In re: BIG RIVERS ELECT RIC CORPORATION v. J. Baxter Schilling

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0010P (6th Cir.)
File Name: 04a0010p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
In re: BIG RIVERS ELECT RIC
CORPORATION,
Debtor.
______________________
UNITED STATES OF AMERICA,
On Behalf of the Rural
Utilities Service of the
Department of Agriculture
and the United States Trustee,
et al.,
Appellees,
v.
J. BAXTER SCHILLING,
Appellant.
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Nos. 02-6212/
6213/6338/6340/
6341/6344/6347
Appeal from the United States District Court
for the Western District of Kentucky at Owensboro.
Nos. 99-00177; 99-00117; 99-00118; 99-00119; 99-00131;
99-00147; 01-00049—Joseph H. McKinley, Jr.;
Avern Cohn, District Judges.
Argued: September 10, 2003
Decided and Filed: January 8, 2004
2 In re Big Rivers
Electric Corp.
Nos. 02-6212/6213/6338/
6340/6341/6344/6347
*The Honorable R ichard M ills, United States District Judge for the
Central District of Illinois, sitting by designation.
Before: GIBBONS and SUTTON, Circuit Judges; MILLS,
District Judge.*
_________________
COUNSEL
ARGUED: Donald L. Cox, LYNCH, COX, GILMAN &
MAHAN, Louisville, Kentucky, for Appellant. Michael E.
Robinson, U.S. DEPARTMENT OF JUSTICE, CIVIL
DIVISION, Washington, D.C., for Appellees. Michael A.
Fiorella, SULLIVAN, MOUNTJOY, STAINBACK &
MILLER, Owensboro, Kentucky, for Debtor. ON BRIEF:
Donald L. Cox, LYNCH, COX, GILMAN & MAHAN,
Louisville, Kentucky, for Appellant. Michael E. Robinson,
William Kanter, U.S. DEPARTMENT OF JUSTICE, CIVIL
DIVISION, Washington, D.C., Alan C. Stout, STOUT LAW
OFFICE, Marion, Kentucky, for Appellees. Michael A.
Fiorella, James M. Miller, SULLIVAN, MOUNTJOY,
STAINBACK & MILLER, Owensboro, Kentucky, for
Debtor.
_________________
OPINION
_________________
SUTTON, Circuit Judge. At issue in this case are the
duties of disinterest and disclosure of an examiner appointed
to facilitate a reorganization under Chapter 11 of the
Bankruptcy Code. The issues arise from the appointment of
J. Baxter Schilling to serve as the examiner in the
reorganization of Big Rivers Electric Corporation, which was
unable to meet obligations on $1.2 billion in debt and whose

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In re Big Rivers
Electric Corp.
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September 1996 bankruptcy petition represented the largest
Chapter 11 case filed in Kentucky history.
As an examiner, Schilling did much to advance the
successful reorganization of Big Rivers, which emerged from
Chapter 11 in June 1997 through a consensual plan of
reorganization approved by the bankruptcy court. During his
tenure as examiner, however, Schilling sought privately to
negotiate a success fee with three of the estate’s unsecured
creditors, by which they would pay him a percentage of their
increased recovery on top of the hourly fee authorized by the
bankruptcy court for his services. Schilling did not disclose
the negotiations, or the agreements he believed he had
reached with these creditors, to the debtor in possession, to
the other creditors or to the court until many months later.
When Schilling’s conduct came to light, several parties
objected to his actions, as did the United States Trustee which
is responsible for appointing bankruptcy examiners and
trustees. In view of his conduct, they argued that Schilling
and his law firm should disgorge all of the fees dispensed to
them during the case—totaling nearly $1 million. The district
court agreed, and we now affirm.
I.
Unable to meet the continuing obligations on more than
$1.2 billion in debt, the Big Rivers Electric Corporation filed
a petition to reorganize the company under Chapter 11 of the
Bankruptcy Code and to remain as a debtor in possession
during the reorganization. Filed on September 26, 1996, the
petition represented the largest bankruptcy case ever filed in
Kentucky and at the time was one of the largest bankruptcy
cases in the country. A publicly-regulated utility, Big Rivers
owed $1.1 billion of its debt to the Rural Utilities Service of
the United States Department of Agriculture (the “Utilities
Service”), which held a perfected security interest in all of
Big Rivers’ assets. See In re Big Rivers Elec. Corp., 284 B.R.
580, 584 (W.D. Ky. 2002). Big Rivers’ largest other creditors
4 In re Big Rivers
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included Bank of New York, Chase Manhattan Bank, and
Mapco Equities, each of which held unsecured claims. Id.
On October 7, 1996, Bluegrass Containment, Inc., a smaller
unsecured creditor, moved the bankruptcy court to appoint a
trustee or an examiner in the Big Rivers case. Id. In a
Chapter 11 case, a trustee replaces the debtor in possession
and takes immediate control of the business and the
reorganization effort. See 11 U.S.C. §§ 1104(a), 1106(a).
Examiners, by contrast, assume a more limited role. They
typically investigate the debtor’s business and handle other
duties specifically assigned by the bankruptcy court, but do
not replace the debtor in possession in handling the day-to-
day affairs of the business. See id. §§ 1104(c), 1106(b).
The bankruptcy court decided that an examiner should be
appointed and ordered the United States Trustee to select one.
In addition to the tasks expressly required of examiners under
the Bankruptcy Code—investigating the debtor’s affairs and
filing a report, see id. § 1106(b)—the bankruptcy court
ordered the examiner to “[w]ork with Big Rivers and its
creditors in . . . resolving various disputes with creditors, . . .
and [] if feasible, attempt to negotiate a global settlement of
the disputes in this case and the development of a consensual
plan of reorganization.” JA 81. The court did not specify the
terms of the examiner’s compensation.
The United States Trustee selected J. Baxter Schilling, a
Kentucky bankruptcy practitioner, as the examiner. At the
time of his appointment, Schilling had frequently served as a
Chapter 7 trustee, had twice served as a Chapter 11 trustee,
but had never served as an examiner. On October 18, 1996,
the bankruptcy court entered an order approving Schilling’s
selection but again did not specify the terms of the examiner’s
compensation. 284 B.R. at 585.
Soon after his selection, Schilling signed a document
entitled “Affidavit of Examiner that He is Disinterested,” in

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which he attested that he was “a disinterested person in this
case” and did not “have an interest materially adverse to the
interest of the estate or of any class of creditors.” Id. at
585–86. Schilling also submitted a separate verified
statement that he had “no connections with the . . . Debtor,
creditors, or any other interested parties.” Id. at 586.
On October 31 and November 1, 1996, Schilling held
meetings in Washington, D.C. with the major secured and
unsecured creditors. In the course of the meetings, Schilling
sought to mediate a dispute between the Utilities Service and
some of the unsecured creditors regarding the priority of their
claims so that the parties could submit a consensual plan of
reorganization to the court. Id. at 586. When the initial
negotiations did not bear fruit, Schilling reached the
conclusion that the parties would never agree on a plan of
reorganization unless someone found a way to bring new
value into the estate. To that end, Schilling decided to
undertake the task himself, performing in his words “trustee
duties, including the principal duty of a trustee to maximize
the value of the debtor’s estate, as well as examiner duties.”
JA 499. Because he effectively would function as a trustee in
this new role and because he customarily had received a
percentage-based fee as a Chapter 7 trustee, Schilling
believed he should be paid like a Chapter 7 trustee for his
work as the examiner in the Big Rivers case. 284 B.R. at 586;
see also JA 129 (Schilling: “I had been given the misnomer
of examiner, but I had been given trustee duties”), 153–54,
164–65, 178–79.
Near the conclusion of these meetings—and at times when
the Utilities Service’s representatives were not in the
room—Schilling discussed these views with some, but not all,
of the unsecured creditors. Schilling initially told Chase and
Bank of New York representatives that he wanted them to pay
him a percentage fee based on the “success” he brought to the
estate in the form of “new value.” 284 B.R. at 586.
Explaining what he meant by a “success fee,” Schilling later
6 In re Big Rivers
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told Chase, Bank of New York and Mapco representatives
that he expected each of them to pay him three percent of
their increased recovery from Big Rivers. Id. Without such
a deal, Schilling told Bank of New York’s attorney, he would
not perform his mediation duties. Id.
Schilling left the Washington meetings believing that,
subject to bankruptcy court approval, Bank of New York,
Chase and Mapco would pay him three percent of their
increased recovery. As later communications reveal,
however, none of these three creditors believed they had
reached such an agreement with Schilling—at least not at that
time. Id.
By November 13, 1996, the Utilities Service learned that
Schilling had made statements about his desire to seek
compensation based on the new value added to the estate.
According to the bankruptcy court, “one or more interested
persons,” including the Utilities Service, spoke to a member
of the bankruptcy court’s staff the morning of November 13,
1996 and requested an in camera hearing regarding the
examiner’s compensation. Id. at 587. These “persons,”
unidentified except for the Utilities Service, expressed
concern about Schilling’s statements that he would seek
compensation based upon new value added to the estate
during his tenure. The bankruptcy judge instructed his staff
member to tell the parties that they could raise the issue at a
hearing if they wished, but that he would not hold an in
camera hearing. No one raised the issue in court during the
hearing on November 13, 1996. Id.
A few days later, on November 15, 1996, the bankruptcy
court entered an order providing for Schilling’s interim
compensation. Id. With the Utilities Service’s consent, the
bankruptcy court allowed the examiner to receive interim
compensation of $180 per hour in 1996 and $185 per hour in
1997, all of which Big Rivers would pay from its “cash
collateral”—i.e., cash in which the estate and another entity

