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finding committee counsel did not hold an adverse interest because it had previously represented debtor-related entities and stating that the "argument under § 1103 fails because [counsel's] alleged adverse interests ... predated [counsel's] representation of the committee"
Summary of this case from Bingham Greenebaum Doll LLP v. Glenview Health Care Facility, Inc. (In re Glenview Health Care Facility)Opinion
02 Civ. 5638 (BSJ)
January 28, 2003, Decided . February 3, 2003, Filed
For Exco Resources, Inc, APPELLANT: Michael P Cooley, Gardere Wynne Sewell, LLP, Dallas, TX USA.
For Milbank Hadley Tweed & McCloy, LLP, APPELLEE: Luc A Despins, Milbank, Tweed, Hadley & McCloy, LLP, New York, NY USA.
For Enron Corp, DEBTOR: John C Nabors, Deirdre B Ruckman, Michael P Cooley, Gardere Wynne Sewell, LLP, Dallas, TX USA.
Carolyn S Schwartz, TRUSTEE.
MEMORANDUM & ORDER
BARBARA S. JONES
UNITED STATES DISTRICT JUDGE
On December 2, 2001, and periodically thereafter, Enron Corporation and certain of its affiliated entities (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The U.S. Trustee formed the Official Committee of Unsecured Creditors ("Committee"), which sought to retain Appellee Milbank, Tweed, Hadley & McCloy LLP ("Milbank") as its counsel in the bankruptcy proceedings. On January 28, 2002, the bankruptcy court signed an order approving Milbank as the Committee's counsel. On March 19, 2002, Appellant Exco Resources, Inc. ("Exco"), a creditor of Enron North America, filed an objection to a monthly fee statement of Milbank and moved to disqualify Milbank as counsel for the Committee. Several creditors joined the motion. The bankruptcy court held a hearing on May 15, 2002 and, in a decision and order dated May 23, 2002, denied Exco's motion to disqualify Milbank. Exco now appeals the bankruptcy court's decision and order. In addition to Milbank, the Committee, the United States Trustee and the Debtors have all submitted briefs in opposition to Exco's motion. For the reasons set forth below, this Court affirms the decision of the bankruptcy court denying Exco's motion to disqualify Milbank as counsel for the Committee.
Jurisdiction
As a preliminary matter, this Court must address whether it has appellate jurisdiction in this case. Appellees Milbank and the Committee challenge this Court's jurisdiction on the following grounds: first, Exco lacks standing to appeal; second, the bankruptcy court's order was not final; and third, Exco failed to name the Committee as an appellee.
In every federal case, the threshold question in determining the power of the court to hear the case is whether a claimant has standing. See Warth v. Seldin, 422 U.S. 490, 498, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975). The criteria for standing in a bankruptcy proceeding is more stringent than the "injury in fact" requirement under Article III. See Kane v. Johns-Manville Corp., 843 F.2d 636, 642 n.2 (2d Cir. 1988). In the Second Circuit, a party appealing a bankruptcy court ruling must be an "aggrieved person." Licensing by Paola, Inc. v. Sinatra, 126 F.3d. 380, 388 (2d Cir. 1997). An aggrieved person is one that is "directly and adversely affected pecuniarily by the challenged order of the bankruptcy court." Id.
The Committee argues that Exco lacks standing because it is not an aggrieved person and because it is asserting the rights of the Committee, rather than its own rights. Generally, a creditor has standing to appeal a bankruptcy order that disposes of the estate's property because such orders directly affect the funds available to meet a creditor's claims. Id.; Kane, 843 F.2d at 642. However, an "unsubstantiated, speculative, and indirect effect" on the party's pecuniary interests is not enough to establish appellate standing. See In re Victory Markets, Inc., 195 B.R. 9, 15-16 (N.D.N.Y. 1996) (rejecting appellant's claim that committee's inadequate representation resulted in pecuniary loss).
