In Re:Congoleum Corp , 426 F.3d 675 ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
10-13-2005
In Re:Congoleum Corp
Precedential or Non-Precedential: Precedential
Docket No. 04-3609
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-3609
IN RE: CONGOLEUM CORP., ET AL.
CENTURY INDEMNITY COMPANY, AS SUCCESSOR TO
CCI INSURANCE COMPANY, AS SUCCESSOR TO
INSURANCE COMPANY OF NORTH AMERICAN;
ACE AMERICAN INSURANCE COMPANY f/k/a
CIGNA INSURANCE COMPANY; ACE PROPERTY
& CASUALTY INSURANCE COMPANY f/k/a CIGNA
PROPERTY & CASUALTY INSURANCE COMPANY,
Appellants
vs.
CONGOLEUM CORPORATION; CONGOLEUM SALES,
INC.; CONGOLEUM FISCAL, INC.
____________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 04-cv-01709)
District Judge: Honorable Stanley R. Chesler
____________
Argued July 15, 2005
Before: SLOVITER, McKEE and WEIS, Circuit Judges.
Filed October 13, 2005
____________
Tancred V. Schiavoni, Esquire (ARGUED)
Jonathan J. Kim, Esquire
O’Melveny & Myers LLP
7 Times Square
Times Square Tower
New York, New York 10036
Marty F. Siegal, Esquire
Siegal & Napierkowski
220 Lake Drive East
Cherry Hill, New Jersey 08002
Leonard P. Goldberger, Esquire
White & Williams LLP
1800 One Liberty Place
Philadelphia, PA 19103
Attorneys for Appellants Century Indemnity Company; Ace
American Insurance Company; Ace Property & Casualty
Insurance Company
Richard W. Hill, Esquire (ARGUED)
Rachel L. Diehl, Esquire
Kevin J. Licciardi, Esquire
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
Kerry A. Brennan, Esquire (ARGUED)
Richard L. Epling, Esquire
Pillsbury Winthrop Shaw Pittman LLP
1540 Broadway
New York, New York 10036
Paul S. Hollander, Esq.
Okin, Hollander & DeLuca
One Parker Plaza
12 th Floor
Fort Lee, NJ 07024
Attorneys for Appellees Congoleum Corporation, Congoleum
Sales, Inc., Congoleum Fiscal, Inc. and Gilbert Heintz &
Randolph, LLP
____________
OPINION
____________
WEIS, Circuit Judge.
In this pre-packaged Chapter 11 reorganization, we
hold that evidence of pre-petition conduct in this case by a law firm
is relevant to a review of a debtor’s application to retain the firm as
special insurance counsel. We conclude that the bankruptcy judge
should not have granted the application here. The firm had acted
as counsel for the debtor pre-petition in negotiating settlement
arrangements with asbestos injury claimants represented by
attorneys who were co-counsel with the firm in insurance matters
for those same claimants. We conclude that conflicts existed which
precluded the firm’s retention under the Rules of Professional
Conduct and the Bankruptcy Code.
Facing nearly 100,000 claims for injury caused by
asbestos in its products and the exhaustion of its primary liability
insurance coverage, Congoleum filed a declaratory judgment in the
Superior Court of New Jersey in 2001 against a number of excess
carriers.1 The complaint was filed by the law firm of Dughi, Hewit
& Pallatucci, which had represented Congoleum in insurance
matters for more than ten years.2
1
Congoleum Corporation v. Ace American Ins. Co.,
et al., Superior Court of New Jersey, Law Division, Middlesex
County, Docket No. MID-L 8908-01.
2
We take judicial notice of the state court
proceedings insofar as they are relevant here. See Furnari v.
Warden, Allenwood Federal Correctional Inst., 218 F.3d 250, 255
(3d Cir. 2000); In re Indian Palms Assocs., Ltd., 61 F.3d 197, 205
(3d Cir. 1995) (concluding that judicial notice can be taken of
certain facts such as that a document was filed, a position taken, an
3
While that litigation continued, Congoleum 3 sought
relief in the Bankruptcy Court in a Chapter 11 pre-packaged plan
of reorganization designed to channel existing and future asbestos
claims to a trust as authorized by 11 U.S.C. § 524(g). Approval of
the plan would enable Congoleum to preserve its assets and
continue in business because the trust would assume its asbestos
liability. Section 524(g) of the Bankruptcy Code requires that 75%
of current asbestos claimants approve a plan of reorganization
before a channeling order may be issued. As a result, garnering
support from a large number of claimants is crucial to the success
of a plan.
A unique feature of asbestos personal injury litigation
is the fact that a small group of law firms represents hundreds of
thousands of plaintiffs. Another notable aspect is that, because
over time they may have been exposed to asbestos in various
environments, some of the injured persons may have claims against
a number of defendants.
The realities of securing favorable votes from
thousands of claimants to meet the 75% approval requirement
forces debtors to work closely with the few attorneys who represent
large numbers of injured claimants. A prepackaged plan of
reorganization acceptable to the debtor must be satisfactory for the
claimants as well4 and, consequently, extensive negotiations are
necessary.
admission or allegation made “as long as it is not unfair to a party
to do so and does not undermine the trial court’s factfinding
authority.”).
3
Congoleum Corporation, Congoleum Sales, Inc.
and Congoleum Fiscal, Inc. filed for bankruptcy. We will refer to
those entities as “Congoleum.”
4
Pre-packaged bankruptcies employing a channeling
injunction are not eligible for the “cram down” provision contained
in 11 U.S.C. § 1129(b)(1) which allows the bankruptcy court to
confirm a plan of reorganization over creditors’ objections in
certain circumstances.
4
I.
In this case, negotiations between the debtor and
counsel for plaintiffs produced a proposal that involved the
creation of a trust funded primarily by proceeds from Congoleum’s
insurance carriers to pay for settlements of existing, as well as
future asbestos personal injury claims. Congoleum was to
contribute to the trust a $2.7 million promissary note payable ten
years after confirmation and ABI, Congoleum’s parent corporation,
was to contribute $250,000 cash and the pledge of its shares in
Congoleum to secure Congoleum’s promissory note. Notably,
neither Congoleum nor related entities were required to contribute
equity to the trust.5
The pre-petition activity that occurred in this case is
5
11 U.S.C.A. § 524(g) provides for the bankruptcy
channeling injunction and subsection (2)(B) contains the
requirements for the injunction; it requires that –
(i) the injunction is to be implemented in connection
with a trust that, pursuant to the plan of reorganization –
(I) is to assume the liabilities of a debtor ...;
(II) is to be funded in whole or in part by the
securities of 1 or more debtors involved in such plan
and by the obligation of such debtor or debtors to
make future payments, including dividends;
(III) is to own, or by the exercise of rights granted
under such plan would be entitled to own if specified
contingencies occur, a majority of the voting shares
of –
(aa) each such debtor;
(bb) the parent corporation of each
such debtor; or
(cc) a subsidiary of each such debtor
that is also a debtor; and
(IV) is to use its assets or income to pay claims and
demands; ...
