In re DN Associates
| Decision Date | 20 August 1992 |
| Docket Number | Bankruptcy No. 91-20417. |
| Citation | 144 BR 195 |
| Parties | In re DN ASSOCIATES d/b/a Atlantic Motor Inn, Debtor. |
| Court | U.S. Bankruptcy Court — District of Maine |
James D. Poliquin, Norman, Hanson & DeTroy, Portland, Me., for DN Associates.
Robert J. Keach, Verrill & Dana, Portland, Me., for Casco Northern Bank.
Eric J. Uhl, Black, Lambert, Coffin & Rudman, Portland, Me., for Seth Driggen.
Gregory A. Tselikis, Bernstein, Shur, Sawyer & Nelson, Portland, Me., for Laurence and Patricia Kenny.
On April 17, 1992, this court confirmed a plan of reorganization proposed by Casco Northern Bank, N.A. ("Casco"), and Laurence A. and Patricia A. Kenny (the "Kennys"). The Casco/Kenny plan provided an immediate one hundred percent cash dividend to unsecured creditors, satisfied the proponents' claims1 and eliminated the interests of DN's general partner and limited partners.2 The plan provides for full payment of all priority claims, including allowed professional fees and expenses.3
Before the court are final applications for compensation and for reimbursement of expenses for professionals who rendered services to the debtor during the course of the reorganization, including counsel,4 appraiser,5 accountant6 and financial consultant.7 By earlier-entered orders, the court authorized the debtor to employ each of the applicants pursuant to 11 U.S.C. § 327(a).8
In response to the fee applications, Casco and the Kennys argue that the debtor's professionals were representing, or working to advance, interests "adverse to the estate" and, therefore, that all compensation must be denied. Alternatively, they argue that compensation must be disallowed because the professionals' efforts provided no "benefit" to the estate. For the reasons set forth below, the court concludes that the applicants are entitled to compensation and reimbursement.
DN, a limited partnership, filed its voluntary Chapter 11 petition on April 19, 1991, in the face of state court foreclosure proceedings initiated by Casco. It filed its first proposed reorganization plan, with disclosure statement, on August 19, 1991, the last day of the 120 day exclusivity period. See 11 U.S.C. § 1121(b). Casco and the Kennys objected to the plan and to the disclosure statement. They moved to appoint a trustee and, alternatively, to cut off exclusivity. During hearings on September 5, 1991, Casco and the Kennys represented that they imminently would file a plan providing a 100% payment to unsecured creditors. The court ordered termination of exclusivity so competing plans could be considered in expedient fashion.9
DN filed its first amended plan on October 5, 1991. Casco and the Kennys filed their plan on November 25, 1991. DN continued to press its own plan, precipitating hearings to consider the classification and valuation issues it generated.
Following November 25, 1991, DN's plan evolved in response to rulings and developments pertaining to, among other things, its classification scheme, the value of the debtor's assets and the limited partners' ability to retain their interests by making capital contributions to the reorganized entity. By the time the court considered confirming the Casco/Kenny plan, DN was promoting its fourth amended plan and promising a fifth. Because the joint creditor plan was readily confirmable, impaired no claims or interests,10 provided for immediate, bank-guaranteed payment of unsecured claims; because DN's proposals remained, in a word, fluid; and because confirmation truncated protracted and expensive litigation, the Casco/Kenny plan was confirmed.
Casco and the Kennys argue that, as soon as they proposed a 100% plan, DN was obliged to concede the reorganization and, necessarily, that all its professionals' subsequent efforts favored interests "adverse to the estate," i.e., those of DN's limited partners, management,11 general partner,12 and promoter.13
In order to determine the applicants' entitlement to compensation, the court must consider whether they lacked "disinterestedness," or actually represented insiders, and thereby acted with an impermissible conflict of interest. The court will next consider whether the professionals' efforts conferred a "benefit" to the estate and whether the amounts sought as compensation are reasonable.
