MEMORANDUM OPINION AND ORDER
In this Chapter 11 bankruptcy case, the United States Trustee (“Trustee”) seeks leave to appeal the order of appointment of Honigman Miller Schwartz and Cohn (“Honigman”) as attorney for the debtor-in-possession. On November 18, 1988, Pulte Home Mortgage Credit Corporation (“PHMCC”), a subsidiary of Pulte Home Mortgage Corporation (“PHM”), filed a voluntary petition for bankruptcy. At the same time, Honigman submitted an application to represent PHMCC and a statement disclosing its connections with the debtor. On November 21, 1988, U.S. Bankruptcy Chief Judge Ray Reynolds Graves approved Honigman’s appointment, then reassigned this case to U.S. Bankruptcy Judge Steven W. Rhodes.
PHM is a publicly-held corporation listed on the New York Stock Exchange. Its subsidiary, PHMCC, is a limited-purpose
On December 7, 1988, Honigman submitted a supplemental disclosure statement regarding its ties with PHMCC. Honig-man stated that one of its partners, Alan Schwartz, served on PHM’s Board of Directors. Another partner, Mark Shaevsky, acted as PHM’s Secretary. Both Schwartz and Shaevsky owned stock in PHM; their combined holdings amounted to less than 1% of PHM’s total stock. The Honigman firm also had a $10,000 prepetition claim against PHMCC for nonbankruptcy-related legal services. Honigman waived this claim. The Trustee asserts that, based on these disclosures, Honigman could not qualify as PHMCC's attorney in this bankruptcy case.
On December 9,1988, Judge Rhodes held a hearing which addressed the Trustee’s objection to Honigman’s appointment. The Trustee argued that since the firm did not meet the “disinterested person” requirements of 11 U.S.C. § 327(a), it had not qualified for appointment from the outset. On December 20, Judge Rhodes authorized the Honigman appointment on several conditions. First, Judge Rhodes ordered Shaevsky to resign as Secretary of PHM. Second, Schwartz was ordered to recuse himself from any board deliberations regarding PHMCC. Third, the Trustee would review PHM’s board minutes to monitor compliance with Judge Rhodes’ order. Fourth, Honigman was ordered to notify the Court and the parties of any further conflicts of interest which might arise. Finally, Judge Rhodes specifically reserved the authority to review and approve Honigman’s fees. The Trustee brought this motion for leave to appeal after Judge Rhodes denied the Trustee’s motion for reconsideration of his order.
The Trustee presents several arguments in support of his motion for leave to appeal. The Trustee begins by addressing the substantial number of cases holding that appeals from motions for attorney disqualification are interlocutory and not otherwise appealable as final judgments under the doctrine of
Cohen v. Beneficial Industrial Loan Corp.,
On March 23, 1989, I held a hearing on this matter. Honigman stated that a reorganization plan paying all of the creditors in full is about to be confirmed. Honigman also said that PHMCC has submitted a proposed plan and disclosure statement, which was to be heard in bankruptcy court on April 4, 1989. The Honigman firm projected that PHMCC will conclude its bankruptcy case by approximately June 1, 1989.
The source of district court jurisdiction over bankruptcy appeals is 28 U.S.C. § 158(a), which states in relevant part:
The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.
28 U.S.C. § 158(a).
Under this provision, I have discretion to grant leave to appeal from interlocutory bankruptcy orders.
In re Looney,
I find that the Trustee has appealed from an interlocutory order, rather than a final order. For the reasons discussed hereinafter, I decline to hear this appeal on an interlocutory basis. The Trustee may raise these issues on appeal from a final judgment of the bankruptcy court.
Several cases have held that in bankruptcy, as in most civil actions, denial of attorney disqualification motions are interlocutory, not final, orders.
See In re Delta Services Industries,
The Trustee argues that such cases are inapposite because he has appealed Honig-man’s appointment
ab initio,
rather than appealing a denial of disqualification. This is a distinction without difference.
