OPINION OF THE COURT
The U.S. Trustee appeals from the District Court’s order authorizing the retention of Jones, Day, Reavis and Pogue (“Jones Day”) as Pillowtex, Inc.’s Chapter 11 bankruptcy counsel. The U.S. Trustee argues that payments of fees by Pillowtex to Jones Day within the 90 days before bankruptcy may have constituted an avoidable preference and that the receipt of such a preference by Jones Day would constitute a conflict of interest with Pillow-tex’s creditors and its bankruptcy estate. The U.S. Trustee maintains that because the Bankruptcy Code provides that debt- or’s counsel may not “hold or represent an interest adverse to the estate” or “an interest materially adverse to the interest of ... any class of creditors,” Jones Day may have been disqualified from serving as Pil-lowtex’s bankruptcy counsel. Without ruling on the U.S. Trustee’s preference allegation, the District Court approved Jones
I.
FACTS AND PROCEDURAL POSTURE
Pillowtex Corporation and its subsidiaries (referred to collectively as Pillowtex) manufacture pillows, blankets, towels and other textiles. Jones Day has represented and advised Pillowtex since 1996 in a variety of matters, including corporate, financial, securities, real property, litigation, environmental, intellectual property, labor, employee benefits and tax affairs. Prior to filing its bankruptcy petition, Pillowtex retained Jones Day to assist it with contingency planning and bankruptcy preparation.
Pillowtex declared bankruptcy on November 14, 2000 by filing a petition under Chapter 11 of the Bankruptcy Code. At the time of filing, Pillowtex had approximately $1,000,000,000 in trade debt, about $750,000,000 in senior secured debt, and roughly $400,000,000 in subordinated debt. For fiscal year 1999, Pillowtex’s gross revenues exceeded $1,500,000,000, and as of July 1, 2000 its assets were valued at approximately $1,700,000,000.
On November 16, 2000, Pillowtex filed an application with the Bankruptcy Court to retain and employ Jones Day as its bankruptcy counsel pursuant to section 327 of the Bankruptcy Code. Pillowtex also applied to retain other professionals to assist it in its restructuring, including KPMG LLP (KPMG) as an independent auditor and consultant. As part of Jones Day’s retention application, Jones Day set forth the date and amount of each payment that Pillowtex made to the firm during the year immediately preceding the filing for bankruptcy. The disclosure by Jones Day showed that Pillowtex made the following payments to Jones Day for services rendered:
11/29/99 $ 203,520.69
12/27/99 450,573.79
12/30/99 155,912.06
2/23/00 181,550.01
3/31/00 67,482.73
4/30/00 146,520.71
6/30/00 1 180,585.22
7/7/00 132,299.71
9/11/00 78,652.94
11/3/00 40,759.09
11/10/00 778,157.33
11/13/00 300,000.00 (retainer — approx. $100,000 toward prepetition fees)
The last payment listed, that on November 13, 2000, was made the day before Pillowtex filed its petition for bankruptcy and was a retainer of $300,000 for services rendered or to be rendered by Jones Day and for reimbursement of expenses.
2
In-
The U.S. Trustee 3 filed an objection to the application by Jones Day and KPMG for retention, arguing that both KPMG and Jones Day had received payments which constituted voidable preferences under section 547 of the Bankruptcy Code. According to the U.S. Trustee, Jones Day “received payments before the filing of the petition which were voidable as preferences .... As a result of these payments, Jones Day is not a disinterested person and cannot be retained to represent the debtors in possession [Pillowtex].” App. at 125. Eventually, the U.S. Trustee withdrew his objection to KPMG’s retention pursuant to stipulation, but continues to press its objection as to Jones Day and requested a hearing.
Before the District Court, Jones Day argued that Pillowtex’s payments to it “were substantially within the historical pattern of payments between Jones Day and the Debtors, which included wide swings in the timing of payments.” App. at 133. Jones Day opposed the requested hearing, arguing that it was “not necessary or appropriate for the Debtors’ estates to incur the time and expense of litigating the preference issue.” App. at 133. It proposed instead that “if a preference action against the firm is initiated and a final order is entered determining that Jones Day in fact received a preference, Jones Day will return to the Debtors’ estates the full amount of the preferential payment and waive any related claim.” App. at 133. Jones Day noted that “the U.S. Trustee has previously adopted” the same approach “with respect to Debtors’ accountants,” KMPG, but “[inexplicably, the U.S. Trustee will not agree to this resolution with Jones Day.” App. at 133.
