Opinion
NOT FOR PUBLICATION
Ordered Submitted on the Brief November 24, 2009
Order entered November 24, 2009. See Fed.R.Bankr.P. 8012; 9th Cir. BAP R. 8012-1.
Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. Nos. 09-16050-JMM, 09-16051-JMM, 09-16052-JMM, (Jointly administered). Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding.
Before: PAPPAS, MARKELL and JURY, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
The Official Committee of Unsecured Creditors (the " Committee") in the jointly administered chapter 11 cases of debtors Bashas', Inc., Bashas' Leasco Inc. and Sportsman's Inc. appeals the order of the bankruptcy court denying the Committee's application to employ a financial advisor. We AFFIRM.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure are referred to as Civil Rules.
FACTS
Bashas' filed a chapter 11 petition on July 12, 2009. At that time, it operated 158 grocery stores in Arizona employing over 10, 000 workers. Bashas' is the twelfth largest employer in the state of Arizona, and the fifteenth largest privately held grocery chain in the United States. Bashas' bankruptcy schedules report annual gross revenue of more than $2 billion for fiscal years 2007 and 2008, as well as $386 million in assets and $271 million in liabilities.
For convenience, the chapter 11 debtors are referred to collectively in the singular.
On July 24, 2009, the United States Trustee appointed the Committee to participate in the bankruptcy case. § 1102(a)(1) (requiring that " as soon as practicable after the order for relief, the United States trustee shall appoint a committee of creditors holding unsecured claims . . . ."). No other official committees have been appointed.
In its capacity as debtor in possession, in the first two months of the case, Bashas' applied for and received court permission to engage eleven different professional entities under § 327, including attorneys, claims agents, auctioneers, real estate brokers, liquor license brokers, and of importance here, a financial advisor, Deloitte Financial Services, LLP (" Deloitte"). The bankruptcy court initially expressed reservations regarding the Deloitte application at a hearing on July 31, 2009, and denied the application. However, after hearing Bashas' motion for reconsideration, the bankruptcy court approved Deloitte's retention as Bashas' financial advisor on August 19, 2009.
After the filing of the Committee's brief in this appeal, Bashas' informed the bankruptcy court on October 30, 2009, that Deloitte had withdrawn as its financial advisor effective September 30, 2009. Bashas' requested appointment of Keegan, Linscott & Kenon, P.C. (" KLK") as replacement financial advisor. The bankruptcy court approved the employment of KLK as replacement financial advisor to the debtor in possession on November 5, 2009.
The Committee filed an application on August 5, 2009, to employ its own financial advisor, Mesirow Financial (" Mesirow"). The bankruptcy court set a hearing on the Mesirow application on September 9, 2009, but Mesirow asked the Committee to withdraw the application on September 1, 2009. Three days later, the Committee filed an application to employ Sierra Consulting Group, LLC (" Sierra") as its financial advisor.
The Committee's application came before the bankruptcy court for hearing on September 9, 2009. No objections to the Sierra retention application had been filed or were raised at the hearing by any of the interested parties in the case. However, in an extended colloquy with the Committee's counsel, the bankruptcy court questioned the Committee's need for a financial advisor: " I looked this through and I'm frankly puzzled by what a consulting group as financial advisor is going to help us with. . . . If a debtor is going to propose a 100 percent plan, why does a committee need a financial advisor?" Hr'g Tr. 50:24-51:1. The court then twice asked counsel for Bashas' if it would be proposing a 100 percent plan. Bashas' counsel confirmed that, " We will be proposing a plan that provides for 100 percent payment to unsecured creditors." Hr'g Tr. 51:10-14. Assuming that a plan would be presented at an early date, the bankruptcy court inquired of the Committee's counsel, " And ask yourself, why would anybody reject a 100 percent plan? So at that point then you confirm an early plan, you've got terms, and the debtor either complies with the terms and pays everybody 100 cents on the dollar or the debtor doesn't, in which case there's a default and we move on to Plan B." As to specific financial questions, the court questioned whether the Committee had shown a need for a financial advisor: " Why does the Committee need help doing that? Don't we already have the Deloitte group looking through a number of these same issues? Plus, you've got access to the Debtor's records if you like." Hr'g Tr. 52:3-6.
