In re Duque, 83-2332-CIV-ALH.
| Decision Date | 20 November 1984 |
| Docket Number | No. 83-2332-CIV-ALH.,83-2332-CIV-ALH. |
| Citation | 48 BR 965 |
| Parties | In re Alberto DUQUE, Debtor. |
| Court | U.S. District Court — Southern District of Florida |
R. Thomas Farrar, Holland & Knight, Miami, Fla., Goldstein & Manello, Boston, Mass., for appellants.
David M. Levine, Miami, Fla., for appellee.
This bankruptcy appeal presents the question whether a Chapter 11 debtor-inpossession may employ and use estate funds to pay criminal counsel in connection with federal investigation and potential defense of criminal charges against the debtor arising out of pre-bankruptcy activities. The Court concludes that estate funds may not be so used and reverses the order authorizing employment of criminal counsel.
The facts are neither complex nor disputed. On May 18, 1983, ALBERTO DUQUE (the debtor) filed this and related corporate Chapter 11 proceedings claiming assets of $50 million and liabilities of $100 million. About ten days prior to the petition appellant SHAWMUT BOSTON INTERNATIONAL BANKING CORPORATION had sued Duque in New York seeking $34 million damages based upon alleged fraud.
Shawmut's allegations were serious and were so regarded by Duque. The facts alleged apparently would support unstated violations of federal criminal law, including mail fraud, wire fraud, criminal use of false bills of lading, conspiracy and RICO, as well as obvious state law crimes. On May 12, 1983, nearly a week prior to filing the bankruptcy petitions, Duque hired James Jay Hogan as criminal counsel and paid him a $75,000.00 retainer.
Seeking such counsel was justified on May 24, 1983 when Duque's bankruptcy counsel was contacted by FBI agents requesting an interview. They were referred to Hogan whom they advised that Duque and four affiliated entities were subjects of a federal criminal investigation.
On July 15, 1983 Duque's bankruptcy counsel applied ex parte, with subsequent notice to creditors, and received authorization for the Chapter 11 bankruptcy estate to retain Hogan as special criminal counsel, nunc pro tunc to May 18, 1983, the date of the bankruptcy petition. The bases for the application were that Hogan had been advised by the FBI that Duque was the subject of the criminal investigation, that Duque claimed an absolute and constitutional right to employ Hogan as special criminal counsel, and that such employment was in the best interest of Duque, the estate and his creditors.
At least two creditors disagreed. On July 21, 1983, Shawmut moved for rehearing and to vacate the order, as did Credit Lyonnais-Panama. On August 9, 1983, the bankruptcy court denied the motion, 33 B.R. 199, and this appeal ensued.
The Court takes judicial notice that on November 15, 1984, Duque in fact was charged along with eleven other individuals in a 95 count indictment. The specific charges are conspiracy (18 U.S.C. § 371), bank embezzlement and misapplication (18 U.S.C. § 656), making false statements on loan applications (18 U.S.C. § 1014), mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), and fraudulently making and uttering false bills of lading (49 U.S.C. § 121).
The initial issues presented by this appeal involve this Court's jurisdiction. The first is to determine whether the order is appealable. If so, the second is to determine the specific basis of this Court's jurisdiction, which in turn will determine the standard by which the review should occur.
Because of uncertainty as to the appealability of the order, Shawmut filed both a notice of appeal under Bankruptcy Rule 8001 and a motion for leave to appeal under Bankruptcy Rule 8003. Under Section 24a of the Bankruptcy Act, the present order would have been regarded as entered in a "proceeding in bankruptcy" and would have been appealable as of right regardless whether it were interlocutory or final in nature. See 2 Collier in Bankruptcy, ¶ 24.14 (14th ed. 1976). Under the 1978 Bankruptcy Code, the distinction between "proceedings" in bankruptcy and "controversies" in bankruptcy has been abolished, and more traditional tests of finality versus interlocutory have been employed. See 1 Collier in Bankruptcy, ¶ 3.037 (15th ed. 1984). Final orders are appealable as of right under Bankruptcy Rule 8001(a), but interlocutory orders are appealable only with leave of the district court under Bankruptcy Rule 8003. This Court concludes that the order appealed from is interlocutory, so that the Court will consider whether to exercise its discretion and allow the appeal.
