In Re: United Artist ( 2003 )


Menu:
  •                                                                                                                            Opinions of the United
    2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                                  for the Third Circuit
    
    
    1-9-2003
    
    In Re: United Artist
    Precedential or Non-Precedential: Precedential
    
    Docket 01-1351
    
    
    
    
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003
    
    Recommended Citation
    "In Re: United Artist " (2003). 2003 Decisions. Paper 823.
    http://digitalcommons.law.villanova.edu/thirdcircuit_2003/823
    
    
    This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
    University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova
    University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
    PRECEDENTIAL
    
           Filed January 9, 2003
    
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    
    No. 01-1351
    
    IN RE: UNITED ARTISTS THEATRE COMPANY, et al.,
    
           Debtors
    
    v.
    
    *DONALD F. WALTON, Acting United States Trustee
    for Region 3
    
    *Donald F. Walton,
    
           Appellant
    
    *(Substituted Pursuant to F.R.A.P. 43(c))
    
    Appeal from the United States District Court
    for the District of Delaware
    (Del. Bankr. No. 00-03514)
    District Judge: Honorable Sue L. Robinson
    
    Argued: December 4, 2001
    
    Before: ALITO, RENDELL, and AMBRO, Circuit Judges
    
    (Opinion Filed: January 9, 2003)
    
    
    
    
           James H.M. Sprayregen
           James W. Kapp, III (Argued)
           David J. Zott
           Kirkland & Ellis
           200 East Randolph Drive
           Suite 6500
           Chicago, IL 60601
    
           Counsel for Appellee
           United Artists Theatre Company,
           et al.
    
           Richard A. Chesley (Argued)
           Houlihan Lokey Howard & Zukin
           123 North Wacker Drive
           4th Floor
           Chicago, IL 60606
    
           Counsel for Appellee
           Houlihan Lokey Howard & Zukin
    
           Bruce G. Forrest (Argued)
           United States Department of Justice
           Civil Division, Appellate Staff
           601 D Street, N.W.
           Washington, DC 20530
    
           Counsel for Appellant
           Acting United States Trustee
    
    OPINION OF THE COURT
    
    AMBRO, Circuit Judge:
    
    The United States Trustee (the "U.S. Trustee") 1 appeals
    the District Court of Delaware’s approval of a bankruptcy
    debtor’s application to retain a financial advisor.
    Specifically, the U.S. Trustee objects to the debtor’s
    agreement to indemnify the financial advisor for claims of
    negligence (as opposed to gross negligence) that may be
    _________________________________________________________________
    
    1. Patricia A. Staiano was the U.S. Trustee at the time of briefing, but
    her term expired on October 5, 2001. Her current replacement is Acting
    U.S. Trustee Donald F. Walton.
    
                                    2
    
    
    leveled against it. We first address whether the U.S. Trustee
    has standing to bring this suit, and determine that he does.
    Next we examine whether subsequent confirmation of the
    reorganization plan renders this case constitutionally or
    equitably moot. After concluding that it is not moot in
    either sense, we turn to the merits of the U.S. Trustee’s
    appeal. We affirm the District Court’s ruling that the
    indemnification provision is permissible, though we do so in
    a way that eschews the inherent imprecision between
    shades of negligence. In so doing, we borrow from corporate
    law analogues, and focus on the process by which financial
    advisors reach their opinions rather than on the substance
    of the opinions themselves.
    
    I. Background
    
    United Artists Theatre Company and affiliates2
    (collectively, the "Debtors" or "United Artists") filed for
    Chapter 11 bankruptcy protection in the District Court.3 At
    the outset the Debtors requested court approval of their
    retention of Houlihan, Lokey, Howard & Zukin Capital
    ("Houlihan Lokey") as financial advisor. The engagement
    letter provided that United Artists would indemnify
    _________________________________________________________________
    
    2. These affiliates are United Artists Theatre Circuit, Inc., United Artists
    Realty Company, United Artists Properties I Corp., United Artists
    Properties II Corp., UAB, Inc., UAB II, Inc., Mamaroneck Playhouse
    Holding Corporation, Tallthe Inc., UA Theatre Amusements, Inc., UA
    International Property Holding, Inc., UA Property Holding II, Inc., United
    Artists International Management Company, Beth Page Theatre Co., Inc.,
    United Film Distribution Company of South America, U.A.P.R., Inc., R
    and S Theatres, Inc., and King Reavis Amusement Company.
    3. The District Court of Delaware’s relationship with the United States
    Bankruptcy Court for the District of Delaware has a checkered past. The
    District Court revoked the automatic reference of bankruptcy cases to
    the Bankruptcy Court effective February 3, 1997. In December of 2000,
    the District Court reinstated the automatic referral, and then revoked it
    once more in April of 2001. An order dated September 6, 2001 again
    reinstated the automatic reference. Revoking the automatic reference
    means in practical terms that bankruptcy cases are assigned to the
    District Court unless, on a case-by-case basis, they are referred to the
    Bankruptcy Court. The District Court retained this case, which was filed
    while the reference revocation was in effect.
    
                                    3
    
    
    Houlihan Lokey’s reasonable attorneys’ fees and expenses,
    as well as any losses incurred by Houlihan Lokey with
    respect to, inter alia, its providing of services. The letter
    also contained an exception for "any Losses that are finally
    judicially determined to have resulted from the gross
    negligence, bad faith, willful misfeasance, or reckless
    disregard of its obligations or duties on the part of
    Houlihan Lokey."4
    _________________________________________________________________
    
    4. The principal indemnity provisions of the retention agreement are as
    follows:
    
           (a) If Houlihan Lokey or any employee, agent, officer, director,
           attorney, shareholder or any person who controls Houlihan
           Lokey (any or all of the foregoing, hereinafter an"Indemnified
           Person") becomes involved in any capacity in any legal or
           administrative action, suit, proceeding, investigation or inquiry,
           regardless of the legal theory or the allegations made in
           connection therewith, directly or indirectly in connection with,
           arising out of, based upon, or in any way related to (i) the
           Agreement; (ii) the services that are the subject of the
           Agreement; (iii) any document or information, whether verbal or
           written, referred to herein or supplied to Houlihan Lokey; (iv)
           the breach of the representations, warranties or covenants by
           the Company given pursuant hereto; (v) Houlihan Lokey’s
           involvement in the Transaction or any part thereof; (vi) any
           filings made by or on behalf of any party with any governmental
           agency in connection with the Transaction; (vii) the Transaction;
           or (viii) proceedings by or on behalf of any creditors or equity
           holders of the Company, the Company will on demand, advance
           or pay promptly, on behalf of each Indemnified Person,
           reasonable attorneys’ fees and other expenses and
           disbursements (including, but not limited to, the cost of any
           investigation and related preparation) as they are incurred by
           the Indemnified Person. The Company also indemnifies and
           holds harmless each Indemnified Person against any and all
           losses, claims, damages, liabilities, costs and expenses
           (including, but not limited to, attorneys’ fees, disbursements
           and court costs, and costs of investigation and preparation)
           ("Losses") to which such Indemnified Person may become
           subject in connection with any such matter.
    
           (b) If for any reason the foregoing indemnification is determined to
           be unavailable to any Indemnified Person or insufficient fully to
           indemnify any such person, then the Company will contribute
           to the amount paid or payable by such person as a result of
    
                                    4
    
    
    The U.S. Trustee objected, claiming, inter alia , that the
    retention agreement exempted Houlihan Lokey from liability
    _________________________________________________________________
    
           any such Losses in such proportion as is appropriate to reflect
           (i) the relationship between Houlihan Lokey’s fee on the one
           hand and the aggregate value of the Transaction on the other
           hand or (ii) if the allocation provided by clause (i) is not
           permitted by applicable law, not only such relative benefit but
           also the relative fault of the other participants in the
           Transaction, on the one hand, and Houlihan Lokey and the
           Indemnified Persons on the other hand, and any other relevant
           equitable considerations in connection with the matters as to
           which such Losses relate; provided, however, that in no event
           shall the amount to be contributed by all Indemnified Persons
           in the aggregate exceed the amount of the fees actually received
           by Houlihan Lokey hereunder.
    
           (c) Any Indemnified Person shall have the right to employ such
           person’s own separate counsel in any such action, at the
           Company’s expense, and such counsel shall have the right to
           have charge of such matters for such person.
    