11 U.S.C.A. § 524(g)(emphasis added).
5
fairly typical of that in a number of asbestos pre-packaged plans.
Joseph F. Rice and Perry Weitz, two plaintiffs’ lawyers,6 negotiated
a settlement of numerous asbestos claims with Congoleum’s
counsel, Gilbert, Heintz & Randolph, LLP (“Gilbert”). The
agreement employed a matrix to “resolve and settle” the amounts
the various classes of claimants would receive as damages. For
example, mesothelioma victims were each allocated $100,000. In
contrast, those with non-malignant injuries would receive $1,000.7
To qualify for compensation, a participating claimant
was required to provide evidence of injury and exposure to
Congoleum products. Claims of the qualified participating
claimants would be secured to 75% of the matrix values and the
remainder would be treated as unsecured claims. In contrast to the
claims of participating claimants addressed in the settlement
agreement, claims settled with a separate group of claimants pre-
petition would be secured in full.
II.
The role Gilbert played in preparing the plan is
challenged in this proceeding. In October 2002, Perry Weitz
recommended that Congoleum retain Gilbert to assist in solving
insurance coverage for Congoleum’s mounting asbestos liability.
Gilbert specializes in insurance coverage disputes and product
6
Perry Weitz is a partner in the law firm of Weitz &
Luxenberg, P.C. Joseph Rice is a partner in the law firm of Motley
Rice, LLC. Those two firms represent hundreds of thousands of
asbestos claimants. Weitz and Rice executed the Claimant
Agreement as representatives of participating asbestos claimants.
7
The settlement amounts were assigned as follows:
(1) mesothelioma – $100,000;
(2) lung cancer – $30,000;
(3) other cancers – $10,000;
(4) Level II non-malignant disease – $3,000; and
(5) Level I – nonmalignant disease – $1,000.
6
liability matters. It serves in a variety of capacities related to
various asbestos mass tort cases and represents defendants as well
as claimant and creditor committees in various asbestos
bankruptcies.
At the time he recommended the firm to Congoleum,
Weitz had existing co-counsel relationships with Gilbert in other
asbestos related proceedings.8 The arrangements were that Gilbert
would represent the claimants in seeking recovery from the insurers
of asbestos defendants.
Gilbert described its work as co-counsel with Weitz
as providing:
“insurance-related advice to certain
claimants in asbestos and other
contexts. [Gilbert] represents certain
asbestos-re la te d bo d ily injur y
claimants in proceedings against a
primary insurer with respect to that
insurer’s coverage obligations . . . in
pursuing coverage claims against
insurers . . . and in pursuing coverage
from insurers of similar defendants.”
Gilbert explained that it did not represent the individual claimants
with respect to the establishment of their tort claims, “but only with
respect to the collection of insurance monies to pay claims that may
be established.”
On February 6, 2003, Gilbert entered into a formal
retention agreement to advise and represent Congoleum in efforts
to negotiate with claimants’ counsel to settle “pending asbestos-
related bodily injury” claims, and arrange for the “terms of a ‘pre-
packaged’ plan of reorganization.” For these services, Gilbert was
to receive a fixed fee of $2 million from Congoleum. Congoleum
8
Perry Weitz’s suggestion that Congoleum contact
Gilbert occurred in the midst of negotiations of claims against
Congoleum by two individuals suffering from mesothelioma,
Messrs. Cook and Arseneault.
7
also paid Perry Weitz and Joseph Rice 9 $1 million each for fees and
expenses they “incurred or may incur in connection with”
negotiating the pre-packaged plan.
In its letter of retention, Gilbert disclosed to
Congoleum its many representations in the asbestos field, including
that it had been retained to represent individual tort claimants “to
provide legal advice with respect to insurance matters.” Gilbert
explained that its “co-counsel with respect to many of these matters
is [Weitz].” Gilbert also stated that it
“represents other clients, not listed
here, that are or may be adverse to the
[sic] Congoleum with respect to
asbestos related claims. GHR will
continue to represent these and other
similarly situated clients in these
capacities in the future. ... In light of
the Firm’s representation of entities
that are potentially adverse to
Congoleum in other matters, GHR
9
No party has raised objections to the fees of $2
million payable to Gilbert and the $1 million each payable to Weitz
and Rice. That matter is not before us and we do not rule on it at
this point.
In In re: Combustion Engineering, 295 B.R. 459(Bankr. D. N.J. 2003) (vacated on other grounds, 391 F.3d 190(2004)), a pre-packaged asbestos bankruptcy case, Joseph Rice
sought a $20 million fee for his pre-petition work. That fee was to
be paid by a corporation affiliated with the debtor, but was
disallowed by the bankruptcy judge because Rice had a conflict of
interest.
In In re Pittsburgh Corning, 308 B.R. 716 (Bankr.
W.D. Pa. 2004), the bankruptcy court refused to allow a fee of $30
million to be received by Gilbert in representing the asbestos
claimants’ committee. The judge found Gilbert had a conflict of
interest in that pre-package asbestos proceeding.
8
cannot provide any legal services to
Congoleum that could impair its
ability to represent fully its corporate
and other clients. Congoleum agrees
that GHR may continue to represent or
to undertake to represent existing or
new clients as described above or in
other matters, even though the
positions taken by other clients in
those matters may be adverse to the
positions taken by Congoleum in those
or other matters. Congoleum will not,
in [sic] the basis of GHR’s
representation of them, object to
GHR’s continuing or undertaking the
representation of other clients in
matters where the positions taken by
such clients are adverse to those taken
by Congoleum in those or other
matters.”
In addition to negotiating on Congoleum’s behalf
with claimants’ counsel to structure the contemplated bankruptcy
reorganization, Gilbert participated in the declaratory judgment
action in New Jersey state court, although the Dughi firm is the
lead trial counsel in that proceeding.