It has been suggested that 28 U.S.C. § 1292(b) provides an analogue to the present framework. Id. at ¶ 3.037v. This analogy is not wholly perfect in its application to bankruptcy cases, since within each case there are adversary proceedings as well as controversies and other administrative matters, each of which is dispositive of aspects of the case and as to which there may be no reason of judicial economy or otherwise to delay appeal. On the contrary, resolving administrative matters with some finality, in the sound discretion of the district court in its appellate capacity, can expedite ultimate disposition of the bankruptcy case and is consistent with the goal of speedy termination of such cases.
The instant order was the subject of rehearing in the bankruptcy court and appears to involve a controlling question of law as to which there is a substantial ground for difference of opinion and as to which an immediate appeal may advance the ultimate termination of the bankruptcy proceedings. To leave the issue unresolved as the case presumably progresses toward reorganization may delay or provide uncertainty as to amounts available under any plan. Additionally, this appeal is wholly dispositive of the validity of the Hogan employment and any resulting fee, and no purpose is served by delaying the appeal. Indeed, it would be manifestly unfair to require Mr. Hogan to continue working with uncertainty as to his right to be paid.
Based upon the foregoing factors, the Court will exercise its discretion under Bankruptcy Rule 8003 and grant Shawmut's motion for leave to appeal. In a recent decision which is factually similar to the instant case, Official Committee of Disputed Litigation Creditors v. McDonald Investments, Inc., 42 B.R. 981 (N.D.Tex., 1984), leave to appeal was likewise granted in order to determine the appeal on an expedited basis. Before proceeding to the merits, however, the Court must determine the applicable standard of review.
This appeal was filed under the "Emergency Rule" in effect during the period between the Supreme Court's Marathon decision invalidating jurisdictional aspects of the Bankruptcy Reform Act of 1978, see Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), and reconstitution of bankruptcy court jurisdiction by the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353. Those 1984 Amendments were enacted July 10, 1984, and under section 122 of that Act the jurisdictional changes were effective immediately.
Under the "Emergency Rule" this Court's review is essentially de novo. It may hold a hearing, receive evidence, accept, reject, or modify wholly or in part the appealed order, and it need give no deference to any findings of the bankruptcy judge. Under the jurisdiction provided by the 1984 Amendments the Court's review is taken in the same manner as appeals in civil proceedings generally, but as to "related proceedings" the review procedure is de novo. Under 28 U.S.C. § 157 as established by the Amendments, the instant case would involve a "core proceeding" reviewed in the general manner rather than de novo. Accordingly at first blush this appeal would appear to be reviewable de novo if the "Emergency Rule" applies but under the ordinary appellate review principles set forth in Bankruptcy Rule 8013 if the 1984 Amendments apply retroactively to it.
In this appeal the parties have relied upon the available record and essentially undisputed facts. Neither party has suggested the necessity for this Court to hold any hearings or receive any evidence. Accordingly the Court does not regard that there would be any meaningful difference between the de novo appeal contemplated by the "Emergency Rule" and an ordinary appeal presenting issues of law on undisputed facts. See Matter of Multiponics, Inc., 622 F.2d 709, 713 (5th Cir.1980) (). For that reason the Court need not determine whether the "Emergency Rule" in effect at the time of the proceedings below and commencement of the appeal is applicable or whether the 1984 Amendments would apply retroactively. Under either review procedure and standard this Court would reach the same result on the merits to which it now proceeds.
Shawmut argues that there is no authority for use of estate funds for criminal counsel under the Bankruptcy Code, and that such an expense neither benefits the estate nor is necessary to preserve any constitutional rights of the debtor. Duque argues that authority to do so can be implied from Code provisions, and that criminal counsel is necessary to protect the debtor's constitutional rights.
Surprisingly, there is little case law on this seemingly not uncommon point. Thus the parties' arguments have proceeded on two planes: first a general analysis of the framework and specific provisions of the Code as they bear on the issue; and secondly with respect to the meager case law on point. The arguments essentially are as follows.
Shawmut posits that upon the filing of a Chapter 11 proceeding a new entity is created. At that point, there is Alberto Duque, the debtor, and Alberto Duque, debtor-in-possession, armed with the powers and saddled with the responsibilities of a trustee in bankruptcy. References in the Code to a trustee unless otherwise stated thus apply...
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