Furr's Supermarkets, Inc.

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO

PACER Cover Sheet
for Electronically Filed Documents

Any data shown here are current as of 06/13/06 . Any element of information on this form,
except the received date, is subject to change as changes may be made to the Court's official docket.

Case Title. Furs Supermarkets, Inc.

Case Number: 01-10779

Description: Findings of Fact and Conclusions of Law by Re: [17-1] Application To Employ
Skadden, Arps, Slate, Meagher & Flom LLP and affiliated practice entities as
General Bankmiptcy Counsel by Fun's Supermarkets, Inc. .

Received on: 2001-06-27 15:01:39.000

Date Filed: 2001-06-27 15:01:39.000

Date Entered On 2001-06-28 00:00:00.000

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Us. cova eR -10779-nlj7_ Doc679 Filed 06/27/01 Entered 06/28/01 09:44:00 Page 1 of 49

GPO

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
FURRS SUPERMARKETS, INC.
Debtor. No. 11-01-10779 SA
FINDINGS OF FACT, CONCLUSIONS OF LAW
AND MEMORANDUM OPINION CONCERNING
DEBTOR’S EMPLOYMENT APPLICATIONS FOR
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
AS CHAPTER 11 COUNSEL FOR THE ESTATE AND
PRICEWATERHOUSECOOPERS AS FINANCIAL
CONSULTANTS FOR THE ESTATE
On February 8, 2001, Furr’s Supermarkets, Inc. (“Debtor
in possession” or “Debtor”) filed its chapter 11 petition. As
part of its “First Day Motions”, the Debtor in Possession
filed an application to employ Skadden, Arps, Slate, Meagher &
Flom, LLP and its affiliated law practice entities (“Skadden”)
as its general bankruptcy counsel, and PricewaterhouseCoopers
(“PwC”) as its Chapter 11 financial consultant. The Skadden
Application (doc. 17) was supported by the Initial Declaration
of Richard Levin (doc. 18) and the PwC application (doc. 15)
by the Declaration of Loretta Cross (doc. 16). At the hearing
on the First Day Motions on February 8, the Court informed all
parties that it would not enter any interim or permanent
employment orders that day, but would do so only after final
hearings on any objections that might be filed to the
applications. The Court also stated that, if an application
were approved, the order would be effective retroactively to
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1 F/k/a “nunc pro tunc.” See In re Albrecht, 233 F.3d
1258, 1260 n. 4 (10th Cir. 2000).
2 The Court also stated that, if employment were approved,
the rates for out-of-state counsel would not be limited to
local rates. The Court made no commitment at that time to
approve any employment.
3 Orders approving the employment of Jacobvitz, Thuma &
Walker as (local) co-counsel for the Debtor, with a top rate
of $175.00 per hour, of Davis and Pierce, P.C. as (local) co-
counsel for the UCC, with a top rate of $275.00 per hour, and
of Pepper Hamilton, LLP as counsel for the UCC, with a top
rate of $450 per hour, were all approved without objection
from any party. Docs. 262, 327 and 357 respectively.
Page 2 of 46
the date of the filing of the application, or “post facto”1,
thus accomplishing the same goal as entering an employment
order on the date of the application subject to revoking the
order if the Court were to determine at a later date that the
application in question should not have been granted to begin
with. Compare In re Sinclair, No 7-94-12905 MS, United States
Bankruptcy Court, District of New Mexico, Memorandum Opinion
and Order Revoking Order Approving Employment of Special
Counsel and Denying Motion for Expedited Approval of
Employment as Special Counsel filed April 29, 1998 (docs. 191
and 190 respectively).2
Both the United States Trustee’s Office (“UST”) and the
Official Unsecured Creditors Committee (“UCC” or “Committee”)
objected to Skadden’s employment, although only the UST
objected to the rates sought by Skadden.3 And the UST
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4 The court also sent a second letter, doc. 411, which it
subsequently “withdrew” following a hearing that stretched
over two days. See minutes of May 9, 2001 hearing. Doc. 438.
5 This memorandum constitutes findings of fact and
conclusions of law pursuant to Rule 7052 of the Federal Rules
of Bankruptcy Procedure.
Page 3 of 46
objected to the proposed terms of the employment of PwC and
the proposed rates. The UST and PwC resolved their
differences about the terms of the employment, so that the
remaining issue with respect to that application is only as to
rates.
On April 20, the Court conducted an evidentiary hearing
on the applications and the objections thereto. On April 26,
the Court faxed a letter to counsel stating that it would
approve the employment of both firms subject to certain
conditions stated in the letter4, with the promise that the
Court would enter a formal order and memorandum opinion as
soon thereafter as reasonably possible. This is the promised
memorandum opinion.5 The Court, having reviewed the PwC
application and the papers filed for and against it, has
satisfied itself that the UST filed legitimate objections to
the original proposed terms of employment, and that the
objections have been appropriately resolved, other than the
issue of rates. Therefore the discussion in this memorandum
about §327 issues is limited to the Skadden employment.
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The Debtor is a regional supermarket chain, with
operations in New Mexico and West Texas. At the start of this
case, the Debtor operated 71 stores (now down to 66), and
employed about 4,900 individuals. Its filing resulted in what
is to date apparently the largest Chapter 11 case in this
jurisdiction. The parties concede, tacitly or otherwise, that
no local firms have the resources to serve as primary counsel
or financial consultant for the estate.
The primary objection to Skadden’s employment is that it
previously represented, and still represents, the holders of a
large percentage of the equity of the Debtor, the holders of
much of the prepetition and postpetition secured debt of the
Debtor, and some of the holders of unsecured claims against
the Debtor. A second objection is that Skadden received a
prepetition preferential transfer (11 U.S.C. §547) from the
Debtor. And the UST argues that this is not a case that
justifies rates as high as the Debtor proposes to pay Skadden.
Skadden responds in summary that it has not represented and is
not representing any of the claims holders on any matter
having to do with this case, that it is willing to give the
estate a postpetition credit for the amount of the alleged
preference, and that the proposed rates are in line with what
it and other firms are charging in other jurisdictions and
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6 Section 1107(b) provides that notwithstanding section
327(a), “a person is not disqualified for employment under
section 327...by a debtor in possession solely because of such
person’s employment by or representation of the debtor before
the commencement of the case.” No one has argued that
Skadden’s prior representation of the Debtor is a
disqualifying factor.
Page 5 of 46
that these rates are what the Debtor was paying prior to the
filing of the petition. The objections and responses are
discussed in more detail below.
In making this decision, the Court has reviewed the
Skadden application, the three supporting declarations by
Richard Levin, the supporting declarations by Mr. Mortensen
and Mr. Jacobvitz respectively, and the objections and
supplemental objections, and the PwC application, the three
supporting declarations by Loretta Cross, the objection and
supplemental objection thereto, and all the briefs. The Court
has also reviewed its chamber’s notes of the hearing testimony
and the voluminous exhibits submitted by the parties.
Discussion of the Skadden Employment
The question is whether Skadden’s employment meets the
requirements of §327, which incorporates §101(14):6
Section 327(a) requires that professionals employed by
the Debtor as debtor in possession “not hold or represent an
interest adverse to the estate” and that they be
“disinterested persons”.
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7 No one has argued that any of the other subdivisions of
§101(14) apply to Skadden, although the Court has determined
that Skadden’s waiver of any prepetition claims against the
estate removes it from the category of being a “creditor” in
violation of §101(14)(A). See below at 8-9.
Page 6 of 46
Section 101(14)(E) defines “disinterested person” in
relevant part as a “person that – does not have an interest
materially adverse to the interest of the estate or of any
class of creditors or equity security holders...for
any...reason.”7
Section 327(c) provides that a person is not disqualified
for employment under §327 “solely because of such person’s
employment by or representation of a creditor, unless there is
objection by another creditor or the United States trustee, in
which case the court shall disapprove such employment if there
is an actual conflict of interest.”
The burden of establishing that Skadden is not
disqualified falls on the Debtor. Interwest Business
Equipment, Inc. v. United States Trustee (In re Interwest
Business Equipment, Inc.), 23 F.3d 311, 318 (10th Cir. 1994);
compare In re Kliegl Bros. Universal Electric Stage Lighting
Co., Inc., 189 B.R. 874, 880 (Bankr. E.D.N.Y. 1995) (burden is
on objecting creditor or UST to prove a conflict of interest
under §327(c)). And a showing that Skadden is not
