In re Pillowtex, Inc., 01-2775.
| Decision Date | 23 September 2002 |
| Docket Number | No. 01-2775.,01-2775. |
| Citation | 304 F.3d 246 |
| Parties | In re: PILLOWTEX, INC. Patricia A. Staiano, the United States Trustee, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Robert D. McCallum, Jr., Assistant Attorney General, Joseph A. Guzinski, Acting General Counsel, P. Matthew Sutko, Attorney, Office of General Counsel, Anne Murphy (Argued), William Kanter, United States Department of Justice, Washington, DC, for Appellant.
Eric D. Schwartz, William H. Sudell, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, Fordham E. Huffman (Argued), David G. Heiman, Jones, Day, Reavis & Pogue, Columbus, OH, Gregory M. Gordon, Daniel P. Winikka, Jones, Day, Reavis & Pogue, Dallas, TX, for Appellees In re: Pillowtex, Inc. and its Affiliated Debtors.
John D. McLaughlin, Jr., Pauline K. Morgan, Young, Conaway, Stargatt & Taylor, Wilmington, DE, Fred S. Hodara (Argued), Akin, Gump, Strauss, Hauer & Feld, New York, NY, for Appellee Official Committee of Unsecured Creditors.
Before SLOVITER, ROTH and McKEE, Circuit Judges.
The U.S. Trustee appeals from the District Court's order authorizing the retention of Jones, Day, Reavis and Pogue ("Jones Day") as Pillowtex, Inc.'s Chapter 11 bankruptcy counsel. The U.S. Trustee argues that payments of fees by Pillowtex to Jones Day within the 90 days before bankruptcy may have constituted an avoidable preference and that the receipt of such a preference by Jones Day would constitute a conflict of interest with Pillowtex's creditors and its bankruptcy estate. The U.S. Trustee maintains that because the Bankruptcy Code provides that debtor's counsel may not "hold or represent an interest adverse to the estate" or "an interest materially adverse to the interest of... any class of creditors," Jones Day may have been disqualified from serving as Pillowtex's bankruptcy counsel. Without ruling on the U.S. Trustee's preference allegation, the District Court approved Jones Day's retention on condition, proposed by Jones Day, that if Jones Day is determined to have received a preference, it return the amount of the preference to Pillowtex's bankruptcy estates and waive any resulting claim. On appeal, the U.S. Trustee argues that the District Court erred in authorizing Jones Day's retention as counsel without making a determination whether Jones Day received a preference and asks this court to remand and direct the District Court to make such a determination promptly.
Pillowtex Corporation and its subsidiaries (referred to collectively as Pillowtex) manufacture pillows, blankets, towels and other textiles. Jones Day has represented and advised Pillowtex since 1996 in a variety of matters, including corporate, financial, securities, real property, litigation, environmental, intellectual property, labor, employee benefits and tax affairs. Prior to filing its bankruptcy petition, Pillowtex retained Jones Day to assist it with contingency planning and bankruptcy preparation.
Pillowtex declared bankruptcy on November 14, 2000 by filing a petition under Chapter 11 of the Bankruptcy Code. At the time of filing, Pillowtex had approximately $1,000,000,000 in trade debt, about $750,000,000 in senior secured debt, and roughly $400,000,000 in subordinated debt. For fiscal year 1999, Pillowtex's gross revenues exceeded $1,500,000,000, and as of July 1, 2000 its assets were valued at approximately $1,700,000,000.
On November 16, 2000, Pillowtex filed an application with the Bankruptcy Court to retain and employ Jones Day as its bankruptcy counsel pursuant to section 327 of the Bankruptcy Code. Pillowtex also applied to retain other professionals to assist it in its restructuring, including KPMG LLP (KPMG) as an independent auditor and consultant. As part of Jones Day's retention application, Jones Day set forth the date and amount of each payment that Pillowtex made to the firm during the year immediately preceding the filing for bankruptcy. The disclosure by Jones Day showed that Pillowtex made the following payments to Jones Day for services rendered:
11/29/99 $ 203,520.69
12/27/99 450,573.79
12/30/99 155,912.06
2/23/00 181,550.01
3/31/00 67,482.73
4/30/00 146,520.71
6/30/001 180,585.22
7/7/00 132,299.71
9/11/00 78,652.94
11/3/00 40,759.09
11/10/00 778,157.33
11/13/00 300,000.00 (retainer — approx
$100,000 toward
prepetition fees)
The last payment listed, that on November 13, 2000, was made the day before Pillowtex filed its petition for bankruptcy and was a retainer of $300,000 for services rendered or to be rendered by Jones Day and for reimbursement of expenses.2 Including the applied portion of the retainer, Pillowtex paid Jones Day $2,516,014 in the year before it declared bankruptcy. Of those payments $997,569.36 were made in the ninety days before Pillowtex filed its petition for bankruptcy.