The District Court did not definitively determine whether Jones Day had received a preference from Pillowtex. Instead, the court adopted Jones Day’s suggestion that it authorize the firm’s retention on condition that if Jones Day was determined to have received preferential transfers, “Jones Day shall promptly return the same to [Pillowtex’s] estate[] and waive any unsecured claim it has by virtue thereof.” App. at 3. According to the District Court, “Subject to the provisions of this Order, Jones Day does not hold or represent any interest adverse to the Debtors’ estates and is a ‘disinterested person,’ as defined in section 101(14) of the Bankruptcy Code and as required by section 327(a) of the Bankruptcy Code.” App. at 2. The U.S. Trustee timely filed this appeal of the retention order.
The bankruptcy proceeding continued while this appeal proceeded. In the interim, no party has brought a preference action against Jones Day. The District Court ultimately confirmed Pillowtex’s Second Amended Joint Plan of Reorganization by an order entered May 2, 2002. At oral argument before this court, Fred Hodara, an attorney for the Official Committee of Unsecured Creditors of Pillowtex which joined in Pillowtex’s brief on appeal, agreed with the U.S. Trustee that under Pillowtex’s confirmed plan of reorganization the unsecured creditors only receive pennies on the dollar for their claims.
JURISDICTION AND STANDARD OF REVIEW
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The District Court exercised jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. That court’s determination of Pillowtex’s application for retention of counsel is a final order,
see, e.g., United States Trustee v. First Jersey Secs., Inc. (In re First Jersey Secs., Inc.),
The U.S. Trustee has standing to appeal the retention order. The U.S. Trustee has statutory responsibility to monitor applications for retention of professional persons in bankruptcy cases, and, “whenever the United States trustee deems it appropriate, [to file] with the court comments with respect to the approval of such applications.” 28 U.S.C. § 586(a)(3)(H). The relevant statute addresses the U.S. Trustee’s standing by explicitly providing that “[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title.” 11 U.S.C. § 307.
See also United States Trustee v. Price Waterhouse,
Although Jones Day argues that it is significant that none of the parties in interest to the bankruptcy objected to its retention as counsel, the House Report to the legislation expanding and implementing the U.S. Trustee program on a national scale, embodied in 11 U.S.C. § 307, expressly puts the U.S. Trustee on the level of a party, as it states: “The U.S. Trustee is given the same right to be heard
as a party in interest,
but retains discretion to decide when a matter of concern to the proper administration of the bankruptcy laws should be raised.” H.R.Rep. No. 764, 99th Cong., 2d Sess. 27 (1986),
reprinted in
1986 U.S.C.C.A.N. 5227, 5240.
See also In re Columbia Gas Sys. Inc.,
III.
DISCUSSION
We review a bankruptcy court’s decision to approve an application for employment for abuse of discretion.
See In re Marvel Ent’mt Group, Inc.,
A debtor in possession, such as Pillow-tex, may, with bankruptcy court approval, employ one or more attorneys to represent it and to assist it in fulfilling its duties.
See
11 U.S.C. § 327(a). The attorneys selected may not be persons who “hold or represent an interest adverse to the estate,” and must be “disinterested persons.”
Id.
The Bankruptcy Code includes as a “disinterested person,” someone who “does
We have considered the statutory requirements for retention of counsel in several opinions. In
In
re
BH&P, Inc.,
We again considered the standards applicable to retention of trustee’s counsel in
In re Marvel Entertainment Group, Inc.,
(1) Section 327(a), as well as § 327(c), imposes a per se disqualification as trustee’s counsel of any attorney who has an actual conflict of interest] (2) the district court may within its discretion— pursuant to § 327(a) and consistent with § 327(c)' — disqualify an attorney who has a potential conflict of interest and (3) the district court may not disqualify an attorney on the appearance of conflict alone.
Id. at 476 (emphases added). In Marvel Entertainment, we reversed the district court’s disqualification of the trustee and trustee’s counsel because it was predicated only on the appearance of a conflict. We held that under section 327(a) the district court could disqualify counsel “only if it had an actual or potential conflict of interest.” Id. at 477.
