Vergos v. Schilling ( 2004 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 In re Big Rivers Nos. 02-6212/6213/6338/
ELECTRONIC CITATION: 2004 FED App. 0010P (6th Cir.) Electric Corp. 6340/6341/6344/6347
File Name: 04a0010p.06
Before: GIBBONS and SUTTON, Circuit Judges; MILLS,
District Judge.*
UNITED STATES COURT OF APPEALS
_________________
FOR THE SIXTH CIRCUIT
_________________ COUNSEL
In re: BIG RIVERS ELECT RIC X ARGUED: Donald L. Cox, LYNCH, COX, GILMAN &
CORPORATION , - MAHAN, Louisville, Kentucky, for Appellant. Michael E.
Robinson, U.S. DEPARTMENT OF JUSTICE, CIVIL
Debtor. - DIVISION, Washington, D.C., for Appellees. Michael A.
- Nos. 02-6212/
______________________ - 6213/6338/6340/ Fiorella, SULLIVAN, MOUNTJOY, STAINBACK &
> 6341/6344/6347 MILLER, Owensboro, Kentucky, for Debtor. ON BRIEF:
,
UNITED STATES OF AMERICA , - Donald L. Cox, LYNCH, COX, GILMAN & MAHAN,
On Behalf of the Rural Louisville, Kentucky, for Appellant. Michael E. Robinson,
- William Kanter, U.S. DEPARTMENT OF JUSTICE, CIVIL
Utilities Service of the - DIVISION, Washington, D.C., Alan C. Stout, STOUT LAW
Department of Agriculture - OFFICE, Marion, Kentucky, for Appellees. Michael A.
and the United States Trustee, - Fiorella, James M. Miller, SULLIVAN, MOUNTJOY,
-
et al., STAINBACK & MILLER, Owensboro, Kentucky, for
-
Appellees, - Debtor.
- _________________
v. -
- OPINION
J. BAXTER SCHILLING , - _________________
N
Appellant.
SUTTON, Circuit Judge. At issue in this case are the
duties of disinterest and disclosure of an examiner appointed
Appeal from the United States District Court to facilitate a reorganization under Chapter 11 of the
for the Western District of Kentucky at Owensboro. Bankruptcy Code. The issues arise from the appointment of
Nos. 99-00177; 99-00117; 99-00118; 99-00119; 99-00131; J. Baxter Schilling to serve as the examiner in the
99-00147; 01-00049—Joseph H. McKinley, Jr.; reorganization of Big Rivers Electric Corporation, which was
Avern Cohn, District Judges. unable to meet obligations on $1.2 billion in debt and whose
Argued: September 10, 2003
*
Decided and Filed: January 8, 2004 The Hon orable R ichard M ills, United States District Judge for the
Central District of Illinois, sitting by designation.
1
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September 1996 bankruptcy petition represented the largest included Bank of New York, Chase Manhattan Bank, and
Chapter 11 case filed in Kentucky history. Mapco Equities, each of which held unsecured claims. Id.As an examiner, Schilling did much to advance the On October 7, 1996, Bluegrass Containment, Inc., a smaller
successful reorganization of Big Rivers, which emerged from unsecured creditor, moved the bankruptcy court to appoint a
Chapter 11 in June 1997 through a consensual plan of trustee or an examiner in the Big Rivers case. Id. In a
reorganization approved by the bankruptcy court. During his Chapter 11 case, a trustee replaces the debtor in possession
tenure as examiner, however, Schilling sought privately to and takes immediate control of the business and the
negotiate a success fee with three of the estate’s unsecured reorganization effort. See 11 U.S.C. §§ 1104(a), 1106(a).
creditors, by which they would pay him a percentage of their Examiners, by contrast, assume a more limited role. They
increased recovery on top of the hourly fee authorized by the typically investigate the debtor’s business and handle other
bankruptcy court for his services. Schilling did not disclose duties specifically assigned by the bankruptcy court, but do
the negotiations, or the agreements he believed he had not replace the debtor in possession in handling the day-to-
reached with these creditors, to the debtor in possession, to day affairs of the business. See id. §§ 1104(c), 1106(b).
the other creditors or to the court until many months later.
When Schilling’s conduct came to light, several parties The bankruptcy court decided that an examiner should be
objected to his actions, as did the United States Trustee which appointed and ordered the United States Trustee to select one.
is responsible for appointing bankruptcy examiners and In addition to the tasks expressly required of examiners under
trustees. In view of his conduct, they argued that Schilling the Bankruptcy Code—investigating the debtor’s affairs and
and his law firm should disgorge all of the fees dispensed to filing a report, see id. § 1106(b)—the bankruptcy court
them during the case—totaling nearly $1 million. The district ordered the examiner to “[w]ork with Big Rivers and its
court agreed, and we now affirm. creditors in . . . resolving various disputes with creditors, . . .
and [] if feasible, attempt to negotiate a global settlement of
I. the disputes in this case and the development of a consensual
plan of reorganization.” JA 81. The court did not specify the
Unable to meet the continuing obligations on more than terms of the examiner’s compensation.
$1.2 billion in debt, the Big Rivers Electric Corporation filed
a petition to reorganize the company under Chapter 11 of the The United States Trustee selected J. Baxter Schilling, a
Bankruptcy Code and to remain as a debtor in possession Kentucky bankruptcy practitioner, as the examiner. At the
during the reorganization. Filed on September 26, 1996, the time of his appointment, Schilling had frequently served as a
petition represented the largest bankruptcy case ever filed in Chapter 7 trustee, had twice served as a Chapter 11 trustee,
Kentucky and at the time was one of the largest bankruptcy but had never served as an examiner. On October 18, 1996,
cases in the country. A publicly-regulated utility, Big Rivers the bankruptcy court entered an order approving Schilling’s
owed $1.1 billion of its debt to the Rural Utilities Service of selection but again did not specify the terms of the examiner’s
the United States Department of Agriculture (the “Utilities compensation. 284 B.R. at 585.
Service”), which held a perfected security interest in all of
Big Rivers’ assets. See In re Big Rivers Elec. Corp., 284 B.R. Soon after his selection, Schilling signed a document
580, 584 (W.D. Ky. 2002). Big Rivers’ largest other creditors entitled “Affidavit of Examiner that He is Disinterested,” in
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which he attested that he was “a disinterested person in this told Chase, Bank of New York and Mapco representatives
case” and did not “have an interest materially adverse to the that he expected each of them to pay him three percent of
interest of the estate or of any class of creditors.” Id. at their increased recovery from Big Rivers. Id. Without such
585–86. Schilling also submitted a separate verified a deal, Schilling told Bank of New York’s attorney, he would
statement that he had “no connections with the . . . Debtor, not perform his mediation duties. Id.
creditors, or any other interested parties.” Id. at 586.
Schilling left the Washington meetings believing that,
On October 31 and November 1, 1996, Schilling held subject to bankruptcy court approval, Bank of New York,
meetings in Washington, D.C. with the major secured and Chase and Mapco would pay him three percent of their
unsecured creditors. In the course of the meetings, Schilling increased recovery. As later communications reveal,
sought to mediate a dispute between the Utilities Service and however, none of these three creditors believed they had
some of the unsecured creditors regarding the priority of their reached such an agreement with Schilling—at least not at that
claims so that the parties could submit a consensual plan of time. Id.
reorganization to the court. Id. at 586. When the initial
negotiations did not bear fruit, Schilling reached the By November 13, 1996, the Utilities Service learned that
conclusion that the parties would never agree on a plan of Schilling had made statements about his desire to seek
reorganization unless someone found a way to bring new compensation based on the new value added to the estate.
value into the estate. To that end, Schilling decided to According to the bankruptcy court, “one or more interested
undertake the task himself, performing in his words “trustee persons,” including the Utilities Service, spoke to a member
duties, including the principal duty of a trustee to maximize of the bankruptcy court’s staff the morning of November 13,
the value of the debtor’s estate, as well as examiner duties.” 1996 and requested an in camera hearing regarding the
JA 499. Because he effectively would function as a trustee in examiner’s compensation. Id. at 587. These “persons,”
this new role and because he customarily had received a unidentified except for the Utilities Service, expressed
percentage-based fee as a Chapter 7 trustee, Schilling concern about Schilling’s statements that he would seek
believed he should be paid like a Chapter 7 trustee for his compensation based upon new value added to the estate
work as the examiner in the Big Rivers case. 284 B.R. at 586; during his tenure. The bankruptcy judge instructed his staff
see also JA 129 (Schilling: “I had been given the misnomer member to tell the parties that they could raise the issue at a
of examiner, but I had been given trustee duties”), 153–54, hearing if they wished, but that he would not hold an in
164–65, 178–79. camera hearing. No one raised the issue in court during the
hearing on November 13, 1996. Id.