disqualified from representing the Debtor by virtue of §327(c)
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is by itself not sufficient to show that Skadden is not
disqualified under §327(a). Interwest, 23 F.3d at 316.
The requirements of subsection (a) are threshold
requirements to be met even if subsection (c) is
implicated. Subsection (c) addresses the situation
where dual representation of the trustee and a
creditor is the sole reason advanced for
disqualification and the professional is otherwise
qualified;...
Winship v. Cook (In re Cook), 223 B.R. 782, 790 (10th Cir.
B.A.P. 1998).
1. Potential Preferential Transfer
In December 2000, Skadden represented the Debtor in
securing additional financing from a group of secured lenders.
On December 29, 2000, Skadden invoiced the Debtor in the
amount of $230,000 for most of the work done. The Debtor paid
$100,000 on that bill on January 9, 2001. On February 2, the
Debtor wire-transferred to Skadden $250,000, comprised of the
remaining $130,000 plus $120,000. The latter sum was intended
as a retainer to pay Skadden to prepare a chapter 11 filing
for the Debtor on an emergency basis. No one disputes that the
$120,000 was completely used up by the date of the filing on
February 8; in fact, the evidence is undisputed that the value
of the time and expenses incurred February 2 - 7 in preparing
the filing equaled at least $189,000. The question is whether
some or all of the $130,000 portion of the February 2, 2001
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8 $250,000 (February 2 wire transfer) - $189,000 (February
2 - 7 cost of filing preparation) = $61,000. This figure is
approximate, and in fact at a hearing on April 30, 2001
Skadden informed the Court, the UCC and the UST that there
were some relatively minor additional charges for time and
expenditures incurred during the six-day preparation period
which should be added to the approximate $189,000 figure,
thereby reducing the approximate $61,000 credit to the estate.
Nothing in this decision is intended to preclude Skadden from
proving up the additional charges, or the UST or the UCC from
contesting any of the $189,000+ worth of charges or otherwise
examining the Debtor’s transactions with its attorneys as
permitted by §329.
9 Skadden also wrote off about $187,000 of other
prepetition bills owed by the Debtor, plus additional amounts
from the December refinancing work that did not make it into
the December 29, 2000 invoice.
Page 8 of 46
payment constituted a preferential transfer, and if so,
whether any of the defenses of §547(c) precluded the need for
Skadden to return some or all of the $130,000 to the estate.
Although Skadden argued in its Reply Brief that the $130,000
was paid within the ordinary course of business as permitted
by §547(c)(2), it also tendered a postpetition credit to the
estate of $61,000.8 Reply Brief at 10. (Doc. 382) At the
hearing, Mr. Levin also testified not only that Skadden would
credit the $61,000, but also that Skadden would credit the
full $130,000 if required to do so. The Court has taken these
offers to mean that Skadden would not assert any claim against
the estate for the amount of the funds credited.9
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10 At the April 30 hearing, Skadden offered to treat the
entire $250,000 received on February 2, 2001 as a retainer for
work to be done for the Debtor from February 2 forward.
Page 9 of 46
At the hearing, Mr. Levin testified, under cross
examination from UCC counsel, that the $130,000 constituted a
payment on the antecedent debt invoiced December 29, and that
the payment met other requirements of §547(b). However, he
refused to concede that the $130,000 was a preferential
transfer. And, as noted above, Skadden argues that the
$189,000 incurred February 2 - 7 constituted “new value” as
provided by §547(c)(4). The Court is therefore satisfied that
Mr. Levin’s testimony on April 20 did not constitute a
concession by Skadden that the entire $130,000 was a
preferential transfer which must be returned or credited in
its entirety.
The Court does conclude, however, that Skadden should
credit the estate for $61,000 on its postpetition billing, as
it has offered to do. Doing so will in effect treat the
entire $250,000 February 2 wire transfer as a retainer for the
prepetition preparation and a retainer for postpetition
services, a permissible procedure.10 More important, it will
remove even the suggestion that Skadden has a prepetition
claim against the estate which would make it adverse to the
estate. United States Trustee v. First Jersey Securities,
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Inc. (In re First Jersey Securities, Inc.), 180 F.3d 504, 509,
512 (3rd Cir. 1999) (preferential transfer constitutes actual
conflict of interest mandating disqualification unless payment
is made in the ordinary course of business); In re Roberts, 46
B.R. 815, 849 (Bankr. D. Ut. 1985), aff’d in relevant part and
rev’d and remanded in part on other grounds, 75 B.R. 402 (D.
Utah 1987)(law firm that is owed fees on petition date for
work not done in contemplation of bankruptcy filing has
interest adverse to estate); see, e.g., Sholer v. Bank of
Albuquerque (In re Gallegos), 68 B.R. 584, 586 (Bankr. D.N.M.
1986) (attorney for debtor in possession who held claim
against estate secured by lien on estate’s liquor license had
an interest adverse to the estate within the meaning of §327).
By so ruling, the Court is effectively adjudicating the
preferential transfer dispute without analyzing whether
Skadden’s ordinary course of business defense is valid,
thereby resolving also the question of whether it is
appropriate or even possible, under §327, to simultaneously
represent the estate while engaging in a dispute about whether
a preferential transfer had occurred. In other words,
Skadden’s tender of the $61,000 postpetition credit means that
the Court does not have to analyze the procedure of those
cases which appear to combine preferential transfer and
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11 Of course, there is inevitably some adjudication of the
preferential transfer issue inherent in any employment
decision. Even in a case when there has been no transfer, the
mere fact that a court assures itself that there has been no
transfer constitutes a determination of the issue.
12 This Court agrees with the opinion of the First Circuit
in In re Martin, 817 F.2d 175 (1st Cir. 1987) that the
requirements of §327(a) that counsel (1) not “hold...an
interest adverse to the estate” and (2) “not have an interest
materially adverse to the interest of the estate....” (by
virtue of the incorporation of §101(14)(E)) appear somewhat
redundant. Id., at 179 and n. 4. The inclusion in
Page 11 of 46
employment litigation in one adjudication. See, e.g. First
Jersey Securities, Inc., 180 F.3d at 512-14.11
As noted above, Section 327(a) requires in part that
professionals employed by the Debtor as debtor in possession
“not hold or represent an interest adverse to the estate”.
With the waiver of any prepetition claim against the estate
and the treatment of the $61,000 as a retainer for
postpetition billings to the estate, Skadden does not “hold...
an interest adverse to the estate” nor, as required by
§101(14)(A) and (E) respectively, is it a creditor of the
estate or “have an interest materially adverse to the interest
of the estate or of any class of creditors or equity security
holders....” See In re BH&P, Inc., 949 F.2d 1300, 1310 and n.
12 (3rd Cir. 1991); Bank Brussells Lambert v. Coan (In re
Arochem Corporation), 176 F.3d 610, 628-30 (2nd Cir. 1999)
(citing BH&P).12
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§101(14)(E) of creditors or equity security holders in
addition to the estate is at least one distinguishing feature
between the two sections which makes for imbrication rather
than redundancy.
13 These entities are Windward/Park FSI, LLC; Windward
Merchant, LP; Windward Northwest, LP; Windward Merban, LP; and
Windward Capital Associates, LP.
Page 12 of 46
2. Representation of Parties with Interests Adverse to the
Estate
In this case the more difficult question arises from the
relationship Skadden has with other parties in the case.
Skadden finds itself as Debtor’s chapter 11 counsel across the
table from a number of parties whom it represents in other
matters and who are equity holders and creditors of the
estate. Mr. Levin testified without contradiction that
Skadden has not ever represented any of the equity holders or
creditors with respect to any matters related to the Debtor,
other than having represented the various Windward entities
(“Windward Entities”)13 in 1995 when those entities purchased
equity in the Debtor. A summary of the relationships between
Skadden and the various parties is as follows, based in good
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14 The UCC spends part of its supplemental objection
alleging that the Debtor’s “stonewalling”, intentional or
otherwise, has deprived the Committee of the ability to
perform its functions. Doc. 367. The implication of the
complaint, given its context, must be that there has been a
lack of disclosure, and that the lack of disclosure evidences
Skadden’s lack of disinterestedness. UCC Supplemental
Objection, at 8-9. Without ruling on the allegation, at the
April 20 hearing the Court reiterated its position that the
parties share documents and information freely, and that in
