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            Title United Artists Theatre Company

 

            Date 2003

            By

            Subject Other\Concurring

                

 Contents

 

 

Page 1

9 of 52 DOCUMENTS

IN RE: UNITED ARTISTS THEATRE COMPANY, et al., Debtors v. * DONALD F. WALTON, Acting United States Trustee for Region 3, * Donald F. Walton, Appellant

* Substituted Pursuant to F.R.A.P. 43(c)

No. 01-1351

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

315 F.3d 217; 2003 U.S. App. LEXIS 275; Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434; 40 Bankr. Ct. Dec. 182

December 4, 2001, Argued

January 9, 2003, Filed

PRIOR  HISTORY:              **1        Appeal  from  the  United States District Court for the District of Delaware (Del. Bankr. No. 00-03514). District Judge: Honorable Sue L. Robinson.

In re UA Theatre Co., 2000 Bankr. LEXIS 2029 (Bankr. D. Del., Dec. 1, 2000)

DISPOSITION: Affirmed.

CASE SUMMARY:

PROCEDURAL  POSTURE:  Appellant  trustee  chal- lenged the judgment of the United States District Court for the District of Delaware which approved appellee debtor's application to retain a financial advisor over the trustee's objection.

OVERVIEW: The debtor applied to retain a financial ad- visor in its bankruptcy action. The trustee objected to the debtor's agreement to indemnify the financial advisor for claims of negligence that might be leveled against it. On appeal of the district court's approval of the debtor's appli- cation, the court held that the indemnity agreement was reasonable and permissible under 11 U.S.C.S. § 328(a). The court held that if financial advisors took the appropri- ate steps to arrive at a result, the substance of that result should not be questioned. The court held that the financial advisor could be held accountable for not advising with the level of care or loyalty expected under the business judgment rule, and the agreement was reasonable because it left open the door to examining the level of care the fi- nancial advisor exercised in the process of obtaining its results.  However,  the  court  held  that  the  debtor  would not be bound to indemnify the financial advisor when its

gross negligence contributed only in part to its damages, and that the financial advisor was not entitled to indem- nity for a dispute in which the debtor alleged the breach of the financial advisor's contractual obligations.

OUTCOME: The judgment approving the debtor's ap- plication  to  retain  a  financial  advisor  over  the  trustee's objection was affirmed.

LexisNexis(R) Headnotes

Bankruptcy Law > Professional Services > Retention

HN1   The  district  court's  approval  of  a  professional's retention is a final order.

Bankruptcy Law > Practice & Proceedings > Appeals

Bankruptcy Law > Professional Services > Retention

HN2  An appellate court reviews the district court's ap- proval under 11 U.S.C.S. §§ 327(a), 328(a) for abuse of discretion, but review its legal determinations de novo. Bankruptcy Law > Practice & Proceedings

Civil Procedure > Justiciability > Standing

HN3  The U.S. Trustee may raise and may appear and be  heard  on  any  issue  in  any  case  or  proceeding.   11

U.S.C.S. § 307. A lack of pecuniary interest in the out- come  of  a  bankruptcy  proceeding  does  not  deny  the U.S. Trustee standing. U.S. Trustees are officers of the Department of Justice who protect the public interest by aiding bankruptcy judges in monitoring certain aspects of bankruptcy proceedings.

Bankruptcy Law > Practice & Proceedings > Appeals

Civil Procedure > Justiciability > Mootness

HN4   The  United  States  Supreme  Court  sets  a  high threshold  for  judging  a  case  moot.  An  appeal  is  moot in the constitutional sense only if events have taken place

315 F.3d 217, *; 2003 U.S. App. LEXIS 275, **1;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

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that make it impossible for the court to grant any effectual relief whatever. An appeal is not moot merely because a court cannot restore the parties to the status quo ante (the state in which it was before). Rather, when a court can fashion some form of meaningful relief, even if it only partially redresses the grievances of the prevailing party, the appeal is not moot.

Bankruptcy Law > Professional Services > Retention

HN5   Debtors  and  their  professionals  cannot  exempt themselves   from   liability   to   non-consenting   parties merely  by  saying  the  word.  The "hallmarks  of  permis- sible non-consensual releases" are fairness, necessity to the reorganization,  and specific factual findings to sup- port  these  conclusions.  Added  to  these  requirements  is that the releases were given in exchange for fair consider- ation. Releases unbacked by adequate findings of fairness, necessity to reorganization and reasonable consideration cannot moot a challenge to the retention agreement's in- demnity.  What  may  not  be  valid  (releases  lacking  the findings Continental II requires) ipso facto cannot moot an indemnity agreement whose order approving it was not final until after confirmation.

Bankruptcy Law > Practice & Proceedings > Appeals

Civil Procedure > Justiciability > Mootness

HN6   The  court  considers  five  factors  in  determining whether it would be equitable or prudential to reach the merits of a bankruptcy appeal:  (1) whether the reorga- nization  plan  has  been  substantially  consummated,  (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court,  (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments.

Bankruptcy Law > Professional Services > Retention

HN7   11 U.S.C.S. § 328(a) requires that the terms and conditions of employment of any professionals engaged under 11 U.S.C.S. § 327 be "reasonable."

Bankruptcy Law > Professional Services > Retention

HN8   11 U.S.C.S. § 330, which deals with what consti- tutes "reasonable" compensation for professionals, takes a "market-driven" approach. Some reference to the mar- ket is not out of place when considering whether terms of retention are "reasonable" in the bankruptcy context. Bankruptcy Law > Professional Services > Retention

HN9  The court's approach is "market driven," not "mar- ket-determined," especially in the realm of bankruptcy, where courts play a special supervisory role.

Bankruptcy Law > Professional Services > Retention

HN10  Delaware courts have resolved the negligence co- nundrum in the corporate sphere by evaluating the process by which boards reach decisions, rather than the final re-

sult of those decisions. A board's failure to inform itself of

"all material information reasonably available" results in a finding of gross negligence. Compliance with a director's duty of care can never appropriately be judicially deter- mined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury, considering the matter after the fact, believes a decision substantively wrong, or de- grees of wrong extending through "stupid" to "egregious" or "irrational", provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule -- one  that  permitted  an  "objective"  evaluation  of  the  de- cision --  would  expose  directors  to  substantive  second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests. Bankruptcy Law > Professional Services > Retention

HN11  Delaware has navigated the Scylla of condoning directors' misconduct and the Charybdis of stifling their business decisions with a rule that stresses not the end result, but the path taken to reach it. Under this approach, courts do not interfere with advice by financial advisors when they (1) have no personal interest, (2) have a rea- sonable awareness of available information after prudent consideration of alternative options, and (3) provide that advice in good faith. In the corporate sphere this is known as the "business judgment rule."

Bankruptcy Law > Professional Services > Retention

HN12  The business judgment rule acknowledges a judi- cial syllogism derived from five fundamental tenets:  (1) the management of a corporation's affairs is placed by law in the hands of its board of directors; (2) performance of the directors' management function consists of:  (a) deci- sion-making -- i.e., the making of economic choices and the weighing of the potential of risk against the potential of  reward,  and  (b)  supervision  of  officers  and  employ- ees -- i.e., attentiveness to corporate affairs; (3) corporate directors  are  not  guarantors  of  the  financial  success  of their management efforts; (4) though not guarantors, di- rectors as fiduciaries should be held legally accountable to the corporation and its stockholders when their perfor- mance falls short of meeting appropriate standards; and

(5)  such  culpability  occurs  when  directors  breach  their fiduciary duty -- that is, when they profit improperly from their positions (i.e., breach the "duty of loyalty") or fail to supervise corporate affairs with the appropriate level of skill (i.e., breach the "duty of care").

Bankruptcy Law > Professional Services > Retention

HN13  Where a debtor's financial affairs -- the pith of a reorganization -- are shaped by its financial advisors, they

315 F.3d 217, *; 2003 U.S. App. LEXIS 275, **1;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

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lay out the economic choices and assess their risks, and

(though not sureties of success) can be held accountable for not advising with the level of care or loyalty expected, transposing the business judgment rule from its corporate ambit to bankruptcy appears well suited. For by this trans- position the court has a means to distinguish gross from simple negligence, and thus a benchmark for approving as reasonable an arrangement for indemnity that includes common negligence.

Bankruptcy Law > Professional Services > Retention

HN14  If financial advisors take the appropriate steps to arrive at a result, the substance of that result should not be questioned. So understood, agreements to indemnify fi- nancial advisors for their negligence are reasonable under

11 U.S.C.S. § 328(a).

COUNSEL: James H.M. Sprayregen, James W. Kapp, III

(Argued), David J. Zott, Kirkland & Ellis, Chicago, IL, Counsel for Appellee United Artists Theatre Company, et al.

Richard A. Chesley (Argued), Houlihan Lokey Howard

&  Zukin,  Chicago,  IL,  Counsel  for  Appellee  Houlihan

Lokey Howard & Zukin.

Bruce G. Forrest (Argued), United States Department of Justice, Civil Division, Appellate Staff, Washington, DC, Counsel for Appellant Acting United States Trustee.