Exco alleges that the bankruptcy court should never have approved Milbank as counsel for the Committee because Milbank's disclosures of conflicts were inadequate. Exco also alleges that Milbank's interests in the Chapter 11 cases are adverse to the interests of the Committee and the unsecured creditors. While this Court is aware that granting appeals to any person affected by a bankruptcy court order "will sound the death knell of the orderly disposition of bankruptcy matters," In re Gucci, 126 F.3d 380, 388 (2d Cir. 1997), Exco's appeal is not outside the limits of appellate standing. If Milbank's interests were indeed adverse to those of the Committee and if Milbank did fail to adequately disclose its relationships, Exco, as an unsecured creditor, would be directly, pecuniarily affected. In In re Arochem Corp., 176 F.3d 610 (2d Cir. 1999), appellants, certain creditors, objected to the trustee's employment of counsel, arguing that counsel's retention conflicted with its representation of a certain unsecured creditor. See Arochem 176 F.3d at 616. When the bankruptcy court approved counsel's employment, the creditors appealed. See id. at 618. Both the district court and the Second Circuit heard the appeal and affirmed the bankruptcy court's retention order on the merits. See id. at 620.
Moreover, the standing requirement is not entirely inflexible. The Second Circuit, for instance, has found an "unsuccessful bidder," who calls into question the "intrinsic fairness" of a bankruptcy sale transaction, also has appellate standing. See In re Colony Hill Assocs., 111 F.3d 269, 274 (2d Cir. 1997). Exco alleges, among other things, that Milbank, to the detriment of the unsecured creditors, failed to disclose relationships with certain bidders. Exco alleges that the Committee consequently breached its fiduciary duty to ENA creditors such as Exco. Like the unsuccessful bidder, Exco questions the intrinsic fairness of this bankruptcy proceeding if Milbank is permitted to continue to represent the Committee. Accordingly, Exco has standing to appeal the bankruptcy court's denial of its motion to disqualify Milbank as counsel for the Committee.
Appellee Milbank further contends that the Court should dismiss Exco's appeal because the bankruptcy court's decision is not a final order. Pursuant to 28 U.S.C. § 158(a)(1), an appeal from a bankruptcy court order may be taken as of right if the order is final. In non-bankruptcy cases, an order denying a motion to disqualify counsel in a civil case is not an appealable, final order. See Firestone Tire & Rubber Co v. Risjord, 449 U.S. 368, 379, 66 L. Ed. 2d 571, 101 S. Ct. 669 (1981).
However, "a more flexible standard of finality" applies in a bankruptcy case. In re Johns Manville Corp., 920 F.2d 121, 126 (2d Cir. 1990). Within a bankruptcy context, orders "may be immediately appealable if they finally dispose of discrete disputes within the larger case." Id. The Second Circuit has held in a line of cases that bankruptcy court orders granting or denying the retention of counsel dispose of such disputes and are, therefore, final and appealable. See Arochem, 176 F.3d at 620; In re Kurtzman, 194 F.3d 54, 57 (2d Cir. 1999); see also In re Palm Coast, Matanza Shores Ltd. P'ship, 101 F.3d 253, 256 (2d Cir. 1996) (order authorizing trustee to retain real estate consultant was a final order).
Milbank attempts to distinguish these cases by noting that they involved an order granting or denying counsel's employment in the first instance, rather than, as here, an order denying a midstream motion to disqualify counsel previously appointed without objection. Such distinction is without consequence. In both scenarios, the bankruptcy court is deciding a conflict issue. In AroChem, the Second Circuit made no such distinction. The court began its analysis of the order's finality with the Supreme Court's non-bankruptcy rule that "orders granting or denying motions to disqualify counsel are not considered final and are not immediately appealable." Arochem, 176 F.3d at 619 (citing Richardson-Merrell, Inc. v. Koller, 472 U.S. 424, 440, 86 L. Ed. 2d 340, 105 S. Ct. 2757 (1985); Firestone, 449 U.S. at 379)). Then the court held the order to be final and appealable because of the more flexible standard of finality that applies in bankruptcy cases -- not because the order involved the initial retention of counsel. See Arochem, 176 F.3d at 620; see also In re Vebeliunas, 246 B.R. 172, 173 (S.D.N.Y. 2000) (noting that Arochem, Palm Coast and Kurtzman "affirm jurisdiction over appeals from orders granting or denying motions to disqualify counsel" in bankruptcy proceedings).