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(here, the Utilities Service) had an interest. See 11 U.S.C.
§ 363(a). The court’s order did not alter Schilling’s ongoing
obligation to “compl[y] with all applicable provisions of the
Bankruptcy Code.” JA 148.
In the meantime, Schilling learned that Chase would not
support his success-fee proposal. He called Chase and
accused the company of “going behind his back and not being
an honest dealer.” 284 B.R. at 586. In response, Chase wrote
Schilling a letter saying that he was incorrect and reaffirming
its support for a success-fee arrangement. Chase asked
Schilling “to keep this confidential,” JA 160, and he
complied.
On December 3, 1996, Schilling had a similar conversation
with representatives from Bank of New York. Having heard
that the Bank’s local counsel had objected to the United
States Trustee about Schilling’s proposed success fee,
Schilling called the Bank to inquire. The Bank’s
representatives assured Schilling that if local counsel had
registered any such complaint, she had no authorization to do
so. 284 B.R. at 587.
On January 22, 1997, Big Rivers filed its proposed plan of
reorganization. The next day, according to Schilling, he
sought and received the bankruptcy judge’s approval to
“begin to negotiate [his] percentage-based fee with the Banks
[Chase and Bank of New York] and Mapco.” Id. This
conversation, to the extent it in fact took place, was ex parte,
was off-the-record and was not the subject of discovery, and
it did not include at any rate the court’s approval to seek such
a fee directly from the three creditors. Id. at 587–88.
The following day, January 24th, Schilling telephoned
Bank of New York, Chase and Mapco to confirm his fee
arrangements. And the following week, Schilling sent each
of these creditors a letter to “confirm [their] telephone
conversation” and to request written confirmation of the
8 In re Big Rivers
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agreement they had reached during the Washington meetings
to pay him three percent of their increased recovery. JA
441–43 (Schilling’s letter to Bank of New York); JA 436–38
(Schilling’s letter to Chase); JA 439–40 (Schilling’s letter to
Mapco).
Schilling’s letter to Chase stated that the bank and Schilling
“had an oral agreement reached during the Washington
conference that [Schilling] would receive compensation of
3% of the new value that Chase received in the case.” “It is
this figure of $835,335.00,” the letter continued, “which was
discussed [on the telephone] last Friday [January 24th] and
which we agreed was reasonable compensation for the
Examiner to receive from Chase at the closing of the plan.”
JA 436–37.
Schilling’s letter to Mapco reflected a similar
understanding. Schilling reported that Mapco’s share of the
three-percent fee amounted to $180,000 and added that he
“agreed with the suggestion of [Chase’s representative] that
the payments from MAPCO and the Banks be deposited into
an escrow account on the closing date under the plan.” JA
439.
The letter to Bank of New York likewise asserted that
Schilling and the Bank had reached an agreement in
Washington. The Bank’s success-fee obligation, Schilling
reported, came to $589,665. In the letter Schilling added that
the Bank had made this promise not only at the Washington
meetings but also during a December 3, 1996 meeting
between Schilling and the Bank’s employees—proving that
the parties had “two oral agreements.” JA 441–42.
Bank of New York and Mapco responded with letters of
their own, each denying that they had reached such an
agreement. Bank of New York “strongly [took] issue with
[Schilling’s] continuous references to ‘agreements’ that ha[d]
allegedly been reached between [Schilling] and [Bank of New

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York] concerning compensation,” JA 372, and reminded
Schilling that “[it] is inappropriate [] for any court-appointed
fiduciary to seek compensation directly from individual
creditors.” JA 373. Mapco insisted that it had “never
previously approved or even considered any compensation
agreement with [Schilling],” and that Schilling’s
compensation “would be determined by the Bankruptcy Court
under the Bankruptcy Code.” JA 452.
Chase took a different tack. In a phone call with Schilling
in response to his letter, it acknowledged that Schilling and
Chase had reached an oral agreement regarding a success fee,
but said that they had struck the agreement during their
January 24, 1997 telephone call, not during the Fall 1996
Washington meetings. 284 B.R. at 589. In the months after
January 1997, Chase asked Schilling to take several positions
adverse to the Utilities Service in the bankruptcy, at times
doing legal research for the examiner to substantiate Chase’s
position. 284 B.R. at 591.
While Schilling and the three unsecured creditors engaged
in a considerable number of communications about what
agreement was reached and when the agreement occurred, one
thing is clear: Neither Schilling nor these unsecured creditors
initially disclosed any of these communications—the private
discussions in Washington, the telephone calls, the letters—to
the Utilities Service, to the United States Trustee, or to the
other parties involved in the Big Rivers bankruptcy.
On March 26, 1997, Schilling filed his first interim fee
application. In making bankruptcy fee applications,
Bankruptcy Rule 2016(a) requires applicants, including
examiners, to disclose “what payments have theretofore been
made or promised to the applicant for services rendered or to
be rendered in any capacity whatsoever in connection with the
case.” Fed. R. Bankr. P. 2016(a). In his application Schilling
included a “Rule 2016(a) Disclosure Statement,” asserting
that he was a “disinterested person” and did not “represent or
10 In re Big Rivers
Electric Corp.
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hold an interest adverse to the interests of the estate with
respect to the matters about which the Examiner was
appointed.” 284 B.R. at 589–90. He did not, however,
mention (1) his agreement with Chase or (2) the agreement
that he believed he had reached with Bank of New York and
Mapco. Id.
On June 5, 1997, Schilling filed a “Request For Payment of
Administrative Expenses,” which explained to the bankruptcy
court that he might seek $4.41 million in compensation based
on new value he had brought into the estate. 284 B.R. at
590–91. He also filed a proof of claim for an amount not to
exceed $4.41 million. Id. at 591. While these documents
disclosed Schilling’s plan to seek percentage-based
compensation, they nowhere disclosed his agreement with
Chase or his alleged agreements with Bank of New York and
Mapco to have the fee paid directly by them. Id.
A few days later, on June 9, 1997, the bankruptcy court
confirmed Big Rivers’ consensual plan of reorganization. Id.
As Schilling had earlier predicted, new value enabled the
parties to develop a consensual plan of reorganization. In
contrast to the plan initially proposed by Big Rivers, the
approved plan included an additional $147 million in new
value for the creditors.
No one denies that Schilling played a significant role in the
negotiations leading to the approved plan. Most significantly,
Schilling supported the auctioning of Big Rivers’ assets and
opposed accepting a pre-petition lease deal that Big Rivers
had negotiated with PacificCorp Energy Company. Big
Rivers and the Utilities Service opposed the auction. The
bankruptcy court ultimately ordered an auction on the
condition that the bidders compete with the PacificCorp
agreement. Louisville Gas and Electric in the end submitted
the highest bid, which added considerable value to the estate
and which laid the groundwork for the consensual plan of

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reorganization that the court eventually confirmed. 284 B.R.
at 590 n.9.
On July 24, 1997, Schilling filed a second interim fee
application. He again included a Rule 2016(a) disclosure
disclaiming any improper interest. And he again failed to
report the promise that Chase had made to him and the
promises that he believed Bank of New York and Mapco had
made to him.
The first written confirmation of an agreement between
Schilling and one of the creditors came in the form of a letter
from Chase to Schilling dated July 31, 1997. JA 291–92. In
the letter, Chase “confirm[ed]” its support for Schilling’s
application for a three-percent fee enhancement and, subject
to bankruptcy court approval, formally agreed to be
responsible for up to $835,335 of the fee enhancement. Id.
Schilling filed the Chase letter with the bankruptcy court
the same day. He attached it to a pleading entitled
“Preliminary Pleading Regarding Application for Allowance
of Compensation and Reimbursement of Expenses,” in which
Schilling noted: (1) “[a]s previously stated in pleadings, and
as disclosed to the Court,” Bank of New York, Chase and
Mapco agreed during the Washington meetings to a
percentage-based approach, and (2) “the [Utilities Service]
stated, at that time, it would not agree or disagree with a
percentage compensation to the Examiner.” JA 288.
Schilling further claimed that the court had “instructed the
parties on July 1, 1997 to attempt to negotiate the Examiner’s
fee request,” that “the Examiner has begun additional
negotiations,” but that “those negotiations have concluded
only with Chase,” as evidenced by the “agreement attached
hereto.” Id. This constituted the first public disclosure of
Schilling’s intention and efforts to have his percentage-based
compensation paid by these three creditors as opposed to the
estate. 284 B.R. at 591–92.
12 In re Big Rivers
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In response to the pleading, Mapco’s attorney wrote
privately to Schilling that the statement was “incorrect, at
least as to my client.” JA 456. Schilling persisted, claiming
that the statement was “correct” and that all three creditors
had agreed to his proposal. 284 B.R. at 592.
Spurred by the public disclosure of Schilling’s agreement
with Chase, the Utilities Service and the United States Trustee
requested discovery into Schilling’s fee arrangement. In view
of the Chase agreement, the Utilities Service objected to the
continued use of its cash collateral to pay Schilling and, along
with the United States Trustee, asked the court to order
Schilling to disgorge the fees he and his law firm had already
received. The bankruptcy court rejected both requests and
enjoined further court filings and discovery concerning the
examiner’s fees.
Not until one year later, in September 1998, did the
bankruptcy court revisit the issue of Schilling’s
compensation. The court permitted the parties to submit
pleadings on the examiner’s fees, but continued a ban on
discovery and refused to hear any evidence. At this point
Schilling claimed for the first time, in open court, that he
“ha[d] never said there was a side agreement with” Mapco.
Id. at 592. Soon after Schilling made this statement, Mapco
filed with the bankruptcy court copies of Schilling’s earlier
letters to the company in which he had insisted that they had
reached such an agreement. Bank of New York also filed
with the court a copy of its letter from Schilling asserting a
similar agreement. Id. at 592–93.
Schilling filed his final fee application in October 1998,
requesting approximately $4.41 million in compensation to
“be paid by the debtor, various creditors of th[e] estate as the
Court equitably determines is appropriate, or a combination
thereof.” JA 485. This figure combined Schilling’s hourly
fees (which totaled $530,928.74) with an enhancement of
three percent of the new value brought into the estate during

