Bankr. L. Rep. P 71,400
In the Matter of ARKANSAS COMPANY, INC., a New York
Corporation, Debtor.
Appeal of BENENSON & SCHER, P.A., Attorneys for the
Creditors Committee of Arkansas Co., Inc.
No. 85-5841.
United States Court of Appeals, Third Circuit.
Submitted Under Third Circuit Rule 12(6) July 24, 1986.
Decided Aug. 13, 1986.
Elliot Scher, Benenson & Scher, P.A., Millburn, N.J., pro se.
Novalyn L. Winfield, Hugh M. Leonard, Trustee, U.S. Dept. of Justice, Newark, N.J., for appellee.
Before GIBBONS, WEIS and SLOVITER, Circuit Judges.
OPINION OF THE COURT
SLOVITER, Circuit Judge.
I.
Introduction
This case raises two issues. First, does the bankruptcy court have the power to grant retroactive approval of the employment of an attorney by a creditors committee in Chapter 11 bankruptcy proceedings? Second, if such power exists, what standard should govern the grant of retroactive approval? We hold that bankruptcy courts may, in extraordinary circumstances, grant retroactive approval of professional employment. We also hold, however, that in this case no extraordinary circumstances were alleged to justify retroactive approval.
II.
Facts
Arkansas Company, Inc. filed a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code. At the first meeting of the Unsecured Creditors Committee on November 28, 1983, the Committee recommended the employment of Benenson & Scher as the Committee's counsel.
Through Benenson & Scher's own oversight, it apparently failed to obtain the return of an affidavit certifying its retention which it had mailed to the Committee chairman, and it failed to file an application for court approval of its employment as Committee counsel. Benenson & Scher rendered legal services to the Creditors Committee for thirteen months before discovering in January 1985 that it had failed to obtain the requisite court approval. It then promptly prepared and submitted to the court an application for approval of its employment as counsel. On January 28, 1985, Benenson & Scher's employment by the Committee from that date forward was approved by the bankruptcy court.
Benenson & Scher subsequently moved the bankruptcy court to approve retroactively its employment from November 28, 1983. In his affidavit Elliot Scher attributed his firm's failure to file the affidavit of the chairman of the creditors committee selecting Scher's firm as counsel only to "inadvertance." App. at 8. The bankruptcy court denied the motion in an order without opinion. However, during the hearing on the motion, the bankruptcy court asserted its belief that under the Bankruptcy Code and this court's decision in In re Hydrocarbon Chemicals, Inc.,
Benenson & Scher appealed to the district court. That court stated that, although this circuit had never actually recognized the power of bankruptcy courts to exercise their discretion to grant retroactive approval, it found persuasive the decision in In re Triangle Chemicals, Inc.,
III.
Discussion
The Bankruptcy Code provides that "with the court's approval, [a creditors] committee may select and authorize the employment by such committee of one or more attorneys." 11 U.S.C. Sec. 1103(a) (emphasis added). The United States Trustee, appearing here as the appellee, concurs with the appellant that the language of the statute does not preclude the bankruptcy court from exercising its equitable powers to grant an order authorizing retention of counsel for the creditors committee nunc pro tunc in an appropriate case. Nonetheless, we must decide if that proposition of law is correct.
In the case relied on by the district court, In re Triangle Chemicals, Inc.,
The bankruptcy court in this case believed that this court's decision in In re Hydrocarbon Chemicals, Inc.,
It is evident, therefore, as the Triangle Chemicals court noted, that even though Hydrocarbon is sometimes cited among cases indicating an inflexible per se rule precluding compensation in the absence of prior court approval, in fact it is one of those cases where some reason other than the failure to obtain prior approval controlled the disallowance of payment of attorney's fees. See Triangle Chemicals,
The seemingly broad language of Hydrocarbon was further interpreted in our later opinion in In re Designaire Modular Home Corp.,
It is therefore an open question in this court whether the bankruptcy court has the power to grant retroactive approval of the employment of an attorney in Chapter 11 proceedings. Some of the bankruptcy courts in this circuit have postulated such power and have acted accordingly. See In re Freehold Music Center, Inc.,
It does not follow that such retroactive approval should be forthcoming merely because the court would have given approval if timely requested. Such a lenient rule would subvert Congress' purpose in imposing a prior approval requirement. We have previously characterized the requirement of prior approval of employment as a means of ensuring "that the court may know the type of individual who is engaged in the proceeding, their integrity, their experience in connection with work of this type, as well as their competency concerning the same." Hydrocarbon,
It has been suggested that these concerns can be amply attended to by the bankruptcy court's after-the-fact control over compensation, see In re Bill & Paul's Sporthaus, Inc.,
It is significant that Congress chose to place the requirement of court approval for the employment of an attorney, accountant, or other professional by the creditors committee directly in the Bankruptcy Code in 1978. 11 U.S.C. Sec. 1103(a). The legislative history makes clear that the 1978 Code was designed to eliminate the abuses and detrimental practices that had been found to prevail. Among such practices was the cronyism of the "bankruptcy ring" and attorney control of bankruptcy cases. In fact, the House Report noted that "[i]n practice ... the bankruptcy system operates more for the benefit of attorneys than for the benefit of creditors." H.R. No. 595, 95th Cong., 2d Sess. 92, reprinted in 1978 U.S. Code Cong. & Ad. News 5787, 5963, 6053.
