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. e du/thir dc ir c uit_1998/59Filed 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 Estat e 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

2Anthony 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)

3CAROSELLI, 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

4James 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 th en decide if the court acted within its proper discret ionary power by denying the motion of the trustee, John J. Gibbons, to appoint the law firm of Gibbons, Del De o, 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 B ank, a creditor in the bankruptcy, disqualified it from se rving as trustee's counsel. We will affirm the appointment o f the trustee and reverse the order denying Gibbons's mot ion for an order authorizing employment of the Firm as his counsel. Because our legal analysis necessarily inv olves a review of the district court's factual findings, we must first set out the adjudicative facts in some detail.

5I.

Marvel and various corporate affiliates filed chapt er 11 petitions on December 27, 1996 and continued to run Marvel as debtor-in-possession. 11 U.S.C. SS 1107-1 108. Approximately 1,700 creditors held $1 billion in cl aims against the Marvel estate.

Both before and after the filing of the petitions, Westgate International, L.P. and High River Limited Partners hip, 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 h olding companies owning all or substantially all of Marvel 's stock. These holding companies, under the control of Ronal d Perelman, had pledged their Marvel stock as securit y for the bonds. Two groups loomed large in the bankruptc y proceedings: one was an Official Bondholders' Commi ttee and an indenture trustee, LaSalle National Bank, ch osen 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 o f the filings, secured by all of Marvel's assets.

From the start of the proceedings, disputes arose a mong the various parties, especially between the Icahn i nterests and the Lenders. The Icahn interests opposed an ini tial bankruptcy financing plan submitted by the Perelman holding companies, under which the holding companie s would have infused $100 million into Marvel in retu rn for priority recognition of the Lenders' debt claims. T he Icahn
interests contended that the Perelman-controlled Ma rvel debtors were favoring their "lender accomplices" to ensure that "Perelman re-acquires control of Marvel, witho ut competitive bidding, for an obscenely low price." Notwithstanding the Icahn interests' objections, th e bankruptcy court approved the financing plan.

From January through June of 1997, tension arose
between the Lenders and the Icahn interests. The Ic ahn interests fought to take control of the Marvel boar d 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),

6so they could foreclose on the holding companies' d efaulted

bonds and vote the pledged stock. Marvel sought a temporary restraining order from the bankruptcy cou rt to enjoin the Icahn interests from voting the stock an d replacing Marvel's board of directors. The bankrupt cy 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 s ame month, the Icahn interests took significant steps t oward 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 deb t, in return for "exclusive" control of Marvel's operatio ns. Through their agent Chase Manhattan Bank, the Lende rs vigorously opposed this plan, explaining that the I cahn interests had presented no "concrete turnaround str ategy . . . or a management team capable of executing one ."

On May 14, 1997, the district court vacated the bankruptcy court's temporary restraining order, per mitting the Icahn interests to vote the pledged stock. In r e Marvel Entertainment Group, Inc., 209 B.R. 832, 840 (D. De l. 1997). With the lifting of the restraining order, t he litigation ended and the inevitable took place--on June 20, 19 97, the Icahn interests took control of Marvel. Thus, an an omaly 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 co mpany merged with its affiliate Toy Biz, and would purcha se the
Lenders' claims at a substantial discount. To consu mmate the settlement, it was necessary to obtain the appr oval of two-thirds of all creditors as required under the Bankruptcy Code, 11 U.S.C. S 1126(c). The Lenders w ere not successful in obtaining this approval.

The parties tried again. Another proposed settlemen t was attempted by the Icahn interests, this time with Ch ase directly as one of the Lenders. The terms were simi lar to

7those 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 proposa l. Moreover, the settlement proposal required the cred itors to support the Icahn interests' control of all Marvel entities and to agree to place High River's and Westgate's d ebt claims into a priority secured position. The necess ary twothirds approval not forthcoming, the settlement negotiations collapsed in October 1997.