Near the conclusion of these meetings—and at times when
the Utilities Service’s representatives were not in the A few days later, on November 15, 1996, the bankruptcy
room—Schilling discussed these views with some, but not all, court entered an order providing for Schilling’s interim
of the unsecured creditors. Schilling initially told Chase and compensation. Id. With the Utilities Service’s consent, the
Bank of New York representatives that he wanted them to pay bankruptcy court allowed the examiner to receive interim
him a percentage fee based on the “success” he brought to the compensation of $180 per hour in 1996 and $185 per hour in
estate in the form of “new value.” 284 B.R. at 586. 1997, all of which Big Rivers would pay from its “cash
Explaining what he meant by a “success fee,” Schilling later collateral”—i.e., cash in which the estate and another entity
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(here, the Utilities Service) had an interest. See 11 U.S.C. agreement they had reached during the Washington meetings
§ 363(a). The court’s order did not alter Schilling’s ongoing to pay him three percent of their increased recovery. JA
obligation to “compl[y] with all applicable provisions of the 441–43 (Schilling’s letter to Bank of New York); JA 436–38
Bankruptcy Code.” JA 148. (Schilling’s letter to Chase); JA 439–40 (Schilling’s letter to
Mapco).
In the meantime, Schilling learned that Chase would not
support his success-fee proposal. He called Chase and Schilling’s letter to Chase stated that the bank and Schilling
accused the company of “going behind his back and not being “had an oral agreement reached during the Washington
an honest dealer.” 284 B.R. at 586. In response, Chase wrote conference that [Schilling] would receive compensation of
Schilling a letter saying that he was incorrect and reaffirming 3% of the new value that Chase received in the case.” “It is
its support for a success-fee arrangement. Chase asked this figure of $835,335.00,” the letter continued, “which was
Schilling “to keep this confidential,” JA 160, and he discussed [on the telephone] last Friday [January 24th] and
complied. which we agreed was reasonable compensation for the
Examiner to receive from Chase at the closing of the plan.”
On December 3, 1996, Schilling had a similar conversation JA 436–37.
with representatives from Bank of New York. Having heard
that the Bank’s local counsel had objected to the United Schilling’s letter to Mapco reflected a similar
States Trustee about Schilling’s proposed success fee, understanding. Schilling reported that Mapco’s share of the
Schilling called the Bank to inquire. The Bank’s three-percent fee amounted to $180,000 and added that he
representatives assured Schilling that if local counsel had “agreed with the suggestion of [Chase’s representative] that
registered any such complaint, she had no authorization to do the payments from MAPCO and the Banks be deposited into
so. 284 B.R. at 587. an escrow account on the closing date under the plan.” JA
439.
On January 22, 1997, Big Rivers filed its proposed plan of
reorganization. The next day, according to Schilling, he The letter to Bank of New York likewise asserted that
sought and received the bankruptcy judge’s approval to Schilling and the Bank had reached an agreement in
“begin to negotiate [his] percentage-based fee with the Banks Washington. The Bank’s success-fee obligation, Schilling
[Chase and Bank of New York] and Mapco.” Id. This reported, came to $589,665. In the letter Schilling added that
conversation, to the extent it in fact took place, was ex parte, the Bank had made this promise not only at the Washington
was off-the-record and was not the subject of discovery, and meetings but also during a December 3, 1996 meeting
it did not include at any rate the court’s approval to seek such between Schilling and the Bank’s employees—proving that
a fee directly from the three creditors. Id. at 587–88. the parties had “two oral agreements.” JA 441–42.
The following day, January 24th, Schilling telephoned Bank of New York and Mapco responded with letters of
Bank of New York, Chase and Mapco to confirm his fee their own, each denying that they had reached such an
arrangements. And the following week, Schilling sent each agreement. Bank of New York “strongly [took] issue with
of these creditors a letter to “confirm [their] telephone [Schilling’s] continuous references to ‘agreements’ that ha[d]
conversation” and to request written confirmation of the allegedly been reached between [Schilling] and [Bank of New
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York] concerning compensation,” JA 372, and reminded hold an interest adverse to the interests of the estate with
Schilling that “[it] is inappropriate [] for any court-appointed respect to the matters about which the Examiner was
fiduciary to seek compensation directly from individual appointed.” 284 B.R. at 589–90. He did not, however,
creditors.” JA 373. Mapco insisted that it had “never mention (1) his agreement with Chase or (2) the agreement
previously approved or even considered any compensation that he believed he had reached with Bank of New York and
agreement with [Schilling],” and that Schilling’s Mapco. Id.
compensation “would be determined by the Bankruptcy Court
under the Bankruptcy Code.” JA 452. On June 5, 1997, Schilling filed a “Request For Payment of
Administrative Expenses,” which explained to the bankruptcy
Chase took a different tack. In a phone call with Schilling court that he might seek $4.41 million in compensation based
in response to his letter, it acknowledged that Schilling and on new value he had brought into the estate. 284 B.R. at
Chase had reached an oral agreement regarding a success fee, 590–91. He also filed a proof of claim for an amount not to
but said that they had struck the agreement during their exceed $4.41 million. Id. at 591. While these documents
January 24, 1997 telephone call, not during the Fall 1996 disclosed Schilling’s plan to seek percentage-based
Washington meetings. 284 B.R. at 589. In the months after compensation, they nowhere disclosed his agreement with
January 1997, Chase asked Schilling to take several positions Chase or his alleged agreements with Bank of New York and
adverse to the Utilities Service in the bankruptcy, at times Mapco to have the fee paid directly by them. Id.
doing legal research for the examiner to substantiate Chase’s
position. 284 B.R. at 591. A few days later, on June 9, 1997, the bankruptcy court
confirmed Big Rivers’ consensual plan of reorganization. Id.
While Schilling and the three unsecured creditors engaged As Schilling had earlier predicted, new value enabled the
in a considerable number of communications about what parties to develop a consensual plan of reorganization. In
agreement was reached and when the agreement occurred, one contrast to the plan initially proposed by Big Rivers, the
thing is clear: Neither Schilling nor these unsecured creditors approved plan included an additional $147 million in new
initially disclosed any of these communications—the private value for the creditors.
discussions in Washington, the telephone calls, the letters—to
the Utilities Service, to the United States Trustee, or to the No one denies that Schilling played a significant role in the
other parties involved in the Big Rivers bankruptcy. negotiations leading to the approved plan. Most significantly,
Schilling supported the auctioning of Big Rivers’ assets and
On March 26, 1997, Schilling filed his first interim fee opposed accepting a pre-petition lease deal that Big Rivers
application. In making bankruptcy fee applications, had negotiated with PacificCorp Energy Company. Big
Bankruptcy Rule 2016(a) requires applicants, including Rivers and the Utilities Service opposed the auction. The
examiners, to disclose “what payments have theretofore been bankruptcy court ultimately ordered an auction on the
made or promised to the applicant for services rendered or to condition that the bidders compete with the PacificCorp
be rendered in any capacity whatsoever in connection with the agreement. Louisville Gas and Electric in the end submitted
case.” Fed. R. Bankr. P. 2016(a). In his application Schilling the highest bid, which added considerable value to the estate
included a “Rule 2016(a) Disclosure Statement,” asserting and which laid the groundwork for the consensual plan of
that he was a “disinterested person” and did not “represent or
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reorganization that the court eventually confirmed. 284 B.R. In response to the pleading, Mapco’s attorney wrote
at 590 n.9. privately to Schilling that the statement was “incorrect, at
least as to my client.” JA 456. Schilling persisted, claiming
On July 24, 1997, Schilling filed a second interim fee that the statement was “correct” and that all three creditors
application. He again included a Rule 2016(a) disclosure had agreed to his proposal. 284 B.R. at 592.
disclaiming any improper interest. And he again failed to
report the promise that Chase had made to him and the Spurred by the public disclosure of Schilling’s agreement
promises that he believed Bank of New York and Mapco had with Chase, the Utilities Service and the United States Trustee
made to him. requested discovery into Schilling’s fee arrangement. In view
of the Chase agreement, the Utilities Service objected to the
The first written confirmation of an agreement between continued use of its cash collateral to pay Schilling and, along
Schilling and one of the creditors came in the form of a letter with the United States Trustee, asked the court to order
from Chase to Schilling dated July 31, 1997. JA 291–92. In Schilling to disgorge the fees he and his law firm had already
the letter, Chase “confirm[ed]” its support for Schilling’s received. The bankruptcy court rejected both requests and
application for a three-percent fee enhancement and, subject enjoined further court filings and discovery concerning the
to bankruptcy court approval, formally agreed to be examiner’s fees.
responsible for up to $835,335 of the fee enhancement. Id.
Not until one year later, in September 1998, did the
Schilling filed the Chase letter with the bankruptcy court bankruptcy court revisit the issue of Schilling’s
the same day. He attached it to a pleading entitled compensation. The court permitted the parties to submit
“Preliminary Pleading Regarding Application for Allowance pleadings on the examiner’s fees, but continued a ban on
of Compensation and Reimbursement of Expenses,” in which discovery and refused to hear any evidence. At this point
Schilling noted: (1) “[a]s previously stated in pleadings, and Schilling claimed for the first time, in open court, that he
as disclosed to the Court,” Bank of New York, Chase and “ha[d] never said there was a side agreement with” Mapco.
