In Re: Jade Management Services

NOT PRECEDENTIAL

UNITED STATE COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________

No. 09-2800
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IN RE: JADE MANAGEMENT SERVICES
d/b/a CROWN MOUNTAIN WATER SERVICES,

Appellant
_______________

On Appeal from the
District Court of the Virgin Islands
No. 3-05-cv-00148
District Judge: Honorable Curtis V. Gomez

Submitted Pursuant to Third Circuit LAR 34.1(a)
May 4, 2010

Before: SMITH, CHAGARES, and JORDAN, Circuit Judges.

(Filed: July 9, 2010 )
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OPINION
________________

CHAGARES, Circuit Judge.

We review in this bankruptcy action an award of attorney’s fees to Nancy D’Anna,

Esq., who for a time represented the appellant, Jade Management Services (“Jade”), as

debtor’s counsel. We will affirm.
 I.

We write solely for the parties’ benefit and, accordingly, give only a brief

recitation of the facts. Jade owned certain real estate in the Virgin Islands while a sister

corporation, Crown Mountain Water, Inc. (“CMW”), operated a business selling potable

water extracted from wells located on Jade’s property. In 1995, the two entities merged,

retaining Jade’s corporate name. On September 11, 2002, Jade filed a petition for

bankruptcy protection under Chapter 11 of the Bankruptcy Code. The next day, Jeannie

Benjamin, Jade’s sole shareholder and its president and chief executive officer, filed an

individual petition for bankruptcy protection under Chapter 13 of the Bankruptcy Code.

D’Anna executed these two petitions as counsel representing both Jade and Benjamin.

On January 14, 2003, the Bankruptcy Court approved Jade’s unchallenged

application to employ D’Anna as debtor’s counsel in its Chapter 11 case. Joint Appendix

(“JA”) 177. On August 15, 2003, Jade filed a proposed plan of reorganization, under

which its assets would be sold and the proceeds applied to satisfy, in full, all secured

claims and tax liens. Satisfaction of the unsecured claims, however, would be uncertain

under the proposed plan.1 JA 182-84. Although Benjamin had personally guaranteed

some or all of Jade’s secured debts, as a result of the proposed plan, she was never called

1
One of the unsecured claims was based on a pending personal injury suit that had
been brought against CMW by Alvin and Eleanor Whyte, in which the Whytes sought
damages of approximately $1.6 million. JA 164. Jade contested the claim, asserting that
the suit was without legal basis. JA 40. The suit ultimately settled for approximately
$170,000. JA 107; 211-12.

2
upon to satisfy her guarantees, nor did she ever file a claim against Jade. The Bankruptcy

Court confirmed the plan on July 8, 2004, and the asset sale was scheduled for February

15, 2005. JA 45, 204.

Four days before the sale was set to occur, Benjamin executed a stock purchase

agreement with another entity, Ursula and The Eleven Thousand Virgins, LLC

(“Ursula”).2 JA 48-62. The same day, Ursula filed an emergency motion in the

Bankruptcy Court to stay the sale of Jade’s assets in the Chapter 11 case. JA 45-47.

Ursula represented that it had the immediate financial ability and intent to satisfy not only

the secured claims and tax liens, but 100% of allowed unsecured claims as well. Upon

the Bankruptcy Court’s approval in Benjamin’s Chapter 13 case, Ursula assumed control

of Jade on February 15, 2005. On May 16, 2005, it filed a proposed amended plan of

reorganization consistent with its stated intentions. JA 102-11. The Bankruptcy Court

confirmed the proposed amended plan on October 5, 2005. JA 282-85.

In the interim, D’Anna filed an application for fees and expenses, in which she

sought a total outstanding sum of $70,251.36 for legal services performed between

September 9, 2002 and May 10, 2005. JA 68-101. On July 15, 2005, Ursula filed an

2
The stock purchase agreement was subject to the Bankruptcy Court’s approval in
Benjamin’s Chapter 13 case, which the court did indeed approve. Solely for sake of
clarity, we refer hereafter to “Jade” as the entity operating before Ursula assumed control,
and we refer to the entity now challenging the fee award as “Ursula.” We do so fully
cognizant that the title of the reorganized debtor (and appellant here) remains “Jade
Management Services.”