Congoleum filed its reorganization petition on
December 31, 2003 and on January 23, 2004 applied for
bankruptcy court approval to retain Gilbert as “special insurance
counsel.” The application stated that Gilbert “would be primarily
responsible for strategic advice on insurance issues, including but
not limited to insurance-related settlement negotiations, and the
representation of the Debtors with respect to insurance issues
arising in the context of the Chapter 11 Cases.”
The application continued, “GHR was the primary
counsel that negotiated with representatives of asbestos plaintiffs
to create the structure of the Debtors’ Plan. GHR also represented
Congoleum in negotiating and drafting asbestos settlement
9
agreements that liquidated numerous claims asserted against
Congoleum in the tort system. The settlement of numerous
asbestos claims allowed the Debtors to negotiate the Plan, which
contemplates that the primary assets dedicated to pay asbestos
claims will be Congoleum’s right to receive insurance proceeds.”
The following services “among other things” were
to be provided by Gilbert:
“(a) advising and representing the
D ebtors in insurance-related
settlement negotiations and mediations
with insurers and other parties;
(b) pursuant to request of the Debtors,
advising and assisting the Debtors in
consultations with parties-in-interest
regarding unresolved, potentially
available insurance coverage;
(c) advising the Debtors as to the
appropriate steps necessary to assert
claims against and obtain proceeds
from insurers;
(d) reviewing and analyzing
insurance-related documents, data,
applications, orders, operating reports,
schedules and other materials;
(e) representing the Debtors at
hearings concerning insurance-related
issues in the bankruptcy case;
(f) advising and assisting the Debtors
in preparing appropriate insurance-
related legal pleadings and proposed
insurance-related orders in the
bankruptcy case;
(g) pursuant to requests of the
Debtors, advising and assisting the
Debtors with respect to insurance-
10
related issues in connection with the
formulation negotiation and
confirm ation of a plan of
reorganization;
(h) pursuant to requests of the
Debtors, assisting and advising the
Debtors generally with respect to
insurance-related issues during the
Chapter 11 Cases, and such other
services as may be in the best interest
of the Debtors; and
(i) preparing appropriate pleadings
and orders, conducting discovery, and
representing Congoleum in the
Coverage Litigation (if the automatic
stay is not maintained) or in any
adversarial proceeding relating to the
determination of insurance rights or
collection of insurance claims;
provided, however, that the Debtors
anticipate that [Dughi] will continue
to act as primary litigation counsel in
the Coverage Litigation and GHR’s
role in this regard will consist of
coordinating the Coverage Litigation
with insurance settlement efforts and
assisting [Dughi] as required.”
Certain of Congoleum’s liability insurers who had
not participated in the formulation of the plan objected to the
application to retain Gilbert. They alleged that Gilbert was in
conflict because of the duties it owed the individual claimants it
represented as co-counsel with Weitz. The insurers also pointed
out that the Kenesis Group, LLC (“Kenesis”), a third party owned
70% by Gilbert and hired pre-petition by Congoleum to screen
claimants, had already been disqualified from being retained to
review claims in In re ACandS, Inc., 297 B.R. 395 (Bankr. D. Del.
2003), a proceeding in which Gilbert had been involved. They
argued that Gilbert’s extensive relationship to Perry Weitz and
11
Joseph Rice in other asbestos matters violated both the
disinterestedness requirement of section 327(a) of the Bankruptcy
Code and the Rules of Professional Conduct. Moreover, the details
of the fee arrangement between Gilbert and Weitz had not been
disclosed. The insurers also asked for discovery to further explore
Gilbert’s relationship with other parties involved in the bankruptcy.
On March 1, 2004, the bankruptcy judge heard
argument on Congoleum’s application to retain Gilbert. The
United States Trustee appeared and stated that he did “not object
to Gilbert Heintz’ retention.” The Trustee conceded, however, that
“[t]here are certainly potential conflicts. And when it’s potential
under Marvel,10 there’s a weighing of whether it’s going to become
actual or not ... [a]nd we need to see what happens here.”
Gilbert contended that its conduct pre-petition was
not relevant to its employment as special counsel. It argued that,
as to the matters listed in the application, the interests of the
individuals it represented as co-counsel with Weitz were aligned
with Congoleum’s interests to obtain recovery from the insurers.
The bankruptcy judge granted the application to
employ Gilbert, holding that the standards set in section 327(e) of
the Bankruptcy Code, rather than those in section 327(a), applied
and, hence, the requirement of disinterestedness of section 327(a)
was not pertinent. The judge noted the difference between pre- and
post- petition representation and said,
“[w]hatever else may have gone on in
the pre-petition negotiations, even if
GHR was bad, bad, bad, now today,
both the Debtor and GHR want to
preserve and maximize the Debtor’s
insurance assets. I’m not making a
finding about whether GHR acted
improperly pre-petition.
I’m just saying that its pre-petition
10
In re: Marvel Entertainment Group, 140 F.3d 463(3d Cir. 1998).
12
behavior cannot carry the day on a
post-petition retention application for
different services.”
In addition to the challenge to Gilbert’s retention, the
insurers also contested Congoleum’s employment of Kenesis
Group, LLP as consultants and claim processors. Gilbert owned a
70% interest in Kenesis. Congoleum had paid $1,678,000 for
Kenesis’ work screening asbestos claimants.11 Congoleum’s
application described Kenesis’ work pre-petition, indicating that it
would continue to review claims it had previously processed and
determined to be deficient to determine whether the defects had
been cured. In addition, the application indicated that Kenesis
would perform consulting services for Congoleum’s law firms,
including Gilbert and Dughi.
On April 5, 2004, about one month after granting
Gilbert’s application, the Bankruptcy Court heard argument on the
Kenesis application. In response to the objections from
Congoleum’s insurers and the United States Trustee, the Court
denied the application. The bankruptcy judge based her denial on
the “concern that Kenesis [was] not disinterested due to its
relationship with [Gilbert].” The judge noted that Kenesis had
been involved in “negotiating the Claimant Agreement [pre-
petition] and that forms the backbone of the reorganization plan.
So the Court finds that they were and continue to be involved in
negotiating the plan.”