In its brief, the Committee states, " the record is clear that not a single party filed an objection to the Sierra application." This is technically true. However, counsel for the Committee at the hearing on September 9 acknowledged that: " There were some concerns raised by both the debtor and the U.S. Trustee's office regarding the application." Hr'g Tr. 50:15-17 (September 9, 2009). We assume that Bashas' withdrew any objection it may have had to the retention application because it later joined in the Committee's motion to reconsider the denial of that application. There is nothing in the record discussing the U.S. Trustee's concerns or position regarding the proposed retention.
After this exchange, the bankruptcy court ruled that it would not approve the Committee's request to employ Sierra as a cost to the bankruptcy estate, but that it would approve retention if the advisor's fees were to be paid by the members of the Committee. In response to counsel's question " whether at some point" the bankruptcy court might reconsider its decision, the court replied, " Well, we'll cross that bridge when we come to it." Hr'g Tr. 55:17-18. The bankruptcy court entered its order denying the Sierra retention application on September 10, 2009.
In response to a question from the Committee's counsel whether the bankruptcy court would consider an order providing for payment to Sierra by the Committee, but allowing the Committee to apply under § 503(b) for reimbursement from the estate as an administrative expense, the bankruptcy court said no, indicating that the proper request for any review of its decision was through Civil Rules 59(e) or 60(b).
The Committee moved for reconsideration of the denial of Sierra's retention on September 17, 2009. In its motion, the Committee generally argued that it should have the right to employ a financial advisor because of the complexity of the bankruptcy case, the bankruptcy court's finding that Bashas' intent to propose a plan providing for 100 percent payment to unsecured creditors was not supported by any evidence, and that Bashas' joined in the motion for reconsideration.
The bankruptcy court denied the Committee's motion for reconsideration in an order entered September 23, 2009, wherein the court reiterated, " If the Committee desires to retain such entity, it may do so at its expense, but not the estates[']." The Committee filed a timely appeal from the bankruptcy court's order denying the retention application on September 22, 2009.
The Committee did not appeal the bankruptcy court's order denying the reconsideration.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court abused its discretion in denying the Committee's application to retain a financial advisor.
STANDARD OF REVIEW
We review orders regarding the employment of bankruptcy professionals for abuse of discretion. Com-1 Info, Inc. v. Wolkowitz (In re Maximus Computers, Inc.), 278 B.R. 189, 195 (9th Cir. BAP 2002). A two-part test is applied to determine if an abuse of discretion has occurred: (1) we review de novo whether the bankruptcy court identified the correct legal rule to apply to the relief requested; (2) we review whether the trial court's application of the facts to the correct legal standard was illogical, implausible or without support in inferences that may be drawn from the facts in the record. If any of these three apply, only then are we able to have a " definite and firm conviction" that the district court reached a conclusion that was a " mistake" or was not among its " permissible" options, and thus that it abused its discretion by making a clearly erroneous finding of fact. United States v. Hinkson, 585 F.3d 1247, 1257 (9th Cir. 2009).
DISCUSSION
A.
The authority and procedures governing an official committee's employment of bankruptcy professionals are found in § 1103(a) and Rule 2014(a). Section 1103(a) provides, in part, that " with the court's approval, [a] committee may select and authorize the employment by such committee of one or more attorneys, accountants or other agents, to represent or perform services for such committee[.]" The legislative history to this provision indicates that " Normally, one attorney should suffice; more than one may be authorized for good cause. The same considerations apply to the service of others, if the need for any at all is demonstrated." S. REP. NO. 989, 95th Cong., 2d Sess. 114-115 (1978) (emphasis added). To implement this Code provision, Rule 2014(a) requires that an application for approval of a committee's employment of a professional be filed and that, " The application shall state the specific facts showing the necessity for the employment. . . ."