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Schilling’s tenure as examiner (which came to
$3,879,071.25).
On October 23, 1998, in response to this application, the
United States Trustee filed a motion to disgorge all of
Schilling’s fees because he had improperly negotiated secret
side agreements for his compensation. Schilling responded
that he had never truly believed that he and Bank of New
York, Chase and Mapco had reached such agreements and
that his statements claiming otherwise were intentionally
untrue. 284 B.R. at 593. As Schilling put it:
A common tactic used in negotiations is to make a
statement, as if it were fact, even though the statement is
incorrect and is known to be incorrect. The Examiner
used this common place tactic in his January, 1997 letters
to Chase and counsel for Bank of New York and
MAPCO, asserting, as a fact, that an agreement had been
reached at the Washington settlement conference,
wherein these creditors would pay the Examiner 3% on
any new value their clients received.
JA 400.
Shortly thereafter, the bankruptcy judge disqualified
himself from hearing the fee issues and transferred the case
to another bankruptcy judge. The new judge continued the
ban on discovery and without an evidentiary hearing issued a
decision on Schilling’s fee application, awarding Schilling
$2,638,205—which covered his hourly compensation plus an
enhancement of four times that amount—to be paid by Big
Rivers. In re Big Rivers Elec. Corp., 233 B.R. 754, 768
(Bankr. W.D. Ky. 1999). Big Rivers, the Utilities Service,
the United States Trustee and Schilling each appealed this
decision to the district court.
On appeal, the district court affirmed in part and reversed
in part. It affirmed the bankruptcy court’s order regarding
14 In re Big Rivers
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Schilling’s base compensation, reversed the order granting
Schilling an enhancement and remanded the case to the
bankruptcy court to consider the disgorgement issue as an
initial matter because the bankruptcy court had not reached
the issue. See In re Big Rivers Elec. Corp., 252 B.R. 676,
687–89 (W.D. Ky. 2000). Schilling appealed the decision to
this Court, which dismissed the appeal for lack of jurisdiction.
See 28 U.S.C. § 158(d) (granting the courts of appeals
“jurisdiction of appeals from all final decisions” of district
courts on appeal from bankruptcy courts); IRS v. Hildebrand
(In re Brown), 248 F.3d 484, 487 (6th Cir. 2001) (“[W]e are
to inquire into the finality of [the district court’s] decision[],
not the finality of the bankruptcy court’s decision.”).
On March 8, 2001, the bankruptcy court, on remand,
transferred the case to the district court asking it to consider
whether to withdraw the order of reference. On March 25,
2001, the district court withdrew the order of reference, which
meant that the district court rather than the bankruptcy court
thereafter would have original jurisdiction over the case.
When all of the district court judges in the Western District of
Kentucky recused themselves from hearing the case, the Chief
Judge of the Sixth Circuit assigned the case to Judge Avern
Cohn of the Eastern District of Michigan.
On August 13, 2002, Judge Cohn granted the joint motion
of the Utilities Service and the United States Trustee for
disgorgement, granted Big Rivers’ motion for partial
disgorgement, and ordered Schilling and his counsel to
disgorge all fees paid to them. 284 B.R. at 602. Based on
detailed factual findings, the court held that Schilling was not
entitled to any fees because he was not a “disinterested”
examiner under 11 U.S.C. § 1104(d). As the court explained:
The Bankruptcy Code and Rules mandate that a
professional, such as an Examiner, be a neutral,
disinterested party in the case. The moment that the
Examiner approached three of Big Rivers’ largest

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unsecured creditors and broached the subject of his
compensation, suggesting that they pay him a
percentage-based fee based on the “success” or “new
value” he brought them to the estate, he was no longer a
disinterested party. Whether or not such an agreement
was reached or whether an agreement was subject to the
approval of the bankruptcy court is irrelevant. What is
relevant is that the Examiner sought to have his
compensation tied to the enhanced value brought to the
estate and, in particular, tied to what [Bank of New
York], Chase and Mapco received on their claims from
the estate.
284 B.R. at 596. Recognizing that Schilling made it “known
to all parties—including the government—that he was going
to seek compensation in the amount of a percentage of the
enhanced value he brought to the estate[,]” the district court
explained that Schilling’s “intention to have his compensation
paid by [Bank of New York], Chase and Mapco was known
only to [him] and these creditors.” Id. at 597. This lack of
disinterestedness, the district court concluded, meant that
Schilling “was not a properly appointed professional and is
therefore not entitled to any compensation.” Id.
The court also held that Schilling failed to disclose his fee
arrangements as required under 11 U.S.C. § 329 and
Bankruptcy Rule 2016. Section 329(a) requires “[a]ny
attorney representing a debtor” to disclose his fee
arrangements. Rule 2016(a) applies broadly to any “entity
seeking interim or final compensation” and requires
disclosure of any “payments . . . made or promised to the
applicant.” The district court concluded that Schilling
violated both provisions by failing to disclose his “fee
discussions with Mapco, Chase, and [Bank of New York].”
284 B.R. at 599. The court did not credit Schilling’s assertion
that he “only reached an agreement with Chase [in July 1997]
and it was immediately disclosed.” Id. Schilling’s “letters
written in January of 1997 belie this assertion,” the court
16 In re Big Rivers
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found: “It [was] only when the government questioned the
Examiner’s actions that the Examiner retreated from the
position in his letters and made the assertion that his
statements were intended for ‘negotiation.’” Id. “Under these
circumstances,” the court concluded, “the only effective
solution is to deny the Examiner, and his law firm, all
compensation.” 284 B.R. at 602. The court’s order required
Schilling—“individually and doing business as The Law Firm
of J. Baxter Schilling”—to remit to Big Rivers $931,075.50,
the amount that had already been dispensed to him and his
firm throughout the case, plus interest. Schilling now appeals
the district court’s disgorgement order, requesting
reinstatement of his hourly and enhanced fees.
II.
Because the district court was exercising original rather
than appellate jurisdiction when it ordered Schilling and his
law firm to disgorge all compensation, we review its order for
abuse of discretion. See Michel v. Federated Dep’t Stores,
Inc. (In re Federated Dep’t Stores, Inc.), 44 F.3d 1310, 1315
(6th Cir. 1995). In doing so, we adopt the district court’s
underlying factual findings unless clearly erroneous and we
review its underlying construction of the Bankruptcy Code de
novo. Id.
A.
In considering the district court’s resolution of these issues,
we start with the statutory framework. In a typical Chapter 11
reorganization, the debtor remains in possession of and
operates the business at the same time that it manages the
reorganization effort. Less typically—when, for example, the
debtor’s management is guilty of fraud or gross
mismanagement—a bankruptcy court orders the appointment
of a trustee to replace the debtor in possession and to take
control over the business and the reorganization effort. See
11 U.S.C. §§ 1104(a), 1106(a). The appointment of an

