United States Court of Appeals

Fifth Circuit



## FILED

December 1, 2005

Charles R. Fulbruge III

Clerk In the United States Court of Appeals

For the Fifth Circuit

_________________________

No. 04-30848

_________________________

IN THE MATTER OF: WEST DELTA OIL COMPANY, INC.,

Debtor.

I.G. PETROLEUM, L.L.C.,

Appellant,

versus

MICHAEL A. FENASCI; PERRIN BUTLER,

Appellees.

_________________________

Appeal from the United States District Court

For the Eastern District of Louisiana

(USDC No. 2:03-CV-3330-J)

_________________________

Before HIGGINBOTHAM, BARKSDALE, and CLEMENT, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

We review today an award of attorney’s fees to special

counsel in a bankruptcy proceeding who allegedly acted to acquire

the assets of the debtor to the debtor’s detriment. In awarding

fees, the bankruptcy court, upheld by the district court, found

no conflict of interest. We reverse.

I

Nin ety-five percent of West Delta Oil Company’s shares were

held by James Ingersoll, Jr. and DKCCB Trust, in equal parts;1 See In re W. Delta Oil Co.

, No. Civ. A. 99-1995, 2000 WL 108919 (E.D. La.

Jan. 28, 2000) (unpublished).

2 Donald Mu ller, president of West Delta, held the remaining five

percent. West Delta hired as counsel Ronald J. Hof, who filed a

petition for relief under Chapter 11 of the Bankruptcy Code on

January 26, 1999. There was bad-blood between Muller and

Ingersoll. Muller had accused Ingersoll of various acts of

mismanagement and, with a voting proxy from DKCCB, voted him out of

office (president and chief operating officer) eleven days before

West Delta filed for bankruptcy. Ingersoll moved to dismiss the

petition and, on April 6, 1999, West Delta retained Michael Fenasci

and Perrin Butler as special counsel to deal with that motion and

other issues relating to Ingersoll. Butler and Fenasci persuaded

the bankruptcy court to deny the Motion to Dismiss. 1

West Delta filed under Chapter 11 but made no effort to

reorganize. A year later, on January 31, 2000, West Delta filed a

plan to liq uidate. Under the plan, all of its assets were to be

transferred to Crescent Oil, an e ntity wholly owned by Donald

Muller, in exchange for payments over a five-year period by

Crescent Oil to West Delta’s creditors. On February 14, an outside

bidder, I.G. Petroleum (“I.G.”), filed a competing liquidating plan

to pay the creditors over fou r years in exchange for all of West

Delta’s assets. On February 18, 2000, a second outside bidder,

Source Energy, filed a competing liquidating plan, but it was later

withdrawn.3

Meanwhile, the Chapter 11 proceedings intensified On February

9, 2000, Fenasci, as coun sel for West Delta and its Board of

Directors, by letter to D avid Waguespack, counsel for I.G.,

threatened a RICO suit and pursuit of Rule 11 sanctions for

supposed allegations made in a Motion to Terminate Use of Property

filed by I.G. Fenasci claimed that the motion had misrepresented

West Delta’s op erations and financial position to creditors and

wrongfully implicated Muller in mismanagement. On February 16 and

17, Butler, as counsel for West Delta and its Board of Directors,

sent letters threatening legal action to persons employed by Texaco

and Conoco, and allegedly working on behalf of Source Energy. The

letters also inquired as to whether Texaco and Conoco were involved

in efforts to take over West Delta, and whether these companies

approved of their employees’ actions with respect to West Delta.

On February 29, the bankruptcy court expanded Fenasci’s scope

of employment, authorizing him to handle certain matters pertaining

to I.G. Those matters included the plan filed by I.G. to take over

West Delta. Subsequently, on March 10, 2000, West Delta filed an

amended plan providing for payment in full of all creditors and no

payment to the equity holders. In its disclosure, West Delta

described the funding mechanism for its plan as follows:

In order to fund the Plan, West Delta has negotiated an

agreement with Crescent Oil Company, Inc. (hereinafter

“Crescent”) to take over operations of the West Delta

Field and to provide funding to pay all creditor’s claims

in full. Crescent presently has a line of credit with

Hibernia National Bank in the amount of $960,000.00 to be

used to pay all creditor’s claims excep t the claims of2 At the hearing, David Waguespack, counsel for I.G., said that he believed

DKCCB Trust may be the elusive investor behind the Crescent bid.