3
objection to the fee application, asserting (1) that D’Anna had been improperly employed

because she was not a disinterested person, and (2) that the fee request was unreasonable.

On September 8, 2005, the Bankruptcy Court held a hearing regarding the

application for fees and expenses, after which it entered an order overruling Ursula’s

objections and approving the fee request. JA 243. Ursula appealed to the District Court

of the Virgin Islands, which affirmed the award. JA 3-28. Ursula now appeals to our

Court.3

II.

A.

Ursula argues first that D’Anna was ineligible for employment under 11 U.S.C. §

327(a), and is therefore ineligible to receive compensation for her services. Specifically,

Ursula argues that D’Anna was not a “disinterested person” (as § 327(a) requires)

because she simultaneously represented Jade in its Chapter 11 case and Benjamin in her

Chapter 13 case, and because Benjamin had personally guaranteed Jade’s secured debts.

Consequently, Ursula contends, D’Anna operated under an actual conflict of interest –

here, a material risk that she would elevate Benjamin’s personal interests over those of

3
The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157. The District Court
had intermediate appellate jurisdiction under 28 U.S.C. § 158(a). We exercise appellate
jurisdiction under 28 U.S.C. § 158(d). We review the District Court’s order de novo, and
we apply the same standards that it was required to apply when reviewing the underlying
decision by the Bankruptcy Court. In re Visual Indus., Inc., 57 F.3d 321, 324 (3d Cir.
1995).

4
Jade’s secured creditors. Accordingly, Ursula argues that D’Anna was improperly

employed from the outset, thereby eliminating the Bankruptcy Court’s discretion to award

her fees.4

Section 327 permits a debtor-in-possession (here, Jade) to employ attorneys “that

do not hold or represent an interest adverse to the estate, and that are disinterested

persons[.]” 11 U.S.C. § 327(a). The Bankruptcy Code defines a “disinterested person” as

a person who:

(A) is not a creditor, an equity security holder, or an insider; (B)
is not and was not, within 2 years before the date of the filing of
the petition, a director, officer, or employee of the debtor; and
(C) does not have an interest materially adverse to the interest of
the estate or of any class of creditors or equity security holders,
by reason of any direct or indirect relationship to, connection
with, or interest in, the debtor, or for any other reason.

11 U.S.C. § 101(14) (emphasis added). Paragraphs (A) and (B) are inapplicable

here; the question is whether D’Anna’s concurrent representation of Benjamin and Jade in

their respective bankruptcy cases caused D’Anna to have an interest that was materially

adverse to, or created an actual conflict of interest with, Jade’s secured creditors.

Under our precedents, “[§] 327(a) presents a per se bar to the appointment of a[n

4
We review the Bankruptcy Court’s decision to approve Jade’s application to
employ D’Anna for abuse of discretion. See In re Pillowtex, Inc., 304 F.3d 246, 250 (3d
Cir. 2002). “An abuse of discretion exists where the [Bankruptcy C]ourt’s decision rests
upon a clearly erroneous finding of fact, an errant conclusion of law or an improper
application of law to fact.” In re Marvel Entm’t Group, Inc., 140 F.3d 463, 470 (3d Cir.
1998) (quotations and citation omitted).

5
attorney] with an actual conflict, [but] gives the [Bankruptcy C]ourt wide discretion in

deciding whether to approve the appointment of a[n attorney] with a potential conflict.” In

re Marvel Entm’t Group, Inc., 140 F.3d 463, 477 (3d Cir. 1998); see also In re Pillowtex,

Inc., 304 F.3d 246, 251-52 (3d Cir. 2002); In re First Jersey Sec., Inc., 180 F.3d 504, 509

(3d Cir. 1999) (“[Section] 327(a) mandates disqualification when there is an actual

conflict of interest, allows for it when there is a potential conflict, and precludes it based

solely on an appearance of conflict.”); In re BH&P, Inc., 949 F.2d 1300, 1316-17 (3d Cir.

1991).

Distinguishing between potential and actual conflicts is a flexible enterprise, and

necessarily is one that is governed by the factual niceties of each particular case.

Generally, however, “a conflict is actual, and hence per se disqualifying, if it is likely that

a professional will be placed in a position permitting [her] to favor one interest over an

impermissibly conflicting interest.” Pillowtex, 304 F.3d at 251 (citation omitted).