In Palm Coast, Arochem, and Kurtzman, the Second Circuit ultimately determined that the bankruptcy order was final because "nothing in the order of the bankruptcy court … indicates any anticipation that the decision will be reconsidered." Arochem, 176 F.3d at 620 (quoting Palm Coast, 101 F.3d at 256); Kurtzman, 194 F.3d at 57. In the instant appeal, Milbank contends that the bankruptcy court's order is not final because in a footnote the court stated that "the better course of action is to address these issues if and when the events were to occur." This statement, however, relates to Exco's speculation concerning Milbank's potential involvement in future litigation regarding Enron transactions. The court explained that "considering the limited scope of Milbank's retention concerning the transactions and the involvement of conflicts counsel in the investigation of the transactions, at this point, the speculation that Milbank may become a defendant or a witness is not sufficient to warrant a finding of adverse interest on Milbank's part." The court does not suggest that it will reconsider its decision relating to Exco's present motion. Moreover, in denying Exco's motion, the bankruptcy court also denied a request to hold the motion in abeyance. Accordingly, this Court finds that the bankruptcy court's order is a final, appealable order.
In its final argument challenging this Court's jurisdiction, Appellee Committee asserts that, by failing to name the Committee as an appellee, Exco did not comply with Bankruptcy Rule 8001(a). Rule 8001(a) provides that "the notice of appeal shall … contain the names of all parties to the judgment, order, or decree appealed from …." Fed. R. Bankr. P. 8001(a). Rule 8001(a) also states that "an appellant's failure to take any step other than timely filing a notice of appeal does not affect the validity of the appeal, but is ground only for such action as the district court … deems appropriate, which may include dismissal of the appeal." Fed. R. Bankr. P. 8001(a).
The time period for filing a notice of appeal is strictly enforced and failure to timely file deprives the district court of jurisdiction to review the bankruptcy court's order. See In re New York Hostel, Inc., 194 B.R. 313, 316 (S.D.N.Y. 1996). Moreover, failure to name an appealing party may preclude that party's appeal. See In re Pettibone Corp., 145 B.R. 570, 574 (N.D. Ill. 1992). Exco adequately named itself as the appellant in the notice of appeal. Because other defects are not jurisdictional, it is within the Court's discretion to take such action as it deems appropriate. See Medford Industries v. Lennar Partners, Inc., 205 B.R. 23 (E.D.N.Y. 1996). This Court finds that Exco's failure to name the Committee as an appellee does not warrant dismissal. Accordingly, the Court will hear Exco's appeal.
Moreover, even if the Court decided that the deficiency warranted dismissal, its jurisdiction would be curtailed only with respect to the Committee, and not as to the parties that Exco properly named. See In re Novon Int'l Inc., No. 98cv0677E(F), 2000 U.S. Dist. LEXIS 5169, 2000 WL 432848, *1 (W.D.N.Y. March 31, 2000).
In its decision, the bankruptcy court discussed Exco's delay in bringing this motion and concluded that such delay would provide a separate ground to deny the relief sought by Exco. The Committee's application to retain Milbank and Milbank's affidavit in support of that application were filed by January 16, 2002. Exco did not file any objections to the application. Nor did Exco appeal the bankruptcy court's January 28, 2002 order approving Milbank's retention. Exco did not file its motion seeking to disqualify Milbank until March 9, 2002, even though, as the bankruptcy court noted, the "underlying basis for the motion" was known to Exco no later than mid-January. This Court agrees with the bankruptcy court's finding that there was an unjustified delay on the part of Exco in bringing this motion. However, because of the seriousness of the allegations, the bankruptcy court addressed the merits and did not deny Exco's motion as untimely.
