In Re Southwest Food Distributors, LLC

FILED
United States Court of Appeals
Tenth Circuit

March 31, 2009
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re:

SOUTHWEST FOOD
DISTRIBUTORS, LLC, d/b/a The
Fadler Company,

Debtor.
No. 08-5160
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS,

Appellant,
v.
EUGENE HARRIS, Receiver for JFC
Management, Inc.; F&M BANK &
TRUST COMPANY,

Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA
(D.C. NO. CV-08-00171-TCK-SAJ)

Submitted on the briefs:

Harley J. Goldstein, Bell, Boyd & Lloyd, LLP, Chicago, Illinois, for Appellant.

Terry M. Thomas, Kayci Bair Hughes, Michael R. Pacewicz, Crowe & Dunlevy,
PC, Tulsa, Oklahoma; and J. Schaad Titus, Kelley G. Loud, Titus, Hillis,
Reynolds, Love, Dickman & McCalmon, Tulsa, Oklahoma, for Appellees.
Before KELLY, ANDERSON, and BRISCOE, Circuit Judges.

ANDERSON, Circuit Judge.

Appellant, the Official Committee of Unsecured Creditors (“Committee”),

appeals the district court’s affirmance of a bankruptcy court’s order denying the

appointment of certain counsel. * We affirm.

BACKGROUND

On January 8, 2008, Southwest Food Distributors, LLC d/b/a The Fadler

Company (“Debtor”), filed a voluntary petition for relief under Chapter 11 of the

Bankruptcy Code in the Bankruptcy Court in the Northern District of Oklahoma.

On the same day, the Debtor filed its “List of Creditors Holding 20 Largest

Unsecured Claims,” which included unsecured creditors in Texas, Illinois,

Pennsylvania, Nebraska, Minnesota, and Georgia. On January 23, 2008, the

Debtor filed its Summary of Schedules and Schedules A-H (collectively

*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination
of this appeal. See Fed. R. App. P. 34(a)(2); 10 th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.

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“Summaries and Schedules”), which listed total assets of $1,157,651 and total

liabilities of $12,240,882.

On January 31, 2008, the Office of the United States Trustee (“UST”)

appointed the Committee as an official committee to represent the interests of the

unsecured creditors of the Debtor, pursuant to 11 U.S.C.§ 1102, and filed a formal

notice the next day reflecting this appointment. At the time of the Committee’s

appointment, the Committee was composed of five entities, each represented by

an individual located outside the Northern District of Oklahoma. 1 Also on

January 31, 2008, the Committee selected Bell, Boyd & Lloyd LLP (“Bell Boyd”)

of Chicago, Illinois, as its lead counsel. Bell Boyd, in turn, selected Gable &

Gotwals of Tulsa, Oklahoma, as its local counsel.

The Committee filed an “Application for Order Authorizing Official

Committee of Unsecured Creditors to Retain and Employ Bell, Boyd & Lloyd

LLP as Counsel” and an “Application for Order Authorizing Official Committee

of Unsecured Creditors to Retain and Employ Gable [&] Gotwals as Local

Counsel” in February 2008. The application to employ Bell Boyd included (1) a

summary of Bell Boyd’s qualifications to represent the Committee; (2) the

professional services to be provided to the Committee; (3) the names and hourly

rates of the professionals expected to be providing services to the Committee; (4)

1
The representatives were located in New York, Texas, Idaho, Illinois, and
California.

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an explanation of the formula used to calculate Bell Boyd’s legal fees; (5) a

request that the application be approved retroactive to the date of the appointment

of the Committee; and (6) a statement that Bell Boyd has no connection with the

Debtor, its creditors, or other parties in interest except as set forth in counsel’s

declaration. See Doc. 68, Appellant’s App. at 165-69. The application

represented that the rates for the Bell Boyd attorneys expected to perform work

on the case ranged from $250 to $505 per hour, and that rates for legal assistants

ranged from $180 to $225 per hour. The application also stated that the listed

rates for Bell Boyd personnel would be subject to “periodic adjustments.” The

declaration to which the application referred affirmed the accuracy of the

statements in the application, described the conflict check process utilized by Bell

Boyd, and included a disclosure of Bell Boyd’s current and previous

representation of certain affiliates, subsidiaries, joint ventures, and/or entities

associated with creditors of the Debtor in matters unrelated to the Debtor’s

bankruptcy. The next day, the Committee filed an application seeking the

appointment of Gable & Gotwals as local counsel. That application made

substantially the same representations, with the exception of fees, as the

application for Bell Boyd’s retention.