The bankruptcy judge further expressed concern that
Kenesis might have a conflict of interest with the debtor because
the payment it received for pre-petition services might be a
preference. Moreover, the court shared “the U.S. Trustee’s
concern that Kenesis is not disinterested due to its relationship with
GHR. The prospect that GHR would be reviewing the work
product of an entity with such a strong overlap of identity is still
11
Kenesis subcontracted its work to The
Clearinghouse LLC, an organization owned by an individual who
was on leave of absence from a position as a paralegal at Joseph
Rice’s law firm. Kenesis purchased The Clearing House before
beginning claims review work for Congoleum.
13
more reason that Kenesis does not meet the standards of 327.”
The insurers appealed the ruling on Gilbert’s
retention. The District Court concluded that the bankruptcy judge
was correct in her rulings on the alignment of interests and the
application of section 327(e). The district judge commented that
because the insurance companies were the primary source of funds
to pay claimants, the carriers “have every interest in making it, to
put it bluntly, difficult to confirm this bankruptcy, and that
motivation is not lost on the Court.”
In their appeal to this Court, the insurers raise several
issues including: (1) whether the District Court erred in affirming
the Bankruptcy Court’s determination that retaining Gilbert
violated neither the Bankruptcy Code nor the Rules of Professional
Conduct; (2) whether the District Court erred by affirming that
section 327(e) of the Bankruptcy Code applied rather than section
327(a); (3) whether the District Court erred in not reversing the
Bankruptcy Court’s findings of fact and conclusions of law where
the Bankruptcy Court neither conducted an evidentiary hearing nor
allowed discovery; (4) whether the District Court erred by failing
to consider Gilbert’s economic and other ties to lawyers
representing asbestos claimants who are adverse to Congoleum;
and (5) whether the District Court erred by affirming the
Bankruptcy Court’s denial of the insurers’ Motion for Judicial
Notice.
Congoleum questions whether the insurers have
standing to challenge the retention of special insurance counsel.
III.
This is a core proceeding pursuant to 28 U.S.C. §
157(b)(2). The District Court had jurisdiction pursuant to 28
U.S.C. §§ 157 and 1334. We have before us a final order which we
review under 28 U.S.C. § 1291. In re United Artists Theatre Co.
V. Walton, 315 F.3d 217 (3d Cir. 2003); In re: Pillowtex, 304 F.3d
246 (3d Cir. 2002).
Because we are a court of appeals, “twice removed
from the primary tribunal, we review both the factual and the legal
determinations of the district court for error.” In re BH & P, Inc.,
949 F.2d 1300, 1305 (3d Cir. 1991)(quoting Universal Minerals,
14
Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981)).
In order to determine whether the District Court erred, we review
the bankruptcy court's findings by the standards the District Court
should have employed. Id. at 1306.
IV.
At the outset we must consider Congoleum’s
contention that the insurers lack standing to bring this appeal.
Congoleum argues that the insurers are not creditors of the debtor,
are not persons aggrieved by the retention order, and under the
more restricted bankruptcy standards, lack appellate standing. In
support of its position, Congoleum cites Travelers Insurance
Company v. H.K. Porter Company, Inc., 45 F.3d 737 (3d Cir.
1995) and In re: Dykes, 10 F.3d 184 (3d Cir. 1993).
Article III standing need not be financial and only
need be fairly traceable to the alleged illegal action. See Miller v.
Nissan Motor Acceptance Corp., 362 F.3d 209, 221 (3d Cir. 2004)
(listing the elements of Article III standing). In the bankruptcy
field, however, we have adopted a jurisprudential rule that limits
appellate standing to persons or entities that are aggrieved by an
order which diminishes their property, increases their burdens, or
detrimentally affects their rights. Travelers, 45 F.3d at 742.
We cited the standing distinction in In re:
Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2005). We
recognized the acute need to limit appeals in bankruptcy cases
which often involve a myriad of parties indirectly affected by every
bankruptcy court order. Combustion Engineering involved a pre-
packaged Chapter 11 plan similar to the one before us. We
concluded that some of the insurers had appellate standing but only
with respect to the limited group of issues that affected them. Id.
at 217-18.
Here, the insurers are entitled to standing even under
the more restrictive standard applied to bankruptcy proceedings.
The retention of special insurance counsel is an important
preliminary matter that will profoundly affect the determination of
the validity of a proposed plan ab initio. It is an issue based on
procedural due process concerns that implicate the integrity of the
bankruptcy court proceeding as a whole. The retention of Gilbert
as special insurance counsel will affect the resolution of issues that
15
may directly affect the rights of insurers and fairness to the
asbestos claimants.
Combustion Engineering and Dykes, on the other
hand, were appeals from final orders confirming plans of
reorganization. In Travelers, the objections were directed at an
order reinstating certain claims. In the present case, the appeal is
from an order which will affect the fairness of the entire
bankruptcy proceeding, including the determination of issues such
as those for which we granted insurer standing to challenge a final
order in Combustion Engineering.
Further, it is extremely important to resolve this
preliminary matter now; otherwise, it may never be addressed.
In re: Marvel Entertainment Group, 140 F.3d 463 (3d
Cir. 1998), presented a challenge to our jurisdiction in an appeal
from an order refusing the trustee’s request to retain a certain law
firm. We treated the bankruptcy judge’s order as final, pointing out
that if we did not take jurisdiction at that point, no “meaningful
review” of the denial of the appointment could ever take place. Id.
at 470.
We observed that once a plan has proceeded to
confirmation, orders involving retention of professionals are
unlikely to get the attention they deserve. Once a bankruptcy
reorganization has been completed, it would be unlikely that the
proceedings would commence again from the beginning to correct
preliminary issues. Id.; see also In re: Amatex Corp., 755 F.2d
1034, 1040 (3d Cir. 1985) (noting that “waiting until a final plan
is approved may well cause several years of hearings and
negotiations to be wasted”); In re: GI Holdings, 385 F.3d 313 (3d
Cir. 2004) (reviewing an order appointing a trustee prior to plan
confirmation). Addressing the challenges to Gilbert’s retention at
this stage comports with our discussion of the unlikelihood of
review late in a bankruptcy in Marvel as well as the concern for
fairness and due process throughout complex bankruptcy
proceedings such as this one.
In addition, counsel for the insurers has a
responsibility, if not a duty, to alert the Court to ethical conflicts.
Rules governing professional conduct are often viewed as even
16
more necessary and applicable in bankruptcy cases than in other
contexts. See 1 Collier on Bankruptcy (15 th ed.) ¶ 8.01[1] (“Thus
the importance of adherence to the ethical rules, as well as
disclosure, initial and continuing, cannot be overemphasized.”).
