In re Big Rivers Elec. Corp.
| Decision Date | 08 January 2004 |
| Docket Number | No. 02-6347.,No. 02-6340.,No. 02-6338.,No. 02-6213.,No. 02-6344.,No. 02-6341.,No. 02-6212.,02-6212.,02-6213.,02-6338.,02-6340.,02-6341.,02-6344.,02-6347. |
| Parties | In re BIG RIVERS ELECTRIC CORPORATION, Debtor. United States of America, On Behalf of the Rural Utilities Service of the Department of Agriculture and the United States Trustee, et al., Appellees, v. J. Baxter Schilling, Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Appeal from the United States District Court for the Western District of Kentucky, Avern Cohn, J.
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Donald L. Cox (argued and briefed), Lynch, Cox, Gilman & Mahan, Louisville, KY, for Appellant.
Michael E. Robinson (argued and briefed), U.S. Department of Justice, Civil Division, William Kanter (briefed), U.S. Department of Justice, Civil Division, Washington, D.C., Alan C. Stout (briefed), Stout Law Office, Marion, KY, for Appellees.
Michael A. Fiorella (argued and briefed), Sullivan, Mountjoy, Stainback & Miller, Owensboro, KY, for Debtor.
James M. Miller (briefed), Sullivan, Mountjoy, Stainback & Miller, Owensboro, KY, for Debtor.
Before GIBBONS and SUTTON, Circuit Judges; MILLS, District Judge.*
At issue in this case are the duties of disinterest and disclosure of an examiner appointed to facilitate a reorganization under Chapter 11 of the Bankruptcy Code. The issues arise from the appointment of J. Baxter Schilling to serve as the examiner in the reorganization of Big Rivers Electric Corporation, which was unable to meet obligations on $1.2 billion in debt and whose September 1996 bankruptcy petition represented the largest Chapter 11 case filed in Kentucky history.
As an examiner, Schilling did much to advance the successful reorganization of Big Rivers, which emerged from Chapter 11 in June 1997 through a consensual plan of reorganization approved by the bankruptcy court. During his tenure as examiner, however, Schilling sought privately to negotiate a success fee with three of the estate's unsecured creditors, by which they would pay him a percentage of their increased recovery on top of the hourly fee authorized by the bankruptcy court for his services. Schilling did not disclose the negotiations, or the agreements he believed he had reached with these creditors, to the debtor in possession, to the other creditors or to the court until many months later. When Schilling's conduct came to light, several parties objected to his actions, as did the United States Trustee which is responsible for appointing bankruptcy examiners and trustees. In view of his conduct, they argued that Schilling and his law firm should disgorge all of the fees dispensed to them during the case — totaling nearly $1 million. The district court agreed, and we now affirm.
Unable to meet the continuing obligations on more than $1.2 billion in debt, the Big Rivers Electric Corporation filed a petition to reorganize the company under Chapter 11 of the Bankruptcy Code and to remain as a debtor in possession during the reorganization. Filed on September 26, 1996, the petition represented the largest bankruptcy case ever filed in Kentucky and at the time was one of the largest bankruptcy cases in the country. A publicly-regulated utility, Big Rivers owed $1.1 billion of its debt to the Rural Utilities Service of the United States Department of Agriculture (the "Utilities Service"), which held a perfected security interest in all of Big Rivers' assets. See In re Big Rivers Elec. Corp., 284 B.R. 580, 584 (W.D.Ky.2002). Big Rivers' largest other creditors included Bank of New York, Chase Manhattan Bank, and Mapco Equities, each of which held unsecured claims. Id.
On October 7, 1996, Bluegrass Containment, Inc., a smaller unsecured creditor, moved the bankruptcy court to appoint a trustee or an examiner in the Big Rivers case. Id. In a Chapter 11 case, a trustee replaces the debtor in possession and takes immediate control of the business and the reorganization effort. See 11 U.S.C. §§ 1104(a), 1106(a). Examiners, by contrast, assume a more limited role. They typically investigate the debtor's business and handle other duties specifically assigned by the bankruptcy court, but do not replace the debtor in possession in handling the day-to-day affairs of the business. See id. §§ 1104(c), 1106(b).