Appellee F&M Bank & Trust Company (“F&M”), a secured creditor of the

Debtor, filed an objection to both applications. Among other things, F&M

objected to the Committee’s proposed retention of “‘national’ counsel at rates

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twice the rates of highly competent local, state or regional counsel.” F&M’s

Objection to Application to Retain Bell Boyd at 1, Appellant’s App. at 189. F&M

went on to argue that “Gable Gotwals is a regional firm that could more than

adequately represent the Committee. Bell Boyd’s rates are not competitive with

the rates of Gable Gotwals or other local firms in this market,” and that “retaining

Bell Boyd will require the bankruptcy estate to incur significant expenses for

travel time that could be avoided if a regional firm were retained.” Id. at 190-91.

In its objection to the retention of Gable & Gotwals, F&M stated that “ Gable

Gotwals is a regional firm that can more than adequately represent the Committee

in this case. F&M Bank therefore objects to the Application to Employ Gable

Gotwals only in so far as Gable Gotwals would be local counsel supporting Bell

Boyd as lead counsel.” F&M’s Objection to Application to Retain Gable Gotwals

at 1-2, Appellant’s App. at 197-98.

On February 19, 2008, the UST filed his comments on the applications for

the retention of Bell Boyd and Gable & Gotwals. The UST explained:

The UST has discussed with all parties his concern about
administrative expenses in this case. The UST has also discussed the
rates proposed to be charged by Bell Boyd as compared to the lower
hourly rates charged by local professionals with similar levels of
experience. The UST recognizes that, at this point, employment is
all that is sought by the professionals. However, the UST does not
want to surprise any professional with an objection to hourly rates
and travel expenses after significant time and out of pocket expenses
have been expended in furtherance of UCC representation.

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Comments of the UST at ¶ 3, Appellant’s App. at 202. The UST further

observed:

If Bell Boyd were to cap all fees at the applicable rates set out
in the Local Fee Survey for 2008, and if both firms sought to be
retained by the UCC undertake efforts to minimize duplication of
services with clear task division and minimal inter-office conferences
and administrative support functions, the expense to the estate would
be reduced and if results at the end of the case warranted, the Court
could consider an application for a bonus at that time.

Id. at 203.

Also on February 19, the Committee filed a supplemental declaration

disclosing additional parties searched by Bell Boyd for conflicts and maintaining

that Bell Boyd represented no adverse interests to any parties or entities involved

in the bankruptcy case, within the meaning of 11 U.S.C. § 1103. On the same

day, the Committee responded to each of F&M’s objections to Bell Boyd’s

retention, and argued, in particular, that the Committee is entitled to retain the

counsel of its choice, even if such counsel is from outside the region. On

February 20, Eugene Harris, the Receiver for JFC Management, Inc., the holder of

an unsecured claim, filed its “Notice of Support” for the positions taken by F&M

with respect to the applications to retain Bell Boyd and Gable & Gotwals.

On February 21, the Bankruptcy Court held a hearing on the applications.

The Committee argued that Bell Boyd had met the standard for retention of

counsel set out in 11 U.S.C. § 1103, and that the concerns raised by those

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objecting to Bell Boyd’s retention were issues related to compensation approval,

rather than retention. The Court observed the following:

One of the questions that I have in my mind–and I do
recognize the fact that there should be some deference given to the
Committee to employ counsel of its choice is whether or not we
really need to have two firms. Do we really need to have two firms
regardless of what rates are finally approved and what fees are
allowed when no matter how efficient the two firms are it does
by–through no fault of anyone’s it adds some additional
inefficiencies or some duplication and it makes things more
complicated for me in reviewing fee applications. There has to be
coordination if there’s more than one firm involved.

