Court Opinion

ID: 8995843
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:36:11.461776+00
Date Added: 2024-06-11T17:11:02.884810
License: Public Domain

HUTCHINSON, Circuit Judge,
concurring and dissenting.
In accord with what I believe is controlling Circuit precedent, I concur with the Court’s holding that our appellate jurisdiction is unaffected by that portion of the district court’s order remanding the case to the bankruptcy court for further reconsideration of the issue of whether the trustee and his counsel are entitled to compensation for their work prior to removal. I write separately on the jurisdictional issues to express my unease with certain aspects of this Circuit’s jurisprudence on the ap-pealability of orders entered by district courts that affect ongoing bankruptcy cases.
On the merits, I respectfully disagree with the Court’s conclusion that the bankruptcy court’s removal of the interim trustee and his counsel was a proper exercise of discretion. Therefore, I respectfully dissent from that aspect of the Court’s opinion.
I.
My concurrence on the jurisdictional issue is compelled by the cases this Court has decided on appellate jurisdiction under 28 U.S.C.A. § 158(d) (West Supp.1991). See In re Colon, 941 F.2d 242, 244-45 (3d Cir.1991); F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103 (3d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 110 (1988); Wheeling-Pittsburgh Steel Corp. v. McCune, 836 F.2d 153, 157-58 (3d Cir.1987); In re Meyertech Corp., 831 F.2d 410, 414 (3d Cir.1987); In re Christian, 804 F.2d 46, 47-48 (3d Cir.1986); see also In re Amatex Corp., 755 F.2d 1034, 1036-41 (3d *1319Cir.1985) (utilizing similar finality analysis in deciding 28 U.S.C.A. § 1291 provided jurisdiction where district court had original jurisdiction over bankruptcy matter); In re Comer, 716 F.2d 168, 171-74 (3d Cir.1983) (utilizing similar finality analysis in deciding jurisdiction question under 28 U.S.C.A. § 1293, predecessor to section 158(d)); In re Marin Motor Oil, Inc., 689 F.2d 445, 447-449 (3d Cir.1982) (same), cert. denied, 459 U.S. 1207, 103 S.Ct. 1196, 75 L.Ed.2d 440 (1983); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 100-01 (3d Cir.1981) (same). But see In re Brown, 803 F.2d 120, 121-23 (3d Cir.1986) (remand order not final under section 158(d) even though hearing the appeal would end the litigation because the order did not affect the distribution of assets or the relationship among creditors). The Court cites some of these cases in support of its holding that the district court’s order is a final one under the flexible test we apply in bankruptcy and so is appealable as a final order under section 158(d). . See Majority Opinion, at 1305-07. Since I too believe those cases control the issue of appellate jurisdiction, I am bound to follow them under our Internal Operating Procedures. Internal Operating Procedure of the U.S. Ct. of App. for the 3d Cir. 9.1 (July, 1991).
Nevertheless I have an uneasy feeling that our case law on the concept of finality under section 158(d) incorrectly equates efficiency in the administration of a particular estate with over-all efficiency in the operation of our bankruptcy system. In applying the efficiency factor to decisions concerning the finality and appealability of orders of our district courts, I think more consideration should be given to the effect a particular decision will have on efficient functioning of the bankruptcy system than on the efficient disposition of the .particular bankruptcy case under consideration. If we become mesmerized by the impact a merits decision has on the administration of the case before us, it is all too easy to decide that appellate treatment of the merits serves the goal of efficiency. See, e.g., In re Brown, 803 F.2d at 122 (“By allowing parties to appeal discrete issues within a single bankruptcy proceeding, we have sought to avoid the waste of resources that would result from insisting upon the completion of proceedings prior to any appeal.”).
In serving the immediate desire to expedite the case, we may sometimes undervalue the need for overall efficiency that lies at the core of the finality principle. When decisions to advance the immediate cause unduly increase the number of appeals, the system’s efficiency suffers. See Flanagan v. United States, 465 U.S. 259, 264, 104 S.Ct. 1051, 1054, 79 L.Ed.2d 288 (1984) (Finality “reduces the ability of litigants to harass opponents and to clog the courts through a succession of costly and time-consuming appeals.”).1 Since “justice delayed” is indeed all too often “justice denied,” its efficient administration in the immediate particular can thus sometimes lead to generalized injustice.
Here the district court order appealed from remands the dispute over interim compensation to the bankruptcy court for reconsideration of its decision not to award fees for work on the Herman and Berkow estates. On remand, the bankruptcy court may affirm its earlier decision not to award any fees or it may award fees in an amount less than that sought by BH & P. In either case, Maggio and his counsel or any other aggrieved party could again appeal to the district court and to us in turn. This multiplication of the possibilities for appeal leaves me unsure that our jurisprudence on finality under section 158(d) has struck the right balance between overall efficiency and case-oriented flexibility.
In F/S Airlease, we stressed that immediate resolution of the issue involved “could obviate the need for further action by the bankruptcy court.” F/S Airlease, 844 F.2d at 104. Here, in contrast, the bank*1320ruptcy court will have to take further action regardless of our determination. If we affirm, the bankruptcy court will reconsider its ruling pursuant to the district court’s decision that the failure to disclose was not willful; if we reverse, the bankruptcy court will have to decide whether the amount of interim compensation requested was reasonable; if we vacate and remand, the bankruptcy court will have to consider the removal and fee issues under a proper legal standard.