On October 30, 1997, the Icahn-controlled debtor-in possession commenced adverse litigation in the dist rict court against the Perelman holding companies, the L enders and other creditors in the Marvel bankruptcy (the "Perelman litigation"). It asserted 19 causes of ac tion alleging breach of fiduciary duty, fraudulent conve yance, preferential transfer and breach of contract. The c omplaint sought to void the Lenders' claims or to subordinat e them to the claims of High River and Westgate. The compl aint described an alleged conspiracy between Toy Biz, th e former Marvel board and the Lenders to "sabotage" t he new Icahn-controlled debtor-in-possession's reorganizat ion efforts. At the same time, the Icahn interests move d 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 Lende rs opposed this withdrawal and renewed their motion be fore the bankruptcy court for the appointment of a trust ee.

The district court noted that the Icahn interests instituted the Perelman litigation "by counsel who had not previously entered an appearance in this matter. Pr ior to the filing of the action, Marvel, as controlled by the Icahn interests, had not sought approval from the bankrup tcy court to retain that counsel, nor had it sought app roval to file the action." At a conference held by the distr ict court to discuss its jurisdiction over the Perelman litigati on, the court "invited the parties to submit papers on the jurisdictional issue, but made clear that it did no t want to interfere with the bankruptcy court's ability to re solve the underlying dispute." Nonetheless, the day after the
conference the Icahn interests sent a letter to the

8bankruptcy court which, as the district court found
,

"incorrectly stated that while that motion [on juri sdiction] was pending, the bankruptcy court was required to r efrain from taking further action." This caused the bankru ptcy court to cancel its hearing on the appointment of a trustee.

At a district court hearing on November 13, 1997, a ll parties agreed to the withdrawal of the Marvel case s from the bankruptcy court and their transfer to the dist rict court. The district court then heard argument on wh ether 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-flo pping on positions throughout the life of this procee ding, whenever it suits their purposes. The Debtor s describe the reorganization plan of the Lenders and T oy Biz as illegal, and claim that the Lenders have no desire that a neutral trustee be appointed. . . . They c laim that the Lenders have put a strangle-hold on the Debt or's financing, and that the Lenders are responsi ble for
failure of both the Settlement and the Secon d Settlement. They also repeat many of the all egations made in the Perelman litigation. . . .

The Creditors Committee describes the relat ionship
between the Icahn interests and the Lenders as having reached an "impasse." . . .

In support of their motion, the Lenders acc use the
Icahn interests of an elaborate scheme to ta ke over Marvel at a discount price while diminishing the value of the Lender's claims on the company as cre ditors. They claim that the Perelman litigation is p art of that scheme, and was brought, at least in part, a s a weapon to punish the Lenders for not consummating t he two
Settlements. . . . The Lenders claim that th e present board is incapable of neutrality, and is gui lty 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 m otion authorizing the United States Trustee to appoint a trustee.

9Appealing that order are Marvel and the Icahn inter ests

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 a n unrelated matter. The representation did not involv e litigation, but only construction financing for the New Jersey Performing Arts Center, a community organiza tion. The Firm's representation of Chase generated a tota l of $48,000 in fees in 1997, about 0.1% of the Firm's r evenue that year. Its representation was virtually complet e 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 a rise
from Gibbons's service as trustee. The waiver inclu ded an authorization permitting the Firm to represent Gibb ons in any matter adverse to Chase. The district court app ointed Gibbons as trustee on December 22, 1997 after consi dering the U.S. Trustee's recommendation and reviewing Gib bons'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 identi cal to Gibbons's prior disclosures in its description of t he Firm's representation of Chase; it stated that the Firm ha d 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 employme nt 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 stateme nt 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 att orneyclient relations between Chase and the Firm.

The district court held a hearing on January 15, 19 98 to consider the Firm's employment. At that time, the F irm's

10representation 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 Ch ase later appeared, and stated that "[t]he appearance of a co nflict 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 lon g ways toward the legal issues that were presented," but t hat "we still have an appearance issue . . . that could imp act 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 impartiall y.