The standard by which this Court is to review an order of the bankruptcy court is set forth in Rule 8013 of the Federal Rules of Bankruptcy Procedure:
On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses.
Fed. R. Bankr. P. 8013.
Thus, the Court will accept the bankruptcy court's findings of fact unless they are clearly erroneous. See In re Manville Forest Products Corp., 896 F.2d 1384, 1388 (2d Cir. 1990). This Court will review the bankruptcy court's legal conclusions de novo. See id.
A party's choice of counsel is entitled to great deference. See, e.g., Board of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979). Disqualification motions are viewed with disfavor because they interfere with a party's right to employ the counsel of its choice. See A.V. By Versace, Inc. v. Gianni Versace, S.p.A., 160 F. Supp. 2d 657, 662-63 (S.D.N.Y. 2001); Universal City Studios, Inc. v. Reimerdes, 98 F. Supp. 2d 449, 455 (S.D.N.Y. 2000). Mere speculation will not suffice to establish sufficient grounds for disqualification. See A.V. By Versace, Inc., 160 F. Supp. 2d at 663.
Exco contends that three reasons exist to warrant Milbank's disqualification: first, during the retention application process, Milbank allegedly failed to disclose substantial conflicts and connections between itself and Debtors, creditors and Committee members; second, under Bankruptcy Code §§ 101, 327, 328 and 1103, Milbank allegedly fails to satisfy the "disinterested person" standard and violates the requirement that it not hold or represent an "adverse interest" and; and third, Milbank's retention allegedly violates the Canons of Professional Ethics and the Disciplinary Rules.
On appeal, this Court will only consider the record that was before the bankruptcy court. See In re Davis, 169 B.R. 285, 293 (E.D.N.Y. 1994); Fed. R. Bankr. P. 8006. The Court, therefore, will disregard any argument or document that appears for the first time on this appeal, including but not limited to, the newspaper articles that appeared after the bankruptcy court's May 23, 2002 order.
Disclosures
Bankruptcy Rule 2014(a) requires a professional seeking employment in a bankruptcy case to submit an application that states "to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, and any other party in interest …." Fed. R. Bankr. P. 2014(a). Rule 2014(a) also requires the applicant to submit a "verified statement" setting forth these connections. Id. The purpose of Rule 2014(a) is to provide the court and the United States trustee with information to determine whether the professional's employment is in the best interest of the estate. See In re The Leslie Fay Co., Inc., 175 B.R. 525, 532 (S.D.N.Y. 1994). Rule 2014 disclosures are to be strictly construed and failure to disclose relevant connections is an independent basis for the bankruptcy court to disallow fees or to disqualify the professional from the case. See id. 175 B.R. at 533.
Exco argues that Milbank failed to disclose numerous conflicts and connections. For instance, Exco alleges that Milbank failed to timely disclose its involvement in a transaction relating to Enron Wind Corporation ("Enron Wind"), an affiliated Enron debtor. On December 27, 2001, the bankruptcy court issued an order approving Enron's application to sell some assets of Enron Wind's non-debtor subsidiary, Enron Wind Development Corp. Exco asserts that Milbank did not completely disclose until its March 11, 2002 fee application that, during the transaction, it had represented both Enron Wind Development Corp. and the Committee and it simultaneously billed both the Enron estate and Enron Wind.
The bankruptcy court found, however, that Milbank's disclosures concerning the Enron Wind transaction complied with the requirements of Rule 2014 and that its disclosures "provided the court, the United States Trustee and any party in interest with adequate information to enable them to take whatever action, if any, deemed necessary regarding Milbank's retention." The bankruptcy court found that Milbank fully disclosed its relationships relating to the Enron Wind transaction in the January 15, 2002 affidavit in support of the application to retain Milbank as counsel for the Committee ("January 15th Affidavit"). The bankruptcy court also found that the relevant facts were fully disclosed in the pleadings filed by Weil, Gotshal & Manges LLP and that Milbank's dual representation was due to exigent circumstances. Moreover, American Electric Power Company, not Enron Wind, paid Milbank. Having reviewed Milbank's January 15th Affidavit and Milbank's several supplemental affidavits, this Court agrees with the bankruptcy court's findings.