JUDGES: Before:  ALITO, RENDELL, and AMBRO, Circuit Judges.

OPINIONBY: AMBRO

OPINION:

*221   OPINION OF THE COURT AMBRO, Circuit Judge:

The United States Trustee (the "U.S.

315 F.3d 217, *222; 2003 U.S. App. LEXIS 275, **1;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

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*222     Trustee")  n1  appeals  the  District  Court  of Delaware's approval of a bankruptcy debtor's application to retain a financial advisor. Specifically, the U.S. Trustee objects to the debtor's agreement to indemnify the finan- cial advisor for claims of negligence (as opposed to gross negligence) that may be leveled against it. We first address whether the U.S. Trustee has standing to bring this suit, and  determine  that  he  does.  Next  we  examine  whether

**2   subsequent confirmation of the reorganization plan renders this case constitutionally or equitably moot. After concluding  that  it  is  not  moot  in  either  sense,  we  turn to the merits of the U.S. Trustee's appeal. We affirm the District Court's ruling that the indemnification provision is permissible, though we do so in a way that eschews the inherent  imprecision  between  shades  of  negligence.  In so doing, we borrow from corporate law analogues, and focus on the process by which financial advisors reach their opinions rather than on the substance of the opin- ions themselves.

n1 Patricia A. Staiano was the U.S. Trustee at the time of briefing, but her term expired on October

5,  2001.  Her  current  replacement  is  Acting  U.S. Trustee Donald F. Walton.

I. Background

United Artists Theatre Company and affiliates n2 (col- lectively,  the  "Debtors"  or  "United  Artists")  filed  for Chapter 11 bankruptcy protection in the District Court. n3  At  the  outset  the  Debtors  requested  court  approval of  their  retention  of  Houlihan,  Lokey,   **3    Howard

& Zukin Capital ("Houlihan Lokey") as financial advisor. The engagement letter provided that United Artists would indemnify  Houlihan  Lokey's  reasonable  attorneys'  fees and expenses, as well as any losses incurred by Houlihan Lokey with respect to, inter alia, its providing of services. The letter also contained an exception for "any Losses that are finally judicially determined to have resulted from the gross negligence, bad faith, willful misfeasance, or reck- less disregard of its obligations or duties on the part of Houlihan Lokey." n4

n2 These affiliates are United Artists Theatre Circuit,   Inc.,   United   Artists   Realty   Company, United  Artists  Properties  I  Corp.,  United  Artists Properties  II  Corp.,   UAB,  Inc.,   UAB  II,  Inc., Mamaroneck   Playhouse   Holding   Corporation, Tallthe  Inc.,  UA  Theatre  Amusements,  Inc.,  UA International Property Holding, Inc., UA Property Holding   II,   Inc.,   United   Artists   International Management  Company,  Beth  Page  Theatre  Co., Inc., United Film Distribution Company of South America,  U.A.P.R.,  Inc.,  R  and  §  Theatres,  Inc.,

**4

and King Reavis Amusement Company.

n3  The  District  Court  of  Delaware's  relation- ship with the United States Bankruptcy Court for the District of Delaware has a checkered past. The District Court revoked the automatic reference of bankruptcy  cases  to  the  Bankruptcy  Court  effec- tive February 3,  1997. In December of 2000,  the District Court reinstated the automatic referral, and then revoked it once more in April of 2001. An or- der dated September 6, 2001 again reinstated the automatic reference. Revoking the automatic refer- ence means in practical terms that bankruptcy cases are assigned to the District Court unless, on a case- by-case basis, they are referred to the Bankruptcy Court. The District Court retained this case, which was filed while the reference revocation was in ef- fect.

n4  The  principal  indemnity  provisions  of  the retention agreement are as follows:

(a)  If  Houlihan  Lokey  or  any  em- ployee,   agent,   officer,   director,   at- torney,   shareholder   or   any   person who  controls  Houlihan  Lokey  (any or  all  of  the  foregoing,   hereinafter an "Indemnified Person") becomes in- volved  in  any  capacity  in  any  legal or administrative action, suit, proceed- ing,  investigation  or  inquiry,  regard- less of the legal theory or the allega- tions made in connection therewith, di- rectly or indirectly in connection with, arising out of,  based upon,  or in any way related to (i) the Agreement; (ii) the  services  that  are  the  subject  of the Agreement; (iii) any document or information,  whether  verbal  or  writ- ten,   referred  to  herein  or  supplied to  Houlihan  Lokey;  (iv)  the  breach of  the  representations,  warranties  or covenants by the Company given pur- suant hereto; (v) Houlihan Lokey's in- volvement  in  the  Transaction  or  any part thereof; (vi) any filings made by or on behalf of any party with any gov- ernmental agency in connection with the Transaction; (vii) the Transaction; or (viii) proceedings by or on behalf of  any  creditors  or  equity  holders  of the  Company,  the  Company  will  on

315 F.3d 217, *222; 2003 U.S. App. LEXIS 275, **4;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

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demand, advance or pay promptly, on behalf  of  each  Indemnified  Person, reasonable  attorneys'  fees  and  other expenses  and  disbursements  (includ- ing,  but  not  limited  to,  the  cost  of any  investigation  and  related  prepa- ration)  as  they  are  incurred  by  the Indemnified   Person.   The   Company also  indemnifies  and  holds  harmless each  Indemnified  Person  against  any and  all  losses,  claims,  damages,  li- abilities,  costs  and  expenses  (includ- ing, but not limited to, attorneys' fees, disbursements  and  court  costs,   and costs of investigation and preparation)

("Losses") to which such Indemnified Person may become subject in connec- tion with any such matter.

(b) If for any reason the foregoing in- demnification is determined to be un- available  to  any  Indemnified  Person or insufficient fully to indemnify any such  person,  then  the  Company  will contribute   to   the   amount   paid   or payable by such person as a result of any such Losses in such proportion as is appropriate to reflect (i) the relation- ship between Houlihan Lokey's fee on the one hand and the aggregate value of the Transaction on the other hand or  (ii)  if  the  allocation  provided  by clause (i) is not permitted by applica- ble law, not only such relative benefit but also the relative fault of the other participants in the Transaction, on the one  hand,  and  Houlihan  Lokey  and the Indemnified Persons on the other hand, and any other relevant equitable considerations in connection with the matters as to which such Losses relate; provided,  however,  that  in  no  event shall the amount to be contributed by all Indemnified Persons in the aggre- gate  exceed  the  amount  of  the  fees actually received by Houlihan Lokey hereunder.

**5

(c) Any Indemnified Person shall have the right to employ such person's own separate  counsel  in  any  such  action, at  the  Company's  expense,  and  such counsel  shall  have  the  right  to  have charge  of  such  matters  for  such  per- son.

(d)  The  indemnification  obligations hereunder shall not apply to any losses that  are  finally  judicially  determined to have resulted from the gross negli- gence, bad faith, willful misfeasance, or  reckless  disregard  of  its  obliga- tions or duties on the part of Houlihan Lokey or such Indemnified Person. In the event of such final judicial deter- mination, the Company shall, subject to Houlihan Lokey's rights of contri- bution,  be  entitled  to  recover  from the  Indemnified  Person  or  Houlihan Lokey the costs and expenses paid on behalf of such Indemnified Person pur- suant  to  this  indemnification  obliga- tion.

In  addition,  United  Artists'  application  to  retain Houlihan Lokey supplemented the gross negligence and willful misconduct carveouts for indemnity in subparagraph  (d)  above  by  providing  that,  in  the case  of  a  judicial  determination,  it  must  be  final and find that either the gross negligence or willful misconduct is "solely" the cause of any claim or expense of Houlihan Lokey. The order approving the application contains the same language.

The application and order also provide indemnity to Houlihan Lokey for its "prepetition performance of  services."  The  U.S.  Trustee,  however,  appeals only whether "indemnification provisions, holding a financial advisor harmless for the consequences of its negligence in connection with services it pro- vides to the debtors in a bankruptcy proceeding," are reasonable under 11 U.S.C. § 328 (a) (emphasis added).

