1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-25-1998

In Re: Marvel Ent

Precedential or Non-Precedential:

Docket 98-7001

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1998

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1998 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"In Re: Marvel Ent" (1998). 1998 Decisions. Paper 59.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/59
Filed March 25, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 98-7001, 98-7040 and 98-7041 

IN RE: MARVEL ENTERTAINMENT GROUP, INC.; ASHER 

CANDY COMPANY; FLEER CORPORATION; FRANK H. 

FLEER CORPORATION; HEROES WORLD DISTRIBUTION, 

INC.; MALIBU COMICS ENTERTAINMENT INC.; MARVEL 

CHARACTERS, INC.; MARVEL DIRECT MARKETING INC.; 

SKYBOX INTERNATIONAL, INC.; SPECIAL COUNSEL TO 

DEBTORS; BOARD OF DIRECTORS OF MARVEL; HIGH 

RIVER LIMITED PARTNERSHIP and WESTGATE 

INTERNATIONAL, L.P.; 

IN RE: JOHN J. GIBBONS, ESQ., Trustee for the Estate 

in Bankruptcy of the Debtors; 

MARVEL ENTERTAINMENT GROUP, INC.; ASHER CANDY 

COMPANY; FLEER CORPORATION; FRANK H. FLEER 

CORPORATION; MALIBU COMICS ENTERTAINMENT, INC.; 

MARVEL CHARACTERS, INC.; MARVEL DIRECT 

MARKETING INC.; SKYBOX INTERNATIONAL, INC.; HIGH 

RIVER LIMITED PARTNERSHIP and WESTGATE 

INTERNATIONAL, L.P., 

 Appellants in No. 98-7001; 

JOHN J. GIBBONS, ESQ., Trustee for the Estate in 

Bankruptcy of the Debtors, 

 Petitioner in No. 98-7040, 

 Appellant in No. 98-7041; 

On Appeal from the United States District Court 

for the District of Delaware 

(D.C. 97-cv-00638) 
Argued: March 10, 1998 

Before: GREENBERG, SCIRICA and ALDISERT, 

Circuit Judges, 

(Filed: March 25, 1998) 

 Edward S. Weisfelner (argued) 

 John P. Biedermann 

 BERLACK, ISRAELS & LIBERMAN 

 120 West 45th Street 

 New York, NY 10036 

 Stephen W. Spence 

 Steven K. Kortanek 

 PHILLIPS, GOLDMAN & SPENCE 

 1200 North Broom Street 

 Bank of Delaware Building 

 Wilmington, DE 19806 

 ATTORNEYS FOR APPELLANTS/ 

 RESPONDENTS/APPELLEES 

 High River Limited Partnership, 

 Westgate International, L. P. 

 Francis J. Menton, Jr. 

 WILLKIE, FARR & GALLAGHER 

 153 East 53rd Street 

 One Citicorp Center 

 New York, NY 10022 

 ATTORNEY FOR APPELLEE 

 Creditors Committee 

 

 John S. Koppel (argued) 

 William Kanter 

 United States Department of Justice 

 Civil Division, Appellate Staff 

 601 D Street, N.W. 

 Washington, DC 20530-0001 

 2 
 Anthony J. Ciccone, Jr. 

 Suite 780 

 Executive Offices of United States 

 Trustees 

 901 E Street, N.W. 

 Washington, DC 20530 

 ATTORNEYS FOR APPELLEE 

 U.S. Trustee 

 Douglas S. Liebhafsky (argued) 

 WACHTELL, LIPTON, ROSEN & 

 KATZ 

 51 West 52nd Street 

 New York, NY 10019 

 ATTORNEY FOR APPELLEES 

 Goldman Sachs Credit Partners, 

 Morgan Stanley Emerging Markets, 

 Lazard Freres & Co., Long Term 

 Credit Bank of Japan, Whipporwill 

 Assoc., Van Kampen America, 

 Canadian Imperial Bank of 

 Commerce, Merrill, Lynch, Pierce, 

 Fenner & Smith, Inc., Bankers 

 Trust Co., Dickstein & Co., L.P., 

 Dickstein Int'l Ltd., Lehman 

 Commercial Paper, Inc., Sumitomo 

 Bank, Ltd., Amroc Inv. Inc., M. D. 

 Sass, Bank of Montreal, 

 Chancellor Capital, Ceres Finance 

 Ltd., Captiva, Value Partners, 

 Banko Central Hispanamerico, IBJ 

 Schroder Bank, Instituto Bancario 

 San Paulo, Morgan Guaranty 

 Trust Co. of New York, Scoggin 

 Capital, Foothill Capital 

 Corporation, CPR (USA) 

 3 
 CAROSELLI, SPAGNOLLI & 

 BEACHLER 

 312 Boulevard of the Allies 

 8th Floor 

 Pittsburgh, PA 15222 

 ATTORNEYS FOR APPELLEE 

 Merrill, Lynch, Pierce, Fenner & 

 Smith, Inc. 

 David B. Stratton 

 PEPPER, HAMILTON & SCHEETZ 

 1201 Market Street 

 Suite 1600 

 Wilmington, DE 19801-1163 

 ATTORNEY FOR APPELLEE 

 Toy Biz Inc. 

 Gary Schildhorn 

 Steven D. Usdin 

 ADELMAN, LAVINE, GOLD & LEVIN 

 1900 Two Penn Center 

 Philadelphia, PA 19102 

 ATTORNEYS FOR APPELLEE/ 

 RESPONDENT 

 Official Committee of Equity 

 Security Holders 

 John J. Gibbons (argued) 

 GIBBONS, DEL DEO, DOLAN, 

 GRIFFINGER & VECCHIONE 

 One Riverfront Plaza 

 Newark, NJ 07102-5497 

 PRO SE PETITIONER/APPELLANT 

 Joanne B. Wills (argued) 

 Mindy Friedman 

 KLEHR, HARRISON, HARVEY, 

 BRANZBURG & ELLERS 

 919 Market Street, Suite 1000 

 Wilmington, DE 19801-3062 

 4 
 James E. Spiotto 

 Ann E. Acker 

 Mark D. Rasmussen 

 Timothy T. Finley 

 CHAPMAN & CUTLER 

 111 West Monroe Street 

 Chicago, IL 60603 

 ATTORNEYS FOR RESPONDENT/ 

 APPELLEE 

 LaSalle National Bank 

 Roderick R. McKelvie, Honorable 

 UNITED STATES DISTRICT COURT 

 District of Delaware 

 844 King Street 

 Wilmington, DE 19801 

 NOMINAL RESPONDENT 

OPINION OF THE COURT 

ALDISERT, Circuit Judge. 