4 Donald A. Muller, who has agreed to subordinate his

claims to all other claims. The line of credit is

secured by certificates of deposit totaling $960,000.00,

which have been pledged by a group of investors. The

investors will receive a working interest in th e West

Delta wells as consideration for the investment. Debtor

estimates the total amount of claims to be paid under the

plan to be approximately $800,000.00.

On March 30, I.G. amended its plan to provide that it would pay all

creditors in full and would pay $400,000 in equity for West Delta’s

assets.

At a hearing on West Delta’s disclosure statement held before

the bankruptcy court on April 20, 2000, Hof declined to disclose

the identity of the investors who were investing money in the new

plan. Hof argued that such information was not necessary because

the investors would not be officers of the reorganized company in

the event that the plan was confirmed, and the creditors would all

be paid in full. When pressed to point to some evidence that the

line of credit at Hibernia National Bank was actually established

and available, Hof noted that he did not have a written document,

but he could “certainly have it” and that the bank had “agreed to

it.” 2

At a deposition taken on July 14, 2000, Muller testified that

he had been negotiating with Burrwood Oil to provide capital to

Crescent in the form of collateral that would be used to secure a

loan from Hibernia National Bank. He stated that the negotiations5

were ongoing, that his contact at Burrwood Oil was a man named

Chris Ezell, and that he had met no one else invo l ved with

Burrwood. He averred that during the course of negotiations, he

had contacted Hibernia National Bank and been informed that

Burrwood had “[a]lmost a million dollars” in an account there.

When asked if Burrwood had co mmitted to put up the money for

Crescent, Muller responded that the negotiations with Burrwood were

almost complete, and that a commitment would be available in time

for confirmation of the plan. Muller stated that the final detail

to be negotiated was the amount of working interest the investors

would receive in the West Delta well.

On July 24, 2000, West Delta withdrew its plan and I.G. filed

an amended plan incre asing the amount to be paid in equity from

$400,000 to $510,000. I.G.’s plan was confirmed on July 28, 2000.

In connection with the withdrawal of the West Delta plan, Charles

Rohm, the Treasurer for West Delta, sent a letter to Hof stating:

Regarding our telephone conversation of this afternoon,

be advised that the final negotiation of the terms and

conditions attendant to our letter of credit have proven

to be so egregious as to cause a impasse with no further

chance of consummating this trade. Also, our attempts to

secure additional funding have proved less successful

than anticipated. Therefore, after careful study of

[ I.G.’s] third plan of reorganization, The Board of

Directors of West Delta has decided to withdraw its plan

of reorganization and fully support [I.G.’s] plan.

Please advise counsel for [I.G.] and the court as soon as

possible.

On September 1, 2000, Butler submitted his first application

for compensation, requesting total attorney’s fees in the amount of3 Earlier, on February 17, 2000, the bankruptcy court had imposed a March

30, 2000 deadline for all administrative claims to be filed.

6 $37,002 for services rendered to West Delta from March 15, 1999 to

June 27, 2000. 3 Fenasci filed his second application for

compensation on the same day, re questing attorney’s fees in the

amount of $38,369 for services rendered fr om February 8, 2000

through July 13, 2000. Fenasci had filed his first application for

compensation on February 7, 2000, in which he claimed $34,465.50 in

attorney’s fees for services provided to West Delta from March 15,

1999 through January 24, 2000. Butler’s billing statement

indicated that his work focused on opposing Ingersoll’s Motion to

Dismiss; dealing with a creditor’s claim by Marvin’s Engi ne; and

opposing Ingersoll’s Motion to Appoint a Trustee in place of the

debtor. Fenasci’s billing statements indicated that his work

centered on opposing a Motion to Terminate Use of Property of

Estate Out of Ordinary Course of Business; opposing the Motion to

Appoint Trustee; opposing the Motion to Dismiss; and dealing with

a creditor’s claim by Marvin’s Engine.