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examiner, as happened here, straddles these options, as an
examiner performs some of the functions of a trustee but does
not replace the debtor and does not take on the day-to-day
task of running the company. See id. §§ 1104(c), 1106(b).
The Bankruptcy Code expressly requires examiners to
perform two duties normally required of trustees and
authorizes the court to assign other duties as well. Id.
§ 1106(b). First, the Code requires examiners to perform an
investigation, which means they must “investigate the acts,
conduct, assets, liabilities, and financial condition of the
debtor, the operation of the debtor’s business and the
desirability of the continuance of such business, and any other
matter relevant to the case or to the formulation of a plan.”
Id. § 1106(a)(3). Second, the Code requires examiners to file
a report, which means they must identify and memorialize
“any fact ascertained pertaining to fraud, dishonesty,
incompetence, misconduct, mismanagement, or irregularity
in the management of the affairs of the debtor, or to a cause
of action available to the estate.” Id. § 1106(a)(4)(A). In
addition to these mandatory duties, a bankruptcy court may
order an examiner to perform “any other duties of the trustee
that the court orders the debtor in possession not to perform.”
Id. § 1106(b).
Given the sensitivity of these tasks and the objectivity
required to perform them, the Code requires all examiners,
like all Chapter 11 trustees, to be “disinterested.” Id.
§ 1104(d). A defined term, “disinterested person” means a
person who:
(A) is not a creditor, an equity security holder, or an
insider;
(B) is not and was not an investment banker for any
outstanding security of the debtor;
18 In re Big Rivers
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(C) has not been, within three years before the date of the
filing of the petition, an investment banker for a security
of the debtor . . . ;
(D) is not and was not, within two years before the date
of the filing of the petition, a director, officer, or
employee of the debtor or of an investment banker
specified in subparagraph (B) or (C) of this paragraph;
and
(E) does not have an interest materially adverse to the
interest of the estate or of any class of creditors or equity
security holders, by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor
or an investment banker specified in subparagraph (B) or
(C) of this paragraph, or for any other reason.
Id. § 101(14).
While examiners and trustees perform some of the same
duties and while each of them must remain disinterested, the
Code distinguishes examiners from trustees in other ways. In
contrast to earlier practices, the Code now prohibits an
examiner from serving as a trustee or as counsel for the
trustee in order to ensure that examiners may not profit from
the results of their work. Compare Bankruptcy Reform Act
of 1978, §§ 321(b) (“A person that has served as an examiner
in the case may not serve as trustee in the case.”), 327(f)
(“The trustee may not employ a person that has served as an
examiner in the case.”) with Bankruptcy Act of 1898, as
amended, § 45, reprinted in Collier on Bankruptcy App. A pt.
3(a) (15th ed. rev. 2003) (including no such prohibition). See
124 Cong. Rec. H11,103 (daily ed. Sept. 28, 1978), reprinted
in 1978 U.S.C.C.A.N. 6473 (“In order to ensure that the
examiner’s report will be expeditious and fair, the examiner
is precluded from serving as a trustee in the case or from
representing a trustee if a trustee is appointed.”); 124 Cong.
Rec. S17,420 (daily ed. Oct. 6, 1978), reprinted in 1978

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U.S.C.C.A.N. 6542; Collier ¶ 327.04[10] (“The purpose of
section 327(f) is to ensure that examiners discharge their
investigatory duties in a purely objective fashion.”); Leonard
L. Gumport, The Bankruptcy Examiner, 20 Cal. Bankr. J. 71,
152 (1992) (“In the interest of fairness to the subject of the
investigation, Congress rejected the historical practice of
permitting the examiner to profit from its report by becoming
the trustee or an employee of the trustee.”).
Nor may examiners play a role in a Chapter 7 proceeding.
In a Chapter 7 liquidation, which occurs (among other times)
at the end of an unsuccessful effort to reorganize a company
under Chapter 11, a trustee always replaces the debtor in
possession, and the Code prohibits the use of an examiner
when a trustee has already been appointed. Id. § 1104(c). See
also 11 U.S.C. § 1109(b) (giving a trustee, but not an
examiner, the right to “raise and [] appear and be heard on
any issue in a [Chapter 11] case”); In re Baldwin United
Corp., 46 B.R. 314, 316 (Bankr. S.D. Ohio 1985) (“An
Examiner performs the investigative duties of a trustee, and
may perform other trustee duties as the Court directs, but he
stands on a different legal footing than a trustee.”). These
modest differences between trustees and examiners do not
diminish an examiner’s duties of disinterest but in fact serve
to highlight them.
The Bankruptcy Code neither expects nor requires
examiners to volunteer their time. Like other officers and
professionals appointed in a Chapter 11 case, examiners may
request “reasonable compensation for actual, necessary
services” and “reimbursement for actual, necessary
expenses.” 11 U.S.C. § 330(a)(1)(A) & (B). Only “[a]fter
notice to the parties in interest and the United States Trustee
and a hearing,” however, may “the court [] award” examiners
these fees and expenses. Id. The bankruptcy court “may, on
its own motion or on the motion of the United States Trustee
. . . or any other party in interest, award compensation that is
less than the amount of compensation that is requested.” Id.
20 In re Big Rivers
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§ 330(a)(2). These same standards apply to interim
compensation, which the Code also authorizes. Id.
§ 330(a)(5).
Rule 2016(a) of the Federal Rules of Bankruptcy Procedure
provides additional details about the procedure that “[a]n
entity,” such as an examiner, “seeking interim or final
compensation . . . from the estate” must follow. “An
application for compensation,” the Rule says, “shall include
a statement as to what payments have theretofore been made
or promised to the applicant for services rendered or to be
rendered in any capacity whatsoever in connection with the
case” and “the source of the compensation so paid or
promised.” Fed. R. Bankr. P. 2016(a) (emphasis added).
B.
In enumerating the duties of examiners and trustees, the
drafters of the Code also invoked the more-generalized
equitable duties applicable to these positions of trust. See
Young v. United States, 535 U.S. 43, 53 (2002) (“[T]he
Bankruptcy Code incorporates traditional equitable
principles.”). In defining the obligation of
“disinterestedness,” the Code says that examiners and trustees
may “not have an interest materially adverse to the interest of
the estate or of any class of creditors or equity security
holders, by reason of any direct or indirect relationship to,
connection with, or interest in, the debtor or an investment
banker specified in subparagraph (B) or (C) of this paragraph,
or for any other reason.” 11 U.S.C. § 101(14)(E) (emphasis
added). The phrase “for any other reason” is not defined. By
prohibiting any “materially adverse” “interest” to any party to
the bankruptcy “for any . . . reason,” Congress plainly
invited—indeed compelled—federal courts to construe
“disinterestedness” against the backdrop of the equitable
duties that apply to positions of trust. See In re Martin, 817
F.2d 175, 181 (1st Cir. 1987) (acknowledging “that the Code
is less than explicit in mapping the contours of the

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disinterestedness requirement” and interpreting the
requirement in a way that is “faithful to our view of
Congress’s intent and to the overriding consideration that
equitable principles govern the exercise of bankruptcy
jurisdiction”) (quotation omitted); cf. Cent. States Southeast
& Southwest Areas Pension Fund v. Cent. Transp., Inc., 472
U.S. 559, 570 & n.10 (1985) (“Congress invoked the common
law of trusts to define the general scope of [fiduciaries’]
authority and responsibility” by providing, for example, that
“assets of an employee benefit plan shall be held in trust.” )
(quotation omitted); NLRB v. Amax Coal Co., 453 U.S. 322,
332–33 (1981) (“ERISA essentially codified [] strict fiduciary
standards” by providing, for example, that a fiduciary “may
not ‘act in any transaction . . . on behalf of a party . . . whose
interests are adverse to the interests of the plan or the interests
of its participants or beneficiaries.’”) (quoting 29 U.S.C.
§ 1106(b)(2)).
By linking trustees and examiners in this respect—by
making t h e m equally obligated to remain
“disinterested”—Congress also signaled that examiners must
satisfy the unbending standards of fiduciary duty that the law
and society long have come to expect of trustees in general
and that the Supreme Court has required of bankruptcy
trustees in particular. See Commodity Futures Trading
Comm’n v. Weintraub, 471 U.S. 343, 355 (1985) (stating that
a Chapter 11 trustee owes a “fiduciary duty . . . to
shareholders as well as to creditors”); Mosser v. Darrow, 341
U.S. 267, 271 (1951) (“Equity tolerates in bankruptcy trustees
no interest adverse to the trust.”); Woods v. City Nat’l Bank &
Trust Co., 312 U.S. 262, 268 (1941) (“Protective committees,
as well as indenture trustees, are fiduciaries.”); In re Baldwin
United Corp., 46 B.R. 314, 316 (S.D. Ohio 1985) (“An
Examiner’s legal status is unlike that of any other court-
appointed officer which comes to mind. He is first and
foremost disinterested and nonadversarial. The benefits of his
investigative efforts flow solely to the debtor and to its
creditors and shareholders, but he answers solely to the
22 In re Big Rivers
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Court.”); In re Hamiel & Sons, Inc., 20 B.R. 830, 832 (Bankr.
S.D. Ohio 1982) (“[T]he trustee or examiner [] constitutes a
court fiduciary and is amenable to no other purpose or
interested party.”); cf. Wolf v. Weinstein, 372 U.S. 633, 650
(1963) (“If, therefore—as seems beyond dispute from the
very terms of the statute—the trustee is himself a fiduciary
within the meaning of [the statute], logic and consistency
would certainly suggest that those who perform similar tasks
and incur like obligations to the creditors and shareholders
should not be treated differently under the statute for this
purpose.”).
Finally, the Code not only says that examiners and trustees
must remain “disinterested,” but it also says that they may
receive only “reasonable compensation.” 11 U.S.C.
§ 330(a)(1)(A). The compensation phrase, the Supreme Court
has reasoned, suggests that trustees and examiners must
remain loyal to all relevant parties in the bankruptcy and must
act as fiduciaries in doing so. See Wolf, 372 U.S. at 642
(“[R]easonable compensation for services necessarily implies
loyal and disinterested service in the interest of those for
whom the claimant purported to act.”) (quotation omitted);
Woods, 312 U.S. at 268–69 (the statutory term “reasonable
compensation” requires “strict adherence to the[] equitable
principles [that govern] the standard of conduct for
fiduciaries”).
In incorporating the equitable duties of trustees into the
Bankruptcy Code and in applying them to bankruptcy trustees
and examiners, Congress followed a well-trodden path. The
National Legislature frequently legislates against the
backdrop of common law and equitable principles, and the
federal courts have often looked to these traditions in
determining the contours of a trustee’s or another fiduciary’s
duties. See Young, 535 U.S. at 53 (“[T]he Bankruptcy Code
incorporates traditional equitable principles.”); Field v. Mans,
516 U.S. 59, 69–70 (1995) (“[N]either the structure of
§ 523(a)(2) [of the Code] nor any explicit statement in