315 F.3d 217, *223; 2003 U.S. App. LEXIS 275, **5;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

Page 6

*223    The U.S. Trustee objected, claiming, inter alia, that the retention agreement exempted Houlihan Lokey from liability for its own negligence,  thus violating the Bankruptcy Code, public policy, and basic tenets of pro-

fessionalism.  Specifically,  it  argued  that  the  agreement was unreasonable under two provisions of the Bankruptcy Code, 11 U.S.C. §§ 327(a) and 328(a), because allowing a debtor's estate

315 F.3d 217, *224; 2003 U.S. App. LEXIS 275, **5;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

Page 7

*224   to indemnify a financial advisor for its own negli- gence undermines the principal purpose of bankruptcy -- conserving  the  debtor's  assets  in  order  to  pay  its  cred- itors.  The  District  Court,  rejecting  the  U.S.  Trustee's objections, approved the Debtors' retention of Houlihan Lokey in a memorandum order dated December 1, 2000

(though  not  entered  on  the  docket  until  December  8,

2000). The Debtors' cases then proceeded as "prenego- tiated"  bankruptcies.  n5  The  confirmation  hearing  for the Debtors' second amended joint plan of reorganization

("the Plan") was held on January 22, 2001. The District Court confirmed the Plan that day (though the order was not  docketed  until  January  25,  2001).  On  February  5,

2001, the U.S. Trustee filed this appeal.

n5  "Prenegotiated"  bankruptcies  have  plans of  reorganization  and  disclosure  statements  filed shortly  after  the  cases  themselves  file,   usually before  the  committee  of  unsecured  creditors  is formed. In re Pioneer Fin. Corp., 246 B.R. 626, 630

(Bankr. D. Nev. 2000); see also Report of the Del. State Bar Ass'n to the Nat'l Bankr. Rev. Comm'n in Support of Maintaining Existing Venue Choices

18 n.39 (October 3, 1996). This contrasts with typ- ical  Chapter  11  cases,  where  a  plan  and  disclo- sure statement are filed many months (sometimes years) after the cases are filed, and "prepackaged bankruptcies" (or "prepacks"), where the plan and disclosure statement are filed, and sufficient favor- able votes on the plan are solicited and obtained, before  the  Chapter  11  case  begins,  leading  to  a prompt  plan  confirmation.  See  generally  Marcia L. Goldstein et al., Prepackaged Chapter 11 Case Considerations and Techniques, in 1 Weil, Gotshal

& Manges, LLP, Reorganizing Failing Businesses ch.  12  (Marvin  E.  Jacob  &  Sharon  Youdelman eds. 1998); Alesia Ranney-Marinelli, Prepackaged Plans  of  Reorganization,   in  A  Practical  Guide to Out-Of--Court Restructurings and Prepackaged Plans of Reorganization § 4.01 A , at 4-9 (Nicholas P. Saggese & Alesia Ranney-Marinelli eds., 2d ed.

2000).

**6

At the time of Plan confirmation the U.S. Trustee did not object to several provisions releasing Houlihan Lokey from liability. Article X(B) provided:

On and after the Effective Date, each of the Debtors, the Reorganized Debtors, their sub- sidiaries,  their  affiliates,  and  the  Releases, and the agents, officers, directors, partners, members,  professionals,  and  agents  of  the foregoing  (and  the  officers,  directors,  part- ners, members, professionals, and agents of each thereof), for good and valuable consid- eration  .  .  .  shall  automatically  be  deemed to have released each other unconditionally and forever from any and all Claims,  obli- gations,  rights,  suits,  damages,  Causes  of Action, remedies and liabilities whatsoever, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown,  foreseen  or  unforeseen,  existing or hereafter arising, in law, equity or other- wise, that any of the foregoing entities would have been legally entitled to assert (in their own  right,  whether  individually  or  collec- tively,  or  on  behalf  of  any  Holder  of  any Claim or Equity Interest or other Person or Entity), based in whole or in part upon any act or omission, transaction,   **7   agreement, event or other occurrence taking place on or before the Effective Date, relating in any way to the Debtors, the Reorganized Debtors, the Chapter 11 Cases,  the Plan,  the Disclosure Statement, or any related agreements, instru- ments or other documents . . . .

Article X(C) read as follows:

On and after the Effective Date, each Holder of  a  Claim  who  has  accepted  the  Plan,  in exchange for, among other things, a distribu- tion under the Plan, shall be deemed to have released unconditionally each of the Debtors, the Reorganized Debtors . . . and the agents, officers,  directors,  partners,  members,  pro- fessionals, and agents of the foregoing

315 F.3d 217, *225; 2003 U.S. App. LEXIS 275, **7;

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Page 8

*225     (and  the  officers,  directors,  part- ners, members, professionals, and agents of each thereof), from any and all Claims, obli- gations,  rights,  suits,  damages,  Causes  of Action, remedies and liabilities whatsoever, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise

. . . .

Finally, Article X(E) provided:

The   Debtors,   .   .   .   their   members   and Professionals (acting in such capacity) shall neither   **8    have  nor  incur  any  liability to any Person or Entity for any act taken or omitted  to  be  taken  in  connection  with  or related to the formulation, preparation, dis- semination, implementation, administration, Confirmation or Consummation of the Plan, the Disclosure Statement or any contract, in- strument, release or other agreement or doc- ument created or entered into in connection with the Plan . . . or any other act taken or omitted to be taken in connection with the Chapter  11  Cases;  provided,  however,  that the foregoing provisions of this  Article X.E

. . . shall have no effect on the liability of any Person or Entity that results from any such act or omission that is determined in a Final Order to have constituted gross negligence or willful misconduct.

We have jurisdiction  pursuant  to 28 U.S.C. § 1291 be- cause   HN1   the  District  Court's  approval  of  a  profes- sional's retention is a final order. HN2  We review the District Court's approval under §§ 327(a) and 328(a) of the Bankruptcy Code for abuse of discretion, but review its legal determinations de novo. In re PWS Holding Corp.,

228 F.3d 224, 235 (3d Cir. 2000).

II. Standing and Mootness

A. Standing **9

While Houlihan Lokey couches its argument solely in terms of mootness, reading closely we find a separate component of its argument:  standing. It contends that a suit against it "could only be brought by someone prox- imately harmed by Houlihan's negligence in performing these services, i.e., an actual or potential financial stake- holder of the UA Debtors." Appellee's Br. at 6. By virtue of the releases it obtained, it reasons, no such stakeholder can  sue.  Because  the  U.S.  Trustee's  appeal  relies  upon these potential claims, Houlihan Lokey therefore argues that the U.S. Trustee lacks standing. Houlihan Lokey also questions the U.S. Trustee's standing more obliquely, ob- serving that "indeed, it is of more than passing interest that the party threatening to now disrupt this confirmed and effective plan is one with no such economic stake." Appellee's Br. at 12.

Contrary to Houlihan Lokey's claim, HN3  the U.S. Trustee "may raise and may appear and be heard on any issue in any case or proceeding." 11 U.S.C. § 307. A lack of pecuniary interest in the outcome of a bankruptcy pro- ceeding  does  not  deny  the  U.S.  Trustee  standing.  See In  re  Columbia  Gas  Sys.  Inc.,  33  F.3d  294,  295-96

(3d Cir. 1994). **10    U.S. Trustees are officers of the Department of Justice who protect the public interest by aiding  bankruptcy  judges  in  monitoring  certain  aspects of bankruptcy proceedings. Id.; accord In re Revco Drug Stores, Inc., 898 F.2d 498, 499-500 (6th Cir. 1990). Thus, we find that the U.S. Trustee has standing to challenge the indemnification provision, n6 and turn to the issue of mootness.

n6 We note that in In re Metricom,  Inc.,  275

B.R. 364, 368 (Bankr. N.D. Cal. 2002), Houlihan Lokey implicitly acknowledged the U.S. Trustee's standing to object by responding to its objections with proposed modifications.

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*226   B. Mootness

Houlihan Lokey argues that the case is both constitu- tionally and equitably moot. The first issue is a question of constitutional significance because, if a case is moot, we lack the power to hear it. Equitable mootness is a more limited inquiry into whether, though we have the power to  hear  a  case,  the  equities  weigh  against  upsetting  a bankruptcy plan that has already been **11   confirmed. We address each issue in turn.

1. Constitutional Mootness

HN4  The United States Supreme Court sets a high threshold for judging a case moot. An appeal is moot in the constitutional sense only if events have taken place that make it "impossible for the court to grant any effectual relief whatever." Church of Scientology of Cal. v. United States, 506 U.S. 9, 12, 121 L. Ed. 2d 313, 113 S. Ct. 447

(1992) (citation omitted). An appeal is not moot "merely because  a  court  cannot  restore  the  parties  to  the  status quo ante the state in which it was before . Rather, when a court can fashion some form of meaningful relief, even if it only partially redresses the grievances of the prevailing party, the appeal is not moot." In re Continental Airlines,

91 F.3d 553, 558 (3d Cir. 1996) (en banc) ("Continental

I") (citations and quotation marks omitted).

Houlihan Lokey asserts that this case is moot because Articles X(B), X(C), and X(E) of the confirmed Plan con- tain  releases  that  preclude  potential  negligence  claims against it. The U.S. Trustee counters that meaningful re- lief may still be obtained because the retention order may be vacated, at least as to the **12  indemnification provi- sion. With respect to Houlihan Lokey's Article X(C) argu- ment, n7 that Article by its own terms subjects Houlihan Lokey to potential suits. Because Article X(C) releases

the Debtors and their professionals from suits by "each Holder of a Claim who has accepted the Plan" (emphasis added), it does not bind all holders of claims. Rather, it covers only those who accept the Plan. Houlihan Lokey is correct that the "UA Plan was accepted by each impaired class that was entitled to vote," Appellee's Br. at 8 n.2, but its point that each class is bound (regardless whether a member objected) misses the mark, even for those ob- jecting who receive distributions under the Plan. If a class member accepts distributions because it is bound by the cram down provisions of § 1129(b)(1) of the Bankruptcy Code (i.e., a procedure for nonconsensual confirmation of a plan of reorganization), but it has not itself accepted the Plan, Article X(C)'s release does not apply to it. Thirty- four unsecured creditors voted to reject the Plan, and thus are unaffected by the release. Because by its own terms the release allows future claims, and in any event we can provide relief by modifying the **13    retention order, Article  X(C)  does  not  render  this  case  constitutionally moot.

n7  We  do  not  focus  on  Article  X(B),  which contains a mutual release of all claims among the Debtors, their affiliates, and the Releasees (defined to  include  "the  D&O  Releasees,  the  Prepetition Lender Releasees, the Placement Agent Releasees, Stonington, the Subordinated Note Releasees, and the Equity Releasees") because it does not affect all creditor constituencies.