The U.S. Trustee3 filed an objection to the application by Jones Day and KPMG for retention, arguing that both KPMG and Jones Day had received payments which constituted voidable preferences under section 547 of the Bankruptcy Code. According to the U.S. Trustee, Jones Day App. at 125. Eventually, the U.S. Trustee withdrew his objection to KPMG's retention pursuant to stipulation, but continues to press its objection as to Jones Day and requested a hearing.
Before the District Court, Jones Day argued that Pillowtex's payments to it "were substantially within the historical pattern of payments between Jones Day and the Debtors, which included wide swings in the timing of payments." App. at 133. Jones Day opposed the requested hearing, arguing that it was "not necessary or appropriate for the Debtors' estates to incur the time and expense of litigating the preference issue." App. at 133. It proposed instead that "if a preference action against the firm is initiated and a final order is entered determining that Jones Day in fact received a preference, Jones Day will return to the Debtors' estates the full amount of the preferential payment and waive any related claim." App. at 133. Jones Day noted that "the U.S. Trustee has previously adopted" the same approach "with respect to Debtors' accountants," KMPG, but "[i]nexplicably, the U.S. Trustee will not agree to this resolution with Jones Day." App. at 133.
The District Court did not definitively determine whether Jones Day had received a preference from Pillowtex. Instead, the court adopted Jones Day's suggestion that it authorize the firm's retention on condition that if Jones Day was determined to have received preferential transfers, "Jones Day shall promptly return the same to [Pillowtex's] estate[] and waive any unsecured claim it has by virtue thereof." App. at 3. According to the District Court, "Subject to the provisions of this Order, Jones Day does not hold or represent any interest adverse to the Debtors' estates and is a `disinterested person,' as defined in section 101(14) of the Bankruptcy Code and as required by section 327(a) of the Bankruptcy Code." App. at 2. The U.S. Trustee timely filed this appeal of the retention order.
The bankruptcy proceeding continued while this appeal proceeded. In the interim, no party has brought a preference action against Jones Day. The District Court ultimately confirmed Pillowtex's Second Amended Joint Plan of Reorganization by an order entered May 2, 2002. At oral argument before this court, Fred Hodara, an attorney for the Official Committee of Unsecured Creditors of Pillowtex which joined in Pillowtex's brief on appeal, agreed with the U.S. Trustee that under Pillowtex's confirmed plan of reorganization the unsecured creditors only receive pennies on the dollar for their claims.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The District Court exercised jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. That court's determination of Pillowtex's application for retention of counsel is a final order, see, e.g., United States Trustee v. First Jersey Secs., Inc. (In re First Jersey Secs., Inc.), 180 F.3d 504, 508 (3d Cir.1999), which this court has jurisdiction to review pursuant to 28 U.S.C. § 1291, see, e.g., In re Marvel Entm't Group, Inc., 140 F.3d 463, 470-71 (3d Cir.1998). The confirmation of Pillowtex's plan of reorganization does not moot this appeal. See, e.g., Citicorp Venture Capital Ltd. v. Committee of Unsecured Creditors, 160 F.3d 982, 986 (3d Cir.1998) (); Michel v. Federated Department Stores, Inc. (In re Federated Department Stores, Inc.), 44 F.3d 1310, 1315-17 (6th Cir.1995) ().
The U.S. Trustee has standing to appeal the retention order. The U.S. Trustee has statutory responsibility to monitor applications for retention of professional persons in bankruptcy cases, and, "whenever the United States trustee deems it appropriate, [to file] with the court comments with respect to the approval of such applications." 28 U.S.C. § 586(a)(3)(H). The relevant statute addresses the U.S. Trustee's standing by explicitly providing that "[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title." 11 U.S.C. § 307. See also United States Trustee v. Price Waterhouse, 19 F.3d 138, 141 (3d Cir.1994).
Although Jones Day argues that it is significant that...
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