Tr. on Hr’g on Application to Employ Counsel at 17-18, Appellant’s App. at 243-

44. The court then determined to receive evidence during the hearing, and Neil

Tomlins, the Senior Vice-President and General Counsel of F&M, testified as to

its interest as an unsecured creditor of the Debtor. 2

After the presentation of evidence, F&M argued that there was “no

evidence that a local firm cannot adequately inform and advise the Committee

with regard to any other matter that might arise in this case. . . . [T]he Committee

must acknowledge that Gable & Gotwals or another local firm can do the job

adequately and more economically.” Id. at 257-58. F&M further argued that

2
Tomlins testified that “at the end of the day the bank will be an unsecured
creditor in this case of anywhere from five to seven million dollars.” Tr. of Hr’g
on Application to Employ Counsel at 25, Appellant’s App. at 251. There was
also testimony that F&M had received 3.8 million dollars from the Debtor in the
ninety days prior to the bankruptcy filing. Counsel for the Debtor testified that it
“would recognize that the bank [F&M] does have a strong economic interest or
sizeable economic interest in the case.” Id. at 256.

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“[t]here are always national creditors in cases in Tulsa, Oklahoma, as the Court

and all the counsel up here well know. National creditors and businesses

routinely entrust their matters to local firms.” Id. Finally, F&M observed that it

“will undoubtedly be the largest unsecured creditor in this case. It’s money and

the money of all unsecureds is at issue here. We request that the application of

Bell Boyd be denied.” Id.

The UST then argued that his “issue is primarily that of economics. Given

the status of the case, given the scope of the . . . case, the U.S. Trustee is very

concerned about the costs of the administration of this case.” Id. at 259.

Bell Boyd argued that “this is not a case with a handful of national

creditors. This is a case predominantly with national creditors. While the bank is

local, the real sizeable claims of the unsecured creditors are not located in Tulsa.

[B]ased on the legal standard here under Section 1103 of the Bankruptcy Code,

which is simply the adverse interest standard, my firm is entitled to be retained.”

Id. at 260. When asked by the court to explain the necessity for two firms, Bell

Boyd responded that it had “come to an agreement where we’ll very specifically

delineate tasks so there’s absolutely no redundancy. If there is redundancy, then

we won’t bill for that . . . While we would think that we can handle the case in a

theoretical perspective, it will actually be much more efficient if we use local

counsel.” Id. at 264. The court then asked Bell Boyd if it would acknowledge

that the prevailing local rates are the “appropriate rates for the Court to consider

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when reviewing fee applications.” Id. at 271. Bell Boyd’s counsel responded

that, while he did not “have the power to consent to do that as such, . . . if that’s

the way Your Honor rules then we will certainly abide by that and stay in the

case.” Id.

The court then took a recess, following which it ruled on the applications to

retain counsel, stating as follows:

The Court concludes that at this juncture there is no evidence that
this Chapter 11 case is complex or difficult or national in scope and
no compelling evidence was presented that counsel in this locale
lacks the necessary expertise that this case requires or is not
available to capably represent the Official Committee of Unsecured
Creditors.
No evidence was presented by the Official Committee that it is
necessary to employ more than one law firm to represent the
Committee in this case. No members of the Official Committee
appeared to explain why it is necessary or appropriate to employ Bell
Boyd or what criteria was used to select Bell Boyd as proposed
counsel for the Committee. Two of the largest unsecured creditors
strongly object to the application and the United States Trustee in
this district has expressed serious concerns about the retention of the
Bell Boyd firm.
There was no evidence that the debtor is not capable or willing
to fulfill the duties of a debtor in possession and this court has
[confidence] in the experience and integrity of debtor’s counsel. The
Court desires to afford the debtor every opportunity to reorganize
and to afford the creditors the best opportunity to recover on their
respective claims and, therefore, recognizes the need to contain
administrative costs and expenses.
Accordingly, the Court concludes that at this juncture in this
case it is not necessary or appropriate to approve more than one law
firm to represent the Committee, nor is it necessary for the estate to
absorb unnecessary costs and expenses related to employment of
counsel from outside this region.
....

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 No one has objected to retention of the Gable Gotwals firm.
The Court has confidence that the firm has the necessary expertise
and many years of experience in Chapter 11 matters to well represent
the Official Committee. Accordingly, the Committee’s retention of
the Gable Gotwals firm is approved.

