filed: June 22, 1995; As Corrected June 28, 1995.
On Appeal From the United States District Court For the Western District of Pennsylvania. (D.C. Civ. No. 93-345E).
Before Becker, Scirica, And Wood, Jr.,*fn* Circuit Judges
WOOD, JR., Circuit Judge.
Fellheimer, Eichen & Braverman, P.C. ("FE&B") appeals the denial of its entire fees application. The bankruptcy court found that during the course of FE&B's representation of Charter Technologies, Incorporated, d.b.a. Elgin Electronics ("the Debtor"), in the context of the Debtor's Chapter 11 proceedings, that FE&B had wrongfully represented the interests of the Debtor's president and principal shareholder, Joseph Burke. The bankruptcy court found that FE&B had sought to further Mr. Burke's interests over the interests of the Debtor by, among other things, filing a patently false $4,250,000 lawsuit against the counsel to the Official Committee of Unsecured Creditors, and by making repeated and knowing misrepresentations to the bankruptcy court. The bankruptcy court further found that FE&B was motivated throughout its representation of the Debtor by subjective bad faith. Consequently, the bankruptcy court sanctioned FE&B by denying its fees application in its entirety. On appeal, the district court upheld the denial of FE&B's fees application. The district court did, however, substitute its own justifications for the bankruptcy court's action. Because we feel that the bankruptcy court's factual findings are not clearly erroneous, and because we find the district court's justifications for the sanctions to be acceptable, we affirm the denial of FE&B's entire fees application.
On January 20, 1993, the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The Debtor also filed a motion at this time to employ FE&B as its counsel. On February 17, 1993, the bankruptcy court conducted a hearing regarding the employment of FE&B. Based, in part, on the testimony of Alan Fellheimer that FE&B would seek to file a reorganization plan for the Debtor between March 15 and March 30, 1993, and that FE&B had "already arranged . . . a significant equity infusion into the company, seven figure infusion, a million dollars," the bankruptcy court approved the employment of FE&B.
Despite these confident assertions, neither a reorganization plan nor a large equity infusion was forthcoming by the end of March 1993, and a meeting was subsequently arranged to discuss the future of the Debtor. This meeting, which took place on May 20, 1993, was attended by Mr. Fellheimer; Mr. Burke; Guy Fustine of Knox, McLaughlin, Gornall & Sennett, P.C. ("the Knox Firm"), counsel to the Official Committee of Unsecured Creditors ("the Committee"); and certain representatives of the Committee. The representatives of the Committee indicated that the Committee was willing to work with the Debtor to solve its financial woes, to wit, the Committee would be willing to accept a plan in which the unsecured creditors as a whole exchanged debt for equity, or a plan in which two members of the Committee--REM Electronics and Advacom, Incorporated--would extend credit to the Debtor or invest cash in the Debtor.
The representatives of the Committee also made it clear that they lacked confidence in the managerial skills of Mr. Burke: If the Debtor's reorganization plan was hinged upon the long-term viability of the Debtor, the Committee pledged to withhold its support unless the Debtor's top-level management was replaced--particularly Mr. Burke. At this point, Mr. Burke and Mr. Fellheimer left the meeting to confer privately. Upon their return, Mr. Fellheimer presented the representatives of the Committee with Mr. Burke's demands. According to Mr. Fellheimer, Mr. Burke would agree to leave the management of the Debtor only if the reorganization plan provided him with: (1) a written employment contract with the Debtor; (2) an equity position in the Debtor; and (3) a release from the personal guarantees Mr. Burke had previously executed which secured certain obligations of the Debtor.
Following this meeting, in a letter dated June 4, 1993, Mr. Fustine reiterated the Committee's views regarding Mr. Burke's long-term future in the Debtor's management.*fn1 In response, in letters dated June 8 and June 14, 1993, Mr. Fellheimer charged Mr. Fustine with representing individual members of the Committee and demanded that the Knox Firm withdraw as counsel to the Committee and, moreover, that certain members of the Committee also withdraw from the Committee. Mr. Fellheimer furthermore threatened to file a motion with the bankruptcy court seeking the dismissal of the Knox Firm if the Knox Firm did not voluntarily withdraw. Mr. Fustine and the Knox Firm responded by again restating the position of the Committee in a letter to FE&B dated June 16, 1993. That same day, Mr. Fustine and the Knox Firm also filed a motion on behalf of the Committee to ratify the appointment of Mr. Fustine and the Knox Firm as the Committee's counsel.