           (d) The indemnification obligations hereunder shall not apply to
           any Losses that are finally judicially determined to have
           resulted from the gross negligence, bad faith, willful
           misfeasance, or reckless disregard of its obligations or duties on
           the part of Houlihan Lokey or such Indemnified Person. In the
           event of such final judicial determination, the Company shall,
           subject to Houlihan Lokey’s rights of contribution, be entitled to
           recover from the Indemnified Person or Houlihan Lokey the
           costs and expenses paid on behalf of such Indemnified Person
           pursuant to this indemnification obligation.
    
    In addition, United Artists’ application to retain Houlihan Lokey
    supplemented the gross negligence and willful misconduct carveouts for
    indemnity in subparagraph (d) above by providing that, in the case of a
    judicial determination, it must be final and find that either the gross
    negligence or willful misconduct is "solely" the cause of any claim or
    expense of Houlihan Lokey. The order approving the application contains
    the same language.
    
    The application and order also provide indemnity to Houlihan Lokey
    for its "prepetition performance of services." The U.S. Trustee, however,
    appeals only whether "indemnification provisions, holding a financial
    advisor harmless for the consequences of its negligence in connection
    with services it provides to the debtors in a bankruptcy proceeding," are
    reasonable under 11 U.S.C. S 328(a)(emphasis added).
    
                                    5
    
    
    for its own negligence, thus violating the Bankruptcy Code,
    public policy, and basic tenets of professionalism.
    Specifically, it argued that the agreement was unreasonable
    under two provisions of the Bankruptcy Code, 11 U.S.C.
    SS 327(a) and 328(a), because allowing a debtor’s estate to
    indemnify a financial advisor for its own negligence
    undermines the principal purpose of bankruptcy --
    conserving the debtor’s assets in order to pay its creditors.
    The District Court, rejecting the U.S. Trustee’s objections,
    approved the Debtors’ retention of Houlihan Lokey in a
    memorandum order dated December 1, 2000 (though not
    entered on the docket until December 8, 2000). The
    Debtors’ cases then proceeded as "prenegotiated"
    bankruptcies.5 The confirmation hearing for the Debtors’
    second amended joint plan of reorganization ("the Plan")
    was held on January 22, 2001. The District Court
    confirmed the Plan that day (though the order was not
    docketed until January 25, 2001). On February 5, 2001,
    the U.S. Trustee filed this appeal.
    
    At the time of Plan confirmation the U.S. Trustee did not
    object to several provisions releasing Houlihan Lokey from
    liability. Article X(B) provided:
    _________________________________________________________________
    
    5. "Prenegotiated" bankruptcies have plans of reorganization and
    disclosure statements filed shortly after the cases themselves file,
    usually before the committee of unsecured creditors is formed. In re
    Pioneer Fin. Corp., 
    246 B.R. 626
    , 630 (Bankr. D. Nev. 2000); see also
    Report of the Del. State Bar Ass’n to the Nat’l Bankr. Rev. Comm’n in
    Support of Maintaining Existing Venue Choices 18 n.39 (October 3,
    1996). This contrasts with typical Chapter 11 cases, where a plan and
    disclosure statement are filed many months (sometimes years) after the
    cases are filed, and "prepackaged bankruptcies" (or "prepacks"), where
    the plan and disclosure statement are filed, and sufficient favorable votes
    on the plan are solicited and obtained, before the Chapter 11 case
    begins, leading to a prompt plan confirmation. See generally Marcia L.
    Goldstein et al., Prepackaged Chapter 11 Case Considerations and
    Techniques, in 1 Weil, Gotshal & Manges, LLP, Reorganizing Failing
    Businesses ch. 12 (Marvin E. Jacob & Sharon Youdelman eds. 1998);
    Alesia Ranney-Marinelli, Prepackaged Plans of Reorganization, in A
    Practical Guide to Out-Of-Court Restructurings and Prepackaged Plans of
    Reorganization S 4.01[A], at 4-9 (Nicholas P. Saggese & Alesia Ranney-
    Marinelli eds., 2d ed. 2000).
    
                                    6
    
    
           [O]n and after the Effective Date, each of the Debtors,
           the Reorganized Debtors, their subsidiaries, their
           affiliates, and the Releasees, and the agents, officers,
           directors, partners, members, professionals, and
           agents of the foregoing (and the officers, directors,
           partners, members, professionals, and agents of each
           thereof), for good and valuable consideration . . . shall
           automatically be deemed to have released each other
           unconditionally and forever from any and all Claims,
           obligations, rights, suits, damages, Causes of Action,
           remedies and liabilities whatsoever, whether liquidated
           or unliquidated, fixed or contingent, matured or
           unmatured, known or unknown, foreseen or
           unforeseen, existing or hereafter arising, in law, equity
           or otherwise, that any of the foregoing entities would
           have been legally entitled to assert (in their own right,
           whether individually or collectively, or on behalf of any
           Holder of any Claim or Equity Interest or other Person
           or Entity), based in whole or in part upon any act or
           omission, transaction, agreement, event or other
           occurrence taking place on or before the Effective Date,
           relating in any way to the Debtors, the Reorganized
           Debtors, the Chapter 11 Cases, the Plan, the
           Disclosure Statement, or any related agreements,
           instruments or other documents . . . .
    
    Article X(C) read as follows:
    
           On and after the Effective Date, each Holder of a Claim
           who has accepted the Plan, in exchange for, among
           other things, a distribution under the Plan, shall be
           deemed to have released unconditionally each of the
           Debtors, the Reorganized Debtors . . . and the agents,
           officers, directors, partners, members, professionals,
           and agents of the foregoing (and the officers, directors,
           partners, members, professionals, and agents of each
           thereof), from any and all Claims, obligations, rights,
           suits, damages, Causes of Action, remedies and
           liabilities whatsoever, whether liquidated or
           unliquidated, fixed or contingent, matured or
           unmatured, known or unknown, foreseen or
           unforeseen, existing or hereafter arising, in law, equity
           or otherwise . . . .
    
                                      7
    
    
    Finally, Article X(E) provided:
    
           The Debtors, . . . their members and Professionals
           (acting in such capacity) shall neither have nor incur
           any liability to any Person or Entity for any act taken
           or omitted to be taken in connection with or related to
           the formulation, preparation, dissemination,
           implementation, administration, Confirmation or
           Consummation of the Plan, the Disclosure Statement
           or any contract, instrument, release or other agreement
           or document created or entered into in connection with
           the Plan . . . or any other act taken or omitted to be
           taken in connection with the Chapter 11 Cases;
           provided, however, that the foregoing provisions of
           [this] Article X.E . . . shall have no effect on the liability
           of any Person or Entity that results from any such act
           or omission that is determined in a Final Order to have
           constituted gross negligence or willful misconduct.
    
    We have jurisdiction pursuant to 28 U.S.C. S 1291
    because the District Court’s approval of a professional’s
    retention is a final order. We review the District Court’s
    approval under SS 327(a) and 328(a) of the Bankruptcy
    Code for abuse of discretion, but review its legal
    determinations de novo. In re PWS Holding Corp., 
    228 F.3d 224
    , 235 (3d Cir. 2000).
    II. Standing and Mootness
    
    A. Standing
    
    While Houlihan Lokey couches its argument solely in
    terms of mootness, reading closely we find a separate
    component of its argument: standing. It contends that a
    suit against it "could only be brought by someone
    proximately harmed by Houlihan’s negligence in performing
    these services, i.e., an actual or potential financial
    stakeholder of the UA Debtors." Appellee’s Br. at 6. By
    virtue of the releases it obtained, it reasons, no such
    stakeholder can sue. Because the U.S. Trustee’s appeal
    relies upon these potential claims, Houlihan Lokey
    therefore argues that the U.S. Trustee lacks standing.
    Houlihan Lokey also questions the U.S. Trustee’s standing
    more obliquely, observing that "[i]ndeed, it is of more than
    
                                    8
    
    
    passing interest that the party threatening to now disrupt
    this confirmed and effective plan is one with no such
    economic stake." Appellee’s Br. at 12.
    
    Contrary to Houlihan Lokey’s claim, the U.S. Trustee
    "may raise and may appear and be heard on any issue in
    any case or proceeding." 11 U.S.C. S 307. A lack of
    pecuniary interest in the outcome of a bankruptcy
    proceeding does not deny the U.S. Trustee standing. See In
    re Columbia Gas Sys. Inc., 
    33 F.3d 294
    , 295-96 (3d Cir.
    1994). U.S. Trustees are officers of the Department of
    Justice who protect the public interest by aiding
    bankruptcy judges in monitoring certain aspects of
    bankruptcy proceedings. Id.; accord In re Revco Drug Stores,
    Inc., 
    898 F.2d 498
    , 499-500 (6th Cir. 1990). Thus, we find
    that the U.S. Trustee has standing to challenge the
    indemnification provision,6 and turn to the issue of
    mootness.
    