As detailed in the House Report, the official committee of unsecured creditors whose function was (and still is) to negotiate with the debtor in possession in the formulation of a plan was elected by the unsecured creditors, much as the trustee was elected in a liquidation case. Although the members of the committee are not compensated, the counsel to the creditors committee is paid, and, as described by the Report, "it is a lucrative position." "Thus," the Report continued, "creditors' attorneys with proxies participate actively in the election of the members of the committee in order that they may be selected as counsel to the committee." Id. at 93, 1978 U.S. Code Cong. & Ad. News 6054. As in the case of the election of a trustee in liquidation proceedings, "those operating the system turn it to their own advantage." Id. at 92, 1978 U.S. Code Cong. & Ad. News 6053. The Report stated further:
Frequently, an attorney that has represented a creditor in past cases will notify him of the bankruptcy of one of the creditor's current debtors. The attorney then obtains a proxy from the creditor to vote the creditor's interest in the case. An attorney may obtain numerous proxies in a particular case in this manner. When the trustee is to be elected, the attorney votes all of his proxies for a colleague. The colleague thus elected then hires the attorney to serve as counsel to the trustee in the case, assuring a fee for his services. The fee for counsel is usually substantially higher than the fee for the trustee, because it is not limited to a specified percentage under the Bankruptcy Act. In a subsequent case, the colleague and the attorney will switch places.
Id. at 92, 1978 U.S. Code Cong. & Ad. News 6053-54. The Report stated that the participation of creditors' attorneys who seek to be selected as counsel to the committee parallels counsel's participation in a trustee election, as described above. Id. at 93, 1978 U.S. Code Cong. & Ad. News 6054.
The House Report did not expressly connect the new statutory requirement of prior approval of attorneys for the creditors committee with the practices criticized in that Report, but the connection is evident. Prior approval and court appointment of the creditors committee, see 11 U.S.C. Sec. 1102(a), are just some of the procedural safeguards imposed by Congress during its overhaul of bankruptcy procedure. If retroactive approval were freely granted, it would subvert the prophylactic purpose underlying the statutory requirement of prior approval.
We thus hold that nunc pro tunc approval should be limited to cases where extraordinary circumstances are present. Otherwise the bankruptcy court may be overly inclined to grant such approval influenced by claims of hardship due to work already performed. In this respect we part company with those courts that have suggested that inadvertence or oversight of counsel may constitute excusable neglect sufficient to relieve the parties of the consequences of their inaction. See In re King Electric Co., Inc.,
To summarize, we hold that retroactive approval of appointment of a professional may be granted by the bankruptcy court in its discretion but that it should grant such approval only under extraordinary circumstances. Such circumstances do not include the mere neglect of the professional who was in a position to file a timely application. When considering an application, the bankruptcy court may grant retroactive approval only if it finds, after a hearing, that it would have granted prior approval, which entails a determination that the applicant satisfied the statutory requirements of 11 U.S.C. Secs. 327(a) and 1103(a) that the applicant be disinterested and not have an adverse interest, and that the services performed were necessary under the circumstances. Thereafter, in exercising its discretion, the bankruptcy court must consider whether the particular circumstances in the case adequately excuse the failure to have sought prior approval. This will require consideration of factors such as whether the applicant or some other person bore repsonsibility for applying for approval; whether the applicant was under time pressure to begin service without approval; the amount of delay after the applicant learned that initial approval had not been granted; the extent to which compensation to the applicant will prejudice innocent third parties; and other relevant factors.
It would obviously be unrealistic to set forth the metes and bounds of the extraordinary circumstances that would warrant exercise of the bankruptcy court's discretion, but certain examples from recent cases are illustrative. In In re Freehold Music Center,
In this case, the district court found that "the equities simply do not fall in appellant's favor."
Therefore, although the bankruptcy court erred in holding it did not have discretion to grant retroactive approval of Benenson & Scher's employment, we agree with the district court that denial of such approval must be affirmed. In so ruling, we do not suggest that Benenson & Scher acted from any improper motive or that it engaged in any of the practices that concerned Congress. It is simply that the prophylactic statutory rule that approval must be sought in advance of performance of services is too strong to be overcome by a mere showing of oversight.
IV.
Conclusion
For the reasons set forth above, the district court's order affirming the order of the bankruptcy court denying retroactive approval of Benenson & Scher's employment will be affirmed.
Notes
In In re National Tool & Mfg. Co.,