Next, Houlihan Lokey argues that Article X(E) of the Plan  moots  the  U.S.  Trustee's  challenge  because  it  ex- cepts from liability (with a carveout for gross negligence and willful misconduct) "the Debtors . . . and their . . . Professionals

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*227    (acting in such capacity) . . . for any act taken or omitted to be taken in connection with or related to the formulation, preparation, dissemination, implementa- tion, administration, Confirmation or Consummation of the Plan . . . or . . . the Chapter 11 Cases." It applies to Houlihan  Lokey,  albeit  only  when  acting  in  a  "profes- sional"   **14   capacity. n8

n8 Thus Houlihan Lokey is not a "professional" when it is acting in its own interest, e.g., buying and selling claims.

Even on its own terms, Article X(E) contains carve- outs  (i.e.,  no  forbearance  from  or  tolerance  of  liability caused by willful misconduct or gross negligence). The question in the appeal comes full circle:  can as a matter of public policy a professional be exempt from its own negligence. The answer depends on how we treat noncon- sensual releases of nondebtors.

HN5   Debtors  and  their  professionals  cannot  ex- empt themselves from liability to non-consenting parties merely  by  saying  the  word.  The "hallmarks  of  permis- sible non-consensual releases" are "fairness, necessity to the reorganization, and specific factual findings to support these conclusions." In re Continental Airlines, 203 F.3d

203, 214 (3d Cir. 2000) ("Continental II"). Added to these requirements is that the releases "were given in exchange for fair consideration." Id. at 215. As in Continental II, here **15   no finding in the confirmation order specif- ically  addressed  the  releases  at  issue.  n9  Id.  Releases unbacked by adequate findings of fairness,  necessity to reorganization and reasonable consideration cannot moot a challenge to the retention agreement's indemnity. What may not be valid (releases lacking the findings Continental II requires) ipso facto cannot moot an indemnity agree- ment whose order approving it was not final until after confirmation. n10

n9 The order confirming the Plan does provide, interestingly under "Conclusions of Law," that the

"releases . . . set forth in the Plan . . . shall be, and hereby are, approved as fair, equitable, reasonable and in the best interests of the Debtors . . . and their

. . . Creditors . . . ."

n10 It could be argued that in In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000), we found an  analogous  release  to  be  permissible  under  §

524(e). However, PWS's holding makes clear that it  was  not  addressing  a  release  that  "affects  the liability of third i.e.,  non-debtor  parties," id. at

247, and thus "is outside the scope of § 524(e)." Id.  In  discussing  Continental  II,  the  PWS  panel noted that "we did not treat § 524(e) as a per se rule barring any provision in a reorganization plan limiting  the  liability  of  third  parties."  Id.  Rather,

"it  was clear  under  any  rule  that the  court  might adopt that the third party  releases at issue were impermissible because 'the hallmarks of permissi- ble non-consensual releases --  fairness, necessity to the reorganization, and specific factual findings to support these conclusions -- are all absent here.'

" Id. (quoting Continental II, 203 F.3d at 214).

More to the point, PWS did address the standard of liability for creditor committee members under

§ 1103(c) of the Bankruptcy Code, holding that this provision "limits liability of a committee to willful misconduct or ultra vires acts." PWS, 228 F.3d at

246. While it is unclear whether the Court meant to include professionals to committees as well (the very next sentence refers to "the entities that pro- vided services to the Committee in the event that they were sued for their participation in the reor- ganization," id. at 246-47) and whether the rubric

"ultra vires acts" is intended to cover any form of negligence, in no event does PWS cover more than immunity from liability under § 1103(c). The level of indemnity of professionals a debtor employs un- der § 327 is what is at issue in this case. Therefore, we cannot hold that the release moots an issue we have not yet examined.

**16

While the merits of this appeal would have been sin- gularly focused had the U.S. Trustee objected to the per- tinent release provisions at confirmation, the bottom line is that the U.S. Trustee did object (and

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*228    strenuously)  to  the  scope  of  the  indemnity  de- manded by Houlihan Lokey. Potential claimants still exist. Reforming the indemnity provision would accord them meaningful relief. Therefore this case is not constitution- ally moot.

2. Equitable Mootness

We next examine equitable mootness. In this analysis, emphasis is decidedly on the first term of the phrase -- whether the requested relief is equitable. "The use of the word 'mootness' as a shortcut for a court's decision that the fait accompli of a plan confirmation should preclude further judicial proceedings has led to unfortunate confu- sion." Continental I, 91 F.3d at 559. "There is a big dif- ference between inability to alter the outcome (real moot- ness) and unwillingness to alter the outcome ('equitable mootness').  Using  one  word  for  two  different  concepts breeds confusion." Id. (quoting In re UNR Indus., Inc., 20

F.3d 766, 769 (7th Cir. 1994))(emphases in original). Here we have the power to alter the **17   outcome because the case is not constitutionally moot, but we must balance the equities of both positions and determine whether it is prudent to upset the Plan at this date. HN6  We consider five factors

in  determining  whether  it  would  be  equi- table or prudential to reach the merits of a bankruptcy appeal . . . :  (1) whether the re- organization plan has been substantially con- summated, (2) whether a stay has been ob- tained, (3) whether the relief requested would affect  the  rights  of  parties  not  before  the court, (4) whether the relief requested would affect the success of the plan, and (5) the pub- lic policy of affording finality to bankruptcy judgments.

Continental I, 91 F.3d at 560. In Continental I, we recog-

nized that reversing a plan's confirmation might "knock the props out from under" "intricate and involved trans- actions," the consummation of which is relied on by the marketplace.   Id. at 561 (quoting In re Roberts Farms, Inc., 652 F.2d 793, 797 (9th Cir. 1981)).

In  In  re  PWS  Holding  Corp.,  we  rejected  an  equi- table mootness claim in a case involving, as already noted supra n.10, a challenge to aspects of releases of liability of **18   creditor committees and possibly their profes- sionals.  228 F.3d 224, 236-37 (3d Cir. 2000). There we observed that "the plan has been substantially consum- mated, but . . . it  could go forward even if the releases were struck." Id. at 236-37. We therefore declined to dis- miss on equitable mootness grounds.

The relief the U.S. Trustee seeks here does not entail

"knocking out  the props" under the Plan. He only re- quests that the provision indemnifying Houlihan Lokey for negligent conduct be stricken from its retention agree- ment.

If  we  were  to  modify  the  indemnity  provision,  the

Plan otherwise would survive intact.

The remaining factors do not persuasively challenge this result. The fact that the U.S. Trustee did not obtain a stay weighs against it, but because the remedy it seeks does not undermine the Plan's foundation, this omission is not fatal. Moreover, allowing a challenge on public policy grounds to an indemnity provision is itself sound public policy. In this context, there is no equity in mooting the U.S. Trustee's challenge to the indemnity provision sought by Houlihan Lokey.

III. Permissibility of Debtors' Indemnifying Financial

Advisors for **19   Their Own Negligence

Having concluded that the U.S. Trustee has standing to bring this appeal and that the issue is not moot, we turn to whether the indemnification provision was permissible. This is an issue of first impression

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*229    for this Court. n11 HN7  Section 328(a) of the Bankruptcy Code requires that the terms and conditions of employment of any professionals engaged under § 327 be

"reasonable." 11 U.S.C.S 328(a). The question we there- fore  ask  is  whether  it  is  reasonable  for  the  Debtors  to indemnify  Houlihan  Lokey  despite  its  own  negligence

(but not gross negligence).

n11   A   bankruptcy   appellate   panel   of   the Eighth Circuit, Unsecured Creditors Committee. v. Pelofsky (In re Thermadyne Holdings Corp.), 283

B.R. 749 (B.A.P. 8th Cir. 2002), considered whether Houlihan Lokey, the financial advisor to a creditors' committee, could obtain indemnity for, inter alia, simple negligence. The B.A.P. held that it was not an abuse of discretion for the bankruptcy court to disapprove such expanded indemnity under the cir- cumstances of that case.

**20

Both parties make plausible points on the issue. The U.S. Trustee argues that allowing professionals to obtain indemnity  for  their  own  negligence  encourages  a  stan- dard both lax and "inconsistent with the financial advi- sor's fiduciary  obligations to the creditors."  Appellant's Br. at 24. Houlihan Lokey worries that the courts might

"Monday-morning quarterback," or second-guess, deci- sions that in hindsight were clearly mistaken, but at the time seemed attractive options. Financial advisors would then be constrained and overly conservative in their ad- vice, thus disadvantaging the estate.