FE&B filed the Debtor's response to the Committee's motion to ratify its counsel on June 28, 1993. FE&B also filed a seven-count complaint on behalf of the Debtor against Mr. Fustine and the Knox Firm seeking $4,250,000 in damages and a preliminary injunction to prevent Mr. Fustine and the Knox Firm from representing the Committee ("the complaint"). The complaint made the following allegations: Count One charged Mr. Fustine and the Knox Firm with breaching their fiduciary duty to the Committee by representing individual members of the Committee; Counts Two and Three charged Mr. Fustine and the Knox Firm with breaching a contract that they had allegedly entered into with the Debtor which required them to refrain from communicating with potential investors in the Debtor; Counts Four and Five charged Mr. Fustine and the Knox Firm with libeling and slandering the Debtor in their letters of June 4 and June 16, 1993; Count Six charged Mr. Fustine and the Knox Firm with intentionally and negligently interfering with the Debtor's existing and prospective contractual relations; and Count Seven charged Mr. Fustine and the Knox Firm with unfairly competing with the Debtor by representing individual members of the Committee. The complaint was signed by Jeffrey Eichen of FE&B.
Viewing the complaint as an insurmountable barrier to a successful reorganization effort, the bankruptcy court quickly scheduled a hearing for July 8, 1993. Mr. Fellheimer telephoned the court on July 6, 1993, however, and requested that the hearing be rescheduled as Mr. Burke--whose testimony Mr. Fellheimer characterized as essential to the complaint--was out of the country and would not return before the hearing. The bankruptcy court consequently rescheduled the hearing for August 3, 1993. In fact, Mr. Burke was not out of the country and Mr. Fellheimer was aware of Mr. Burke's actual whereabouts on the same day--July 6, 1993--that he telephoned the bankruptcy court. On July 19, 1993, FE&B again sought to delay the hearing by filing a motion to postpone the hearing. In this motion, FE&B asserted that Vito Casoni, another allegedly essential witness, would be unavailable on the new date of the hearing. The bankruptcy court, however, refused to further reschedule the hearing.
On July 20, 1993, the Knox Firm, Mr. Fustine, and the Committee filed a Motion for Sanctions Pursuant to Bankruptcy Rule 9011 and Rule 11 of the Federal Rule of Civil Procedure*fn2 against FE&B ("the sanction motion"). The sanction motion alleged that sanctions were appropriate in that the complaint filed by FE&B lacked a reasonable basis in law and in fact and that the complaint was filed for improper tactical purposes.
In one last salvo before the hearing, FE&B filed a Motion to Disqualify Defendants from Acting as Legal Counsel to Witnesses ("motion to disqualify"). The motion to disqualify alleged that Mr. Fustine and the Knox Firm suffered from an irreconcilable conflict of interests due to their representation of individual members of the Committee and due to their status as parties and material witnesses in the litigation on the complaint.
On August 3, 1993, the hearing on the Debtor's complaint was held. At the Conclusion of the first day of the hearing, Mr. Fellheimer sought to withdraw the complaint on behalf of the Debtor and to terminate the entire adversary proceeding. In the words of Mr. Fellheimer, the Debtor decided to withdraw the complaint "because it doesn't see any benefit . . . in proceeding in the long run." Mr. Fellheimer further stated: "I don't want to burden the Court any further with this. And I also feel that . . . the best interest of the debtor would be served by ending it and working towards a reorganization." The bankruptcy court then withdrew the complaint and chastised Mr. Fellheimer for, in its view, representing the interests of Mr. Burke over the interests of the Debtor.*fn3 The Committee reserved its right to proceed with its sanction motion at a later date.
On August 25, 1993, FE&B filed an interim fees and expenses application for the period January 20, 1993, through August 21, 1993 ("fees application"). FE&B requested $200,275.50 in compensation and $21,916.83 for the reimbursement of expenses. The Committee thereafter filed an objection to FE&B's fees application on September 23, 1993.
II. THE PROCEEDINGS BELOW
The bankruptcy court held a hearing on the fees application and on the sanction motion on October 20, 1993, and issued its opinion and order regarding these matters on November 2, 1993. Charter Techs., Inc., d.b.a. Elgin Elecs. v. Knox, McLaughlin, Gornall & Sennett, P.C. ( In re Charter Techs., Inc.), 160 Bankr. 925 (Bankr. W.D. Pa.). The bankruptcy court granted the sanction motion and denied FE&B's entire fees application, except for $15,000 which the court allowed for reimbursement of expenses. The bankruptcy court also granted the motion of the Committee for the appointment of a Chapter 11 trustee. In reaching its decision, the bankruptcy court made the following factual findings.