These expedited and consolidated appeals require us to 

decide if the district court properly exercised its discretion 

by appointing a trustee in the bankruptcy of Marvel

Entertainment Group, Inc., because of the extreme 

acrimony between the debtor-in-possession and the 

creditors. If we affirm the appointment, we must then 

decide if the court acted within its proper discretionary 

power by denying the motion of the trustee, John J.

Gibbons, to appoint the law firm of Gibbons, Del Deo, 

Dolan, Griffinger & Vecchione, P.C. ("the Firm") as counsel 

to the trustee. The district court determined that the Firm's 

prior unrelated representation of Chase Manhattan Bank, a 

creditor in the bankruptcy, disqualified it from serving as 

trustee's counsel. We will affirm the appointment of the 

trustee and reverse the order denying Gibbons's motion for 

an order authorizing employment of the Firm as his 

counsel. Because our legal analysis necessarily involves a 

review of the district court's factual findings, we must first 

set out the adjudicative facts in some detail. 

 5 
I. 

Marvel and various corporate affiliates filed chapter 11 

petitions on December 27, 1996 and continued to run

Marvel as debtor-in-possession. 11 U.S.C. SS 1107-1108. 

Approximately 1,700 creditors held $1 billion in claims 

against the Marvel estate. 

Both before and after the filing of the petitions, Westgate 

International, L.P. and High River Limited Partnership, each 

controlled by Carl Icahn, (the "Icahn interests"), purchased 

at a discount a substantial number of pre-petition debt 

claims and bonds which had been issued by several holding 

companies owning all or substantially all of Marvel's stock. 

These holding companies, under the control of Ronald 

Perelman, had pledged their Marvel stock as security for 

the bonds. Two groups loomed large in the bankruptcy 

proceedings: one was an Official Bondholders' Committee 

and an indenture trustee, LaSalle National Bank, chosen to 

act primarily on behalf of the Icahn interests; the other, 

various creditors of Marvel, known as "the Lenders," who 

held over $600 million in debt claims at the time of the 

filings, secured by all of Marvel's assets. 

From the start of the proceedings, disputes arose among 

the various parties, especially between the Icahn interests 

and the Lenders. The Icahn interests opposed an initial 

bankruptcy financing plan submitted by the Perelman

holding companies, under which the holding companies 

would have infused $100 million into Marvel in return for 

priority recognition of the Lenders' debt claims. The Icahn 

interests contended that the Perelman-controlled Marvel 

debtors were favoring their "lender accomplices" to ensure 

that "Perelman re-acquires control of Marvel, without 

competitive bidding, for an obscenely low price." 

Notwithstanding the Icahn interests' objections, the 

bankruptcy court approved the financing plan. 

From January through June of 1997, tension arose 

between the Lenders and the Icahn interests. The Icahn 

interests fought to take control of the Marvel board of 

directors. Substantial litigation went forward. On January 

13, 1997, the Icahn interests moved the bankruptcy court 

to lift the automatic bankruptcy stay, 11 U.S.C. S 362(a)(3), 

 6 
so they could foreclose on the holding companies' defaulted 

bonds and vote the pledged stock. Marvel sought a 

temporary restraining order from the bankruptcy court to 

enjoin the Icahn interests from voting the stock and 

replacing Marvel's board of directors. The bankruptcy court 

issued the order on March 24, 1997. On the same day, the 

Lenders moved the bankruptcy court for an order 

appointing a responsible officer to take control of the 

bankruptcy, or in the alternative a trustee. That same 

month, the Icahn interests took significant steps toward 

gaining control of Marvel. They offered to infuse $365 

million into Marvel, partially for operation of its business 

but mostly to repay $300 million of its secured debt, in 

return for "exclusive" control of Marvel's operations. 

Through their agent Chase Manhattan Bank, the Lenders 

vigorously opposed this plan, explaining that the Icahn 

interests had presented no "concrete turnaround strategy 

. . . or a management team capable of executing one." 

On May 14, 1997, the district court vacated the 

bankruptcy court's temporary restraining order, permitting 

the Icahn interests to vote the pledged stock. In re Marvel 

Entertainment Group, Inc., 209 B.R. 832, 840 (D. Del. 

1997). With the lifting of the restraining order, the litigation 

ended and the inevitable took place--on June 20, 1997, the 

Icahn interests took control of Marvel. Thus, an anomaly 

arose. The Icahn interests began to wear two hats--one as 

creditors of the holding companies that controlled Marvel; 

the other as the debtor-in-possession of Marvel. 

Settlement negotiations proceeded throughout the 

summer of 1997. The new Icahn-controlled debtor-inpossession proposed a settlement in which the Icahn

interests would control a newly-organized Marvel company 

merged with its affiliate Toy Biz, and would purchase the 

Lenders' claims at a substantial discount. To consummate 

the settlement, it was necessary to obtain the approval of 

two-thirds of all creditors as required under the 

Bankruptcy Code, 11 U.S.C. S 1126(c). The Lenders were 

not successful in obtaining this approval. 

The parties tried again. Another proposed settlement was 

attempted by the Icahn interests, this time with Chase 

directly as one of the Lenders. The terms were similar to 

 7 
those contained in the first effort, but this time Chase was 

required to sell its claims to the Icahn interests for even 

less than what was offered under the former proposal. 

Moreover, the settlement proposal required the creditors to 

support the Icahn interests' control of all Marvel entities 

and to agree to place High River's and Westgate's debt 

claims into a priority secured position. The necessary twothirds approval not forthcoming, the settlement 

negotiations collapsed in October 1997. 

On October 30, 1997, the Icahn-controlled debtor-inpossession commenced adverse litigation in the district 

court against the Perelman holding companies, the Lenders 

and other creditors in the Marvel bankruptcy (the 

"Perelman litigation"). It asserted 19 causes of action 

alleging breach of fiduciary duty, fraudulent conveyance, 

preferential transfer and breach of contract. The complaint 

sought to void the Lenders' claims or to subordinate them 

to the claims of High River and Westgate. The complaint 

described an alleged conspiracy between Toy Biz, the 

former Marvel board and the Lenders to "sabotage" the new 

Icahn-controlled debtor-in-possession's reorganization 

efforts. At the same time, the Icahn interests moved the 

district court for an order withdrawing the chapter 11 

petitions and all related matters in the bankruptcy court 

and removing them to the district court to be heard in 

conjunction with the Perelman litigation. The Lenders 

opposed this withdrawal and renewed their motion before 

the bankruptcy court for the appointment of a trustee. 

