AroChem Corp., In re

• Decision Date: 18 May 1999
• Docket Number: Docket No. 98-5009
• Citation: 176 F.3d 610
• Parties: In re AROCHEM CORPORATION, Debtor. Bank Brussels Lambert, Banque Indosuez, Chase Manhattan Bank, N.A., Swiss Bank Corporation, Victory Holding Company, Crail Fund, Skopbank, Eric Johnson, Sherry L. Hutchison, The Estate of Robert Johnson, and Victory Oil Company, Appellants, v. Richard M. COAN, Trustee, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 610

176 F.3d 610

In re AROCHEM CORPORATION, Debtor Bank Brussels Lambert, Banque Indosuez, Chase Manhattan Bank, N.A., Swiss Bank Corporation, Victory Holding Company Crail Fund, Skopbank, Eric Johnson, Sherry L. Hutchison, The Estate of Robert Johnson, and Victory Oil Company, Appellants, v. Richard M. COAN, Trustee, Appellee.

Docket No. 98-5009.

United States Court of Appeals Second Circuit.

Argued Sept. 23, 1998.

Decided May 18, 1999.

Richard C. Tufaro, Washington, D.C. (Milbank, Tweed, Hadley & McCloy, Washington, D.C., of counsel), for Appellants The Chase Manhattan Bank, Banque Indosuez and Swiss Bank Corporation.

Andrew J. Frackman, O'Melveny & Myers, New York City, for Appellants Victory Oil Co., Victory Holding Co., Crail Fund, Eric C. Johnson, Sherry L. Hutchison and the Estate of Robert Johnson.

William S. Fish, Jr., Tyler, Cooper & Alcorn, Hartford, CT, for Appellants Bank Brussels Lambert and Skopbank.

Jerry J. Strochlic, Gibson, Dunn & Crutcher, New York City, of counsel, for Appellants.

Michael A. Caddell, Houston, TX (Caddell & Chapman, Houston, TX, Timothy D. Miltenberger, Coan, Lewendon, Royston & Gulliver, New Haven, CT, of counsel), for Appellee.

Before: MESKILL, LEVAL and STRAUB, Circuit Judges.

MESKILL, Circuit Judge:

Appeal from an order of the United States District Court for the District of Connecticut, Eginton, J., affirming an order of the United States Bankruptcy Court for the District of Connecticut, Shiff, C.B. J., authorizing the appellee trustee's retention of counsel to pursue lawsuits against creditors on behalf of the debtors' estates.

Affirmed.

BACKGROUND

This dispute grows out of the bankruptcy of AroChem Corporation and AroChem International, Inc. (collectively "AroChem" or the "Estates"), Delaware corporations formed in 1988 to engage in the petrochemical and petroleum business. The Trustee for the bankrupt Estates, appellee Richard M. Coan (Trustee), sought authority to employ the law firm of Caddell & Conwell ("Caddell" or "Caddell Firm") to pursue litigation, on the Estates' behalf, against various creditors and shareholders of AroChem. Appellants, named defendants in the Trustee's lawsuit who object to the retention of Caddell, consist of two groups of AroChem's biggest creditors: the "Bank Group," ¹ comprising banks that lent money to AroChem, and the "Victory Group," ² comprising, for the most part investment bankers who consulted on the creation of AroChem. Two nonparties, William R. Harris (Harris) and Edwin E. Wells (Wells), occupy central roles in the AroChem story, which is discussed briefly below.

In 1987 Wells assisted Harris in obtaining from the Victory Group financing needed to form AroChem. In return, Wells and Victory received a portion of AroChem's common stock and seats on its six-member board of directors. Harris maintained a sixty percent interest in AroChem and served as its president, chief executive officer and director. The Bank Group became involved when its members entered into a revolving credit agreement with AroChem in 1990, under which AroChem could borrow up to $245 million as needed for its business operations.

From the beginning of their relationship, Harris, Wells and the Victory Group disagreed about the operation and management of AroChem. Moreover, from 1989 forward, Wells accused Harris of serious wrongdoing at AroChem and of inflicting serious harm on the company. To that end he wrote letters to members of the Bank Group, before they executed the revolving credit agreement, warning them that Harris was engaging in unauthorized speculative oil trading with AroChem money and that criminal investigative authorities had been notified.

In 1991 the Bank Group discovered that AroChem's assets and net worth had been grossly overstated. In 1992, after an investigation confirmed that AroChem's senior management (including Harris) had engaged in widespread fraud, the Bank Group forced AroChem into involuntary bankruptcy under Chapter 11. The consolidated cases were later converted to Chapter 7 proceedings and Coan was appointed Trustee in August 1992. By the time the fraudulent scheme was uncovered and AroChem was placed in bankruptcy, the banks had lost in excess of $190 million.

In 1992 Harris was convicted of a variety of financial crimes growing out of his activity at AroChem, and he is now serving a 188 month term of imprisonment. United States v. Harris, 805 F.Supp. 166, 168 (S.D.N.Y.1992).

