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Philadelphia Newspapers, LLC v. Official Committee of Unsecured Creditors

June 10, 2009

PHILADELPHIA NEWSPAPERS, LLC PLAINTIFF,
v.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS ET AL., DEFENDANTS.



The opinion of the court was delivered by: Eduardo C. Robreno, J.

MEMORANDUM

There are two issues pending before the Court: (1) Does the Court have jurisdiction to consider an appeal from the order of the Bankruptcy Court denying, without prejudice, the Debtors' application for the appointment of special counsel under § 11 U.S.C. § 327(e); and (2) If there is jurisdiction, does the Bankruptcy Court's denial of the application constitute an abuse of discretion. For the reasons that follow, the Court holds it does have jurisdiction to consider the appeal, and the Bankruptcy Court's denial of the appointment of special counsel is affirmed in part and reversed in part as an abuse of discretion.

The decision of the Bankruptcy Court is affirmed to the extent that it denies the appointment of special counsel to investigate the recording incident and litigate non-bankruptcy claims; it is reversed to the extent that it denies the appointment of special counsel to advise the Debtors concerning the legal implications of the recording incident and its impact upon bankruptcy and non-bankruptcy issues. The case is remanded to the Bankruptcy Court for further consideration in accordance with this memorandum and order.

I. BACKGROUND

On May 11, 2009, Philadelphia Newspapers, LLC and its related entities (the "Debtors") filed an Emergency Motion for Expedited Appeal (doc. no. 5), pursuant to Federal Bankruptcy Rule 8019, appealing the ruling issued by the Bankruptcy Court on April 20, 2009, denying the Debtors' application for retention of special counsel. Following a hearing on the motion, the Court granted the motion for expedited appeal and issued an expedited briefing schedule (doc. no. 12).*fn1

The Official Unsecured Creditors' Committee (the "Committee") filed a motion to dismiss the Debtors' appeal for lack of jurisdiction, arguing that the Bankruptcy Court's order did not constitute a final, appealable order (doc. no. 14). The Steering Group of Pre-petition Lenders, together with the Citizens Bank of Pennsylvania, filed a motion to dismiss the Debtors' appeal, also arguing that the Bankruptcy Court's order was not final, and asserting the applicability of the doctrines of equitable mootness and judicial estoppel (doc. no. 15). These motions are pending before the Court.

A. The "Recording Incident" and its Aftermath

The Debtors initiated the underlying Chapter 11 bankruptcy proceeding on February 22, 2009. Prior to filing the Chapter 11 proceeding, the Debtors engaged in pre-petition negotiations with the Secured Lenders. During these negotiations, the Secured Lenders were represented by their appointed agent, Citizens Bank of Pennsylvania, (the "Agent Bank"), and a small group of lenders who acted as an unofficial Steering Group for other participants in the senior secured credit facility (the "Steering Group").

During pre-petition negotiations, the Debtors, the Steering Group, and the Agent Bank met in person in Philadelphia on November 17, 2008 to discuss restructuring alternatives. During the meeting, the Debtors' CEO, Brian Tierney, became aware that Steering Group member and CIT Group, Inc. ("CIT") representative, Vincent DeVito, was tape recording the meeting. Tierney demanded that the recording device be turned off, asserting that such recording without consent of the party being recorded is a violation of Pennsylvania law. DeVito complied with the demand. (Hereinafter, this sequence of events is referred to as "the recording incident").

Following the recording incident, the Debtors expressed concerns to the Steering Group of potential legal implications arising from the incident. According to the Debtors, counsel for the Steering Group, Fred Hodara, warned the Debtors that "tattling" to CIT regarding DeVito's conduct is a "mistake" that "would exacerbate the situation." (Doc. no. 18, exh. 3, P-127). Thereafter, in-house counsel for CIT confirmed, in writing to the Debtors, that the recording was destroyed and no other recordings had occurred.*fn2 According to the Debtors, following the reporting of the recording incident, the relationship between the Steering Group and the Debtors deteriorated, ending in the filing of the instant bankruptcy petition.*fn3

B. Application for Appointment of Special Counsel

Sometime after the recording incident, the Debtors retained the law firm of Elliot Greenleaf & Siedzikowski, PC. to determine whether the recording incident gave rise to any cause of action. Elliot Greenleaf was familiar with the Debtors having previously provided general legal services to the Debtors in unrelated actions. (Doc. no. 18, exh. 4, P-142). Elliot Greenleaf proceeded to gather facts pertaining to the recording incident, conducted legal research, drafted a proposed complaint, and generally provided advice to the Debtors concerning the Debtors' legal options.

On April 8, 2009, the Debtors filed in the Bankruptcy Court an Application for Entry of an Order Authorizing Retention and Employment of Elliot Greenleaf as special counsel under section 327(e) of the Bankruptcy Code. In the Application, the Debtors submitted that the special counsel would render the following specific services for the Debtors:

1. Investigation of certain incident(s) involving the unauthorized recording of confidential pre-petition meeting(s) between the Debtors and their senior secured lenders;

2. Advice regarding potential causes of action to be pursued in connection with such unauthorized recording; and

3. Pursuit of any non-bankruptcy litigation or other legal action in connection with such unauthorized recording(s) and in connection with the possible improper use and disclosure of such unauthorized recording(s) to others.

See Debtors' Application, (doc. no. 18, exh. 4, P-143, ¶9).

The Committee and the Secured Lenders objected to the Application. The United States Trustee took no position concerning the need for the investigation, but asked for a budget and additional information in the event that the Application was granted.

On April 20, 2009, the Bankruptcy Court held a hearing to consider the Debtors' Application. Tierney testified in support of the Debtors' Application, recounting the recording incident and the animosity which ensued among the parties after the recording incident was discovered. In addition, Tierney testified to the advantages of Elliot Greenleaf's involvement in an investigation of the recording incident, specifically emphasizing the firm's legal expertise and reasonable billing rates.

At the conclusion of the hearing, the Bankruptcy Court issued an oral ruling*fn4 which denied the Debtors' Application for Appointment of Special Counsel, without prejudice and appointed the Creditors' Committee to conduct an investigation into the recording incident.*fn5 The Debtors now appeal the part of the order which denied the Application for Appointment of Special Counsel.*fn6

II. APPELLATE JURISDICTION

The Court must first consider whether it has jurisdiction over this appeal. In bankruptcy cases, the district court sits as an appellate court and has appellate jurisdiction pursuant to 28 U.S.C. § 158(a). In re Sheckard, 394 B.R. 56, 61 (E.D. Pa. 2008); In re Top Grade Sausage, Inc., 227 F.3d 123, 125 (3d Cir. 2000).

Title 11 Section 158(a) provides in pertinent part, "the district courts shall have jurisdiction to hear appeals: (1) from judgments, orders, and decrees." The Committee and Secured Lenders have moved to dismiss the appeal on the basis that the Court lacks ...


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