In re First Jersey Securities, Inc., 98-5236

Citation180 F.3d 504
Decision Date10 June 1999
Docket NumberNo. 98-5236,98-5290.,98-5236
PartiesIn re FIRST JERSEY SECURITIES, INC., Debtor United States Trustee; Securities & Exchange Commission v. First Jersey Securities, Inc. In re First Jersey Securities, Inc., Debtor Securities & Exchange Commission v. First Jersey Securities, Inc.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Katharine B. Gresham (Argued), Securities & Exchange Commission, Washington, DC, for Appellant.

Deborah R. Kant (Argued), William Kanter, United States Department of Justice, Washington, DC, for Appellant.

Walter J. Greenhalgh (Argued), Duane, Morris & Heckscher, Newark, New Jersey, for Appellee.

Before: ALITO and McKEE, Circuit Judges, and SCHWARTZ, District Judge.*

OPINION OF THE COURT

SCHWARTZ, Senior District Judge.

This appeal addresses the propriety of the appointment of counsel for a debtor in possession, where the debtor transferred restricted securities to its counsel in payment for pre-petition services on the eve of its filing for bankruptcy. The United States Trustee ("Trustee") and the Securities and Exchange Commission ("SEC") contend the law firm of Robinson, St. John, & Wayne ("RSW") was disqualified from serving as counsel for the debtor, First Jersey Securities, because it held an interest adverse to the debtor's estate by reason of the transfer to it of the restricted securities. The Bankruptcy Court and the United States District Court for the District of New Jersey held the debtor could retain RSW as counsel. Because counsel received a preference under Section 547 of the Bankruptcy Code, 11 U.S.C. § 547, we will reverse and remand.

I.

First Jersey Securities, Inc.1 (the "debtor" or "First Jersey") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 7, 1995. 11 U.S.C. § 101 et seq. This action was prompted after the SEC prevailed in a securities fraud action against First Jersey and its 100% shareholder, Robert Brennan, and obtained an order for them to disgorge $75 million in illegal proceeds. S.E.C. v. First Jersey Securities, Inc., 890 F.Supp. 1185 (S.D.N.Y.1995), aff'd in part, rev'd in part, 101 F.3d 1450 (2d Cir.1996). Obtaining that order left the SEC as the largest unsecured creditor of the debtor.

Concurrent with the filing of the petition, the debtor filed an application pursuant to § 327(a) of the Bankruptcy Code to retain RSW as its counsel. First Jersey owed the firm approximately $389,000 for legal services rendered prior to the filing for bankruptcy primarily for work performed in the securities fraud litigation.2 On the same day of its Chapter 11 filing, the debtor transferred 200,001 shares of unregistered restricted stock in International Thoroughbred Breeders, Inc. ("ITB") to RSW.3 This stock was to be liquidated by RSW, with payments to be made in the following manner: $200,000 as a retainer for representation in the bankruptcy proceedings; $250,000 for payment on firm invoices for representation in the securities fraud litigation, with any excess to be returned to the debtor. The $250,000 was to be considered full payment for the $389,327 due for pre-petition services. The firm waived the remaining pre-petition balance, thereby eliminating itself as a creditor of the debtor. Apparently, shares in ITB were the debtor's only meaningful resource, as its bankruptcy petition listed only $22,367 in other assets. Ultimately, RSW found a buyer for the shares, and transferred all of the ITB stock for $600,003. RSW kept $450,000 and returned the remainder to the debtor. While the transfer of stock was noted in both the debtor's petition and counsel's petition to be retained as counsel, neither party disclosed the payment was made within 90 days of the debtor filing for bankruptcy.

On August 11, 1995, four days after the filing of the petition, the Trustee, joined by the SEC three days later, objected to the appointment of RSW as counsel, arguing the firm was not "disinterested" as is required by the Bankruptcy Code. 11 U.S.C. § 327(a). The Trustee and the SEC (collectively referred to as "SEC") maintained the transfer of ITB restricted stock was a preferential payment, thereby disqualifying RSW from acting as counsel for the debtor because it held an interest adverse to the estate. RSW, in response, submitted a certification asserting the payment was made in the ordinary course of business, was not preferential, and was deemed timely payment. It did not disclose the date of the stock transfer. What occurred in the Bankruptcy Court and District Court is set forth below.