On January 27, 1998, the district court denied Gibb ons's motion for an order authorizing employment of the F irm as trustee's counsel, reasoning that the Firm's "repre sentation of Chase taints the image of objectivity that the t rustee and his counsel should possess." Gibbons immediatelyfil ed both this appeal challenging the district court's d ecision and a petition for a writ of mandamus.1 On Februar y 12, 1998, we granted Gibbons's motion to expedite the a ppeal and petition and consolidated these cases with the Icahn interests' prior appeal from the appointment of a t rustee.

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 ab use 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 abu se of discretion. See In re BH & P Inc., 949 F.2d 1300, 1 317 (3d Cir. 1991). "An abuse of discretion exists where th e district court's decision rests upon a clearly erroneous fin ding of fact, an errant conclusion of law, or an improper application of law to fact." ACLU v. Black Horse Pi ke Reg'l Bd. of Educ., 84 F.3d 1471, 1476 (3d Cir. 1996) (in ternal quotation omitted).

___________________________________________________ ______________

1. Because we will rule in Gibbons's favor on his d irect appeal, it is unnecessary for us to consider his petition for man damus. See In re Ford Motor Co., 110 F.3d 954, 964 (3d Cir. 1997). The pe tition therefore will
be dismissed as moot.

11II.

Because this is an appeal from a district court exe rcising original jurisdiction in bankruptcy, our jurisdicti on 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 consider ing bankruptcy appeals under S 1291 than we do when considering other civil orders under the same secti on. Id. at 1039. A finality determination in a bankruptcy appe al involves consideration of such factors as "the impa ct 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 a n order in bankruptcy directly. See Amatex, 755 F.2d at 103 9 (stating in the context of S 1291 that "we have con sistently considered finality in a more pragmatic and less te chnical way in bankruptcy cases").

We recognize that the Courts of Appeals are not in total agreement on whether a district court order appoint ing a bankruptcy trustee is interlocutory or final. See I n re Cajun Elec. Power Coop., Inc., 69 F.3d 746, 748 (5th Cir. 1995) (appointment of bankruptcy trustee is an immediatel y appealable final order); In re Plaza de Diego Shopp ing Ctr., Inc., 911 F.2d 820, 826 (1st Cir. 1990) (same); Com mittee of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2 d 239, 241 (4th Cir. 1987) (same). But see In re Cash Curr ency Exch., Inc., 762 F.2d 542, 548 (7th Cir. 1985) (unappealable); see also In re St. Charles Preserva tion Investors, Ltd., 916 F.2d 727, 729 (D.C. Cir. 1990) (district court order requiring confirmation of permanent tru stee unappealable). Using the liberal finality rules whi ch apply in bankruptcy matters of this nature, we believe th at jurisdiction is proper over the order appointing a trustee here. In the past, we have exercised jurisdiction o ver a district court order affirming a bankruptcy court o rder appointing a trustee. Sharon Steel, 871 F.2d at 122 2, 1225- 1226; see also Plaza de Diego, 911 F.2d at 826 ("If an

12appeal [from appointment of trustee] were postponed until

a plan of reorganization were confirmed, there woul d 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 bankrup tcy proceeding, allowing the possibility of an order re turning this bankruptcy to its very beginning for a second round, the concept of judicial efficiency would be effecti vely turned on its head. Liberal finality considerations in ord ers appointing bankruptcy trustees are necessary becaus e these orders cannot be meaningfully postponed to th e 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 kno w 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 sol ely for the purpose of reversing the appointment of a trust ee and have the proceedings begin again from scratch. The practical reality is that unless an appeal can be l odged now, there will never be a meaningful review of the orde r appointing a trustee. We therefore hold that jurisd iction over the district court's order appointing a truste e is proper pursuant to S 1291.