There are, of course, concerns about the tactical use
of disqualification motions to harass opposing counsel. See
Richardson-Merrell, Inc. v. Koller, 472 U.S. 424, 436 (1985)
(disqualification of counsel in a civil, not a bankruptcy
appointment). Similarly, courts must be cautious about infringing
on the right of the debtor to retain counsel of its choice.
Nevertheless, the obligation to ensure that professional ethics are
followed has led courts to rule that counsel has standing to raise
and challenge unethical procedures on the part of opposing
lawyers. See Kevlik v. Goldstein, 724 F.2d 844, 848 (1 st Cir. 1984)
(citing cases from the Courts of Appeals for the Fourth and Fifth
Circuits authorizing attorneys to report ethical concerns to the
court).
We raised, but did not decide, whether a “motion to
disqualify must be brought by a former client” in In re: Corn
Derivatives Antitrust Litigation, 748 F.2d 157, 161 (3d Cir. 1984).
However, we noted, “one of the inherent powers of any federal
court is the admission and discipline of attorneys practicing before
it.” Id. at 160.
The District Court in Schiffli Embroidery Workers’
Pension Fund v. Ryan, Beck & Co., 1994 WL 62124 (D.N.J. 1994),
cited then Rule 8.1 of the New Jersey Rules of Professional
Conduct, which required lawyers to report violations of the Rules
of Professional Conduct. Based on that duty, the court found that
a lawyer had standing to present a motion to disqualify its opposing
counsel.
Rule 8.3 of the New Jersey Rules of Professional
Conduct is the current version of the rule addressed in Schiffli; it
provides that a lawyer who knows that another lawyer has
committed a violation of the Rules of Professional Conduct that
raises a “substantial question as to that lawyer’s honesty,
trustworthiness, or fitness as a lawyer in other respects shall inform
the appropriate professional authority.” See also O’Connor v.
Jones, 946 F.2d 1395, 1399 (8 th Cir. 1991) (“In cases where
17
counsel is in violation of professional ethics, the court may act on
motion of an aggrieved party or may act sua sponte to disqualify.”);
International Electronics Corp. v. Flanzer, 527 F.2d 1288, 1295 (2d
Cir. 1975) (considering the issue of attorney conflict despite failure
of parties to raise the point).
We need not decide whether the insurers’ counsel
had a duty to disclose Gilbert’s conduct in this case. It is enough
that the insurers’ counsel had the right to raise the issue under the
Rules of Professional Conduct and require adjudication by the
court. Concluding otherwise would suggest that we do not support
the long-standing role of lawyers practicing before federal courts
in monitoring and reporting ethical violations.
We note also, as a practical matter, that in
circumstances such as those present here, it is highly unlikely that
any of the parties other than the insurers or their attorneys would
challenge the application for retention of Gilbert. Congoleum,
Gilbert, Perry Weitz and Joseph Rice worked together to negotiate
the terms of the pre-packaged plan and all were deeply committed
in having it approved. Moreover, we are aware that the standard
set out in Travelers is a jurisprudential and not a strict statutory
requirement for standing. We are persuaded that, in the
circumstances here, the insurers and their attorneys have standing
to present this appeal.
V.
Having concluded that standing has been established,
we turn to the Rules of Professional Conduct and the standards set
by the Bankruptcy Code.
A.
The District Court’s local rules provide that the rules
of American Bar Association, as revised by the New Jersey
Supreme Court, apply to attorneys practicing before the court
“subject to such modifications as may be required or permitted by
federal statute, regulation, court rule or decision of law.” Local
Rule 103.1 (D.N.J.). In the absence of a “definitive state court
decision interpreting the rules as promulgated by the [New Jersey]
Supreme Court, the federal court will proceed to reach its own
conclusions as to the appropriate application of the rules of
18
professional conduct. United States v. Balter, 91 F.3d 427, 435 (3d
Cir. 1996) (quoting New Jersey District Court Local Rules).
In International Business Machines Corp. v. Levin,
579 F.2d 271, 279 n.2 (3d Cir. 1978), we noted that the “conduct
of practitioners before the federal courts must be governed by the
rules of those courts rather than those of the state courts.”
However, in United States v. Miller, 624 F.2d 1198 (3d Cir. 1980),
we approved the district court’s reliance on an opinion of the
Supreme Court of New Jersey in applying the local rules on
professional conduct. We observed that incorporation of state law
in this field serves to avoid “detriment to the public’s confidence
in the integrity of the bar that might result from courts in the same
state enforcing different ethical norms.” Id. at 1200.
State precedents as to professional responsibility
should be consulted when they are compatible with federal law and
policy and do not “balkanize federal law.” Grievance Comm. for
Southern District of New York v. Simels, 48 F.3d 640, 645 (2d Cir.
1995); see also Resolution Trust Corp. v. Bright, 6 F.3d 336, 341
(5 th Cir. 1993). Bankruptcy professionals are required to examine
their relationship not only based on the two-party litigation model,
but also one guided by “a stricter, fiduciary standard.” 1 Collier on
Bankruptcy (15 th ed.) ¶ 8.01[1].
Rule 1.7 of the New Jersey Rules of Professional
Conduct, like Rule 1.7 of the ABA’s Model Rules of Professional
Conduct, provides that, a lawyer shall not represent a client if there
is a “concurrent conflict of interest,” a situation where either:
(1) the representation of one client will be directly
adverse to another client; or
(2) there is a significant risk that the representation
of one or more clients will be materially limited by
the lawyer's responsibilities to another client, a
former client, or a third person or by a personal
interest of the lawyer.
NJ RPC 1.7(a).12 Notwithstanding the existence of a concurrent
12
Rule 1.7 of the New Jersey Rules of Professional
Conduct was revised in November 2003 and the new rule became
19
conflict of interest, a lawyer may undertake the representation if:
(1) each affected client gives informed consent,
confirmed in writing, after full disclosure and
consultation ... [w]hen the lawyer represents multiple
clients in a single matter, the consultation shall
include an explanation of the common representation
and the advantages and risks involved;
(2) the lawyer reasonably believes that the lawyer
will be able to provide competent and diligent
representation to each affected client;
(3) the representation is not prohibited by law; and
(4) the representation does not involve the assertion
of a claim by one client against another client
represented by the lawyer in the same litigation or
other proceeding before a tribunal.