The district court noted that the Icahn interests 

instituted the Perelman litigation "by counsel who had not 

previously entered an appearance in this matter. Prior to 

the filing of the action, Marvel, as controlled by the Icahn 

interests, had not sought approval from the bankruptcy 

court to retain that counsel, nor had it sought approval to 

file the action." At a conference held by the district court to 

discuss its jurisdiction over the Perelman litigation, the 

court "invited the parties to submit papers on the 

jurisdictional issue, but made clear that it did not want to 

interfere with the bankruptcy court's ability to resolve the 

underlying dispute." Nonetheless, the day after the

conference the Icahn interests sent a letter to the

 8 
bankruptcy court which, as the district court found, 

"incorrectly stated that while that motion [on jurisdiction] 

was pending, the bankruptcy court was required to refrain 

from taking further action." This caused the bankruptcy 

court to cancel its hearing on the appointment of a trustee. 

At a district court hearing on November 13, 1997, all 

parties agreed to the withdrawal of the Marvel cases from 

the bankruptcy court and their transfer to the district 

court. The district court then heard argument on whether 

a trustee should be appointed. The argument was 

summarized by the court: 

 In opposing the motion, the Debtors accuse the 

 Lenders, and specifically Chase, of flip-flopping on 

 positions throughout the life of this proceeding, 

 whenever it suits their purposes. The Debtors describe 

 the reorganization plan of the Lenders and Toy Biz as 

 illegal, and claim that the Lenders have no desire that 

 a neutral trustee be appointed. . . . They claim that the 

 Lenders have put a strangle-hold on the Debtor's 

 financing, and that the Lenders are responsible for 

 failure of both the Settlement and the Second 

 Settlement. They also repeat many of the allegations 

 made in the Perelman litigation. . . . 

 The Creditors Committee describes the relationship 

 between the Icahn interests and the Lenders as having 

 reached an "impasse." . . . 

 In support of their motion, the Lenders accuse the 

 Icahn interests of an elaborate scheme to take over 

 Marvel at a discount price while diminishing the value 

 of the Lender's claims on the company as creditors. 

 They claim that the Perelman litigation is part of that 

 scheme, and was brought, at least in part, as a weapon 

 to punish the Lenders for not consummating the two 

 Settlements. . . . The Lenders claim that the present 

 board is incapable of neutrality, and is guilty of 

 breaching its fiduciary duties to creditors.

Appellants High River's and Westgate's Ex. C at 7-8. On 

December 12, 1997, the district court granted the motion 

authorizing the United States Trustee to appoint a trustee. 

 9 
Appealing that order are Marvel and the Icahn interests 

which control it. 

The U.S. Trustee recommended Gibbons to serve as 

trustee. Pursuant to this recommendation, Gibbons 

disclosed that the Firm was representing Chase in an 

unrelated matter. The representation did not involve 

litigation, but only construction financing for the New 

Jersey Performing Arts Center, a community organization. 

The Firm's representation of Chase generated a total of 

$48,000 in fees in 1997, about 0.1% of the Firm's revenue 

that year. Its representation was virtually complete at the 

time Gibbons was selected as trustee. In addition, Gibbons 

disclosed that Chase had granted the Firm an 

unconditional waiver of any conflicts which might arise 

from Gibbons's service as trustee. The waiver included an 

authorization permitting the Firm to represent Gibbons in 

any matter adverse to Chase. The district court appointed 

Gibbons as trustee on December 22, 1997 after considering 

the U.S. Trustee's recommendation and reviewing Gibbons's 

disclosure form. 

Gibbons subsequently moved for an order authorizing

employment of the Firm as trustee's counsel. In 

conjunction with this motion, Gibbons submitted an 

affidavit from the Firm which was materially identical to 

Gibbons's prior disclosures in its description of the Firm's 

representation of Chase; it stated that the Firm had 

represented Chase "from time to time," and that it currently 

was representing Chase in the Arts Center financing. 

In light of the Firm's relationship with Chase, the Icahn 

interests filed an objection to the Firm's employment as 

counsel, and LaSalle filed a preliminary statement with the 

district court questioning whether the Firm was 

"disinterested," as required by the Bankruptcy Code. 11 

U.S.C. S 327(a). The Firm responded to this statement with 

a letter indicating that it could properly serve as trustee's 

counsel, documenting this claim with Chase's waiver of 

conflicts and a letter mutually terminating all attorneyclient relations between Chase and the Firm. 

The district court held a hearing on January 15, 1998 to 

consider the Firm's employment. At that time, the Firm's 

 10 
representation of Chase had already been terminated. 

LaSalle argued that it wanted to reserve its rights to object 

to the Firm's employment if a conflict involving Chase later 

appeared, and stated that "[t]he appearance of a conflict of 

interest . . . creates some discomfort." Similarly, the Icahn 

interests said that "the termination of the [Firm's and 

Chase's attorney-client] relationship does go a long ways 

toward the legal issues that were presented," but that "we 

still have an appearance issue . . . that could impact on 

subsequent determinations by the trustee." Thus, it is clear 

that LaSalle and the Icahn interests were concerned not 

with an actual conflict of interest, but with the 

"appearance" that the Firm would not act impartially. 

On January 27, 1998, the district court denied Gibbons's 

motion for an order authorizing employment of the Firm as 

trustee's counsel, reasoning that the Firm's "representation 

of Chase taints the image of objectivity that the trustee and 

his counsel should possess." Gibbons immediatelyfiled 

both this appeal challenging the district court's decision 

and a petition for a writ of mandamus.1 On February 12, 

1998, we granted Gibbons's motion to expedite the appeal 

and petition and consolidated these cases with the Icahn 

interests' prior appeal from the appointment of a trustee. 

We review the district court's findings of fact for clear 

error, conduct plenary review over its conclusions of law 

and review its decision to appoint a trustee for abuse of 

discretion. See In re Sharon Steel Corp., 871 F.2d 1217, 

1222, 1225-1226 (3d Cir. 1989). The district court's 

disqualification of the Firm is reviewed for an abuse of 

discretion. See In re BH & P Inc., 949 F.2d 1300, 1317 (3d 

Cir. 1991). "An abuse of discretion exists where the district 

court's decision rests upon a clearly erroneous finding of 

fact, an errant conclusion of law, or an improper 

application of law to fact." ACLU v. Black Horse Pike Reg'l 

Bd. of Educ., 84 F.3d 1471, 1476 (3d Cir. 1996) (internal 

quotation omitted). 

_________________________________________________________________ 

1. Because we will rule in Gibbons's favor on his direct appeal, it is 

unnecessary for us to consider his petition for mandamus. See In re Ford 

Motor Co., 110 F.3d 954, 964 (3d Cir. 1997). The petition therefore will 

be dismissed as moot. 

