John Coleman
SO ORDERED,
United States Bankruptcy Judge
The Order of the Court is set forth below. The case docket reflects the date entered.
MEMORANDUM OPINION AND ORDER DISAPPROVING APPLICATIONS TO EMPLOY AND FOR COMPENSATION
Before the Court are two Applications filed by Charles J. Swayze, III1 (“Swayze“) and the law firm of Whittington, Brock & Swayze, P.A. (“WBS“) on behalf of the Debtor, John Coleman: (1) the Application to Employ Attorneys (the “Employment Application“) (Dkt. #291) and (2) the First Application for Allowance of Compensation and Reimbursement of Necessary Expenses for the Law Offices of Whittington, Brock & Swayze, P.A. (the “Fee Application“) (Dkt. #292).2 The United States Trustee (the “UST“) filed Objections to both Applications. (Dkt. #s 302, 303). WBS then filed a Response (Dkt. #304) to the UST‘s Objection to the Employment Application and a Response and Motion to Strike (Dkt. #305) to the UST‘s Objection to the Fee Application. The
Court conducted a hearing, and at the conclusion of the hearing, took the legal issues raised by the parties under advisement.3 The Court is now prepared to rule. Based on the below, the Court finds that both Applications should be disapproved.
I. JURISDICTION
This Court has subject matter jurisdiction pursuant to
II. BACKGROUND
The Debtor filed his Voluntary Chapter 11 Petition (the “Petition“) on September 29, 2021. (Dkt. #1). Craig Geno (“Geno“) filed the Petition on the Debtor‘s behalf. Prior to filing the Petition, and in addition to Geno‘s representation of the Debtor, the Debtor engaged the services of WBS and its attorneys, Swayze and Swayze Jr. In fact, on the same day the Petition was filed, the Debtor paid a $25,000.00 retainer to WBS, which was later disclosed to the Court in WBS‘s Disclosure of Compensation filed on January 14, 2022. Dkt. #95.4
In addition to the disclosure filed above, other documents filed with the Court indicated that Swayze and Swayze Jr. were
After an attempted voluntary dismissal of the Chapter 11 case, the Court found that it would be in the best interests of Creditors and the bankruptcy estate—in large part due to the Debtor‘s bad faith conduct—to appoint an examiner. See Order Denying the Debtor‘s Motion to Dismiss and Ordering the Appointment of an Examiner under
On July 13, 2022, Geno filed his First Application for Allowance of Compensation and Reimbursement of Necessary Expenses for the Law Offices of Craig M. Geno, PLLC (Dkt. #209), which the Court approved on August 9, 2022. (Dkt. #218). Later, the Examiner and Phelps sought approval of fee applications, and the Court approved those fee applications on December 15, 2022. (Dkt. #s 237, 238). On January 10, 2023, the UST filed a Motion to Convert to Chapter 7. (Dkt. #241). Prior to the conversion of the bankruptcy case to a case under Chapter 7, the Examiner, Phelps, and Geno all filed fee applications, which the Court approved.9 (Dkt. #s 247, 248, and 266). The Court then converted
Over two months later, on May 8, 2023, WBS filed the Applications at issue in this Opinion and Order. The Employment Application states that WBS and its attorneys have represented the Debtor in prior years and are currently serving as co-counsel with Geno in this bankruptcy case. Further, while the Employment Application acknowledges that this bankruptcy case was converted to a case under Chapter 7, it contains language that the Debtor-in-possession (not the Chapter 7 Trustee) is requesting the employment of WBS. Further, the Employment Application states that WBS‘s employment is necessary to facilitate a successful reorganization. Finally, the Employment Application contains the standard disinterestedness language, admitting that WBS has no conflicts of interests, but its attorneys previously represented the Debtor, Express Grain Terminals, LLC, (“Express Grain“), Express Biodiesel, LLC (“Express Biodiesel“), and Express Processing, LLC (“Express Processing“).11
Regarding the Fee Application, WBS contends that it rendered substantial, reasonable, and necessary services to Debtor which benefited the bankruptcy estate. Based on the Itemization and description of the work performed, WBS: (1) participated in multiple telephonic conferences and meetings with attorneys, creditors, realtors, and the Debtor; (2) performed legal research relating to the intersection of a state court chancery receivership and bankruptcy law; (3) drafted pleadings and other legal documents filed in this Court; (4) reviewed various forms of correspondence; and (5) performed contractual and other work to facilitate the sale of and closing on parcels of real property.12 For those services, WBS is seeking a total of $14,881.28 in attorneys’ fees and costs for the time period between September 27, 2021 to May 2, 2023.13 Some of the work performed occurred prior to the Petition date and, of course, all the services rendered by WBS and its attorneys occurred prior to this Court‘s approval of any employment.
The UST‘s Objections to the Applications are straightforward. To begin, the UST asserts that WBS and its attorneys fail to provide any justification for why they are seeking employment 18 months postpetition and almost a year after Geno filed his application for employment. Based on the lack of justification for the tardy filing, the UST claims that WBS‘s Employment Application violates Uniform Local
WBS‘s Responses to the UST‘s arguments above suggests its attorneys delayed filing the Applications because the Debtor, who was arguably engaging in activity determinantal to his own interests, sought to dismiss his own bankruptcy case. WBS argues that if the Court would have dismissed the bankruptcy case, no filings would have been necessary. WBS also states that its attorneys were still working up until the filing of the Applications, so filing the Applications prior to completion of the work would have been premature. WBS claims that no party would be prejudiced if the Court approved the Applications at this juncture because it fully disclosed its representation and the $25,000.00 retainer currently on deposit in its trust account.