Nevertheless, as we explained in BH&P, “denomination of a conflict as ‘potential’ or

‘actual’ and the decision concerning whether to disqualify a professional based upon that

determination in situations not yet rising to the level of an actual conflict are matters

committed to the bankruptcy court’s sound exercise of discretion.” 949 F.2d at 1316-17.

See also In re Martin, 817 F.2d 175, 182-83 (1st Cir. 1987) (“The bankruptcy judge is on

the front line, in the best position to gauge the ongoing interplay of factors and to make the

delicate judgment calls which such a decision entails. . . . [E]ach situation must be judged

6
prospectively on its own merits. . . . [H]orrible imaginings alone cannot be allowed to

carry the day. Not every conceivable conflict must result in sending counsel away to lick

his wounds.”).

We are convinced that the Bankruptcy Court did not abuse its discretion here.

Under the particular factual circumstances of this case, there existed at most a potential

conflict of interest inherent in D’Anna’s concurrent representation of the debtor-in-

possession and its sole shareholder who had guaranteed the debtor’s secured debt.

“Simultaneous representation of a debtor corporation and the controlling shareholders,

although not a disqualifying conflict per se, becomes a basis to disqualify counsel when

adverse interests either exist or are likely to develop.” In re Plaza Hotel Corp., 111 B.R.

882, 890 (Bankr. E.D. Cal. 1990) (emphasis added; citations omitted); see also TWI Int’l,

Inc. v. Vanguard Oil & Serv. Co., 162 B.R. 672, 675 (S.D.N.Y. 1994) (“[A]n attorney that

represents a corporation in bankruptcy and its principal is not per se interested.”) (citation

omitted); In re Hurst Lincoln Mercury, Inc., 80 B.R. 894, 895 (Bankr. S.D. Ohio 1987) (“It

is fundamental that simultaneous representation of a corporation and its sole stockholder is

not in and of itself improper.”) (citation omitted).

In this case, the value of Jade’s encumbered assets far outpaced the value of the

secured claims that Benjamin had guaranteed. Compare JA 41, 192-93 (appraised value of

Jade’s business approximately $1.2 million) with JA 39 (secured claims totaling

$422,170). From the outset, it appeared substantially certain that all secured claims would

7
be satisfied in full, thereby diminishing or eliminating outright any potential tension

between Benjamin and the secured creditors. And while it is not dispositive, we note that

that likelihood ultimately came to fruition, for Benjamin filed no claims against the estate.

Though a “court should generally disapprove employment of a professional with a

potential conflict,” there exists an exception to that general rule “where the possibility that

the potential conflict will become actual is remote[.]” BH&P, 949 F.2d at 1316. We find

no abuse of discretion in the Bankruptcy Court’s determination that such a remote

possibility existed here.

Ursula’s reliance on Plaza Hotel undermines, rather than supports, its position. See

Appellant Reply Br. at 6. There, the court explained that an “actual conflict generally

exists where . . . owners-guarantors are being sued on their guarantees of the debtor

corporation’s debt.” Plaza Hotel, 111 B.R. at 890 (emphasis added). But as we have said,

that is not the case here, where there appeared to be no significant risk that Benjamin

would ever be called upon to satisfy her guarantees. Our cases make clear that we eschew

bright-line rules in the determination whether a given arrangement constitutes an actual or

potential conflict of interest.

Our conclusion is further bolstered by the fact that Ursula did not so much as hint

that it objected to D’Anna’s dual representation until after the stock purchase agreement

had been approved, after it had taken control of Jade, after it had submitted an amended

proposed plan of reorganization, and after D’Anna had completed her representation. Cf.