I.G. filed objections to the appli cations for compensation,

grounding its argument in part on its discovery that Butler and

Fenas ci were two of the investors behind Burrwood Oil. At his

deposition, which was introdu ced into evidence at the bankruptcy

court’s September 22, 2000 hear ing on the applications, Butler

claimed that sometime in May, April, or June of 1 999, he floated7

the idea of putting up money as a passive investor in order to help

Muller secure financing for Crescent. He claimed that no documents

were ever signed, and that he just wanted to “be there as

insurance” i f Muller needed him in order to go forward with the

plan. Nonetheless, Butler and Fenasci hired Robert Haik, a lawyer,

to negotiate with Muller and then e mployed a second negotiator,

Chris Ezell, who Muller later said was his contact at Burrwood Oil,

when Haik fell il l. He also met with a Hibernia National Bank

officer and inquired as to whether a pledge of an unencumbered

piece of property worth $500,000 would be sufficient as s ecurity

for a proposed loan to Crescent. He was informed that such a

pledge would be sufficient.

In his deposition, also offered into evidence at the September

22 hearing, Fenasci denied the ex istence of any signed documents

evidencing an agreement between Burrwood and Crescent. He alleged

that no agreements were ever reached to post collateral or assist

in the provision of financing. Fenasci did state that he was part

of a “loose association” of people who were “merely waiting” and

ready should an offer to deal be extended. He asserted that he had

no role in the negotiation of terms, as this was handled entirely

by Haik and Ezell. He claimed that the negotiations were “all

talk” and that no deal was ever made. He asserted that no

certificates of deposit were pledged in conjunction with the West

Delta Plan. He did concede that there was a bank account at

Hibernia National Bank in the name of Burrwood, which was the name8

used by the “loose association” of people, and that he had $150,000

on deposit with the bank. He related that Butler discussed

pledging a $500,000 piece of unencumbered property. However, no

pledge was ever made because West Delta never applied for the loan,

and no agreement for financing was ever reached.

At the hearing on the applications held on September 22, 2000

before the bankruptcy court, Hof claimed that he did not know who

the Burrwood investors were, at least not at the time the hearing

on the disclosures was held. He testified that he included in the

West Delta disclosure the statement that “Crescent had a line of

credit for $960,000” based on infor mation provided by West Delta

management. He also stated with respect to West Delta’s plan to

liquidate to Crescent:

The onl y thing that had to be worked out was the terms

and conditions with the [Burrwood] investors. Basically,

there was [sic] investo rs putting up collateral to

s upport the Hibernia line of credit to Crescent . And

that agreement between the investors and Crescent is what

eventually broke down before confirmation and caused us

to withdraw our plan and support the [I.G.] plan.

On March 8, 2001, t he bankruptcy court entered an order

hold ing that Fenasci and Butler’s failure to disclose their

participation in B urrwood did not warrant rejection of their fee

applications. The court recounted that

[a]t one time, Burrwood Oil company was nego tiating to

provide collateral to secure a loan to West Delta. Mr.

Fenasci and Mr. Butler agreed, at some time that cannot

be fixed with any degree of accuracy, to participate as

passive investors with other investors in Burrwood Oil.

If called upon to save the debtor from ceasing operations4 In re W. Delta Oil Co.

, No. 99-10406, at 6-7 (Bankr. E.D. La. Mar. 8,

2001) (unpublished order).