We believe that the overriding interests of judicia l economy and the effective finality of the district court's decision give us jurisdiction also over Gibbons's a ppeal of the district court's order denying his motion for a n order approving employment of the Firm as his counsel. Gi ven that this Court has jurisdiction over the appeal of the appointment of a trustee, considerations of efficie ncy favor hearing this related appeal at the same time. Moreo ver, considering LaSalle's2 concession that the only way

___________________________________________________ ______________

2. In addition to LaSalle, Appellees in Gibbons's a ppeal include the Icahn interests, the Official Equity Security Holders' Co mmittee and Toy Biz, Inc. Only LaSalle and the Equity Committee filed br iefs, and counsel for LaSalle argued the case alone. We understand the ar guments presented by LaSalle to represent the Appellees' collective p osition.

13Gibbons 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 concl usively determined is impractical, as in the situation of t he order appointing the trustee. We will not overburden the courts of this judicial circuit by requiring the parties to c onduct the entire bankruptcy proceeding with this issue hangin g 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 pursua nt 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 simil ar cause,

. . . or

(2) if such appointment is in the interests of creditors, any equity security holders, and other inter ests of the

estate . . . .

11 U.S.C. S 1104(a). The party moving for appointme nt of a trustee, in this case the Lenders, must prove the n eed for a trustee under either subsection by clear and conv incing evidence. See Sharon Steel, 871 F.2d at 1226. "It i s settled that appointment of a trustee should be the excepti on, rather than the rule." Id. at 1225. In the usual ch apter 11 proceeding, the debtor remains in possession throug hout reorganization because "current management is gener ally best suited to orchestrate the process of rehabilit ation for
the benefit of creditors and other interests of the estate." In

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

E.D.N.Y. 1989). Thus, the basis for the strong pres umption against appointing an outside trustee is that there is often no need for one: "The debtor-in-possession is afidu ciary of the creditors and, as a result, has an obligation t o refrain from acting in a manner which could damage the esta te, or hinder a successful reorganization." Petit v. New E ngland Mort. Servs., 182 B.R. 64, 69 (D. Me. 1995) (intern al quotations omitted). The strong presumption alsofin ds its basis in the debtor-in-possession's usual familiari ty with the business it had already been managing at the ti me of the bankruptcy filing, often making it the best par ty to conduct operations during the reorganization. See S haron Steel, 871 F.2d at 1226. The facts here, however, m ilitate against invoking this presumption. The Icahn intere sts took control over Marvel's management six months after t he chapter 11 filing. We are not confronted with a deb tor who possesses extensive familiarity with the company's operations. It is therefore inappropriate to sugges t that the usual presumption should be applied to a Johnny-com elately debtor-in-possession, especially one that is also a
substantial creditor.

The district court determined that the Icahn intere sts
were "unable to resolve conflicts" with creditors o f the estate. On the basis of this acrimony, it ordered t he appointment of a trustee. We hold that the district court did not abuse its discretion because (A) this acrim ony rises to the level of "cause" under S 1104(a)(1), and (B) a trustee would serve the best interests of the parties and e state.

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 (f inding "cause" due to debtor-in-possession's gross mismanagement of estate and internal conflicts of i nterest). In Sharon Steel, we noted that the appointment of a trustee is mandatory upon a determination of cause, but als o that
"a determination of cause . . . is within the discr etion of the

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

242). A review of cases from other circuits, as wel l as the policies behind the appointment of a trustee, demon strates 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 trust ee shall be appointed "for cause, including fraud, dishonest y, incompetence, or gross mismanagement . . . or simil ar cause". The Court of Appeals for the Fourth Circuit has recognized that "the concepts of incompetence, dish onesty, gross mismanagement and even fraud all cover a wide range of conduct," and courts must be given the dis cretion necessary to determine if the debtor-in-possession' s "conduct shown rises to a level sufficient to warra nt the appointment of a trustee." Dalkon Shield, 828 F.2d at 242 (internal quotation omitted). This discretionary au thority is consistent with a "policy of flexibility" permeatin g the Bankruptcy Code's overall aim of protecting credito rs while giving debtors a second chance. Id. The Code itself
, therefore, does not prohibit the appointment of a t rustee 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 reason ing 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), i n which the court upheld a trustee appointment based on afi nding 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 th e only effective way to pursue reorganization." The debtor -inpossession was a utility cooperative whose board me mbers 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, w ere required to decide whether to appeal the agency ord er, seeking to maintain the high rates charged to the i ndividual