Next, Exco alleges that Milbank allowed only its own clients to bid on the sale of Debtors' Trading Unit, which generated a $ 2 billion profit over a nine to twelve month period of time prior to the bankruptcy. The sale of the trading unit involved Citibank, JP Morgan Chase and UBS Warburg, as the three bidders, and The Blackstone Group L.P. as the investment banker conducting the auction. The bankruptcy court approved the sale of the trading unit to UBS Warburg on January 18, 2002. Exco alleges that Milbank failed to disclose its connections to the parties involved in the sale, namely Enron, Citibank, JP Morgan Chase, UBS Warburg and The Blackstone Group.
At the May 15, 2002 hearing before the bankruptcy court, however, counsel for Debtors argued that the Committee did not make any decisions regarding how the sale of Debtors' trading units would be conducted. As Debtors explained, their counsel -- not Milbank -- controlled the sale. Moreover, the bankruptcy court correctly found that Milbank disclosed in its January 15th Affidavit that it had represented the bidders in matters unrelated to the Enron trading unit transaction.
Exco also alleges that Milbank failed to adequately disclose its relationship with certain underwriters in structured finance transactions, such as Mahonia, Marlin I, Osprey I, Osprey II, and six credit-linked note transactions. Exco argues that Milbank should have specified the names of the underwriters and the amounts involved so that an interested party could determine whether there was a problem with Milbank's representation of the Committee. Exco also argues that Milbank failed to disclose the nature and magnitude of the Credit-Linked Note transactions.
The bankruptcy court found, however, that Milbank's disclosures of the Mahonia transaction in the January 15th Affidavit complied with Rule 2014. Milbank also disclosed in the January 15th Affidavit that it had represented the six investment bankers in the credit-linked note transactions. Moreover, Milbank disclosed in its "Engagement Limitations" that, because of prior representations of certain Enron companies, there were limitations on the scope of its representation of the Committee and that conflicts counsel would handle matters outside of Milbank's scope. As is evident from the "Engagement Limitations," Milbank is not representing the Committee in any matters that Exco has identified as situations in which Milbank has an adverse interest. This Court has reviewed Milbank's disclosures concerning the structured finance transactions and concludes that the bankruptcy court's findings are not clearly erroneous.
Milbank's January 15th Affidavit was twenty-nine pages long and contained four exhibits. In this affidavit and exhibits, Milbank extensively disclosed connections with potential parties of interest in the case. Milbank also disclosed its former representations of Enron entities and of other clients involved with Enron. In the January 15th Affidavit, Milbank agreed to provide regular supplements to the affidavit to provide additional disclosure of its relevant connections. To that end, Milbank has submitted six supplemental disclosures to continually reflect the nature of any relationship with new parties in interest and to expand upon prior disclosures. See In re Granite Partners, L.P., 219 B.R. 22, 35 (noting that although Rule 2014(a) does not expressly require supplemental disclosures, they are necessary to preserve the integrity of the bankruptcy system). While Exco maintains that the supplemental disclosures demonstrate that Milbank's disclosures are untimely and inadequate, this Court finds that the supplemental disclosures support the bankruptcy court's finding that Milbank's disclosures have been "meaningful, forthright, continuous and sufficiently detailed."
Rule 2014 requires Milbank to ensure all relevant connections have been brought to light. See In re Leslie Fay Co., Inc., 175 B.R. at 533. The rule does not, however, require the detailed description of those connections that Exco proposes in this case. The bankruptcy court found that Exco would require Milbank to disclose information beyond the requirements of Rule 2014, such as every possible consequence resulting from Milbank's connections, as well as a prediction as to the outcome of any possible litigation that may relate to its connections. This Court agrees with the bankruptcy court that such disclosures are beyond the scope of Rule 2014 and that Milbank's disclosures complied with Rule 2014. Adverse Interests/ Disinterestedness
Exco alleges that Milbank has adverse interests that require its disqualification under 11 U.S.C. §§ 1103, 327, and 328. The bankruptcy court found Milbank does not hold or represent an adverse interest under any of these sections. § 1103(b) states:
An attorney or accountant employed to represent a committee appointed under section 1102 of this title may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case. Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.
