In re Big Rivers Elec. Corp.

• Decision Date: 13 August 2002
• Docket Number: No. 4:01-CV:49.,4:01-CV:49.
• Citation: 284 B.R. 580
• Parties: In re BIG RIVERS ELECTRIC CORPORATION, Debtor.
• Court: U.S. District Court — Western District of Kentucky

Page 580

284 B.R. 580

In re BIG RIVERS ELECTRIC CORPORATION, Debtor.

No. 4:01-CV:49.

United States District Court, W.D. Kentucky. Owensboro Division.

August 13, 2002.

As Corrected August 19, 2002.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM OPINION AND ORDER REQUIRING DISGORGEMENT OF EXAMINER'S FEES AND EXAMINER'S COUNSEL'S FEES

COHN, District Judge.

Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.¹

TABLE OF CONTENTS

                  I. Introduction ............................................................. 583
                 II. Background ............................................................... 584
                III. Findings of Fact ......................................................... 584
                     A. Big Rivers' Bankruptcy ................................................ 584
                     B. The Examiner's Appointment and Conduct ................................ 584
                        1. Appointment ........................................................ 584
                        2. Seeking Compensation ............................................... 586
                     C. Disgorgement .......................................................... 593
                     D. Proceedings in this Court ............................................. 594
                 IV. Conclusions of Law ....................................................... 594
                     A. The Parties' Arguments ................................................ 594
                

                     B. Standing .............................................................. 595
                     C. The Law ............................................................... 595
                        1. Disinterested Person ............................................... 595
                        2. Duty to Disclose ................................................... 597
                        3. Public Policy ...................................................... 599
                        4. A Word About Ex Parte Communications and the Bankruptcy Court's
                             So-Called Approval ............................................... 600
                        5. Enhanced Compensation in General and the Examiner's Efforts in the
                             Case ............................................................. 600
                  V. Conclusion ............................................................... 601
                

I. Introduction

This is the remnants of what has been appropriately termed a "monstrosity" of a bankruptcy case. What is left is a dispute over fees paid, or to be paid, to the Examiner and the Examiner's counsel. Consistent with the history of the case, this dispute is contentious and has generated an excess of papers.

There are presently three matters before the Court. First, the Rural Utilities Service (RUS) and the United States Trustee (collectively, the government) have filed a joint motion seeking disgorgement of all of the fees paid to the Examiner in this case on the grounds that the Examiner engaged in misconduct in soliciting payments from certain unsecured creditors for his compensation as Examiner.

Second, Big Rivers Electrical Corporation (Big Rivers) has filed a motion seeking partial disgorgement of the Examiner's fees and the Examiner's counsel's fees, as follows: (1) the fees incurred in pursuing an "enhanced fee," (2) the fees incurred in pursuing/defending the Examiner's right to interim compensation, (3) the fees incurred in requesting amicus in one of the several appeals from the bankruptcy court and (4) the fees incurred in defending against the instant disgorgement motions.

Finally, the Examiner and his counsel² have separately filed "final fee applications." The Examiner seeks compensation for services from October 13, 1998 to May 21, 1999 in the amount of $57,337.50 and $1,520.98 in expenses. The Examiner's counsel seeks compensation for legal services from October 13, 1998 to August 18, 2000 and from October 24, 2000 to November 21, 2000 in the amount of $322,588.25 in legal fees and $4,701.27 in expenses.

For the reasons which follow, the government's motion for disgorgement is GRANTED. Big Rivers' motion for partial disgorgement is GRANTED. The Examiner must disgorge all fees paid to him. Likewise, although the government has not requested disgorgement of the Examiner's counsel's fees, and Big Rivers has only requested partial disgorgement, because the Examiner's counsel is essentially the alter ego of the Examiner, and under the circumstances, the Examiner's counsel must also disgorge all fees. As such, the Examiner and the Examiner's counsel's final fee applications are DISALLOWED.

As will be explained, the Examiner's actions, relating to his compensation were wholly incompatible with his obligations under the Bankruptcy Code and Rules; disgorgement of all fees paid to the Examiner and his counsel is the appropriate remedy for the Examiner's failure to adhere to the required standard of behavior for a professional in a bankruptcy case.