    B. Mootness
    
    Houlihan Lokey argues that the case is both
    constitutionally and equitably moot. The first issue is a
    question of constitutional significance because, if a case is
    moot, we lack the power to hear it. Equitable mootness is
    a more limited inquiry into whether, though we have the
    power to hear a case, the equities weigh against upsetting
    a bankruptcy plan that has already been confirmed. We
    address each issue in turn.
    
    1. Constitutional Mootness
    
    The United States Supreme Court sets a high threshold
    for judging a case moot. An appeal is moot in the
    constitutional sense only if events have taken place that
    make it "impossible for the court to grant any effectual
    relief whatever." Church of Scientology of Cal. v. United
    States, 
    506 U.S. 9
    , 12 (1992) (citation omitted). An appeal
    is not moot "merely because a court cannot restore the
    parties to the status quo ante [the state in which it was
    _________________________________________________________________
    
    6. We note that in In re Metricom, Inc., 
    275 B.R. 364
    , 368 (Bankr. N.D.
    Cal. 2002), Houlihan Lokey implicitly acknowledged the U.S. Trustee’s
    standing to object by responding to its objections with proposed
    modifications.
    
                                    9
    
    
    before]. Rather, when a court can fashion some form of
    meaningful relief, even if it only partially redresses the
    grievances of the prevailing party, the appeal is not moot."
    In re Continental Airlines, 
    91 F.3d 553
    , 558 (3d Cir. 1996)
    (en banc) ("Continental I") (citations and quotation marks
    omitted).
    
    Houlihan Lokey asserts that this case is moot because
    Articles X(B), X(C), and X(E) of the confirmed Plan contain
    releases that preclude potential negligence claims against
    it. The U.S. Trustee counters that meaningful relief may
    still be obtained because the retention order may be
    vacated, at least as to the indemnification provision. With
    respect to Houlihan Lokey’s Article X(C) argument, 7 that
    Article by its own terms subjects Houlihan Lokey to
    potential suits. Because Article X(C) releases the Debtors
    and their professionals from suits by "each Holder of a
    Claim who has accepted the Plan" (emphasis added), it does
    not bind all holders of claims. Rather, it covers only those
    who accept the Plan. Houlihan Lokey is correct that the
    "UA Plan was accepted by each impaired class that was
    entitled to vote," Appellee’s Br. at 8 n.2, but its point that
    each class is bound (regardless whether a member
    objected) misses the mark, even for those objecting who
    receive distributions under the Plan. If a class member
    accepts distributions because it is bound by the cram down
    provisions of S 1129(b)(1) of the Bankruptcy Code (i.e., a
    procedure for nonconsensual confirmation of a plan of
    reorganization), but it has not itself accepted the Plan,
    Article X(C)’s release does not apply to it. Thirty-four
    unsecured creditors voted to reject the Plan, and thus are
    unaffected by the release. Because by its own terms the
    release allows future claims, and in any event we can
    provide relief by modifying the retention order, Article X(C)
    does not render this case constitutionally moot.
    _________________________________________________________________
    
    7. We do not focus on Article X(B), which contains a mutual release of all
    claims among the Debtors, their affiliates, and the Releasees (defined to
    include "the D&O Releasees, the Prepetition Lender Releasees, the
    Placement Agent Releasees, Stonington, the Subordinated Note
    Releasees, and the Equity Releasees") because it does not affect all
    creditor constituencies.
    
                                    10
    
    
    Next, Houlihan Lokey argues that Article X(E) of the Plan
    moots the U.S. Trustee’s challenge because it excepts
    from liability (with a carveout for gross negligence and
    willful misconduct) "[t]he Debtors . . . and their . . .
    Professionals (acting in such capacity) . . . for any act taken
    or omitted to be taken in connection with or related to the
    formulation, preparation, dissemination, implementation,
    administration, Confirmation or Consummation of the Plan
    . . . or . . . the Chapter 11 Cases." It applies to Houlihan
    Lokey, albeit only when acting in a "professional" capacity.8
    
    Even on its own terms, Article X(E) contains carveouts
    (i.e., no forbearance from or tolerance of liability caused by
    willful misconduct or gross negligence). The question in the
    appeal comes full circle: can as a matter of public policy a
    professional be exempt from its own negligence. The answer
    depends on how we treat nonconsensual releases of
    nondebtors.
    
    Debtors and their professionals cannot exempt
    themselves from liability to non-consenting parties merely
    by saying the word. The "hallmarks of permissible non-
    consensual releases" are "fairness, necessity to the
    reorganization, and specific factual findings to support
    these conclusions." In re Continental Airlines, 
    203 F.3d 203
    ,
    214 (3d Cir. 2000) ("Continental II"). Added to these
    requirements is that the releases "were given in exchange
    for fair consideration." Id. at 215. As in Continental II, here
    no finding in the confirmation order specifically addressed
    the releases at issue.9 Id. Releases unbacked by adequate
    findings of fairness, necessity to reorganization and
    reasonable consideration cannot moot a challenge to the
    retention agreement’s indemnity. What may not be valid
    (releases lacking the findings Continental II requires) ipso
    _________________________________________________________________
    
    8. Thus Houlihan Lokey is not a "professional" when it is acting in its
    own interest, e.g., buying and selling claims.
    
    9. The order confirming the Plan does provide, interestingly under
    "Conclusions of Law," that the "releases . . . set forth in the Plan . . .
    shall be, and hereby are, approved as fair, equitable, reasonable and in
    the best interests of the Debtors . . . and their . . . Creditors . . . ."
    
                                    11
    
    
    facto cannot moot an indemnity agreement whose order
    approving it was not final until after confirmation. 10
    
    While the merits of this appeal would have been
    singularly focused had the U.S. Trustee objected to the
    pertinent release provisions at confirmation, the bottom line
    is that the U.S. Trustee did object (and strenuously) to the
    scope of the indemnity demanded by Houlihan Lokey.
    Potential claimants still exist. Reforming the indemnity
    provision would accord them meaningful relief. Therefore
    this case is not constitutionally moot.
    
    2. Equitable Mootness
    We next examine equitable mootness. In this analysis,
    emphasis is decidedly on the first term of the phrase --
    whether the requested relief is equitable. "The use of the
    word ‘mootness’ as a shortcut for a court’s decision that the
    _________________________________________________________________
    
    10. It could be argued that in In re PWS Holding Corp., 
    228 F.3d 224
    ,
    246 (3d Cir. 2000), we found an analogous release to be permissible
    under S 524(e). However, PWS’s holding makes clear that it was not
    addressing a release that "affect[s] the liability of third [i.e., non-debtor]
    parties," id. at 247, and thus "is outside the scope of S 524(e)." Id. In
    discussing Continental II, the PWS panel noted that "[w]e did not treat
    S 524(e) as a per se rule barring any provision in a reorganization plan
    limiting the liability of third parties." Id. Rather, "it was clear under any
    rule that the court might adopt that the [third party] releases at issue
    were impermissible because ‘the hallmarks of permissible non-
    consensual releases--fairness, necessity to the reorganization, and
    specific factual findings to support these conclusions--are all absent
    here.’ " Id. (quoting Continental II, 203 F.3d at 214).
    
    More to the point, PWS did address the standard of liability for creditor
    committee members under S 1103(c) of the Bankruptcy Code, holding
    that this provision "limits liability of a committee to willful misconduct
    or ultra vires acts." PWS, 228 F.3d at 246. While it is unclear whether
    the Court meant to include professionals to committees as well (the very
    next sentence refers to "the entities that provided services to the
    Committee in the event that they were sued for their participation in the
    reorganization," id. at 246-47) and whether the rubric "ultra vires acts"
    is intended to cover any form of negligence, in no event does PWS cover
    more than immunity from liability under S 1103(c). The level of
    indemnity of professionals a debtor employs underS 327 is what is at
    issue in this case. Therefore, we cannot hold that the release moots an
    issue we have not yet examined.
    