Id. at 274-75. The Bankruptcy Court issued its written order on February 22,

2008, reiterating its oral findings denying Bell Boyd’s appointment as counsel for

the Committee and approving the retention of Gable & Gotwals.

The Committee appealed the decision to the United States District Court for

the Northern District of Oklahoma. The district court referred the matter to a

magistrate judge who, on August 12, 2008, issued a report and recommendation

recommending that the district court affirm the order of the Bankruptcy Court.

The Committee filed an objection to the report and recommendation, to which

F&M filed a response. On October 16, 2008, the district court issued an order

adopting the magistrate judge’s report and recommendation and affirming the

Bankruptcy Judge’s order rejecting the retention of Bell Boyd’s and accepting the

retention of Gable & Gotwals as counsel for the Committee. This appeal

followed.

DISCUSSION

“‘In reviewing a bankruptcy court decision under 28 U.S.C. § 158(a) and

(d), the district court and the court of appeals apply the same standards of review

that govern appellate review in other cases.’” Affordable Bail Bonds, Inc. v.

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Sandoval (In re Sandoval), 541 F.3d 997, 1000 (10 th Cir. 2008) (quoting Troff v.

Utah (In re Troff), 488 F.3d 1237, 1239 (10 th Cir. 2007)). “Denial of an

application for professional employment is reviewed under an abuse of discretion

standard.” Winship v. Cook (In re Cook), 223 B.R. 782, 788 (10 th Cir. BAP

1998); see also Interwest Bus. Equip., Inc. v. United States Trustee (In re

Interwest Bus. Equip., Inc.), 23 F.3d 311, 315 (10 th Cir. 1994)). “A [] court

abuses its discretion where it commits a legal error or relies on clearly erroneous

factual findings, or where there is no rational basis in the evidence for its ruling.”

Gillman v. Ford (In re Ford), 492 F.3d 1148, 1153 (10 th Cir. 2007) (further

quotation omitted). 3

When a committee has selected counsel to represent it in bankruptcy

proceedings, counsel must comply with the provisions of 11 U.S.C. § 1103 and

Fed. R. Bankr. P. 2014. Section 1103(b) provides that an attorney “may not,

while employed by such committee, represent any other entity having an adverse

interest in connection with the case.” 11 U.S.C. § 1103(b). Additionally, in order

3
The Committee attempts to characterize the issue before us on appeal as
strictly a legal one–“[w]hether the Bankruptcy Court erred as a matter of law
when it denied the retention of counsel chosen by the Committee based upon such
counsel being from outside the region of the judicial district in which the case is
pending, on the ground that competent counsel in the region is available.”
Appellant’s Op. Br. at 3. As indicated in text, our standard of review is clearly an
abuse of discretion standard, although that standard incorporates an inquiry into
whether the Bankruptcy Court committed an error of law, an issue which we
traditionally review de novo.

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to obtain court approval for its appointment, counsel must satisfy the conditions

of Rule 2014, which provides:

An order approving the employment of attorneys . . . pursuant to . . .
§ 1103 . . . of the Code shall be made only on application of the
trustee or committee . . . [,] [stating] the specific facts showing the
necessity for the employment, the name of the person to be
employed, the reasons for the selection, the professional services to
be rendered, any proposed arrangement for compensation, and, to the
best of the applicant’s knowledge, all of 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). The Committee argues that, once proposed counsel

has met the requirements of § 1103 and Rule 2014, then no further inquiry is

necessary and the bankruptcy court must appoint such counsel. Their

interpretation of the statute and rule is too narrow, and we therefore disagree.

“Although the Code vests in the bankruptcy trustee the immediate power to

select candidates for employment by the bankruptcy estate, it gives broad

discretion to the bankruptcy court over the appointment of professionals to work

on behalf of the trustee and the estate, in part by empowering the court to approve

candidates so selected.” Harold & Williams Dev. Co. v. United States Trustee (In

re Harold & Williams Dev.), 977 F.2d 906, 909 (4 th Cir. 1992). If the bankruptcy

court lacked such discretion, it would simply be a rubber stamp for the selections

of counsel or other professionals by participants in bankruptcy proceedings. As

the district court observed, “the Committee’s interpretation of the rule and the

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statute would limit a bankruptcy court’s inquiry and would leave little room for

the discretion afforded bankruptcy courts in reviewing applications for

employment.” Rep. & Rec. at 12, Appellant’s Appl at 19. “The purpose of the

rule requiring court approval of employment is to enable the court to control

administrative expenses.” In re Sound Radio, Inc., 145 B.R. 193, 202 (Bnkr.