First, the bankruptcy court found that "the evidence establishing that Fustine and the Knox Firm represented the Committee, and only the Committee, is overwhelming." Charter Techs., 160 Bankr. at 927. In this regard, the bankruptcy court further found that "the Debtor failed to present any evidence that Fustine and the Knox Firm represented any individual member of the Committee." Id.
Second, the bankruptcy court found that "the overwhelming evidence supports the fact that the language of the June 4th letter accurately reflected the Committee's position." Id. at 928. The bankruptcy court found that the Debtor's allegations to the contrary were based upon "a complete lack of evidence." Id. The Debtor had attempted to prove that the June 4th letter was a vehicle designed to further the interests of individual members of the Committee, rather than a statement of the consensus of the Committee. Towards this end, the Debtor alleged in its complaint that two Committee members--Robert E. Miller and Frank Slurkanich--telephoned Mr. Burke and "stated that Fustine and the Knox Firm were not authorized to send the June 4th letter and that it does not represent the position or opinion of the Committee." Id. The bankruptcy court found, however, that Mr. Slurkanich--a former employee of the Debtor--never denied the authority of Mr. Fustine to send the June 4th letter. Instead, Mr. Slurkanich merely indicated that he did not personally "put out" the letter. Furthermore, the bankruptcy court found that "Slurkanich did not call in response to the June 4th letter, but rather in response to a notice of termination as a sales representative which Slurkanich received from Burke on June 7, 1993, which Burke had issued in retaliation for the Committee's June 4th letter!" Id. The bankruptcy court found, moreover, that the Committee had objectively sound reasons for wishing to replace Mr. Burke.*fn4
Third, the bankruptcy court summarily rejected the Debtor's defamation allegations. The Debtor had claimed that Mr. Fustine and the Knox firm stated falsely that the Debtor had accumulated $1,600,000 in pre-tax losses since October 1989 and that the Debtor had nonetheless paid $315,000 in stock dividends over that same time period. The bankruptcy court found that it was "readily determinable" through the Debtor's own financial records that these statements were "true and accurate." Id. at 929.
Fourth, the bankruptcy court found that there was "absolutely no evidence" to support the Debtor's allegation that Mr. Fustine breached an agreement that he had allegedly entered into that forbade him from meeting with potential investors in the Debtor. Id. According to the complaint, Mr. Fustine breached this agreement when he met with Vito Casoni and George Leone of SMG Control Systems. As the bankruptcy court found, this meeting took place on May 20, 1993. The earliest date that Mr. Fellheimer discussed such an agreement with Mr. Fustine, however, according to Mr. Fellheimer's own time sheets, was May 21, 1993--one day after the alleged breach of the agreement took place.
Fifth, the bankruptcy court found that, contrary to the assertion in the Debtor's complaint, the statements of Mr. Fustine to Mr. Casoni of SMG Control Systems did not cause SMG Control Systems to lower its bid for the Debtor. Id. As the bankruptcy court noted, the affidavit of Mr. Casoni submitted by the Debtor explicitly states that "the session of May 20th with Mr. Fustine did not alter SMG's offer as to price." The bankruptcy court also found that Mr. Fustine did not, as further asserted in the complaint, cause Kulicke & Soffa to withdraw its business from the Debtor. Id. As indicated by the affidavit of Jim King of Kulicke & Soffa, that firm "retracted business from the debtor as a result of the debtor's inability to fulfill Kulicke & Soffa's production schedule on time and serious problems we perceive in the debtor's quality and recycling procedure." The bankruptcy court found that FE&B had not bothered to contact Mr. Casoni, or anyone at Kulicke & Soffa, to ascertain the veracity of these allegations before filing the complaint. Id.
Last, the bankruptcy court was greatly offended by Mr. Fellheimer's misrepresentation to it that Mr. Burke would be out of the country and unable to attend the hearing on the complaint on the day it was originally scheduled. Id. at 929-30. After noting that FE&B had made six telephone calls to the Debtor on July 6, including at least one direct call between Mr. Fellheimer and Mr. Burke, the bankruptcy court concluded: "There is no rational basis favorable to Fellheimer as to why he would represent to the Court on July 6 that he thought Burke was in England and unavailable for the scheduled hearing on July 8." Id. at 930.
On the strength of these preliminary findings, the bankruptcy court determined that sanctions against FE&B were appropriate:
Debtor's counsel failed to make any reasonable inquiry into the underlying facts before filing the within Complaint. Debtor's counsel knew or should have known that many of the ...