, that this task was completed by May 1981. Second, W & C assisted Sleigh’s New York counsel in preparing a filing for the U.S. Department of Commerce, as required by the International Investment Security Act of 1976. See 22 U.S.C. §§ 3101-3108 (1982). This work was completed (with a limited exception not relevant here) by October 1981.

Third, W & C performed a “due diligence” search of AOV’s corporate records. The search itself was conducted on August 17-19, and on September 8-12, 1981. The written report detailing the results of the search was submitted to Sleigh on December 31, 1981.

On November 6, 1981, AOV filed a Chapter 11 bankruptcy petition. This petition was filed with the assistance of the law firm of Docter, Docter & Salus (“DD & S”); DD & S was appointed by the bankruptcy court as special bankruptcy counsel to AOV on November 17. Because of the size and complexity of the hoped-for reorganization, AOV also hired White & Case as its general counsel. AOV paid W & C a $50,-000 retainer on November 6, 1981, and the law firm began work immediately thereafter.

In December, AOV asked the bankruptcy court to formally appoint W & C as general bankruptcy counsel. In its application'to the court, W & C disclosed that it had previously represented some of the AOV creditors, including Sleigh, but asserted that none of its work for Sleigh was related to the AOV bankruptcy. The application did not disclose whether Sleigh still owed the law firm money for services rendered. The bankruptcy court entered an order appointing W & C on December 22, 1981.

During the next two years, AOV took the lead in negotiating, drafting, and implementing a successful Disclosure Statement and Reorganization Plan. The Plan was overwhelmingly endorsed by the creditors (but not by Bruce), and was confirmed on review by the district court. In re AOV Industries, 31 B.R. 1005 (D.D.C.1983). Bruce appealed the confirmation to this court. After an order remanding the case for further fact finding, see AOV I, at 1144-45, we dismissed a large part of the appeal as moot. Id. at 1146-50.

While the challenges to the Plan were working their way through the system, W & C, along with the other lawyers and accountants who had contributed to the reorganization, filed requests for compensation with the bankruptcy court. White & Case filed a series of interim fee requests during the course of its representation, and filed a final fee application on October 7, 1983. The total fee requests from all professionals was over $3.3 million; the W & C request totaled nearly $1.7 million. Bruce, the United States Trustee, and the Disbursing Agent objected to the W & C application.

AOV’s new president, Peter Gilchrist, also was concerned about the amount of AOV’s assets that would have to be consumed to satisfy the fee requests. He immediately began negotiations with the requesting parties, asking them to modify their demands. After extensive discussions, W & C agreed to scale down its claim to $1.33 million.

The bankruptcy court held a hearing on all the fee applications on November 30 and December 2, 1983. In an oral ruling the judge determined that White & Case was entitled to $1.275 million in fees, 4.6% less than the negotiated figure and 25% less than the original request. To reach this amount, the bankruptcy judge used the “lodestar” method approved by this court in Copeland v. Marshall, 641 F.2d 880 (D.C.Cir.1980) (en banc). The judge calculated a reasonable hourly rate, then multiplied the rate by the number of hours W & C should have spent on its various tasks. After noting the high quality of the representation and the great complexity of the legal issues presented, the judge then reduced the award slightly because he determined that W & C had billed for roughly 350 hours of duplicative services. Transcript of Judge’s Ruling No. 81-0617, at 26 (Bankr.D.C. Dec. 2, 1983); see also infra Part III.

Bruce appealed to the district court, raising the same claims as he had in the bankruptcy court: (1) White & Case had a conflict of interest in representing AOV; (2) the bankruptcy judge should have appointed an independent examiner to analyze the fee requests; (3) the results obtained for the Debtor did not justify the fees awarded. Finding no merit in these allegations, the district judge affirmed the W & C award in full on September 27, 1984. In re AOV Industries, 43 B.R. 468 (D.D.C.1984).

Bruce now challenges the district court’s decision. While this appeal was pending, we had occasion to consider Bruce’s conflict of interest claims in AOV I. There Bruce argued that the conflict so tainted the Plan that, not only should the fee award be eliminated, but also the Plan confirmation should be reversed. The panel rejected the attack on the Plan, but deferred consideration of the effect of the alleged conflict on the award until the arguments could be fully presented in this appeal. AOV I, at 1154.

II.

The Bankruptcy Code provides that the bankruptcy court may award debtor’s counsel “reasonable compensation for actual, necessary services rendered.” 11 U.S.C. § 330(a)(1) (1982). The court in its discretion may also award reimbursement for necessary expenses. Id. § 330(a)(2). The decision on whether and at what level to award fees from the debtor’s estate rests in the first instance with the bankruptcy or district court. The requested fees may be reduced or eliminated on a number of grounds, including a finding that the debtor was billed for unnecessary or duplicative services, or a finding that counsel had a conflict of interest in representing the estate. See, e.g., In re Chou-Chen Chemicals, Inc., 31 B.R. 842 (Bankr.W.D.Ky.1983) (conflict of interest); In re The Liberal Market, Inc., 24 B.R. 653 (Bankr.S.D.Ohio 1982) (duplicative services); In re Sutherland, 14 B.R. 55 (Bankr. Vt.1981) (unnecessary services).