D.N.J. 1992). Further, “[a]bsent extraordinary circumstances, bankruptcy estates

should not be consumed by the fees and expenses of court-appointed

professionals.” In re Kusler, 224 B.R. 180, 184 (Bankr. N.D. Okla. 1998 (quoting

In re Toney, 171 B.R. 414, 415 (Bankr. S.D. Fla. 1994) (citing In re Auto Parts

Club, Inc., 211 B.R. 29 (9 th Cir. BAP 1997))).

Furthermore, as the bankruptcy court’s explanation of its reasoning above

indicates, the court carefully examined the necessity for Bell Boyd’s services in

this case and concluded that, for a variety of reasons, the appointment of Bell

Boyd, in addition to Gable & Gotwals, was unnecessary. The legislative history

for § 1103 “indicates the need for close scrutiny of . . . [the] employment [of

more than one attorney.” In re The Bible Speaks, 67 B.R. 426 (Bankr. D. Mass.

1986). “The subsection provides for the employment of more than one attorney.

However, this will be the exception and not the rule; cause must be shown to

depart from the normal standard.” H.R. Rep. No. 595, 95 th Cong., 1st Sess. 402

(1977), reprinted in U.S. Code Cong. & Admin. News 1978, pp. 5787, 6358;

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accord, S. Rep. No. 989, 95 th Cong. 1 st Sess. 114 (1977), reprinted in U.S. Code

Cong. & Admin. News 1978, p. 5900.

The Committee argues that, to the extent the bankruptcy court’s rejection of

Bell Boyd was motivated by the fact that Bell Boyd’s fees were “national” and

therefore higher than necessary, such an argument is simply a fee issue, which

can be addressed later when fee applications are submitted. While there is some

merit to that argument, it does not absolve the bankruptcy court from the

necessity of considering the wisdom of appointing more expensive counsel at the

outset. As the bankruptcy court stated in In re The Bible Speaks, 67 B.R. 426

(Bankr. D. Mass. 1986), when it denied approval of the employment of two law

firms, “the inevitable reduction of requested compensation has aspects of

unfairness to counsel whose joint employment has been previously authorized.

Denial of that joint employment in the first instance avoids the entire problem.”

Id. at 428. Thus, delaying to the fee application stage consideration of the

necessity of appointing more expensive counsel may simply postpone the

resolution of a question which may be dealt with more efficiently and fairly at the

retention stage. We agree with the district court, when it observed:

[There is] nothing inappropriate in the Bankruptcy Court considering
attorney fees at the state of the case where a creditors’ committee
seeks approval of retained counsel. It would be grossly inefficient
for the Bankruptcy Court to ignore attorney fees at that stage and set
itself up for a needless fight at the attorney fees stage over which
fees were duplicative and higher than necessary. It would also seem
unfair to national counsel to be retained at the early state of

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 proceedings only to be surprised when the Bankruptcy Court later
reduced their fees to the local rate and removed all duplication.

Rep. & Rec. at 16-17, Appellant’s App. at 23-24.

While the right to select counsel of one’s own choice is an undeniable right

afforded to participants in bankruptcy, that right is not without boundaries. We

cannot say that the court abused its discretion in deciding that the case did not

merit the appointment of two sets of counsel, and that Gable & Gotwals could

adequately perform the job. 4

CONCLUSION

For the foregoing reasons, we AFFIRM the decision of the district court.

4
The Committee also argues that, even aside from the Court’s refusal to
confirm the employment of Bell Boyd, the Committee was “forced” to retain
Gable & Gotwals once the Court decided that there was no need to retain two law
firms. This argument mischaracterizes the Bankruptcy Court’s analysis. The
Court did not simply conclude that insufficient cause had been shown for the
retention of two law firms; rather, it also concluded that local less expensive
counsel was adequate for the job, and that the Committee’s application to retain
such counsel should accordingly be granted.

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