5 Id. at 7-8.

9 as a result of a failure to file a plan, Burrwo od Oil

would have posted collateral so that Crescent Oil could

obtain a line of credit of $960,000 to fund the debtor’s

plan of reorganization as desc r ibed in the debtor’s

disclosure statement. These negotiations, however, never

came to fruition. Both Mr. Fenasci and Mr. Butler

testified unequivocally that no agreement ever existed

between them and Burrwood Oil, that they never signed

anything, never pledged any collateral at the bank, and

never acquired an interest in Crescent Oil. The

disclosure statement probably should have disclosed the

possible participation of Mr. Fenasci and Mr. Butler, and

it certainly would have had to have been disclosed at any

confirmation hearing on the debtor’s plan of

reorganization. 4

The court concluded that this failure to disclose could be excused

for three reasons:

(1) the tentative plans by Mr. Fenasci a nd Mr. Butler

were never reduced to any firm agreement;

(2) the debtor’s plan (and any participation by

Burrwood Oil and/or Crescent Oil) never came on for

confirmation; and

(3) Mr. Fenasci and Mr. Butler are unfamiliar with

bankruptcy law. 5

The court denied Fenasci’s and Butler’s applications for fees

earned after March 30, 2000 because of their failure to disclose

pre-petition claims against West Delta in a timely fashion. The

court then granted Fenasci’s first fee application in full and

granted him $8,075.25 on his second fee application. The court

denied Butler’s application without prejudice to allow him to

attach a list sufficiently det ailing the services (and dates of6 See W. Delta Oil Co. v. Hof

, No. Civ. A. 01-1163, 2001 WL 1456863 (E.D.

La. Nov. 14, 2001) (unpublished).

7 W. Delta Oil Co. v. Hof

, No. Civ. 01-1163, 2002 WL 506814, at *8 (E.D.

La. Mar. 28, 2002) (unpublished).

8 507 U.S. 380 (1993).

10 those services) that he provided. Upon rehearing, the bankruptcy

court granted Butler’s application for fees incurred before March

30, 2000.

I.G. appealed , and the United States District Court for the

Eastern District of Lou isiana dismissed the appeal as premature. 6

After the bankruptcy court clarified that its order granting fees

was final and appealable, the district court granted I.G.’s motion

for reconsideration. On March 28, 2002, the district court held

that the ban kruptcy court abused its discretion by granting

untimely fee applications without applying the appropriat e legal

standard for deciding whether there was cause or excusable neglect.

In addition, the district court held that the bankruptcy court

failed to inquire pr operly as to whether Butler and Fenasci’s

participation in Burrwood gave rise to a poss ible “adverse

interest” to We st Delta. 7 The court reversed and remanded for

further consideration.

On remand, the bankruptcy court first applied the factors set

forth by the Supreme Court in Pioneer Investment Services Co. v.

Brunswick Associates Limited Partnership 8 and determined that

Butler’s and Fenasci’s fee applications were granted properly under9 See In re W. Delta Oil Co.

, No. 99-10406, at 5-20 (Bankr. E.D. La. Oct.

7, 2003) (unpublished).

10 Id. at 24 (quoting 11 U.S.C. § 327(e)) (footnote omitted).

11 the excusable neglect standard. 9 The court then turned to examine

whether Butler and Fenasci’s involvement with Burrwood and failure

to disclose that involvement warranted denial of their fees. The

court first d etermined that Butler and Fenasci’s failure to

disclose their involvement with Burrwood constituted a violation of

Federal Rule of Bankruptcy Procedure 2014(a), requiring an attorney

employed under 11 U.S.C. § 327 to file a verified statement

disclosing his “connections with the debtor, creditors,” and “any

other party in interest.” The court found that this failure to

disclose did not warrant denial of fees, however, because even if

Butler and Fenasci had disclosed their involvement with Burrwood,

the court would have found that this involvement was not adverse to

the West Delta estate.

T he court observed that under § 327(e), “an attorney may

represent the d ebtor in bankruptcy proceedings for a specified

limited purpose, if it is in the best interest of the estate, and

if ‘such attorney does not represent or hold any interest adverse

to the debtor or to the estate with respect to the matter on which

such attorney is to be empl oyed.’” 1 0 The court then noted that

great latitude is allowed “‘in assessing conflict of interest11 Id. at 26 (quoting In re Henlar, Ltd.

, No. 96-2374, 1997 WL 4567, at *3

(E.D. La. Jan. 6, 1997)).

12 Id. (quoting 11 U.S.C. § 327(e)) (emphasis added in In re W. Delta Oil

Co. ).