Thus, these appeals do little to advance even the efficient administration of this case. Without them, present counsel and the trustee could still have appealed the bankruptcy court’s decision to deny them compensation under section 158(d) at the end of the proceeding, and so seek appellate correction of any error the bankruptcy court might have made in denying them compensation for services already rendered. Moreover, the immediate replacement of Maggio and his counsel may have mooted the removal issue.2
Despite these concerns, I have concluded that F/S Airlease and the other cases the Court cites on the flexible concept of finality section 158(d) implies control the issue of appellate jurisdiction. Thus, I concur in the holding that we have appellate jurisdiction.3
II.
I agree with much of the Court’s reasoning on the merits of the bankruptcy court’s decision to remove the interim trustee and his counsel because the interim trustee is not a disinterested person under 11 U.S.C.A. § 101(14)(E) (West Supp.1991) and his counsel is likewise not a disinterested person who “hold[s] or represents] an interest adverse to the estate” within the meaning of 11 U.S.C.A. § 827(a) (West 1979). I am in especially strong agreement with the Court’s conclusion that the rebut-table presumption the bankruptcy court relied on to disqualify a trustee from serving in jointly administered cases where there are interdebtor claims is so “overbroad” that it would drastically curtail, if not eliminate the efficiencies of joint administration. See Majority Opinion, at 1811. I also find no fault with the Court’s analysis of the applicable statutory law and its conclusion that the question of whether an interim trustee and his counsel should be disqualified from representing some estates that are being jointly administered because the estate of one has claims against the estate of one or more related entities or individu*1321als rests within the sound discretion of the bankruptcy court. Id. at 1313. On the merits, my disagreement with the Court is limited to its conclusion that the bankruptcy court, on the facts of this case, did not abuse its discretion when it removed Mag-gio and his counsel for conflicts of interest.
As the majority has demonstrated, the bankruptcy court’s presumption against appointment of a single trustee for joint administration of related estates whenever one estate has claims against the other is legally incorrect. Accordingly, the bankruptcy court’s exercise of its discretion to remove Maggio and his counsel was made in consideration of an improper factor. Therefore, we should vacate the district court’s order affirming the bankruptcy court’s disqualification order, with instructions to vacate the bankruptcy court’s order and remand the case to the bankruptcy court for an exercise of discretion under correct legal standards. See Universal Minerals, Inc., 669 F.2d at 102 (“[t]o the extent the parties challenge the choice ... of legal precepts, we always employ the fullest scope of review”).
I also disagree with the majority’s holding there was no abuse of discretion because I think that even absent the presumption created by the bankruptcy court the present record cannot support a finding that either Maggio or his counsel had presently existing conflicts of interest that could have affected their status as disinter ested persons in any material way. Thus, I think the bankruptcy court’s finding that an actual conflict existed in this case is clearly erroneous. See Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir.1988) (“in reviewing the district court’s review of the bankruptcy court’s factual findings, we, like the district court, employ the ‘clearly erroneous’ standard”). If so, the district court’s affirmance of that finding, see Matter of BH & P, Inc., 119 B.R. 35, 43 (D.N.J.1990), is therefore legally incorrect.
In either case, the district court should have vacated the bankruptcy court’s removal order and remanded that issue to the bankruptcy court. There the record could be further developed as to whether the putative conflict of interest facing the trustee and his counsel with respect to the BH & P estate’s claims against the bankrupt estates of its individual stockholders was “material.” My more detailed reasoning follows.
The bankruptcy court held that its over-broad presumption can be rebutted when “the possibility that the conflict will become actual is remote and circumstances make use of a common fiduciary and professional particularly compelling.” In re BH & P, Inc., 103 B.R. 556, 572 (Bankr.D.N.J.1989), affd in part and vacated in part, 119 B.R. 35.4 It went on, however, to find an actual conflict saying:
An argument could be made that there is only a potential conflict until it is certain that the estates of Herman and Ber-kow have sufficient funds to pay a dividend. However, the more the trustee and professional succeed in increasing the size of the Herman and Berkow estates, the greater the likelihood that they would be in the impossible position of having to review their own claims on behalf of BH & P. That problem certainly does not appear conducive to putting forth one’s best efforts on behalf of the Herman and Berkow estates, if success ultimately means disqualification. The court does not have any evidence at this point that the trustee or professional have failed to pursue all assets of the Herman and Berkow estate [sic] vigorously. .
Id. at 565-66.
Because the bankruptcy court employed the phrases “actual conflict” and “potential conflict” I too use them despite my agreement with those cases that hold there is no meaningful distinction between “actual” and “potential” conflicts of interest. See, e.g., id. (distinction is “elusive and perhaps illusory”); In re Kendavis Indus. Int'l, Inc., 91 B.R. 742, 754 (Bankr.N.D.Tex.*13221988). I think we could more accurately refer to “present” or “existing” conflicts of interest as opposed to'those conflicts that may or are likely to arise as events unfold. Whatever terms we use, I believe that “materiality” adequately distinguishes those cases in which disqualification is appropriate from those in which it is not.