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§ 523(a)(2)(A) reveals, let alone dictates, the particular level
of reliance required by § 523(a)(2)(A), and there is no reason
to doubt Congress’s intent to adopt a common-law
understanding of the terms it used.”); Cent. States, 472 U.S.
at 570 (“[R]ather than explicitly enumerating [in ERISA] all
of the powers and duties of trustees and other fiduciaries,
Congress invoked the common law of trusts to define the
general scope of their authority and responsibility.”); Amax
Coal Co., 453 U.S. at 330 (“Given this established rule
against dual loyalties and Congress’ use of terms long
established in the courts of chancery, we must infer that
Congress intended to impose on trustees traditional fiduciary
duties unless Congress has unequivocally expressed an intent
to the contrary.”).
When Congress enacted the Bankruptcy Act of 1898, ch.
541, 30 Stat. 544, which became the basis for modern
bankruptcy law, it assuredly meant to incorporate similar
common-law duties as the original Act nowhere defined,
much less mentioned, a duty of disinterestedness or any
equivalent concept. When Congress substantially modified
the 1898 Act through the Chandler Amendments in 1938, ch.
575, 52 Stat. 840, it did the same thing in adopting a
requirement of “disinterest,” which was broadly defined as an
“adverse interest” “for any reason.” See Chandler
Amendments of 1938, Pub. L. No. 75-696, § 158(4), 52 Stat.
840 (1938) (“A person shall not be deemed disinterested . . .
if—it appears that he has . . . for any reason an interest
materially adverse to the interests of any class of creditors or
stockholders.”) And in 1978, when the current Bankruptcy
Code was adopted, Congress embraced a similar definition of
“disinterest.” See 11 U.S.C. § 101(14)(E) (“[D]isinterested
person . . . does not have an interest materially adverse to the
interest of the estate or of any class of creditors or equity
security holders, by reason of any direct or indirect
relationship to . . . the debtor . . . or for any other reason.”).
24 In re Big Rivers
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In each of these forty-year increments—in 1898, in 1938,
in 1978—Congress legislated against the backdrop of
centuries of common-law decisions about the duties of
trustees and other fiduciaries as well as against the backdrop
of courts construing statutes in the context of similar
common-law traditions. And in each instance, Congress
incorporated these principles and traditions. Cf. Wolf, 372
U.S. at 641 (“[T]he purpose behind § 249 was to codify these
decisions and to give pervasive effect in Chapter X
proceedings to the historic maxim of equity that a fiduciary
may not receive compensation for services tainted by
disloyalty or conflict of interest.”).
C.
An examiner’s duties in a bankruptcy proceeding, then,
flow from the Code, the Federal Rules of Bankruptcy
Procedure and the common law, including the once-distinct
principles of equity. All of these sources considered, a
bankruptcy examiner has three general duties. First,
consistent with the statutory requirement of “disinterest,” the
examiner may not have a “material adverse” interest to any
party to the bankruptcy “for any . . . reason,” either at the time
of appointment or during the course of the bankruptcy. See
In re Marvel Entm’t Group, 140 F.3d 463, 476 (3d Cir. 1998)
(“A plain reading of this section suggests one is a
‘disinterested person’ only if he has no interest that is
materially adverse to a party in interest in the bankruptcy.”);
Roger J. Au & Son, Inc. v. Aetna Ins. Co. ( In re Roger J. Au
& Son, Inc.), 64 B.R. 600, 605 n.8 (N.D. Ohio 1986) (This
section “appears broad enough to include anyone who in the
slightest degree might have some interest or relationship that
would color the independent and impartial attitude required
by the Code.”) (quotation and citation omitted); In re Watson,
94 B.R. 111, 116 (Bankr. S.D. Ohio 1988) (“A disinterested
person should be divested of any scintilla of personal interest
which might be reflected in [that person’s] decisions
concerning estate matters.”).

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Second, consistent with the Federal Rules of Bankruptcy
Procedure, examiners have several disclosure obligations.
They must disclose all “payments . . . made or promised” to
them, meaning they must disclose in all fee applications any
understandings they believe they have reached with anyone
regarding their compensation. See Henderson v. Kisseberth
(In re Kisseberth), 273 F.3d 714, 720 (6th Cir. 2001) (“An
attorney in a bankruptcy case has an affirmative duty to
disclose fully and completely all fee arrangements and
payments.”); Mapother & Mapother, P.S.C. v. Cooper (In re
Downs), 103 F.3d 472, 480 (6th Cir. 1996) (“[T]he fulfillment
of the [disclosure] duties imposed under [the Code] are
crucial to the administration and disposition of proceedings
before bankruptcy courts.”); Neben & Starrett v. Chartwell
Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880 (9th
Cir. 1995) (“The disclosure rules impose upon attorneys an
independent responsibility.”); In re BH&P Inc., 949 F.2d
1300, 1317–18 (3d Cir. 1991) (holding that a trustee
“breache[s] the duty of disclosure” when he “contemplate[s]
and discusse[s] a specific situation involving a potentiality for
conflict” but fails to disclose it).
Third, consistent with the statutory requirement for
receiving “reasonable compensation” and with the common-
law standards of fiduciary duty, examiners owe the creditors
and shareholders a duty of loyalty. In imposing this duty on
examiners and trustees, bankruptcy law “seeks to avoid such
delicate inquiries . . . into the conduct of its own appointees
by exacting from them forbearance of all opportunities to
advance self-interest.” Mosser v. Darrow, 341 U.S. 267, 271
(1951). See G. Bogert, Law of Trusts and Trustees § 543
(rev. 2d ed. 2003) (trustees “must display throughout the
administration of the [case] complete loyalty to the interests
of [the creditors and shareholders] and must exclude all
selfish interest”); Collier ¶ 1108.09[1] (“[A] chapter 11
trustee, like the trustee of a conventional personal trust, owes
single-minded devotion to the interests of those on whose
behalf the trustee acts.”).
26 In re Big Rivers
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III.
Schilling’s conduct as an examiner in the Big Rivers
bankruptcy failed to live up to these standards. First, he
violated his duty to remain “disinterested.” An agreement
with a single creditor that links the examiner’s compensation
to the creditor’s recovery qualifies as such an interest because
it creates the risk that the examiner will favor one creditor at
the expense of other creditors, to say nothing of all equity
holders. Given the zero-sum realities of most bankruptcies,
every dollar recovered by a favored creditor becomes a dollar
lost to a disfavored creditor. Opportunities abound,
moreover, for bankruptcy examiners paid in this manner to
benefit selected creditor patrons. They might decline to
investigate and report any “cause[s] of action available to the
estate” against the favored creditor (say, for a fraudulent
conveyance). See 11 U.S.C. § 1106(a)(4). They might file,
or threaten to file, a report that harms a disfavored creditor
unless it accepts a settlement that increases the recovery of a
favored creditor. They might stall or obstruct confirmation of
a plan that represents the best interests of the estate if it
contains no recovery for the favored creditor (and no
commission for the examiner).
Whether as a matter of fact an individual examiner chooses
to do any of these things does not alter the “disinterestedness”
inquiry. That self-interest might lead examiners to act in
these ways suffices to disqualify them, because the Code does
not merely prohibit trustees and examiners from acting upon
materially adverse interests, it prohibits trustees and
examiners from having them. See Woods, 312 U.S at 268
(“[T]he incidence of a particular conflict of interest can
seldom be measured with any degree of certainty. The
bankruptcy court need not speculate as to whether the result
of the conflict was to delay action where speed was essential,
to close the record of past transactions where publicity and
investigation were needed, to compromise claims by
inattention where vigilant assertion was necessary, or