Mapco agreed during the Washington meetings to a Id. at 592. Soon after Schilling made this statement, Mapco
percentage-based approach, and (2) “the [Utilities Service] filed with the bankruptcy court copies of Schilling’s earlier
stated, at that time, it would not agree or disagree with a letters to the company in which he had insisted that they had
percentage compensation to the Examiner.” JA 288. reached such an agreement. Bank of New York also filed
Schilling further claimed that the court had “instructed the with the court a copy of its letter from Schilling asserting a
parties on July 1, 1997 to attempt to negotiate the Examiner’s similar agreement. Id. at 592–93.
fee request,” that “the Examiner has begun additional
negotiations,” but that “those negotiations have concluded Schilling filed his final fee application in October 1998,
only with Chase,” as evidenced by the “agreement attached requesting approximately $4.41 million in compensation to
hereto.” Id. This constituted the first public disclosure of “be paid by the debtor, various creditors of th[e] estate as the
Schilling’s intention and efforts to have his percentage-based Court equitably determines is appropriate, or a combination
compensation paid by these three creditors as opposed to the thereof.” JA 485. This figure combined Schilling’s hourly
estate. 284 B.R. at 591–92. fees (which totaled $530,928.74) with an enhancement of
three percent of the new value brought into the estate during
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Schilling’s tenure as examiner (which came to Schilling’s base compensation, reversed the order granting
$3,879,071.25). Schilling an enhancement and remanded the case to the
bankruptcy court to consider the disgorgement issue as an
On October 23, 1998, in response to this application, the initial matter because the bankruptcy court had not reached
United States Trustee filed a motion to disgorge all of the issue. See In re Big Rivers Elec. Corp., 252 B.R. 676,
Schilling’s fees because he had improperly negotiated secret 687–89 (W.D. Ky. 2000). Schilling appealed the decision to
side agreements for his compensation. Schilling responded this Court, which dismissed the appeal for lack of jurisdiction.
that he had never truly believed that he and Bank of New See 28 U.S.C. § 158(d) (granting the courts of appeals
York, Chase and Mapco had reached such agreements and “jurisdiction of appeals from all final decisions” of district
that his statements claiming otherwise were intentionally courts on appeal from bankruptcy courts); IRS v. Hildebrand
untrue. 284 B.R. at 593. As Schilling put it: (In re Brown), 248 F.3d 484, 487 (6th Cir. 2001) (“[W]e are
to inquire into the finality of [the district court’s] decision[],
A common tactic used in negotiations is to make a not the finality of the bankruptcy court’s decision.”).
statement, as if it were fact, even though the statement is
incorrect and is known to be incorrect. The Examiner On March 8, 2001, the bankruptcy court, on remand,
used this common place tactic in his January, 1997 letters transferred the case to the district court asking it to consider
to Chase and counsel for Bank of New York and whether to withdraw the order of reference. On March 25,
MAPCO, asserting, as a fact, that an agreement had been 2001, the district court withdrew the order of reference, which
reached at the Washington settlement conference, meant that the district court rather than the bankruptcy court
wherein these creditors would pay the Examiner 3% on thereafter would have original jurisdiction over the case.
any new value their clients received. When all of the district court judges in the Western District of
Kentucky recused themselves from hearing the case, the Chief
JA 400. Judge of the Sixth Circuit assigned the case to Judge Avern
Cohn of the Eastern District of Michigan.
Shortly thereafter, the bankruptcy judge disqualified
himself from hearing the fee issues and transferred the case On August 13, 2002, Judge Cohn granted the joint motion
to another bankruptcy judge. The new judge continued the of the Utilities Service and the United States Trustee for
ban on discovery and without an evidentiary hearing issued a disgorgement, granted Big Rivers’ motion for partial
decision on Schilling’s fee application, awarding Schilling disgorgement, and ordered Schilling and his counsel to
$2,638,205—which covered his hourly compensation plus an disgorge all fees paid to them. 284 B.R. at 602. Based on
enhancement of four times that amount—to be paid by Big detailed factual findings, the court held that Schilling was not
Rivers. In re Big Rivers Elec. Corp., 233 B.R. 754, 768 entitled to any fees because he was not a “disinterested”
(Bankr. W.D. Ky. 1999). Big Rivers, the Utilities Service, examiner under 11 U.S.C. § 1104(d). As the court explained:
the United States Trustee and Schilling each appealed this
decision to the district court. The Bankruptcy Code and Rules mandate that a
professional, such as an Examiner, be a neutral,
On appeal, the district court affirmed in part and reversed disinterested party in the case. The moment that the
in part. It affirmed the bankruptcy court’s order regarding Examiner approached three of Big Rivers’ largest
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unsecured creditors and broached the subject of his found: “It [was] only when the government questioned the
compensation, suggesting that they pay him a Examiner’s actions that the Examiner retreated from the
percentage-based fee based on the “success” or “new position in his letters and made the assertion that his
value” he brought them to the estate, he was no longer a statements were intended for ‘negotiation.’” Id. “Under these
disinterested party. Whether or not such an agreement circumstances,” the court concluded, “the only effective
was reached or whether an agreement was subject to the solution is to deny the Examiner, and his law firm, all
approval of the bankruptcy court is irrelevant. What is compensation.” 284 B.R. at 602. The court’s order required
relevant is that the Examiner sought to have his Schilling—“individually and doing business as The Law Firm
compensation tied to the enhanced value brought to the of J. Baxter Schilling”—to remit to Big Rivers $931,075.50,
estate and, in particular, tied to what [Bank of New the amount that had already been dispensed to him and his
York], Chase and Mapco received on their claims from firm throughout the case, plus interest. Schilling now appeals
the estate. the district court’s disgorgement order, requesting
reinstatement of his hourly and enhanced fees.
284 B.R. at 596. Recognizing that Schilling made it “known
to all parties—including the government—that he was going II.
to seek compensation in the amount of a percentage of the
enhanced value he brought to the estate[,]” the district court Because the district court was exercising original rather
explained that Schilling’s “intention to have his compensation than appellate jurisdiction when it ordered Schilling and his
paid by [Bank of New York], Chase and Mapco was known law firm to disgorge all compensation, we review its order for
only to [him] and these creditors.” Id. at 597. This lack of abuse of discretion. See Michel v. Federated Dep’t Stores,
disinterestedness, the district court concluded, meant that Inc. (In re Federated Dep’t Stores, Inc.), 44 F.3d 1310, 1315
Schilling “was not a properly appointed professional and is (6th Cir. 1995). In doing so, we adopt the district court’s
therefore not entitled to any compensation.” Id. underlying factual findings unless clearly erroneous and we
review its underlying construction of the Bankruptcy Code de
The court also held that Schilling failed to disclose his fee novo. Id.arrangements as required under 11 U.S.C. § 329 and
Bankruptcy Rule 2016. Section 329(a) requires “[a]ny A.
attorney representing a debtor” to disclose his fee
arrangements. Rule 2016(a) applies broadly to any “entity In considering the district court’s resolution of these issues,
seeking interim or final compensation” and requires we start with the statutory framework. In a typical Chapter 11
disclosure of any “payments . . . made or promised to the reorganization, the debtor remains in possession of and
applicant.” The district court concluded that Schilling operates the business at the same time that it manages the
violated both provisions by failing to disclose his “fee reorganization effort. Less typically—when, for example, the
discussions with Mapco, Chase, and [Bank of New York].” debtor’s management is guilty of fraud or gross
284 B.R. at 599. The court did not credit Schilling’s assertion mismanagement—a bankruptcy court orders the appointment
that he “only reached an agreement with Chase [in July 1997] of a trustee to replace the debtor in possession and to take
and it was immediately disclosed.” Id. Schilling’s “letters control over the business and the reorganization effort. See
written in January of 1997 belie this assertion,” the court 11 U.S.C. §§ 1104(a), 1106(a). The appointment of an
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examiner, as happened here, straddles these options, as an (C) has not been, within three years before the date of the
examiner performs some of the functions of a trustee but does filing of the petition, an investment banker for a security
not replace the debtor and does not take on the day-to-day of the debtor . . . ;
task of running the company. See id. §§ 1104(c), 1106(b).
(D) is not and was not, within two years before the date
The Bankruptcy Code expressly requires examiners to of the filing of the petition, a director, officer, or
perform two duties normally required of trustees and employee of the debtor or of an investment banker
authorizes the court to assign other duties as well. Id. specified in subparagraph (B) or (C) of this paragraph;
§ 1106(b). First, the Code requires examiners to perform an and
investigation, which means they must “investigate the acts,
conduct, assets, liabilities, and financial condition of the (E) does not have an interest materially adverse to the
debtor, the operation of the debtor’s business and the interest of the estate or of any class of creditors or equity
desirability of the continuance of such business, and any other security holders, by reason of any direct or indirect
matter relevant to the case or to the formulation of a plan.” relationship to, connection with, or interest in, the debtor
Id. § 1106(a)(3). Second, the Code requires examiners to file or an investment banker specified in subparagraph (B) or
a report, which means they must identify and memorialize (C) of this paragraph, or for any other reason.