On the issue of materiality, we know from this record that the bankruptcy court established deadlines applicable to filing both proofs of claim and nondischargeability complaints in the Herman and Berkow proceedings. Maggio was forced to file proofs of claim against the Herman and Berkow estates to preserve any claim BH & P might have against those estates for potentially voidable transfers of assets to various real estate tax shelters. Aside from their filing, decisions on the validity and amount of BH & P’s claims was deferred.5
As pointed out by the trustee and his counsel, the future disposition of these claims was likely to be no more than “academic” because the Herman and Berkow estates had no funds to pay unsecured creditors. An examination of the schedules filed in the individual debtors’ estates shows that Herman has scheduled liabilities, including contingent liabilities on his guaranties of BH & P’s obligations, that total more than $40,000,000.00, but has only about $3,000.00 in unencumbered assets. His schedules also list monthly income of about $8,300.00 and expenses of about $8,500.00. The schedules filed by Berkow are similar. Although I realize that additional assets may be uncovered, the remaining factual background of these estates, as recited by the Court, convinces me that at this point in the proceedings the possibility of uncovering or recovering into the Berkow and Herman estates sufficient assets to permit any significant recovery on the BH & P estate’s claims against those two estates is so unlikely and remote as to be “[im]material” within the meaning of section 101(14)(E).
The joint administration of all three estates had continued in an orderly manner for almost one year after the trustee filed the protective proofs of claim and nondis-chargeability complaints against the Herman and Berkow estates. Then, the trustee and his counsel, just before the removal proceedings began, filed an adversary proceeding on behalf of BH & P. By it, they sought to avoid, to the extent of $1,300,-000.00, the secured status of the Bank of New York’s lien on BH & P’s assets for a debt said to be in excess of $10,000,000.00.6 Even if only the remaining $8,700,000.00 of the $10,000,000.00 debt the Bank of New York claims is secured by its lien on BH & P’s assets, the liquidation of the Bank's lien is likely to exhaust all the known assets of the three estates.7 Accordingly, any conflict between the three estates that might be occasioned by the claims Maggio and his counsel filed for BH & P against the Herman and Berkow estates has not yet arisen and it is unlikely that it ever will. At best, the filing of the claims creates a future, not a present, conflict of interest, and the facts, as known at this time, are simply not sufficient to warrant a conclusion that this future conflict is material enough to warrant disqualification of either the trustee or his counsel or a denial of *1323fees for work performed on the Herman and Berkow estates before disqualification. Considering the likelihood, or rather the lack of likelihood, that any BH & P recovery from the Herman and Berkow estates could significantly affect the rights of other creditors of the three estates, I think that the bankruptcy court’s finding of an existing material conflict requiring removal is clearly erroneous.
Finally, I note that this Court’s opinion on the merits of this appeal sets forth a new standard for evaluating the effect of conflicts of interest on the joint administration of related bankruptcy estates. It gleans that standard from the decision of the United States Court of Appeals for the First Circuit in In re Martin, 817 F.2d 175 (1st Cir.1987). Under that newly announced standard, I would remand this case to the bankruptcy court for careful consideration of the following principle:
The naked existence of a potential for conflict of interest does not render the [arrangement] nugatory, but makes it voidable as the facts may warrant. It is for the [bankruptcy] court to decide whether the [arrangement] carries with it a sufficient threat of material adversity to warrant prophylactic action....
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[H]orrible imaginings alone cannot be allowed to carry the day.
In re Martin, 817 F.2d at 182-83, quoted in Majority Opinion, at 1312-13.
In considering this standard, I think the bankruptcy court might well conclude that the requisite “threat of material adversity” is absent from this record. Indeed, the bankruptcy court specifically found that there was no evidence that the interim trustee or his counsel failed to vigorously pursue the interests of all three estates. If sufficient assets are recovered, other steps such as the appointment of special counsel could resolve any conflict at that time. See In re O.P.M. Leasing Servs., Inc., 16 B.R. 932, 939-40 (Bankr.S.D.N.Y.1982). “To act earlier in a preemptive manner could result in confusion and interruption of the orderly administration of ... bankruptcy proceedings and cause ... unnecessary great expense.” Id. at 939. The bankruptcy court’s finding of an actual conflict also ignores the legislative history of the Bankruptcy Code which shows that joint administration of estates is preferred whenever it is cost efficient. See 13A Collier on Bankruptcy 1110-115.04 (14th ed. 1977). Joint administration serves to ameliorate proliferation of trustees and attorneys whose separate fees can inflate administrative expenses to the detriment of other creditors.
For these reasons, I respectfully dissent from the Court’s ruling on the merits. Instead, I would vacate the order of the district court and remand the case to it with instructions to remand in turn to the bankruptcy court for the purpose of examining the removal question under the legal standard set forth by the Court.