II. Background

The background of this case has been set forth in several published opinions and need not be repeated. See In re Big Rivers Elec. Corp., 233 B.R. 768, 771-77 (Bankr.W.D.Ky.1999) (awarding fees to professionals); In re Big Rivers Elec. Corp., 233 B.R. 754 (Bankr.W.D.Ky.1999) (awarding compensation to the Examiner, including an enhanced fee, later reversed on appeal to the district court); In re Big Rivers Elec. Corp., 233 B.R. 726, 728-33 (Bankr.W.D.Ky.), aff'd 233 B.R. 739, 742-45 (W.D.Ky.1998) (denying claim filed by prospective purchaser of Big Rivers); In re Big Rivers Elec. Corp., 213 B.R. 962, 964-71 (Bankr.W.D.Ky.1997) (denying motion to disqualify bankruptcy judge and remove the Examiner). The findings of fact relevant to the disgorgement issue follow.

III. Findings of Fact

A. Big Rivers' Bankruptcy

On September 26, 1996, Big Rivers filed for Chapter 11 bankruptcy protection with approximately $1.2 billion in debt. At the time, its principal creditors consisted of the RUS of the United States Department of Agriculture, to whom Big Rivers owed more than $1.1 billion, secured by a mortgage on all of its assets, which resulted from low interest loans RUS had made or guaranteed to finance Big Rivers' generation and transmission facilities, buildings, plant, and equipment. It also owed unsecured amounts to the Bank of New York (BONY), Chase Manhattan Bank (Chase) and Mapco Equities (Mapco). BONY and Chase's unsecured claims arose from letters of credit issued by them securing unsecured pollution control bonds issued by Big Rivers. Mapco's unsecured claim of approximately $18.5 million was owed on a coal contract. BONY, Chase, and Mapco disputed the RUS's claim of a right of priority.

Big Rivers' filing represented the largest bankruptcy in Kentucky and one of the largest in the country at the time.

B. The Examiner's Appointment and Conduct

1. Appointment

On October 7, 1996, Bluegrass Containment, Inc., an unsecured creditor, filed a Motion To Appoint Trustee Or Examiner. Mapco, Chase and BONY filed motions for the appointment of a Trustee.

The appointment of an Examiner is governed by 11 U.S.C. § 1104(b) which states:

[A]t any time before the confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity ...

if —

(1) such appointment is in the interests of creditors ...; or

(2) the debtor's fixed, liquidated, unsecured debts ... exceed $5,000,000.

11 U.S.C. § 1104(b) (emphasis added).

In this circuit, section 1104(b) is strictly interpreted: "The provision plainly means that the bankruptcy court `shall' order the appointment of an examiner when the total fixed, liquidated, unsecured debt exceeds $5 million," if a party or the U.S. Trustee requests one. In re Revco D.S., Inc., 898 F.2d 498, 501 (6th Cir.1990).

On October 16, 1996, the bankruptcy court granted Bluegrass Containment, Inc.'s motion and directed the appointment of an Examiner. The bankruptcy court also stated that in addition to the duties under 11 U.S.C. § 1106(b),³ the Examiner shall:

1) Investigate all allegations set forth in the BC Motion, the Chase/BYN Motion, and Mapco Motion (collectively, "Trustee Motions") concerning the alleged mismanagement and/or breaches of fiduciary duty by Big Rivers.

2) Prepare a Report, to be filed under seal with this Court, concerning the validity of the allegations set forth in the Trustee Motions.

3) Work with Big Rivers and its creditors in (a) facilitating discovery concerning the Trustee Motions; (b) resolving various disputes with creditors, including Green River Coal Co., Inc. ("Green River") and (c) if feasible, "attempt to negotiate a global settlement of the disputes in this case and the development of a consensual plan of reorganization."

The bankruptcy court directed the U.S. Trustee to select an examiner. On October 18, 1996, upon application of the U.S. Trustee, the bankruptcy court issued an Order Approving Appointment of Examiner, appointing J. Baxter Schilling as Examiner.⁴ Neither the October 16 or 18, 1996 orders state how the Examiner is to be compensated for his services.

At the time of his selection, the Examiner submitted an Affidavit of Examiner that He is Disinterested, stating in part that he "is a disinterested person in this case; that [he] is not a creditor.... [and] does not have an interest materially adverse to the interest of the estate or of any class of creditors." See Exhibit A. He also filed a Verified Statement of Appointee — Examiner, stating that he has "no connections with the ... Debtor, creditors, or any other interested parties." See Exhibit B.

2. Seeking compensation⁵

Within two...