13 Id. at 28.

12 qualifications’” under § 327(e), 11 and opined that “for purposes of

determining the qualification of an applicant under § 328(e), the

court only considers whether an applicant’s interest is ‘adverse’

with respect to ‘ the matter on which such attorney is to be

employed .’” 12

Turning to the scope of Butler and Fenasci’s representation of

West Delta, the court determined that their defe nse against

Ingersoll’s Motion to Dismiss was unrelated to th eir interest in

Burrwood. Further, the court found that even if the matters were

sufficiently related to merit a “broader inquiry,” there was little

evidence connecting Butler and Fenasci to Burrwood. Finally, the

court noted that Butler a nd Fenasci’s defense against the motion

act ually benefitted the bankruptcy estate. The court next found

that although Fenasci’s representation of Wes t Delta in a matter

relating to I.G. presented a “potential conflict of interest,” the

contingent and preliminary nature of Burrwood’s existence never

gave rise to an “actual conflict” or an “adverse interest.” 13

The court conclud ed that any adverse interest generated by

Butler and Fenasc i’s involvement with Burrwood was directed at

I.G., not the bankruptcy estate. Based on these determinations,14 W. Delta Oil Co. v. Fenasci

, No. Civ. A. 03-0330, 2004 WL 1770110 (E.D.

La. Aug. 6, 2004).

13 the court held that, in its discretion, the fee applications of

Butler and Fenasci would be granted. I.G. appealed this order to

the district court, which affirmed. 14 The court found that even if

the Burrwood negotiations were more than preliminary and an actual

conflict existed, t hese facts would not have compelled the

bankruptcy court to deny fees. Accordingly, the district court

held that the bankruptcy court did not abuse its discretion when it

granted Butler’s and Fenasci’s fee applications. I.G. timely

appealed this decision.

II

On appeal, I.G. argues that the bankruptcy and district courts

abused their discretion in determining that Butler and Fenasci’s

involvement with Burrwood and failure to disclose such involvement

did not warrant denial or reduction of their attorney’s fees. In

addition, I.G. contends that the bankruptcy and district courts

erred as a matter of law in granting Butler’s and Fenasci’s

untimely filed fee applications. Because we conclude that the

bankruptcy court abused its discretion in excusing Butler and

Fenasci ’s conflict of interest, we need not reach I.G.’s second

contention.

We review a decision of the district court affirming a

decision of the bankruptcy court “by applying the same standards of15 In re Crowell , 138 F.3d 1031, 1033 (5th Cir. 1998).

16 See In re Barron , 325 F.3d 690, 692 (5th Cir. 2003).

17 Id. ; see In re Tex. Securities, Inc.

, 218 F.3d 443, 445 (5th Cir. 2000);

In re Fender , 12 F.3d 480, 487 (5th Cir. 1994).

18 11 U.S.C. § 327(e).

19 Id.

14 review to the bankruptcy court’s findings of fact and conclusions

of law as applied by the district court.” 15 To this effect, we

review a bankruptcy court’s determination of attorney’s fees for

abuse of discretion. 16 Specific findings of fact supporting the

award are reviewed for clear error, and conclusions of law are

reviewed de novo

. 17

As we have already discussed, 11 U.S.C. § 327(e) provides for

the employment of counsel by a bankruptcy trustee for “a specified

special purpose.” 18 Counsel employed under this subsection must

“not represent or hold any interest adverse to the debtor or to the

estate with respect to the matter on which such attorney is to be

employed.” 19 A court may deny compensation for services provided

by an attorney who holds such an adverse interest.

We have observed that these standards are “strict” and that

attorneys engaged in the conduct of a bankruptcy case “should be

free of the slightest personal interest which might be reflected in

their decisions concerning matters of the debtor’s estate or which

might impair the high degree of impartiality and detached judgment20 In re Consolidated Bancshares, Inc.

, 785 F.2d 1249, 1256 & n.6 (5th Cir.

1986) (internal quotation marks and citations omitted).

21 Id. (quoting Brennan’s v. Brennan’s Restaurant, Inc.

, 590 F.2d 168, 173-

74 (5th Cir. 1979)).