                                    12
    
    
    fait accompli of a plan confirmation should preclude further
    judicial proceedings has led to unfortunate confusion."
    Continental I, 91 F.3d at 559. "[T]here is a big difference
    between inability to alter the outcome (real mootness) and
    unwillingness to alter the outcome (‘equitable mootness’).
    Using one word for two different concepts breeds
    confusion." Id. (quoting In re UNR Indus., Inc., 
    20 F.3d 766
    ,
    769 (7th Cir. 1994))(emphases in original). Here we have
    the power to alter the outcome because the case is not
    constitutionally moot, but we must balance the equities of
    both positions and determine whether it is prudent to upset
    the Plan at this date. We consider five factors
    
           in determining whether it would be equitable or
           prudential to reach the merits of a bankruptcy appeal
           . . . [:] (1) whether the reorganization plan has been
           substantially consummated, (2) whether a stay has
           been obtained, (3) whether the relief requested would
           affect the rights of parties not before the court, (4)
           whether the relief requested would affect the success of
           the plan, and (5) the public policy of affording finality
           to bankruptcy judgments.
    Continental I, 91 F.3d at 560. In Continental I, we
    recognized that reversing a plan’s confirmation might
    "knock the props out from under" "intricate and involved
    transactions," the consummation of which is relied on by
    the marketplace. Id. at 561 (quoting In re Roberts Farms,
    Inc., 
    652 F.2d 793
    , 797 (9th Cir. 1981)).
    
    In In re PWS Holding Corp., we rejected an equitable
    mootness claim in a case involving, as already noted supra
    n.10, a challenge to aspects of releases of liability of
    creditor committees and possibly their professionals. 
    228 F.3d 224
    , 236-37 (3d Cir. 2000). There we observed that
    "[t]he plan has been substantially consummated, but . . .
    [it] could go forward even if the releases were struck." Id. at
    236-37. We therefore declined to dismiss on equitable
    mootness grounds.
    
    The relief the U.S. Trustee seeks here does not entail
    "knocking [out] the props" under the Plan. He only requests
    that the provision indemnifying Houlihan Lokey for
    negligent conduct be stricken from its retention agreement.
    
                                    13
    
    
    If we were to modify the indemnity provision, the Plan
    otherwise would survive intact.
    
    The remaining factors do not persuasively challenge this
    result. The fact that the U.S. Trustee did not obtain a stay
    weighs against it, but because the remedy it seeks does not
    undermine the Plan’s foundation, this omission is not fatal.
    Moreover, allowing a challenge on public policy grounds to
    an indemnity provision is itself sound public policy. In this
    context, there is no equity in mooting the U.S. Trustee’s
    challenge to the indemnity provision sought by Houlihan
    Lokey.
    
    III. Permissibility of Debtors’ Indemnifying
    Financial Advisors for Their Own Negligence
    
    Having concluded that the U.S. Trustee has standing to
    bring this appeal and that the issue is not moot, we turn to
    whether the indemnification provision was permissible. This
    is an issue of first impression for this Court. 11 Section
    328(a) of the Bankruptcy Code requires that the terms and
    conditions of employment of any professionals engaged
    under S 327 be "reasonable." 11 U.S.C.S 328(a). The
    question we therefore ask is whether it is reasonable for the
    Debtors to indemnify Houlihan Lokey despite its own
    negligence (but not gross negligence).
    
    Both parties make plausible points on the issue. The U.S.
    Trustee argues that allowing professionals to obtain
    indemnity for their own negligence encourages a standard
    both lax and "inconsistent with the financial advisor’s
    fiduciary obligations to the creditors." Appellant’s Br. at 24.
    Houlihan Lokey worries that the courts might "Monday-
    morning quarterback," or second-guess, decisions that in
    hindsight were clearly mistaken, but at the time seemed
    attractive options. Financial advisors would then be
    _________________________________________________________________
    
    11. A bankruptcy appellate panel of the Eighth Circuit, Unsecured
    Creditors Committee. v. Pelofsky (In re Thermadyne Holdings Corp.), 
    283 B.R. 749
     (B.A.P. 8th Cir. 2002), considered whether Houlihan Lokey, the
    financial advisor to a creditors’ committee, could obtain indemnity for,
    inter alia, simple negligence. The B.A.P. held that it was not an abuse of
    discretion for the bankruptcy court to disapprove such expanded
    indemnity under the circumstances of that case.
    
                                    14
    
    
    constrained and overly conservative in their advice, thus
    disadvantaging the estate.
    
    Though heretofore we have not addressed in depth the
    reasonableness of indemnifying financial advisors, we have
    recognized that S 330, which deals with what constitutes
    "reasonable" compensation for professionals, takes a
    "market-driven" approach. In re Busy Beaver Bldg. Ctrs.,
    Inc. 
    19 F.3d 833
    , 852 (3d Cir. 1994). While this case dealt
    with the reasonableness of paralegals’ compensation, rather
    than their indemnification, it underscores that some
    reference to the market is not out of place when considering
    whether terms of retention are "reasonable" in the
    bankruptcy context.
    
    Indemnification of financial advisors against their own
    negligent conduct is becoming a common market
    occurrence. In re Joan and David Halpern Inc. , 
    248 B.R. 43
    ,
    47 (Bankr. S.D.N.Y. 2000), aff ’d, No. 00-10961 SMB, 
    2000 WL 1800690
     (S.D.N.Y. Apr. 4, 2000)). These provisions are
    of relatively recent origin, spurred by the In re Merry-Go-
    Round Enterprises, Inc. settlement of a suit against
    accountants advising the estate. 
    244 B.R. 327
     (Bankr. D.
    Md. 2000). Where previously there was no great concern
    with bankruptcy professionals being sued for negligence,
    after Merry-Go-Round professionals worried that suits would
    occur frequently, and they sought to lessen their potential
    liability by contracting for indemnification. See Joseph A.
    Guzinski, The United States Trustees: Ongoing Challenges,
    in 23rd Annual Current Developments in Bankruptcy and
    Reorganization 251, 274 (PLI Commercial Law and Practice
    Course, Handbook Series No. 820, 2001) ("In re Merry-Go-
    Round served as a kind of wake up call for bankruptcy
    specialists . . . . Fearing exposure to similar claims,
    specialists . . . have sought indemnification by the company
    filing the bankruptcy."); Kurt F. Gwynne, Indemnification
    and Exculpation of Professional Persons in Bankruptcy
    Cases, 10 ABI L. Rev. 711, 727-29 (2002); Shanon D.
    Murray, U.S. Trustee Watchdog Starting to Bite, Some Say,
    N.Y.L.J., May 3, 2001, at 5 (stating that "the current
    movement of restructuring advisers who want to be
    indemnified for their bankruptcy work stems from a $4
    billion fraud, negligence and malpractice case that a
    
                                    15
    regional trustee brought against Ernst & Young for its role
    in the bankruptcy proceedings of Merry-Go-Round").
    
    However, that indemnification provisions like Houlihan
    Lokey’s are now common in the marketplace does not
    automatically make them "reasonable" underS 328.12 Our
    approach is "market driven," not "market-determined,"
    especially in the realm of bankruptcy, where courts play a
    special supervisory role. With the understanding and
    limitations set out below, we believe Houlihan Lokey’s
    indemnification agreement to be reasonable and therefore
    permissible under S 328. In coming to this conclusion, we
    revisit traditional negligence/gross negligence analysis,
    borrowing from Delaware corporate law, and emphasizing
    that the indemnity provision leaves the door open to
    examining the level of care financial advisors exercise in the
    process of obtaining the results, rather than the results
    themselves. We look to Delaware corporate law as a guide
    primarily because it offers time-tested insights on how
    courts should best evaluate an issue similar to the one
    before us.13 Additionally, Delaware’s law often cues the
    market.
    
    Directors and officers in Delaware may obtain indemnity
    for their own negligence.14 Section 145(a) of Delaware
    _________________________________________________________________
    
    12. See, e.g., Unsecured Creditors Comm. v. Pelofsky (In re Thermadyne
    Holdings Corp.), 
    283 B.R. 749
     (B.A.P. 8th Cir. 2002); In re Metricom, Inc.,
    
    275 B.R. 364
     (Bankr. N.D. Cal. 2002) (rejecting indemnification of
    Houlihan Lokey, advisor to the bondholders’ committee, as unreasonable
    where the debtor and official committee of unsecured trade creditors
    retained two other financial advisors without such indemnification
    agreements, and there was no showing that such an agreement was
    necessary). Cf. In re Comdisco, Inc., 
    2002 WL 31109431
     (N.D. Ill. Sept.
    23, 2002) (reasonableness of indemnity for professional advisors depends
    on the facts of each case); In re DEC International, Inc., 
    282 B.R. 423
    (W.D. Wis. 2002) (indemnity of bankruptcy professionals not per se
    unreasonable but must be scrutinized with care).
    
    13. While the retention agreement between United Artists and Houlihan
    Lokey purports to be governed by New York law, our opinion relates to
    what is reasonable under S 328(a) of the Bankruptcy Code. As this
    without doubt is a matter of federal law, we need not examine New York
    law, and only refer to Delaware corporate law as a useful analogue.
    