the event of a dispute, the Court is available on short notice
to resolve disputes (which will usually be by reference to the
foregoing principle) so that lack of information need not and
should not be the basis for any argument. Between the three
declarations filed by Mr. Levin, his testimony and the
exhibits admitted at the evidentiary hearing on April 20, and
his statement at the May 8 hearing, the Court finds that there
has been no failure or shortage of disclosure on Skadden’s
part, particularly when the rushed circumstances of the
chapter 11 filing are taken into account. The UST does not
argue that there has been insufficient disclosure.
Page 13 of 46
part on the First Supplemental Declaration14 of Richard Levin
relied on heavily by the UCC in its arguments:
A. The Windward Entities hold about 60% of the Debtor’s
equity. In 1995 Skadden represented the Windward
Entities in their acquisition of a part ownership of the
Debtor; from that point forward Skadden has represented
the Debtor and not the Windward Entities in the Debtor’s
transactions with the Windward Entities. Skadden
continues to represent the Windward Entities in
“corporate transactions” other than those having to do
with the Debtor. The Windward Entities were billed about
0.07% of the total fees billed in CY 2000 by Skadden. The
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Windward Entities also received payments, as insider
shareholders, of approximately $257,000 in the year
preceding the filing of the petition.
B. Credit Suisse First Boston (“CSFB”) holds about 21% of
the Debtor’s equity directly and, through the Windward
Entities, 18% indirectly. CSFB also holds $8.7 million in
secured claims. Skadden continues to represent CSFB in
“corporate transactions”. CSFB was billed about 2.15% of
the total fees billed in CY 2000 by Skadden.
C. MetLife holds the beneficial ownership of 53% of the
stock and 55% of the warrants issued in the Debtor,
indirectly through one of the Windward Entities. MetLife
holds $37.4 million in secured claims and $32.8 million
in an unsecured claim, and also holds a portion of the
$33 million in postpetition financing advanced to the
Debtor pursuant to a final order entered on March 14,
2001 (“DIP Financing Order”). Doc. 241. Skadden
continues to represent MetLife in “litigation”, which is
in large part defending MetLife in asbestos-related
litigation. MetLife was billed about 2.57% of the total
fees billed in CY 2000 by Skadden.
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D. Heller Financial, Inc. (“Heller”) is acting as agent for
the prepetition and post petition secured lenders
MetLife, Bank of America Group, Fleet Financial Group and
itself. Heller holds a prepetition secured claim of
$17.7 million and a portion of the $33 million in
postpetition financing provided by the DIP Financing
Order. Skadden continues to represent Heller in “tax
matters, litigation and corporate transactions”. Heller
was billed about 0.08% of the total fees billed in CY
2000 by Skadden.
E. Bank of America holds a prepetition secured claim of
$17.7 million and a portion of the $33 million in
postpetition financing provided by the DIP Financing
Order. Skadden continues to represent Bank of America,
N.A. and Bank of America Corp. in “tax matters and
corporate transactions”. These two Bank of America
entities were billed about 0.09% of the total fees billed
in CY 2000 by Skadden. In addition, Skadden attorneys
hold something less than 14,000 shares of stock in Bank
of America stock, mostly held in “blind” brokerage
accounts that the attorneys do not control. As of March
7, 2001, there were over 1.6 billion shares of Bank of
America common stock outstanding.
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F. Fleet Financial Group holds a prepetition secured claim
of $14.2 million and a portion of the $33 million in
postpetition financing provided by the DIP Financing
Order. Skadden continues to represent Fleet Financial
Group in “corporate transactions”. Fleet Financial Group
was billed about 0.01% of the total fees billed in CY
2000 by Skadden.
G. McDonnell Douglas Finance holds a prepetition secured
claim of $8.5 million. Skadden continues to represent
McDonnell Douglas Finance in “litigation and corporate
transactions”. No evidence was presented about what
percentage McDonnell Douglas Finance was billed of the
total fees billed in CY 2000 by Skadden.
H. Finova Capital Corporation holds a prepetition secured
claim of $4.6 million. Skadden continues to represent
Finova in “tax matters and corporate transactions”.
Finova was billed about 0.0008% of the total fees billed
in CY 2000 by Skadden.
I. Compaq Financial Corporation holds a prepetition secured
claim of $345,392. Compaq Financial Corporation or its
affiliates were billed about 1.2% of the total fees
billed in CY 2000 by Skadden.
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Page 17 of 46
J. CIT Equipment Financing holds a prepetition equipment
lease. CIT Equipment Financing or its affiliates were
billed for nothing in CY 2000 by Skadden.
K. Chattem, Inc. holds an unsecured claim of $50,896.
Chattem, Inc. was billed about 0.01% of the total fees
billed in CY 2000 by Skadden.
L. Skadden also represents a number of the trade creditors
in litigation, tax matters and/or corporate transactions,
and in two instances respectively, political law advice
and bankruptcy matters. These creditors each hold
relatively small unsecured claims in this case, except
for Pepsi Cola Co., and are identified as follows:
Campbell Soup Company, Coca-Cola Enterprises, Crystal
Springs Bottled Water, Inc., The Earthgrains Company,
Frito Lay, Inc., Kimberly Clark Corp., Mars Incorporated,
Nabisco Holdings Corp., Pepsi Cola Co., Pharmacia
Corporation, The Pillsbury Company, Sara Lee Corporation,
Vlasic Foods International, Inc., Waste Management of New
Mexico, and Mission Foods.
Additional facts raised by the parties are recited below where
relevant for the discussion.
The UST’s objections, summarized in her Supplemental
Objection to Employment Applications of Skadden, Arps, Slate,
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Page 18 of 46
Meagher & Flom, LLP (doc. 370), essentially are that Skadden
has too many and too significant connections with the secured
creditors and the majority shareholders, particularly the
Windward Entities, to allow it to serve. The UST also argues
that the Debtor’s approval of the interim and final DIP
Financing Order, in which the Debtor agreed not to contest the
validity of the secured lenders prepetition liens as a
condition for obtaining the postpetition financing in itself
created a conflict (rather than, apparently, merely
demonstrating the conflict), and that the prepetition payments
received by Windward put Skadden in a conflict position of
having to review those payments on behalf of the Debtor. The
UST argues that all of Skadden’s relationships, taken
together, rise to the level of an actual conflict, thus
precluding Skadden’s employment. The UCC also argues that
Skadden’s relationship with the secured lenders and the equity
holders is so pervasive that an actual conflict exists, giving
this Court no discretion on whether to disqualify Skadden.
Skadden asserts first that it has never represented any
of the parties, including any secured lender or equity holder,
in connection with any transaction with the Debtor, with the
single exception of the Windward Entities purchase of a
portion of the Debtor’s equity in 1995. No one has contested
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Page 19 of 46
this assertion, nor has anyone argued that the 1995
transaction has any material bearing on this issue.
More important, Skadden asserts, in part through the
sworn testimony of Mr. Levin, that Skadden’s restructuring
group often faces the question of where its loyalty might lie
in circumstances such as these. Mr. Levin stated that Skadden
makes clear to its clients that the restructuring group does
not “hold back”, that the group is “zealous” in representing
its client, and that the firm’s reputation would be at stake
if the restructuring group acted otherwise. The Court
observed the demeanor of Mr. Levin during this answer and
throughout his testimony, and has weighed all of his
testimony, including the three declarations that he executed
and swore to as part of the evidentiary presentation on April
20. The Court finds Mr. Levin’s testimony credible. And the
Court explicitly finds that Skadden has represented and will
continue to represent the Debtor vigorously and formidably,
and without pause or hesitation.
In making this decision, the Court’s duty is to ensure
compliance with the Code, thereby protecting the interests of
the estate (including the interests of the creditors). The
Court also has a duty to police the practice of law as that
practice occurs before the Court, which would include not
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Page 20 of 46
permitting violations of the applicable rules of professional
conduct. The Court is comfortable both that the interests of
the estate are well protected and that no ethical violations
result from Skadden’s representation of the Debtor.
As noted above, §327(a) directly and by reference to
§101(14)(E) precludes the employment of counsel who have or
hold an interest “adverse” to the estate or its creditors or
equity holders. The Code does not define “adverse interest”
