Retroactive approval of employment and compensation to attorney for Chapter 7 trustee is not allowed.
Cite as
1998 DJDAR 5453Published
Apr. 13, 1999Filing Date
Mar. 11, 1998Summary
The U.S.B.A.P. 9th held that retroactive approval of employment and compensation for Chapter 7 trustee counsel was inappropriate, and warranted fee disgorgement.
On Sept. 16, 1991, Vincent and Pauline Cardinalli filed a Chapter 11 bankruptcy petition. In August 1997, the case was converted to a Chapter 7 case. The court appointed John Richardson as Chapter 7 trustee. Richardson asked the law firm Rosenblum, Parish & Isaacs (RPI) to represent him in the case. The estate had minimal assets, and neither RPI nor Richardson believed that enough assets could be recovered to pay RPI's legal fees. Because RPI did not believe it would be paid, it decided not to file an application for employment. The primary attorney at RPI handling the matter had nine years of bankruptcy experience. After four years of providing legal services in the case for Richardson, RPI realized that sufficient assets existed to pay the estate's administrative claims, including RPI's legal fees. RPI filed applications for retroactive approval of employment, and for the approval of compensation in the amount of $3,769 in fees and $193.95 in expenses. The U.S. Trustee opposed the applications. The bankruptcy court overruled the opposition, and approved RPI's employment and compensation. The bankruptcy court warned RPI that if it ever again waited until sufficient assets existed before seeking employment approval, the court would not act favorably.
The U.S.B.A.P. 9th reversed and remanded, with instructions for RPI to disgorge all fees. The matter was not moot simply because Richardson's final report was approved, the suspect fees paid, and the closing of the case imminent. RPI was a party to the appeal, and the reviewing court could grant "effective relief" even if the case was closed, by ordering RPI to return the subject funds. Although a bankruptcy court has unfettered discretion to deny retroactive employment, the discretion to approve retroactive employment is more limited. Such employment should only be approved in "exceptional circumstances." Both 11 U.S.C. Section 327(a) and Rule 2014(a) of the Federal Rules of Bankruptcy Procedure require a professional to seek approval of employment prior to commencing work. The responsible attorney at RPI was an experienced bankruptcy attorney who understood these rules. Notwithstanding, RPI had a history of similar conduct in other cases. RPI's only reason for not seeking prior approval of its employment was because it did not want to incur the expense of doing so without the possibility of being compensated. A voluntary decision to disregard the rules in order to save money was not a satisfactory explanation. Approval of employment is required even if the professional does not seek to be compensated. One reason for this is to assure against conflicts of interest. Another is to protect the estate from claims of volunteers that provided unnecessary services. The bankruptcy court should not have approved RPI's employment in this case, and any fees collected by RPI had to be disgorged.
— Brian Cardile
Appeal from the United States Bankruptcy Court for the Northern District of California Honorable Arthur S. Weissbrodt, Bankruptcy Judge, Presiding
Before: MEYERS, RYAN, and SMITH 1, Bankruptcy Judges.
MEYERS, Bankruptcy Judge:
I The law firm of Rosenblum, Parish & Isaacs, PC ("Rosenblum") agreed to represent a Chapter 7 trustee. Because Rosenblum did not think it would get paid, it decided not to file an application for employment.
Four years after it started working on the case, after realizing that the estate had enough funds to pay administrative expenses, Rosenblum filed applications for retroactive approval of employment and approval of compensation. The court approved both applications over the objections of the Office of the United States Trustee ("UST"). The UST appeals.
We REVERSE and REMAND.
II FACTS Vincent and Pauline Cardinalli ("Debtors") filed a Chapter 11 petition on September 16, 1991. In July 1993, the bankruptcy case was converted to a Chapter 7 case and in August 1993, John W. Richardson ("Trustee") was appointed Chapter 7 trustee.
The Trustee asked Rosenblum to represent him in the case. According to Rosenblum, the Trustee and Rosenblum both believed the chances of recovering funds for the estate were "dismal."