Prolific litigation evidences the discord among the players in the AroChem saga. The first lawsuit arose when the shareholder disputes over AroChem's management led Victory to elect to sell its shares. Victory proposed to sell its shares to Wells, who had a right of first refusal under the shareholder agreement. When no agreement was reached, however, Victory attempted to sell its shares to Harris. Wells objected, leading Victory to seek a judicial declaration that Victory was free to sell its shares to Harris. Victory Holding Co. v. Stetson Capital Corp., No. 89-2334 (Apr. 23, 1989) (C.D.Cal.) (Victory Action). Wells asserted counterclaims seeking to compel Victory to sell the shares to him.

In July 1989, while the Victory Action was pending, Harris sued Wells and the Victory Group in the District of Connecticut, accusing Wells of failing to perform his duties as an investment advisor to AroChem and of harming Harris and AroChem by making false accusations. Harris v. Wells, No. B 89-391 (D.Conn.) (Harris Action). The following month, Wells brought suit in the District of Connecticut against Harris, other board members and AroChem. Wells v. Harris, No. B 89-482 (D.Conn.) (Wells Connecticut Action). Wells alleged that through certain shareholder agreements Harris had caused Wells to lose his equity interest in AroChem, and that Harris was engaging in speculative trading and other activities that were harming Wells and AroChem. In 1990 Harris and Wells each amended their complaints to assert derivative claims on behalf of AroChem and to name additional defendants. The Victory Action, the Harris Action and the Wells Connecticut Action were then consolidated for pretrial purposes before Judge Eginton and the parties filed several counterclaims and cross-claims.

In the spring of 1994, Wells and his corporations retained Caddell, who, on Wells' behalf, brought an action in Texas state court against over fifty defendants, including Harris, the Bank Group and the Victory Group. Wells v. Chase Manhattan Bank, N. A., No. 94-35500 (Dist. Ct., Harris Cty. Tex.) (filed July 19, 1994) (Wells Texas Action).

Between 1992 and 1994, the Trustee liquidated the physical assets of AroChem--primarily its oil refining facilities located in Puerto Rico--and became familiar with AroChem's history. In the summer of 1994, the Trustee began efforts to liquidate AroChem's only remaining assets: its causes of action. In addition to examining derivative causes of action brought by Harris against Wells and Wells against Harris, which the Trustee inherited when the AroChem Chapter 7 petition was filed, the Trustee investigated allegations by Wells that the Bank Group and others were active participants in the wrongdoing at AroChem. This allegation was evidenced by the Bank Group's lending more than $100 million to AroChem despite its awareness of allegations that Harris was engaging in criminal activity there.

In this endeavor, the Trustee instructed general counsel for the AroChem Estates, Coan, Lewendon, Royston & Gulliver, LLC (Coan, Lewendon), to investigate the Estates' potential claims. To this end, Coan, Lewendon reviewed internal records of AroChem as well as accounting records prepared by an independent auditor following the discovery of wrongdoing in 1990, consulted with a forensic accountant about the viability of claims against the Bank Group and the Victory Group, discussed with counsel for Victory the validity of the Victory Group's claims against Wells and others, discussed with counsel for the Bank Group the validity of the Bank Group's claims against Wells and the Victory Group, and discussed with Caddell claims against Wells, the Bank Group, Victory Group and others. Ultimately, counsel analyzed the relative merits of the AroChem Estates' causes of action and presented its recommendations to the Trustee. Counsel's investigation consumed between 150 and 200 hours of attorney time in the summer of 1994.

As a result of the investigation, the Trustee concluded that he should pursue claims against the Victory Group and the Bank Group, as well as other wrongdoers, including Harris, AroChem's accountants, Ernst & Young and AroChem's attorneys, Whitman & Ransom. The Trustee also concluded that although he should not pursue claims against Wells, he should retain the option to do so.

The Trustee also concluded that he would need to retain counsel to bring the Estates' claims against the Bank Group and the Victory Group. Because the Estates had no unencumbered funds, the Trustee was forced to secure counsel willing to represent the Estates in this matter on a contingency fee basis and thereby incur substantial costs.

To that end, both the Trustee and Wells searched for lawyers to represent the Estates. Despite discussions with a number of firms in Massachusetts, Connecticut and New York, the Trustee ultimately "after due diligence, found no ... qualified firm willing to undertake representation of the Estate on terms even remotely as favorable to the Estate." In re AroChem Corp., 181 B.R. 693, 697 (Bankr.D.Conn.1995).

Shortly thereafter, the Trustee met with Wells and representatives of the Caddell Firm, which had just recently filed the Wells Texas Action on Wells' behalf. In no small part because of its familiarity with the case, Caddell offered to represent the Estates in their claims against the Bank Group and Victory Group on a contingency fee basis. Thereafter the Trustee retained Caddell to file a federal action in the ...