A. Bankruptcy Court

On August 24, 1995, the Bankruptcy Court held a hearing on the debtor's application to retain RSW as its counsel. The SEC contended the payment of RSW's prepetition claim was a voidable preference under the Bankruptcy Code, 11 U.S.C. § 547(b),4 which is a cause for disqualification under Section 327(a).5 During the hearing, RSW acknowledged the stock transfer took place within the 90 day preference period, but contended it was made in the ordinary course of business, and not made in exchange for an "antecedent debt". Counsel explained the $250,000 payment was for a series of invoices from January through May 1995, as well as for work done in June and July of that year. He stated,

The normal course of doing business with the debtor for at least the past 12 months and probably going back a year and a half or two years, would be a method where we would generate an invoice, we would then submit a group of invoices after several months, ... submit that to the debtor, discuss with the debtor a method of payment, and the debtor would make payment on those groups of invoices.

Bankruptcy Docket No. 30, August 24, 1995 Hearing at 31.

The Bankruptcy Court approved the debtor's application to retain RSW from the bench on August 24, 1995 and subsequently issued a written opinion. In re Brennan, 187 B.R. 135 (Bankr.D.N.J. 1995). That Court held the SEC did not present a prima facie case that RSW received a voidable preference under Section 547(b) of the Bankruptcy Code. Specifically, the Bankruptcy Court found there was no prima facie showing of a transfer to "satisfy an antecedent debt owed by the debtor before such transfer was made", as is required under § 547(b)(2).6In re Brennan, 187 B.R. at 153. The Court reasoned a debt is not "owed" within the meaning of the statute until payment is past due, even if the debt is antecedent. It accepted RSW's assertion that the debtor's financial obligation to the firm was not past due, and consequently the payment was deemed timely.

In the alternative, the Court found the transfer of stock, even if a preference, was not a voidable preference because it was a payment made in the ordinary course of business under Section 547(c). If the transfer was incurred and made in the ordinary course of business between the parties, and made according to ordinary business terms, then the transfer cannot be avoided by the debtor's estate. 11 U.S.C. § 547(c)(2)7 In addition, the Court dismissed the SEC's claim that the debtor and counsel failed to disclose adequately the details of the pre-petition transfer of the stock. The Bankruptcy Court concluded, "The U.S. Trustee and the SEC therefore failed to establish that the payment in question is probably an avoidable preference. The mere accusation that it could be avoidable is not sufficient to disqualify Robinson." In re Brennan, 187 B.R. at 154.

B. District Court

The SEC and Trustee appealed the decision of the Bankruptcy Court to the United States District Court for the District of New Jersey, contending the Bankruptcy Court erred in finding the law firm was not disqualified under § 327(a). The District Court filed a memorandum and order affirming the Bankruptcy Court's decision. In re First Jersey Securities, Inc., No. 95-5455 (D. N.J. filed April 9, 1998).

The Court agreed with the Bankruptcy Court that the transfer of ITB stock did not constitute a preference under § 547(b), and therefore, RSW should not be disqualified. The District Court also concluded the stock transfer was not made on account of an antecedent debt owed by the debtor before the transfer was made. Finally, the Court declined to address the Bankruptcy Court's conclusion that the stock transfer payment was made in the ordinary course of business.

II.

The District Court exercised jurisdiction under 28 U.S.C. § 158(a) to review the Bankruptcy Court's final order approving the debtor's application for retention of counsel. This Court has jurisdiction under 28 U.S.C. § 158(d) to review the District Court's final order. United States Trustee v. Price Waterhouse, 19 F.3d 138 (3d Cir. 1994).

Our standard of review of a District Court's determination on appeal from a Bankruptcy Court decision has been articulated on numerous occasions. "As an appellate court twice removed from the primary tribunal, we review both the factual and legal determinations of the district court for error." Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-2 (3d Cir.1981). Our vantage point is identical to that of the District Court, "so we review the bankruptcy court's findings by the standards the district court should employ to determine whether the district court erred in its review." Id. at 102. Accordingly, the Bankruptcy Court's findings of fact are reviewable for clear error. In re Continental Airlines, 125 F.3d 120, 128 (3d Cir.1997). Legal determinations are subject to plenary review. Id. The Bankruptcy Court's exercise of discretion is reviewed for abuse thereof. In re Engel, 124 F.3d 567, 571 (3d Cir.1997).

III.

The SEC urges this Court to reverse the District Court's decision approving the retention of RSW as counsel for the debtor. It argues the Court erred in finding the stock transfer was not a voidable preference under 11 U.S.C. § 547, and that error led it to conclude RSW was qualified to serve as counsel to the debtor under 11...

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