NJ RPC 1.7(b).
Comments to the ABA version of this rule explain
the policies underlying a rule against concurrent conflicts of
interest. Absent consent, a lawyer may not act as an advocate in
one matter against a person the lawyer represents in some other
matter, because a conflict that materially limits a lawyer’s
representation of her client, even absent direct adversity may hinder
a lawyer’s ability to “recommend or advocate all possible
positions” for her clients. Annotated Model Rules of Professional
Conduct 109 (5 th ed.).
As the New Jersey rule specifies, the lawyer’s own
interests should not be permitted to have an adverse effect on, or
otherwise materially limit, the representation of a client. A lawyer
effective on January 1, 2004. The previous version of Rule 1.7 did
not address situations where a lawyer’s responsibilities to former
clients impaired the current representation and it did not use the
“significant risk language”; instead it mentioned situations where
the representation of a client “may be materially limited” by a
lawyer’s other responsibilities. These changes do not affect our
disposition of the case because Gilbert would have been acting
under a concurrent conflict under either version of the rule.
20
cannot allow a related business interest to affect his representation,
for example, by referring clients to an enterprise in which the
lawyer has an identified financial interest. See id.In addition to the standards established by
professional ethics, attorneys retained in bankruptcy proceedings
are also required to meet the restrictions imposed by section 327 of
the Bankruptcy Code.13 Subsection (a) restricts retention of
lawyers and other professionals to those who do not hold or
represent an interest adverse to the estate and are disinterested.
Subsection (e) permits employment of an attorney “for a specified
special purpose,” so long as the attorney does not hold or represent
“any interest adverse to the debtor or to the estate with respect to
the matter” on which he is to be employed. The “special purpose”
13
Section 327(a) states:
“ Except as otherwise provided in this section, the trustee, with the
court's approval, may employ one or more attorneys, accountants,
appraisers, auctioneers, or other professional persons, that do not
hold or represent an interest adverse to the estate, and that are
disinterested persons, to represent or assist the trustee in carrying
out the trustee's duties under this title.”
11 U.S.C.A. § 327(a). Section 327(e) addresses professionals
employed for a “specified special purpose” and provides that
“The trustee, with the court's approval, may employ,
for a specified special purpose, other than to represent the trustee
in conducting the case, an attorney that has represented the debtor,
if 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.”
11 U.S.C.A. § 327(e).
Section 327 applies to a debtor in possession as well
as a trustee. United States Trustee v. Price Waterhouse, 19 F.3d
138 (3d Cir. 1994).
21
must be unrelated to the reorganization and must be explicitly
described in the application. 3 Collier on Bankruptcy (15 th ed.) ¶
327.04[9][d].
To put the matter in focus we will review Gilbert’s
activities in chronological order. In September 2002, when it had
existing co-counsel agreements with Weitz in several asbestos
matters, Gilbert represented Congoleum in settlement negotiations
with Weitz to resolve the claims of two of its own clients,14 Cook
and Arsenault, whose mesothelioma claims were then in trial.
Congoleum settled the cases for cash, plus a secured claim against
funds that Congoleum hoped to recover from its excess insurers.15
In November 2002, Gilbert became co-counsel with Weitz in two
other asbestos bankruptcy cases.
In February 2003, Congoleum retained Gilbert for the
purpose of negotiating the pre-packaged chapter 11 reorganization.
The retainer called for negotiations with “key asbestos bodily
injury claimants’ counsel” as well as arriving at the “terms of a
‘pre-packaged’ plan of reorganization . . . reviewing and
commenting on the plan of reorganization . . . [and] assisting or
consulting with Congoleum and its bankruptcy counsel on a
strategy for confirmation of the pre-packaged plan.”
For most of 2003, Gilbert, Weitz and Rice worked
on the terms of an agreement to settle Congoleum’s current
asbestos related injury claims. The settlement agreement they
ultimately drafted provided for screening of each participating
claimant by Kenesis, a process that was in effect during the pre-
petition period. At the same time, Gilbert was assisting the Dughi
firm in the coverage litigation in the New Jersey state court.
14
It appears that Gilbert acted as co-counsel with
Weitz for these two individuals in their claims against another
bankrupt asbestos company.
15
We note a striking disparity between the combined
settlement of $16 million, which included fully secured
assignments of insurance proceeds Messrs. Cook and Arseneault
received, and the partially unsecured $100,000 settlement that
others with mesothelioma claims would receive under the
settlement agreement’s disease matrix.
22
Weitz represented many individuals who presented
claims against Congoleum and who were screened by Kenesis and
who were also clients of Gilbert as co-counsel. Before the
insurers’ appeal reached the District Court, Gilbert produced in the
New Jersey coverage action a list of claimants that it represented
as co-counsel with Weitz. This list contains the names of
approximately 15,000 individuals; the insurers estimated 10,000 of
those individuals have claims against Congoleum. Neither Gilbert
nor Congoleum have denied that there is an overlap of claimants.16
In at least three other asbestos claimant cases, Gilbert
and Weitz had agreed to charge the individuals they jointly
represented a 10% contingency fee “on any and all insurance
proceeds recovered . . . [by the claimant] in connection with their
claims against [the asbestos defendant] and its insurers.” The
insurers here assert that that same fee arrangement is present in
cases against Congoleum. Gilbert has not denied that assertion
despite demands that it disclose the details of its fee sharing
arrangements with Weitz. Thus Gilbert represented Congoleum
and actively participated in the claimants’ settlement negotiations
while simultaneously representing some of those claimants, albeit
assertedly only in insurance matters.
In negotiating the settlement agreement and plan
terms with Weitz and Rice pre-petition, Gilbert, as counsel for
Congoleum, had a duty to limit the company’s responsibility on
such key features as the disease matrix, exposure to asbestos from
Congoleum products, if any, and the extent of actual injury.
Although the settlement agreement required the claimants to
release Congoleum, Gilbert admitted in the coverage action in state
16
In a deposition in the New Jersey coverage action,
Scott Gilbert, a partner in Gilbert, was asked if any of the claimants
he represented as co-counsel with Weitz in the Robert A. Keasbey
case were also suing Congoleum. Scott Gilbert replied that he was
unsure how many claimants overlapped and had never attempted
to determine if there was an overlap. In subsequent deposition
testimony he would only “assume” that Gilbert represented clients
in other bankruptcies that had claims against Congoleum, including
Messrs. Cooke and Arsenault.
