646 B.R. 779
Bankr. W.D. Pa.2022Background
- Matthew and Carla Young filed a Chapter 13 petition on November 29, 2018. Two years later Mrs. Young retained Bailey Cowan Heckaman PLLC and Ennis & Ennis, P.A. (the Applicants) to pursue a personal-injury/class-action claim; she signed an employment agreement on August 8, 2020 but did not seek bankruptcy-court approval or disclose the asset in the case file.
- The debtors filed a motion in August 2022 seeking retroactive (nunc pro tunc / post facto) approval of the Applicants’ retention and their agreed fee arrangement.
- The Chapter 13 trustee opposed retroactive relief, arguing the Applicants did not satisfy the Third Circuit’s F/S Airlease standard and that retroactive approval would prejudice unsecured creditors.
- At hearing, Applicants asserted they were unaware of the active bankruptcy until 2022 and do not vet for bankruptcies until settlement; the record revealed inconsistencies (intake form disclosures and a 2019 adversary related to the 2018 filing) and failure to perform a PACER search.
- The court found the Applicants competent and disinterested (so §327(a) qualifications would have been met), but concluded the two‑year delay resulted from oversight and poor judgment, not extraordinary circumstances; it denied retroactive approval to 2020 and approved retention only as of the August 4, 2022 filing date.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court should grant retroactive/post facto approval of counsel’s retention under the F/S Airlease test | Applicants (Debtors) argued firms were disinterested and only learned of the bankruptcy in 2022, so retroactive approval is appropriate | Trustee argued Applicants failed to show extraordinary circumstances and retroactive approval would harm creditors | Court: Disinterestedness met, but no extraordinary circumstances; denied retroactive approval back to 2020; approved retention only as of Aug 4, 2022 |
| Whether a "nunc pro tunc" order is the proper vehicle | Debtors sought nunc pro tunc relief to make the record reflect prior employment | Trustee and court noted nunc pro tunc presumes a court-ordered act not entered through court inadvertence | Court: "Nunc pro tunc" not appropriate here (no court inadvertence); relief characterized as post-facto/retroactive under F/S Airlease |
| Whether Applicants had notice or should have discovered the bankruptcy (due diligence) | Applicants claimed lack of knowledge and said their practice was to vet later | Trustee argued PACER provides constructive notice and intake disclosures suggested actual notice; failure to check PACER was negligent | Court: Applicants had constructive (and likely actual) notice; failing to check PACER was oversight, not an extraordinary excuse |
| Whether retroactive approval would prejudice unsecured creditors and permit compensation under §330 | Debtors argued they exempted net proceeds and sought to honor agreed fees | Trustee argued full settlement proceeds cannot be exempted; retroactive fee approval would prioritize counsel over unsecured creditors | Court: Retroactive approval back two years would prejudice unsecured creditors; that factor weighs against retroactive compensation |
Key Cases Cited
- F/S Airlease II, Inc. v. Simon, 844 F.2d 99 (3d Cir. 1988) (establishes two-part test for retroactive employment: §327 disinterestedness and extraordinary circumstances)
- Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (discusses interplay of §327 employment approval and entitlement to compensation under §330)
- In re Arkansas Co., 798 F.2d 645 (3d Cir. 1986) (bankruptcy courts may exercise equitable power to authorize retroactive employment in exceptional cases)
- In re Albrecht, 233 F.3d 1258 (10th Cir. 2000) (failure to obtain prior court approval can bar compensation)
- Cushman & Wakefield of CT v. Keren Ltd. P’ship (In re Keren Ltd. P’ship), 189 F.3d 86 (2d Cir. 1999) (recognizes circumstances in which retroactive authorization may be permitted)
- Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696 (2020) (clarifies proper use/meaning of nunc pro tunc relief)