Bankruptcy courts have discretion in denying applications for employment of professionals. Elias v. Lisowski Law Firm, Chtd. (In re Elias), 215 B.R. 600, 603 (9th Cir. BAP 1997), aff'd, 188 F.3d 1160 (9th Cir. 1999) (per curiam). Indeed, the Panel has described this as a " broad" or " wide discretion" standard. Movitz v. Baker (In re Triple Star Welding, Inc.), 324 B.R. 778, 781 (9th Cir. BAP 2005); see also, Harold & Williams Dev. Co. v. United States Trustee (In re Harold & Williams Dev. Co.), 977 F.2d 906, 909 (4th Cir. 1992); In re Martin, 817 F.2d 175, 182 (1st Cir. 1987). As the Tenth Circuit recently explained,
[The Bankruptcy Code] gives broad discretion to the bankruptcy court over the appointment of professionals . . . in part by empowering the court to approve candidates so selected. 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. . . . " 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 (Bankr. D.N.J. 1992). Further, " absent extraordinary circumstances, bankruptcy estates should not be consumed by the fees and expenses of court-appointed professionals." [ Quoting In re Toney, 171 B.R. 414, 415 (Bankr. S.D. Fla. 1994), and citing In re Auto Parts Club, 211 B.R. 29 (9th Cir. BAP 1997)].
Official Comm. of Unsecured Creditors v. Harris (In re Sw. Food Distributors), 561 F.3d 1106, 1112 (10th Cir. 2009).
A critical element in demonstrating the need to employ a financial advisor is whether that employment duplicates the efforts of other professionals already employed. As the bankruptcy court in In re Drexel Burnham Lambert explained,
the application must explain how the investment banker/advisor will eliminate, or at least reduce, the duplication of effort Judge Paskey alluded to in In re Hillsborough Holdings Corp., 125 B.R. 837 [838-39 (Bankr. M.D. Fla. 1991)], where there are armies of professionals apparently doing the same thing as the investment banker/advisor. Specifically, the intention is to avoid accountants and investment bankers/advisors massaging the same numbers twice when one trip to the masseuse would generally suffice.
133 B.R. 13, 27 (Bankr. S.D.N.Y. 1991).
The Committee's application to employ Sierra addresses the various elements required under Rule 2014(a), such as duties, terms of compensation, and disinterestedness. However, with the exception of one conclusory statement, the application provides no substantive explanation of the need for the advisor's services nor the likelihood that there may be a duplication of the services to be rendered by Bashas' advisor. Arguably, then, the application does not comply with Rule 2014(a), and the bankruptcy court, in exercising its discretion, might have denied the application for that reason.
" The Committee needs assistance in collecting and analyzing financial and other information in relation to the Chapter 11 cases."
In its motion for reconsideration, the Committee did expand on the need for a financial advisor. However, as noted above, the Committee has not appealed the bankruptcy court's denial of that motion. Because we can not be sure that the arguments advanced in the reconsideration motion were considered by the bankruptcy court before it originally denied the Committee's application, the Panel need not consider those matters in this appeal. Crawford v. Lungren, 96 F.3d 380, 389 n.6 (9th Cir. 1996); Sylvester v. Hafif (In re Sylvester), 220 B.R. 89, 91 n.4 (9th Cir. BAP 1998).
Even if we were to consider the substance of the Committee's motion for reconsideration as to the Committee's need for a financial advisor, it would not impact our decision. A motion for reconsideration should not be granted unless there is newly discovered or previously unavailable evidence, the court committed clear error, or there was an intervening change in law. McDowell v. Cameron, 290 F.3d 1036, 1038 (9th Cir. 1999) (en banc). As discussed below, the bankruptcy court did not err in denying the retention application, and there was no intervening change in the law. The sole " new" evidentiary " fact" raised in the reconsideration motion that was not available to the bankruptcy court or parties at the time of the original retention hearing was that Bashas', the debtor in possession, had elected to support the retention. However, that development did not compel the bankruptcy court to approve the Committee's retention application.