16member companies and thus to better enable the debt or-inpossession to meet its debt obligations to its cred itors 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 he althy cooperatives operate." Cajun Elec., 74 F.3d at 600 (adopting dissent at 69 F.3d at 751). The extent of this conf lict 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" conf licts 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 teaching s of this case are that a district court may find cause to ap point a trustee for "acrimony" only on a case-by-case basis , when the inherent conflicts extend beyond the healthy co nflicts that always exist between debtor and creditor, or a s 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), a nd 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 diffe rentstances on many issues." Citing (1) the debtor-inpossession's institution of several adversary actio ns, (2) the unconsummated settlements, (3) the U.S. Trustee's o pinion "that the parties seem to be unable to reach a cons ensus" and (4) its observations that "the Debtors and the Lenders have flung accusations at each other, and have fail ed to demonstrate any ability to resolve matters cooperat ively,"
the district court concluded that "there is no reas onable likelihood of any cooperation between the parties i n 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 f ound a deep conflict to exist between the Icahn-controlled debtorin-possession and the creditors in bankruptcy. Also like

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

promises to get worse without a disinterested admin istrator at the helm." Id.; see also In re Colorado-Ute Elec . Assoc., Inc., 120 B.R. 164, 176 (Bankr. D. Colo. 1990) (fin ding cause to appoint trustee under S 1104(a)(1) when th e court could not "envision a way for the current managemen t and
board to resolve the inherent conflict between what is best for Colorado-Ute, its creditors and the co-op membe rs").

We expressly hold that there is no per se rule by w hich mere conflicts or acrimony between debtor and credi tor 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 hol ding companies, are currently in control of the debtor a t the same time that the debtor proposes reorganization p lans. In this position, although the Icahn interests are tec hnically and officially fiduciaries to all creditors, they w ould also be placed in an awkward position of evaluating their o wn indenture and debt claims. Having found that this unhealthy conflict of interest was manifest in the" deepseeded conflict and animosity" between the Icahn-co ntrolled
debtor and the Lenders and in the lack of confidenc e all creditors had in the Icahn interests' ability to ac t as fiduciaries, the district court did not depart from the proper
exercise of discretion when it determined sufficien t cause existed under S 1104(a)(1) to appoint a neutral tru stee to facilitate reorganization.

We reject the Icahn interests' argument that unhapp y creditors involved in future bankruptcies could rem ove 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 dis trict court's sound discretion to make a determination of cause, and this requires fact-finding and application of the f acts to relevant precepts. The district court here determin ed that the Icahn interests were not entirely without blame for the breakdown of reorganization efforts with the Lender s: "[T]here can be no question that the debtor-in-poss ession has demonstrated difficulty resolving its conflicts with other parties, such as the Lenders." The district court n oted that the Icahn-controlled debtor-in-possession institute d