. Outside the field of bankruptcy, the disruptive effect of appeals from decisions determining whether counsel is to be disqualified for conflict of interest provides the rationale for the firm rule in federal jurisprudence that orders relating to counsel’s disqualification are interlocutory and so unappealable. See Flanagan, 465 U.S. at 260, 104 S.Ct. at 1052.

. In this connection I note several developments in the bankruptcy court that the parties did not refer to on this appeal. Maggio was replaced in both the Herman and Berkow proceedings before the bankruptcy court’s August 23, 1989 order disqualifying him. Maggio was replaced in the Herman proceeding on August 7, 1989 and at some point before July 31, 1989 in the Ber-kow proceeding. Maggio’s counsel was replaced in the Berkow proceeding on July 31, 1989 and, after the disqualification order, in the Herman proceeding. The Bank of New York, after it succeeded in securing an order from the bankruptcy court removing the interim trustee and his counsel and denying them compensation for work on the Herman and Berkow estates, decided not to participate in this appeal despite this Court’s request that it consider filing a brief. Its non-participation required the Court to secure the services of an amicus in order to obtain adversary briefing of the important issues this case presents. Ultimately, the adversary proceeding Maggio filed against the Bank of New York was dismissed by a consent order on December 11, 1989.

. Although neither this Court nor the district court examined the finality of the bankruptcy court’s order removing the trustee and his counsel and denying them compensation under 11 U.S.C.A. § 158(a), this area of our jurisprudence may also warrant re-examination as to whether such orders are properly classified as final or interlocutory. If interlocutory, the district court's subject matter jurisdiction over the appeals of the trustee and his counsel would be discretionary. Particular orders removing or retaining experts that do seriously affect the rights of parties interested in the administration of a bankrupt’s or a debtor’s estate and are so beyond the bounds of propriety as to constitute an abuse of discretion may be subject to adequate control under the discretionary power section 158(a) gives a district court to hear and decide appeals from interlocutory orders of bankruptcy courts. An appeal of such orders by grace of the district court could arguably be more efficient than the present practice of granting any aggrieved party who wishes to attack the bankruptcy court’s discretion in selecting or retaining experts an immediate appeal as of right.

. Thus, the effect of the improper presumption cannot be isolated from the discretionary result the bankruptcy court reached in this case. At the very least, it may have improperly shifted the burden of proof from the party seeking disqualification to the trustee and his counsel.

. After instructing the trustee and his counsel to employ a "wait and see" approach regarding any potential conflicts, see Affidavit of Gary N. Marks, Esq., reprinted in Appendix (App.) at 287, the United States trustee now argues as amicus that the trustee and his counsel should be disqualified on the basis of an actual conflict of interest.

. About two months after the trustee filed this adversary complaint, the Bank of New York objected to the interim trustee’s and his counsel’s petition for interim compensation, asserting the conflict of interest that ultimately led the bankruptcy court to remove the trustee and his counsel and finally deny them the interim compensation they sought for their work on the Herman and estates. Even the bankruptcy court, which ruled against the trustee and his counsel, "recognizefd] that the timing of th[e] objection has a peculiar smell to it.” Id. at 275.

.This would almost certainly be the case in the event the three estates were consolidated. The record indicates consolidation is a possibility. The Bank of New York also has a contingent unsecured claim against the Herman and Ber-kow estates since the individual debtors personally guaranteed BH & P’s $10,000,000.00 indebtedness to it.