    14. Though directors and officers are fiduciaries of the corporations they
    serve, we do not hold financial advisors like Houlihan Lokey to be
    
                                    16
    
    
    General Corporation Law provides that corporations may
    indemnify directors and officers "if the person acted in good
    faith and in a manner the person reasonably believed to be
    in or not opposed to the best interests of the corporation."
    8 Del. Code S 145(a). Section 145(b) requires that, if the
    director or officer is adjudged liable to the corporation, he
    or she will be indemnified "only to the extent that the . . .
    court . . . shall determine upon application that, despite the
    adjudication of liability but in view of all the circumstances
    of the case, such person is fairly and reasonably entitled to
    indemnity for such expenses which the . . . court shall
    deem proper." Id. S 145(b).
    
    Changes in Delaware’s corporate law make plain that
    S 145(b) requires the "adjudication of liability" to be one of
    gross, rather than ordinary, negligence.
    
           Prior to the 1986 amendment to the statute, the
           language relating to the disqualifying adjudication read
           ‘adjudged to be liable for negligence or misconduct in
           the performance of his duty to the corporation.’ Since
           Delaware case law has clearly established ‘gross
           negligence’ as the standard for liability of directors in
           violating their duty of care, the reference to ‘negligence’
    _________________________________________________________________
    
    fiduciaries. Still, in the bankruptcy context they may owe a higher level
    of care than in ordinary practice. Compare In re Gillett Holdings, 
    137 B.R. 452
    , 458 (Bankr. D. Colo. 1991) ("Investment bankers and financial
    advisors hired by the Debtor are also fiduciaries."), and In re Allegheny
    Int’l, Inc., 
    100 B.R. 244
    , 246 (Bankr. W.D. Pa. 1989) ("We now hold that
    the investment bankers/financial advisors hired by the debtor and the
    Creditors’ Committee are also fiduciaries."), with In re Joan and David
    Halpern Inc., 248 B.R. at 46 (earlier cases rejecting indemnification
    "overlook the common law principles permitting indemnity of fiduciaries,
    and the idea that a fiduciary cannot be indemnified for negligence, or
    that such indemnification is contrary to public policy, is just plain
    wrong"), In re Mortgage & Realty Trust, 
    123 B.R. 626
    , 631 (Bankr. C.D.
    Cal. 1991) (rejecting indemnification because it is inconsistent with
    "professionalism," but not holding financial advisors to be fiduciaries),
    and In re Drexel Burnham Lambert Group, 
    133 B.R. 13
    , 27 (Bankr.
    S.D.N.Y. 1991) (same). The upshot for this case is that, to the extent that
    fiduciaries may obtain indemnity for their negligence, financial advisors
    in bankruptcy (who may or may not be fiduciaries) may do the same.
    
                                    17
    
    
           in section 145(b) was inappropriate [and was therefore
           removed].
    
    E. Norman Veasey et al., Delaware Supports Directors with
    a Three-Legged Stool of Limited Liability, Indemnification,
    and Insurance, 42 Bus. Law. 399, 405 (1987); see also
    Cede & Co. v. Technicolor, Inc., 
    634 A.2d 345
    , 364 n.31
    (Del. 1993); Smith v. Van Gorkom, 
    488 A.2d 858
    , 873 (Del.
    1985) (applying a gross negligence standard). In other
    words, the most that Delaware law requires of directors,
    though they are fiduciaries, is that they not be grossly
    negligent. 1 David A. Drexler et al., Delaware Corporation
    Law and Practice S 15.06[1], at 15-35 (2001) (citing Brehm
    v. Eisner, 
    746 A.2d 244
    , 262 (Del. 2000), and Aronson v.
    Lewis, 
    473 A.2d 805
    , 812 (Del. 1984)). Put another way,
    Delaware courts tolerate ordinary negligence from corporate
    fiduciaries. It is important, however, to understand how
    these terms are understood in this particular context.
    Courts are increasingly recognizing the awkwardness
    inherent in using the terms "negligence" and"gross
    negligence" in the area of corporate governance. The art of
    governing (it is emphatically not a science) is replete with
    judgment calls and "bet the company" decisions that in
    retrospect may seem visionary or deranged, depending on
    the outcome. Corporate directors do not choose between
    reasonable (non-negligent) and unreasonable (negligent)
    alternatives, but rather face a range of options, each with
    its attendant mix of risk and reward. Too coarse a filter, the
    traditional negligence construct does not allow these
    nuances to emerge.
    
           While it is often stated that corporate directors and
           officers will be liable for negligence in carrying out their
           corporate duties, all seem agreed that such a
           statement is misleading. Whereas an automobile driver
           who makes a mistake in judgment as to speed or
           distance injuring a pedestrian will likely be called upon
           to respond in damages, a corporate officer who makes
           a mistake in judgment as to economic conditions,
           consumer tastes or production line efficiency will
           rarely, if ever, be found liable for damages suffered by
           the corporation.
    
                                    18
    
    
    Joy v. North, 
    692 F.2d 880
    , 885 (2d Cir. 1982) (Winter, J.)
    (citations omitted).
    
    In simple terms, "[t]he vocabulary of negligence[,] while
    often employed . . . [,] is not well-suited to judicial review
    of board attentiveness." In re Caremark Int’l Inc. Derivative
    Litig., 
    698 A.2d 959
    , 967 n.16 (Del. Ch. 1996) (Allen, C.)
    (citation omitted). The same principle applies to financial
    advisors. In situations where choices are not clear, neither
    are gradations of negligence as a means of analysis.
    
    In the last two decades this confusion about what
    negligence means led to uncertainty about liability exposure
    for both corporate directors and financial advisors. A
    "crisis" in corporate governance arose when Delaware
    courts began to hold directors personally liable for their
    negligence, and directors were unable to find insurance
    against the risks associated with their jobs. See 1 Drexler,
    supra, S 15.06[1], at 15-36. As already noted, in the
    bankruptcy context the In re Merry-Go-Round settlement of
    a suit against an accounting firm advising the estate was a
    similarly seismic event for financial advisors. Houlihan
    Lokey and other financial advisors fear increases in liability
    exposure for the risks associated with doing their jobs.15
    
    Delaware courts have resolved the negligence conundrum
    in the corporate sphere by evaluating the process by which
    boards reach decisions, rather than the final result of those
    decisions. A board’s failure to inform itself of"all material
    information reasonably available" results in a finding of
    gross negligence. Aronson, 473 A.2d at 812. 16 In fact,
    Delaware’s jurisprudence is a direct response to the type of
    concerns about second-guessing that Houlihan Lokey
    voices:
    _________________________________________________________________
    
    15. In this respect Houlihan Lokey’s position is similar to that of creditor
    committee members. See 7 Lawrence P. King, Collier on Bankruptcy
    P1103.05[4], at 1103-32-33 (15th ed. rev. 1996) ("If members of the
    committee can be sued by persons unhappy with the committee’s
    performance during the case or unhappy with the outcome of the case,
    it will be extremely difficult to find members to serve on an official
    committee.").
    
    16. In Merry-Go-Round, claims regarding such a failure by the accounting
    firm were at issue.
    
                                    19
    
    
           [C]ompliance with a director’s duty of care can never
           appropriately be judicially determined by reference to
           the content of the board decision that leads to a
           corporate loss, apart from consideration of the good
           faith or rationality of the process employed. That is,
           whether a judge or jury [,] considering the matter after
           the fact, believes a decision substantively wrong, or
           degrees of wrong extending through "stupid" to
           "egregious" or "irrational", provides no ground for
           director liability, so long as the court determines that
           the process employed was either rational or employed
           in a good faith effort to advance corporate interests. To
           employ a different rule--one that permitted an
           "objective" evaluation of the decision--would expose
           directors to substantive second guessing by ill-
           equipped judges or juries, which would, in the long-
           run, be injurious to investor interests.
    
    Caremark, 698 A.2d at 967 (emphases in original).
    
    When Houlihan Lokey agreed to advise the Debtors, it
    took on the role of a professional (indeed, one highly
    respected for its adept counsel in the high-stakes arena of
    major restructurings). Its job was to advise the Debtors
    well, and it owed them a duty of care in fulfilling this
    obligation. To disappoint the reasonable expectations of the
    Debtors, their creditors, and indeed the Court, is
    unacceptable. At the same time, Houlihan Lokey
    convincingly describes the stifling effects of unduly close
    scrutiny by the courts. A rule of reason must prevail.
    
