Opinion ID: 3062086
Heading Depth: 5
Heading Rank: 2

Heading: The Trustee Was Disinterested

Text: 34 SMDI argues that conflicts of interest prevented Jubber from proposing a plan as a disinterested trustee. This argument turns on the Bankruptcy Code’s requirement that trustees be “disinterested.” § 1104(b), (d). In relevant part, the Code defines a disinterested person as someone 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 for any other reason.” § 101(14)(C).5 SMDI relies on the “for any other reason” portion of this definition. It contends, in essence, that ConsumerInfo’s payment to the estate of the Trustee’s litigation expenses under the APA—and its promise to continue to pay his fees as Trustee for the Liquidating Trust—created a disabling conflict. According to SMDI, the resulting “lack of disinterestedness tainted his administration of the case, the Joint Plan, and the plan confirmation process.” Conf. App., Aplt. Br. at 32. “These are serious matters that . . . go to the very integrity of the bankruptcy process in this case.” Paige, 584 F.3d at 1348. We hold bankruptcy trustees and the professionals they employ to a high standard where conflicts of interest are concerned; the “catch-all clause” upon which SMDI relies “is broad enough to exclude [a trustee] with some interest or relationship that ‘would even faintly color the independence and impartial attitude required by the Code and Bankruptcy Rules.’” Winship v. Cook (In re 5 The Trustee’s law firm was also subject to the disinterestedness requirement. Professionals employed by a trustee to administer the estate must be disinterested, and also cannot “hold or represent an interest adverse to the estate.” § 327(a). 35 Cook), 223 B.R. 782, 789 (B.A.P. 10th Cir. 1998) (quoting In re BH&P, Inc., 949 F.2d 1300, 1309 (3d Cir. 1991)). We are satisfied, however, that no such interest or relationship was present here. We emphasize, first, that although ConsumerInfo provided the funds which paid the Trustee’s fees, ConsumerInfo was not paying the fees directly. Rather, the estate itself paid the Trustee (upon his application for and receipt of the court’s approval), with money the estate received from ConsumerInfo pursuant to the court-approved APA. As the district court noted, “SMDI has failed to cite . . . a single case where a trustee’s court approved and non-personal relationships resulted in the denial of . . . confirmation [of a] plan because the trustee was not disinterested.” Paige, 439 B.R. at 793. We agree with the view the BAP expressed in the Fee Appeal that the bankruptcy court’s Sale Order—and not the Trustee or ConsumerInfo—was the source of any potential conflict or appearance of impropriety. Paige, 2010 WL 3699747, at  n.74; Paige, No. 08-62, slip op. at 7–8. SMDI never appealed or challenged that order. See Paige, 2007 WL 4143212, at . We recognize, as a general proposition, that “[a]n attorney representing a debtor should not receive payment, either directly or indirectly, from any of the creditors.” In re Huntmar Beaumeade 1 Ltd. P’ship, 127 B.R. 363, 365 (Bankr. E.D. Va. 1991) (quoting In re WPMK, 42 B.R. 157, 163 (Bankr. D. Haw. 1984)) (internal quotation marks omitted). But under the circumstances of this case, we are unwilling to take this principle so far as to bar the estate from paying the Trustee and his firm with 36 funds the estate received under a court-approved asset sale.6 A contrary conclusion, we believe, would have placed the estate in an untenable position. SMDI asks us to hold that the Trustee lost his disinterested status after the APA had already been approved, when ConsumerInfo acquired the CCB Claims. Conf. App., Aplt. Br. at 32. But as the BAP noted in the Fee Appeal, any other trustee stepping into Jubber’s shoes at that point would have been subject to the same obligations to ConsumerInfo under the APA, and any such trustee would have been paid by the estate with money from ConsumerInfo.7 Thus, if the Trustee was not disinterested, we fail to 6 We note that nothing in the record suggests that ConsumerInfo deliberately delayed asserting the CCB Claims so that it could first obtain court approval of the APA and then create a conflict. CCB filed its proof of claim in October 2006 for expenditures it made on development of the Domain Name. Fee App., Aplee. Br. at 10. In December, the court entered the Sale Order. CCB amended its claim in January 2007, and ConsumerInfo bought CCB’s rights and interests in the Domain Name that same month. As the Trustee points out in his Fee Appeal response brief, ConsumerInfo’s actions look less like a deliberate attempt to manufacture a court-endorsed conflict of interest, and more like an effort to “hedg[e] its bets” once it discovered that a new party might have a claim to the Domain Name. Id. at 32. 