as such. E.g., In re Amdura Corporation, 121 B.R. 862, 864
(Bankr. D. Co. 1990). A commonly cited definition of to “hold
an interest adverse to the estate” is
(1) to possess or assert any economic interest that
would tend to lessen the value of the bankruptcy
estate or that would create either an actual or
potential dispute in which the estate is a rival
claimant; or (2) to possess a predisposition under
circumstances that render such a bias against the
estate.
In re Roberts, 46 B.R. at 827.
Courts have usually analyzed the “adverse interest” test
in terms or concepts they are familiar with; that is, in terms
of conflicts of interest. 3 Collier on Bankruptcy (15th Ed.
Rev. 2000), ¶327.04[3], at page 327-30. In this context, the
Court must examine the circumstances of each case in making an
employment decision.
Because the few absolute disqualifications Congress
has established are carefully delineated and
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Page 21 of 46
narrowly tailored, the court must take care not to
fashion absolute prohibitions beyond those
legislatively mandated without some measure of
assurance that the purposes of the Bankruptcy Code
always will be served thereby. ...[T]he court...must
not abdicate the equitable discretion granted to it
by establishing rules of broad application which
fail to take into account the facts of a particular
case and the overall objectives of the bankruptcy
system.
Harold & Williams Development Company v. United States Trustee
(In re Harold & Williams Development Company), 977 F.2d 906,
909 -10 (4th Cir. 1992) (Italics, citations and footnotes
omitted.) “This inquiry is of necessity case-specific.” In
re Martin, 817 F.2d at 182. Since the “carefully tailored and
narrowly delineated” provisions of §327(a) explicitly preclude
a professional from representing the estate if the
professional holds an interest adverse to the estate, Ҥ327(a)
mandates disqualification when there is an actual conflict of
interest, allows for it when there is a potential conflict,
and precludes it based solely on an appearance of conflict.”
In re First Jersey Securities, Inc., 180 F.3d at 509,
summarizing the Third Circuit’s earlier holding in In re
Marvel Entertainment Group, Inc., 140 F.3d 463, 476 (3rd Cir.
1998).
The mere appearance of conflict is by itself insufficient
to disqualify counsel. Id. See In re BH&P Inc., 949 F.2d at
1310 (dealing with §324 and removal of trustee). The New
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15 Pursuant to New Mexico Supreme Court order dated June
25, 1986, the Rules of Professional Conduct, based on the
American Bar Association’s Model Rules, became effective
January 1, 1987. See Compiler’s notes to Table of Contents,
Rules of Professional Conduct, NMRA Volume 2. “The Model
Rules take a much narrower view of a conflict of interest than
does the Model Code. The new ABA formulation abandoned the
appearance of impropriety concept of Canon Nine as an
unworkable standard and replaced Canons Four and Five with
Model Rules 1.6, 1.7, and 1.9.” R. Craig Smith, Conflicts of
Interest under the Bankruptcy Code, 8 Geo.J. Legal Ethics
1045, 1055 (1995)(hereafter Smith, Conflicts of Interest.)
Page 22 of 46
Mexico Rules of Professional Conduct no longer include an
“appearance of impropriety” standard.15 Cases such as In re
Kendavis Industries International, Inc., 91 B.R. 742, 753
(Bankr. N.D. Tx. 1988) (fees for counsel for debtor in
possession reduced because of conflicts of interest, failure
to disclose and rendering services of questionable benefit to
estate) rely on the “appearance of impropriety” standard.
Accord, In re Martin, 817 F.2d at 180-81; Rome v. Braunstein,
19 F.3d 54, 58 (1st Cir. 1994) (citing In re Martin). Since
Kendavis Industries and Martin were decided, the American Bar
Association standards of ethical conduct deleted the
appearance of impropriety standard. See note 15; see also In
re Roberts, 46 B.R. at 836. As noted above, New Mexico has
adopted the Rules of Professional Conduct.
In Winship v. Cook (In re Cook), 223 B.R. 782 (10th Cir.
B.A.P. 1998), the Bankruptcy Appellate Panel for the Tenth
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Page 23 of 46
Circuit stated that the appearance of impropriety was an
independent ground for disqualification under §327(c). Id.,
at 789, citing as authority 1 Collier on Bankruptcy
¶327.04[7][b] (Lawrence P. King ed., 15th ed. rev. 1998).
Collier in turn cites In re American Printers & Lithographers,
Inc., 148 B.R. 862, 863, 865-66 (Bankr. N.D. Ill. 1992).
Although the American Printers court cited to In re Martin,
817 F.2d at 181, American Printers was resolved on the basis
of an actual conflict of interest: the proposed counsel for
the debtor also represented the estate’s primary creditor
which provided 10% of the law firm’s revenues. In addition,
Cook did not originate in New Mexico, which has no “appearance
of impropriety” standard.
Notwithstanding the foregoing, the Court is not ruling
categorically that appearances count for nothing. As Circuit
Judge Friendly stated, “[t]he conduct of bankruptcy
proceedings not only should be right but must seem right”,
quoted in In re Leslie Fay Companies, Inc., 175 B.R. 525, 536
(Bankr. S.D. N.Y. 1994) (citations omitted). At the same
time, the Court must insure that the accusations of conflict
of interest do not in themselves become self-fulfilling
prophecies. Where to draw the line between not disqualifying
a firm for the mere “appearance of impropriety” and
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Page 24 of 46
disqualifying a firm because the employment of that firm will
materially damage the bankruptcy process can only be
determined on a case-by-case basis. In this instance,
however, the UST’s allegations of harm to the estate remain
unproven. In consequence, the UST’s argument in closing –
that Skadden’s relationship to other parties will lead
creditors to question whether the DIP Financing Order should
have been entered into – is not persuasive.
Some courts have rejected the distinction between actual
conflicts and potential conflicts. E.g., In re Ginco, Inc.,
105 B.R. 620, 621 (D. Colo. 1988). “The concept of potential
conflicts is a contradiction in terms. Once there is a
conflict, it is actual – not potential.” In re Kendavis
Industries International, Inc., 91 B.R. at 754 (emphasis in
original); see generally id. at 753-56. And see also In re
Wm. J. O’Connor, 52 B.R. 892, 897 (Bankr. W.D. Ok. 1985), that
speaks of “potential actual conflicts”. As the facts in this
case demonstrate, the distinction between “actual” and
“potential” conflicts can be quite subtle.
Other courts disagree with the “absolutist” position of
cases such as Kendavis Industries, arguing among other points
that failure to distinguish between “actual” and “potential”
conflicts constitutes a “per se” rule that results in the
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16 What is apparent is that the courts are talking about
a spectrum of interests, ranging from conflicting interests
that are so immediate or demanding that they cry out for
disqualification, to the “conflict” that is non-existent or so
remote that it does not present a concern. In every case the
court has to find where to draw the line. In other words, the
choices in characterization of conflicts are often not black
and white but rather varying shades of gray. See Sonderby and
McGuire, Gray Area in the Law? Recent Developments Relating to
Conflicts of Interest and the Retention of Attorneys in
Bankruptcy Cases, 105 Com. L.J. 237 (Fall 2000).
Nevertheless, because the courts speak in terms of “actual”
and “potential” conflicts, e.g., In re First Jersey
Securities, Inc., 180 F.3d at 509, and §327(c) even uses the
term “actual conflict”, this Court will use the same
terminology.
Page 25 of 46
court abdicating its responsibility to fully consider the
facts presented and make an informed decision. In re BH&P
Inc., 949 F.2d at 1316-17, cited in In re Interwest Business
Equipment, 23 F.3d at 315; In re American Printers &
Lithographers, Inc., 148 B.R. at 865.16 In any event an
examination of cases such as Kendavis Industries shows an
analysis that ultimately found very real conflicts of interest
that were not remote or “potential”. In short, as pointed out
in In re Leslie Fay Companies, Inc., 175 B.R. at 532,
virtually every court, even those that discount the difference
between actual and potential conflicts, has done a fact-
specific inquiry to determine whether the professional in
question held an interest adverse to the estate. E.g., In re
Amdura Corporation, 121 B.R. at 866. Those that have not
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Page 26 of 46
conducted such an inquiry have been reversed. E.g., In re
Harold & Williams Development Company, 977 F.2d at 910-11.
The Court finds that Skadden does not have any actual
conflict of interest in representing the estate. None of its
attorneys are representing any party in a matter that is
adverse to, or has any connection with, the Debtor or the
estate, other than the representation of the debtor in
possession in this case.
Both the UST and the UCC argue that the total amount of
the 2000 billings represented by the clients of Skadden,
4.93%, make Skadden’s conflict with the estate a real one,
citing In re Amdura Corporation, 121 B.R. 862 and In re
American Printers & Lithographers, Inc., 148 B.R. 862. (In