    Delaware has navigated the Scylla of condoning directors’
    misconduct and the Charybdis of stifling their business
    decisions with a rule that stresses not the end result, but
    the path taken to reach it. Under this approach, courts do
    not interfere with advice by financial advisors when they (1)
    have no personal interest,17 (2) have a reasonable
    awareness of available information after prudent
    _________________________________________________________________
    
    17. The Bankruptcy Code itself requires that professionals working for
    the estate be disinterested persons, a term defined in 11 U.S.C.
    S 101(14). See also 11 U.S.C. S 327(a) ("[T]he trustee . . . may employ . . .
    persons[ ] that do not hold or represent an interest adverse to the estate,
    and that are disinterested persons . . . ."); id. S 328(c) (the court may
    deny compensation if during employment the professional "is not a
    disinterested person, or represents or holds an interest adverse to the
    interest of the estate"). While we leave for another day whether, for
    example, a financial advisor trading in claims with respect to a debtor it
    serves is disinterested, we note that such a circumstance is not rare.
    
                                    20
    
    
    consideration of alternative options, and (3) provide that
    advice in good faith. See 1 Drexler, supra, S 15.03, at 15-6.
    In the corporate sphere this is known as the "business
    judgment rule." A creature of common law, McMullen v.
    Beran, 
    765 A.2d 910
    , 916 (Del. 2000), it acknowledges a
    judicial syllogism derived from five fundamental tenets:
    
           (1) the management of a corporation’s affairs is placed
           by law in the hands of its board of directors;
    
           (2) performance of the directors’ management function
           consists of: (a) decision-making -- i.e., the making
           of economic choices and the weighing of the
           potential of risk against the potential of reward,
           and (b) supervision of officers and employees --
           i.e., attentiveness to corporate affairs;
    
           (3) corporate directors are not guarantors of the
           financial success of their management efforts;
    
           (4) though not guarantors, directors as fiduciaries
           should be held legally accountable to the
           corporation and its stockholders when their
           performance falls short of meeting appropriate
           standards; and
    
           (5) such culpability occurs when directors breach
           their fiduciary duty -- that is, when they profit
           improperly from their positions (i.e., breach the
           "duty of loyalty") or fail to supervise corporate
           affairs with the appropriate level of skill (i.e.,
           breach the "duty of care").
    
    1 Drexler, supra, S 15.03, at 15-6.
    
    Here, where a debtor’s financial affairs -- the pith of a
    reorganization -- are shaped by its financial advisors, they
    lay out the economic choices and assess their risks, and
    (though not sureties of success) can be held accountable for
    not advising with the level of care or loyalty expected,
    transposing the business judgment rule from its corporate
    ambit to bankruptcy appears well suited. For by this
    transposition we have a means to distinguish gross from
    simple negligence, and thus a benchmark for approving as
    
                                    21
    reasonable an arrangement for indemnity that includes
    common negligence.18
    
    Our understanding of the developing standards used in
    this area fortifies our view that the District Court did not
    abuse its discretion by finding the contested terms in the
    agreement at issue here to be reasonable. At this initial
    stage of the indemnity process (considering and approving
    a retention arrangement containing an agreement to
    indemnify for ordinary negligence), no evidence before the
    District Court tended to disqualify Houlihan Lokey under
    the tenets we set out for determining reasonableness of the
    indemnity proposed.19
    
    We reach this result with two caveats. The first is that
    Houlihan Lokey attempted to supplement its retention
    agreement with a provision in the retention application and
    approving order that in effect mandates indemnification to
    Houlihan Lokey for even its gross negligence if that
    negligence is not judicially determined to be "solely" the
    _________________________________________________________________
    
    18. Houlihan Lokey argues that our approach nonetheless subjects it to
    claims that it has not followed a correct process in advising debtors.
    While financial advisors are not Garibaldi for all reorganizations, they are
    trained to enhance their prospects. Undertaking this duty for so high a
    recompense ($150,000 per month plus a "transaction fee" of 70 basis
    points of United Artists’ debt) is hardly reasonable if that training is not
    applied.
    
    19. Before the Court was the affidavit of Michael A. Kramer (Managing
    Director of Houlihan Lokey), submitted in support of the Debtors’
    application to retain Houlihan Lokey, and stating that it was
    "disinterested" (and thus had no personal interest in the United Artists
    cases), a claim that the U.S. Trustee did not dispute. There was no
    allegation that Houlihan Lokey imprudently considered financial options
    available to the Debtors, nor was there any allegation of Houlihan
    Lokey’s bad faith.
    
    In any event, section 328(a) itself provides a safe harbor for the Court
    to reconsider its approval of any employment terms for professionals.
    
           Notwithstanding such terms and conditions, the court may allow
           compensation different from the compensation provided under such
           terms and conditions after the conclusion of such employment, if
           such terms and conditions prove to have been improvident in light
           of developments not capable of being anticipated at the time of the
           fixing of such terms and conditions.
    
                                    22
    
    
    cause of its damages. In other words, the Debtors would be
    bound to indemnify Houlihan Lokey when its gross
    negligence contributed only in part to its damages. This
    attempted end run goes out of bounds for acceptable public
    policy. See Gwynne, supra, at 730-01 & nn.106-07.
    
    Secondly, as note 8 supra and the accompanying text
    indicate, Houlihan Lokey in the Plan sought indemnity only
    for actions in its professional capacity. The retention
    agreement arguably goes further, for it requires
    indemnification of Houlihan Lokey for contractual disputes
    with the Debtors. To the extent that Houlihan Lokey seeks
    indemnity for a contractual dispute in which the Debtors
    allege the breach of Houlihan Lokey’s contractual
    obligations,20 this is hardly an indemnity-eligible activity.
    See Cochran v. Stifel Fin. Corp., No. Civ. A. 17350, 
    2000 WL 1847676
    , at *7 (Del. Ch. Dec. 13, 2000), aff ’d in relevant
    part, rev’d in part on other grounds, 
    809 A.2d 555
     (Del.
    2002); cf. Gwynne, supra, at 731. 21
    
    * * * * *
    
    Financial advisors are an essential part of
    reorganizations. Our decision today recognizes the need for
    safeguards from the second-guessing of creditors and,
    ultimately, the courts. At the same time, it assigns courts
    their accustomed task of evaluating the process by which
    advice is given. If financial advisors take the appropriate
    steps to arrive at a result, the substance of that result
    _________________________________________________________________
    
    20. We doubt that this kind of enhanced indemnity was contemplated by
    Houlihan Lokey. Subparagraph (a)(iv) of Exhibit A to the retention
    agreement speaks only of the breach by the Debtors of their contractual
    covenants, representations, and warranties. While subparagraph (a)(i)
    relates to any dispute involving the agreement (which theoretically may
    involve breaches by Houlihan Lokey of its obligations), it appears that
    such a conceivable argument is overridden by subparagraph (d), which
    exempts from indemnity "gross negligence, ... willful misfeasance, or
    reckless disregard [by Houlihan Lokey] of its obligations or duties" under
    the agreement.
    
    21. As noted supra n.4, the U.S. Trustee has not appealed whether the
    order permitting indemnification of Houlihan Lokey for its prepetition
    performance of services to the Debtors is reasonable under S 328(a). We
    therefore do not address this question.
    
                                    23
    
    
    should not be questioned. So understood, agreements to
    indemnify financial advisors for their negligence are
    reasonable under S 328(a) of the Bankruptcy Code.22
    
    IV. Conclusion
    
           The U.S. Trustee has standing to bring this case. His
    claim is not constitutionally moot because Plan
    confirmation has not released all potential claims against
    Houlihan Lokey. It is not equitably moot because the relief
    requested will not upset the confirmed Plan. Because it is
    permissible for financial advisors to obtain indemnity for
    negligent acts if understood in the context noted above, the
    contested provision is acceptable. We therefore affirm.
    _________________________________________________________________
    
    22. Our concurring colleague has taken a more familiar path to the
    same result. That path is plausible and merits consideration. We go
    another way because the traditional approach sheds no light on when
    negligence becomes gross, and thus not indemnifiable. With great
    conviction, however, we disavow the attempt to blot our judicial
    escutcheon with the claim that we engage in "policy making" that "goes
    far beyond the parameters of our judicial function." We address directly
    the issue on appeal, see supra n.4, and in deciding that issue explain
    when it is "reasonable" under S 328(a) of the Bankruptcy Code to
    approve an agreement to indemnify a financial advisor for its own
    negligence by laying down markers to discern what simple negligence is
    and is not. As our colleague points out, "the law is unsettled and our
    bankruptcy and district courts need guidance."
    