 11 
II. 

Because this is an appeal from a district court exercising 

original jurisdiction in bankruptcy, our jurisdiction stems 

from 28 U.S.C. S 1291, not from 28 U.S.C.S 158(d). See In 

re Amatex Corp., 755 F.2d 1034, 1038 (3d Cir. 1985). We 

apply a broader concept of "finality" when considering 

bankruptcy appeals under S 1291 than we do when 

considering other civil orders under the same section. Id. at 

1039. A finality determination in a bankruptcy appeal 

involves consideration of such factors as "the impact of the 

matter on the assets of the bankruptcy estate, the 

preclusive effect of a decision on the merits, and whether 

the interests of judicial economy will be furthered." BH & P, 

949 F.2d at 1306 (quoting F/S Airlease II, Inc. v. Simon, 

844 F.2d 99, 104 (3d Cir. 1988)). We see no reason to use 

conflicting standards when a district court, as 

distinguished from a bankruptcy court, has issued an order 

in bankruptcy directly. See Amatex, 755 F.2d at 1039 

(stating in the context of S 1291 that "we have consistently 

considered finality in a more pragmatic and less technical 

way in bankruptcy cases"). 

We recognize that the Courts of Appeals are not in total 

agreement on whether a district court order appointing a 

bankruptcy trustee is interlocutory or final. See In re Cajun 

Elec. Power Coop., Inc., 69 F.3d 746, 748 (5th Cir. 1995) 

(appointment of bankruptcy trustee is an immediately 

appealable final order); In re Plaza de Diego Shopping Ctr., 

Inc., 911 F.2d 820, 826 (1st Cir. 1990) (same); Committee of 

Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 

241 (4th Cir. 1987) (same). But see In re Cash Currency 

Exch., Inc., 762 F.2d 542, 548 (7th Cir. 1985) 

(unappealable); see also In re St. Charles Preservation 

Investors, Ltd., 916 F.2d 727, 729 (D.C. Cir. 1990) (district 

court order requiring confirmation of permanent trustee 

unappealable). Using the liberal finality rules which apply 

in bankruptcy matters of this nature, we believe that 

jurisdiction is proper over the order appointing a trustee 

here. In the past, we have exercised jurisdiction over a 

district court order affirming a bankruptcy court order 

appointing a trustee. Sharon Steel, 871 F.2d at 1222, 1225- 

1226; see also Plaza de Diego, 911 F.2d at 826 ("If an 

 12 
appeal [from appointment of trustee] were postponed until 

a plan of reorganization were confirmed, there would be no 

satisfactory way to vindicate the" debtor's rights.). Were we 

to put off hearing an appeal of the district court's order 

appointing a trustee until after the entire bankruptcy 

proceeding, allowing the possibility of an order returning 

this bankruptcy to its very beginning for a second round, 

the concept of judicial efficiency would be effectively turned 

on its head. Liberal finality considerations in orders 

appointing bankruptcy trustees are necessary because 

these orders cannot be meaningfully postponed to the 

bankruptcy's conclusion. 

Were we not to take jurisdiction at this juncture, no 

meaningful review of the order appointing a trustee could 

ever take place, as a practical matter. What we know as 

men and women we must never forget as judges. Once 

bankruptcy reorganization has been completed after 

months or years and after a plan of reorganization has been 

hammered out, it strains credulity to suggest that a 

reviewing court would jettison years of bankruptcy 

infighting, compromise and final determinations solely for 

the purpose of reversing the appointment of a trustee and 

have the proceedings begin again from scratch. The 

practical reality is that unless an appeal can be lodged now, 

there will never be a meaningful review of the order 

appointing a trustee. We therefore hold that jurisdiction 

over the district court's order appointing a trustee is proper 

pursuant to S 1291. 

We believe that the overriding interests of judicial 

economy and the effective finality of the district court's 

decision give us jurisdiction also over Gibbons's appeal of 

the district court's order denying his motion for an order 

approving employment of the Firm as his counsel. Given 

that this Court has jurisdiction over the appeal of the 

appointment of a trustee, considerations of efficiency favor 

hearing this related appeal at the same time. Moreover, 

considering LaSalle's2 concession that the only way

_________________________________________________________________ 

2. In addition to LaSalle, Appellees in Gibbons's appeal include the Icahn 

interests, the Official Equity Security Holders' Committee and Toy Biz, 

Inc. Only LaSalle and the Equity Committee filed briefs, and counsel for 

LaSalle argued the case alone. We understand the arguments presented 

by LaSalle to represent the Appellees' collective position. 

 13 
Gibbons could properly continue to serve as trustee is to 

divest all interest in the Firm for the duration of his 

trusteeship, we perceive a most transparent effort to 

remove him as trustee without resort to meeting the

burdens imposed by the Bankruptcy Code. See 11 U.S.C. 

S 324(a) (trustee may only be removed "for cause"). In 

addition, to delay the appeal of the order denying counsel 

until all matters in the bankruptcy have been conclusively 

determined is impractical, as in the situation of the order 

appointing the trustee. We will not overburden the courts of 

this judicial circuit by requiring the parties to conduct the 

entire bankruptcy proceeding with this issue hanging 

heavily over their heads when we can easily decide it now 

on the facts already on record. For these reasons, 

jurisdiction over Gibbons's appeal is proper pursuant to 

S 1291. 

We will now turn to the merits of the appeals. 

III. 

Under the Bankruptcy Code, the district court was 

empowered to appoint a trustee: 

 (1) for cause, including fraud, dishonesty, 

 incompetence, or gross mismanagement of the affairs 

 of the debtor by current management, either before or 

 after the commencement of the case, or similar cause, 

 . . . or 

 (2) if such appointment is in the interests of creditors, 

 any equity security holders, and other interests of the 

 estate . . . . 

11 U.S.C. S 1104(a). The party moving for appointment of a 

trustee, in this case the Lenders, must prove the need for 

a trustee under either subsection by clear and convincing 

evidence. See Sharon Steel, 871 F.2d at 1226. "It is settled 

that appointment of a trustee should be the exception, 

rather than the rule." Id. at 1225. In the usual chapter 11 

proceeding, the debtor remains in possession throughout 

reorganization because "current management is generally 

best suited to orchestrate the process of rehabilitation for 

the benefit of creditors and other interests of the estate." In 

 14 
re V. Savino Oil & Heating Co., 99 B.R. 518, 524 (Bankr. 