First, to be precise, Bashas' joinder in the motion for reconsideration of the denial of retention never concedes that the Committee needs a financial advisor. What the joinder states is:
it has become apparent to Bashas' that the Committee sincerely believes it requires the services of an FA to enable it to properly evaluate the debtor's financial information, which is admittedly voluminous. Bashas' relationship with these business partners is so important, that if these long-term partners believe that an FA is necessary, then in the interest of maintaining these long-term relationships, Bashas' supports its business partners and joins in their request that the court reconsider its September 10th order.
As can be seen, while Bashas' supports the retention, it is not because Bashas' perceives a need for it, but rather to preserve a working relationship with Committee members who may believe there is such a need.
The Committee repeatedly asserts in its reconsideration motion, as well as in its brief in this appeal, that the size and complexity of Bashas' reorganization required the bankruptcy court to approve its employment of a financial advisor:
" Typically, applications to employ estate professionals are granted as a matter of course when they are unopposed and especially where such an application is supported by the debtor." Br. at 10. Without regard for whether this statement is always true, it is not relevant. Past practice can never trump what the law provides.
The case law establishes, beyond argument, that in large restructurings such as these cases it is incumbent upon the court to ensure that debtors and committees receive the professional representation that the Code requires of them given the fiduciary role in which they serve.
The Committee cites to only one case for this broad statement, the Tenth Circuit's recent decision in In re Sw. Food Distributors. We cite this decision above for the proposition that a bankruptcy court has broad discretion in approving the hiring of professionals, but disagree that it supports the Committee's position in this case. The decision did not involve a " large restructuring, " but instead was filed by a debtor with less than $1 million in assets. More importantly, in that case, the Tenth Circuit affirmed the bankruptcy court's denial of the employment of a professional because the creditor's committee had not demonstrated a need for the retention. In re Sw. Food Distributors, 561 F.3d at 1112.
In sum, neither the retention application nor the Committee's later arguments in the reconsideration motion adequately demonstrate a need for Sierra's retention, thus failing to satisfy the threshold requirement of Rule 2014(a).
Rather than defending the showing made in the application, the Committee instead challenges as deficient two statements made by the bankruptcy court in explaining its reasons for denying its request: that Bashas' would present a plan providing for 100 percent payout to the unsecured creditors and consequently the Committee had no need to employ a financial advisor; and that the Committee could rely on analyses and data provided by Bashas' expert, Deloitte. As discussed below, neither of these arguments has merit.
B.
The Committee argues that the bankruptcy court had no evidence that Bashas' would present a 100 percent payment plan. This contention is simply incorrect.
At the hearing, the bankruptcy court asked its counsel if Bashas' would present a full-payment plan, and counsel replied, " We will be proposing a plan that provides for 100 percent payment to unsecured creditors." Hr'g Tr. 51:10-14. At that point in the bankruptcy case, the bankruptcy court had presided over more than a dozen hearings, and the bankruptcy court's docket included over 800 pleadings and other filings. Even a cursory review of the transcript and record on appeal shows that the bankruptcy court was fully engaged and familiar with the status and circumstances in this complex case. The bankruptcy court was assured by Bashas' counsel that a 100 percent payout plan would be proposed, the court expected the plan to be presented in the foreseeable future, and if Bashas' plan failed to materialize as promised, the parties could then consider other options. Viewing the proceedings in context, the bankruptcy court did not abuse its discretion when it based its denial of the Committee's application, in part, on Bashas' representation that it would propose a 100 percent payout plan.