The attorney who worked on the case is Charles P. Maher ("Maher"). He is a shareholder of Rosenblum. The application for compensation states that at the time the application was filed Maher had nine years of experience in bankruptcy and insolvency law and billed at hourly rates of $185-$225.
Rosenblum performed various services for the Trustee. On September 1, 1993, Rosenblum filed an opposition to the court's order to show cause why the case should not be dismissed for the Debtors' failure to file a statement of intention. On October 12, 1993, it filed an application for an order approving a compromise. After the application was opposed, Rosenblum filed a reply, attended a hearing on the matter and submitted a proposed order approving the compromise. This compromise was approved by the court and resulted in an $8,750 payment to the estate. Rosenblum also consulted with a creditor who wanted to file a complaint objecting to the Debtors' discharge and negotiated with an attorney for the return of $5,002 given without court authorization during the Debtors' Chapter 11 case.
On April 7, 1997, Rosenblum filed a First and Final Application for Compensation and Expense Reimbursement for services performed from August 3, 1993 through February 28, 1997. On May 9, 1997, Rosenblum filed an Application for Order Authorizing Employment of Counsel Nunc Pro Nunc.
The UST opposed the applications. After conducting a hearing on the matters, the court granted the employment application and approved all the fees and reimbursement of expenses requested by Rosenblum ($3,769 in fees and $193.95 in expenses). The court warned Rosenblum that if Rosenblum ever again delayed seeking approval of its employment until it believed there were sufficient funds in the estate, the court would not approve its employment retroactively.
III STANDARD OF REVIEW The decision whether to authorize employment nunc pro tunc is reviewed for an abuse of discretion or erroneous application of the law. In re Atkins, 69 F.3d 970, 973 (9th Cir. 1995). Citing In re Kroeger Properties and Development, Inc., 57 B.R. 821, 823 (9th Cir. BAP 1986), Rosenblum asserts that the bankruptcy court has "virtually unfettered discretion" in deciding whether to allow retroactive employment. Kroeger Properties involved a different scenario than the instant case. In Kroeger Properties, the Panel was reviewing the bankruptcy court's denial of a request for nunc pro tunc appointment. Id. Only in exceptional circumstances should employment of professionals be approved on a retroactive basis; thus, the court's discretion to deny such approval is virtually unfettered. Here, in contrast to Kroeger Properties, the order on appeal grants the request for retroactive appointment. The court's discretion to approve such requests is limited. Atkins, supra, 69 F.3d at 976. See In re Downtown Inv. Club III, 89 B.R. 59 (9th Cir. BAP 1988); In re Crook, 79 B.R. 475 (9th Cir. BAP 1987).
IV DISCUSSION
A. Jurisdiction
Rosenblum contends that the appeal is moot because the UST approved the Trustee's Report of Distribution and entry of a final decree is imminent. It asserts that it is therefore too late for the Panel to provide effective relief to the Appellant, because compensation has already been paid to Rosenblum and the bankruptcy case will soon be closed.
The UST responds that a final decree will not be entered until this appeal is resolved; and even if it were and the case closed, the bankruptcy court could reopen the case to order Rosenblum to return the disbursed funds.
An appeal may be rendered moot if it becomes impossible to fashion effective relief. In re Blumer, 66 B.R. 109, 113 (9th Cir. BAP 1986), aff'd without op., 826 F.2d 1069 (9th Cir. 1987). "Effective relief is impossible if funds have been disbursed to persons who are not parties to the appeal or if failure to obtain a stay has permitted such a comprehensive change as to render it inequitable to consider the merits of the appeal." Id. Where the party who received estate funds is the appellee, the Panel could provide effective relief by instructing the trial court to order the return of any erroneously disbursed funds. Id. Like the situation in Blumer, in the case at hand the appellee is the party who was paid from the estate. The Panel can grant effective relief by directing the bankruptcy court to order Rosenblum to return the disbursed funds. The appeal is not moot.