7 The BAP reasoned as follows: We observe, as a factual matter, that even if the Trustee and Counsel resigned from representing the estate when ConsumerInfo purchased the CCB conversion claim (as SMDI contends should have occurred), any successor trustee and its counsel would have inherited exactly the same alleged “adversity” or “conflict” that SMDI imputes to the Trustee and Counsel. The APA and Sale Order imposed obligations on the estate, the breach of which could have exposed the estate to litigation for specific performance and/or the assertion of an administrative claim by ConsumerInfo. SMDI contends that those very duties required the Trustee to favor ConsumerInfo’s interests over the interests of the estate’s other creditors, and created a conflict between the Trustee and the estate. This argument was rejected by the bankruptcy court in (continued...) 37 see how any substitute trustee could have been disinterested either. SMDI suggests that special counsel or an examiner could have been appointed for the purpose of evaluating the CCB Claims. Conf. App., Aplt. Br. at 36 n.191. But since all of the money in the estate came from ConsumerInfo, any such professional still would have been receiving payment from ConsumerInfo via the estate, just as the Trustee and his firm did. SMDI also argues that it should have been allowed to object to the CCB Claims. Id. The bankruptcy court, however, told SMDI that it could contest ConsumerInfo’s claims by 7 (...continued) the unappealed Sale Order when it overruled “on [its] merits with prejudice” SMDI’s objection that the APA required the Trustee to “surrender [his] business judgment and independence to ConsumerInfo.” Under SMDI’s interpretation of Sections 327(a) and 101(14), no one could have qualified to be employed to represent the estate or to carry out the estate’s duties under the APA and Sale Order because every successor trustee would be faced with the same circumstances and thus the same alleged conflict. The alleged conflict was inherent in the position of trustee as a representative of the estate; it is not personal to this Trustee or Counsel. Paige, 2010 WL 3699747, at  n.74. The BAP stood by this analysis in its denial of SMDI’s motion for rehearing, stating: The alleged “conflict” between the Trustee’s duty to perform the APA and the Trustee’s duty to address the CCB-Related Claims was . . . situational and inherent in the posture of the case. . . . [I]f these two overlapping events disqualified the Trustee and Counsel from representing the estate, anyone else seeking to be employed to represent the estate would be confronted with the same conflict. Retaining special “independent counsel,” as suggested by SMDI, would not have altered the status quo because special counsel would still be employed and directed by the Trustee. Paige, No. 08-62, slip op. at 7–8. We find the BAP’s reasoning persuasive. 38 filing counterclaims within the Adversary Proceeding, and it chose not to do so. Paige, 2007 WL 4143212, at . Finally, SMDI suggests that “[t]he APA could have been modified.” Conf. App., Aplt. Br. at 36 n.191. It does not explain how. Simply put, we see no effective solution the bankruptcy court could have implemented, short of barring ConsumerInfo outright from pursuing the CCB Claims or else taking over the role of the Trustee. SMDI offers no authority for either approach, and we are aware of none. iii. ConsumerInfo’s Pre-Sale Order Conduct Does Not Demonstrate Bad Faith SMDI also argues that ConsumerInfo’s pre-APA conduct demonstrates that the Joint Plan was not proposed in good faith. According to SMDI, ConsumerInfo acted in bad faith to prevent Paige from filing a joint plan with SMDI. Then, SMDI argues, ConsumerInfo was able to obtain court approval of the APA because no plan had been proposed. According to SMDI, the APA, in turn, prevented SMDI from gaining confirmation of its own plan. Thus, SMDI argues that the bankruptcy court should have refused to confirm the Joint Plan on the basis that it was not proposed in good