18litigation against Perelman without seeking the app roval of

the bankruptcy court; moreover, the debtor-in-posse ssion was represented by counsel who had not previously e ntered an appearance in the case. In addition, the day aft er 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 mot ion [on jurisdiction] was pending, the bankruptcy court was required to refrain from taking further action." Th is 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 disc lose 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 t rustee support our conclusion. The appointment of a truste e is the installation of a court officer charged with fiduci ary duties.
The district court's determination that cause exist ed to appoint an independent trustee based on the Icahn interests' actions is a recognition of their failur e to assume these duties. When the chapter 11 petition was file d in this case, the debtor-in-possession assumed the samefidu ciary duties as would an appointed trustee; the Icahn int erests later stepped into this fiduciary position when the y 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 straightfor ward
disclosure to the Court and creditors." See V. Savi no Oil, 99
B.R. at 526. The Icahn interests' actions surroundi ng the Perelman litigation fall short of this fiduciary be nchmark. Also among the fiduciary obligations of a debtor-in possession is the "duty to protect and conserve pro perty in its possession for the benefit of creditors." In re Ionosphere Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 199 0). The intense and high-stakes bickering between the Icahn
interests and the Lenders does not instill confiden ce that the Icahn interests could fairly negotiate with the creditors to whom they owe these duties, nor that reorganizat ion will

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

B.R. 615, 623 (Bankr. N.D. Ill. 1994) (finding no w rongful conduct by debtor-in-possession but an inability to control reorganization, thus an inability to discharge fidu ciary duties, necessitating appointment of trustee "to un freeze" unproductive negotiations).

As one bankruptcy court has noted:

The willingness of Congress to leave a debto r-in- possession is premised on an expectation tha t 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, Sect ion 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 c ourt acted within the proper bounds of discretion in appointin g a trustee under S 1104(a)(1) because of the Icahn int erests' contribution to the acrimony with Marvel's creditor s.

B.

Unlike S 1104(a)(1), which provides for mandatory appointment upon a specific finding of cause, S 110 4(a)(2) "envisions a flexible standard." It gives the distr ict court discretion to appoint a trustee "when to do so woul d serve the parties' and estate's interests." Sharon Steel, 871 F.2d at 1226. Here the court found that "deep seeded con flict and animosity between a debtor and its creditors" i s at the heart of this bankruptcy case, thus "the selection of a plan, whatever its details, is in the best interests of a ll parties, and the best way to achieve that result is to appoi nt a trustee." Even if we were of the view that the appo intment of a trustee was not mandated by the analysis requi red in S 1104(a)(1), we are satisfied that the district co urt'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 m akes the appointment of a trustee in the best interests of t he parties

and the estate.

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

disputes between the debtor-in-possession and credi tors led the bankruptcy court to appoint a trustee, a decisi on upheld by the district court because this "may be t he 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 sug gests that "friction" will continue at an unacceptable level. While some degree of antagonism and animosity betw een a debtor and creditors can be expected in any bankruptcy proceeding, it has reached a part icular intensity here which is complicating efforts to "reorganize" the Debtor.

Id. The court also focused on the discretionary nat ure of the appointment decision, which involves to some ex tent weighing equities, stating, "the balance of interes ts here weighs in favor of appointing a trustee." Id. at 71

.

Similarly in this case, the district court's length y account of this complex bankruptcy case, in which "the part ies are sharply divided on many issues, and are presently incapable of resolving them," supported its exercis e of discretion to appoint a trustee, exactly as the cou rt had done in Petit. See id. at 70 ("deep-seeded conflict and animosity between a debtor and its creditors provid es a basis for the appointment of a trustee"); see also ColoradoUte, 120 B.R. at 176 (appointment of trustee in int erests 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 reh abilitate the debtor"); In re The Bible Speaks, 74 B.R. 511, 512 (Bankr. D. Mass. 1987) (appointing trustee when"fri ction [had] developed between the Debtor and the Creditor s' Committee which threaten[ed] to engulf this estate in costly and legalistic bickering over the entire range of t he reorganization process").

We also reject the Icahn interests' arguments that the district court must apply a strict cost-benefit ana lysis when deciding to appoint a trustee. This is a case of pr ofound financial magnitude, involving approximately $1 bil lion in

21claims against the estate. See In re Sharon Steel C orp., 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 trus t and confidence in . . . management.").