The Committee objects that this statement by Bashas' counsel is not " evidence" that a full-payment plan will be proposed. The Committee is correct in that respect, but it is incorrect in further describing counsel's statement as " hearsay." It is neither. It is a " representation of counsel, " and as such, the bankruptcy court was justified in relying upon it, in part, in making its decision. As noted by one appellate court, " the [trial] court, as a matter of federal procedure, is entitled to rely on statements made by counsel in open court." Ergo Science, Inc. v. Martin, 73 F.3d 595, 600 (5th Cir. 1996) Moreover, if " a later dispute arises as to the nature of the statements, litigants possess procedural remedies to correct mistakes." Id .
The Committee argues that the bankruptcy court should have allowed the Committee an opportunity to introduce evidence in support of these issues, citing the Panel's decision in In re Crest Mirror & Door Co., Inc., 57 B.R. 830, 832 (9th Cir. BAP 1986): " In order to make an informed decision about an employment application, it may be necessary for the judge to hear testimony or make further inquiry of counsel." Id . at 832.
Crest Mirror does not compel reversal. Immediately following the cited text, the Crest Mirror panel noted that the bankruptcy court in that case had been presented with a new, material and previously undisclosed fact at the hearing to approve retention: " Here, for example, the bankruptcy judge did not discover that Crest sought to have Greeley's employment retroactively approved until that fact came out at the hearing." It was under those circumstances that the panel correctly instructed the bankruptcy court to provide an opportunity for the applicant to offer evidence regarding a material issue that had not been disclosed to the court or the other parties before the retention hearing.
In this appeal, there was a hearing at which the Committee had an opportunity to present its arguments. At this retention hearing, the Committee never requested the opportunity to introduce evidence regarding the issues before the court. Indeed, at one point, counsel for the Committee declined the opportunity to continue with its argument, saying " I know when to quit. I'm not going to argue any longer." Hr'g Tr. 55:8-9.
C.
The Committee also objects to the bankruptcy court's suggestion that it could rely on analyses and data prepared by Bashas' financial advisor as a reason to deny retention of its own expert. The Committee insists that " both the Bankruptcy Code and equity require the Court to permit the Committee to employ an independent financial advisor in these cases."
Of course, there is nothing in the Bankruptcy Code that " requires" a bankruptcy court to approve a professional's employment. As to the equitable considerations, the Committee cites to an older case, In re Saxon Indus., Inc., 29 B.R. 320 (Bankr. S.D.N.Y. 1983).
The Saxon court was presented with an employment application by an equity committee to engage a financial advisor, Arthur Anderson & Co. The creditor's committee in that case objected, arguing that the equity committee could simply rely on financial information provided by the creditor's committee's financial advisor. The Saxon court ruled in favor of the equity committee, concluding that " [i]ndependent and disinterested advice is required for the Equity Committee to meet its fiduciary responsibilities and for the Committee's professionals to meet their fiduciary responsibilities." Id . at 322. According to the Committee's interpretation of Saxon, sharing the information and advice provided by a financial advisor would constitute a conflict of interest in violation of § 1103.
The Saxon court's ruling was premised on the understanding that the equity committee's proposed financial advisor would occupy a very limited role:
After being advised that the Creditors' Committee was willing to make available all reports and information generated by its accountants, Ernst & Whitney, the Equity Committee determined that it would be unnecessary, wasteful, and duplicative to retain its own professionals to perform general accounting services being undertaken by others. Consequently, the Equity Committee proposed to retain Arthur Andersen to perform only specific services that may be requested from time to time which are of special interest and concern to the Equity Committee.
Id . at 321. Whereas in Saxon the financial advisor's duties would be limited and would rely on analyses and data provided by the creditor's committee expert, the Committee here apparently seeks to employ a financial advisor independent of the other professionals, with a full portfolio of responsibilities and authority to engage in independent fact finding and data development. Also, whereas the Saxon committee acknowledged that withholding of information by one party is " unnecessary, wasteful and duplicative, " the Committee here suggests that, under Saxon, such sharing is a conflict of interest in violation of § 1103(a).