fact, the total billings to Skadden clients were no less than
6.1008% in CY2000 and almost certainly higher. See pages 12-
16 above.) In Amdura, the court disqualified counsel who
conceded that he could not “bite the hand that feeds” his
firm. And in American Printers, the court disqualified
counsel because counsel’s firm derived 10% of its gross annual
revenues from LaSalle National Bank, which was the debtor’s
largest creditor and its source of post petition financing.
Neither those facts (the percentages of billings) nor the
cited cases require the disqualification of the firm. To
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17 That is why it is not that important to know what are
the individual percentages of CY2000 billings represented by
Campbell Soup Company et al. No one has suggested that those
percentages are anywhere near the size of MetLife’s or CSFB’s
billings.
Page 27 of 46
begin with, consistent with cases such as In re BH&P Inc., 949
F.2d at 1316-17, In re Harold & Williams Development Company,
977 F.2d at 909-10 and In re Martin, 817 F.2d at 182, Amdura
and American Printers do not set out per se tests for
disqualification. Each of those courts examined the specific
facts presented to them and made the decision.
(Appropriately, the UCC and the UST do not argue otherwise.)
Examining the details of this case, the 6.1% represents the
billings for over half a dozen of Skadden’s clients. To
measure the impact of the representation, it is more
appropriate to break down the numbers by each client
individually, since there is no reason to think that there is
anything Skadden would or could do in this case to make all of
them act as one in making a decision about whether to continue
to have Skadden represent them in the other matters.17
Further, with respect to the various individual creditors
represented by Skadden, many appear to have Skadden performing
work that is not likely (although it could be) connected with
the bankruptcy restructuring group, work that includes tax
matters, corporate transactions, litigation and, in one case,
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Page 28 of 46
political law advice. The evidence is that over 1,000
attorneys work at Skadden and while there is no question that
the imputed disqualification rule is applicable (see below at
pages 30-31), the scope of services provided by Skadden and
the multiple personnel that provide those services practically
speaking make it less likely that the personnel in the
bankruptcy restructuring group would be tempted to temporize.
Using the guideline of considering the creditors
individually, the largest creditor in terms of CY2000 billing
is MetLife at 2.53%, followed closely by CSFB at 2.15%.
Neither of those numbers in themselves are so large that they
lead this Court to conclude that Skadden’s efforts on behalf
of the estate are in danger of compromise. It is true, as
pointed out in In re Leslie Fay Companies, 175 B.R. at 535,
that a firm should be presumed to loyal to a client. “That
the client may not be a major client is no reason to think
that Weil Gotshal would ignore the relationship.” Id. As the
respondents point out, even a small percentage of a firm’s
gross revenues may represent for a few attorneys a very
important part of the revenue they bring into the firm and
therefore a very important part of their personal income. A
related aspect, or perhaps merely an illustration, of the
situation is Mr. Levin’s disclosure that he is currently
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18 This disclosure came in connection with a hearing
conducted by the Court at the request of the Debtor in
response to a partial “letter ruling” issued by this Court on
May 4, 2001 (doc. 411). The hearing began on May 8 and
finished on May 9, the minutes of which are docs. 431 and 438
respectively. Attached to the May 9 minutes are the Court’s
notes for a portion of the hearing on May 9, dealing with the
reconsideration and “withdrawal” of the May 4 letter. Note:
the text attached to the May 9 minutes is not the official
record of the proceedings; the official record is of course
the verbatim transcript taken by the court reporter. The text
attached to the minute sheet is comprised of the notes
prepared and used by the Court in announcing its decision, and
has been put into the record for the convenience of readers of
the file.
Page 29 of 46
working for CSFB on an unrelated bankruptcy restructuring
matter.18
Even given all the foregoing, however, the Court finds
that another statement of the Leslie Fay Companies court is
more applicable in this case:
Rather than worry about the potential/actual
dichotomy it is more productive to ask whether a
professional has ‘either a meaningful incentive to
act contrary to the best interests of the estate and
its sundry creditors – an incentive sufficient to
place those parties at more than acceptable risk –
or the reasonable perception of one.’
In re Leslie Fay Companies, 175 B.R. at 532, citing In re
Martin, 817 F.2d at 180-81. Given the role that the Skadden
bankruptcy restructuring group plays for its clients, as
testified to by Mr. Levin, the Court has concluded that there
is not a meaningful incentive to act contrary to the best
interests of the estate and its creditors. Indeed, acting
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Page 30 of 46
aggressively on behalf of each of its restructuring group
clients in each (unrelated) case aligns the interests of the
client – in this case, the debtor in possession – and the
firm’s restructuring group, in part because it presumably
enhances the restructuring group’s reputation and thus leads
to more business. Further, to rule that the fact, standing
alone, that Skadden represents other parties in unrelated
matters requires Skadden’s disqualification in this case,
would be to make a per se rule about professionals and
unrelated matters that is not required by the Code and in fact
departs from it. E.g., In re BH&P Inc., 949 F.2d at 1316-17,
In re Harold & Williams Development Company, 977 F.2d at 909-
10 and In re Martin, 817 F.2d at 182. That is particularly
true in light of the evidence presented in this case. And it
is also true regardless of the percentages of Skadden’s
billings represented by each of the parties in question; that
is, a professional should be disqualified only if a fact-
specific inquiry, such as occurred in In re Envirodyne
Industries, Inc., 150 B.R. 1008, 1018-19 (Bankr. N.D. Il.
1993), In re Amdura Corporation, 121 B.R. at 867, and In re
American Printers & Lithographers, Inc., 148 B.R. at 863-65,
leads to the conclusion that the client’s importance to the
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19 The Envirodyne court also found specific facts that
showed the firm’s bias in favor of the creditor. Id., at
1019.
Page 31 of 46
professional is such that the professional will have an
incentive to act contrary to the interests of the estate.
To some extent, courts have made disqualification
decisions based on assumptions about the behavior of the
professionals in question. For example, the court in In re
Envirodyne Industries, Inc., 150 B.R. at 1019 found that where
a “substantial client” of the firm was an insider, an owner
and a “substantial creditor” of the debtor, the firm could not
represent the debtor, despite the firm’s protestations to the
contrary.19 See also In re American Printers & Lithographers,
Inc., 148 B.R. at 865-66 (“SCK&G may not be able to do this
without jeopardizing its relationship with its large and very
important client LaSalle. Therefore, an actual conflict
exists, and disqualification of SCK&G is required under the
circumstances.”) Compare In re Amdura Corporation, 121 B.R.
at 867 (counsel admitted that lead lender of debtor was “the
hand that feeds” the firm). In this instance, the Court has
made its decision less in reliance on assumptions of how
Skadden (or other firms) would treat its clients and more on
the basis of the evidence. This approach is consistent with
not setting down bright-line tests for disqualification, and
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20 Of course, Skadden may decline voluntarily to negotiate
or litigate with a party for business or perhaps other
reasons. If that occurs, and the Debtor needs to have some
Page 32 of 46
with not disqualifying counsel based solely on appearances.
In doing so, the Court is not suggesting that Envirodyne
Industries and American Printers & Lithographers were wrongly
decided. Rather, the Court, which would probably have decided
those cases the same way, has been able to make the decision
in this case without the use of as many assumptions as those
courts relied on.
A consequence of the ruling is that Skadden is not
precluded from negotiating or litigating directly with any
creditor (including, for example, MetLife) or any other party
about the party’s claims or interests, the treatment of those
claims or interests in any plan that Skadden may develop and
file for the Debtor, or any other issue. Nor does it need to
have its co-counsel, Jacobvitz Thuma & Walker, conduct
preference screens or take on any other specific role. While
this ruling permits Debtor’s counsel to share the
responsibilities for the Debtor’s representation as counsel
have anticipated it (Skadden to perform the more strategic
duties and the Jacobvitz firm to perform many of the other
tasks), that is not the purpose of this ruling, but merely an