23
court that the release was a limited one and applied only if
proceeds were recovered from the insurance companies. If that
attempt failed, then Congoleum would be liable to the individual
claimants for the amount of the settlements, thus pitting
Congoleum against the individual claimants Gilbert represents as
co-counsel with Weitz.
Congoleum’s interests called for a reduction in the
number of claims approved that would likely be included in a
settlement package presented to the insurers. The insurers cited
major deficiencies in the validity of some claims approved by
Kenesis. To the extent that the claims were not valid, it was
Gilbert’s responsibility in representing Congoleum to see that they
were rejected, even though it would be adverse to Gilbert’s
interests if those claims were pursued individually or were
excluded from a “package” offered to the insurers in settlement.
This was not a potential, but an actual conflict.
To legitimize the alleged conflicts, Gilbert relies on
waivers both from Congoleum and clients the firm represented as
co-counsel with Weitz. However, Gilbert did not contact the
claimants; instead it relied upon Weitz to secure those waivers.
As discussed above, in several earlier asbestos
bankruptcy proceedings, Weitz executed engagement letters for
Gilbert’s work as co-counsel. In those agreements, Weitz waived
“all present and future conflicts of interest on behalf of” the
individual clients the firms jointly represented and agreed to advise
the clients of the information contained in the engagement letters
including Gilbert’s disclosure of its representation of tort
defendants. Gilbert has not disclosed an engagement letter with
Weitz for claimants in the Congoleum case, although it has not
denied that one exists.
The record does not establish that Weitz had the
authority to issue waivers on behalf of the thousands of individual
claimants it represented. In addition, the record does not include
the information, if any, that Weitz furnished to the individuals nor
does it indicate whether they were given the opportunity to object
24
to Gilbert’s representation.17
Although concurrent conflicts may be waived by
clients under the New Jersey and ABA Rules of Professional
Conduct, the effect of a waiver, particularly a prospective waiver,
depends upon whether the clients have given truly informed
consent. Given the complexities of the bankruptcy proceeding and
the “many hats” worn by Gilbert throughout the pre- and post-
petition process, we cannot conclude that the purported waivers
Gilbert received from Weitz “on behalf of” the individual clients
constituted informed, prospective consent. See Baldasarre v.
Butler, 625 A.2d 458 (N.J. 1993) (concluding that informed
consent was not sufficient in a complex commercial real estate
transaction); In re Matter of Edward J. Dolan, 384 A.2d 1076, 1082
(N.J. 1978) (“[T]his Court will not tolerate consents which are less
than knowing, intelligent and voluntary.”); In re Lanza, 322 A.2d
445 (N.J. 1974) (concluding that attorney should have first
explained . . . all the facts and indicated in specific detail all of the
areas of potential conflict that foreseeably might arise.”).
We conclude that Gilbert did not receive effective
waivers from the claimants it represented and, therefore, acted in
violation of the Rules of Professional Conduct.
B.
In addition to failing to review the waiver problem,
the bankruptcy judge relied on an unrealistic view that the
insurance interests of the claimants and Congoleum were so closely
aligned and so narrowly defined that there was no actual conflict
of interest. This error was the result, to a great extent, of the
17
In a subsequent proceeding, the insurers
challenged Rice & Weitz’s failure to disclose any type of co-
counsel, consultant or fee sharing relationships as required by
Bankruptcy Rule 20019. The bankruptcy judge directed Weitz,
Rice and others to comply and commented that many of the
creditors “have never seen a copy of the disclosure statement and,
for all the court knows, have absolutely no idea how their claim
will be treated under the plan.” Baron & Budd, P.C. v. Unsecured
Asbestos Claimant’s Committee [Congoleum], 321 B.R. 147, 2005
WL 435207 (D. N.J. 2005).
25
court’s refusal to consider evidence about Gilbert’s activities in
negotiating and preparing the plan before its filing. Those pre-
petition activities were clearly separate from seeking a recovery
from insurance companies after the claims were liquidated or from
attempting to negotiate settlements with the insurers.18
The application presented to the bankruptcy court
recited that Gilbert would be “primarily responsible for strategic
advice on insurance issues, including but not limited to insurance-
related settlement negotiations and the representation of the
Debtors with respect to insurance issues arising in the context of
the chapter 11 cases.” However, the application also stated that
Gilbert’s representation had encompassed the negotiations of the
plan and pre-petition settlement of asbestos claims. The
application indicated that services to be provided post-petition
included “advising and assisting the debtors with respect to
insurance-related issues in connection with the formulation,
negotiation, and confirmation of a plan of reorganization.”
Although the bankruptcy court relied on the narrow
role Gilbert was to have in the reorganization process, the judge did
not inquire about the broad scope of Gilbert’s activities in
negotiating the plan and the settlement agreement. Nor did the
court question Gilbert’s role post-petition, as described in
Congoleum’s application, in “advising and assisting [Congoleum]
with respect to insurance-related issues in connection with the
formulation, negotiation and confirmation of a plan of
reorganization.”
18
On May 13, 2005, the state judge in the New
Jersey coverage action heard oral argument on a motion to
disqualify Gilbert as counsel for Congoleum in that action. The
court concluded it would “reluctantly deny the insurance
companies’ motion to disqualify GHR as Congoleum’s attorney.”
The judge stated that he might have reached a different result if he
had received the motion to disqualify earlier in the proceedings.
The court also noted, in support of its decision not to grant the
motion to disqualify, that the Bankruptcy and District Courts in this
proceeding had previously denied similar motions as to Gilbert’s
alleged conflicts of interest.
26
Gilbert, in fact, continues to participate actively in
formulating and revising the plan. There have been changes and
amendments, at least four of them, to the text of the original plan
thus far and Gilbert has been involved in that process. A fifth
version of the plan is set for consideration some months hence.
In the usual situation, when counsel is retained to
recover insurance proceeds, the underlying claim has been reduced
to a judgment or settled for a specific amount. The retention of
special counsel to act solely as appellate lawyer in such
circumstances is an example of the intent of section 327(e). But
here the claims have not been liquidated – the plan has not yet been
approved and only that ruling will confirm the specific allocation
of damages. Until that occurs, action against the insurers is
premature. Gilbert has attempted to draw a sharp demarcation
between its insurance advice and other tasks it undertook. Its
efforts, however, might be likened to attempts at using a scalpel to
carve a bowl of soup.