Although the retention of counsel for the trustee was at issue in both BH&P and Marvel Entertainment, the same standards apply to the retention of counsel for the debtor in possession. See 11 U.S.C. § 1107(a) (“Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.”).
In
In re First Jersey Securities, Inc.,
We held that counsel was disqualified because within 90 days of the filing for bankruptcy it had received from the debt- or stock in payment of a bill of $250,000 in settlement for antecedent legal work. Counsel had argued that the stock payment was made in the ordinary course of business and therefore not subject to avoidance, but we rejected that contention because payment of fees in unregistered restricted securities was a method of payment inconsistent with the parties’ prior course of dealings. See id. at 513. The U.S. Trustee relies on the authority of First Jersey Securities in pointing to Pil-lowtex’s payment of substantial fees to Jones Day as a possible preference.
In this case, the District Court never decided whether Jones Day received an avoidable preference from Pillowtex when it accelerated billing for and received payment for past due bills during the ninety days before Pillowtex declared bankruptcy. An avoidable preference is defined in section 547(b) of the Bankruptcy Code as
any transfer of an interest of the debtor in property — (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made — (A) on or within 90 days before the date of the filing of the petition; ... (5) that enables such creditor to receive more than such creditor would receive [in a Chapter 7 distribution],
11 U.S.C. § 547(b).
The preference rule prevents debtors from depleting the estate to pay favored creditors with assets that otherwise would have been apportioned among creditors according to the prioritization scheme of the Bankruptcy Code. See, e.g., George M. Treister et al., Fundamentals of Bankruptcy Law § 4.03(c), at 169 (noting that § 547 “is designed to achieve the policy of fostering equality of distribution among the creditors of an insolvent debtor”). When the debtor becomes insolvent, a payment to one creditor from the estate’s limited assets is necessarily paid at the expense of another creditor. The receipt of a preference by a creditor thus creates a conflict with unpaid creditors, whose share of the remaining assets is diminished by the payment. 4
We agree with the U.S. Trustee that the court’s order incorporating the two conditions does not resolve the question whether Jones Day received an avoidable preference and was therefore not disinterested and whether it should have been disqualified. If payments to Jones Day were determined to be preferences, Jones Day would, in any event, be obliged to return the funds to the estate. See 11 U.S.C. § 550 (“[T]o the extent a transfer is avoided under section ... 547 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred, or ... the value of such property.”).
Nor does its undertaking to waive the claims resulting from the preference resolve the issue of its possible disqualification if the fee payment was an avoidable preference. Jones Day cites a series of cases to illustrate that a professional can eliminate an adverse interest by waiving any claim it has against the estate, but it is not in the same position as the professionals in these cases.
See, e.g., In re Princeton Medical Mgmt., Inc.,
In each of the cited cases, the professional waived its fees
prior
to being approved for retention under section 327(a).
See, e.g., Princeton,
Jones Day points to the decision in
In re Midland Food Sews., LLC,
No. 00-4036 (Bankr.D.Del. Dec. 14, 2000) (oral ordér granting retention), where a bankruptcy court, despite a creditor’s claim that the proposed counsel had been paid a preference, granted a retention petition by debt-
At the heart of the U.S. Trustee’s objection to retention of Jones Day as counsel before the preference issue was decided is the improbability that Jones Day, as counsel to the debtor-in-possession, would bring an action against itself to recover any preference. As the U.S. Trustee states in its brief, “[bjecause Jones Day has taken and retained payments that may be preferential and it ‘will not be advising the Debtors to seek to recover payments made to Jones Day’ ... the conflict of interests, if any, has been in place since Jones Day’s retention was approved and is an actual conflict of interest today.” Appellant’s Reply Br. at 6-7.
Jones Day responds that there are other creditors who could raise the preference issue, if it is a matter of concern. However, the relationship between a debtor and its creditors is not always adversarial. 6 In such a situation, the U.S. Trustee can play an important role in assuring adherence to the requirements of the Bankruptcy Code.
