## Facts

- Marvel Entertainment Group, Inc. and affiliates filed Chapter 11 petitions and operated as debtors-in-possession, with roughly $1 billion in asserted claims.
- Marvel’s stock was held through holding companies that issued nearly $900 million in bonds secured by pledged Marvel shares.
- Entities controlled by Carl Icahn acquired substantial amounts of the holding-company debt and, after litigation over voting rights, gained control of Marvel’s board, thereby controlling the debtor-in-possession.
- A secured lender group held over $600 million in secured claims against Marvel and became locked in severe conflict with the Icahn-controlled debtor-in-possession over financing, governance, and reorganization direction.
- The debtor-in-possession sued the lenders and others alleging a conspiracy to undermine its reorganization efforts, reflecting escalating hostility.
- The cases were withdrawn from bankruptcy court and handled in the district court due to the intensity of the dispute.
- On the lenders’ motion supported by the U.S. Trustee, the district court appointed John J. Gibbons as Chapter 11 trustee, displacing the debtor-in-possession.
- The district court later denied the trustee’s request to retain his law firm as counsel based solely on the firm’s prior, unrelated representation of a creditor (Chase Manhattan Bank).

## Issues

1. Whether the district court abused its discretion under 11 U.S.C. § 1104(a) by appointing a Chapter 11 trustee based on extreme acrimony and a breakdown in negotiations between the debtor-in-possession and major creditor constituencies.
2. Whether the district court abused its discretion under 11 U.S.C. § 327(a) by disqualifying the trustee’s proposed counsel solely due to prior, unrelated representation of a creditor.

## Decision

- Affirmed the appointment of a Chapter 11 trustee under § 1104(a).
- Held that the record supported the district court’s finding that hostility between the debtor-in-possession and key creditors threatened to prevent progress toward a feasible plan, making a trustee appointment in the estate’s interests.
- Reversed the order denying the trustee’s retention of his chosen law firm as counsel.
- Held that prior, unrelated representation of a creditor, without a showing of a present adverse interest or meaningful risk of divided loyalty, did not justify disqualification under § 327(a).

## Legal Principles

- A Chapter 11 debtor’s continued control is favored, but the presumption can be overcome when evidence shows the debtor-in-possession cannot effectively perform fiduciary duties or move the case toward reorganization.
- Under § 1104(a)(2), a trustee may be appointed “in the interests of creditors” and the estate even absent findings of fraud or dishonesty, where severe creditor-debtor conflict materially impedes administration and negotiations.
- Trustee-appointment decisions are reviewed for abuse of discretion, with substantial deference to the trial court’s assessment of case dynamics and reorganization feasibility.
- Under § 327(a), professional retention turns on whether the professional is disinterested and does not hold or represent an interest adverse to the estate.
- Conflict review under § 327(a) is practical: prior or other connections to creditors do not automatically disqualify counsel; disqualification requires a concrete present risk that the connection will skew representation against the estate.
- A trustee is ordinarily entitled to reasonable latitude in selecting counsel, absent a demonstrated disqualifying conflict.

## Conclusion

The court upheld replacing an embattled debtor-in-possession with a Chapter 11 trustee when conflict with major creditors had deteriorated to the point of obstructing reorganization, and it required a case-specific showing of actual adverse interest before disqualifying the trustee’s chosen counsel based on prior, unrelated creditor representation.


In re Marvel Ent. Grp., Inc., 140 F.3d 463 (3d Cir. 1998)