22 Id. (quoting Woods v. City Nat’l Bank & Trust Co. of Chicago , 312 U.S.

262, 268 (1940)). Two of our sister circuits have expressed a preference for

denying fees in the event that bankruptcy counsel is found to labor under a

conflict of interest. S ee In re Prince

, 40 F.3d 356, 360 (11th Cir. 1994) (“When

injury to the debtor’s estate occurs

. . . denial of fees is proper.”); Gray v.

English

, 30 F.3d 1319, 1324 (10th Cir. 1994) (“In exercising t he discretion

granted by the statute we think the court should lean strongly toward denial of

fees, and if the past benefit to the wrongdoer fiduciary can be quantified, to

require disgorgement of compensation previously paid that fiduciary even before

the conflict arose.”). This preference was couched in terms of the bankruptcy

court’s equitable power to deny fees in In re Watson Seafood & Poultry Co. :

There are compelling reasons for denying all fees when a conflict of

interest is present. Nevertheless, because the bankruptcy court is

a court of e quity, the bankruptcy judge should not be bound by a

completely inflexible rule mandating denial of all fees in all

cases. The general rule should be that all fees are denied when a

conflict is present, but the court should ha ve the ability to

deviate from th at rule in those cases where the need for attorney

discipline is outweighed by the equities of the case.

40 B.R. 436, 440 (Bankr. D.N.C. 1984).

15 expected of them during the course of administration.” 20

Accordingly, we are “sensitive to preventing conflicts of interest”

a nd require a “‘painstaking analysis of the facts and prec ise

application of precedent’” when inquiring into alleged conflicts. 21

If an act ual conflict of interest is present, “no more need be

shown . . . to support a denial of compensation.” 22

In addition, Federal Rule of Bankruptcy Procedure 2014(a)

requires any professional applying for employment to set forth “to

the best of the applicant’s knowledge” all known connections of the

applicant with the “debtor, credi tors, or any other party in

interest, their respective attorney s and accountants, the United23 In re Metropolitan Environmental, Inc.

, 293 B.R. 871, 887 (Bankr. N.D.

Ohio 2003) (collecting cases).

24 In re Crivello

, 134 F.3d 831, 836 (7th Cir. 1998); see Rome v.

Braunstein

, 19 F.3d 54, 59-60 ( 1 st Cir. 1994) (“[A]s soon as counsel acquires

even a constructive knowledge reasonably s u ggesting an actual or potential

conflict, a bankruptcy court ruling should be obtained. . . . Absent the

spontaneous, timely and complete disclosure required by section 327(a) and [Rule]

2014(a), court-appointed counsel proceed at their own risk .” (internal citations

omitted)).

16 States trustee, or any person employed in the office of the United

States trustee.” Although this provision does not explicitly

require ongoing disclosure, “case law has uniformly held that under

Rule 2014(a), (1) full disclosure is a continuing responsibility,

and (2) an attorney is under a duty to promptly notify the court if

any potential for conflict arises.” 23 “Though this provision allows

the fox to guard the proverbial hen house, counsel who fail to

disclose timely and completely their connections proceed at their

own risk because failur e to disclose is sufficient grounds to

revoke an employment order and deny compensation.” 24

With this backdrop, we now proceed to examine whether, given

Butler and Fenasci’s involvement with Burrwood, they were

“disinterested” in the bankruptcy proceedings or had an interest

“adverse” to the bankruptcy estate.

The Bankruptcy Code defines “disinterested person” 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

h olders, by reason of any direct or indirect relationship to,25 11 U.S.C. § 101(14)(e).

26 46 B.R. 815, 827 (Bankr. D. Utah 1985), aff’d in relevant part and rev’d

and remanded in part on other grounds , 75 B.R. 402 (D. Utah 1987).

27 See In re AroChem Corp.

, 176 F.3 d 610, 623 (2d Cir. 1999); I n re

Crivello

, 134 F.3d at 835; see also In re Perry

, 194 B.R. 875, 878-79 (E.D. Cal.