                                    24
    
    
    ALITO, Circuit Judge, Concurring:
    
    I fully join the thoughtful and scholarly opinion of the
    court but add a few words in response to Judge Rendell’s
    concurring opinion. With respect, I believe that Judge
    Rendell’s opinion quarrels with an opinion other than the
    one that the court has issued. The opinion of the court, as
    I understand it, holds only that the "reasonableness"
    standard of 11 U.S.C. S 328(a) does not categorically
    prohibit indemnification of financial advisers, as the United
    States Trustee argues. If such a blanket prohibition is
    desirable, it should be enacted by Congress.
    
    Contrary to the suggestion in Judge Rendell’s
    concurrence, the court does not hold that Houlihan Lokey’s
    indemnification agreement must be interpreted in
    accordance with the principles of Delaware corporate law
    that the opinion of the court discusses. Nor does the court
    issue an authoritative interpretation of that agreement.
    Rather, the court discusses principles of Delaware
    corporate law because they provide a sophisticated
    framework for evaluating the conduct of financial advisers
    and because this understanding of the circumstances in
    which in it sensible to hold financial advisers responsible
    for unsuccessful business decisions helps to explain why
    indemnification agreements such as the one in this case
    are not categorically "unreasonable."
    
                                    25
    
    
    RENDELL, Circuit Judge, Concurring:
    
    I agree with the result reached by the District Court and
    agree that we should affirm its order. However, I
    respectfully reject the majority’s ruling on the merits, as I
    read Judge Ambro’s opinion, because it represents a
    significant departure, if not a quantum leap, from the issue
    before us.
    
    Writing for the panel, brother Ambro does not address
    what the District Court did or the arguments raised by the
    parties on this unresolved yet important issue; the opinion
    actually ignores the issue presented on appeal. The Trustee
    seeks a per se ban on provisions granting indemnity to
    financial advisors for negligence. Houlihan Lokey takes the
    position that such provisions should be permissible and
    that the court should examine them on a case-by-case
    basis. The parties briefed the various aspects of that issue,
    including the propriety of professionals’ obtaining such
    indemnity and whether it was appropriate or necessary in
    the given setting. While, as the District Court noted, there
    is no binding caselaw, there are numerous cases that
    express differing views on the issue.1
    _________________________________________________________________
    
    1. In rejecting a per se ban on indemnity provisions, the District Court
    focused on the "reasonableness" language in section 328(a) and
    conducted an independent analysis of this agreement. A number of other
    courts favor this approach and have used it to uphold some indemnity
    provisions and reject others. For example, the District Court for the
    Northern District of Illinois and the Bankruptcy Court for the Southern
    District of New York have both upheld similar indemnity provisions,
    rejecting the Trustee’s argument that such provisions should be per se
    unreasonable. In re Comdisco, Inc., Nos. 02 C 1174 & 02 C 1397
    (consolidated), 
    2002 U.S. Dist. LEXIS 17994
    , at *16 (N.D. Ill. Sept. 25,
    2002); In re Joan & David Halpern, Inc., 
    248 B.R. 43
    , 47 (Bankr. S.D.N.Y
    2000). Houlihan Lokey cites to numerous non precedential decisions of
    the Bankruptcy Courts for the District of Delaware doing the same. A’ee
    Br. at 22. Bankruptcy Courts in California and Colorado have also
    subjected indemnity provision to a full reasonableness inquiry. See, e.g.,
    In re Metricom, Inc., 
    275 B.R. 364
    , 371 (Bankr. N.D. Cal. 2002) (stating
    that "the issue is whether particular terms are reasonable under given
    circumstances, and such a determination can only be made on a case by
    case basis") (ultimately rejecting provision at issue); In re Gillett Holdings,
    Inc., 
    137 B.R. 452
    , 458-49 (Bankr. D. Colo. 1991) ("This Court will not
    
                                    26
    
    
    Instead of addressing these arguments, Judge Ambro’s
    opinion ventures into the arena of corporate law and
    fashions an open-ended good faith business judgment rule,
    based upon Delaware corporate law principles, as the test
    for the "reasonableness" of advisors’ indemnity. It does so
    because it finds the concepts of negligence and gross
    negligence to be too results-oriented.
    
    I do not doubt that scholars and professors -- and indeed
    some practitioners -- may have an aversion to distinctions
    made between negligence and gross negligence and have
    therefore suggested that corporate directors should not be
    liable if they follow the appropriate process and exercise
    their business judgment. However, that is not the issue
    _________________________________________________________________
    
    go so far as to hold that indemnity provisions per se are either
    unacceptable or unnecessary in these circumstances. Indemnity
    provisions must be analyzed on a case-by-case basis.") (citation omitted)
    (ultimately rejecting provision at issue); In re Mortgage & Realty Trust,
    
    123 B.R. 626
    , 630 (Bankr. C.D. Cal. 1991) (rejecting provision at issue
    because debtor had presented no evidence of its reasonableness).
    
    In support of her theory that indemnity provisions should be banned
    outright, the Trustee relies on an opinion from one of our own
    bankruptcy courts, In re Allegheny International, Inc., 
    100 B.R. 244
    , 247
    (Bankr. W.D. Pa. 1989). In Allegheny, Judge Cosetti decided that
    financial advisors were fiduciaries of the debtors who hired them. Id. at
    246. He went on to appropriate Judge Cardozo’s famous remarks in
    Meinhard v. Salmon, 
    164 N.E. 545
    , 546 (N.Y. 1928), for the proposition
    that fiduciaries owe the highest standard of care, and to conclude that
    "holding a fiduciary harmless for its own negligence is shockingly
    inconsistent with the strict standard of conduct for fiduciaries."
    Allegheny, 100 B.R. at 247. Courts faced with this issue have referenced
    the "fiduciary" language, but have generally looked at an advisor’s
    fiduciary status as one factor in a reasonableness analysis, not as
    support for a per se ban on indemnity. See, e.g., Gillett, 137 B.R. at 458;
    Mortgage & Realty Trust, 123 B.R. at 630.
    
    Here, the parties have not argued that professionals like Houlihan are
    fiduciaries as such, and I suggest that resort to nomenclature for
    resolution of the issues before us would be wrong. The issue here is
    "reasonableness" under section 328(a). An agreement about what status
    might be attributed to professionals based on analogous corporate trust
    principles should give way to a consideration of what is reasonable
    under all of the circumstances in the bankruptcy context.
    
                                    27
    
    
    before us, nor is it a concept that either of the parties has
    even remotely embraced.
    
    Responding to a line of inquiry at oral argument, the
    Trustee and Houlihan Lokey filed supplemental briefs
    specifically addressing the propriety of our creating a new
    "reasonableness" standard separate and apart from the
    negligence principles embodied in their agreement. They
    specifically requested that we not do so. 2 As both parties
    have noted, we should decide the issue presented to us, not
    craft new rules or address matters beyond the scope of the
    appeal. I should note that I would favor Judge Alito’s
    reading of Judge Ambro’s opinion, but fear it will not be so
    read.
    
    I cannot help but wonder why we should resort to
    reasoning that "eschews the inherent imprecision between
    shades of negligence" when the parties bargained under
    traditional negligence principles and rules. And why should
    we concern ourselves with Delaware law applicable to
    directors, when the retention agreement here was
    _________________________________________________________________
    
    2. In their Supplemental Briefs, the Trustee and Houlihan Lokey both
    pointed out the dangers inherent in our creating a new standard in this
    case. First and foremost, both parties noted that our appellate
    jurisdiction should be limited to deciding the issue presented, that is,
    whether the District Court abused its discretion in approving the
    retention agreement. See App. Supp. Br. at 3 ("The crafting of new
    negligence standards . . . seems inconsistent with the scope of this
    appeal.")
    
    The parties also implored us not to venture into the realm of the
    legislature, as we are not equipped to weigh the many complicated
    interests that go into bankruptcy administration, nor can we predict the
    implications of a new untested standard or the ways it might upset the
    current balance of incentives. App. Supp. Br. at 6-7; A’ee Supp. Br. at
    6. The Trustee worries that the majority’s test will essentially excuse all
    professional misconduct by financial advisors, while for its part,
    Houlihan Lokey fears the rigid test will undermine its own safeguards,
    exposing it to "process" litigation by creditors unhappy with their
    recovery, even where there was no basis on which to attack the
    substantive advice actually given. App. Supp. Br. at 9; A’ee Supp. Br. at
    5. In short, neither party revealed any inclination to support what the
    majority has done. Rather, both vehemently argued against this
    approach.
    
                                    28
    
    
    specifically governed by New York law and was meant to
    govern a relationship not with directors, but between a
    company and its professional financial advisors? 3 Financial
    advisors are not directors, and I do not find their status to
    be analogous.
    