E.D.N.Y. 1989). Thus, the basis for the strong presumption 

against appointing an outside trustee is that there is often 

no need for one: "The debtor-in-possession is afiduciary of 

the creditors and, as a result, has an obligation to refrain 

from acting in a manner which could damage the estate, or 

hinder a successful reorganization." Petit v. New England 

Mort. Servs., 182 B.R. 64, 69 (D. Me. 1995) (internal 

quotations omitted). The strong presumption alsofinds its 

basis in the debtor-in-possession's usual familiarity with 

the business it had already been managing at the time of 

the bankruptcy filing, often making it the best party to 

conduct operations during the reorganization. See Sharon 

Steel, 871 F.2d at 1226. The facts here, however, militate 

against invoking this presumption. The Icahn interests took 

control over Marvel's management six months after the 

chapter 11 filing. We are not confronted with a debtor who 

possesses extensive familiarity with the company's 

operations. It is therefore inappropriate to suggest that the 

usual presumption should be applied to a Johnny-comelately debtor-in-possession, especially one that is also a 

substantial creditor. 

The district court determined that the Icahn interests 

were "unable to resolve conflicts" with creditors of the 

estate. On the basis of this acrimony, it ordered the 

appointment of a trustee. We hold that the district court 

did not abuse its discretion because (A) this acrimony rises 

to the level of "cause" under S 1104(a)(1), and (B) a trustee 

would serve the best interests of the parties and estate. 

A. 

We have not heretofore addressed the question of 

whether acrimony between debtor and creditor in a 

bankruptcy case may rise to the level of "cause" 

necessitating the appointment of a trustee under 

S 1104(a)(1). Cf. Sharon Steel, 871 F.2d at 1228 (finding 

"cause" due to debtor-in-possession's gross 

mismanagement of estate and internal conflicts of interest). 

In Sharon Steel, we noted that the appointment of a trustee 

is mandatory upon a determination of cause, but also that 

"a determination of cause . . . is within the discretion of the 

 15 
court." Id. at 1226 (quoting Dalkon Shield, 828 F.2d at 

242). A review of cases from other circuits, as well as the 

policies behind the appointment of a trustee, demonstrates 

that the district court here properly exercised its discretion 

by invoking S 1104(a)(1) to reach its conclusion. 

It is significant that the language of S 1104(a)(1) does not 

promulgate an exclusive list of causes for which a trustee 

must be appointed, but rather provides that a trustee shall 

be appointed "for cause, including fraud, dishonesty, 

incompetence, or gross mismanagement . . . or similar 

cause". The Court of Appeals for the Fourth Circuit has 

recognized that "the concepts of incompetence, dishonesty, 

gross mismanagement and even fraud all cover a wide

range of conduct," and courts must be given the discretion 

necessary to determine if the debtor-in-possession's 

"conduct shown rises to a level sufficient to warrant the 

appointment of a trustee." Dalkon Shield, 828 F.2d at 242 

(internal quotation omitted). This discretionary authority is 

consistent with a "policy of flexibility" permeating the 

Bankruptcy Code's overall aim of protecting creditors while 

giving debtors a second chance. Id. The Code itself, 

therefore, does not prohibit the appointment of a trustee 

based on a finding of acrimony between debtor and 

creditor, parties whose interests must be balanced and 

protected under the discretion of the courts. 

Moreover, we are impressed by the persuasive reasoning 

in In re Cajun Elec. Power Coop., Inc., 74 F.3d 599, 600 (5th 

Cir.) (adopting on rehearing the opinion of dissent in 69 

F.3d at 751), cert. denied, 117 S. Ct. 51 (1996), in which 

the court upheld a trustee appointment based on afinding 

of acrimony. In that case, the debtor-in-possession's 

interests conflicted with those of its creditors to such an 

extent that "the appointment of a trustee may be the only 

effective way to pursue reorganization." The debtor-inpossession was a utility cooperative whose board members 

were faced with a federal agency order lowering its utility 

rates. The debtor-in-possession's board members, 

themselves managers or members of the debtor-inpossession's individual member utility companies, were 

required to decide whether to appeal the agency order, 

seeking to maintain the high rates charged to the individual 

 16 
member companies and thus to better enable the debtor-inpossession to meet its debt obligations to its creditors in 

bankruptcy, or to take no action and charge less to their 

individual companies. Cajun Elec., 69 F.3d at 747. The 

court recognized that the debtor-creditor conflict went 

"beyond the `inherent' conflicts under which all healthy 

cooperatives operate." Cajun Elec., 74 F.3d at 600 (adopting 

dissent at 69 F.3d at 751). The extent of this conflict alone 

provided sufficient cause for the appointment of a trustee 

under S 1104(a)(1). 

In Cajun Electric, the court recognized that all 

cooperatives operate amidst certain "inherent" conflicts of 

interest, but rejected the notion that its holding created a 

" `per se rule' under which any cooperative seeking Chapter 

11 protection would be automatically subject to the

appointment of a trustee." Id. Rather, the teachings of this 

case are that a district court may find cause to appoint a 

trustee for "acrimony" only on a case-by-case basis, when 

the inherent conflicts extend beyond the healthy conflicts 

that always exist between debtor and creditor, or as it 

found in that case, when the parties "begin working at 

cross-purposes". 

We therefore adopt the reasoning in Cajun Electric, 74 

F.3d at 600 (adopting dissent at 69 F.3d at 751), and apply 

its teachings to the case at bar. Here the district court 

found that "the Debtors, as controlled by the Icahn

interests, and the Lenders, take dramatically different 

stances on many issues." Citing (1) the debtor-inpossession's institution of several adversary actions, (2) the 

unconsummated settlements, (3) the U.S. Trustee's opinion 

"that the parties seem to be unable to reach a consensus" 

and (4) its observations that "the Debtors and the Lenders 

have flung accusations at each other, and have failed to 

demonstrate any ability to resolve matters cooperatively," 

the district court concluded that "there is no reasonable 

likelihood of any cooperation between the parties in the 

near future." As in Cajun Electric, 74 F.3d at 600 (adopting 

dissent at 69 F.3d at 751), the district court did not clearly 

err, based on its review of these events, when it found a 

deep conflict to exist between the Icahn-controlled debtorin-possession and the creditors in bankruptcy. Also like 

 17 
Cajun Electric, "this is a large and messy bankruptcy that 

promises to get worse without a disinterested administrator 

at the helm." Id.; see also In re Colorado-Ute Elec. Assoc., 

Inc., 120 B.R. 164, 176 (Bankr. D. Colo. 1990) (finding 

cause to appoint trustee under S 1104(a)(1) when the court 

could not "envision a way for the current management and 

board to resolve the inherent conflict between what is best 

for Colorado-Ute, its creditors and the co-op members"). 