In re Delta Services, id.,
applied the principle that denial of disqualification is interlocutory to an
ab initio
objection to appointment. Further, the finality requirement serves strong congressional policies against piecemeal reviews and against obstructing and impeding ongoing judicial proceedings,
United States v. Nixon,
Nor does Judge Rhodes’ order fall within the collateral order exception to the finality doctrine. Under
Cohen v. Beneficial Industrial Loan Corporation, supra,
an order will be treated as final if it: (1) finally determines rights collateral to and separable from the main proceeding; (2) presents a serious and unsettled question; and (3) is effectively unreviewable on appeal from final judgment such that denial of immediate review will harm the appellant irreparably.
In re Wieboldt Stores, Inc.,
The Trustee argues that Honigman did not meet the requirement of disinterest imposed by the following statute:
Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
11 U.S.C. § 327(a).
In relevant part, the statute defines a “disinterested person” as one who:
(A) is not a creditor, an equity security holder, or an insider;
(D) is not and was not, within two years before the date of the filing of the petition, a director, officer of the debtor or of an investment banker specified in sub-paragraph (B) or (C) of this paragraph;
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11 U.S.C. § 101(13).
These requirements apply to both trustees and debtors in possession.
In re Rob
In § 327(a), Congress provided an enforcement mechanism as follows:
Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person’s employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.
11 U.S.C. § 328(c).
The Trustee argues that one purpose of § 327(a) is to avoid even the appearance of impropriety; this purpose will be unreviewable on appeal from final judgment. Several courts agree that one congressional purpose underlying § 327(a) is to avoid even the appearance of impropriety.
See, e.g., In re Lew H. Thompson,
However, Congress chose to enforce § 327(a) with a fee waiver provision, which often applies at a case’s conclusion. Apparently, Congress believed that its purposes underlying § 327(a) would be sufficiently addressed at the close of a case, contrary to the Trustee’s argument.
Congress also gave the bankruptcy courts discretion in enforcing § 327(a). Fee waiver is discretionary with the bankruptcy court.
In re Pierce,
Although the Trustee argues that the United States Court of Appeals for the Sixth Circuit disapproved of such curative measures in
In re Georgetown of Kettering Ltd.,
The fact that Gagel's creditor interest was subsequently disallowed does not serve to obviate the conflict, as suggested by the district court, but rather enhances the conflict. See Advisory Note to Rule 215(c) (“[I]f there is a question as to the validity of a general creditor’s claim, his attorney would be subject to a disqualifying interest.”).
Id. at 540. The court did not say that Gagel’s interest was waived as a curative measure, as in this case. Rather, the court referred to Rule 215(c), which stated:
Employment by a General Creditor. An attorney or accountant shall not be disqualified to act as attorney for the trustee or receiver merely because of his employment by a general creditor in the case.
In re Georgetown of Kettering Ltd., supra, at 539, fn. 4.
In Georgetown the challenged attorney represented Gagel, an unsecured creditor for 90% of all unsecured debts, at the same time that he represented the debtor in possession. The cited advisory note restricted Rule 215(c) by disqualifying a general creditor’s attorney where the validity of the creditor’s claim was questioned. Since Ga-gel’s claim was disallowed, his claim had been questioned, thereby creating a Rule 215(c) basis for disqualification.
Georgetown does not prohibit Judge Rhodes’ curative order. Further, at least one case cited by the Trustee, and recommended as “scholarly” by other counsel in this case, specifically approved curative measures. The court in In re Roberts, supra, considered the alternatives for an attorney whose client petitioned for bankruptcy, while owing the lawyer prepetition fees. The court suggested that:
To avoid this predicament [creditor status], a law firm could waive all fees and costs incurred for services unrelated to the bankruptcy case, thus eliminating its status as a creditor of the debtor in possession.
Id. at 849.
Judge Rhodes included Honigman’s fee waiver in his order, as Roberts suggests. I find no reason to allow a cure by fee waiver, but not by the other pragmatic means Judge Rhodes employed. At a minimum, Judge Rhodes’ order sufficiently cures any appearance of impropriety to avoid the irreparable harm necessary under Cohen, supra. I emphasize that I do not now reach the question whether Honigman actually conformed to § 327(a).