“any fact ascertained pertaining to fraud, dishonesty,
incompetence, misconduct, mismanagement, or irregularity Id. § 101(14).
in the management of the affairs of the debtor, or to a cause
of action available to the estate.” Id. § 1106(a)(4)(A). In While examiners and trustees perform some of the same
addition to these mandatory duties, a bankruptcy court may duties and while each of them must remain disinterested, the
order an examiner to perform “any other duties of the trustee Code distinguishes examiners from trustees in other ways. In
that the court orders the debtor in possession not to perform.” contrast to earlier practices, the Code now prohibits an
Id. § 1106(b). examiner from serving as a trustee or as counsel for the
trustee in order to ensure that examiners may not profit from
Given the sensitivity of these tasks and the objectivity the results of their work. Compare Bankruptcy Reform Act
required to perform them, the Code requires all examiners, of 1978, §§ 321(b) (“A person that has served as an examiner
like all Chapter 11 trustees, to be “disinterested.” Id. in the case may not serve as trustee in the case.”), 327(f)
§ 1104(d). A defined term, “disinterested person” means a (“The trustee may not employ a person that has served as an
person who: examiner in the case.”) with Bankruptcy Act of 1898, as
amended, § 45, reprinted in Collier on Bankruptcy App. A pt.
(A) is not a creditor, an equity security holder, or an 3(a) (15th ed. rev. 2003) (including no such prohibition). See
insider; 124 Cong. Rec. H11,103 (daily ed. Sept. 28, 1978), reprinted
in 1978 U.S.C.C.A.N. 6473 (“In order to ensure that the
(B) is not and was not an investment banker for any examiner’s report will be expeditious and fair, the examiner
outstanding security of the debtor; is precluded from serving as a trustee in the case or from
representing a trustee if a trustee is appointed.”); 124 Cong.
Rec. S17,420 (daily ed. Oct. 6, 1978), reprinted in 1978
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U.S.C.C.A.N. 6542; Collier ¶ 327.04[10] (“The purpose of § 330(a)(2). These same standards apply to interim
section 327(f) is to ensure that examiners discharge their compensation, which the Code also authorizes. Id.
investigatory duties in a purely objective fashion.”); Leonard § 330(a)(5).
L. Gumport, The Bankruptcy Examiner, 20 Cal. Bankr. J. 71,
152 (1992) (“In the interest of fairness to the subject of the Rule 2016(a) of the Federal Rules of Bankruptcy Procedure
investigation, Congress rejected the historical practice of provides additional details about the procedure that “[a]n
permitting the examiner to profit from its report by becoming entity,” such as an examiner, “seeking interim or final
the trustee or an employee of the trustee.”). compensation . . . from the estate” must follow. “An
application for compensation,” the Rule says, “shall include
Nor may examiners play a role in a Chapter 7 proceeding. a statement as to what payments have theretofore been made
In a Chapter 7 liquidation, which occurs (among other times) or promised to the applicant for services rendered or to be
at the end of an unsuccessful effort to reorganize a company rendered in any capacity whatsoever in connection with the
under Chapter 11, a trustee always replaces the debtor in case” and “the source of the compensation so paid or
possession, and the Code prohibits the use of an examiner promised.” Fed. R. Bankr. P. 2016(a) (emphasis added).
when a trustee has already been appointed. Id. § 1104(c). See
also 11 U.S.C. § 1109(b) (giving a trustee, but not an B.
examiner, the right to “raise and [] appear and be heard on
any issue in a [Chapter 11] case”); In re Baldwin United In enumerating the duties of examiners and trustees, the
Corp., 46 B.R. 314, 316 (Bankr. S.D. Ohio 1985) (“An drafters of the Code also invoked the more-generalized
Examiner performs the investigative duties of a trustee, and equitable duties applicable to these positions of trust. See
may perform other trustee duties as the Court directs, but he Young v. United States, 535 U.S. 43, 53 (2002) (“[T]he
stands on a different legal footing than a trustee.”). These Bankruptcy Code incorporates traditional equitable
modest differences between trustees and examiners do not principles.”). In defining the obligation of
diminish an examiner’s duties of disinterest but in fact serve “disinterestedness,” the Code says that examiners and trustees
to highlight them. may “not have an interest materially adverse to the interest of
the estate or of any class of creditors or equity security
The Bankruptcy Code neither expects nor requires holders, by reason of any direct or indirect relationship to,
examiners to volunteer their time. Like other officers and connection with, or interest in, the debtor or an investment
professionals appointed in a Chapter 11 case, examiners may banker specified in subparagraph (B) or (C) of this paragraph,
request “reasonable compensation for actual, necessary or for any other reason.” 11 U.S.C. § 101(14)(E) (emphasis
services” and “reimbursement for actual, necessary added). The phrase “for any other reason” is not defined. By
expenses.” 11 U.S.C. § 330(a)(1)(A) & (B). Only “[a]fter prohibiting any “materially adverse” “interest” to any party to
notice to the parties in interest and the United States Trustee the bankruptcy “for any . . . reason,” Congress plainly
and a hearing,” however, may “the court [] award” examiners invited—indeed compelled—federal courts to construe
these fees and expenses. Id. The bankruptcy court “may, on “disinterestedness” against the backdrop of the equitable
its own motion or on the motion of the United States Trustee duties that apply to positions of trust. See In re Martin, 817
. . . or any other party in interest, award compensation that is F.2d 175, 181 (1st Cir. 1987) (acknowledging “that the Code
less than the amount of compensation that is requested.” Id. is less than explicit in mapping the contours of the
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disinterestedness requirement” and interpreting the Court.”); In re Hamiel & Sons, Inc., 20 B.R. 830, 832 (Bankr.
requirement in a way that is “faithful to our view of S.D. Ohio 1982) (“[T]he trustee or examiner [] constitutes a
Congress’s intent and to the overriding consideration that court fiduciary and is amenable to no other purpose or
equitable principles govern the exercise of bankruptcy interested party.”); cf. Wolf v. Weinstein, 372 U.S. 633, 650
jurisdiction”) (quotation omitted); cf. Cent. States Southeast (1963) (“If, therefore—as seems beyond dispute from the
& Southwest Areas Pension Fund v. Cent. Transp., Inc., 472 very terms of the statute—the trustee is himself a fiduciary
U.S. 559, 570 & n.10 (1985) (“Congress invoked the common within the meaning of [the statute], logic and consistency
law of trusts to define the general scope of [fiduciaries’] would certainly suggest that those who perform similar tasks
authority and responsibility” by providing, for example, that and incur like obligations to the creditors and shareholders
“assets of an employee benefit plan shall be held in trust.” ) should not be treated differently under the statute for this
(quotation omitted); NLRB v. Amax Coal Co., 453 U.S. 322, purpose.”).
332–33 (1981) (“ERISA essentially codified [] strict fiduciary
standards” by providing, for example, that a fiduciary “may Finally, the Code not only says that examiners and trustees
not ‘act in any transaction . . . on behalf of a party . . . whose must remain “disinterested,” but it also says that they may
interests are adverse to the interests of the plan or the interests receive only “reasonable compensation.” 11 U.S.C.
of its participants or beneficiaries.’”) (quoting 29 U.S.C. § 330(a)(1)(A). The compensation phrase, the Supreme Court
§ 1106(b)(2)). has reasoned, suggests that trustees and examiners must
remain loyal to all relevant parties in the bankruptcy and must
By linking trustees and examiners in this respect—by act as fiduciaries in doing so. See Wolf, 372 U.S. at 642
m a k i n g t h e m equally obligate d to r e ma in (“[R]easonable compensation for services necessarily implies
“disinterested”—Congress also signaled that examiners must loyal and disinterested service in the interest of those for
satisfy the unbending standards of fiduciary duty that the law whom the claimant purported to act.”) (quotation omitted);
and society long have come to expect of trustees in general Woods, 312 U.S. at 268–69 (the statutory term “reasonable
and that the Supreme Court has required of bankruptcy compensation” requires “strict adherence to the[] equitable
trustees in particular. See Commodity Futures Trading principles [that govern] the standard of conduct for
Comm’n v. Weintraub, 471 U.S. 343, 355 (1985) (stating that fiduciaries”).