Though  heretofore  we  have  not  addressed  in  depth the  reasonableness  of  indemnifying  financial  advisors, we have recognized that HN8  § 330, which deals with what constitutes "reasonable" compensation for profes- sionals,  takes  a  "market-driven"  approach.   In  re  Busy

Beaver Bldg. Ctrs., Inc. 19 F.3d 833, 852 (3d Cir. 1994). While this case dealt with the reasonableness of parale- gals' compensation, rather than their indemnification,  it underscores that some reference to the market is not out of place when considering whether terms of retention are

"reasonable" in the bankruptcy context.

Indemnification **21   of financial advisors against their own negligent conduct is becoming a common mar- ket occurrence.  In re Joan and David Halpern Inc., 248

B.R. 43, 47 (Bankr. S.D.N.Y. 2000), aff'd, No. 00-10961

SMB, 2000 WL 1800690 (S.D.N.Y. Apr. 4, 2000)). These provisions are of relatively recent origin, spurred by the In re Merry-Go--Round Enterprises, Inc. settlement of a suit  against  accountants  advising  the  estate.   244  B.R.

327 (Bankr. D. Md. 2000). Where previously there was no  great  concern  with  bankruptcy  professionals  being sued for negligence, after Merry-Go--Round profession- als worried that suits would occur frequently,  and they sought  to  lessen  their  potential  liability  by  contracting for indemnification. See Joseph A. Guzinski, The United States  Trustees:   Ongoing  Challenges,  in  23rd  Annual Current Developments in Bankruptcy and Reorganization

251,  274  (PLI  Commercial  Law  and  Practice  Course, Handbook  Series  No.  820,  2001)  ("In  re  Merry-Go-- Round served as a kind of wake up call for bankruptcy spe- cialists . . . . Fearing exposure to similar claims, specialists

. . . have sought indemnification by the company filing the bankruptcy.");  Kurt F. Gwynne,  Indemnification **22  and Exculpation of Professional Persons in Bankruptcy Cases, 10 ABI L. Rev. 711, 727-29 (2002);  Shanon D. Murray,  U.S. Trustee Watchdog Starting to Bite,  Some Say,  N.Y.L.J.,  May 3,  2001,  at 5 (stating that "the cur- rent movement of restructuring advisers who want to be indemnified for their bankruptcy work stems from a $4 billion fraud, negligence and malpractice case that a re- gional trustee brought against Ernst & Young for its

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*230   role in the bankruptcy proceedings of Merry-Go-- Round").

However,               that          indemnification     provisions              like Houlihan Lokey's are now common in the marketplace does  not  automatically  make  them  "reasonable"  un- derS 328. n12 HN9  Our approach is "market driven," not  "market-determined,"  especially  in  the  realm  of bankruptcy,   where  courts  play  a  special  supervisory role. With the understanding and limitations set out be- low, we believe Houlihan Lokey's indemnification agree- ment  to  be  reasonable  and  therefore  permissible  under

§  328.  In  coming  to  this  conclusion,  we  revisit  tradi- tional  negligence/gross  negligence  analysis,  borrowing from Delaware corporate law, and emphasizing that the indemnity provision leaves the door open to examining the  level  of  care  financial  advisors   **23    exercise  in the process of obtaining the results,  rather than the re- sults themselves. We look to Delaware corporate law as a guide primarily because it offers time-tested insights on  how  courts  should  best  evaluate  an  issue  similar  to the one before us. n13 Additionally, Delaware's law often cues the market.

n12 See,  e.g.,  Unsecured Creditors Comm. v. Pelofsky (In re Thermadyne Holdings Corp.), 283

B.R.  749  (B.A.P.  8th  Cir.  2002);  In  re  Metricom, Inc., 275 B.R. 364 (Bankr. N.D. Cal. 2002) (reject- ing indemnification of Houlihan Lokey, advisor to the bondholders' committee, as unreasonable where the  debtor  and  official  committee  of  unsecured trade  creditors  retained  two  other  financial  advi- sors without such indemnification agreements, and there was no showing that such an agreement was

necessary). Cf.   Bodenstein v. Comdisco,  Inc. (In re Comdisco, Inc.), 2002 U.S. Dist. LEXIS 17994,

2002 WL 31109431 (N.D. Ill. Sept. 23, 2002) (rea- sonableness of indemnity for professional advisors depends on the facts of each case);  Bodenstein v. KPMG  Corporate  Fin.  L.L.C.  (In  re  DEC  Int'l, Inc.),  282  B.R.  423  (W.D.  Wis.  2002) (indemnity of  bankruptcy  professionals  not  per  se  unreason- able but must be scrutinized with care).

**24

n13  While  the  retention  agreement  between United Artists and Houlihan Lokey purports to be governed by New York law, our opinion relates to what is reasonable under § 328(a) of the Bankruptcy Code. As this without doubt is a matter of federal law, we need not examine New York law, and only refer  to  Delaware  corporate  law  as  a  useful  ana- logue.

Directors  and  officers  in  Delaware  may  obtain  in- demnity for their own negligence. n14 Section 145(a) of Delaware General Corporation Law provides that corpo- rations may indemnify directors and officers "if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation." 8 Del. Code § 145(a). Section 145(b) requires that, if the director or officer is adjudged liable to the corporation,  he or she will be indemnified "only to the extent that the . . . court . . . shall determine upon application that,

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*231   despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the .   **25   . . court shall deem proper." Id. § 145(b).

n14 Though directors and officers are fiducia- ries of the corporations they serve, we do not hold financial advisors like Houlihan Lokey to be fidu- ciaries. Still,  in the bankruptcy context they may owe a higher level of care than in ordinary prac- tice. Compare In re Gillett Holdings, 137 B.R. 452,

458 (Bankr. D. Colo. 1991) ("Investment bankers and financial advisors hired by the Debtor are also fiduciaries."),  and In re Allegheny Int'l,  Inc.,  100

B.R. 244,  246 (Bankr. W.D. Pa. 1989) ("We now hold that the investment bankers/financial advisors hired by the debtor and the Creditors' Committee are also fiduciaries."), with In re Joan and David Halpern Inc., 248 B.R. at 46 (earlier cases rejecting indemnification "overlook the common law princi- ples  permitting  indemnity  of  fiduciaries,  and  the idea that a fiduciary cannot be indemnified for neg- ligence, or that such indemnification is contrary to public policy, is just plain wrong"), In re Mortgage

&  Realty  Trust,  123  B.R.  626,  631  (Bankr.  C.D. Cal. 1991) (rejecting indemnification because it is inconsistent with "professionalism," but not hold- ing financial advisors to be fiduciaries), and In re Drexel Burnham Lambert Group, 133 B.R. 13, 27

(Bankr. S.D.N.Y. 1991) (same). The upshot for this case is that, to the extent that fiduciaries may obtain indemnity for their negligence,  financial advisors in bankruptcy (who may or may not be fiduciaries) may do the same.

**26

Changes in Delaware's corporate law make plain that S 145(b) requires the "adjudication of liability" to be one of gross, rather than ordinary, negligence.

Prior to the 1986 amendment to the statute, the language relating to the disqualifying ad- judication read 'adjudged to be liable for neg- ligence or misconduct in the performance of his duty to the corporation.' Since Delaware case law has clearly established 'gross negli- gence' as the standard for liability of directors in violating their duty of care, the reference to  'negligence'  in  section  145(b)  was  inap- propriate and was therefore removed .

E.  Norman  Veasey  et  al.,  Delaware  Supports  Directors

with   a   Three-Legged   Stool   of   Limited   Liability, Indemnification,  and Insurance,  42 Bus. Law. 399,  405

(1987);  see  also  Cede  &  Co.  v.  Technicolor,  Inc.,  634

A.2d 345,  364 n.31 (Del. 1993); Smith v. Van Gorkom,

488 A.2d 858, 873 (Del. 1985) (applying a gross negli- gence standard). In other words, the most that Delaware law requires of directors, though they are fiduciaries, is that they not be grossly negligent. 1 David A. Drexler et al., Delaware Corporation Law and Practice § 15.06 1 ,

**27   at 15-35 (2001) (citing Brehm v. Eisner, 746 A.2d

244,  262  (Del.  2000),  and  Aronson  v.  Lewis,  473  A.2d

805, 812 (Del. 1984)). Put another way, Delaware courts tolerate ordinary negligence from corporate fiduciaries. It is important, however, to understand how these terms are understood in this particular context.

Courts are increasingly recognizing the awkwardness inherent in using the terms "negligence" and "gross neg- ligence" in the area of corporate governance. The art of governing (it is emphatically not a science) is replete with judgment calls and "bet the company" decisions that in retrospect may seem visionary or deranged, depending on the outcome. Corporate directors do not choose between reasonable (non-negligent) and unreasonable (negligent) alternatives, but rather face a range of options, each with its attendant mix of risk and reward. Too coarse a filter, the traditional negligence construct does not allow these nuances to emerge.

