United Artists Theatre Co. v. Walton

• Decision Date: 09 January 2003
• Docket Number: No. 01-1351.,01-1351.
• Citation: 315 F.3d 217
• Parties: In re: UNITED ARTISTS THEATRE COMPANY, et al., Debtors v. Donald F. WALTON,<SMALL><SUP>*</SUP></SMALL> Acting United States Trustee for Region 3 Donald F. Walton,<SMALL><SUP>*</SUP></SMALL> Appellant.
• Court: U.S. Court of Appeals — Third Circuit

315 F.3d 217

In re: UNITED ARTISTS THEATRE COMPANY, et al., Debtors v. Donald F. WALTON,^* Acting United States Trustee for Region 3

Donald F. Walton,^* Appellant.

No. 01-1351.

United States Court of Appeals, Third Circuit.

Argued December 4, 2001.

Filed January 9, 2003.

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James H.M. Sprayregen, James W. Kapp, III (Argued), David J. Zott, Kirkland & Ellis, Chicago, IL, for Appellee United Artists Theatre Company, et al.

Richard A. Chesley (Argued), Houlihan Lokey Howard & Zukin, Chicago, IL, for Appellee Houlihan Lokey Howard & Zukin.

Bruce G. Forrest (Argued), United States Department of Justice, Civil Division, Appellate Staff, Washington, DC, for Appellant Acting United States Trustee.

Before: ALITO, RENDELL, and AMBRO, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

The United States Trustee (the "U.S Trustee")¹ appeals the District Court of Delaware's approval of a bankruptcy debtor's application to retain a financial advisor. Specifically, the U.S. Trustee objects to the debtor's agreement to indemnify the financial advisor for claims of negligence (as opposed to gross negligence) that may be leveled against it. We first address whether the U.S. Trustee has standing to bring this suit, and determine that he does. Next we examine whether subsequent confirmation of the reorganization plan renders this case constitutionally or equitably moot. After concluding that it is not moot in either sense, we turn to the merits of the U.S. Trustee's appeal. We affirm the District Court's ruling that the indemnification provision is permissible, though we do so in a way that eschews the inherent imprecision between shades of negligence. In so doing, we borrow from corporate law analogues, and focus on the process by which financial advisors reach their opinions rather than on the substance of the opinions themselves.

I. Background

United Artists Theatre Company and affiliates² (collectively, the "Debtors" or "United Artists") filed for Chapter 11 bankruptcy protection in the District Court.³ At the outset the Debtors requested court approval of their retention of Houlihan, Lokey, Howard & Zukin Capital ("Houlihan Lokey") as financial advisor. The engagement letter provided that United Artists would indemnify Houlihan Lokey's reasonable attorneys' fees and expenses, as well as any losses incurred by Houlihan Lokey with respect to, inter alia, its providing of services. The letter also contained an exception for "any Losses that are finally judicially determined to have resulted from the gross negligence, bad faith, willful misfeasance, or reckless disregard of its obligations or duties on the part of Houlihan Lokey."⁴

The U.S. Trustee objected, claiming, inter alia, that the retention agreement exempted Houlihan Lokey from liability for its own negligence, thus violating the Bankruptcy Code, public policy, and basic tenets of professionalism. Specifically, it argued that the agreement was unreasonable under two provisions of the Bankruptcy Code, 11 U.S.C. §§ 327(a) and 328(a), because allowing a debtor's estate to indemnify a financial advisor for its own negligence undermines the principal purpose of bankruptcy — conserving the debtor's assets in order to pay its creditors. The District Court, rejecting the U.S. Trustee's objections, approved the Debtors' retention of Houlihan Lokey in a memorandum order dated December 1, 2000 (though not entered on the docket until December 8, 2000). The Debtors' cases then proceeded as "prenegotiated" bankruptcies.⁵ The confirmation hearing for the Debtors' second amended joint plan of reorganization ("the Plan") was held on January 22, 2001. The District Court confirmed the Plan that day (though the order was not docketed until January 25, 2001). On February 5, 2001, the U.S. Trustee filed this appeal.