Of course, Jones Day does not concede that it received a preference. It argues that the $997,569.36 it received within the 90-day period was in the ordinary course of business, and therefore not an avoidable preference under section 547(c)(2). Moreover, it argues that any conflict created by that preference was not material, and notes that, “once a court concludes the debtor paid a preference to a professional, it must evaluate whether the preference creates an ‘interest materially adverse to the interest of ... any class of creditors.’ ” § 101(14)(E). See note 4, supra. According to Jones Day, given the uncertainty over whether it was paid a preference, let alone a preference constituting a materially adverse interest to other creditors, the District Court was well within its discretion to order its retention.
It is true that “historically, bankruptcy courts have been accorded wide discretion in connection with ... the terms and conditions of the employment of professionals.” Appellee’s Br. at 10 (quoting
BH&P,
Although a bankruptcy court enjoys considerable discretion in evaluating whether professionals suffer from conflicts, that discretion is not limitless. A bankruptcy court does not enjoy the discretion to bypass the requirements of the Bankruptcy Code. For example, we held in
United States Trustee v. Price Waterhouse,
At the oral argument, Jones Day contended that all bankruptcy lawyers find themselves with past due bills from puta
The record does not show which view is accurate. The parties may choose to present evidence at the hearing on remand that would permit the District Court to make a finding of fact on the matter.
Because there has never been a judicial determination whether Jones Day received a preference, it is unclear at this time whether the preference, if there were one, presents a conflict which would require Jones Day’s disqualification. We hold that when there has been a facially plausible claim of a substantial preference, the district court and/or the bankruptcy court cannot avoid the clear mandate of the statute by the mere expedient of approving retention conditional on a later determination of the preference issue.
The District Court in this case could not adequately evaluate the alleged conflict and was not in a position to conclude that any preference did not pose a conflict with Pillowtex’s estate or a material conflict with the other creditors. We therefore agree with the U.S. Trustee that the District Court must hold a hearing on whether Pillowtex received a preference, and will remand for that purpose. 7
Notes
. In the Disclosure of Compensation that Jones Day filed as part of Pillowtex's retention application, Jones Day listed this payment as having been made on 6/30/99, but its placement in an otherwise chronological listing of payments suggests that date is a scrivener's error. In its brief, the U.S. Trustee lists the payment as having been made in the year 2000.
. Although Jones Day initially represented that it had applied $100,000 of that retainer as payment of fees through November 13, 2000, it now explains that it inadvertently failed to transfer that sum from its trust account into a non-trust account as of that date.
. The reference is to the United States Trustee authorized to supervise the administration of bankruptcy cases in "[t]he judicial districts established for the States of Delaware, New Jersey, and Pennsylvania,” 28 U.S.C. § 581(a)(3), also known as "Region 3.”
. Section 327(a) sets forth two relevant standards for disqualification, one applicable to conflicts with the debtor's estate and one governing conflicts with other creditors. The first prohibits a professional from "holding] or represent[ing] an interest adverse to the estate.” 11 U.S.C. § 327(a). The second, contained in the definition of "disinterested person," requires that a professional be free of "an interest materially adverse to the interest of ... any class of creditors." 11 U.S.C. § 101(14)(E). Thus, a professional may not have any conflict with the estate, while a conflict with creditors must be "material.”
It is unclear whether, as the U.S. Trustee argues, the receipt of a preference will always create a conflict with the debtor. "Preference law ... is not part of the arsenal of rights and remedies between a debtor and his creditors .... preference law focuses on relationships among creditors in light of the advantages of a collective proceeding, not on relationships between creditors and the debtor.” Thomas H. Jackson, Avoiding Powers in Bankruptcy, 36 Stan. L. Rev. 725, 757 (1984) (emphasis in original). We reserve the U.S. Trustee's argument for future resolution.
. The Bankruptcy Code prohibits retention of a professional who is a prepetition creditor of the debtor.
See
11 U.S.C. § 101(14)(A) (stating that a disinterested person “is not a creditor”);
Price Waterhouse,
.
See generally In the Matter of Arkansas Company, Inc.,
. There was some confusion at oral argument about whether the U.S. Trustee has standing to pursue the preference action below. Although we leave the question to the District Court on remand in the first instance, we call to its attention our discussion in
U.S. Trustee
v.
Columbia Gas Sys. Inc. (In re Columbia Gas Sys. Inc.),