While  it  is  often  stated  that  corporate  di- rectors  and  officers  will  be  liable  for  neg- ligence  in  carrying  out  their  corporate  du- ties, all seem agreed that such a statement is misleading. Whereas an automobile **28  driver who makes a mistake in judgment as to speed or distance injuring a pedestrian will likely be called upon to respond in damages, a corporate officer who makes a mistake in judgment  as  to  economic  conditions,  con- sumer tastes or production line efficiency will rarely,  if ever,  be found liable for damages suffered by the corporation.

Joy v. North, 692 F.2d 880, 885 (2d Cir. 1982) (Winter, J.) (citations omitted).

In  simple  terms,  "the  vocabulary  of  negligence ,  while  often  employed  .  .  .   ,   is  not  well-suited  to  ju- dicial review of board attentiveness." In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967 n.16 (Del. Ch.

1996) (Allen, C.) (citation omitted). The same principle applies to financial advisors. In situations where choices are  not  clear,  neither  are  gradations  of  negligence  as  a means of analysis.

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In the last two decades this confusion about what neg- ligence means led to uncertainty about liability exposure for both corporate directors and financial advisors. A "cri-

sis" in corporate governance arose when Delaware courts began to hold directors

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*232   personally liable for their negligence, and direc- tors  were  unable  to  find  insurance   **29    against  the risks associated with their jobs. See 1 Drexler, supra, §

15.06 1 , at 15-36. As already noted, in the bankruptcy context the In re Merry-Go--Round settlement of a suit against an accounting firm advising the estate was a simi- larly seismic event for financial advisors. Houlihan Lokey and other financial advisors fear increases in liability ex- posure for the risks associated with doing their jobs. n15

n15 In this respect Houlihan Lokey's position is similar to that of creditor committee members. See  7  Lawrence  P.  King,  Collier  on  Bankruptcy P1103.05 4 ,  at 1103-32--33 (15th ed. rev. 1996)

("If members of the committee can be sued by per- sons  unhappy  with  the  committee's  performance during the case or unhappy with the outcome of the case, it will be extremely difficult to find members to serve on an official committee.").

HN10  Delaware courts have resolved the negligence conundrum in the corporate sphere by evaluating the pro- cess by which boards reach decisions, rather than the final result of those decisions.   **30   A board's failure to in- form itself of "all material information reasonably avail- able" results in a finding of gross negligence. Aronson,

473 A.2d at 812. n16 In fact, Delaware's jurisprudence is a direct response to the type of concerns about second- guessing that Houlihan Lokey voices:

Compliance with a director's duty of care can never appropriately be judicially determined by reference to the content of the board deci- sion that leads to a corporate loss, apart from consideration of the good faith or rationality of  the  process  employed.  That  is,  whether a  judge  or  jury   ,   considering  the  matter after  the  fact,  believes  a  decision  substan-

tively  wrong,  or  degrees  of  wrong  extend- ing through "stupid" to "egregious" or "irra- tional", provides no ground for director lia- bility, so long as the court determines that the process employed was either rational or em- ployed in a good faith effort to advance cor- porate interests. To employ a different rule -- one that permitted an "objective" evaluation of the decision --  would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long- run, be injurious to investor interests.

**31

Caremark, 698 A.2d at 967 (emphases in original).

n16  In  Merry-Go--Round,   claims  regarding such  a  failure  by  the  accounting  firm  were  at  is- sue.

When Houlihan Lokey agreed to advise the Debtors, it took on the role of a professional (indeed, one highly respected for its adept counsel in the high-stakes arena of major restructuring). Its job was to advise the Debtors well,  and it owed them a duty of care in fulfilling this obligation. To disappoint the reasonable expectations of the Debtors, their creditors, and indeed the Court, is unac- ceptable. At the same time, Houlihan Lokey convincingly describes the stifling effects of unduly close scrutiny by the courts. A rule of reason must prevail.

HN11  Delaware has navigated the Scylla of condon- ing  directors'  misconduct  and  the  Charybdis  of  stifling their business decisions with a rule that stresses not the end result, but the path taken to reach it. Under this ap- proach, courts do not interfere with advice by financial advisors when they (1) have no personal **32   interest, n17 (2)

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*233  have a reasonable awareness of available informa- tion after prudent consideration of alternative options, and

(3) provide that advice in good faith. See 1 Drexler, supra,

§ 15.03, at 15-6. In the corporate sphere this is known as the "business judgment rule." A creature of common law, McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000),

HN12  it acknowledges a judicial syllogism derived from five fundamental tenets:

(1) the management of a corporation's affairs is placed by law in the hands of its board of directors;

(2)  performance  of  the  directors'  manage- ment  function  consists  of:                 (a)  decision- making  --   i.e.,   the  making  of  economic choices and the weighing of the potential of risk against the potential of reward, and (b) supervision of officers and employees -- i.e., attentiveness to corporate affairs;

(3) corporate directors are not guarantors of the financial success of their management ef- forts;

(4) though not guarantors, directors as fidu- ciaries should be held legally accountable to the  corporation  and  its  stockholders  when their performance falls short of meeting ap- propriate standards; and

(5)  such  culpability  occurs  when  directors

**33   breach their fiduciary duty -- that is, when they profit improperly from their po- sitions (i.e., breach the "duty of loyalty") or fail to supervise corporate affairs with the ap- propriate level of skill (i.e., breach the "duty of care").

1 Drexler, supra, § 15.03, at 15-6.

n17 The Bankruptcy Code itself requires that professionals working for the estate be disinterested persons, a term defined in 11 U.S.C. S 101(14). See also 11 U.S.C. § 327(a) ("The trustee . . . may em- ploy  .  .  .  persons   that  do  not  hold  or  represent an interest adverse to the estate, and that are dis- interested persons . . . .");  id. § 328(c) (the court may deny compensation if during employment the professional "is not a disinterested person, or rep- resents or holds an interest adverse to the interest of  the  estate").  While  we  leave  for  another  day whether,  for  example,  a  financial  advisor  trading

in claims with respect to a debtor it serves is dis- interested, we note that such a circumstance is not rare.

**34

Here, HN13  where a debtor's financial affairs -- the pith of a reorganization -- are shaped by its financial ad- visors, they lay out the economic choices and assess their risks, and (though not sureties of success) can be held ac- countable for not advising with the level of care or loyalty expected, transposing the business judgment rule from its corporate ambit to bankruptcy appears well suited. For by this transposition we have a means to distinguish gross from  simple  negligence,  and  thus  a  benchmark  for  ap- proving as reasonable an arrangement for indemnity that includes common negligence. n18

n18 Houlihan Lokey argues that our approach nonetheless subjects it to claims that it has not fol- lowed a correct process in advising debtors. While financial advisors are not Garibaldi for all reorgani- zations, they are trained to enhance their prospects. Undertaking  this  duty  for  so  high  a  recompense

($ 150,000 per month plus a "transaction fee" of

70  basis  points  of  United  Artists'  debt)  is  hardly reasonable if that training is not applied.

**35

Our understanding of the developing standards used in this area fortifies our view that the District Court did not abuse its discretion by finding the contested terms in the agreement at issue here to be reasonable. At this initial stage of the indemnity process (considering and approv- ing a retention arrangement containing an agreement to indemnify for ordinary negligence), no evidence before the District Court tended to disqualify Houlihan Lokey under the tenets we set out for determining reasonable- ness of the indemnity proposed. n19

n19   Before   the   Court   was   the   affidavit of  Michael  A.  Kramer  (Managing  Director  of Houlihan  Lokey),   submitted  in  support  of  the Debtors' application to retain Houlihan Lokey, and stating  that  it  was  "disinterested"  (and  thus  had no  personal  interest  in  the  United  Artists  cases), a claim that the U.S. Trustee did not dispute. There was  no  allegation  that  Houlihan  Lokey  impru- dently considered financial options available to the Debtors, nor was there any allegation of Houlihan Lokey's bad faith.

In  any  event,  section  328(a)  itself  provides  a safe harbor for the Court to reconsider its approval

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of any employment terms for professionals. Notwithstanding such terms and con- ditions, the court may allow compen- sation different from the compensation provided under such terms and condi- tions after the conclusion of such em- ployment, if such terms and conditions

**36

prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.

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*234   We reach this result with two caveats. The first is that Houlihan Lokey attempted to supplement its retention agreement with a provision in the retention application and approving order that in effect mandates indemnifica- tion to Houlihan Lokey for even its gross negligence if that negligence is not judicially determined to be "solely" the  cause  of  its  damages.  In  other  words,  the  Debtors would be bound to indemnify Houlihan Lokey when its gross negligence contributed only in part to its damages. This attempted end run goes out of bounds for acceptable public policy. See Gwynne, supra, at 730-01 & nn.106-

07.