Neither did the court abuse its discretion by decid ing not to appoint an examiner in the trustee's stead: "I'm just not convinced that an examiner is going to get done wha t 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 a ppoint a trustee now . . . since a trustee has the power to perform all of the functions of an examiner"). Under the Ba nkruptcy Code, a trustee is given all the powers of an exami ner 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 reo rganization plan. 11 U.S.C. SS 1106(a)(5), (b). An examiner is not a
substitute for a trustee. The district court need n ot have favored the appointment of an examiner here, especi ally after finding that a trustee is the more appropriat e position. See In re Patton's Busy Bee Disposal Serv., Inc., 1 82 B.R. 681, 685 (Bankr. W.D.N.Y. 1995) ("The position of e xaminer is not a device to circumvent the appointment of a
trustee.").

Whether viewed from S 1104(a)(1) or (a)(2), the dis trict court acted within appropriate bounds of discretion in appointing a trustee to act as a neutral and effici ent fiduciary in this complicated bankruptcy under the circumstances of the strife-ridden history presente d 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 di strict court erred when it disapproved the employment of t he
Firm as trustee's counsel.

22The Bankruptcy Code allows the trustee of a bankrup tcy

estate to employ attorneys to assist him in his dut ies. 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 "tha t do not hold or represent an interest adverse to the estate ." See also S 327(c) (district court shall disapprove trus tee's employment of an attorney who has represented a cre ditor "if there is an actual conflict of interest"). Sect ion 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 cr editors or equity security holders, by reason of any di rect or indirect relationship to, connection with, o r interest in, the debtor or an investment banker specified in subparagraph (B) or (C) of this paragraph, o r for any

other reason.

11 U.S.C. S 101(14)(E). A plain reading of this sec tion suggests that one is a "disinterested person" only if he has an interest that is materially adverse to a party i n interest in the bankruptcy. The interest in question may be materially adverse either for one of the specific r easons delineated in the statute or "for any other reason. "

We conclude that in considering Gibbons's motion fo r an order authorizing employment of the Firm as trustee 's counsel, the district court applied an incorrect le gal standard under SS 327(a) and 101(14)(E), and even u nder the proper standard its denial of the motion was no t 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 bot h parties have somewhat misread BH & P, and urge upon us such conflicting interpretations of it, we have stu died our previous decision in great detail and today express ly

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

imposes a per se disqualification as trustee's coun sel 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 a n attorney who has a potential conflict of interest a nd (3) the district court may not disqualify an attorney on th e appearance of conflict alone.

In BH & P, an S corporation and both of its princip al shareholders each filed for bankruptcy. The cases w ere consolidated and a single trustee and law firm were appointed to represent all three estates. Id. at 13 03. After the corporation filed a fraud and breach of fiducia ry duty suit against the shareholders, the corporation's pr imary secured lender alleged that the trustee and the law firm
had a conflict of interest. Id. at 1304. The distri ct court disqualified the trustee and the law firm from serv ing the shareholders' estates, and we affirmed.

In reiterating BH & P's precise rule on attorney disqualification under S 327(a), we focus only on t hat
section of BH & P which discussed the standards for attorney disqualification. In Part IV of the opinio n, we said:

While the bankruptcy court recognized that b y the terms of section 327(c) "disapproval of empl oyment is mandatory where there is an actual conflict, " it does not follow "that there is no discretion [und er section 327(a)] to disapprove employment when the co nflict is `potential' ". The court then held that

[t]he court should generally disapprove empl oyment 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 interes t . . . .

The other exception is where the possibilit y that the potential conflict will become actual is remote, and the reasons for employing the profession al in question are particularly compelling. This c ourt will not attempt here to define the parameters of this exception, which necessarily will depend upo n the

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

even in such situations, employment of a professional with a potential conflict is di sfavored.

We do not find error in the bankruptcy cour t's articulation of the standard governing confl ict of interest applicable to professionals. . . . As we have said, denomination of a conflict as "potenti al" or "actual" and the decision concerning whether to disqualify a professional based upon that determination in situations not yet rising t o the level of
an actual conflict are matters committed to the bankruptcy court's sound exercise of discret ion.