We expressly hold that there is no per se rule by which 

mere conflicts or acrimony between debtor and creditor 

mandate the appointment of a trustee. In this case, rather, 

we are faced with circumstances in which the Icahn 

interests, themselves creditors of the Perelman holding 

companies, are currently in control of the debtor at the 

same time that the debtor proposes reorganization plans. In 

this position, although the Icahn interests are technically 

and officially fiduciaries to all creditors, they would also be 

placed in an awkward position of evaluating their own 

indenture and debt claims. Having found that this 

unhealthy conflict of interest was manifest in the"deepseeded conflict and animosity" between the Icahn-controlled 

debtor and the Lenders and in the lack of confidence all 

creditors had in the Icahn interests' ability to act as 

fiduciaries, the district court did not depart from the proper 

exercise of discretion when it determined sufficient cause 

existed under S 1104(a)(1) to appoint a neutral trustee to 

facilitate reorganization. 

We reject the Icahn interests' argument that unhappy 

creditors involved in future bankruptcies could remove the 

debtors-in-possession by their obstinate refusal to

cooperate. We are not impressed by this argumentum ad 

terrorem. In the view we take, it is within the district court's 

sound discretion to make a determination of cause, and 

this requires fact-finding and application of the facts to 

relevant precepts. The district court here determined that 

the Icahn interests were not entirely without blame for the 

breakdown of reorganization efforts with the Lenders: 

"[T]here can be no question that the debtor-in-possession 

has demonstrated difficulty resolving its conflicts with other 

parties, such as the Lenders." The district court noted that 

the Icahn-controlled debtor-in-possession instituted 

 18 
litigation against Perelman without seeking the approval of 

the bankruptcy court; moreover, the debtor-in-possession 

was represented by counsel who had not previously entered 

an appearance in the case. In addition, the day after the 

district court "made clear that it did not want to interfere 

with the bankruptcy court's ability to resolve the underlying 

dispute," the Icahn interests sent a letter to the bankruptcy 

court which "incorrectly stated that while that motion [on 

jurisdiction] was pending, the bankruptcy court was

required to refrain from taking further action." This caused 

the bankruptcy court to cancel a hearing on the 

appointment of a trustee. Such actions by a debtor-inpossession have been sufficient for other courts to find 

cause for appointment of a trustee. See, e.g. , V. Savino Oil, 

99 B.R. at 526 (debtor-in-possession failed to disclose to 

court corporate relationship with entity uninvolved in 

bankruptcy case and "made affirmative efforts to 

misrepresent or conceal" material matters). 

Finally, the policies behind the appointment of a trustee 

support our conclusion. The appointment of a trustee is the 

installation of a court officer charged with fiduciary duties. 

The district court's determination that cause existed to 

appoint an independent trustee based on the Icahn 

interests' actions is a recognition of their failure to assume 

these duties. When the chapter 11 petition was filed in this 

case, the debtor-in-possession assumed the samefiduciary 

duties as would an appointed trustee; the Icahn interests 

later stepped into this fiduciary position when they took 

control of Marvel. See 11 U.S.C. S 1107(a); United States v. 

Whiting Pools, Inc., 462 U.S. 198, 200 n.3 (1983). These 

obligations include "[o]pen, honest and straightforward 

disclosure to the Court and creditors." See V. Savino Oil, 99 

B.R. at 526. The Icahn interests' actions surrounding the 

Perelman litigation fall short of this fiduciary benchmark. 

Also among the fiduciary obligations of a debtor-inpossession is the "duty to protect and conserve property in 

its possession for the benefit of creditors." In re Ionosphere 

Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 1990). The 

intense and high-stakes bickering between the Icahn

interests and the Lenders does not instill confidence that 

the Icahn interests could fairly negotiate with the creditors 

to whom they owe these duties, nor that reorganization will 

 19 
occur effectively. See, e.g., In re Bellevue Place Assocs., 171 

B.R. 615, 623 (Bankr. N.D. Ill. 1994) (finding no wrongful 

conduct by debtor-in-possession but an inability to control 

reorganization, thus an inability to discharge fiduciary 

duties, necessitating appointment of trustee "to unfreeze" 

unproductive negotiations). 

As one bankruptcy court has noted: 

 The willingness of Congress to leave a debtor-in- 

 possession is premised on an expectation that current 

 management can be depended upon to carry out the 

 fiduciary responsibilities of a trustee. And if the debtor- 

 in-possession defaults in this respect, Section 

 1104(a)(1) commands that the stewardship of the 

 reorganization effort must be turned over to an 

 independent trustee. 

V. Savino Oil, 99 B.R. at 526. Here, the district court acted 

within the proper bounds of discretion in appointing a 

trustee under S 1104(a)(1) because of the Icahn interests' 

contribution to the acrimony with Marvel's creditors. 

B. 

Unlike S 1104(a)(1), which provides for mandatory 

appointment upon a specific finding of cause, S 1104(a)(2) 

"envisions a flexible standard." It gives the district court 

discretion to appoint a trustee "when to do so would serve 

the parties' and estate's interests." Sharon Steel, 871 F.2d 

at 1226. Here the court found that "deep seeded conflict 

and animosity between a debtor and its creditors" is at the 

heart of this bankruptcy case, thus "the selection of a plan, 

whatever its details, is in the best interests of all parties, 

and the best way to achieve that result is to appoint a 

trustee." Even if we were of the view that the appointment 

of a trustee was not mandated by the analysis required in 

S 1104(a)(1), we are satisfied that the district court's 

determination would come within proper exercise of 

discretion under the flexible S 1104(a)(2) standard. The level 

of acrimony found to exist in this case certainly makes the 

appointment of a trustee in the best interests of the parties 

and the estate. 

 20 
In Petit, 182 B.R. at 70, for example, numerous discovery 

disputes between the debtor-in-possession and creditors led 

the bankruptcy court to appoint a trustee, a decision 

upheld by the district court because this "may be the only 

way that the bankruptcy court can ensure that 

reorganization will proceed." The district court in that case 

described the impasse reached between the parties: 

 The tangled history of these proceedings suggests that 

 "friction" will continue at an unacceptable level. While 

 some degree of antagonism and animosity between a 

 debtor and creditors can be expected in any 

 bankruptcy proceeding, it has reached a particular 

 intensity here which is complicating efforts to 

 "reorganize" the Debtor. 

Id. The court also focused on the discretionary nature of 

the appointment decision, which involves to some extent 

weighing equities, stating, "the balance of interests here 

weighs in favor of appointing a trustee." Id. at 71. 

Similarly in this case, the district court's lengthy account 

of this complex bankruptcy case, in which "the parties are 

sharply divided on many issues, and are presently 

incapable of resolving them," supported its exercise of 

discretion to appoint a trustee, exactly as the court had 

done in Petit. See id. at 70 ("deep-seeded conflict and 

animosity between a debtor and its creditors provides a 

basis for the appointment of a trustee"); see also ColoradoUte, 120 B.R. at 176 (appointment of trustee in interests of 

parties where "serious conflicts . . . between and among the 

debtor, its board and creditors [made] the prospect for 

gridlock seem more probable than the ability to rehabilitate 

the debtor"); In re The Bible Speaks, 74 B.R. 511, 512 

(Bankr. D. Mass. 1987) (appointing trustee when"friction 

[had] developed between the Debtor and the Creditors' 

Committee which threaten[ed] to engulf this estate in costly 

and legalistic bickering over the entire range of the 

reorganization process"). 

