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In re Marvel Entertainment Group

March 25, 1998

IN RE: MARVEL ENTERTAINMENT GROUP, INC.; ASHER CANDY COMPANY; FLEER CORPORATION; FRANK H. FLEER CORPORATION; HEROES WORLD DISTRIBUTION, INC.; MALIBU COMICS ENTERTAINMENT INC.; MARVEL CHARACTERS, INC.; MARVEL DIRECT MARKETING INC.; SKYBOX INTERNATIONAL, INC.; SPECIAL COUNSEL TO DEBTORS; BOARD OF DIRECTORS OF MARVEL; HIGH RIVER LIMITED PARTNERSHIP AND WESTGATE INTERNATIONAL, L.P.; IN RE: JOHN J. GIBBONS, ESQ., TRUSTEE FOR THE ESTATE IN BANKRUPTCY OF THE DEBTORS; MARVEL ENTERTAINMENT GROUP, INC.; ASHER CANDY COMPANY; FLEER CORPORATION; FRANK H. FLEER CORPORATION; MALIBU COMICS ENTERTAINMENT, INC.; MARVEL CHARACTERS, INC.; MARVEL DIRECT MARKETING INC.; SKYBOX INTERNATIONAL, INC.; HIGH RIVER LIMITED PARTNERSHIP AND WESTGATE INTERNATIONAL, L.P., APPELLANTS IN NO. 98-7001;


On Appeal from the United States District Court for the District of Delaware (D.C. 97-cv-00638)

Argued: March 10, 1998

Before: Greenberg, Scirica and Aldisert, Circuit Judges,

The opinion of the court was delivered by: Aldisert, Circuit Judge.

OPINION OF THE COURT

These expedited and consolidated appeals require us to decide if the district court properly exercised its discretion by appointing a trustee in the bankruptcy of Marvel Entertainment Group, Inc., because of the extreme acrimony between the debtor-in-possession and the creditors. If we affirm the appointment, we must then decide if the court acted within its proper discretionary power by denying the motion of the trustee, John J. Gibbons, to appoint the law firm of Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C. ("the Firm") as counsel to the trustee. The district court determined that the Firm's prior unrelated representation of Chase Manhattan Bank, a creditor in the bankruptcy, disqualified it from serving as trustee's counsel. We will affirm the appointment of the trustee and reverse the order denying Gibbons's motion for an order authorizing employment of the Firm as his counsel. Because our legal analysis necessarily involves a review of the district court's factual findings, we must first set out the adjudicative facts in some detail.

I.

Marvel and various corporate affiliates filed chapter 11 petitions on December 27, 1996 and continued to run Marvel as debtor-in-possession. 11 U.S.C. §§ 1107-1108. Approximately 1,700 creditors held $1 billion in claims against the Marvel estate.

Both before and after the filing of the petitions, Westgate International, L.P. and High River Limited Partnership, each controlled by Carl Icahn, (the "Icahn interests"), purchased at a discount a substantial number of pre-petition debt claims and bonds which had been issued by several holding companies owning all or substantially all of Marvel's stock. These holding companies, under the control of Ronald Perelman, had pledged their Marvel stock as security for the bonds. Two groups loomed large in the bankruptcy proceedings: one was an Official Bondholders' Committee and an indenture trustee, LaSalle National Bank, chosen to act primarily on behalf of the Icahn interests; the other, various creditors of Marvel, known as "the Lenders," who held over $600 million in debt claims at the time of the filings, secured by all of Marvel's assets.

From the start of the proceedings, disputes arose among the various parties, especially between the Icahn interests and the Lenders. The Icahn interests opposed an initial bankruptcy financing plan submitted by the Perelman holding companies, under which the holding companies would have infused $100 million into Marvel in return for priority recognition of the Lenders' debt claims. The Icahn interests contended that the Perelman-controlled Marvel debtors were favoring their "lender accomplices" to ensure that "Perelman re-acquires control of Marvel, without competitive bidding, for an obscenely low price." Notwithstanding the Icahn interests' objections, the bankruptcy court approved the financing plan.