The Trustee argues that Judge Rhodes should not have considered factors such as the parties’ consent to Honigman’s appointment or the added expense of new counsel because expediency cannot control where, as here, there is a clear statutory proscription. At this point, I only note that there is a split of authority on this issue.
Compare In re Gray,
The Trustee further argues that the harm to its role in monitoring professionals’ employment, and in not monitoring PHM, in this bankruptcy context will be irreparably harmed unless addressed immediately. I find that the questions concerning the Trustee’s role, as well as the basis for Judge Rhodes’ decision, may be effectively reviewed later. The Trustee, the sole appellant here, will not suffer irreparable harm by waiting to raise these issues. These questions do not presently meet the third requirement in Cohen.
Notwithstanding the Trustee’s failure to satisfy the requirements in
Cohen,
28 U.S.C. § 158(a) gives me discretion to take this interlocutory appeal. I should exercise this discretion sparingly, since interlocutory bankruptcy appeals should be the exception, rather than the rule.
In re Wieboldt Stores, supra,
at 580;
In re Huff,
Because § 158(a) contains no criteria to guide the exercise of this discretion, district courts have looked to circuit court standards governing interlocutory appeals in 28 U.S.C. § 1292(b).
See,
e.g.,
Wieboldt
and
Huff, supra; In re Southern Industrial Banking Corporation,
In applying § 1292(b), the United States Court of Appeals for the Sixth Circuit has required four elements:
(1) The question involved must be one of “law”;
(2) It must be controlling;
(3) There must be substantial ground for “difference of opinion” about it; and
(4) An immediate appeal must materially advance the ultimate termination of the litigation.
Id.
at 201
citing Cardwell v. Chesapeake & Ohio Ry. Co.,
The Trustee has not met two of these requirements. The Trustee concedes that this appeal would not materially advance the suit’s ultimate termination.
Brief in Support of Motion for Leave to Appeal Amended Order Authorizing Appointment of Attorneys,
at page 13. Neither does this appeal present a controlling question of law. The United States District Court for the Ninth Circuit has held that an erroneous recusal order is not controlling because it would not materially affect the outcome of litigation.
In re Cement Antitrust Litigation,
The issue of Honigman’s disqualification is not controlling under any of these definitions. Since a judge’s recusal does not materially affect a case’s outcome, Honig-man’s possible disqualification should not materially affect this case’s outcome. The Trustee has not suggested that Honig-man’s disqualification could require reversal of this case later. This appeal would not save time and expense.
On the contrary, taking this interlocutory appeal now would cause considerable delay and increased expense. The attorney for the creditor’s committee estimates that substitution of attorneys would cost the estate from one-half to one million dollars in legal fees and require at least ninety days to educate the new attorneys. Brief of Appellee, PHM Credit Corp., Regarding Appeal of U.S. Trustee to Disqualify Honigman Miller Schwartz and Cohn as Counsel for PHM Credit Corp., at page 13. The district court in Southern Industrial Banking, supra, at 201, cited delay of the bankruptcy case as one reason for its refusal to hear an interlocutory bankruptcy appeal. I should consider delay and expense here because the factors in § 1292(b) should be viewed as a direction to consider the probable gains and losses of immediate appeal. 16 Federal Practice and Procedure, supra, at 156. Because the Trustee has not met the standards of § 1292(b), and immediate appeal would add unnecessary delay and expense when this case is about to conclude, I decline to exercise my § 158(a) discretion to take this interlocutory appeal.
Accordingly, IT IS ORDERED that the United States Attorney’s motion for leave to appeal the bankruptcy court’s order authorizing the appointment of Honigman Miller Schwartz and Cohn is hereby DENIED.
Notes
. Although Judge Rhodes' order did not require Schwartz or Shaevsky to sell their PHM stock, the Trustee allows that if this were Honigman’s only connection to PHMCC, disqualification might not he necessary. Appellant United States Trustee's Brief on Appeal of Amended Order Authorizing Appointment of Attorneys at page 19. I will not assume the Trustee argues that this stock ownership alone creates an appearance of impropriety.