We also reject the Icahn interests' arguments that the 

district court must apply a strict cost-benefit analysis when 

deciding to appoint a trustee. This is a case of profound 

financial magnitude, involving approximately $1 billion in 

 21 
claims against the estate. See In re Sharon Steel Corp., 86 

B.R. 455, 466 (W.D. Pa. 1988) ("In a case of this 

magnitude, the cost of having a trustee in place is

insignificant when compared with the other costs of

administration and when compared with the enormous 

benefit to be achieved by the establishment of trust and 

confidence in . . . management."). 

Neither did the court abuse its discretion by deciding not 

to appoint an examiner in the trustee's stead: "I'm just not 

convinced that an examiner is going to get done what needs 

to get done here. I think we need a decision-maker to come 

in and make some decisions." See Petit, 182 B.R. at 72 ("it 

would be more efficient and less costly simply to appoint a 

trustee now . . . since a trustee has the power to perform 

all of the functions of an examiner"). Under the Bankruptcy 

Code, a trustee is given all the powers of an examiner to 

analyze and report on the interests of the parties and 

actions of the debtor, but is also given the power to act on 

behalf of the estate, including the filing of a reorganization 

plan. 11 U.S.C. SS 1106(a)(5), (b). An examiner is not a 

substitute for a trustee. The district court need not have 

favored the appointment of an examiner here, especially 

after finding that a trustee is the more appropriate position. 

See In re Patton's Busy Bee Disposal Serv., Inc., 182 B.R. 

681, 685 (Bankr. W.D.N.Y. 1995) ("The position of examiner 

is not a device to circumvent the appointment of a 

trustee."). 

Whether viewed from S 1104(a)(1) or (a)(2), the district 

court acted within appropriate bounds of discretion in 

appointing a trustee to act as a neutral and efficient 

fiduciary in this complicated bankruptcy under the 

circumstances of the strife-ridden history presented here. 

IV. 

Having concluded that the district court was within its 

discretion in ordering the appointment of a trustee, we turn 

now to Gibbons's appeal. Gibbons argues that the district 

court erred when it disapproved the employment of the 

Firm as trustee's counsel. 

 22 
The Bankruptcy Code allows the trustee of a bankruptcy 

estate to employ attorneys to assist him in his duties. 11 

U.S.C. S 327(a). In determining the standards under which 

an attorney may serve in this capacity, we must, of course, 

begin with the language of the statute. Section 327(a) first 

provides that the trustee may employ attorneys "that do not 

hold or represent an interest adverse to the estate." See 

also S 327(c) (district court shall disapprove trustee's 

employment of an attorney who has represented a creditor 

"if there is an actual conflict of interest"). Section 327(a) 

also requires that the attorney be a "disinterested

person[ ]." A "disinterested person" is defined, in relevant 

part, as a person who: 

 does not have an interest materially adverse to the 

 interest of the estate or of any class of creditors or 

 equity security holders, by reason of any direct or 

 indirect relationship to, connection with, or interest in, 

 the debtor or an investment banker specified in 

 subparagraph (B) or (C) of this paragraph, or for any 

 other reason. 

11 U.S.C. S 101(14)(E). A plain reading of this section 

suggests that one is a "disinterested person" only if he has 

an interest that is materially adverse to a party in interest 

in the bankruptcy. The interest in question may be 

materially adverse either for one of the specific reasons 

delineated in the statute or "for any other reason." 

We conclude that in considering Gibbons's motion for an 

order authorizing employment of the Firm as trustee's 

counsel, the district court applied an incorrect legal 

standard under SS 327(a) and 101(14)(E), and even under 

the proper standard its denial of the motion was not a 

permissible exercise of discretion. 

A. 

We previously interpreted the standards applicable to 

employment of trustee's counsel under SS 327(a) and

101(14)(E) in BH & P, 949 F.2d 1300. Insofar as both 

parties have somewhat misread BH & P, and urge upon us 

such conflicting interpretations of it, we have studied our 

previous decision in great detail and today expressly 

 23 
reiterate its holding: (1) Section 327(a), as well as S 327(c), 

imposes a per se disqualification as trustee's counsel of any 

attorney who has an actual conflict of interest; (2) the 

district court may within its discretion--pursuant to 

S 327(a) and consistent with S 327(c)--disqualify an 

attorney who has a potential conflict of interest and (3) the 

district court may not disqualify an attorney on the 

appearance of conflict alone. 

In BH & P, an S corporation and both of its principal 

shareholders each filed for bankruptcy. The cases were 

consolidated and a single trustee and law firm were

appointed to represent all three estates. Id. at 1303. After 

the corporation filed a fraud and breach of fiduciary duty 

suit against the shareholders, the corporation's primary 

secured lender alleged that the trustee and the lawfirm 

had a conflict of interest. Id. at 1304. The district court 

disqualified the trustee and the law firm from serving the 

shareholders' estates, and we affirmed. 

In reiterating BH & P's precise rule on attorney 

disqualification under S 327(a), we focus only on that 

section of BH & P which discussed the standards for

attorney disqualification. In Part IV of the opinion, we said: 

 While the bankruptcy court recognized that by the 

 terms of section 327(c) "disapproval of employment is 

 mandatory where there is an actual conflict," it does 

 not follow "that there is no discretion [under section 

 327(a)] to disapprove employment when the conflict is 

 `potential' ". The court then held that 

 [t]he court should generally disapprove employment 

 of a professional with a potential conflict, with 

 certain possible exceptions. First of all, . . . there 

 may occasionally be large cases where every 

 competent professional in a particular field is already 

 employed by a creditor or a party in interest . . . . 

 The other exception is where the possibility that 

 the potential conflict will become actual is remote, 

 and the reasons for employing the professional in 

 question are particularly compelling. This court will 

 not attempt here to define the parameters of this 

 exception, which necessarily will depend upon the 

 24 
 facts of a particular case. I will, however, note that 

 even in such situations, employment of a 

 professional with a potential conflict is disfavored. 

 We do not find error in the bankruptcy court's 

 articulation of the standard governing conflict of 

 interest applicable to professionals. . . . As we have 

 said, denomination of a conflict as "potential" or 

 "actual" and the decision concerning whether to 

 disqualify a professional based upon that 

 determination in situations not yet rising to the level of 

 an actual conflict are matters committed to the 

 bankruptcy court's sound exercise of discretion. 