faith. Conf. App., Aplt. Br. at 45–46. We disagree. The bankruptcy court made specific factual findings, in its memorandum decision confirming the Joint Plan, regarding the conduct of Paige and ConsumerInfo. The bankruptcy court “f[ound] any allegations of attempted bribery of Mr. Paige or subversion of a purported joint plan by the Debtor and SMDI unsubstantiated.” Paige, 2007 WL 4143212, at . The court also acknowledged that it had been troubled by 39 ConsumerInfo’s conduct, but said that “any concerns of the Court . . . have been addressed and allayed by the Joint Plan proponents in the evidence presented.” Id. The court concluded that “Mr. Paige ignored the advice of his own attorney and kept his attorney in the dark regarding his contacts with ConsumerInfo.” Id. Although the court thought “ConsumerInfo’s attorneys should have known that . . . Mr. Paige was being represented by counsel, . . . engaging in these communications, albeit possibly improper under ethical rules, does not translate into filing of a plan by ‘means forbidden by law’ and not in ‘good faith’ eight months later.” Id. In the court’s view, the passage of eight months from the sale hearing to when the Joint Plan was filed “erodes and waters down much of the argument that SMDI has made.” Id. at . The bankruptcy court also determined that SMDI was not prejudiced by ConsumerInfo’s conduct. Rather, SMDI’s failure to file a plan prior to the sale hearing resulted primarily from SMDI’s “mistaken belief that the Debtor had the exclusive right to file a plan after conversion of the case to one under Chapter 11. SMDI . . . was waiting on the Debtor to file a joint plan. SMDI has since acknowledged that this interpretation was incorrect.” Id. at . Furthermore, “if SMDI was prejudiced between October 13 and December 7,” the court determined that “it was because of Mr. Paige’s conduct and not because of any wrongdoing by ConsumerInfo or its counsel.” Id. These factual findings are not clearly erroneous.8 8 SMDI argues that the bankruptcy court only arrived at these conclusions because (continued...) 40 The district court concluded that even if the bankruptcy court’s interpretation of good faith under Pikes Peak was overly narrow, “SMDI’s allegations of improper interference by ConsumerInfo are unpersuasive.” Paige, 439 B.R. at 796. We agree. Even if ConsumerInfo’s attorneys acted improperly in the period preceding the Sale Order, these actions did not prevent the SMDI Plan from receiving “an adequate and balanced appraisal.” Paige, 584 F.3d at 1348. Considering the bankruptcy court’s findings of fact, “the bankruptcy court did not err in finding that ConsumerInfo’s conduct was not in bad faith.”9 Paige, 439 B.R. at 796. 8 (...continued) it refused to consider some of SMDI’s evidence. In particular, SMDI objects to the bankruptcy court’s failure to consider transcriptions of voicemails Paige left for ConsumerInfo’s attorneys and its refusal to allow SMDI to call ConsumerInfo’s attorneys as witnesses. Conf. App., Aplt. Reply Br. at 15–16 (citing Conf. App., Aplt. App. at 2685–97). As we read them, however, the transcribed voicemails do not contradict the bankruptcy court’s findings. We do not think the bankruptcy court abused its discretion in declining to make ConsumerInfo’s attorneys testify about them, see Paige, 439 B.R. at 797 (“The excluded voice mails did not show any evidence of bribery and it is unclear what testimony from ConsumerInfo’s counsel would have added.”), or in excluding any of the other evidence to which SMDI points, Rinehart v. Sharp (In re Sharp), 361 B.R. 559, 565 (Bankr. W.D. Okla. 2007) (“When a trial court excludes evidence upon which the offering party properly objects, we will reverse only if the exclusion is an abuse of discretion that results in manifest injustice to the parties.” (quotation omitted)). 9 We do not reach ConsumerInfo’s contention that SMDI’s good faith arguments are barred because SMDI did not appeal the bankruptcy court’s Sale Order. ConsumerInfo suggests somewhat vaguely that the Sale Order constitutes the law of the case, that the Sale Order “was res judicata on the parties and the court,” and that SMDI’s good faith arguments are an impermissible collateral attack on the Sale Order. Conf. App., Aplt. Br. at 40–41. Because we affirm the bankruptcy court’s determination that the Joint Plan was proposed in good faith, we need not rule on these arguments. 41