From January through June of 1997, tension arose between the Lenders and the Icahn interests. The Icahn interests fought to take control of the Marvel board of directors. Substantial litigation went forward. On January 13, 1997, the Icahn interests moved the bankruptcy court to lift the automatic bankruptcy stay, 11 U.S.C. § 362(a)(3), so they could foreclose on the holding companies' defaulted bonds and vote the pledged stock. Marvel sought a temporary restraining order from the bankruptcy court to enjoin the Icahn interests from voting the stock and replacing Marvel's board of directors. The bankruptcy court issued the order on March 24, 1997. On the same day, the Lenders moved the bankruptcy court for an order appointing a responsible officer to take control of the bankruptcy, or in the alternative a trustee. That same month, the Icahn interests took significant steps toward gaining control of Marvel. They offered to infuse $365 million into Marvel, partially for operation of its business but mostly to repay $300 million of its secured debt, in return for "exclusive" control of Marvel's operations. Through their agent Chase Manhattan Bank, the Lenders vigorously opposed this plan, explaining that the Icahn interests had presented no "concrete turnaround strategy . . . or a management team capable of executing one."

On May 14, 1997, the district court vacated the bankruptcy court's temporary restraining order, permitting the Icahn interests to vote the pledged stock. In re Marvel Entertainment Group, Inc., 209 B.R. 832, 840 (D. Del. 1997). With the lifting of the restraining order, the litigation ended and the inevitable took place--on June 20, 1997, the Icahn interests took control of Marvel. Thus, an anomaly arose. The Icahn interests began to wear two hats--one as creditors of the holding companies that controlled Marvel; the other as the debtor-in-possession of Marvel.

Settlement negotiations proceeded throughout the summer of 1997. The new Icahn-controlled debtor-in-possession proposed a settlement in which the Icahn interests would control a newly-organized Marvel company merged with its affiliate Toy Biz, and would purchase the Lenders' claims at a substantial discount. To consummate the settlement, it was necessary to obtain the approval of two-thirds of all creditors as required under the Bankruptcy Code, 11 U.S.C. § 1126(c). The Lenders were not successful in obtaining this approval.

The parties tried again. Another proposed settlement was attempted by the Icahn interests, this time with Chase directly as one of the Lenders. The terms were similar to those contained in the first effort, but this time Chase was required to sell its claims to the Icahn interests for even less than what was offered under the former proposal. Moreover, the settlement proposal required the creditors to support the Icahn interests' control of all Marvel entities and to agree to place High River's and Westgate's debt claims into a priority secured position. The necessary two-thirds approval not forthcoming, the settlement negotiations collapsed in October 1997.

On October 30, 1997, the Icahn-controlled debtor-in-possession commenced adverse litigation in the district court against the Perelman holding companies, the Lenders and other creditors in the Marvel bankruptcy (the "Perelman litigation"). It asserted 19 causes of action alleging breach of fiduciary duty, fraudulent conveyance, preferential transfer and breach of contract. The complaint sought to void the Lenders' claims or to subordinate them to the claims of High River and Westgate. The complaint described an alleged conspiracy between Toy Biz, the former Marvel board and the Lenders to "sabotage" the new Icahn-controlled debtor-in-possession's reorganization efforts. At the same time, the Icahn interests moved the district court for an order withdrawing the chapter 11 petitions and all related matters in the bankruptcy court and removing them to the district court to be heard in conjunction with the Perelman litigation. The Lenders opposed this withdrawal and renewed their motion before the bankruptcy court for the appointment of a trustee.

The district court noted that the Icahn interests instituted the Perelman litigation "by counsel who had not previously entered an appearance in this matter. Prior to the filing of the action, Marvel, as controlled by the Icahn interests, had not sought approval from the bankruptcy court to retain that counsel, nor had it sought approval to file the action." At a conference held by the district court to discuss its jurisdiction over the Perelman litigation, the court "invited the parties to submit papers on the jurisdictional issue, but made clear that it did not want to interfere with the bankruptcy court's ability to resolve the underlying dispute." Nonetheless, the day after the conference the Icahn interests sent a letter to the bankruptcy court which, as the district court found, "incorrectly stated that while that motion [on jurisdiction] was pending, the bankruptcy court was required to refrain from taking further action." This caused the bankruptcy court to cancel its hearing on the appointment of a trustee.