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 contentio n, 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 lawfi rm with an actual conflict, and gives the district court wi de discretion in deciding whether to approve the appoi ntment of a law firm with a potential conflict. Therefore, the district court erred when it held that it could disqualify a s disinterested any person who "in the slightest degr ee might have some interest or relationship that would even faintly color the independence and impartial attitude requi red by the Code and the Bankruptcy Rules." App. at 39 (quo ting BH & P, 949 F.2d at 1308, in turn quoting isolated language from the district court opinion in that ca se, 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 "a ppearance 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 seve ral reasons, however, we find this reference to be"a ma rginal comment [which] will not bear the heavy weight [LaS alle

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

4132, 4134 (U.S. Feb. 24, 1998) (declining to credi t a previous footnote that was not essential to the dec ision 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 confl ict. Part IV mentions only actual and potential conflict s. 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 conclusio n 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 conflic t and the appearance of conflict may, without more, justify r emoving
a trustee from service." Id. at 1313. At the risk o f parsing language too finely, the conjunctive reference to p otential conflict and appearance of conflict indicates that the two together, but not appearance alone, can justify disqualification. This conclusion is supported by t he 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 con flict must result in sending [the trustee] away to lick h is wounds.' " Id. (quoting In re Martin, 817 F.2d 175, 183 (1st Cir. 1987)). To allow disqualification merely on th e "appearance of impropriety" indeed would allow"horr ible imaginings alone" to carry the day. Finally, in BH & P we
affirmed the district court's determination that th e attorneys in that case had an "actual conflict of i nterest." Id. at 1315, 1317. In light of this determination, we do not find BH & P's transitory reference to the appearanc e of conflict to be controlling. We therefore reject LaS alle's invitation to read an appearance of conflict disqua lification into S 327(a). Section 327(a) permitted the distric t court to disqualify the Firm only if it had an actual or pot ential
conflict of interest.

B.

Even applying the proper standard, the district cou rt's disqualification of the Firm would amount to an abu se of discretion. The Firm's conflict here is not potenti al or

26actual. LaSalle acknowledges as much when it states that

its concern is "the ability of [the Firm] to act wi th total objectivity and avoid even the appearance of `possi ble unfairness and partiality.' " LaSalle's Br. at 28 ( quoting the district court's opinion). The Firm has never repre sented Chase on a matter related to this bankruptcy and se vered all attorney-client relations with Chase in anticip ation of its selection as trustee's counsel. If we were to uphol d the district court's order under these circumstances, i t is with the utmost difficulty that we could imagine how a l aw firm with any prior relationship to a secured creditor c ould ever

serve as trustee's counsel. Such a result would be tantamount to a per se rule, which we refused to ad opt 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 th is case, and then disapproved the employment of the Fi rm, in which he is the first named partner, as trustee's c ounsel. Sauce for the goose, then, is not sauce for the gan der. The disclosures in reference to both Gibbons's appointm ent and the Firm's employment are the same. They revealed t he Firm's representation of Chase and that Chase had g ranted
the Firm an unconditional waiver of conflicts. Also , unlike when the court approved Gibbons's appointment as tr ustee, while the motion for approval of the Firm's employm ent 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 conclu sion. It applied the incorrect legal standard and thus stray ed 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

27and 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 appo intment of the bankruptcy trustee and disapproving the Firm as trustee's counsel. The district court properly exer cised 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 f acts the appointment of a trustee was in the best intere sts of the parties and the bankruptcy estate. Therefore, its o rder appointing a trustee will be affirmed.

The district court exceeded permissible bounds of discretion, however, when it applied an inappropria te legal precept to deny Gibbons's motion for an order autho rizing employment of the Firm as trustee's counsel. The Fi rm does not have an actual or potential conflict of interes t and may not be disqualified under 11 U.S.C. SS 327(a) and 101(14)(E). The district court's order will be reve rsed, and
the case will be remanded with directions that the district court enter an order approving the Firm's employmen t.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

28