Gilbert’s retention is far too expansive an assignment
to be appropriate for an appointment under § 327(e). The
application more properly falls under the ambit of § 327(a) which
allows employment of professionals to assist generally in the
administration of the estate. That subsection, however, prohibits
appointments of individuals or entities who hold or represent an
interest adverse to the estate and are not “disinterested.”
In Marvel Entertainment Group, 140 F.3d 463 (3d
Cir. 1998), we held that disqualification could be imposed where
an actual conflict of interest was present or, within the discretion
of the court, where a potential conflict of interest existed. The
presence of the appearance of impropriety standing alone is not a
sufficient ground for disqualification, id. at 477, but there is more
than that here. See also In re: BHNP, 949 F.2d 1300, 1313 (3d Cir.
1991) (“[I]n some circumstances, the potential for conflict and the
appearance of conflict may, without more, justify remov[al] . . .[of
a trustee].”); In re: Martin, 817 F.2d 175, 180-81 (1 st Cir. 1987)
(concluding that section 327 addresses the appearance of
impropriety, “irrespective of the integrity of person or firm under
consideration.”); 3 Collier on Bankruptcy (15 th ed.) § 327.04[5][a]
(noting that the appearance of impropriety may, when combined
with a potential conflict, be sufficient for disqualification).
27
Our discussion of the Rules of Professional Conduct
demonstrates that Gilbert also cannot meet the Bankruptcy Code’s
requirement of disinterestness contained in section 327(a). Its
status as co-counsel with Weitz and its ownership interest in
Kenesis represent factors which prevent Gilbert from being
completely loyal to Congoleum’s interests. We note also in this
respect that waivers under § 327(a) are ordinarily not effective.
See In re: Granite Partners LP, 219 B.R. 22, 34 (Bankr. S.D.N.Y.
1998); Collier on Bankruptcy ¶ 328.05[3] (15 th ed.).
We conclude that Gilbert’s employment in this case
was contrary to section 327 of the Bankruptcy Code.
We do not approve of a bankruptcy court applying
less than careful scrutiny to pre-petition procedures in pre-
packaged plans. The parties here seek the court’s imprimatur of a
reorganization that will free the debtor of all current and future
asbestos liability. The legitimacy of such a transaction is
dependent on the stature of the court.19
In a pre-packaged setting, most of the work on a plan
of reorganization that would occur in a “traditional bankruptcy”
happens before the debtor files its petition. For a court to approve
19
In Baron & Budd, P.C. v. Unsecured Asbestos
Claimant’s Committee [Congoleum], 321 B.R. 147 n.17, 2005 WL
435207 (D. N.J. 2005), a proceeding in the Congoleum case
subsequent to this one, both courts agreed that pre-petition
relationships were relevant. “The totality of the facts before the
bankruptcy court suggest the opportunity for abuse of fee sharing
relationships, involving attorneys in connection with the pre-
petition process, to the end of conferring preferential security
interests on appellant’s clients.”
See also S. Elizabeth Gibson, Fed. Judicial Ctr.,
Judicial Management of Mass Tort Bankruptcy Cases 122 (2005).
(“A judge presented with a prepackaged mass tort plan needs to be
fully informed about the circumstances surrounding the prepetition
negotiations in order to determine whether the process has been
tainted by conflicts of interest or self-interested actions by the
participants.”).
28
a pre-packaged plan whose preparation was tainted with
overreaching, for example, would be a perversion of the
bankruptcy process.
Pre-packaged plans offer a means of expediting the
bankruptcy process by doing most of the work in advance of filing.
That efficiency, however, must not be obtained at the price of
diminishing the integrity of the process. In this case, it was not a
proper exercise of the bankruptcy court’s discretion to fail to
consider and appraise the conduct of the parties and counsel pre-
petition.
We observe also that the bankruptcy court has an
obligation to prevent unnecessary expenditures in the
administration of an estate. See In re: Busy Beaver Bldg. Ctrs.,
Inc., 19 F.3d 833 (3d Cir. 1994) (holding that the bankruptcy court
has authority to examine counsel fees sua sponte). Even if it be
assumed that Gilbert’s representation of Congoleum post-petition
was exclusively related to its forthcoming disputes with the
insurers, it is not clear on this record why it was necessary to
appoint an additional firm to handle insurance issues. The Dughi
firm had represented Congoleum for more than ten years in
insurance matters and had been actively engaged in the state court
coverage action since 2001. The record fails to reveal what special
competence in the insurance field Gilbert would provide in
addition to that of the Dughi firm.
The flood of asbestos litigation has been a serious
problem for the courts of this country because the large number of
claims are not easily adaptable to traditional common law
procedures. See Achem Products v. Windsor, 521 U.S. 591 (1997);
Combustion Engineering, 391 F.3d at 200. Congress has provided
for the use of a trust and channeling injunction as a possible
solution, but it appears that the proposals for implementation of an
administrative system somewhat similar to that used in black lung
claims are more promising.
As this case demonstrates, leaving the procedures for
allocation of resources predominantly in the hands of private,
conflicting interests has led to problems of fair and equal
resolution. The need for counsel with undivided loyalties is more
pressing in cases of this nature than in more familiar conventional
litigation. Correspondingly, the level of court supervision must be
29
of a high order.
Many of the issues are similar to those that arise in
class actions for personal injuries. In re: Community Bank of
Northern Virginia, 418 F.3d 277 (3d Cir. 2005), we commented
that “in class actions, particularly settlement-only suits, the district
court has a duty ‘to protect the members of the class . . . from
lawyers for the class who may, in derogation of their professional
and fiduciary obligations, place their pecuniary self-interest ahead
of that of the class.’” Id. at 318 (quoting Reynolds v. Beneficial
Nat’l Bank, 288 F.3d 277, 279 (7 th Cir. 2002)). We need make no
finding that this has occurred in the case before us, but we caution
that here, as in situations of settlement-only class litigation,
“careful and comprehensive scrutiny is required.”
We recognize that ordinarily a remand to the District
and Bankruptcy courts would be in order for further findings and
appropriate action. However, here the record contains sufficient
evidence that we may expedite the procedures. Therefore, we will
reverse the order approving the retention of the Gilbert firm and
remand to the District Court for further proceedings consistent with
this Opinion.
30