1996); In re Caldor , 193 B.R. 165, 171 (Bankr. S.D.N.Y. 1996); In re Red Lion,

Inc.

, 166 B.R. 296, 298 (S.D. Tex. 1994); I n re Lee

, 94 B.R. 172, 177 (Bankr.

C.D. Cal. 1988).

28 See Louisiana Rules of Professional Conduct 1.7, 1.8 (2004 ed.); In re

Prince

, 40 F.3d at 360 (“The accurate measure of prejudice

. . . is not what [the

attorney] actually did or did not do in handling [the debtor’s] case, but rather

whether [the attorney] could have unbiasedly made decisions in the best interest

of the client.”).

17 connection with, or interest in, the debtor.” 25 The Bankruptcy Code

does not define the phrase “represent or hold any interest adverse

to the debtor or to the estate,” and our court has not had occasion

to elaborate upon it. In I n re Roberts , the United States

Bankruptcy Court for the Distric t of Utah determined that the

nearly identical phrase in § 327(a) meant:

(1) to possess or assert any economic interest that

wo uld tend to lessen the value of the bankruptcy

estate or that would create either an actu al or

potential di spute in which the estate is a rival

claimant; or

(2) to possess a predisposition under circumstances

that render such a bias against the estate. 26

This definition has been employed by at least two circuit courts,

as well as a number of district and b ankruptcy courts. 2 7 While

helpful, this definition must be employed with an eye to the

specific facts of each case, and with attention to circumstances

which may impair a professional’s ability to offer impartial,

disinterested advice to his or her client. 28 Thus, both definitions29 The bankruptcy court stated that the Bankruptcy Code is “not primarily

or even necessarily concerned with the protection or payment of the equ i ty

interest in the debtor.” S ee In re W. De lta Oil Co. , No. 99-10406, at 28-30

(Bankr. E.D. La. Oct. 7, 2003) (unpublished). At the same time, however, the

court seemed to dist inguish the new equity owner (I.G.) from the old equity

owners (the shareholders of West Delta), presumably because the l atter were

protected by the Bankruptcy Code. Whatever the court’s holding, it is clear that

18 h ave as their critical element the presence of an “adverse

interest.”

Turning to the facts here, we have little difficulty reaching

the conclusion that Butler and Fenasci’s involvement with Burrwood

implicated their duty to report under Rule 2014(a) and constituted

a potential conflict with their client’s best interests. A lawyer

who simultaneously represents a debtor in a bankruptcy proceeding

and seeks to acquire a financial interest in the debtor faces

myriad quandaries, particularly in the liquidation context. In

essence, the lawyer is representing a seller (the debtor) and a

buyer (himself). Efforts to preserve and enhance the value of the

seller’s assets will work inevitably against the buyer’s interest

in purchasing at the lowest price possible. In addition, efforts

to market the seller to other pot ential bidders may drive up the

price, forcing buyers to increase their bids. Moreover, opting to

reorganize rather than liquidate may reduce or eliminate possible

avenues for anyone wishing to acquire specific economic interests.

In short, by operating as a potential buyer, a lawyer for a

bankruptcy estate possesses a predisposition to reduce the price of

the estate’s assets which works to the detriment of the estate, its

creditors, and its equity stakeholders. 29the Bankruptcy Code protects the equity holders of debtors, even though creditors

are paid first. Here, because under all of the proposed liquidation plans all

of the creditors were to have been paid fully, the bankruptcy court should have

been concerned with maximizing the payment to the equity hold ers. Thus, a

reduction in price of the estate would improperly harm West Delta’s equity

stakeholders - Ingersoll, DKCCB, and Muller.