Because the role of debtor's counsel is central, because counsel's actions have drawn the most criticism from Casco and Kenny, because other professionals were retained within the context of DN's counsel-guided reorganization strategy and because counsel's fees and expenses represent far and away the largest portion of fees sought, the court will first analyze the attorney fee application.
a. Relevant Statutory Sections. Section 323(a) of the Code states that a trustee in a bankruptcy case "is the representative of the estate." Section 1107(a) of the Code gives a debtor-in-possession the same rights and duties as a trustee.14 The debtor-in-possession:
may employ one or more attorneys . . . that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee\'s duties under this title.
11 U.S.C. § 327(a). Counsel for the debtor-in-possession is charged with providing legal services to assist the debtor in fulfilling its duties to the estate.15 Services rendered are compensable from estate assets.16 If, during the course of representation, counsel ceases to be disinterested or represents or holds an interest adverse to the estate, the court has discretion to reduce or to deny compensation:
Except as provided in sections 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person\'s employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.
11 U.S.C. § 328(c) (emphasis added).17 See In re M-H Group, Inc., 139 B.R. 836 (Bankr.N.D.Ohio 1991) (); In re EWC, Inc., 138 B.R. 276, 282 (Bankr. W.D.Okl.1992) (). Even when a conflict is demonstrated, the court may award fees. See e.g., In re Kendavis Industries Int'l, Inc., 91 B.R. 742, 761 (Bankr.N.D.Tex.1988) ().
Thus, the court must scrutinize counsel's actions to ascertain whether, having been retained to represent the debtor, he or she ceased to be disinterested or represented parties holding interests adverse to the estate. See In re Kendavis Industries Int'l, Inc., 91 B.R. at 748; In re Chou-Chen Chemicals, Inc., 31 B.R. 842 (Bankr. W.D.Ky.1983).
b. Representing the Debtor: Fiduciary Duties and Conflicts of Interest.
Without question, the Chapter 11 debtor and its management occupy a fiduciary role vis-a-vis the estate and its constituents. In re Freedom Solar Center, Inc., 776 F.2d 14 (1st Cir.1985); In re Office Products of Am., Inc., 136 B.R. 983, 986 (Bankr.W.D.Tex.1992); In re Chapel Gate Apartments, Ltd., 64 B.R. 569, 576 (Bankr. N.D.Tex.1986). See Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 355, 105 S.Ct. 1986, 1994, 85 L.Ed.2d 372 (1985); Wolf v. Weinstein, 372 U.S. 633, 649, 83 S.Ct. 969, 979, 10 L.Ed.2d 33 (1963). That role requires them to refrain from activities aimed to benefit only themselves. See In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 840 (Bankr.C.D.Cal. 1991); In re Kendavis Industries Int'l, Inc., 91 B.R. at 752. Counsel may not assist in such efforts, on pain of losing the right to compensation. In re Wilde Horse Enterprises, Inc., 136 B.R. at 840-43. "A debtor-in-possession's attorney cannot be compensated for representing the interest of the debtor or the debtor's directors, officers and/or shareholders in a manner which is adverse to, or does not benefit, the estate or the creditors." In re Office Products of Am., Inc., 136 B.R. at 989. See In re Freedom Solar Center, Inc., 776 F.2d at 16-17 (). See also In re Chapel Gate Apartments, Ltd., 64 B.R. at 576.18
Although DN's limited partners, its general partner and its management appeared through separate counsel throughout the case, Casco and the Kennys argue that, in promoting DN's proposals for reorganization, and shunning the creditor plan, DN's counsel represented interests "adverse to the estate." Therefore, they urge that compensation for such services be denied.19
Casco and the Kennys ask the court to infer that counsel's activities were impermissibly intended to benefit DN's insiders because continuing to prosecute DN's plan after the Casco/Kenny plan was filed would "only" benefit them, not the creditors. Granted, differences in the competing plans can be found principally in DN's objectives to retain control of its assets, to keep existing management and, with infusions of new capital, to maintain the interests of limited partners. However, DN's plan sought to achieve none of these results by denying creditors their due. DN proposed that unsecured creditors be paid in full shortly after confirmation; that Casco retain its collateral and be paid its secured claim; and that administrative claims be fully paid.
Although there were substantial hurdles to confirmation of DN's plan, in none of its multiple incarnations did it aim to benefit insiders and equity at the expense of the creditor body. DN's course was consistent...
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