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otherwise to dilute the undivided loyalty owed to those whom
the claimant purported to represent. Where an actual conflict
of interest exists, no more need be shown in this type of case
to support a denial of compensation.”); W.F. Dev. Corp. v.
U.S. Trustee (In re W.F. Dev. Corp.), 905 F.2d 883, 884 (5th
Cir. 1990) (“In a bankruptcy proceeding, limited and general
partners do hold materially adverse positions.”); In re
Crimson Inv., 109 B.R. 397, 402 (Bankr. D. Ariz. 1989)
(“[B]y receiving compensation from Debtor’s creditors,
Debtor’s counsel had, and has, a pecuniary interest materially
adverse to the interest of the secured creditors and the
interests of the estate—a conflict of interest that requires
denial of all compensation.”).
Schilling undeniably had such an agreement—an oral
one—with Chase no later than January 24, 1997. Had
Schilling reached such an agreement before his appointment,
the bankruptcy court could not have allowed him to serve as
a trustee or examiner because he would not have been
disinterested. See Michel, 44 F.3d at 1319 (holding that the
debtor’s retention of a professional who was not disinterested,
as required under the Code, was invalid from day one despite
the bankruptcy court’s approval based on equitable concerns).
That Schilling reached the agreement in the midst of his
examination and in secret only makes matters worse,
especially in view of his affirmative statements to the court
that he remained a “disinterested person” who did not
“represent or hold an interest adverse to the interests of the
estate.” JA 300.
Second, Schilling violated his disclosure obligations. Each
time Schilling filed an interim fee application, Rule 2016(a)
required him to disclose “payments . . . made or promised” to
him “for services rendered or to be rendered in any capacity
whatsoever in connection with the case.” Schilling’s January
1997 oral agreement with Chase regarding his compensation
constituted a “payment[]” “promised” within the meaning of
the rule, whether or not the promise was subject to bankruptcy
28 In re Big Rivers
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court approval. Yet Schilling did not disclose the agreement
in his March 1997 and July 1997 interim fee applications,
each time in violation of the rule. See Henderson v.
Kisseberth (In re Kisseberth), 273 F.3d 714, 720 (6th Cir.
2001) (“An attorney in a bankruptcy case has an affirmative
duty to disclose fully and completely all fee arrangements and
payments.”); Mapother & Mapother, P.S.C. v. Cooper (In re
Downs), 103 F.3d 472, 480 (6th Cir. 1996) (“[T]he fulfillment
of the duties imposed under these provisions [§ 329 and Rule
2016] are crucial to the administration and disposition of
proceedings before the bankruptcy courts.”); In re Crimson
Inv., 109 B.R. at 402 (“[C]ounsel’s failure to disclose
forthrightly the source of all compensation should warrant the
denial of all compensation.”).
Rule 2016(a) also required Schilling to disclose the
promises for payment that Schilling believed Bank of New
York, Chase and Mapco had made to him at the Fall 1996
conference in Washington. When a court-appointed fiduciary
believes a party has promised him payment, he may not use
later disputes over the existence or enforceability of the
promise to excuse an earlier failure to disclose it. See In re
BH&P Inc., 949 F.2d 1300, 1317–18 (3d Cir. 1991) (holding
that a trustee who has “contemplated and discussed a specific
situation involving a potentiality for conflict” has a duty to
disclose it).
Third, Schilling violated his duty of loyalty—not just by
entering into the oral agreement with Chase, but by
misrepresenting his actions to the court and to the parties
during his negotiations with the parties and during his efforts
to backtrack from them. Schilling did so on multiple
occasions: when he filed documents claiming to have no
adverse interest; when he filed documents claiming to have
received no promises for payment; when he claimed that he
“never said there was a side agreement with [Mapco],” 284
B.R. at 592; and when he asserted in January 1997 letters to
Bank of New York, Mapco and Chase that they had agreed at

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the Washington conference to pay him a percentage of their
recovery, only to claim later that these assertions were just a
negotiation tactic—i.e., a misrepresentation. Rather than
serve all parties to the bankruptcy and rather than do so in a
straightforward and transparent manner, Schilling sought
compensation in a way that did none of these things. Hired to
serve the estate’s interests, he started down a path that served
his own.
In each of these instances, it bears repeating, the issue was
not whether Schilling would be compensated for his efforts.
Absent violations of the Code and his fiduciary obligations,
he would be, and indeed the court early on provided that he
would be compensated at his standard hourly rate of $180 per
hour in 1996 and $185 per hour in 1997. Perceiving an
opportunity to be paid still more, however, Schilling
negotiated, and in some instances consummated,
compensation arrangements for his personal benefit (and
ostensibly for the benefit of some creditors but not others).
All the while, he did so secretively and outside of the
traditional mechanisms for permitting fiduciaries to identify
and pursue matters of self-interest—notice to all parties and
a hearing before the court. Where the law demanded “[n]ot
honesty alone, but the punctilio of an honor the most
sensitive,” Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y.
1928) (Cardozo, C.J.), and “forbearance of all opportunities
to advance self interest,” Mosser, 341 U.S. at 271, Schilling
responded with too little honesty and too much self-interest.
His conduct simply was not compatible with an examiner’s,
or for that matter a trustee’s, duty of loyalty.
IV.
Having concluded that Schilling violated his duties to
remain disinterested and loyal and having concluded that he
violated his duty to disclose payments promised to him, we
must consider whether the sanction imposed by the district
court was appropriate. Cf. Wolf, 372 U.S. at 653 (“[T]he bare
30 In re Big Rivers
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holding that § 249 [of the Bankruptcy Act] has been violated
does not automatically determine the consequences of such a
violation.”). Our role in this respect is a modest one, as “a
bankruptcy court”—or, in this instance, a district court acting
in its place—“is given a great deal of latitude in fashioning an
appropriate sanction.” Mapother v. Mapother P.S.C. v.
Cooper (In re Downs), 103 F.3d 472, 478 (6th Cir. 1996).
“[T]he []court’s sanction,” therefore, “should not be disturbed
unless a clear abuse of discretion is found.” Id.
No abuse of discretion occurred here. Because the Code
permits only “reasonable compensation” and because that
requirement “‘necessarily implies loyal and disinterested
service in the interest of those for whom the claimant
purported to act,’” Wolf, 372 U.S. at 642, “a fiduciary may
not receive compensation for services tainted by disloyalty or
conflict of interest,” id. at 641. Absent “peculiar and unique
circumstances,” we thus have held, a court must deny all
compensation when a party is not disinterested at the time of
appointment. See Michel, 44 F.3d at 1319–20 (holding that
the debtor’s financial advisor—whom the Code required to be
disinterested—was not disinterested, was not validly
appointed, and therefore was not entitled to compensation,
even though the financial advisor had fully disclosed its
interest at the outset and even though the bankruptcy court
had approved the appointment).
That Schilling breached these duties at some point after his
appointment does not change matters. In In re Downs we
held that a bankruptcy court abused its discretion by allowing
a party to retain fees who had exhibited a “willful disregard”
of Rule 2016 and of § 329 (requiring a debtor’s attorney to
report compensation arrangements) and who did so after an
appointment. 103 F.3d at 479–80. The authority to decline
all fees, we concluded, “is inherent, and in the face of such
infractions should be wielded forcefully.” Id. at 479.
“Section 329 and Rule 2016 are fundamentally rooted in the
fiduciary relationship between attorneys and the courts,” and

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“the fulfillment of the duties imposed under these provisions
are crucial to the administration and disposition of
proceedings before the bankruptcy courts.” Id. at 480. While
In re Downs did not involve a “simple technical breach” of
Rule 2016—the attorney there “acted affirmatively to conceal
his fee arrangement” and “misled” the trustee and other
creditors, id. at 479—neither does this case. See Gray v.
English, 30 F.3d 1319, 1324 (10th Cir. 1994) (“[W]hen [a
fiduciary] loses his disinterested status during the course of
administering a bankrupt’s estate . . . . the court should lean
strongly toward denial of fees, and if the past benefit to the
wrongdoer can be quantified, to require disgorgement of
compensation previously paid that fiduciary even before the
conflict arose. This approach is most in keeping with
common law fiduciary principles and best serves the
deterrence purpose of the rule.”).
What is true of Schilling is also true of “The Law Firm of
J. Baxter Schilling,” the sole member of which is J. Baxter
Schilling. JA 287. The district court did not abuse its
discretion in concluding that, for these purposes, Schilling
and his counsel (Schilling) were one and the same, and that
Schilling’s firm must also disgorge all fees. 284 B.R. at 583.
No doubt the sanction in this case is a harsh and
unforgiving one. Schilling’s efforts, he claims, brought
approximately $145 million of new value into the estate.
Rather than the thanks of a grateful court and the thanks of
grateful parties, he received an order to reimburse the debtor
nearly $1 million in fees. Steep as the sanction may be, it
represents the price of disloyalty, a price the courts have not
hesitated to charge in dealing with similar breaches of trust.
Serving as an examiner, as with “trusteeship,” “is serious
business and is not to be undertaken lightly or so discharged.”
Mosser, 341 U.S. at 274. When it comes to loyalties and
conflicts of interest, we do not ask whether harm has resulted,
because “the[] effect is often difficult to trace.” Id. at 273.
“Where an actual conflict of interest exists, no more need be
32 In re Big Rivers
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shown in this type of case to support a denial of
compensation.” Woods, 312 U.S. at 268; see Mosser, 341
U.S. at 273 (“[E]quity has sought to limit difficult and
delicate fact-finding tasks concerning its own trustee by
precluding such [self-dealing] transactions for the reason that
their effect is often difficult to trace, and the prohibition is not
merely against injuring the estate—it is against profiting out
of the position of trust.”); Ross v. Kirschenbaum (In re Beck
Ind.), 605 F.2d 624, 636 (2d Cir. 1979) (“Courts do not take
kindly to arguments by fiduciaries who have breached their
obligations that, if they had not done this, everything would
have been the same.”) (Friendly, J.).
Nor are examiners and trustees without recourse when these
issues arise in the course of a bankruptcy. Mosser’s advice on
the point remains as sound today as it was a half-century ago:
“seek instructions from the court, given upon notice to
creditors and interested parties.” Id. at 274. When, for
whatever reason, an examiner sees a legitimate need to serve
some masters rather than others in a bankruptcy, and above all
when one of the preferred masters is himself, the necessary
condition for proceeding is full disclosure and court
permission. Schilling instead chose secrecy and deception, a
choice that properly cost him his fees.
V.
Schilling makes several contentions to the contrary, all of
which amount to variations on a few points and none of
which is persuasive.
A.
First and foremost, Schilling argues that merely negotiating
a fee arrangement with creditors does not make an examiner
improperly interested or disloyal. Appellant Br. at 38; Reply
Br. at 1, 3, 7. Saving for later the question whether this
argument has a mistaken factual premise—that until July