19 We find no merit in Butler and Fenasci’s contention that they

possessed no interest adverse to West Delta because their

involvement with an inchoate entity composed of loosely affiliated

investors was merely preliminary in nature. While they failed in

their effort to acquire an interest in West Delta, this failure was

not for lack of effort. Specifically, they hired not one but two

agents to negotiate term s with Crescent. They actively made

preparations to collateralize the loan by engaging in discussions

with Hibernia National Bank officers, depositing monies, and

inquiring as to the propriety of pledging real property. When

pressed as to his source of funding prior to West Delta’s

withdrawal of its plan, Muller testified that his negotiations with

Burrwood were nearly complete, with only the question of the size

of the royalty i nterest left to be resolved. When West Delta

finally withdrew its plan, its trea surer cited as the reason

Burrwood’s egregious demands. Throughout this process, Butler and

Fenasci failed to disclose their participation in Burrwood to the

court or to their client. Regardless of whether they were involved

actively in the negotiation of terms or drafting of the West Delta

plan, Butler and Fenasci had a live inter est in play right up to

the point at which the bankruptcy court confirmed the I.G. plan.30 11 U.S.C. § 327(e) (emphasis added).

20 T he bankruptcy court’s determination that there was little

evidence to connect Butler and Fenasci to Burrwood, and that this

interest was so contingent as to constitute no interest at all,

ignores the reality that both Butler and F enasci testified to

taking affirmative steps in an effort to acquire a valuable

financial stake in their client. The ultimate s uccess of these

efforts is irrelevant--the active pursuit of success is sufficient

to give rise to an adverse interest here. The bankruptcy court’s

determination to the contrary was clearly erroneous.

Nor can we accept Butler and Fenasci’s contention that, given

the supposed narrow scope of their engagement by West Delta, their

involvement with Burrwood was not adverse to West Delta’s discrete

interests. As we have noted, special counsel employed under §

327(e) need only avoid possessing interests “adverse to the debtor

or to the estate with respect to the matter on which such attorney

is to be employed .” 30 As we have recounted, Butler and Fenasci

represented West Delta in opposing a motion to dismiss and a motion

to appoint a trustee filed by Ing ersoll. But they did more that

cannot be viewed properly as beyond the scope of their engagement

or a different “matter.” After working on these motions, Butler

and Fenasci, purporting to represent West Delta, wrote letters to

potential bidders thre a tening legal action, including Rule 11

sanctions and RICO. In essence, the lawyers were hampering a31 Indeed, Butler’s and Fenasci’s original applications for fees claimed

time spent in these later actions.

21 process - competitive bidding - designed to help the estate while

enhancing their investmen t opportunity. These later actions

redefined the scope of their employment as representation of West

Delta in the general liquidation process; 3 1 and their interests

there were clearly adverse to those of West Delta. Moreover, such

redefinition of scope was made manifest in Fenasci’s case when the

court expanded his engagement to include representation of matters

relating to I.G.; it can hardly be ga insaid that the “matter” on

w hich Fenasci was employed included his clandestine efforts t o

acquire a stake in West Delta, and at a discount, since

Burrwood/Crescent offered substantially less money than I.G.

We conclude that Butler and Fenasci were obligated to report

their involvement in Burrwood to the bankruptcy court pursuant to

Rule 2014(a). We also conclude that their interest in acquiring a

financial stake in West Delta through Burrwood was adverse to West

Delta. It created incentives to lessen the value of the bankruptcy

estate, incentives that were acted upon when they attempted to

chill the bidding process for the assets.

We hold that the bankruptcy court abused its discretion in

awardin g fees to Butler and Fenasci. Butler and Fenasci had an

interest adverse to that of the estate with respect to matters on

which they were employed, and in their efforts to promote that

interest they violated their duty to their client. There are32 It is irrelevant that no evidence exists pointin g to actual prejudice

to the estate. As the Supreme Court has made perfectly clear, such evidence is

not required because of difficulty of proof and because the problem is not just

“actual evil results” but the “tendency to evil in other cases.” Woods v. City

Nat’l Bank & Trust Co., 312 U.S. 262, 268 (1940).

22 sufficient grounds on which to deny attorney’s fe es. 32 The

bankruptcy court’s exercise of discretion was flawed by legal error

- the conclusion that Butler and Fenasci had no interest adverse to

that of the estate with respect to matters on wh ich they were

employed. The court, had it viewed the conflict properly, should

not have allowed attorney’s fees to Butler or Fenasci.

III

The judgment of the district court awarding attorney’s fees is

REVERSED.