As he did in the bankruptcy and district courts, Bruce argues that the fee award should be reduced or vacated on three grounds. His most serious charge is that White & Case had a conflict of interest that violated the Bankruptcy Code. He also continues to assert that the bankruptcy judge was obligated to appoint an independent examiner to scrutinize the fee applications, and that the benefits of the Plan to the Debtor were so inadequate that the award was unjustified.

A. Conflict of Interest

Bruce has repeatedly claimed that W & C should have been disqualified from representing Sleigh because of the law firm’s conflict of interest. White & Case has steadfastly rejected this contention, saying that Bruce and his counsel “see[ ] conflicts of interest everywhere.... It is like people who see communists under their beds.” See In re AOV, 31 B.R. at 1011. Undaunted, Bruce alleges four types of conflict in this appeal.

Appellant’s first claim can be disposed of quickly. Bruce charges that W & C drafted the terms of the Reorganization Plan to favor Sleigh, its former client, over the other creditors. Although the contours of this argument are ill-defined, Bruce’s evidence of this bias is the so-called “release provision” of the Plan. As discussed in AOV I, the release provision provided that Sleigh and another creditor, Steag Handel GmbH, would contribute $3 million in cash to the Debtor’s estate for the benefit of the unsecured creditors; in return, a creditor who wished to draw down its pro rata share of this fund was required to relinquish any direct claims it had against either Sleigh or Steag. See 792 F.2d at 1142-43. Bruce implies that truly neutral debtor’s counsel would not have allowed Sleigh to escape liability that easily.

We reject Bruce’s invitation to find that the release provision per se proves that W & C acted with divided loyalty. While such an arrangement is relatively novel in reorganization proceedings, there is nothing inherently suspect about the debtor and creditors agreeing to a large influx of capital into the bankrupt estate in exchange for the release of the creditors’ claims against the funders. In AOV I, we said in a slightly different context:

As two courts below agreed, this provision on its face was entirely reasonable. Sleigh and Steag could not have been expected to commit millions of dollars to a reorganization plan and still remain liable to individual creditors for the full amount of their claims.

Id. at 1152.

More importantly, Bruce has failed to introduce evidence that in these specific circumstances the provision was preferential to Sleigh, or that W & C induced creditors to vote against their own interests in approving the Plan. There is nothing to suggest that the creditors who voted for the Plan were misled by W & C as to the effect of the release provision, and no evidence that the law firm had any coercive influence over those creditors who released their claims. The release provision helped bring about a successful reorganization, which was W & C’s primary responsibility to the Debtor. In short, there is little in either fact or theory to suggest that W & C’s interests were so intertwined with those of Sleigh that the law firm helped draft a biased Plan. Appellant’s vague claims to the contrary are unconvincing.

Bruce’s second claim is no more compelling. A few months after it began representing AOV, W & C received a guarantee from Sleigh: Sleigh stated that it would pay those legal fees and disbursements incurred by W & C to the extent that they were neither paid by the Debtor nor allowed by the bankruptcy judge. Thus the law firm was assured of recovering the full value of its work from either AOV or a party that had interests potentially hostile to those of AOV. The existence and terms of the fee guarantee were disclosed to the creditors and the bankruptcy court when W & C filed its first application for interim fees on April 15, 1982.

One of the Creditors’ Committees objected, claiming that the guarantee:

creates the appearance of a conflict of interest with the obligations that debtors’ counsel has to the creditors____ [T]he guarantee[] will inevitably raise questions whether any plan proposed by the debtors is excessively favorable to Sleigh.

Motion of Alla-Ohio Valley Coals Creditors’ Committee for an Order Declaring Invalid the Fee Guarantee given by H.C. Sleigh to Debtors’ Counsel, No. 81-0617, at 2-3 (May 7, 1982). After holding a special hearing, the bankruptcy court declared the guarantee invalid. While the judge found no evidence of any actual conflict of interest or bad faith on the part of W & C, he ruled that the guarantee could not be allowed for the reasons expressed by the Creditors’ Committee. Transcript of Oral Ruling, No. 81-0617, at 7-11 (Bankr.D.D.C. July 9, 1982). See In re Bergdog Productions of Hawaii, 7 B.R. 890 (Bankr.D.Hawaii 1980) (declaring similar fee arrangement invalid).

Even though the guarantee was invalidated less than three months after it was extended, Bruce continues to assert that its brief existence justifies a fee reduction. To the extent Bruce is claiming that the guarantee had a tangible impact on W & C’s behavior, we reject the argument; the judge nullified the arrangement long before the Plan was drafted, so there is no danger that W & C was tempted to alter the Plan to favor the party that might pay its fees. Bruce’s better argument is that the attempt to obtain a guarantee was part of W & C’s effort to protect its own interests first, even at the risk of creating the appearance of a conflict. See In re Perry, Adams and Lewis Securities, Inc., 5 B.R. 63, 64 (Bankr.W.D.Mo.1980) (“the avoidance of the real appearance of impropriety is of chief concern to a court of bankruptcy”);