a Chapter 11 trustee owes a “fiduciary duty . . . to
shareholders as well as to creditors”); Mosser v. Darrow, 341 In incorporating the equitable duties of trustees into the
U.S. 267, 271 (1951) (“Equity tolerates in bankruptcy trustees Bankruptcy Code and in applying them to bankruptcy trustees
no interest adverse to the trust.”); Woods v. City Nat’l Bank & and examiners, Congress followed a well-trodden path. The
Trust Co., 312 U.S. 262, 268 (1941) (“Protective committees, National Legislature frequently legislates against the
as well as indenture trustees, are fiduciaries.”); In re Baldwin backdrop of common law and equitable principles, and the
United Corp., 46 B.R. 314, 316 (S.D. Ohio 1985) (“An federal courts have often looked to these traditions in
Examiner’s legal status is unlike that of any other court- determining the contours of a trustee’s or another fiduciary’s
appointed officer which comes to mind. He is first and duties. See Young, 535 U.S. at 53 (“[T]he Bankruptcy Code
foremost disinterested and nonadversarial. The benefits of his incorporates traditional equitable principles.”); Field v. Mans,
investigative efforts flow solely to the debtor and to its 516 U.S. 59, 69–70 (1995) (“[N]either the structure of
creditors and shareholders, but he answers solely to the § 523(a)(2) [of the Code] nor any explicit statement in
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§ 523(a)(2)(A) reveals, let alone dictates, the particular level In each of these forty-year increments—in 1898, in 1938,
of reliance required by § 523(a)(2)(A), and there is no reason in 1978—Congress legislated against the backdrop of
to doubt Congress’s intent to adopt a common-law centuries of common-law decisions about the duties of
understanding of the terms it used.”); Cent. States, 472 U.S. trustees and other fiduciaries as well as against the backdrop
at 570 (“[R]ather than explicitly enumerating [in ERISA] all of courts construing statutes in the context of similar
of the powers and duties of trustees and other fiduciaries, common-law traditions. And in each instance, Congress
Congress invoked the common law of trusts to define the incorporated these principles and traditions. Cf. Wolf, 372
general scope of their authority and responsibility.”); Amax U.S. at 641 (“[T]he purpose behind § 249 was to codify these
Coal Co., 453 U.S. at 330 (“Given this established rule decisions and to give pervasive effect in Chapter X
against dual loyalties and Congress’ use of terms long proceedings to the historic maxim of equity that a fiduciary
established in the courts of chancery, we must infer that may not receive compensation for services tainted by
Congress intended to impose on trustees traditional fiduciary disloyalty or conflict of interest.”).
duties unless Congress has unequivocally expressed an intent
to the contrary.”). C.
When Congress enacted the Bankruptcy Act of 1898, ch. An examiner’s duties in a bankruptcy proceeding, then,
541, 30 Stat. 544, which became the basis for modern flow from the Code, the Federal Rules of Bankruptcy
bankruptcy law, it assuredly meant to incorporate similar Procedure and the common law, including the once-distinct
common-law duties as the original Act nowhere defined, principles of equity. All of these sources considered, a
much less mentioned, a duty of disinterestedness or any bankruptcy examiner has three general duties. First,
equivalent concept. When Congress substantially modified consistent with the statutory requirement of “disinterest,” the
the 1898 Act through the Chandler Amendments in 1938, ch. examiner may not have a “material adverse” interest to any
575, 52 Stat. 840, it did the same thing in adopting a party to the bankruptcy “for any . . . reason,” either at the time
requirement of “disinterest,” which was broadly defined as an of appointment or during the course of the bankruptcy. See
“adverse interest” “for any reason.” See Chandler In re Marvel Entm’t Group, 140 F.3d 463, 476 (3d Cir. 1998)
Amendments of 1938, Pub. L. No. 75-696, § 158(4), 52 Stat. (“A plain reading of this section suggests one is a
840 (1938) (“A person shall not be deemed disinterested . . . ‘disinterested person’ only if he has no interest that is
if—it appears that he has . . . for any reason an interest materially adverse to a party in interest in the bankruptcy.”);
materially adverse to the interests of any class of creditors or Roger J. Au & Son, Inc. v. Aetna Ins. Co. ( In re Roger J. Au
stockholders.”) And in 1978, when the current Bankruptcy & Son, Inc.), 64 B.R. 600, 605 n.8 (N.D. Ohio 1986) (This
Code was adopted, Congress embraced a similar definition of section “appears broad enough to include anyone who in the
“disinterest.” See 11 U.S.C. § 101(14)(E) (“[D]isinterested slightest degree might have some interest or relationship that
person . . . does not have an interest materially adverse to the would color the independent and impartial attitude required
interest of the estate or of any class of creditors or equity by the Code.”) (quotation and citation omitted); In re Watson,
security holders, by reason of any direct or indirect 94 B.R. 111, 116 (Bankr. S.D. Ohio 1988) (“A disinterested
relationship to . . . the debtor . . . or for any other reason.”). person should be divested of any scintilla of personal interest
which might be reflected in [that person’s] decisions
concerning estate matters.”).
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Second, consistent with the Federal Rules of Bankruptcy III.
Procedure, examiners have several disclosure obligations.
They must disclose all “payments . . . made or promised” to Schilling’s conduct as an examiner in the Big Rivers
them, meaning they must disclose in all fee applications any bankruptcy failed to live up to these standards. First, he
understandings they believe they have reached with anyone violated his duty to remain “disinterested.” An agreement
regarding their compensation. See Henderson v. Kisseberth with a single creditor that links the examiner’s compensation
(In re Kisseberth), 273 F.3d 714, 720 (6th Cir. 2001) (“An to the creditor’s recovery qualifies as such an interest because
attorney in a bankruptcy case has an affirmative duty to it creates the risk that the examiner will favor one creditor at
disclose fully and completely all fee arrangements and the expense of other creditors, to say nothing of all equity
payments.”); Mapother & Mapother, P.S.C. v. Cooper (In re holders. Given the zero-sum realities of most bankruptcies,
Downs), 103 F.3d 472, 480 (6th Cir. 1996) (“[T]he fulfillment every dollar recovered by a favored creditor becomes a dollar
of the [disclosure] duties imposed under [the Code] are lost to a disfavored creditor. Opportunities abound,
crucial to the administration and disposition of proceedings moreover, for bankruptcy examiners paid in this manner to
before bankruptcy courts.”); Neben & Starrett v. Chartwell benefit selected creditor patrons. They might decline to
Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880 (9th investigate and report any “cause[s] of action available to the
Cir. 1995) (“The disclosure rules impose upon attorneys an estate” against the favored creditor (say, for a fraudulent
independent responsibility.”); In re BH&P Inc., 949 F.2d conveyance). See 11 U.S.C. § 1106(a)(4). They might file,
1300, 1317–18 (3d Cir. 1991) (holding that a trustee or threaten to file, a report that harms a disfavored creditor
“breache[s] the duty of disclosure” when he “contemplate[s] unless it accepts a settlement that increases the recovery of a
and discusse[s] a specific situation involving a potentiality for favored creditor. They might stall or obstruct confirmation of
conflict” but fails to disclose it). a plan that represents the best interests of the estate if it
contains no recovery for the favored creditor (and no
Third, consistent with the statutory requirement for commission for the examiner).
receiving “reasonable compensation” and with the common-
law standards of fiduciary duty, examiners owe the creditors Whether as a matter of fact an individual examiner chooses
and shareholders a duty of loyalty. In imposing this duty on to do any of these things does not alter the “disinterestedness”
examiners and trustees, bankruptcy law “seeks to avoid such inquiry. That self-interest might lead examiners to act in
delicate inquiries . . . into the conduct of its own appointees these ways suffices to disqualify them, because the Code does
by exacting from them forbearance of all opportunities to not merely prohibit trustees and examiners from acting upon
advance self-interest.” Mosser v. Darrow, 341 U.S. 267, 271 materially adverse interests, it prohibits trustees and
(1951). See G. Bogert, Law of Trusts and Trustees § 543 examiners from having them. See Woods, 312 U.S at 268
(rev. 2d ed. 2003) (trustees “must display throughout the (“[T]he incidence of a particular conflict of interest can
administration of the [case] complete loyalty to the interests seldom be measured with any degree of certainty. The
of [the creditors and shareholders] and must exclude all bankruptcy court need not speculate as to whether the result
selfish interest”); Collier ¶ 1108.09[1] (“[A] chapter 11 of the conflict was to delay action where speed was essential,
trustee, like the trustee of a conventional personal trust, owes to close the record of past transactions where publicity and
single-minded devotion to the interests of those on whose investigation were needed, to compromise claims by
behalf the trustee acts.”). inattention where vigilant assertion was necessary, or
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otherwise to dilute the undivided loyalty owed to those whom court approval. Yet Schilling did not disclose the agreement
the claimant purported to represent. Where an actual conflict in his March 1997 and July 1997 interim fee applications,
of interest exists, no more need be shown in this type of case each time in violation of the rule. See Henderson v.
to support a denial of compensation.”); W.F. Dev. Corp. v. Kisseberth (In re Kisseberth), 273 F.3d 714, 720 (6th Cir.
U.S. Trustee (In re W.F. Dev. Corp.), 905 F.2d 883, 884 (5th 2001) (“An attorney in a bankruptcy case has an affirmative
Cir. 1990) (“In a bankruptcy proceeding, limited and general duty to disclose fully and completely all fee arrangements and
partners do hold materially adverse positions.”); In re payments.”); Mapother & Mapother, P.S.C. v. Cooper (In re
Crimson Inv., 109 B.R. 397, 402 (Bankr. D. Ariz. 1989) Downs), 103 F.3d 472, 480 (6th Cir. 1996) (“[T]he fulfillment
(“[B]y receiving compensation from Debtor’s creditors, of the duties imposed under these provisions [§ 329 and Rule
Debtor’s counsel had, and has, a pecuniary interest materially 2016] are crucial to the administration and disposition of
adverse to the interest of the secured creditors and the proceedings before the bankruptcy courts.”); In re Crimson
interests of the estate—a conflict of interest that requires Inv., 109 B.R. at 402 (“[C]ounsel’s failure to disclose
denial of all compensation.”). forthrightly the source of all compensation should warrant the
denial of all compensation.”).