Milbank violates § 1103(b) if it simultaneously represents both the Committee and another party, with an interest adverse to the committee, in matters related to the bankruptcy proceeding. See Daido Steel Co., Ltd., v. Official Comm. Of Unsecured Creditors, 178 B.R. 129, 132 (N.D. Ohio 1995). Section 1103(b) is not violated if Milbank represents an entity with an adverse interest in a matter unrelated to the bankruptcy case or in a matter that pre-dates Milbank's representation of the Committee. See Id.; In re Firstmark Corp., 132 F.3d 1179, 1182 (7th Cir. 1997) (emphasis added).
Exco's argument under § 1103 fails because Milbank's alleged adverse interests relating to the structured finance transactions pre-date Milbank's representation of the Committee. Moreover, Conflicts Counsel represents the Committee with respect to all matters in which Milbank was previously involved. Accordingly, the bankruptcy court was correct in finding that Milbank complies with the requirements of § 1103(b).
While Milbank asserts that § 1103(b) is the only statutory provision that applies to the Committee's right to select counsel, Exco argues Milbank must also satisfy the requirements of § 327(a). Section 327(a) concerns solely the employment of professionals by a trustee or a debtor and requires that the professional not hold an adverse interest to the estate and that the professional be disinterested under § 101(14). However, § 328(c) of the bankruptcy code allows a bankruptcy court to deny compensation to a professional employed under either § 327 or § 1103 if that professional is not disinterested or holds an adverse interest. See 11 U.S.C. § 328(c) (emphasis added). Consequently, at least one case has held that, notwithstanding the language of § 1103, the disinterested and adverse interest requirements of 327(a) also apply to the initial retention of counsel for a committee under § 1103. See In re Caldor, 193 B.R. 165, 170-171 (Bankr. S.D.N.Y. 1996).
In the instant case, the bankruptcy court concluded that, even if the stricter requirements of § 327(a) are applied to Milbank's representation of the Committee, Milbank satisfies these requirements because it is disinterested under § 101(14) and because it does not hold an adverse interest. This Court agrees.
§ 101(14) defines a disinterested person, in pertinent part, as any person that:
(C) has not been, within three years before the date of the filing of the petition, an investment banker for a security of the debtor, or an attorney for such an investment banker in connection with the offer, sale, or issuance of a security of the debtor; and …
(E) 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 … or for any other reason.
Exco alleges that Milbank is not disinterested under 11 U.S.C. § 101(14) because it was counsel to investment bankers in connection with the offer, sale or issuance of a security of Debtors in the Marlin transactions, the Osprey I transactions and certain credit linked note transactions. Exco asserts that Milbank represented certain clients as arrangers of a structured finance offering in senior secured notes issued by the Marlin Water Trust II and by the Osprey Trust. Exco argues that as part of the Marlin and Osprey transactions, Enron issued preferred stock and entered into a Remarketing Agreement with Milbank's clients that, under certain provisions, required Milbank's clients to sell the preferred stock. Exco maintains, therefore, that Milbank's clients are underwriters or investment bankers in violation of 101(14).
Milbank, on the other hand, asserts that it represented certain investment bankers for securities issued by only non-Debtor entities prior to the petition date and disclosed these representations in its application. While Milbank acknowledges that some of its clients were parties to Remarketing Agreements with Enron, Milbank maintains that certain specified conditions would have to be met before the investment bankers would remarket Enron stock. Milbank asserts that the investment bankers never purchased, offered, sold or issued Enron securities.
Exco alleges, however, that the transactions are the Debtors' attempt to disguise the sale of Enron shares through trust vehicles and that Milbank's representation of investment bankers in connection with the secured notes is truly representation of those investment bankers in the sale of Enron stock.