At a district court hearing on November 13, 1997, all parties agreed to the withdrawal of the Marvel cases from the bankruptcy court and their transfer to the district court. The district court then heard argument on whether a trustee should be appointed. The argument was summarized by the court:

In opposing the motion, the Debtors accuse the Lenders, and specifically Chase, of flip-flopping on positions throughout the life of this proceeding, whenever it suits their purposes. The Debtors describe the reorganization plan of the Lenders and Toy Biz as illegal, and claim that the Lenders have no desire that a neutral trustee be appointed. . . . They claim that the Lenders have put a strangle-hold on the Debtor's financing, and that the Lenders are responsible for failure of both the Settlement and the Second Settlement. They also repeat many of the allegations made in the Perelman litigation. . . .

The Creditors Committee describes the relationship between the Icahn interests and the Lenders as having reached an "impasse." . . .

In support of their motion, the Lenders accuse the Icahn interests of an elaborate scheme to take over Marvel at a discount price while diminishing the value of the Lender's claims on the company as creditors. They claim that the Perelman litigation is part of that scheme, and was brought, at least in part, as a weapon to punish the Lenders for not consummating the two Settlements. . . . The Lenders claim that the present board is incapable of neutrality, and is guilty of breaching its fiduciary duties to creditors.

Appellants High River's and Westgate's Ex. C at 7-8. On December 12, 1997, the district court granted the motion authorizing the United States Trustee to appoint a trustee. Appealing that order are Marvel and the Icahn interests which control it.

The U.S. Trustee recommended Gibbons to serve as trustee. Pursuant to this recommendation, Gibbons disclosed that the Firm was representing Chase in an unrelated matter. The representation did not involve litigation, but only construction financing for the New Jersey Performing Arts Center, a community organization. The Firm's representation of Chase generated a total of $48,000 in fees in 1997, about 0.1% of the Firm's revenue that year. Its representation was virtually complete at the time Gibbons was selected as trustee. In addition, Gibbons disclosed that Chase had granted the Firm an unconditional waiver of any conflicts which might arise from Gibbons's service as trustee. The waiver included an authorization permitting the Firm to represent Gibbons in any matter adverse to Chase. The district court appointed Gibbons as trustee on December 22, 1997 after considering the U.S. Trustee's recommendation and reviewing Gibbons's disclosure form.

Gibbons subsequently moved for an order authorizing employment of the Firm as trustee's counsel. In conjunction with this motion, Gibbons submitted an affidavit from the Firm which was materially identical to Gibbons's prior disclosures in its description of the Firm's representation of Chase; it stated that the Firm had represented Chase "from time to time," and that it currently was representing Chase in the Arts Center financing.

In light of the Firm's relationship with Chase, the Icahn interests filed an objection to the Firm's employment as counsel, and LaSalle filed a preliminary statement with the district court questioning whether the Firm was "disinterested," as required by the Bankruptcy Code. 11 U.S.C. § 327(a). The Firm responded to this statement with a letter indicating that it could properly serve as trustee's counsel, documenting this claim with Chase's waiver of conflicts and a letter mutually terminating all attorney-client relations between Chase and the Firm.

The district court held a hearing on January 15, 1998 to consider the Firm's employment. At that time, the Firm's representation of Chase had already been terminated. LaSalle argued that it wanted to reserve its rights to object to the Firm's employment if a conflict involving Chase later appeared, and stated that "he appearance of a conflict of interest . . . creates some discomfort." Similarly, the Icahn interests said that "the termination of the [Firm's and Chase's attorney-client] relationship does go a long ways toward the legal issues that were presented," but that "we still have an appearance issue . . . that could impact on subsequent determinations by the trustee." ...


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