At the time of Plan confirmation the U.S. Trustee did not object to several provisions releasing Houlihan Lokey from liability. Article X(B) provided:

[O]n and after the Effective Date, each of the Debtors, the Reorganized Debtors, their subsidiaries, their affiliates, and the Releasees, and the agents, officers, directors, partners, members, professionals, and agents of the foregoing (and the officers, directors, partners, members, professionals, and agents of each thereof), for good and valuable consideration... shall automatically be deemed to have released each other unconditionally and forever from any and all Claims, obligations, rights, suits, damages, Causes of Action, remedies and liabilities whatsoever, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise, that any of the foregoing entities would have been legally entitled to assert (in their own right, whether individually or collectively, or on behalf of any Holder of any Claim or Equity Interest or other Person or Entity), based in whole or in part upon any act or omission, transaction, agreement, event or other occurrence taking place on or before the Effective Date, relating in any way to the Debtors, the Reorganized Debtors, the Chapter 11 Cases, the Plan, the Disclosure Statement, or any related agreements, instruments or other documents....

Article X(C) read as follows:

On and after the Effective Date, each Holder of a Claim who has accepted the Plan, in exchange for, among other things, a distribution under the Plan, shall be deemed to have released unconditionally each of the Debtors, the Reorganized Debtors ... and the agents, officers, directors, partners, members, professionals, and agents of the foregoing (and the officers, directors, partners, members, professionals, and agents of each thereof), from any and all Claims, obligations, rights, suits, damages, Causes of Action, remedies and liabilities whatsoever, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise....

Finally, Article X(E) provided:

The Debtors, ... their members and Professionals (acting in such capacity) shall neither have nor incur any liability to any Person or Entity for any act taken or omitted to be taken in connection with or related to the formulation, preparation, dissemination, implementation, administration, Confirmation or Consummation of the Plan, the Disclosure Statement or any contract, instrument, release or other agreement or document created or entered into in connection with the Plan ... or any other act taken or omitted to be taken in connection with the Chapter 11 Cases; provided, however, that the foregoing provisions of [this] Article X.E ... shall have no effect on the liability of any Person or Entity that results from any such act or omission that is determined in a Final Order to have constituted gross negligence or willful misconduct.

We have jurisdiction pursuant to 28 U.S.C. § 1291 because the District Court's approval of a professional's retention is a final order. We review the District Court's approval under §§ 327(a) and 328(a) of the Bankruptcy Code for abuse of discretion, but review its legal determinations de novo. In re PWS Holding Corp., 228 F.3d 224, 235 (3d Cir.2000).

II. Standing and Mootness

A. Standing

While Houlihan Lokey couches its argument solely in terms of mootness, reading closely we find a separate component of its argument: standing. It contends that a suit against it "could only be brought by someone proximately harmed by Houlihan's negligence in performing these services, i.e., an actual or potential financial stakeholder of the UA Debtors." Appellee's Br. at 6. By virtue of the releases it obtained, it reasons, no such stakeholder can sue. Because the U.S. Trustee's appeal relies upon these potential claims, Houlihan Lokey therefore argues that the U.S. Trustee lacks standing. Houlihan Lokey also questions the U.S. Trustee's standing more obliquely, observing that "[i]ndeed, it is of more than passing interest that the party threatening to now disrupt this confirmed and effective plan is one with no such economic stake." Appellee's Br. at 12.

Contrary to Houlihan Lokey's claim, the U.S. Trustee "may raise and may appear and be heard on any issue in any case or proceeding." 11 U.S.C. § 307. A lack of pecuniary interest in the outcome of a bankruptcy proceeding does not deny the U.S. Trustee standing. See In re Columbia Gas Sys. Inc., 33 F.3d 294, 295-96 (3d Cir.1994). U.S. Trustees are officers of the Department of Justice who protect the public interest by aiding bankruptcy judges in monitoring certain aspects of bankruptcy proceedings. Id.; accord In re Revco Drug Stores, Inc., 898 F.2d 498, 499-500 (6th Cir.1990). Thus, we find that the U.S. Trustee has standing to challenge the indemnification provision,⁶ and turn to the issue of mootness.

B. Mootness

Houlihan Lokey argues that the case is both constitutionally and equitably moot. The first issue is a question of constitutional significance because, if a case is moot, we lack the power to hear it. Equitable mootness is a more limited inquiry into whether, though we have the power to hear a case, the equities weigh against upsetting a bankruptcy plan that has already been confirmed. We address each issue in turn.

1. Constitutional Mootness

The United States Supreme Court sets a high threshold for judging a case moot. An appeal is moot in the constitutional sense only if events have taken place that make it "impossible for the court to grant any effectual relief whatever." Church of Scientology of Cal. v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992) (citation omitted). An appeal is not moot "merely because a court cannot restore the parties to the status quo ante [the state in which it was before]. Rather, when a court can fashion some form of...