    I must confess that although I would acknowledge that
    my colleagues sincerely believe that their view represents a
    contribution to our thinking about the issue at hand, I find
    it very difficult to conceive of the application, and
    implications, of this new test. Presumably, the first and
    third prongs -- "disinterested" and "good faith" -- are easily
    met, but what does the second prong mean? When does a
    financial advisor not have "a reasonable awareness of
    available information after prudent consideration of
    alternative options"?
    
    In a footnote, Judge Ambro seemingly applies the post-
    hoc test he espouses (n.19), concluding that the evidence
    before the District Court revealed no personal interest on
    the part of Houlihan Lokey in the United Artists cases, and
    that, because there were no allegations of imprudent
    consideration by Houlihan Lokey of the available financial
    options or of bad faith, Houlihan Lokey is entitled to
    indemnity. Even were I to agree that the creation of a new
    test is warranted, surely this is not the way to apply it. This
    conclusory treatment leaves us uncertain as to how the test
    should be applied in other instances. I cannot tell whether
    it will provide a blank check for substandard performance
    (as the Trustee urges), or will foment process-oriented
    litigation (as Houlihan Lokey submits). Further, I cannot
    imagine what guidance we are giving to the District Court
    by changing the rules midstream, much less what
    implications this poses for indemnity agreements already in
    force.
    
    The rationale for adopting this test -- namely, an
    aversion to a "results-oriented" approach to liability, and
    therefore, indemnity -- goes far beyond the parameters of
    _________________________________________________________________
    
    3. Although United Artists is a Delaware corporation, its retention
    agreement with Houlihan Lokey contains an explicit choice of law
    provision specifying New York law as the governing state law. App. at
    132-33.
                                    29
    
    
    our judicial function, into the sphere of policy making. To
    my mind, the adoption of a business judgment rule as
    providing a standard for indemnification of professional
    advisors is fraught with policy considerations, none of
    which has been explored in this case. These are the types
    of concerns that should be considered in the first instance
    by a legislative, rather than a judicial, body. Further, the
    test can only be applied after the fact, thus essentially
    emasculating the bankruptcy courts’ testing of terms of
    retention at the time of retention, as is clearly envisioned by
    section 328(a). I fear that our grafting such a test onto
    section 328(a) goes beyond our ken, especially here where
    we are reviewing a determination by the District Court that
    followed traditional lines of reasoning.
    
    The issue actually before us, as framed by the parties
    and decided by the District Court, deserves our attention.
    Is there something essentially problematic with the concept
    of professionals bargaining for indemnity against their own
    negligence? Should it ever be permitted? If so, under what
    circumstances? We should address the issue as presented,
    because the law is unsettled and our bankruptcy and
    district courts need guidance.
    
    The District Court considered the merits of this issue
    very seriously and thoroughly, entertaining briefing and
    oral argument that spans nearly 500 pages of the
    voluminous appendix submitted on appeal. Instead of
    creating a new test, I would affirm by disavowing the notion
    of a per se ban, engaging in a discussion of the factors that
    the courts have examined in considering "reasonableness"
    on a case by case basis under section 328, and approving
    the ultimate result reached by the District Court based on
    the extensive record presented.4
    _________________________________________________________________
    
    4. Among the specified factors, and facts, weighing in favor of the
    reasonableness of this agreement in the situation presented here are:
    1) the retention of Houlihan Lokey was in the best interest of the estate,
    as it played a crucial role in the restructuring; 2) United Artists’
    creditors approved the agreement and have never objected to the
    indemnity provision; 3) the agreement did not prov ide blanket immunity,
    but rather contained detailed procedures for determining at a later date
    whether a particular application for indemnity should be granted;
    
                                    30
    
    
    The review and assessment of the law and the record--
    rather than the creation of a slippery slope for testing
    consulting professionals’ liability in the bankruptcy arena
    -- should be the basis of our rule. The concluding
    paragraphs of the opinion seem to venture into an analysis
    of "reasonableness," noting two aspects of the indemnity
    agreement that are, respectively, an "end run" around
    "acceptable public policy" (the indemnity for gross
    negligence when that negligence is not solely the cause of
    damages), and not an "indemnity-eligible activity" (the
    indemnity for contractual disputes with Debtors). These
    aspects were never argued or briefed, but I suggest that it
    is this type of scrutiny of the provisions of the retention
    agreement that is called for under the "reasonableness"
    standard of section 328(a). I agree that, assessed under the
    "reasonableness" standard, these two terms do not pass
    muster. But, unfortunately, we are left confused as to
    whether the overall inquiry is, as urged in the thrust of the
    opinion, a post hoc examination, or whether some scrutiny
    -- on some reasonableness basis -- is to be undertaken at
    the outset. It is hard to imagine that reasoning done at the
    outset, if it does occur, could be anything other than a
    complete and binding determination of "reasonableness,"
    making some after the fact business judgment rule
    _________________________________________________________________
    
    4) Houlihan Lokey had been retained pre-petition u nder an agreement
    containing an indemnity clause. Most of its work was performed prior to
    the initiation of bankruptcy proceedings, so, relatively speaking, its post-
    bankruptcy indemnity was not particularly significant; 5) United Artists
    and Houlihan Lokey are sophisticated business entities with equal
    bargaining power who engaged in an arms length negotiation; 6) such
    terms are viewed as normal business terms in the marketplace, see In re
    Busy Beaver Bldg. Centers, 
    19 F.3d 833
    , 849 (3d Cir. 1994) (condoning
    a "market-driven" approach to reasonableness); and finally, 7) under the
    terms of section 328, the District Court retained discretion to modify the
    agreement "if such terms and conditions prove to have been
    improvident." 11 U.S.C. S 328(a). Indeed, we have encouraged similar
    exercises of discretion in the realm of post-bankruptcy fees for attorney
    services to debtors under 11 U.S.C. S 330. In re Top Grade Sausage, Inc.,
    
    227 F.3d 123
    , 132-33 (3d Cir. 2000). I would therefore approve the
    indemnity agreement, subject to the two caveats noted by the majority,
    as discussed in the penultimate paragraph of this concurrence.
    
                                    31
    
    
    unnecessary and uncalled for. Once again, we are left
    questioning how to apply this test.
    
    Therefore, although I concur in the resulting affirmance,
    I would arrive at that result via an entirely different route.
    
    A True Copy:
    Teste:
    
           Clerk of the United States Court of Appeals
           for the Third Circuit
    
                                    32
    

Document Info

DocketNumber: 01-1351

Filed Date: 1/9/2003

Precedential Status: Precedential

Modified Date: 10/13/2015

Authorities (27)

Church of Scientology of Cal. v. United States , 506 U.S. 9 ( 1992 )

in-re-roberts-farms-inc-a-corporation-debtor-curvin-j-trone-jr-and , 652 F.2d 793 ( 1981 )

Fed. Sec. L. Rep. P 98,860 Athalie Doris Joy v. Nelson L. ... , 692 F.2d 880 ( 1982 )

In Re Revco D.S., Inc., Debtors. Conrad J. Morgenstern, U.S.... , 898 F.2d 498 ( 1990 )

In Re Busy Beaver Building Centers, Inc. Kirkpatrick & ... , 19 F.3d 833 ( 1994 )

In the Matter Of: Unr Industries, Inc., Debtors. Appeals of ... , 20 F.3d 766 ( 1994 )

in-re-columbia-gas-systems-inc-columbia-gas-transmission-corporation , 33 F.3d 294 ( 1994 )

in-re-continental-airlines-nationsbank-of-tennessee-na-fka , 91 F.3d 553 ( 1996 )

in-re-continental-airlines-and-continental-airlines-holdings-inc , 203 F.3d 203 ( 2000 )

In Re: Top Grade Sausage, Inc., Debtor (99-5383) , 227 F.3d 123 ( 2000 )

in-re-pws-holding-corporation-brunos-inc-food-max-of-mississippi-inc , 228 F.3d 224 ( 2000 )

Smith v. Van Gorkom , 488 A.2d 858 ( 1985 )

Stifel Financial Corp. v. Cochran , 809 A.2d 555 ( 2002 )

In Re Joan and David Halpern Inc. , 248 B.R. 43 ( 2000 )

In Re Pioneer Finance Corp. , 246 B.R. 626 ( 2000 )

In Re Metricom, Inc. , 275 B.R. 364 ( 2002 )

In Re Gillett Holdings, Inc. , 137 B.R. 452 ( 1991 )

In Re Allegheny Intern., Inc. , 100 B.R. 244 ( 1989 )

In Re Mortgage & Realty Trust , 123 B.R. 626 ( 1991 )

In Re DEC Intern., Inc. , 282 B.R. 423 ( 2002 )

View All Authorities »