Schilling undeniably had such an agreement—an oral
one—with Chase no later than January 24, 1997. Had Rule 2016(a) also required Schilling to disclose the
Schilling reached such an agreement before his appointment, promises for payment that Schilling believed Bank of New
the bankruptcy court could not have allowed him to serve as York, Chase and Mapco had made to him at the Fall 1996
a trustee or examiner because he would not have been conference in Washington. When a court-appointed fiduciary
disinterested. See Michel, 44 F.3d at 1319 (holding that the believes a party has promised him payment, he may not use
debtor’s retention of a professional who was not disinterested, later disputes over the existence or enforceability of the
as required under the Code, was invalid from day one despite promise to excuse an earlier failure to disclose it. See In re
the bankruptcy court’s approval based on equitable concerns). BH&P Inc., 949 F.2d 1300, 1317–18 (3d Cir. 1991) (holding
That Schilling reached the agreement in the midst of his that a trustee who has “contemplated and discussed a specific
examination and in secret only makes matters worse, situation involving a potentiality for conflict” has a duty to
especially in view of his affirmative statements to the court disclose it).
that he remained a “disinterested person” who did not
“represent or hold an interest adverse to the interests of the Third, Schilling violated his duty of loyalty—not just by
estate.” JA 300. entering into the oral agreement with Chase, but by
misrepresenting his actions to the court and to the parties
Second, Schilling violated his disclosure obligations. Each during his negotiations with the parties and during his efforts
time Schilling filed an interim fee application, Rule 2016(a) to backtrack from them. Schilling did so on multiple
required him to disclose “payments . . . made or promised” to occasions: when he filed documents claiming to have no
him “for services rendered or to be rendered in any capacity adverse interest; when he filed documents claiming to have
whatsoever in connection with the case.” Schilling’s January received no promises for payment; when he claimed that he
1997 oral agreement with Chase regarding his compensation “never said there was a side agreement with [Mapco],” 284
constituted a “payment[]” “promised” within the meaning of B.R. at 592; and when he asserted in January 1997 letters to
the rule, whether or not the promise was subject to bankruptcy Bank of New York, Mapco and Chase that they had agreed at
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the Washington conference to pay him a percentage of their holding that § 249 [of the Bankruptcy Act] has been violated
recovery, only to claim later that these assertions were just a does not automatically determine the consequences of such a
negotiation tactic—i.e., a misrepresentation. Rather than violation.”). Our role in this respect is a modest one, as “a
serve all parties to the bankruptcy and rather than do so in a bankruptcy court”—or, in this instance, a district court acting
straightforward and transparent manner, Schilling sought in its place—“is given a great deal of latitude in fashioning an
compensation in a way that did none of these things. Hired to appropriate sanction.” Mapother v. Mapother P.S.C. v.
serve the estate’s interests, he started down a path that served Cooper (In re Downs), 103 F.3d 472, 478 (6th Cir. 1996).
his own. “[T]he []court’s sanction,” therefore, “should not be disturbed
unless a clear abuse of discretion is found.” Id.In each of these instances, it bears repeating, the issue was
not whether Schilling would be compensated for his efforts. No abuse of discretion occurred here. Because the Code
Absent violations of the Code and his fiduciary obligations, permits only “reasonable compensation” and because that
he would be, and indeed the court early on provided that he requirement “‘necessarily implies loyal and disinterested
would be compensated at his standard hourly rate of $180 per service in the interest of those for whom the claimant
hour in 1996 and $185 per hour in 1997. Perceiving an purported to act,’” Wolf, 372 U.S. at 642, “a fiduciary may
opportunity to be paid still more, however, Schilling not receive compensation for services tainted by disloyalty or
negotiated, and in some instances consummated, conflict of interest,” id. at 641. Absent “peculiar and unique
compensation arrangements for his personal benefit (and circumstances,” we thus have held, a court must deny all
ostensibly for the benefit of some creditors but not others). compensation when a party is not disinterested at the time of
All the while, he did so secretively and outside of the appointment. See Michel, 44 F.3d at 1319–20 (holding that
traditional mechanisms for permitting fiduciaries to identify the debtor’s financial advisor—whom the Code required to be
and pursue matters of self-interest—notice to all parties and disinterested—was not disinterested, was not validly
a hearing before the court. Where the law demanded “[n]ot appointed, and therefore was not entitled to compensation,
honesty alone, but the punctilio of an honor the most even though the financial advisor had fully disclosed its
sensitive,” Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. interest at the outset and even though the bankruptcy court
1928) (Cardozo, C.J.), and “forbearance of all opportunities had approved the appointment).
to advance self interest,” Mosser, 341 U.S. at 271, Schilling
responded with too little honesty and too much self-interest. That Schilling breached these duties at some point after his
His conduct simply was not compatible with an examiner’s, appointment does not change matters. In In re Downs we
or for that matter a trustee’s, duty of loyalty. held that a bankruptcy court abused its discretion by allowing
a party to retain fees who had exhibited a “willful disregard”
IV. of Rule 2016 and of § 329 (requiring a debtor’s attorney to
report compensation arrangements) and who did so after an
Having concluded that Schilling violated his duties to appointment. 103 F.3d at 479–80. The authority to decline
remain disinterested and loyal and having concluded that he all fees, we concluded, “is inherent, and in the face of such
violated his duty to disclose payments promised to him, we infractions should be wielded forcefully.” Id. at 479.
must consider whether the sanction imposed by the district “Section 329 and Rule 2016 are fundamentally rooted in the
court was appropriate. Cf. Wolf, 372 U.S. at 653 (“[T]he bare fiduciary relationship between attorneys and the courts,” and
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“the fulfillment of the duties imposed under these provisions shown in this type of case to support a denial of
are crucial to the administration and disposition of compensation.” Woods, 312 U.S. at 268; see Mosser, 341
proceedings before the bankruptcy courts.” Id. at 480. While U.S. at 273 (“[E]quity has sought to limit difficult and
In re Downs did not involve a “simple technical breach” of delicate fact-finding tasks concerning its own trustee by
Rule 2016—the attorney there “acted affirmatively to conceal precluding such [self-dealing] transactions for the reason that
his fee arrangement” and “misled” the trustee and other their effect is often difficult to trace, and the prohibition is not
creditors, id. at 479—neither does this case. See Gray v. merely against injuring the estate—it is against profiting out
English, 30 F.3d 1319, 1324 (10th Cir. 1994) (“[W]hen [a of the position of trust.”); Ross v. Kirschenbaum (In re Beck
fiduciary] loses his disinterested status during the course of Ind.), 605 F.2d 624, 636 (2d Cir. 1979) (“Courts do not take
administering a bankrupt’s estate . . . . the court should lean kindly to arguments by fiduciaries who have breached their
strongly toward denial of fees, and if the past benefit to the obligations that, if they had not done this, everything would
wrongdoer can be quantified, to require disgorgement of have been the same.”) (Friendly, J.).
compensation previously paid that fiduciary even before the
conflict arose. This approach is most in keeping with Nor are examiners and trustees without recourse when these
common law fiduciary principles and best serves the issues arise in the course of a bankruptcy. Mosser’s advice on
deterrence purpose of the rule.”). the point remains as sound today as it was a half-century ago:
“seek instructions from the court, given upon notice to
What is true of Schilling is also true of “The Law Firm of creditors and interested parties.” Id. at 274. When, for
J. Baxter Schilling,” the sole member of which is J. Baxter whatever reason, an examiner sees a legitimate need to serve
Schilling. JA 287. The district court did not abuse its some masters rather than others in a bankruptcy, and above all
discretion in concluding that, for these purposes, Schilling when one of the preferred masters is himself, the necessary
and his counsel (Schilling) were one and the same, and that condition for proceeding is full disclosure and court
Schilling’s firm must also disgorge all fees. 284 B.R. at 583. permission. Schilling instead chose secrecy and deception, a
choice that properly cost him his fees.
No doubt the sanction in this case is a harsh and
unforgiving one. Schilling’s efforts, he claims, brought V.
approximately $145 million of new value into the estate.
Rather than the thanks of a grateful court and the thanks of Schilling makes several contentions to the contrary, all of
grateful parties, he received an order to reimburse the debtor which amount to variations on a few points and none of
nearly $1 million in fees. Steep as the sanction may be, it which is persuasive.
represents the price of disloyalty, a price the courts have not
hesitated to charge in dealing with similar breaches of trust. A.