outcome of it.20
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other party conduct the negotiation or litigation, the net
extra cost to the estate, if any, can be dealt with at a fee
application hearing and deducted from Skadden’s compensation.
21 Two reasons counsel this approach: attorneys are bound
by the rules of the state in which they practice, regardless
of what type of law they practice, and the substantive
concepts that make up the rules of ethical conduct are drawn
in large part from state law, even though they are applied in
the bankruptcy context. Goldstein, Retention of Counsel:
Ethical Issues and Special Considerations in Bankruptcy Cases,
SE71 ALI-ABA 237, 239-240 (2000).
Page 33 of 46
Skadden also submitted waivers that it had obtained from
various clients who are also secured creditors in this case,
such as MetLife. These waivers would be insufficient to cure
noncompliance with §327, since the language of that section
does not contain such an exception to its requirements for
professionals. See In re American Printers & Lithographers,
Inc., 148 B.R. at 867; In re Amdura Corporation, 121 B.R. at
866; Smith, Conflicts of Interest, 8 Geo.J. Legal Ethics at
1051. However, they may well be useful to comply with the
state rules of professional responsibility, see, e.g., id.; In
re Envirodyne Industries, Inc., 150 B.R. at 1015 (local rules
of professional responsibility are relevant to the §327
determination), specifically Rules 16-107 and 16-110 of the
New Mexico Rules of Professional Conduct as those rules may be
applicable.21
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Page 34 of 46
The UST argues that the Debtor’s agreement, in approving
the DIP financing orders, not to contest the “validity,
perfection, priority, enforceability, and non-avoidability” of
the secured lenders prepetition liens as a condition for
obtaining the postpetition financing in itself created a
conflict of interest. And the UCC questioning of Mr. Levin
raised the argument that the Debtor had failed to sufficiently
examine the lenders’ security interests in the negotiation of
the DIP financing orders. The response to those arguments is
three-fold: first, it is routine (based on this Court’s
experience and knowledge) for prepetition lenders to insist,
as a condition for post petition lending, that the debtor not
contest the perfected status of the prepetition security
interests or any other aspect of the prepetition lending. In
this respect, the Debtor, having financially exsanguinated by
the time of the filing of the petition, had no choice but to
accept that condition of the post petition lending. To have
insisted otherwise would have left the Debtor with nothing to
reorganize; it was a situation of “waive or close”.
Second, Mr. Levin testified that in December there had
been a refinancing, at which time the Debtor had executed a
series of documents acknowledging the validity of the senior
secured position of the lenders, and that while he could not
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Page 35 of 46
say that he had personal knowledge of who on the Skadden team
in the week before the filing had reviewed those agreements,
it was highly unlikely that anything had changed significantly
since December. Third, the DIP financing orders permit those
matters to be raised by the Committee anyway, so that the
estate is left with virtually the identical rights that it
would have had had it not agreed to those provisions in the
DIP financing order.
Thus, the Committee’s argument that in effect Skadden
failed to represent the estate adequately, and the UST’s
argument that Skadden’s action in not contesting the validity
of the liens constituted in itself a conflict of interest, are
more speculation than reality. The Committee’s argument in
particular is comprised mostly of speculation and imaginative
Monday-morning quarterbacking engaged in long after the
funding crisis on the petition date has passed. And the UST’s
argument that the terms of the financing order themselves
demonstrate an actual conflict leaps to a conclusion based on
innuendo rather than evidence. “[I]nterests are not adverse
because it is possible to conceive a set of circumstances
under which they might clash.” In re Leslie Fay Companies,
Inc., 175 B.R. at 532; see also In re Martin, 817 F.2d at 183
(“[H]orrible imaginings alone cannot be allowed to carry the
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Page 36 of 46
day.”). Neither argument acknowledges the reality of the
world of post petition debtor financing.
The UST also argues that the prepetition payments
received by Windward put Skadden in a conflict position of
having to review those payments on behalf of the Debtor. Mr.
Levin stated that this was a case where there was simply
nothing for equity, so Windward’s ownership interest was not a
problem. The fact that there is insufficient value in a
company to provide any return to an equity owner does not of
course prevent the owner from attempting to influence the
outcome of a case, as is attested to by, for example, the
continuous stream of cases wrestling with the absolute
priority rule. However, what the Court has ruled already with
respect to the creditors in this case is applicable as well to
the equity holders. This Court has no reason to believe that
Skadden will treat the equity holders any less aggressively
than the creditors.
The UST also argues that Skadden’s representation, in
unrelated matters, of PricewaterhouseCoopers and Deloitte &
Touche, LLP (the Committee’s proposed financial adviser),
coupled with Skadden’s failure to object to the terms of
employment of both those entities (the UST has since resolved
its objections to the PwC application, except as to rates, and
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Page 37 of 46
as to the Deloitte & Touche application, constitute factors
that, taken with the other facts in this case, require
disqualification. The Court finds that these facts, taken
alone, do not constitute even part of a basis for
disqualification. As Mr. Levin pointed out, Skadden has no
business opposing its client’s choice of financial advisers,
and the decision not to oppose the Committee’s choice of a
financial adviser should be encouraged, not criticized.
Nor do these facts taken altogether justify
disqualification. The UST argues that the disqualification
decision rendered in In re Solv-Ex Corporation, No. 11-97-
14361, Memorandum Opinion (Bankr. D. N.M. February 13,
1998)(doc. 274) is a useful precedent. In that case, the
court denied the application to employ the law firm chosen by
the debtor in possession, finding that the law firm had an
actual conflict of interest precluding it from serving. Id.
at 16. The court in that case also found (and this is the
point for which the UST particularly urges the case) that
there were a number of potential conflicts which, taken
together, constituted a sufficient basis for finding that the
firm was not disinterested.
Each of these facts, when looked at individually,
are not in and of themselves reasons to disqualify a
firm. However, the facts in the present case, when
taken together, lead the Court to the conclusion
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22 The Court also has not, in making this decision, felt
it necessary to engage in balancing the Debtor’s right to
choose counsel with the dictates of §327(a).
Page 38 of 46
that Hinkle, Cox is an interested party and is thus
disqualified from representing the Debtors. In
weighing the Debtors’ right to choose counsel as
well the fact that Hinkle, Cox has represented the
Debtors for years against the fact that Hinkle, Cox
has a lack of disinterestedness, the Court finds on
balance that the lack of disinterestedness outweighs
the other considerations.
Id. at 12-13. This Court of course respects the reasoning and
insights contained in the Solv-Ex decision, but does not feel
that it is compelled to apply that methodology in every case,
including this case.22 Indeed, as the Solv-Ex court
acknowledged, “[C]ourts, in general, have declined to
formulate bright-line rules regarding the criteria for
disqualification, but instead have tended to favor an approach
which gives the bankruptcy court discretion to evaluate each
case on its facts, taking all circumstances into account.”
Id., at 5. (Citation omitted.)
There is certainly merit in the approach, in fact a
requirement, that the Court look at all the circumstances as a
whole in making a disqualification decision. And it would be
simplistic and inaccurate to, so to speak, assign a value of 0
to potential conflicts and a value of 1 to actual conflicts,
so that all the potential conflicts in the world could never
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23 That would especially be the case if one views
conflicts as falling along a continuum from non-existent to
fully realized and material. See note 16 above.
Page 39 of 46
add up to an actual conflict.23 Nevertheless the Court finds
that each alleged conflict should be analyzed on its own, at
least on the first round of examination, and if no individual
conflict presents a problem, then that conclusion would
suggest that the employment is appropriate. That is because,
in a general sense, the mere fact that there is more than one
potential conflict, each of which taken alone is non-
disqualifying, should not instead result in disqualification
solely by dint of numbers. The Court has analyzed each of the