The bankruptcy court found "absolutely no evidence … to prove, much less substantiate, Exco's allegations that the form of these vehicles was an artifice for a roundabout issuance of Enron securities." This Court concurs with the bankruptcy court's finding that Exco's allegations are based on mere conjecture and speculation insufficient to support a motion for disqualification. See A.V. by Versace, Inc., 160 F. Supp. 2d at 663; TWI Int'l, Inc. v. Vanguard Oil And Service Co., 162 B.R. 672, 675 (S.D.N.Y. 1994) ("merely hypothesizing that conflicts may arise is not sufficient to warrant the disqualification of an attorney") (quoting In re Stamford Color Photo, Inc., 98 B.R. 135, 138 (D. Conn. 1989).
The bankruptcy court relied on the Remarketing Agreements filed under seal in concluding that Milbank is disinterested pursuant to § 101(14). Having reviewed the Remarketing Agreements, this Court agrees with the bankruptcy court's findings that the conditions required for investment bankers to become underwriters of Enron stock have not been satisfied.
Exco argues that Milbank's prior representations, relating to the structured finance transactions, create an adverse interest. An adverse interest is defined as follows:
(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.
In re Arochem Corp., 176 F.3d at 623 quoting In re Roberts, 46 B.R. 815 (Bankr. D. Utah 1985).
The bankruptcy court found that the procedures Milbank has in place are satisfactory to handle its adverse representations in prior matters. This Court agrees.
Milbank's scope of employment is limited so that Milbank will not be handling any matter regarding Mahonia or any structured finance transaction that involved Milbank's representation. See N.Y. Bar Op. 2001-3 at 2-3 ("representation may be limited to eliminate adversity and avoid a conflict of interest"). Conflicts counsel reviews, on a daily basis, the docket and all pleadings to identify any matters from which Milbank should be excluded. Milbank has also created a "firewall" to prevent the transfer of information between Milbank employees who are representing the Committee and Milbank employees who previously represented parties with an adverse interest.
Moreover, conflicts counsel investigates the structured transactions relating to Milbank and the Examiner will investigate all of the structured transactions. The bankruptcy court explained that either Conflicts Counsel or the Examiner would discover any action by Milbank that would constitute a breach of Milbank's fiduciary duty in its own investigation of structured transactions. Accordingly, the bankruptcy court correctly concluded that there "is effectively no adverse interest in Milbank continuing these investigations."
The bankruptcy court also found that Milbank's receipt of alleged preferential transfers does not create an adverse interest between Milbank and the unsecured creditors. As the bankruptcy court explained, the Examiner will determine whether Milbank received an avoidable preference and Milbank, having waived its right to litigate the preference issue, will be bound by the Examiner's findings. The bankruptcy court found that Milbank's agreement to waive its rights to challenge the Examiner's findings has the same effect as the accepted practice of waiving a claim in order to comply with the disinterested person standard of § 101(14)(A). On appeal, Exco has not challenged the bankruptcy court's findings regarding Milbank's alleged preferential transfers. Because Milbank has agreed to be bound by the Examiner's determination, this Court agrees with the bankruptcy court that Milbank does not hold an adverse interest.
Ethical Violations
Bankruptcy courts also look to the Code of Professional Responsibility in analyzing conflicts of interest. See In re Caldor, 193 B.R. at 178. Exco, therefore, alleges that Milbank should be disqualified under Canon 5 and Canon 9 of the Code of Professional Responsibility. This Court concurs with the bankruptcy court that, having found both that Milbank is not involved in any matter in which it has an adverse interest and that the use of conflicts counsel and ethical walls are appropriate, there is no basis for a violation of the Code of Professional Responsibility.
Conclusion
For the foregoing reasons, this Court affirms the Bankruptcy Court's Decision and Order dated May 23, 2002. Exco's request to set aside the bankruptcy court's decision and to have Milbank disqualified as counsel for the Official Committee of Unsecured Creditors is denied.
SO ORDERED:
BARBARA S. JONES
UNITED STATES DISTRICT JUDGE
Dated: January 28, 2003