ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 93-00297).
Before: Stapleton, Cowen, and Alito, Circuit Judges.
This is an appeal from a district court order affirming a bankruptcy court order that approved the employment by several debtors in possession of an accounting firm that had a claim against their estates for prepetition services. Applying the plain language of 11 U.S.C. § 327(c) and related provisions of the Bankruptcy Code, we hold that the district court and the bankruptcy court erred, and we therefore reverse.
In November 1992, Sharon Steel Corporation, Sharon Specialty Steel, Inc., and Monessen, Inc. filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. By order of the bankruptcy court, these cases are being jointly administered, and the debtors are continuing to operate their businesses as debtors in possession.
Shortly after filing their petitions, the debtors filed applications to employ Price Waterhouse as their accountant and financial advisor. The debtors selected Price Waterhouse in part because it had previously provided them with accounting, auditing, and consulting services and had thus developed expertise regarding their financial affairs and needs.
According to the affidavit of a Price Waterhouse partner, the debtors, as of December 1992, owed Price Waterhouse $875,894.15 for prepetition services. The affidavit stated, however, that Price Waterhouse would not participate as an unsecured creditor in the debtors' Chapter 11 cases and would not vote its claim in connection with the confirmation of any plan of reorganization. In late December 1992, the bankruptcy court granted interim approval of the retention of Price Waterhouse retroactive to the applications' filing dates, but the court provided that it would reconsider Price Waterhouse's continued employment at a hearing to be held a short time later.
Although no creditor objected to Price Waterhouse's continued retention, the United States Trustee filed an objection.*fn1 The United States Trustee contended that under 11 U.S.C. § 327(a) the debtors could not employ professionals who were not "disinterested" and that Price Waterhouse was not "disinterested" under the definition set out in 11 U.S.C. § 101(14) because it was a creditor. The bankruptcy court nevertheless authorized the continued employment of Price Waterhouse. The bankruptcy court acknowledged that "Price Waterhouse is one of the twenty largest creditors of the estate," and that therefore, if the relevant provisions of the Bankruptcy Code were "read and interpreted literally as suggested by the United States Trustee, Price Waterhouse would be barred as creditors are per se 'interested'." Bank. Ct. Op. at 5 (Mar. 17, 1993). The bankruptcy court also stated that "the United States Trustee's position finds support in numerous cases." Id. However, the court added:
While some courts do interpret § 327(a) literally, we believe that a more practical view is required which considers the economic realities of the case and the overriding purposes of Chapter 11 of the Bankruptcy Code.
Id. Observing that "Price Waterhouse is most familiar with the Debtor's accounting systems and operations," the court also stated:
Even if the Debtor had the capability of engaging an accounting firm to replace Price Waterhouse, it would be extraordinarily expensive and take a substantial length of time to become familiar with the Debtor's needs.
The debtor has no cash to pay a retainer to a new firm and it is unlikely that a new firm could be engaged without a retainer given the serious possibility that this estate will have no funds with which to pay administrative expenses. Further, the Debtor is under ...