alleged actual or potential conflicts, and for the reasons set
out above, concludes that the employment is proper. And in
any event, even taking all the potential conflicts together,
the Court still finds that the employment is proper. The
representation of other parties to this case – equity, secured
creditors and unsecured creditors – in matters unrelated to
this case, does not require disqualification in the absence of
some concrete indication that the estate’s interests are
likely to be compromised. And of course the fact that Skadden
may have received a preferential transfer which it has
successfully resolved adds nothing to the basis for
disqualification.
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Page 40 of 46
In light of the foregoing, the Court will approve the
Debtor’s employment of Skadden, without requiring the firm to
erect any “ethical walls”, contrary to portions of the letters
issued by the Court on April 26 and May 4, 2001. The Court
will also require Skadden to perform follow up conflict checks
no less often than quarterly, although requiring only
quarterly conflict checks is not intended to shift in any way
the burden on Skadden (1) to continue to ensure that it has or
represents no interest adverse to the estate and (2) to
disclose immediately any such interest. See, e.g., Matter of
XGW Excavating Co, Inc., 111 B.R. 469, 473 (Bankr. D.N.J.
1990).
Discussion of rates for Skadden and PwC
Skadden has proposed two sets of maximum rates, which it
makes available to all its clients. Skadden explains the two
rate structures as follows:
The firm’s clients may choose between a traditional
rate structure, under which the firm bills for
various cost and disbursement items on an ‘as used’
basis, and the bundled rate structure, under which
many of those costs are not charged.
Hourly rates under the bundled rate structure are
approximately seven percent higher than the hourly
charges under the firm’s traditional rate structure,
but under the bundled rate structure Skadden, Arps
does not bill separately for any of the following
charges: outgoing faxes, overtime meals,
transportation allowance (for late work),
secretarial overtime, word processing or secretarial
word processing services, proofreading, and record
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Page 41 of 46
clerks and other miscellaneous support, such as file
clerks. In addition, the firm’s charge for internal
photocopying and other reproduction is reduced from
$.15 per page to $.10 per page.
It has long been the case in this jurisdiction that
certain costs are considered to be “overhead” and thus not
separately billable to the estate. These include secretarial
work (overtime or not) and word processing (secretarial or
not). Record and file clerks would ordinarily fit into this
same category. And while the Court assumes that anyone filing
a document with the Court will have proofread it before
filing, that task, and thus the cost, would in any event be
included in the process of reviewing a document before filing.
It is also the case that a reasonable charge for outgoing
faxes and for photocopying is permitted. $.15 per page is a
reasonable charge for photocopying. Finally, overtime meals
and late work transportation allowances would also be
appropriately treated as part of overhead.
In consequence, the Court will allow Skadden to charge
its “unbundled” rates for attorneys and paralegals, plus
reasonable charges for outgoing faxes and $.15 per page for
photocopying, plus New Mexico gross receipts taxes as may be
applicable. Those “unbundled” rates are 93% of the rates set
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24 For purposes of calculating the rates for the
associates for the Class of 2000, the “bundled” rate shall be
$250.00 per hour, as noted on Exhibit A’s footnote.
Page 42 of 46
out on the attached Exhibit A24, which is taken from the
Initial Levin Declaration. No rate increases shall be allowed
except upon application to the Court. Consistent with the
standard practice in this jurisdiction, the Debtor is
authorized to pay monthly to Skadden 75% of the fees billed
each month and 100% of the costs, with 25% of the fees to be
held back until further order of the Court.
Nothing in this decision approving the unbundled rate
structure requires Skadden to bill at the maximum level, of
course. The Court has noted the contents of Appendix 4
attached to the Second Supplemental Levin Declaration, which
shows that the rates at which Skadden is currently billing the
services of various persons are less than the maximum sought
in the Initial Levin Declaration. (A copy of Appendix 4 is
appended to this opinion.) The Court is not limiting Skadden
to the rates set out in Appendix 4, but of course to the
extent that the actual rates charged by Skadden deviate
downward from the authorized rates in the direction of the
rates set out in Appendix 4, the more likely a fee application
is to be approved.
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Page 43 of 46
The rates as approved are less than what the Debtor has
asked for (although higher than the rates argued for by the
UST). The Court is aware of the Congressional policy embodied
in the Code to compensate bankruptcy professionals comparably
to non-bankruptcy work in order to ensure that bankruptcy
cases received the same quality attention as other areas of
law. On that basis, in part, the Debtor has asked to employ
Skadden at its bundled rates, and the rates proposed are
represented to be those that Skadden has been charging this
Debtor for its prepetition representation and are generally
consistent with rates charged by Skadden in other fields of
law (see Exhibit A attached hereto). The Court has in effect
reduced those rates somewhat, for two reasons. One is that,
although this case is the largest and most complex that has
been filed in this jurisdiction, it nevertheless is relatively
small and less complex compared to many of the cases in which
Skadden and the other national-level professionals have
charged rates comparable to what is being requested in this
case. In so ruling, the Court is not in any way ignoring the
maxim that even the smallest case can present very complex
problems. And certainly a continuous theme of the testimony
in this case from professionals and non-professionals alike
has been that this Debtor’s financial circumstances make this
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Page 44 of 46
case a difficult one. Nevertheless, the fact that this
bankruptcy matter has only one debtor with 71 stores (at the
start of the case) and assets in only two states, and debts of
less than $300,000,000, suggests to the Court that a somewhat
lower rate of compensation is appropriate. The other reason
is the Court’s deference to the long-established policies in
this district concerning what costs are appropriately charged
to the estate and what are not, whether counsel are local or
national.
With respect to PwC, the Court has already noted that the
only issue left for decision is the question of rates. The
estate may employ that financial consulting firm, subject to
the rates being reduced to the levels sought by the firm in
the Edwards Theaters cases in the Central District of
California (UST Exhibit 14, summarized in UST Exhibit 21).
Those hourly rates are as follows: partners/directors ($400 -
$450), managers ($300-$350), associates ($150-175), senior
associates ($200-275) and professional assistants ($90). PwC
may also charge New Mexico gross receipts tax as may be
necessary. As with Skadden, no rate increases shall be
allowed except upon application to the Court, and the Debtor
is authorized to pay monthly to PwC 75% of the fees billed
each month and 100% of the costs, with 25% of the fees to be
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Page 45 of 46
held back until further order of the Court. And the same cost
limitations are imposed on PwC.
The reasons for the reduced rates are the same as are
applicable to the rates allowed Skadden. And while the Court
is aware that PwC sought a rate of $590 per hour for its
former retail chain chapter 11 CEO now turned consultant, the
Court is comfortable that PwC can achieve results for the
estate at the $450-per-hour level as the maximum rate.
CONCLUSION
For the foregoing reasons, the Debtor may employ Skadden,
Arps, Slate, Meagher & Flom, LLP and its affiliated law
practice entities as general bankruptcy counsel at the rates
and under the conditions set forth herein, and may employ
PricewaterhouseCoopers as its financial consultant at the
rates and under the conditions set forth herein. Orders
consistent with this memorandum opinion shall issue.
Honorable James S. Starzynski
United States Bankruptcy Judge
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Page 46 of 46
I hereby certify that on June 27, 2001, a true and correct
copy of the foregoing was either electronically transmitted,
faxed, delivered, or mailed to the listed counsel and parties.
Robert H. Jacobvitz
500 Marquette NW #650
Albuquerque, NM 87102
William F. Davis
PO Box 6
Albuquerque, NM 87103
Paul M. Fish
P. O. Box 2168
Albuquerque, NM 87103
Charles A. Beckham, Jr.
1000 Louisiana, Suite 4300
Houston, TX 77002
Office of the UST
PO Box 608
Albuquerque, NM 87103-0608
Richard Levin
300 South Grand Avenue
Los Angeles, CA 90071-3144
Case 01-10779-nlj7 Doc 679 Filed 06/27/01 Entered 06/28/01 09:44:00 Page 47 of 49