Secondly, as note 8 supra and the accompanying text indicate,  Houlihan Lokey in the Plan sought indemnity only for actions in its professional capacity. The retention agreement arguably goes further, for it requires indemni- fication of Houlihan Lokey for contractual disputes with the Debtors. To the extent that Houlihan Lokey seeks in- demnity for a contractual dispute in which the Debtors allege the breach of Houlihan Lokey's contractual obli- gations, n20 this is hardly an indemnity-eligible activity. See Cochran v. Stifel Fin. Corp.,  2000 Del. Ch. LEXIS

179, No. Civ. A. 17350, 2000 WL 1847676, at *7 (Del. Ch. Dec. 13, 2000)   **37   , aff 'd in relevant part, rev'd in part on other grounds, 809 A.2d 555 (Del. 2002); cf. Gwynne, supra, at 731. n21

n20  We  doubt  that  this  kind  of  enhanced  in- demnity  was  contemplated  by  Houlihan  Lokey. Subparagraph (a)(iv) of Exhibit A to the retention agreement speaks only of the breach by the Debtors of their contractual covenants, representations, and warranties. While subparagraph (a)(i) relates to any dispute  involving  the  agreement  (which  theoreti- cally may involve breaches by Houlihan Lokey of its obligations), it appears that such a conceivable argument is overridden by subparagraph (d), which exempts from indemnity "gross negligence, ... will- ful misfeasance, or reckless disregard by Houlihan Lokey  of its obligations or duties" under the agree- ment.

n21 As noted supra n.4,  the U.S. Trustee has

not appealed whether the order permitting indem- nification of Houlihan Lokey for its prepetition per- formance of services to the Debtors is reasonable under § 328(a). We therefore do not address this question.

**38

* * * * *

Financial advisors are an essential part of reorgani- zations. Our decision today recognizes the need for safe- guards from the second-guessing of creditors and, ulti- mately,  the  courts.  At  the  same  time,  it  assigns  courts their accustomed task of evaluating the process by which advice is given. HN14  If financial advisors take the ap- propriate steps to arrive at a result, the substance of that result  should  not  be  questioned.  So  understood,  agree- ments to indemnify financial advisors for their negligence are reasonable under § 328(a) of the Bankruptcy Code. n22

n22 Our concurring colleague has taken a more familiar path to the same result. That path is plau- sible and merits consideration. We go another way because the traditional approach sheds no light on when negligence becomes gross, and thus not in- demnifiable.  With  great  conviction,  however,  we disavow the attempt to blot our judicial escutcheon with the claim that we engage in "policy making" that  "goes  far  beyond  the  parameters  of  our  ju- dicial function." We address directly the issue on appeal, see supra n.4, and in deciding that issue ex- plain when it is "reasonable" under § 328(a) of the Bankruptcy Code to approve an agreement to in- demnify a financial advisor for its own negligence by  laying  down  markers  to  discern  what  simple negligence is and is not. As our colleague points out, "the law is unsettled and our bankruptcy and district courts need guidance."

**39

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*235   IV. Conclusion

The U.S. Trustee has standing to bring this case. His claim is not constitutionally moot because Plan confirma- tion has not released all potential claims against Houlihan Lokey.  It  is  not  equitably  moot  because  the  relief  re- quested will not upset the confirmed Plan. Because it is permissible for financial advisors to obtain indemnity for negligent acts if understood in the context noted above, the contested provision is acceptable. We therefore affirm.

CONCURBY: ALITO, TRENDELL

CONCUR: ALITO, Circuit Judge, Concurring:

I fully join the thoughtful and scholarly opinion of the court but add a few words in response to Judge Rendell's concurring  opinion.  With  respect,  I  believe  that  Judge Rendell's opinion quarrels with an opinion other than the one that the court has issued. The opinion of the court, as I understand it, holds only that the "reasonableness" stan- dard of 11 U.S.C. § 328(a) does not categorically prohibit indemnification of financial advisers, as the United States Trustee argues. If such a blanket prohibition is desirable, it should be enacted by Congress.

Contrary  to  the  suggestion  in  Judge  Rendell's  con- currence, the court does not hold **40    that Houlihan Lokey's  indemnification  agreement  must  be  interpreted in accordance with the principles of Delaware corporate law that the opinion of the court discusses. Nor does the court issue an authoritative interpretation of that agree- ment. Rather, the court discusses principles of Delaware corporate law because they provide a sophisticated frame- work for evaluating the conduct of financial advisers and because this understanding of the circumstances in which in  it  sensible  to  hold  financial  advisers  responsible  for unsuccessful business decisions helps to explain why in- demnification agreements such as the one in this case are not categorically "unreasonable."

RENDELL, Circuit Judge, Concurring:

I agree with the result reached by the District Court and agree that we should affirm its order. However, I re- spectfully reject the majority's ruling on the merits, as I read Judge Ambro's opinion, because it represents a sig- nificant departure, if not a quantum leap, from the issue before us.

Writing for the panel, brother Ambro does not address what the District Court did or the arguments raised by the parties on this unresolved yet important issue; the opinion actually ignores the **41  issue presented on appeal. The Trustee seeks a per se ban on provisions granting indem- nity to financial advisors for negligence. Houlihan Lokey

takes the position that such provisions should be permissi- ble and that the court should examine them on a case-by-- case basis. The parties briefed the various aspects of that issue, including the propriety of professionals' obtaining such indemnity and whether it was appropriate or nec- essary in the given setting. While, as the District Court noted,  there is no binding caselaw,  there are numerous cases that express differing views on the issue. n1

n1 In rejecting a per se ban on indemnity pro- visions, the District Court focused on the "reason- ableness" language in section 328(a) and conducted an independent analysis of this agreement. A num- ber  of  other  courts  favor  this  approach  and  have used it to uphold some indemnity provisions and reject others. For example,  the District Court for the Northern District of Illinois and the Bankruptcy Court for the Southern District of New York have both  upheld  similar  indemnity  provisions,  reject- ing  the  Trustee's  argument  that  such  provisions should  be  per  se  unreasonable.  In  re  Comdisco, Inc., Nos. 02 C 1174 & 02 C 1397 (consolidated),

2002 U.S. Dist. LEXIS 17994, at *16 (N.D. Ill. Sept.

25, 2002); In re Joan & David Halpern, Inc., 248

B.R. 43, 47 (Bankr. S.D.N.Y 2000). Houlihan Lokey cites to numerous non precedential decisions of the Bankruptcy Courts for the District of Delaware do- ing  the  same.  A'ee  Br.  at  22.  Bankruptcy  Courts in California and Colorado have also subjected in- demnity provision to a full reasonableness inquiry. See, e.g., In re Metricom, Inc., 275 B.R. 364, 371

(Bankr. N.D. Cal. 2002) (stating that "the issue is whether particular terms are reasonable under given circumstances, and such a determination can only be made on a case by case basis") (ultimately re- jecting provision at issue); In re Gillett Holdings, Inc., 137 B.R. 452, 458-49 (Bankr. D. Colo. 1991)

("This Court will not go so far as to hold that in- demnity provisions per se are either unacceptable or unnecessary in these circumstances. Indemnity provisions must be analyzed on a case-by--case ba- sis.") (citation omitted) (ultimately rejecting provi- sion at issue); In re Mortgage & Realty Trust, 123

B.R. 626,  630 (Bankr. C.D. Cal. 1991) (rejecting provision at issue because debtor had presented no evidence of its reasonableness).

In support of her theory that indemnity provi- sions  should  be  banned  outright,  the  Trustee  re- lies on an opinion from one of our own bankruptcy courts, In re Allegheny International, Inc., 100 B.R.

244,  247  (Bankr.  W.D.  Pa.  1989).  In  Allegheny, Judge Cosetti decided that financial advisors were fiduciaries of the debtors who hired them.   Id. at

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246. He went on to appropriate Judge Cordoo's fa- mous remarks in Meinhard v. Salmon, 249 N.Y. 458,

164 N.E. 545, 546, (N.Y. 1928), for the proposition that  fiduciaries  owe  the  highest  standard  of  care, and to conclude that "holding a fiduciary harmless for its own negligence is shockingly inconsistent with the strict standard of conduct for fiduciaries." Allegheny, 100 B.R. at 247. Courts faced with this issue have referenced the "fiduciary" language, but have generally looked at an advisor's fiduciary sta- tus as one factor in a reasonableness analysis, not at support for a per se ban on indemnity. See, e.g., Gillett, 137 B.R. at 458; Mortgage & Realty Trust,

123 B.R. at 630.

Here, the parties have not argued that profes- sionals like Houlihan are fiduciaries as such, and I suggest that resort to nomenclature for resolution of the issues before us would be wrong. The issue here is "reasonableness" under section 328(a). An agreement about what status might be attributed to professionals  based  on  analogous  corporate  trust principles  should  five  way  to  a  consideration  of what is reasonable under all of the circumstances in the bankruptcy context.

**42

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*236     Instead  of  addressing  these  arguments,  Judge Ambro's opinion ventures into the arena of corporate law and  fashions  an  open-ended  good  faith  business  judg- ment rule, based upon Delaware corporate law principles, as the test for the "reasonableness" of advisors' indemnity. It does so because it finds the concepts of negligence and gross negligence to be too results-oriented.

