672 B.R. 788
Bankr. D. Ariz.2025Background
- Athena Medical Group, LLC, a medical wound care provider, filed for Chapter 11 bankruptcy under subchapter V in March 2023 facing a large unsecured claim by Wound Care Specialists, LLC (WCS).
- Early in the case, due to alleged missteps, the debtor was removed as debtor-in-possession (DIP), and the powers of the Subchapter V Trustee were expanded as of June 28, 2023.
- Dorsey & Whitney LLP represented the debtor, even post-DIP removal, helping to propose and confirm multiple reorganization plans.
- Dorsey filed a fee application requesting over $1.25 million in fees for services performed after the debtor's removal as DIP.
- WCS objected, arguing the Bankruptcy Code does not allow estate-compensated fees for counsel of a dispossessed subchapter V debtor.
- The court denied Dorsey's fee application in its entirety, holding there was no statutory basis for such post-dispossession fees.
Issues
| Issue | Plaintiff's Argument (Dorsey) | Defendant's Argument (WCS) | Held |
|---|---|---|---|
| Eligibility for Fees Post-DIP Removal | Only debtor can file a plan under § 1189 and must therefore retain/pay counsel | Once debtor is removed as DIP, it cannot retain counsel under § 327; no Code provision allows payment | Fees not allowed; post-removal counsel cannot be compensated under § 327/330 |
| Retained Status as 'Professional Person' | Dorsey remains a professional retained under § 327 despite removal as DIP | Only the trustee (or DIP) can employ professionals; after removal, debtor/counsel lose § 327/330 status | Not persuasive; retention ends with DIP status |
| Compensation as 'Actual and Necessary Costs' under § 503(b)(1)(A) | Work by Dorsey preserved estate; § 503(b)(1)(A) allows compensation not otherwise covered | § 503(b)(2) & (b)(1)(A) cannot be used to circumvent § 327/330 requirements; specific provisions control | Not permitted; § 503(b)(1)(A) not an alternative route for counsel fees |
| Equity/Fairness Concerns | Excluding dispossessed debtors’ counsel is unfair, undermines SBRA purpose | Courts must apply statute as written, not balance equities | Legal provisions prevail over equity here |
Key Cases Cited
- Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (debtor’s counsel cannot be compensated from estate after loss of DIP status)
- In re Weibel, Inc., 176 B.R. 209 (B.A.P. 9th Cir. 1994) (compensation to professionals must be through § 327/330, not § 503(b)(1)(A))
- In re Milwaukee Engraving Co., Inc., 219 F.3d 635 (7th Cir. 2000) (rejects use of § 503(b)(1)(A) for attorney’s fees not permitted under § 327/330)
- F/S Airlease II, Inc. v. Simon, 844 F.2d 99 (3d Cir. 1988) (same—specific statutes control over general in attorney compensation)