Serving as an examiner, as with “trusteeship,” “is serious
business and is not to be undertaken lightly or so discharged.” First and foremost, Schilling argues that merely negotiating
Mosser, 341 U.S. at 274. When it comes to loyalties and a fee arrangement with creditors does not make an examiner
conflicts of interest, we do not ask whether harm has resulted, improperly interested or disloyal. Appellant Br. at 38; Reply
because “the[] effect is often difficult to trace.” Id. at 273. Br. at 1, 3, 7. Saving for later the question whether this
“Where an actual conflict of interest exists, no more need be argument has a mistaken factual premise—that until July
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1997 Schilling merely negotiated with the three creditors and reached at the Washington settlement conference.” Cf. Model
had not reached any fee agreement—we disagree with its Rules of Prof’l Conduct R. 4.1 (“In the course of representing
legal premise. a client a lawyer shall not knowingly . . . make a false
statement of material fact or law to a third person.”). On this
As the district court properly concluded, the law does not record, Schilling cannot tenably show that his conduct during
allow a court-appointed fiduciary to engage in secret and self- the negotiations was any more consistent with his duties of
interested negotiations so long as the parties stop short of a disinterest and loyalty than a formal compensation agreement
formal agreement. 284 B.R. at 597. An examiner violates the would have been.
duty to remain disinterested and loyal no less by negotiating
a fee in secrecy than by reaching a formal (but secret) The core problem with Schilling’s contrary position is his
agreement because the risks of partiality in each setting are apparent view that he was just another party seeking to
equally grave, as this case well proves. maximize his personal recovery, failing to realize that “many
forms of conduct permissible in a workaday world for those
Schilling’s conduct during the “negotiations” illustrates the acting at arm’s length, are forbidden to those bound by
point. When Schilling proposed a fee arrangement in secret fiduciary ties.” Meinhard, 164 N.E. at 546. As every law
to Bank of New York, Mapco and Chase at the Fall 1996 student learns, fiduciaries are “held to something stricter than
Washington conference, he threatened that he would not the morals of the market place,” id., a principle that
perform his mediation duties without such a deal. When a appropriately applies to the sensitive duties of trustees and
Chase representative denied that a deal existed, he accused examiners. Whether or not other parties were permitted to
Chase of not being an honest broker. In January 1997 negotiate in secret or to mislead each other in pursuit of a
Schilling sent letters to Bank of New York, Mapco and larger recovery, and whether or not Schilling was permitted
Chase—creditors of the estate to whom he owed a duty of to negotiate in secret for the estate’s gain or to mislead the
loyalty—asserting that each of them had agreed at the estate’s creditors for the estate’s gain, Schilling had no right
Washington conference to pay him a percentage of their to negotiate in secret or to mislead the estates’s creditors for
recovery. In an August 1997 letter to Mapco, Schilling his own gain.
continued to insist that he and the three creditors had reached
a compensation agreement at the Washington conference. Nor is Schilling correct in arguing that this overlooks
Schilling later claimed, at a September 1998 court hearing, § 1129(a) of the Code, which provides that a court may not
that “he never said there was a side agreement with [Mapco],” confirm a plan of reorganization unless “[a]ny payment made
284 B.R. at 592, which led two of the creditors to disclose the or to be made by the proponent, by the debtor, or by a person
January 1997 letters. Upon disclosure of the letters, Schilling . . . acquiring property under the plan, for services or for costs
changed his story again, claiming that what he had asserted in and expenses in or in connection with the case . . . has been
the January 1997 letters was intentionally untrue: “A approved by, or is subject to the approval of, the court as
common tactic used in negotiations,” Schilling explained, “is reasonable.” It is true that this section makes most fees
to make a statement, as if it were fact, even though the incurred in a Chapter 11 case subject to court approval. And
statement is incorrect and is known to be incorrect. The it is true that this section refers to court approval of fees that
Examiner used this common place tactic in his January, 1997 in some instances may be paid directly by creditors,
letters . . . asserting, as a fact, that an agreement had been indicating that creditors like Bank of New York, Chase and
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Mapco may pay professionals’ fees themselves (including, to meaningful.” Id. at 515. These cases, in short, do not support
use one obvious example, their own professionals’ fees). Yet Schilling’s claim (Appellant Br. at 38) that he “could have
§ 1129(a) does not, as Schilling argues, authorize an examiner been paid a fee by the Banks and Mapco” without violating
to negotiate an agreement to share in a creditor’s recovery so the Code “as long as before the plan was confirmed the
long as the agreement is ultimately subject to court approval. payment was subject to approval by [the bankruptcy court].”
The provision by no means eliminates the examiner’s duty to
remain loyally disinterested and to comply with pertinent B.
disclosure requirements at each stage of the case.
Schilling next argues that two sections of the Bankruptcy
Neither Leiman v. Guttman, 336 U.S. 1 (1949), nor Mabey Code—§ 326 and § 328(a)—permit an examiner to receive a
v. Southwestern Elec. Power Co. (In re Cajun Elec. Power percentage-based fee. Section 326 provides in pertinent part
Coop., Inc.), 150 F.3d 503 (5th Cir. 1998), comes to a that “reasonable compensation” for a trustee may “not []
different conclusion. Leiman stands for the general exceed 3 percent of such moneys in excess of $1,000,000
proposition that a bankruptcy court must approve all fee upon all money disbursed or turned over in the case by the
arrangements provided for in a plan of reorganization before trustee to parties in interest.” As Schilling correctly observes,
confirming the plan. 336 U.S. at 8. And In re Cajun held that some bankruptcy courts read § 326 of the Code to allow
§ 1129(a)(4) does not mandate pre-payment review of fees trustees to receive compensation in the form of a percentage
paid by individual creditors to a creditors’ committee to of the assets distributed, at least in small Chapter 7 cases.
compensate the committee for legal fees incurred in See, e.g., In re Ohio Ind., Inc., 299 B.R. 853, 859 (Bankr.
connection with the bankruptcy. 150 F.3d at 514. N.D. Ohio 2003) (“Oftentimes, in smaller Chapter 7 cases, the
trustee is paid the maximum fee permitted under 11 U.S.C.
Both cases, notably, involved fee arrangements among § 326(a). This recognizes that in smaller cases trustees
parties who, unlike an examiner, are not required to remain provide services that are worth at least as much as the
disinterested. Compare 11 U.S.C. § 1104(d) (trustees and § 326(a) cap. The same results do not follow in larger
examiners must be “disinterested”) and id. § 327(a) cases.”). But see Connolly v. Harris Trust Co. (In re
(professionals employed by a trustee or a debtor in possession Miniscribe Corp.), 309 F.3d 1234, 1243 (10th Cir. 2002)
must be “disinterested”), with id. § 1103(b) (professionals (“[W]e reject a [] percentage-based rationale for calculating
employed by committees need not be “disinterested”). And reasonable trustee compensation . . . .”). Section 328(a)
neither case suggests that § 1129(a)(4) excuses an examiner allows trustees and committees to employ counsel “on a
from other requirements under the Code. In re Cajun, in contingent fee basis.”
point of law, states just the opposite, reasoning that it is
“Congress’s express provision for pre-payment judicial Neither provision advances Schilling’s cause. Even though
review of payments” in “[§] 330, provid[ing] for the award of § 326 has been construed by some bankruptcy courts to
‘reasonable compensation’ to . . . an examiner,’” and in permit a percentage-based fee in Chapter 7 cases and even
“§ 331[,] provid[ing] that . . . an examiner . . . may apply for though § 328(a) permits counsel for a trustee to seek a
interim compensation,” that “renders its silence with respect contingency-fee arrangement, these provisions do not
to the timing of the judicial determination of the authorize Schilling’s distinct conduct. They do not permit a
reasonableness of a payment subject to § 1129(a)(4) trustee (or counsel for a trustee) to solicit percentage-based
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compensation from some but not all of the creditors, to reach a percentage of the assets distributed. No one would suggest
an agreement with one of them, to do so secretively without that the trustee has an improper interest, he adds, just because
disclosure to the court or the other parties, or to deceive the the more the creditors and equity holders recover the more the
other parties about the undertaking. trustee earns. If everyone benefits, in other words, no conflict
can exist.
The argument also overlooks the distinct obligations of
trustees and examiners on the one hand and counsel for The argument, however, does not square with reality or
trustees on the other. The former owe fiduciary obligations with what Schilling in fact did. Schilling secretly negotiated
to the estate and its myriad interests and thus serve multiple compensation tied to some creditors’ recovery; he did not
masters. The Code, accordingly, does not allow their openly ask the court to award him a percentage of the estate’s
compensation to be tied to a particular party’s recovery. The growth or of all creditors’ and equity holders’ recovery.
latter owe fiduciary duties to their client (the trustee) and While a rising tide may indeed lift all boats, the deal he set
serve only one master. No conflict, accordingly, is created by out to negotiate gave him an incentive to lift only four
tying the attorneys’ compensation to recoveries in the very boats—three unsecured creditors’ and his own—which is
matters for which they were hired. exactly the problem of divided loyalties that the Code and the
common law have long worked to avoid.
Schilling’s reliance on Architectural Bldg. Components v.