I  do  not  doubt  that  scholars  and  professors --  and indeed  some  practitioners  --  may  have  an  aversion  to distinctions  made  between  negligence  and  gross  negli- gence and have therefore suggested that corporate direc-

tors  should  not  be  liable  if  they  follow  the  appropriate process and exercise their business judgment. However, that is not the issue before us, nor is it a concept that either of the parties has even remotely embraced.

Responding to a line of inquiry at oral argument, the Trustee  and  Houlihan  Lokey  filed  supplemental  briefs specifically  addressing  the  propriety  of  our  creating  a new "reasonableness" standard separate and apart from the  negligence  principles  embodied  in  their agreement. They specifically

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*237    requested that we not do so. n2 As both parties have noted, we should decide the issue presented to us,

**43   not craft new rules or address matters beyond the scope of the appeal. I should note that I would favor Judge Alito's reading of Judge Ambro's opinion, but fear it will not be so read.

n2 In their Supplemental Briefs, the Trustee and Houlihan Lokey both pointed out the dangers inher- ent in our creating a new standard in this case. First and foremost, both parties noted that our appellate jurisdiction should be limited to deciding the issue presented, that is, whether the District Court abused its discretion in approving the retention agreement. See App. Supp. Br. at 3 ("The crafting of new neg- ligence standards . . . seems inconsistent with the scope of this appeal.")

The parties also implored us not to venture into the realm of the legislature, as we are not equipped to  weigh  the  many  complicated  interests  that  go into  bankruptcy  administration,  nor  can  we  pre- dict  the  implications  of  a  new  untested  standard or the ways it might upset the current balance of incentives. App. Supp. Br. at 6-7; A'ee Supp. Br. at  6.  The  Trustee  worries  that  the  majority's  test will essentially excuse all professional misconduct by financial advisors, while for its part, Houlihan Lokey fears the rigid test will undermine its own safeguards,  exposing  it  to  "process"  litigation  by creditors unhappy with their recovery, even where there was no basis on which to attack the substan- tive  advice  actually  given.  App.  Supp.  Br.  at  9; A'ee Supp. Br. at 5. In short, neither party revealed any  inclination  to  support  what  the  majority  has done. Rather, both vehemently argued against this approach.

**44

I cannot help but wonder why we should resort to rea- soning  that  "eschews  the  inherent  imprecision  between shades  of  negligence"  when  the  parties  bargained  un-

der traditional negligence principles and rules. And why should we concern ourselves with Delaware law applica- ble to directors, when the retention agreement here was specifically governed by New York law and was meant to govern a relationship not with directors, but between a  company  and  its  professional  financial  advisors?   n3

Financial  advisors  are  not  directors,  and  I  do  not  find their status to be analogous.

n3 Although United Artists is a Delaware cor- poration,  its  retention  agreement  with  Houlihan Lokey contains an explicit choice of law provision specifying  New  York  law  as  the  governing  state law. App. at 132-33.

I must confess that although I would acknowledge that my colleagues sincerely believe that their view represents a contribution to our thinking about the issue at hand, I find it very difficult to conceive of the application, and im- plications,   **45   of this new test. Presumably, the first and third prongs -- "disinterested" and "good faith" -- are easily met, but what does the second prong mean? When does  a  financial  advisor  not  have  "a  reasonable  aware- ness of available information after prudent consideration of alternative options"?

In  a  footnote,  Judge  Ambro  seemingly  applies  the post-hoc test he espouses (n.19), concluding that the ev- idence before the District Court revealed no personal in- terest on the part of Houlihan Lokey in the United Artists cases, and that, because there were no allegations of im- prudent consideration by Houlihan Lokey of the available financial options or of bad faith, Houlihan Lokey is enti- tled to indemnity. Even were I to agree that the creation of a new test is warranted, surely this is not the way to ap- ply it. This conclusory treatment leaves us uncertain as to how the test should be applied in other instances. I cannot tell  whether  it  will  provide  a  blank  check  for  substan- dard performance (as the Trustee urges), or will foment process-oriented litigation (as Houlihan Lokey submits). Further, I cannot imagine what guidance we are giving to the District Court by changing the rules midstream,

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*238    much **46    less what implications this poses for indemnity agreements already in force.

The  rationale  for  adopting  this  test  --  namely,  an aversion to a "results-oriented" approach to liability, and therefore, indemnity -- goes far beyond the parameters of our judicial function,  into the sphere of policy making. To my mind, the adoption of a business judgment rule as providing a standard for indemnification of professional advisors  is  fraught  with  policy  considerations,  none  of which has been explored in this case. These are the types of concerns that should be considered in the first instance by a legislative, rather than a judicial, body. Further, the test  can  only  be  applied  after  the  fact,  thus  essentially emasculating the bankruptcy courts' testing of terms of retention at the time of retention, as is clearly envisioned by  section  328(a).  I  fear  that  our  grafting  such  a  test onto section 328(a) goes beyond our ken, especially here where we are reviewing a determination by the District Court that followed traditional lines of reasoning.

The issue actually before us, as framed by the parties and  decided  by  the  District  Court,  deserves  our  atten- tion.  Is  there  something  essentially  problematic   **47  with the concept of professionals bargaining for indem- nity  against  their  own  negligence? Should  it  ever  be permitted?  If so, under what circumstances?  We should address the issue as presented, because the law is unsettled and our bankruptcy and district courts need guidance.

The District Court considered the merits of this issue very seriously and thoroughly, entertaining briefing and oral argument that spans nearly 500 pages of the volumi- nous appendix submitted on appeal. Instead of creating a new test, I would affirm by disavowing the notion of a per se ban, engaging in a discussion of the factors that the courts have examined in considering "reasonableness" on a case by case basis under section 328, and approving the ultimate result reached by the District Court based on the extensive record presented. n4

n4  Among  the  specified  factors,   and  facts, weighing  in  favor  of  the  reasonableness  of  this

agreement in the situation presented here are: 1) the retention of Houlihan Lokey was in the best interest of the estate, as it played a crucial role in the restruc- turing;  2)  United  Artists'  creditors  approved  the agreement and have never objected to the indem- nity  provision;  3)  the  agreement  did  not  provide blanket  immunity,  but  rather  contained  detailed procedures for determining at a later date whether a  particular  application  for  indemnity  should  be granted; 4) Houlihan Lokey had been retained pre- petition under an agreement containing an indem- nity clause. Most of its work was performed prior to the initiation of bankruptcy proceedings, so, rela- tively speaking, its post-bankruptcy indemnity was not particularly significant;  5) United Artists and Houlihan Lokey are sophisticated business entities with  equal  bargaining  power  who  engaged  in  an arms length negotiation; 6) such terms are viewed as normal business terms in the marketplace,  see In re Busy Beaver Bldg. Centers, 19 F.3d 833, 849

(3d Cir. 1994) (condoning a "market-driven" ap- proach to reasonableness); and finally, 7) under the terms  of  section  328,  the  District  Court  retained discretion to modify the agreement "if such terms and  conditions  prove  to  have  been  improvident."

11 U.S.C. § 328(a). Indeed,  we have encouraged similar exercises of discretion in the realm of post- bankruptcy fees for attorney services to debtors un- der 11 U.S.C. § 330. In re Top Grade Sausage, Inc.,

227 F.3d 123, 132-33 (3d Cir. 2000). I would there- fore approve the indemnity agreement, subject to the two caveats noted by the majority, as discussed in the penultimate paragraph of this concurrence.

**48

The review and assessment of the law and the record-- rather than the creation of a slippery slope for testing con- sulting professionals' liability in the bankruptcy arena -- should be the basis of our rule. The concluding paragraphs of the opinion

315 F.3d 217, *239; 2003 U.S. App. LEXIS 275, **48;

Bankr. L. Rep. (CCH) P78,777; 49 Collier Bankr. Cas. 2d (MB) 1434

Page 25

*239   seem to venture into an analysis of "reasonable- ness,"  noting  two  aspects  of  the  indemnity  agreement that  are,  respectively,  an  "end  run"  around  "acceptable public policy" (the indemnity for gross negligence when that negligence is not solely the cause of damages), and not  an  "indemnity-eligible  activity"  (the  indemnity  for contractual disputes with Debtors). These aspects were never argued or briefed, but I suggest that it is this type of scrutiny of the provisions of the retention agreement that is called for under the "reasonableness" standard of section

328(a). I agree that, assessed under the "reasonableness" standard, these two terms do not pass muster. But, unfor- tunately, we are left confused as to whether the overall

inquiry is, as urged in the thrust of the opinion, a post hoc examination, or whether some scrutiny --  on some rea- sonableness basis -- is to be undertaken at the outset. It is hard to imagine that reasoning done at **49   the outset, if it does occur, could be anything other than a complete and binding determination of "reasonableness," making some after the fact business judgment rule unnecessary and uncalled for. Once again, we are left questioning how to apply this test.

Therefore,  although  I  concur  in  the  resulting  affir- mance, I would arrive at that result via an entirely different route.

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