Court Opinion

ID: 39969
Source: CourtListenerOpinion
Date Created: 2010-04-25 20:38:14+00
Date Added: 2024-06-11T17:16:23.728047
License: Public Domain

United States Court of Appeals
                                                               Fifth Circuit
                                                            F I L E D
              In the United States Court of Appeals
                                                           December 1, 2005
                      For the Fifth Circuit
                                                        Charles R. Fulbruge III
                    _________________________                   Clerk

                           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

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

held by James Ingersoll, Jr. and DKCCB Trust, in equal parts;
Donald Muller, 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 liquidate.         Under the plan, all of its assets were to be

transferred to Crescent Oil, an entity 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 four 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.

      1
        See In re W. Delta Oil Co., No. Civ. A. 99-1995, 2000 WL 108919 (E.D. La.
Jan. 28, 2000) (unpublished).

                                         2
     Meanwhile, the Chapter 11 proceedings intensified On February

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

Directors,    by   letter   to   David       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 operations 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 except the claims of

                                         3
        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 the 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 negotiations

      2
        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
were ongoing, that his contact at Burrwood Oil was a man named

Chris Ezell, and that he had met no one else involved 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 committed 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 increasing 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 of

                                   5
$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, requesting attorney’s fees in the

amount of $38,369 for services rendered from 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 Engine; 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 applications for compensation,

grounding its argument in part on its discovery that Butler and

Fenasci were two of the investors behind Burrwood Oil.                 At his

deposition, which was introduced into evidence at the bankruptcy

court’s September 22, 2000 hearing on the applications, Butler

claimed that sometime in May, April, or June of 1999, he floated

       3
        Earlier, on February 17, 2000, the bankruptcy court had imposed a March
30, 2000 deadline for all administrative claims to be filed.

                                        6
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” if 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 employed a second negotiator,

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

when Haik fell ill.      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 security

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 existence 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 name

                                      7
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 information provided by West Delta

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

liquidate to Crescent:

     The only thing that had to be worked out was the terms
     and conditions with the [Burrwood] investors. Basically,
     there was [sic] investors putting up collateral to
     support 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, the bankruptcy court entered an order

holding   that    Fenasci   and   Butler’s   failure   to   disclose   their

participation in Burrwood did not warrant rejection of their fee

applications.     The court recounted that

     [a]t one time, Burrwood Oil company was negotiating 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 operations

                                      8
     as a result of a failure to file a plan, Burrwood 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 described 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 and 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 detailing the services (and dates of

     4
        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
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 Louisiana 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   bankruptcy   court   abused    its    discretion    by   granting

untimely fee applications without applying the appropriate legal

standard for deciding whether there was cause or excusable neglect.

In addition, the district court held that the bankruptcy court

failed to inquire properly as to whether Butler and Fenasci’s

participation        in   Burrwood    gave    rise    to   a   possible   “adverse

interest” to West 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   Partnership8       and   determined   that

Butler’s and Fenasci’s fee applications were granted properly under

      6
        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
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   determined    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.

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

represent the debtor 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 employed.’”10             The court then noted that

great latitude is allowed “‘in assessing conflict of interest

      9
        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
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   defense   against

Ingersoll’s Motion to Dismiss was unrelated to their 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 and Fenasci’s defense against the motion

actually benefitted the bankruptcy estate.                The court next found

that although Fenasci’s representation of West 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 concluded that any adverse interest generated by

Butler and Fenasci’s involvement with Burrwood was directed at

I.G., not the bankruptcy estate.               Based on these determinations,

        11
        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
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,    these   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 of

      14
         W. Delta Oil Co. v. Fenasci, No. Civ. A. 03-0330, 2004 WL 1770110 (E.D.
La. Aug. 6, 2004).

                                        13
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 judgment

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

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

and require a “‘painstaking analysis of the facts and precise

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

If an actual 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, creditors, or any other party in

interest, their respective attorneys and accountants, the United

      20
        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. See 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 the 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 equity, 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 have the ability to
      deviate from that 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
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 failure 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

holders, by reason of any direct or indirect relationship to,

      23
        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 (1st Cir. 1994) (“[A]s soon as counsel acquires
even a constructive knowledge reasonably suggesting 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
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 In re Roberts, the United States

Bankruptcy Court for the District of Utah determined that the

nearly identical phrase in § 327(a) meant:

      (1)     to possess or assert         any economic interest that
              would tend to lessen        the value of the bankruptcy
              estate or that would         create either an actual or
              potential dispute 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 bankruptcy courts.27                  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 definitions

      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.3d 610, 623 (2d Cir. 1999); In 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); In 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
have    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 potential 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.29

       29
        The bankruptcy court stated that the Bankruptcy Code is “not primarily
or even necessarily concerned with the protection or payment of the equity
interest in the debtor.” See In re W. Delta 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 distinguish the new equity owner (I.G.) from the old equity
owners (the shareholders of West Delta), presumably because the latter were
protected by the Bankruptcy Code. Whatever the court’s holding, it is clear that

                                      18
       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 terms 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 interest left to be resolved.                       When West Delta

finally withdrew its plan, its treasurer 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 interest in play right up to

the point at which the bankruptcy court confirmed the I.G. plan.

the 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 holders.         Thus, a
reduction in price of the estate would improperly harm West Delta’s equity
stakeholders - Ingersoll, DKCCB, and Muller.

                                          19
     The 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 Fenasci testified to

taking affirmative        steps   in   an   effort   to   acquire   a   valuable

financial stake in their client.            The ultimate success 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 Ingersoll.             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 threatening legal action, including Rule 11

sanctions and RICO.         In essence, the lawyers were hampering a

     30
          11 U.S.C. § 327(e) (emphasis added).

                                       20
process - competitive bidding - designed to help the estate while

enhancing     their    investment   opportunity.        These   later   actions

redefined the scope of their employment as representation of West

Delta in the general liquidation process;31 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 gainsaid that the “matter” on

which Fenasci was employed included his clandestine efforts to

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

awarding 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 are

      31
         Indeed, Butler’s and Fenasci’s original applications for fees claimed
time spent in these later actions.

                                      21
sufficient    grounds   on   which   to    deny   attorney’s   fees.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 which 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.

      32
         It is irrelevant that no evidence exists pointing 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