In re Walsh, 538 B.R. 466

Background

Debtor John Walsh obtained a $339,010.28 state-court judgment for attorney’s fees under Illinois’ Citizen Participation Act (ICPA) after Freeborn & Peters LLP (Freeborn) represented him in defamation litigation against Wright Development Group, LLC.
Walsh filed chapter 13 bankruptcy shortly after the litigation began (March 18, 2008), did not disclose the pending fee claim or Wright as a creditor, and confirmed a chapter 13 plan; the case later converted to chapter 7 in December 2011.
Freeborn continued prosecuting the ICPA fee petition through the Illinois Supreme Court and state trial court hearings; the trial court later entered judgment awarding fees, some of which Freeborn seeks here as unpaid post-petition, pre-conversion fees ($196,691.65).
Wright moved to vacate the state-court judgment after discovering Walsh’s nondisclosure; appellate rulings found that post-petition state-court proceedings were void and that the claim belonged to the chapter 7 trustee.
Freeborn filed a fee application in bankruptcy seeking allowance and administrative priority under 11 U.S.C. §§ 330(a) and 503(b), but had never been retained or disclosed under § 327/FRBP 2014 or filed required § 329 disclosures; the Chapter 7 Trustee and the Sixty Thirty Condominium Association objected.
The bankruptcy court denied Freeborn’s fee application, disallowed the administrative expense claim, and sustained both objections.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Freeborn may recover fees as compensation under § 330(a)(4)(B) for services "in connection with" a chapter 13 case	Freeborn: its work produced the Judgment and thus benefited the debtor/estate; § 330(a)(4)(B) permits compensation to debtor’s counsel in chapter 13	Trustee/Condo: Freeborn never represented Walsh in his chapter 13 case, made no § 329 disclosures, and was not employed under § 327	Denied — Freeborn failed to show it represented debtor’s interests in the chapter 13 case or complied with retention/disclosure rules; § 330(a)(4)(B) inapplicable
Whether Freeborn may obtain administrative-expense priority under § 503(b)(2) or (b)(1)(A) without prior court approval under § 327	Freeborn: alternatively requests allowance under § 503(b)(1)(A) as necessary costs preserving the estate	Trustee/Condo: professionals requiring § 327 approval cannot obtain priority under § 503(b)(1)(A); § 503(b)(2) requires prior § 327 retention and § 330 award	Denied — § 503(b)(2) requires § 327 employment and § 330 award; § 503(b)(1)(A) cannot be used to circumvent § 327/§ 330 — Freeborn’s claim disallowed
Whether Freeborn’s failure to disclose affected entitlement to fees	Freeborn: contends fees were incurred and beneficial; implied that prepetition payment by third party should not bar recovery	Trustee/Condo: nondisclosure and failure to notify trustee of litigation prevented court oversight and left Freeborn unpaid as an unapproved volunteer	Held against Freeborn — failure to disclose/seek employment/control by bankruptcy court precludes allowance of fees from the estate
Whether the Judgment is an estate asset for purposes of fee allowance	Freeborn: asserts Judgment resulted from its efforts and produced the only estate asset	Trustee/Appeals: appellate court held post-petition proceedings void and claim belongs to trustee; uncertain asset status in this opinion	Court did not need to resolve final asset status for fee denial; fee claim disallowed regardless

Key Cases Cited

Lamie v. United States Trustee, 540 U.S. 526 (2004) (bankruptcy court control over employment and effect of noncompliance with Code requirements)
In re Weinschneider, 395 F.3d 401 (7th Cir. 2005) (court approval under § 327 is required for payment from the estate)
In re Milwaukee Engraving Co., 219 F.3d 635 (7th Cir. 2000) (§§ 327, 330, and 503(b)(2) preclude using § 503(b)(1)(A) to circumvent retention/compensation requirements)
F/S Airlease II, Inc. v. Simon (In re F/S Airlease II, Inc.), 844 F.2d 99 (3d Cir. 1988) (denying retroactive retention and administrative priority where § 327 procedures were not followed)
Cushman & Wakefield, Inc. v. Keren Ltd. P’ship (In re Keren Ltd. P’ship), 189 F.3d 86 (2d Cir. 1999) (similar prohibition on using § 503(b)(1)(A) to avoid § 327/§ 330)
In re Singson, 41 F.3d 316 (7th Cir. 1994) (interpretation of interplay among §§ 327, 330, and 503)