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1997 Schilling merely negotiated with the three creditors and
had not reached any fee agreement—we disagree with its
legal premise.
As the district court properly concluded, the law does not
allow a court-appointed fiduciary to engage in secret and self-
interested negotiations so long as the parties stop short of a
formal agreement. 284 B.R. at 597. An examiner violates the
duty to remain disinterested and loyal no less by negotiating
a fee in secrecy than by reaching a formal (but secret)
agreement because the risks of partiality in each setting are
equally grave, as this case well proves.
Schilling’s conduct during the “negotiations” illustrates the
point. When Schilling proposed a fee arrangement in secret
to Bank of New York, Mapco and Chase at the Fall 1996
Washington conference, he threatened that he would not
perform his mediation duties without such a deal. When a
Chase representative denied that a deal existed, he accused
Chase of not being an honest broker. In January 1997
Schilling sent letters to Bank of New York, Mapco and
Chase—creditors of the estate to whom he owed a duty of
loyalty—asserting that each of them had agreed at the
Washington conference to pay him a percentage of their
recovery. In an August 1997 letter to Mapco, Schilling
continued to insist that he and the three creditors had reached
a compensation agreement at the Washington conference.
Schilling later claimed, at a September 1998 court hearing,
that “he never said there was a side agreement with [Mapco],”
284 B.R. at 592, which led two of the creditors to disclose the
January 1997 letters. Upon disclosure of the letters, Schilling
changed his story again, claiming that what he had asserted in
the January 1997 letters was intentionally untrue: “A
common tactic used in negotiations,” Schilling explained, “is
to make a statement, as if it were fact, even though the
statement is incorrect and is known to be incorrect. The
Examiner used this common place tactic in his January, 1997
letters . . . asserting, as a fact, that an agreement had been
34 In re Big Rivers
Electric Corp.
Nos. 02-6212/6213/6338/
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reached at the Washington settlement conference.” Cf. Model
Rules of Prof’l Conduct R. 4.1 (“In the course of representing
a client a lawyer shall not knowingly . . . make a false
statement of material fact or law to a third person.”). On this
record, Schilling cannot tenably show that his conduct during
the negotiations was any more consistent with his duties of
disinterest and loyalty than a formal compensation agreement
would have been.
The core problem with Schilling’s contrary position is his
apparent view that he was just another party seeking to
maximize his personal recovery, failing to realize that “many
forms of conduct permissible in a workaday world for those
acting at arm’s length, are forbidden to those bound by
fiduciary ties.” Meinhard, 164 N.E. at 546. As every law
student learns, fiduciaries are “held to something stricter than
the morals of the market place,” id., a principle that
appropriately applies to the sensitive duties of trustees and
examiners. Whether or not other parties were permitted to
negotiate in secret or to mislead each other in pursuit of a
larger recovery, and whether or not Schilling was permitted
to negotiate in secret for the estate’s gain or to mislead the
estate’s creditors for the estate’s gain, Schilling had no right
to negotiate in secret or to mislead the estates’s creditors for
his own gain.
Nor is Schilling correct in arguing that this overlooks
§ 1129(a) of the Code, which provides that a court may not
confirm a plan of reorganization unless “[a]ny payment made
or to be made by the proponent, by the debtor, or by a person
. . . acquiring property under the plan, for services or for costs
and expenses in or in connection with the case . . . has been
approved by, or is subject to the approval of, the court as
reasonable.” It is true that this section makes most fees
incurred in a Chapter 11 case subject to court approval. And
it is true that this section refers to court approval of fees that
in some instances may be paid directly by creditors,
indicating that creditors like Bank of New York, Chase and

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Mapco may pay professionals’ fees themselves (including, to
use one obvious example, their own professionals’ fees). Yet
§ 1129(a) does not, as Schilling argues, authorize an examiner
to negotiate an agreement to share in a creditor’s recovery so
long as the agreement is ultimately subject to court approval.
The provision by no means eliminates the examiner’s duty to
remain loyally disinterested and to comply with pertinent
disclosure requirements at each stage of the case.
Neither Leiman v. Guttman, 336 U.S. 1 (1949), nor Mabey
v. Southwestern Elec. Power Co. (In re Cajun Elec. Power
Coop., Inc.), 150 F.3d 503 (5th Cir. 1998), comes to a
different conclusion. Leiman stands for the general
proposition that a bankruptcy court must approve all fee
arrangements provided for in a plan of reorganization before
confirming the plan. 336 U.S. at 8. And In re Cajun held that
§ 1129(a)(4) does not mandate pre-payment review of fees
paid by individual creditors to a creditors’ committee to
compensate the committee for legal fees incurred in
connection with the bankruptcy. 150 F.3d at 514.
Both cases, notably, involved fee arrangements among
parties who, unlike an examiner, are not required to remain
disinterested. Compare 11 U.S.C. § 1104(d) (trustees and
examiners must be “disinterested”) and id. § 327(a)
(professionals employed by a trustee or a debtor in possession
must be “disinterested”), with id. § 1103(b) (professionals
employed by committees need not be “disinterested”). And
neither case suggests that § 1129(a)(4) excuses an examiner
from other requirements under the Code. In re Cajun, in
point of law, states just the opposite, reasoning that it is
“Congress’s express provision for pre-payment judicial
review of payments” in “[§] 330, provid[ing] for the award of
‘reasonable compensation’ to . . . an examiner,’” and in
Ҥ 331[,] provid[ing] that . . . an examiner . . . may apply for
interim compensation,” that “renders its silence with respect
to the timing of the judicial determination of the
reasonableness of a payment subject to § 1129(a)(4)
36 In re Big Rivers
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meaningful.” Id. at 515. These cases, in short, do not support
Schilling’s claim (Appellant Br. at 38) that he “could have
been paid a fee by the Banks and Mapco” without violating
the Code “as long as before the plan was confirmed the
payment was subject to approval by [the bankruptcy court].”
B.
Schilling next argues that two sections of the Bankruptcy
Code—§ 326 and § 328(a)—permit an examiner to receive a
percentage-based fee. Section 326 provides in pertinent part
that “reasonable compensation” for a trustee may “not []
exceed 3 percent of such moneys in excess of $1,000,000
upon all money disbursed or turned over in the case by the
trustee to parties in interest.” As Schilling correctly observes,
some bankruptcy courts read § 326 of the Code to allow
trustees to receive compensation in the form of a percentage
of the assets distributed, at least in small Chapter 7 cases.
See, e.g., In re Ohio Ind., Inc., 299 B.R. 853, 859 (Bankr.
N.D. Ohio 2003) (“Oftentimes, in smaller Chapter 7 cases, the
trustee is paid the maximum fee permitted under 11 U.S.C.
§ 326(a). This recognizes that in smaller cases trustees
provide services that are worth at least as much as the
§ 326(a) cap. The same results do not follow in larger
cases.”). But see Connolly v. Harris Trust Co. (In re
Miniscribe Corp.), 309 F.3d 1234, 1243 (10th Cir. 2002)
(“[W]e reject a [] percentage-based rationale for calculating
reasonable trustee compensation . . . .”). Section 328(a)
allows trustees and committees to employ counsel “on a
contingent fee basis.”
Neither provision advances Schilling’s cause. Even though
§ 326 has been construed by some bankruptcy courts to
permit a percentage-based fee in Chapter 7 cases and even
though § 328(a) permits counsel for a trustee to seek a
contingency-fee arrangement, these provisions do not
authorize Schilling’s distinct conduct. They do not permit a
trustee (or counsel for a trustee) to solicit percentage-based