B. The Merits
The UST asserts that the employment order should be reversed because Rosenblum failed to provide a satisfactory explanation for its delay in filing an employment application. Both Bankruptcy Code Section 327(a) and Fed.R.Bankr.P. 2014(a) explicitly require attorneys to seek court approval before commencing employment for the estate. Downtown Inv. Club III, supra, 89 B.R. at 63. The UST describes Rosenblum as an "experienced, sophisticated, San Francisco bankruptcy boutique law firm" which knew about the requirement of obtaining court approval before performing services for the estate. Rosenblum does not claim otherwise.
The UST points out that in at least four other bankruptcy cases, Rosenblum had performed services for Chapter 7 trustees without seeking compensation or authorization to be employed nunc pro tunc and was never paid for its services. Rosenblum responds that it should not be punished for doing pro bono work. The UST replies that this so-called pro bono work is performed for Rosenblum's otherwise paying trustee clients in order to foster client goodwill. Providing pro bono services to a paying client is different than providing pro bono services to indigents, particularly since Rosenblum sought compensation once assets were recovered. We agree with the UST's characterization of Rosenblum's actions. Denying Rosenblum retroactive employment authorization is not akin to punishing it for performing pro bono services.
In this circuit, bankruptcy courts may approve a professional's unauthorized services retroactively. Atkins, supra, 69 F.3d at 973. Such retroactive authorization is limited to situations in which exceptional circumstances exist. Id. at 974. To establish exceptional circumstances, applicants must: "(1) satisfactorily explain their failure to receive prior judicial approval; and (2) demonstrate that their services benefitted the bankrupt estate in a significant manner." Id.
The UST maintains that Rosenblum has not established the existence of exceptional circumstances because it has not satisfactorily explained its failure to obtain prior court approval. In its motion for retroactive approval of employment, Rosenblum stated that it "hesitated to incur the expense of becoming employed in the case because at first it did not appear that any funds would come into the estate to pay for Applicant's services." In other words, Rosenblum decided to disregard the Bankruptcy Code and Rules because it did not want to spend money when it would not receive any money in return. This explanation does not justify retroactive approval of employment.
Preapproval of employment is important not just when the professional will be paid by the estate. Approval of employment is required even if compensation is not requested as an administrative expense. In re Campbell, 176 B.R. 558, 561 (Idaho 1994). One important purpose of requiring applications prior to employment is to ensure that the applicant does not have any interests adverse to the estate. In re BOH! Ristorante, Inc., 99 B.R. 971, 973 (9th Cir. BAP 1989). Another purpose is to protect against claims from volunteers performing unnecessary services. In re Jenkins, 188 B.R. 416, 421 (9th Cir. BAP 1995), aff'd, 130 F.3d 1335 (9th Cir. 1997). Professionals who seek employment authorization after their services are completed frustrate the intentions of Bankruptcy Code Section 327(a) and Fed.R.Bankr.P. 2014(a).
We have held that retroactive authorization should not be given where the lateness in requesting court approval of employment stems from inexcusable or unexplained negligence. Downtown Inv. Club III, supra, 89 B.R. at 63. If inexcusable neglect is not a satisfactory excuse, certainly the intentional decision to flaunt the Code and Rules should not be permitted.
The voluntary decision to disregard the Bankruptcy Rules in order to save money is not a satisfactory reason to file an untimely employment application.
V CONCLUSION The appeal is not moot. The orders approving Rosenblum's employment nunc pro tunc and authorizing the estate to pay its fees and reimburse its expenses will be reversed and remanded with instructions for the bankruptcy court to order Rosenblum to disgorge the compensation payments it received from the estate.
Attorneys:
For Appellant(s):
Robert S. Gebhard
Office of the United States Trustee
280 S. First Street
Suite 268
San Jose, CA 95113
Attorney for the United States Trustee
For Appellee(s):
Charles P. Mahar
555 Montgomery Street
15th Floor
San Francisco, CA 94111
Attorney for Rosenblum,
Parish & Isaacs and John W. Richardson, Trustee
1 Hon. Erithe A. Smith, Bankruptcy Judge for the Central District of California, sitting by designation.
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