8
In re Kliegl Bros. Universal Elec. Stage Lighting Co., 189 B.R. 874, 877 (Bankr. E.D.N.Y.

1995) (emphasizing importance of objecting to professional’s employment under § 327(a)

at earliest practicable time). Indeed, at the hearing, the Bankruptcy Court characterized

Ursula’s challenge to the fee application as little more than a post hoc attempt to decrease

the purchase price for which it had bargained: “[I]t seems to me . . . that pursuant to the

[stock purchase agreement], you’ve got to pay the administrative expenses, and now [you]

don’t like the administrative expenses.” JA 229. We do not disagree with this

assessment.5

Ursula’s challenge places heavy reliance on D’Anna’s failure to provide a complete

statement pursuant to Federal Rule of Bankruptcy Procedure 2014. That rule effectuates §

327(a)’s disinterestedness requirement, and mandates that a debtor’s application to employ

the professional “be accompanied by a verified statement of the person to be employed

setting forth the person’s connections with the debtor, creditors, any other party in interest,

their respective attorneys and accountants, the United States trustee, or any person

employed in the office of the United States trustee.” Fed. R. Bankr. P. 2014(a). In this

case, D’Anna’s verified statement represented only that she had “no prior relationship or

connection with any creditor which would be adverse to the interest of the debtor,”

omitting her connection to Benjamin, who clearly was a party in interest. JA 148. Seizing

5
We note further that, at the hearing regarding the fee request, the United States
Trustee stated on the record that it too “ha[d] reviewed the application and . . . ha[d] no
objection to the award of compensation requested.” JA 237.

9
on the omission, Ursula argues that this is clear evidence of D’Anna’s actual conflict of

interest.

We are not persuaded. Under the rule, “[a]ll facts that may be pertinent to a court’s

determination of whether an attorney is disinterested or holds an adverse interest to the

estate must be disclosed.” In re Hathaway Ranch P’ship, 116 B.R. 208, 219 (C.D. Cal.

1990) (emphasis in original; citations omitted). “The duty is one of complete disclosure of

all facts, and, if the duty is neglected, even innocently, the offender should stand no better

than if the duty to disclose had been correctly performed.” Plaza Hotel, 111 B.R. at 883.

But again, from the outset, D’Anna’s dual representation of Jade and Benjamin was

known to all concerned. The matters were assigned to the same Bankruptcy Judge (Judge

Cosetti), who regularly heard both matters together, establishing that he was well aware of

D’Anna’s connection to Benjamin. Indeed, Judge Fitzerald (to whom the cases were

assigned after Judge Cosetti’s retirement) recognized this fact explicitly: “I don’t agree

that [D’Anna’s employment] was in error. Judge Cosetti clearly was aware of the facts in

the case . . . at the beginning[,] when the appointment was approved[.]” JA 228.

Consequently, as a result of her employment, D’Anna stood in no better position than she

would have had she provided a more comprehensive Rule 2014 affidavit. Cf. Plaza Hotel,

111 B.R. at 883. At bottom, the record makes clear that the Bankruptcy Court was

“[a]rmed with knowledge of all the relevant facts.” Martin, 817 F.2d at 182.6

6
Ursula also argues that the Bankruptcy Court should have rejected D’Anna’s fee
request because she fraudulently omitted her connection to Benjamin on her Rule 2014

10
 We find no cause to disturb the Bankruptcy Court’s order authorizing D’Anna’s

employment. Accordingly, we conclude that the court did not err in finding her eligible

for compensation.7

B.

Ursula next argues that the Bankruptcy Court erred by awarding D’Anna the full

amount of fees for which she applied because they were unreasonable. A court may award

an attorney employed under § 327 “reasonable compensation for actual, necessary services

rendered” or expenses incurred, but may not award compensation for “unnecessary

duplication of services,” or “services that were not . . . reasonably likely to benefit the

debtor’s estate[] or necessary to the administration of the case.” 11 U.S.C. § 330(a)(1),

affidavit. For similar reasons, we reject this argument as well. Again, because the record
plainly reveals Judge Cosetti’s awareness of D’Anna’s dual representation, there is no
reason to believe that he would have rejected Jade’s application to employ her even if a
complete Rule 2014 statement had been filed. Moreover, aside from the omission in the
Rule 2014 affidavit, Ursula has proffered no evidence intimating that D’Anna in any way
attempted to defraud the court. While we certainly do not condone D’Anna’s substandard
affidavit, we cannot fault the Bankruptcy Court for failing to reject it as fraudulent.
7
Given our resolution, we have no occasion to decide whether a bankruptcy court
retains discretion under § 328 – which authorizes a court to award compensation where a
professional becomes disinterested during his or her employment – to award
compensation to a professional who is improperly employed under § 327(a). Compare In
re Crivello, 134 F.3d 831, 836-39 (7th Cir. 1998) (holding that bankruptcy court has
discretion to award fees under § 328 despite professional’s improper employment under
§327(a)) with In re Federated Dep’t Stores, Inc., 44 F.3d 1310, 1319-20 (6th Cir. 1995)
(holding that bankruptcy courts are not so authorized); cf. also U.S. Trustee v. Price
Waterhouse, 19 F.3d 138, 142 (3d Cir. 1994) (stating in dicta that “we interpret [§] 328(c)
to mean that if a non-‘disinterested’ professional person is improperly employed . . . the
court may deny compensation and reimbursement”).