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compensation from some but not all of the creditors, to reach
an agreement with one of them, to do so secretively without
disclosure to the court or the other parties, or to deceive the
other parties about the undertaking.
The argument also overlooks the distinct obligations of
trustees and examiners on the one hand and counsel for
trustees on the other. The former owe fiduciary obligations
to the estate and its myriad interests and thus serve multiple
masters. The Code, accordingly, does not allow their
compensation to be tied to a particular party’s recovery. The
latter owe fiduciary duties to their client (the trustee) and
serve only one master. No conflict, accordingly, is created by
tying the attorneys’ compensation to recoveries in the very
matters for which they were hired.
Schilling’s reliance on Architectural Bldg. Components v.
McClarty (In re Foremost Mfg. Co.), 137 F.3d 919 (6th Cir.
1998), is unavailing for much the same reason. There we
suggested that a trustee could negotiate an agreement with an
unsecured creditor to have the creditor pay the fee of the
trustee’s counsel in a discrete matter that benefitted the estate
and the creditor. See id. at 924. See also 11 U.S.C. § 327(c)
(permitting counsel for the trustee to be counsel for a creditor,
unless the United States Trustee objects). Neither In re
Foremost Mfg. Co. nor § 327(c), however, says that a trustee
may negotiate his personal compensation with a particular
creditor.
C.
Schilling also contends that his oral agreement with one
creditor and his negotiations with three creditors to receive a
percentage of their recovery created no conflict of interest
with the other creditors or with the estate. In Schilling’s
words, his “interests were wholly and congruently aligned
with those of the estate.” Appellant Br. at 44. Schilling
analogizes his circumstances to a Chapter 7 trustee being paid
38 In re Big Rivers
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a percentage of the assets distributed. No one would suggest
that the trustee has an improper interest, he adds, just because
the more the creditors and equity holders recover the more the
trustee earns. If everyone benefits, in other words, no conflict
can exist.
The argument, however, does not square with reality or
with what Schilling in fact did. Schilling secretly negotiated
compensation tied to some creditors’ recovery; he did not
openly ask the court to award him a percentage of the estate’s
growth or of all creditors’ and equity holders’ recovery.
While a rising tide may indeed lift all boats, the deal he set
out to negotiate gave him an incentive to lift only four
boats—three unsecured creditors’ and his own—which is
exactly the problem of divided loyalties that the Code and the
common law have long worked to avoid.
Schilling next argues that this reasoning rewrites the Code
to require something that it does not—that an examiner
remain “neutral.” As Schilling observes, the district court
several times referred to the requirement that an examiner
remain “neutral,” a requirement nowhere found in the Code
or Rules. By “neutral and disinterested,” however, the district
court clearly meant “impartial and disinterested,” which the
Code does require. See 11 U.S.C. § 101(14); Wissman v.
Pittsburgh Nat’l Bank, 942 F.2d 867, 872 (4th Cir. 1991)
(“The trustee . . . has a duty to administer the estate
impartially for the good of each and all of the creditors. No
interest, except that of the estate, should be his
consideration.”) (quotation and citation omitted); In re
Gibbons-Grable Co., 135 B.R. 514, 516 (Bankr. N.D. Ohio
1991) (“A trustee has a duty to the estate’s creditors to
provide impartial administration for their benefit.”); Collier
¶ 1108.09[4] (discussing a trustee or debtor in possession’s
“duty of impartiality”); id. ¶ 1108.09[4][d][ii] (Although “to
conclude that a trustee . . . is duty bound to serve all interests
all of the time, or even some interests all of the time, strains
logic as well as the provisions of the Code[,] . . . a trustee . . .

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[is] required to exercise due care . . ., refrain from self-dealing
. . . and, when conflicts among constituencies do arise,
negotiate honestly and in good faith in support of the
particular position that [he] determine[s] to be appropriate
. . . .”).
D.
Schilling also takes issue with many of the district court’s
factual findings. He asserts, for instance, that he had no
agreements, only negotiations, with the creditors before
July 31, 1997, when he received Chase’s written agreement
and promptly filed it with the court. The district court,
however, found that “[i]n the January 27, 1997 telephone call
from the Examiner to Mr. Daniello of Chase, they reached an
agreement in principle . . . whereby Chase agreed to pay []
him a fee calculated according to how much he increased its
recovery or decreased its exposure.” 284 B.R. at 589. The
record amply supports this finding, which accordingly is not
clearly erroneous.
Schilling further asserts that he did not solicit Bank of New
York, Mapco and Chase to pay his fees from their funds, only
to support his request for a percentage fee to be paid by the
estate. The record does not clearly reflect whether Schilling
indicated whom he expected to pay this fee when he first
raised the issue at the Washington meetings. One possibility
is that he proposed that the three creditors pay him three
percent of the increased amount that they received from Big
Rivers. Another possibility, as Schilling now argues and as
representatives of the three creditors recalled in their
deposition testimony, is that Schilling merely suggested that
he should receive three percent of the new value without
indicating who would foot the bill. In view of the light cast
by the later January 1997 letters, in which Schilling says that
the three creditors would pay the fee, we cannot conclude that
the district court committed reversible error in making this
finding.
40 In re Big Rivers
Electric Corp.
Nos. 02-6212/6213/6338/
6340/6341/6344/6347
Schilling also claims that he did not negotiate his
percentage fee in secret. “The possible fee arrangement,” he
asserts, “was broadly disclosed.” “In fact,” says Schilling,
“the discussions were known to Bankruptcy Judge Roberts,
the [United States Trustee], Big Rivers and all creditors then
actively involved in the case not later than November 13,
1996.” Appellant Br. at 53. In making this argument,
however, Schilling omits several important details. The
bankruptcy court, the United States Trustee and some
creditors, it is true, were aware that Schilling might seek an
enhanced fee and specifically one that turned on a percentage
of new value created for the estate. But the record supports
the district court’s finding that only Schilling and the three
creditors (Bank of New York, Mapco and Chase) knew that
he was negotiating to have the three creditors pay him a
percentage of their recovery. And this fact, no one argues,
was ever disclosed.
E.
Schilling lastly argues that several procedural impediments
barred the district court from reaching the disgorgement issue.
His principal objection is that no one had standing to raise the
disgorgement issue—not the Utilities Service, not the United
States Trustee, not Big Rivers, not any of its member
cooperatives. Some of the parties lacked a sufficient financial
stake in the outcome to have standing, Schilling argues, and
others waived their challenges to the fee. The district court
disagreed, and so do we. Even if the Utilities Service, the
United States Trustee, Big Rivers and its member
cooperatives all lacked standing (a doubtful proposition), the
district court would still have standing to raise the issue on it
own. Section 105(a) of the Bankruptcy Code itself provides
ample authority: “No provision of this title providing for the
raising of an issue by a party in interest shall be construed to
preclude the court from, sua sponte, taking any action or
making any determination necessary or appropriate to . . .
prevent an abuse of process.” See In re Busy Beaver Bldg.

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Ctrs., Inc., 19 F.3d 833, 841 (3d Cir. 1994) (holding that a
bankruptcy court (or district court, if the reference has been
withdrawn) has authority to review a fee application on its
own initiative, whether or not any party objects to it).
Schilling responds that § 105 does not allow a court to
override contrary provisions elsewhere in the Code and
accordingly “Section 105 cannot trump Section 1129(a)(4).”
Reply Br. at 18. But this point goes to the merits of the
disgorgement issue, not to whether anyone has standing to
raise it. He also notes—correctly—that the district court did
not rely on § 105. But since we review judgments, not
reasoning, the contention is unavailing. See Chevron U.S.A.
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842
(1984) (“[T]his Court reviews judgments, not opinions.”).
Schilling next contends that the district court exceeded the
scope of the remand order and disregarded “the law of the
case.” Appellant Br. at 26. The bankruptcy court, recall,
initially granted the examiner’s fee application (without the
benefit of the evidence at Judge Cohn’s disposal). Several
parties appealed to the district court, which, acting as an
appellate court, affirmed in part and reversed in part.
Concluding that the issue of disgorgement was not decided by
the bankruptcy court, District Court Judge McKinley
“remand[ed] the case to the Bankruptcy Court for proper
resolution of this issue,” including “whether the Examiner
negotiated and obtained certain side compensation
agreements with various creditors.” In re Big Rivers Elec.
Corp., 252 B.R. at 687–89.
Schilling argues that by using the conjunctive—“negotiated
and obtained”—Judge McKinley established the “law of the
case,” which on remand allowed Judge Cohn to order
disgorgement “only if” he found both that “(1) negotiations
occurred between the Examiner and creditors (which was
undisputed) and (2) an agreement was reached between the
Examiner and these creditors.” Appellant Br. at 27. But
42 In re Big Rivers
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Nos. 02-6212/6213/6338/
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these few words do not bear the weight Schilling places on
them. The remand order concerned the “proper resolution” of
the “issue of disgorgement,” and had no other strings
attached. 252 B.R. at 689. At all events, the district court
found, and we do not doubt, that Schilling reached an oral
agreement with Chase no later than January 1997. See 284
B.R. at 589.
Nor, contrary to Schilling’s position, did the “law of the
case” make it an abuse of discretion for the district court to
deny Schilling’s counsel fees on the ground that Schilling and
his counsel were “essentially the alter ego” of one another.
Id. at 583. According to Schilling, an earlier district court
decision, which held that for purposes of a jurisdictional issue
“there is a distinction between [Schilling and his law firm],”
JA 492, established the law of the case. We disagree. Until
the district court ordered Schilling and the “Law Firm of J.
Baxter Schilling” to disgorge all fees, no court had ever
decided whether to hold both Schilling and his law firm (sole
member, Schilling) accountable for the conduct at issue here.
Schilling in the end may not retain what Schilling must
disgorge.
* * * * *
As this case illustrates, being a bankruptcy examiner, like
being a bankruptcy trustee, “is serious business and is not to
be undertaken lightly.” Mosser, 341 U.S. at 274. And the
“most effective sanction for good administration” of these
indispensable positions of trust remains sanctions “for the
consequences of forbidden acts,” id., including on this
occasion the remittance of nearly $1 million in legal fees.
While this sanction “creates a very heavy liability” and while
it confirms that the position of examiner should not be
“undertaken lightly,” id. at 273–74, the job remains one for
which mere mortals may apply. As Justice Jackson observed
in Mosser, “there are ways by which a trustee,” like an
examiner, may effectively protect against such sanctions. Id.

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at 274. Whether it is the business-judgment rule which
shields fiduciaries from liability for “disinterested mistakes in
business judgment,” the all-purpose utility of full disclosure,
or the “well established” practice of seeking “instructions
from the court, given upon notice to creditors and interested
parties, as to matters which involve difficult questions of
judgment,” id., examiners have ample ways to ensure that
they honor the unremitting duties of loyalty and
disinterestedness and avoid the liabilities imposed here.
VI.
For these reasons, we affirm the district court’s judgment.

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