Exh ibit te A Lhd
“ONFIDENTIAL

SASM&F LLP & AFFILIATES
INTERNAL TIME CHARGE SCHEDULE*

September 1, 2000

Standard
Bundled Rate
PARTNERS & OF COUNSEL: $445 - $670
COUNSEL AND ASSOCIATES:
Rate
Counsel & Special Counsel $415
Associate Class 1991 & Prior 405
Associate Class 1992 405
Associate Class 1993 390
Associate Class 1994 375
Associate Class 1995 365
Associate Class 1996 355
Associate Class 1997 340
Associate Class 1998 310
Associate Class 1999 280
Associate Class 2000 230**
LEGAL ASSISTANTS: $80 - $160
‘ These are the standard hourly fee rates for most attorneys and legal assistants and do not include

amounts for charges and disbursements. [na limited number of cases or for specific types of work {e.g.,
M&A transactions, certain types of tax matters, ete), individual rates may he higher or lower than those
stated. In addition, the Firm has a standard “bundled rate" for clients who are not billed separately for
word processing, proofreading, facsimile or overtime meals, and in-house reproduction is charged at $0.10

per page.

* First year associate standard will move to the rate of $250/hr. on April 1, 200).

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Case 01-10779-nlj7 Doc 679 Filed 06/27/01 Entered 06/28/01 09:44:00 Page 49 of 49
Appendix 4 Skadden, Arps Attorneys
Attorney
Porition
Department
Law School
Degree Date
Hourly Rate
Jay M. Goffman
Partner
Corporate Restructuring
University of North Carolina
1983
$630
Richard B. Levin
Partrer
Corporate Restructuring
Yale Law School
1975
$590
Peter W. Clapp
Coursel
Corporate Restructuring
University of California, Hastings College of the Law
1982
$415
Donna McGraw Weiss
Associate
Corporate
Harvard Law School
1994
$375
Alan J. Carr
Associate
Corporate Restructuring
Tulane University Law School
1995
$365
Barbara R. Mirza
Associate
Employee Benefits
University of Toronto
1995
$365
Stephen J. Lubben
Asscciate
Corporate Restructuring
Harvard Law School; Boston University School of Law
2000; 1996
$355
Amy S. Park
Asscciate
Corporate Restructuring
Seton Hall University School of Law
1996
$340
Jena Q. Bridges
Asscciate
Corporate
University of Virginia School of Law
1997
$340
Jamie Edmonson
Asscciate
Corporate Restructuring
Loycla Law School, Loyola Marymount University
1996
$310
Q. Scott Kaye
Associate
Corporate Restructuring
University of Florida School of Law
1999
$280
Vanessa P. Rubinstein
Associate
Corporate
Northwestern University School of Law
2000
$230
N.B. Includes all attomeys who have billed more than 10 post-petition hours in the Debtors case as of April 1, 2001.
-