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(4). In addressing the fee request, the Bankruptcy Court was required to consider the

following factors: (1) the time spent performing the services; (2) the rates charged; (3)

whether the services were necessary to the administration of, or beneficial toward the

completion of, the case; (4) whether the services were performed within a reasonable

amount of time commensurate with the complexity or importance of the task(s) completed;

(5) whether the attorney demonstrated skill and experience in the bankruptcy field; and (6)

whether the compensation is reasonable based on the customary compensation charged by

comparably skilled practitioners in non-bankruptcy cases. 11 U.S.C. § 330(a)(3). We

review for abuse of discretion, see In re Engel, 124 F.3d 567, 571 (3d Cir. 1997) (citation

omitted), and we find none.

Ursula argues that D’Anna’s work on the Whyte personal injury matter, see supra

note 1, was duplicative of work performed by counsel for Jade’s liability insurance carrier.

Ursula paraphrases a letter from the insurance carrier to Jade, in which Ursula claims that

the carrier advised Jade that it “need not expend any costs for its defense.” Appellant Br.

at 46. But the letter supports, rather than undermines, D’Anna’s claim that her work on

the Whyte matter was reasonable and necessary. The letter advised Jade that its policy

limit was $100,000, and that Jade would not be covered to the extent a verdict was

returned in excess of that amount. JA 156. Accordingly, the insurance carrier specifically

suggested that Jade “may wish to retain the services of another counsel to protect [its]

interests[] against a verdict in excess of policy limits.” Id. The letter only advised that

12
Jade had no obligation to “assume any legal expenses” if it did not “wish to engage

personal counsel.” Id. That Jade opted to use D’Anna’s additional services, consistent

with the insurance carrier’s suggestion, does not render the services duplicative. And, in

fact, the settlement amount turned out to be greater than the $100,000 policy limit. JA

107, 211-12. Given these circumstances, it was plainly not an abuse of discretion to award

D’Anna fees for work performed on the Whyte matter.

Ursula also challenges D’Anna’s work in addressing certain technical defects in the

1995 merger between Jade and CMW. Specifically, several annual reports and corporate

franchise taxes that the companies were required to file and pay apparently never were,

and thus the Virgin Islands Government never formally processed the merger.

Accordingly, D’Anna spent time addressing these defects in contemplation of the sale of

the business to Ursula. JA 36 n.1; 162 n.1; 235-36. Ursula now argues that D’Anna’s

efforts to complete the merger caused it to assume the liability potentially accompanying

the Whyte claim. Consequently, Ursula says, D’Anna’s services were actually harmful,

rather than beneficial, to the estate. D’Anna argues, conversely, that execution of the

stock purchase agreement was contingent on Jade providing to Ursula a certificate of its

good standing, which she says included proof of bona fide title to CMW’s assets.

We need not parse the terms of the stock purchase agreement to resolve the issue.

Irrespective of Jade’s contractual obligations, it would be strange indeed to hold that

curing deficiencies in official corporate paperwork submitted to the Government does not

13
in some sense benefit the corporation. And we do not so hold.

The remainder of Ursula’s challenge to the fee request amounts to little more than

trifling objections to D’Anna’s fee calculation. Upon review, we find these objections

(which, we note, Ursula failed to specify to the Bankruptcy Court, JA 231) to be without

merit. We decline to disturb the Bankruptcy Court’s considered judgment. See In re Busy

Beaver Bldg. Ctrs., Inc., 19 F.3d 833, 845 (3d Cir. 1994) (“Because its time is precious,

the reviewing court need only correct reasonably discernible abuses, not pin down to the

nearest dollar the precise fee to which the professional is ideally entitled.”) (footnote

omitted).

III.

For the foregoing reasons, we will affirm the order of the District Court.

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