The bankruptcy court decided that an examiner should be appointed and ordered the United States Trustee to select one. In addition to the tasks expressly required of examiners under the Bankruptcy Code — investigating the debtor's affairs and filing a report, see id. § 1106(b) — the bankruptcy court ordered the examiner to "[w]ork with Big Rivers and its creditors in ... resolving various disputes with creditors, ... and [] if feasible, attempt to negotiate a global settlement of the disputes in this case and the development of a consensual plan of reorganization." JA 81. The court did not specify the terms of the examiner's compensation.
The United States Trustee selected J. Baxter Schilling, a Kentucky bankruptcy practitioner, as the examiner. At the time of his appointment, Schilling had frequently served as a Chapter 7 trustee, had twice served as a Chapter 11 trustee, but had never served as an examiner. On October 18, 1996, the bankruptcy court entered an order approving Schilling's selection but again did not specify the terms of the examiner's compensation. 284 B.R. at 585.
Soon after his selection, Schilling signed a document entitled "Affidavit of Examiner that He is Disinterested," in which he attested that he was "a disinterested person in this case" and did not "have an interest materially adverse to the interest of the estate or of any class of creditors." Id. at 585-86. Schilling also submitted a separate verified statement that he had "no connections with the ... Debtor, creditors or any other interested parties." Id. at 586.
On October 31 and November 1, 1996, Schilling held meetings in Washington, D.C. with the major secured and unsecured creditors. In the course of the meetings, Schilling sought to mediate a dispute between the Utilities Service and some of the unsecured creditors regarding the priority of their claims so that the parties could submit a consensual plan of reorganization to the court. Id. at 586. When the initial negotiations did not bear fruit, Schilling reached the conclusion that the parties would never agree on a plan of reorganization unless someone found a way to bring new value into the estate. To that end, Schilling decided to undertake the task himself, performing in his words "trustee duties, including the principal duty of a trustee to maximize the value of the debtor's estate, as well as examiner duties." JA 499. Because he effectively would function as a trustee in this new role and because he customarily had received a percentage-based fee as a Chapter 7 trustee, Schilling believed he should be paid like a Chapter 7 trustee for his work as the examiner in the Big Rivers case. 284 B.R. at 586; see also JA 129 (Schilling: "I had been given the misnomer of examiner, but I had been given trustee duties"), 153-54, 164-65, 178-79.
Near the conclusion of these meetings — and at times when the Utilities Service's representatives were not in the room — Schilling discussed these views with some, but not all, of the unsecured creditors. Schilling initially told Chase and Bank of New York representatives that he wanted them to pay him a percentage fee based on the "success" he brought to the estate in the form of "new value." 284 B.R. at 586. Explaining what he meant by a "success fee," Schilling later told Chase, Bank of New York and Mapco representatives that he expected each of them to pay him three percent of their increased recovery from Big Rivers. Id. Without such a deal, Schilling told Bank of New York's attorney, he would not perform his mediation duties. Id.
Schilling left the Washington meetings believing that, subject to bankruptcy court approval, Bank of New York, Chase and Mapco would pay him three percent of their increased recovery. As later communications reveal, however, none of these three creditors believed they had reached such an agreement with Schilling — at least not at that time. Id.
By November 13, 1996, the Utilities Service learned that Schilling had made statements about his desire to seek compensation based on the new value added to the estate. According to the bankruptcy court, "one or more interested persons," including the Utilities Service, spoke to a member of the bankruptcy court's staff the morning of November 13, 1996 and requested an in camera hearing regarding the examiner's compensation. Id. at 587. These "persons," unidentified except for the Utilities Service, expressed concern about Schilling's statements that he would seek compensation based upon new value added to the estate during his tenure. The bankruptcy judge instructed his staff member to tell the parties that they could raise the issue at a hearing if they wished, but that he would not hold an in camera hearing. No one raised the issue in court during the hearing on November 13, 1996. Id.
A few days later, on November 15, 1996, the bankruptcy court entered an order providing for Schilling's interim compensation. Id. With the Utilities Service's consent, the bankruptcy court allowed the examiner to receive interim compensation of $180 per hour in 1996 and $185 per hour in 1997, all of which Big Rivers would pay from its "cash collateral" — i.e., cash in which the estate and another entity (here, the Utilities Service) had an interest. See 11 U.S.C. § 363(a). The court's order did not alter Schilling's ongoing obligation to "compl[y] with all applicable provisions of the Bankruptcy Code." JA 148.
In the meantime, Schilling learned that Chase would not support his success-fee proposal....
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