McClarty (In re Foremost Mfg. Co.), 137 F.3d 919 (6th Cir. Schilling next argues that this reasoning rewrites the Code
1998), is unavailing for much the same reason. There we to require something that it does not—that an examiner
suggested that a trustee could negotiate an agreement with an remain “neutral.” As Schilling observes, the district court
unsecured creditor to have the creditor pay the fee of the several times referred to the requirement that an examiner
trustee’s counsel in a discrete matter that benefitted the estate remain “neutral,” a requirement nowhere found in the Code
and the creditor. See id. at 924. See also 11 U.S.C. § 327(c) or Rules. By “neutral and disinterested,” however, the district
(permitting counsel for the trustee to be counsel for a creditor, court clearly meant “impartial and disinterested,” which the
unless the United States Trustee objects). Neither In re Code does require. See 11 U.S.C. § 101(14); Wissman v.
Foremost Mfg. Co. nor § 327(c), however, says that a trustee Pittsburgh Nat’l Bank, 942 F.2d 867, 872 (4th Cir. 1991)
may negotiate his personal compensation with a particular (“The trustee . . . has a duty to administer the estate
creditor. impartially for the good of each and all of the creditors. No
interest, except that of the estate, should be his
C. consideration.”) (quotation and citation omitted); In re
Gibbons-Grable Co., 135 B.R. 514, 516 (Bankr. N.D. Ohio
Schilling also contends that his oral agreement with one 1991) (“A trustee has a duty to the estate’s creditors to
creditor and his negotiations with three creditors to receive a provide impartial administration for their benefit.”); Collier
percentage of their recovery created no conflict of interest ¶ 1108.09[4] (discussing a trustee or debtor in possession’s
with the other creditors or with the estate. In Schilling’s “duty of impartiality”); id. ¶ 1108.09[4][d][ii] (Although “to
words, his “interests were wholly and congruently aligned conclude that a trustee . . . is duty bound to serve all interests
with those of the estate.” Appellant Br. at 44. Schilling all of the time, or even some interests all of the time, strains
analogizes his circumstances to a Chapter 7 trustee being paid logic as well as the provisions of the Code[,] . . . a trustee . . .
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6340/6341/6344/6347 Electric Corp. Electric Corp. 6340/6341/6344/6347
[is] required to exercise due care . . ., refrain from self-dealing Schilling also claims that he did not negotiate his
. . . and, when conflicts among constituencies do arise, percentage fee in secret. “The possible fee arrangement,” he
negotiate honestly and in good faith in support of the asserts, “was broadly disclosed.” “In fact,” says Schilling,
particular position that [he] determine[s] to be appropriate “the discussions were known to Bankruptcy Judge Roberts,
. . . .”). the [United States Trustee], Big Rivers and all creditors then
actively involved in the case not later than November 13,
D. 1996.” Appellant Br. at 53. In making this argument,
however, Schilling omits several important details. The
Schilling also takes issue with many of the district court’s bankruptcy court, the United States Trustee and some
factual findings. He asserts, for instance, that he had no creditors, it is true, were aware that Schilling might seek an
agreements, only negotiations, with the creditors before enhanced fee and specifically one that turned on a percentage
July 31, 1997, when he received Chase’s written agreement of new value created for the estate. But the record supports
and promptly filed it with the court. The district court, the district court’s finding that only Schilling and the three
however, found that “[i]n the January 27, 1997 telephone call creditors (Bank of New York, Mapco and Chase) knew that
from the Examiner to Mr. Daniello of Chase, they reached an he was negotiating to have the three creditors pay him a
agreement in principle . . . whereby Chase agreed to pay [] percentage of their recovery. And this fact, no one argues,
him a fee calculated according to how much he increased its was ever disclosed.
recovery or decreased its exposure.” 284 B.R. at 589. The
record amply supports this finding, which accordingly is not E.
clearly erroneous.
Schilling lastly argues that several procedural impediments
Schilling further asserts that he did not solicit Bank of New barred the district court from reaching the disgorgement issue.
York, Mapco and Chase to pay his fees from their funds, only His principal objection is that no one had standing to raise the
to support his request for a percentage fee to be paid by the disgorgement issue—not the Utilities Service, not the United
estate. The record does not clearly reflect whether Schilling States Trustee, not Big Rivers, not any of its member
indicated whom he expected to pay this fee when he first cooperatives. Some of the parties lacked a sufficient financial
raised the issue at the Washington meetings. One possibility stake in the outcome to have standing, Schilling argues, and
is that he proposed that the three creditors pay him three others waived their challenges to the fee. The district court
percent of the increased amount that they received from Big disagreed, and so do we. Even if the Utilities Service, the
Rivers. Another possibility, as Schilling now argues and as United States Trustee, Big Rivers and its member
representatives of the three creditors recalled in their cooperatives all lacked standing (a doubtful proposition), the
deposition testimony, is that Schilling merely suggested that district court would still have standing to raise the issue on it
he should receive three percent of the new value without own. Section 105(a) of the Bankruptcy Code itself provides
indicating who would foot the bill. In view of the light cast ample authority: “No provision of this title providing for the
by the later January 1997 letters, in which Schilling says that raising of an issue by a party in interest shall be construed to
the three creditors would pay the fee, we cannot conclude that preclude the court from, sua sponte, taking any action or
the district court committed reversible error in making this making any determination necessary or appropriate to . . .
finding. prevent an abuse of process.” See In re Busy Beaver Bldg.
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Ctrs., Inc., 19 F.3d 833, 841 (3d Cir. 1994) (holding that a these few words do not bear the weight Schilling places on
bankruptcy court (or district court, if the reference has been them. The remand order concerned the “proper resolution” of
withdrawn) has authority to review a fee application on its the “issue of disgorgement,” and had no other strings
own initiative, whether or not any party objects to it). attached. 252 B.R. at 689. At all events, the district court
found, and we do not doubt, that Schilling reached an oral
Schilling responds that § 105 does not allow a court to agreement with Chase no later than January 1997. See 284
override contrary provisions elsewhere in the Code and B.R. at 589.
accordingly “Section 105 cannot trump Section 1129(a)(4).”
Reply Br. at 18. But this point goes to the merits of the Nor, contrary to Schilling’s position, did the “law of the
disgorgement issue, not to whether anyone has standing to case” make it an abuse of discretion for the district court to
raise it. He also notes—correctly—that the district court did deny Schilling’s counsel fees on the ground that Schilling and
not rely on § 105. But since we review judgments, not his counsel were “essentially the alter ego” of one another.
reasoning, the contention is unavailing. See Chevron U.S.A. Id. at 583. According to Schilling, an earlier district court
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 decision, which held that for purposes of a jurisdictional issue
(1984) (“[T]his Court reviews judgments, not opinions.”). “there is a distinction between [Schilling and his law firm],”
JA 492, established the law of the case. We disagree. Until
Schilling next contends that the district court exceeded the the district court ordered Schilling and the “Law Firm of J.
scope of the remand order and disregarded “the law of the Baxter Schilling” to disgorge all fees, no court had ever
case.” Appellant Br. at 26. The bankruptcy court, recall, decided whether to hold both Schilling and his law firm (sole
initially granted the examiner’s fee application (without the member, Schilling) accountable for the conduct at issue here.
benefit of the evidence at Judge Cohn’s disposal). Several Schilling in the end may not retain what Schilling must
parties appealed to the district court, which, acting as an disgorge.
appellate court, affirmed in part and reversed in part.
Concluding that the issue of disgorgement was not decided by *****
the bankruptcy court, District Court Judge McKinley
“remand[ed] the case to the Bankruptcy Court for proper As this case illustrates, being a bankruptcy examiner, like
resolution of this issue,” including “whether the Examiner being a bankruptcy trustee, “is serious business and is not to
negotiated and obtained certain side compensation be undertaken lightly.” Mosser, 341 U.S. at 274. And the
agreements with various creditors.” In re Big Rivers Elec. “most effective sanction for good administration” of these
Corp., 252 B.R. at 687–89. indispensable positions of trust remains sanctions “for the
consequences of forbidden acts,” id., including on this
Schilling argues that by using the conjunctive—“negotiated occasion the remittance of nearly $1 million in legal fees.
and obtained”—Judge McKinley established the “law of the While this sanction “creates a very heavy liability” and while
case,” which on remand allowed Judge Cohn to order it confirms that the position of examiner should not be
disgorgement “only if” he found both that “(1) negotiations “undertaken lightly,” id. at 273–74, the job remains one for
occurred between the Examiner and creditors (which was which mere mortals may apply. As Justice Jackson observed
undisputed) and (2) an agreement was reached between the in Mosser, “there are ways by which a trustee,” like an
Examiner and these creditors.” Appellant Br. at 27. But examiner, may effectively protect against such sanctions. Id.Nos. 02-6212/6213/6338/ In re Big Rivers 43
6340/6341/6344/6347 Electric Corp.
at 274. Whether it is the business-judgment rule which
shields fiduciaries from liability for “disinterested mistakes in
business judgment,” the all-purpose utility of full disclosure,
or the “well established” practice of seeking “instructions
from the court, given upon notice to creditors and interested
parties, as to matters which involve difficult questions of
judgment,” id., examiners have ample ways to ensure that
they honor the unremitting duties of loyalty and
disinterestedness and avoid the liabilities imposed here.
VI.
For these reasons, we affirm the district court’s judgment.