Id., 949 F.2d at 1316-1317 (citations omitted). 

This passage clearly indicates that S 327(a) allows

disqualification of attorneys only if they have an actual or 

a potential conflict of interest. In addition, the first sentence 

of the passage cuts against the trustee's contention, in light 

of S 327(c), that the Firm may only be disqualified based on 

an actual conflict. 

We reiterate the teachings of BH & P: Section 327(a) 

presents a per se bar to the appointment of a lawfirm with 

an actual conflict, and gives the district court wide 

discretion in deciding whether to approve the appointment 

of a law firm with a potential conflict. Therefore, the district 

court erred when it held that it could disqualify as 

disinterested any person who "in the slightest degree might 

have some interest or relationship that would even faintly 

color the independence and impartial attitude required by 

the Code and the Bankruptcy Rules." App. at 39 (quoting 

BH & P, 949 F.2d at 1308, in turn quoting isolated 

language from the district court opinion in that case, not 

our discussion of the standards for attorney 

disqualification). Following this faulty reasoning, LaSalle 

contends that section 327(a), as interpreted in BH & P, 

allows disqualification of a law firm for a mere "appearance 

of impropriety." We disagree with this contention. 

To be sure, BH & P, 949 F.2d at 1313, does contain a 

reference to the "appearance of conflict." For several 

reasons, however, we find this reference to be"a marginal 

comment [which] will not bear the heavy weight [LaSalle 

 25 
has] placed on it." See Rivet v. Regions Bank, 66 U.S.L.W. 

4132, 4134 (U.S. Feb. 24, 1998) (declining to credit a 

previous footnote that was not essential to the decision in 

the previous case). First, part IV of BH & P, which interprets 

section 327(a) and from which we quoted extensively above, 

makes no mention whatsoever of appearances of conflict. 

Part IV mentions only actual and potential conflicts. 

Second, we do not believe that BH & P's discussion of 

S 101(14)(E)'s disinterest requirement, as applied to the 

disqualification of a trustee, mandates a conclusion that 

apparent conflicts alone allow a finding of 

disinterestedness. In this context, we said in BH & P that 

"[i]n some circumstances, the potential for conflict and the 

appearance of conflict may, without more, justify removing 

a trustee from service." Id. at 1313. At the risk of parsing 

language too finely, the conjunctive reference to potential 

conflict and appearance of conflict indicates that the two 

together, but not appearance alone, can justify 

disqualification. This conclusion is supported by the next 

passage of our opinion, where we note that "it must be 

made clear that `[h]orrible imaginings alone cannot be 

allowed to carry the day. Not every conceivable conflict 

must result in sending [the trustee] away to lick his 

wounds.' " Id. (quoting In re Martin, 817 F.2d 175, 183 (1st 

Cir. 1987)). To allow disqualification merely on the 

"appearance of impropriety" indeed would allow"horrible 

imaginings alone" to carry the day. Finally, in BH & P we 

affirmed the district court's determination that the 

attorneys in that case had an "actual conflict of interest." 

Id. at 1315, 1317. In light of this determination, we do not 

find BH & P's transitory reference to the appearance of 

conflict to be controlling. We therefore reject LaSalle's 

invitation to read an appearance of conflict disqualification 

into S 327(a). Section 327(a) permitted the district court to 

disqualify the Firm only if it had an actual or potential 

conflict of interest. 

B. 

Even applying the proper standard, the district court's 

disqualification of the Firm would amount to an abuse of 

discretion. The Firm's conflict here is not potential or 

 26 
actual. LaSalle acknowledges as much when it states that 

its concern is "the ability of [the Firm] to act with total 

objectivity and avoid even the appearance of `possible 

unfairness and partiality.' " LaSalle's Br. at 28 (quoting the 

district court's opinion). The Firm has never represented 

Chase on a matter related to this bankruptcy and severed 

all attorney-client relations with Chase in anticipation of its 

selection as trustee's counsel. If we were to uphold the 

district court's order under these circumstances, it is with 

the utmost difficulty that we could imagine how a law firm 

with any prior relationship to a secured creditor could ever 

serve as trustee's counsel. Such a result would be 

tantamount to a per se rule, which we refused to adopt in 

BH & P. 

The district court's exercise of its discretion is further 

called into question by the anomalous situation in which it 

approved Gibbons's appointment as the trustee in this 

case, and then disapproved the employment of the Firm, in 

which he is the first named partner, as trustee's counsel. 

Sauce for the goose, then, is not sauce for the gander. The 

disclosures in reference to both Gibbons's appointment and 

the Firm's employment are the same. They revealed the 

Firm's representation of Chase and that Chase had granted 

the Firm an unconditional waiver of conflicts. Also, unlike 

when the court approved Gibbons's appointment as trustee, 

while the motion for approval of the Firm's employment as 

counsel was pending, Chase and the Firm terminated their 

attorney-client relationship. Given these facts, a logical 

basis for this inconsistency is evanescent, if not 

infinitesimal. There is an irreconcilable conflict with 

dictates of good reason in the notion that Gibbons, as the 

head of the Firm, is eligible to serve as trustee, but the 

Firm is ineligible to serve as his counsel. 

This anomaly is particularly troubling and augments the 

primary reason why we reverse the district court's denial of 

the trustee's motion. We reverse the district court because 

it utilized a faulty premise in reaching its conclusion. It 

applied the incorrect legal standard and thus strayed 

beyond an appropriate exercise of discretion by 

disqualifying the Firm under S 327(a) based solely on the 

appearance of conflict. The trustee was within his rights 

 27 
and prerogative to select the Firm as his counsel. To deny 

the trustee's choice was to commit reversible error. 

* * * * * * * * * 

In sum, we have jurisdiction under 28 U.S.C. S 1291 to 

review the district court's orders authorizing appointment of 

the bankruptcy trustee and disapproving the Firm as

trustee's counsel. The district court properly exercised its 

discretion in appointing a trustee under either 11 U.S.C. 

S 1104(a)(1) or (a)(2) because "cause" includes the acrimony 

found here between the Icahn-controlled debtor-inpossession and the creditors and because on these facts 

the appointment of a trustee was in the best interests of the 

parties and the bankruptcy estate. Therefore, its order 

appointing a trustee will be affirmed. 

The district court exceeded permissible bounds of 

discretion, however, when it applied an inappropriate legal 

precept to deny Gibbons's motion for an order authorizing 

employment of the Firm as trustee's counsel. The Firm does 

not have an actual or potential conflict of interest and may 

not be disqualified under 11 U.S.C. SS 327(a) and 

101(14)(E). The district court's order will be reversed, and 

the case will be remanded with directions that the district 

court enter an order approving the Firm's employment. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 28