Although the Ninth Circuit has not had occasion to explore the issues raised in Saxon, one bankruptcy court in this circuit has allowed, and in fact required, sharing of information among the parties:
The application seeks the appointment in order to carry out a broad and expansive investigation into the affairs of the debtor, much more detailed and involved than the usual advice to the Committee during the course of the debtor's plan. The application provides for a " . . . forensic review of current and historical intercompany transactions between Sunshine Mining Company (" Sunshine"), Sunshine's subsidiaries (" Affiliates") and Sunshine Precious Metals, Inc. (the debtor) . . ." as well as " . . . a financial and operational analysis of the mining operations of the Debtor." As such, the defined duties are overly broad since the record does not support the necessity of such work and its attendant expense. While there may be allegations in the record of improper intra-corporate dealings, such allegations do not warrant a full scale audit into these dealings and into a cost analysis of the mining operations of the debtor. If the Committee has difficulty obtaining financial information from the debtor, application can be made to the Court for disclosure and production of the debtor's records.
In re Sunshine Precious Metals, Inc., 142 B.R. 918, 921 (Bankr. D. Idaho 1992).
Appellate authority from other circuits also blesses the sharing of information among parties in the bankruptcy case. The Third Circuit implicitly approved the sharing of information between the debtor's professionals and an equity committee when it allowed the bankruptcy court to consider the sharing of financial information between the debtor and committee in designing caps on the compensation of professionals employed by the equity committee. Comm. of Equity Sec. Holders of Federal-Mogul Corp. v. Official Comm. of Unsecured Creditors (In re Federal Mogul Corp.), 348 F.3d 390, 404-405 (3d Cir. 2003).
In sum, the bankruptcy court did not abuse its discretion in denying the Sierra retention application, in part, because the Committee could utilize information and analysis prepared by the financial advisor to Bashas'.
D.
While the bankruptcy court properly based its ruling on two different grounds, that a 100 percent plan was to be proposed shortly by Bashas', and that the Committee could obtain the needed financial information from Bashas', the Committee contends that the bankruptcy court instead denied it permission to employ a financial advisor solely to control administrative expenses. The Committee urges us to hold that this was not a proper basis to deny the application. See, In re Standard Steel Sections, Inc., 200 B.R. 511, 513 n.2 (S.D.N.Y. 1996) (" The court may not deny appointment simply because of its belief that such appointment may prove to be a drain on the assets of the estate.").
Although the bankruptcy court repeatedly cautioned the parties that it was concerned about controlling costs, the reasons it articulated for denying the Sierra retention application was that there was no need for the Committee to have its own financial advisor because Bashas' intended to propose a plan which provided a 100 percent payout to unsecured creditors and the Committee could obtain financial analyses from Bashas'. In doing so, the bankruptcy court identified the correct legal rule to apply in deciding whether to approve or deny the requested application, i.e., whether the requirements of § 1103(a) and Rule 2014(a) had been satisfied. The threshold requirement in Rule 2014(a) is that the applicant has shown a need for the employment of the professional. Here, the bankruptcy court determined that the Committee had not established a need for a financial advisor. The bankruptcy court's conclusion was neither illogical nor implausible and is supportable by the facts, and inferences that may be drawn from the facts, in the record. Consequently, the bankruptcy court did not abuse its discretion in denying the Committee's application to retain Sierra as its financial advisor.
Before concluding, a final point is appropriate. The bankruptcy court properly denied the employment application based upon the facts available to the court at that time. While the bankruptcy court denied the Committee's reconsideration request made immediately following its original ruling, if the material facts change, we see no reason the Committee could not again apply to the bankruptcy court for permission to engage a professional. For example, if contrary to its representation to the bankruptcy court, Bashas' proposes something other than a 100 percent payment plan, or if the 100 percent plan it proposes is flawed in some fashion in the Committee's view and is rejected by the unsecured creditors, the Committee may be able to persuade the bankruptcy court that a financial advisor is required to allow it to effectively contest confirmation and explore other options in the case.
CONCLUSION
We AFFIRM the decision of the bankruptcy court.