As to the September 28, 2021 time entry questioned by the UST, WBS states that its work on that day was “substantial and consequential“. Specifically, WBS pled the following:
On said date, UMB Bank, N.A. (“UMB“) filed a Verified Complaint of Receiver, Temporary Restraining Order, Breach of Contract, Breach of Guarantee and Other Relief and Request for Expedited Hearing against Express Grain, [the] Debtor and various other defendants in the Chancery Court of Leflore County, Mississippi. The Complaint was 29 pages plus 26 exhibits. The Law Firm reviewed the Complaint and met with UMB and its counsel. The Law Firm also consulted with Geno and [the] Debtor. At the conclusion it was determined that the best course of action was bankruptcy protection for the Debtor. The activities of September 28, 2021 were necessary and for the benefit of [the] Debtor‘s estate.
Response to United States Trustee‘s Objection to First Application for Allowance of Compensation and Reimbursement of Necessary Expenses for the Law Offices of Whittington, Brock & Swayze, P.A. and Motion to Strike Objection, Dkt. #305.
The Court conducted a hearing on June 21, 2023 at which Swayze, the UST, and the Chapter 7 Trustee all participated.15 At the hearing, Swayze outlined the scope of WBS‘s representation of the Debtor both before and after the Debtor filed his Petition. The UST reiterated its objections and argued that WBS still had not adequately
to duplication of services between Geno and Swayze, including a three-hour hearing in the Express Grain bankruptcy case on September 6, 2021, and two telephone calls between Geno and Swayze on April 18, 2022 and May 11, 2022.
The Chapter 7 Trustee agreed with the UST and argued that there is no legal basis for the Court to employ WBS or approve WBS‘s attorneys’ fees post-conversion. The Chapter 7 Trustee also asserted that the $25,000.00 retainer is property of the Debtor‘s bankruptcy estate (paid by the Debtor, individually, from his Regions bank account), which is why he requested WBS turnover those funds prior to the filing of the Applications. The Chapter 7 Trustee argued that WBS should only be entitled to an unsecured claim to be paid the same as all other unsecured creditors.
III. DISCUSSION
The issue facing this Court is whether the Court can approve WBS‘s employment, making it retroactive16 to the date WBS began working for the Debtor. In deciding this issue, the Court must simultaneously address WBS‘s request for compensation and expense reimbursement. The Court is aware of the split in authority regarding courts’ ability to provide retroactive relief after the United States Supreme Court‘s decision in Archdiocese of San Juan v. Acevedo Feliciano17, and the issue of professional employment and compensation in a converted bankruptcy case adds an additional layer of complexity. No party presented much legal authority, and as such, the Court will fill in the gaps.
A. Retention and Compensation Generally
Section 330 addresses compensation for professionals previously employed under
B. Acevedo: Nunc Pro Tunc Orders
As mentioned above, since the Supreme Court‘s decision in Acevedo, some bankruptcy courts have questioned the appropriateness of issuing orders nunc pro tunc, including professional retention orders. The Court readily admits that many professional employment applications (at least in consumer bankruptcy cases for special counsel) still seek employment nunc pro tunc. Therefore, this Court, like others before it, must directly address this issue to provide clarity for professionals seeking employment and compensation under the Bankruptcy Code and Rules.
In Acevedo, the defendant removed the case from a Puerto Rico state court to the federal district court. Acevedo, 140 S. Ct. at 699-700 (2020). Postremoval, i.e., while the federal court still had jurisdiction over the case, the Puerto Rico court entered several payment and seizure orders against the defendant. Id. Five months later, the federal court remanded the case to the Puerto Rico court. Id. The federal court‘s remand order was entered nunc pro tunc, which made the remand effective several days prior to the entry of the Puerto Rico court‘s initial payment and seizure order. Id. The Supreme Court held the payment and seizure orders were void because the Puerto Rico court lacked jurisdiction while the case was pending in federal court. Id. at 700. In addition, the federal court could not make its remand order effective at the time in which the Puerto Rico court did not have jurisdiction. Id. The Supreme Court explained that while federal courts may issue
C. Retroactive Relief Post-Acevedo
Because other courts have addressed the authority of bankruptcy courts to enter orders providing relief retroactively since Acevedo, this Court need not start from scratch.21 Following Acevedo, courts have refrained from issuing nunc pro tunc orders when such relief would distort the factual record, including overcome untimely filings, or remedy a jurisdictional deficiency22. For instance, in In re Nilhan Dev., LLC, 620 B.R. 385 (Bankr. N.D. Ga. 2020), the court found that Acevedo effectively prohibited the grant of nunc pro tunc authorization for a loan transaction falling outside the ordinary course of business, which did not align with the provisions of
In In re Zvoch, 618 B.R. 734 (Bankr. W.D. Pa. 2020), the court highlighted that Acevedo prohibits the granting of a nunc pro tunc order when the need for such an order arises from the debtor‘s failure to seek preapproval for a car financing agreement, rather than any inadvertence on the part of the court. Zvoch, 618 B.R. at 741. As to the timeliness of pleadings, in McNeill v.
Hinson, 2020 WL 8617627 (W.D.N.C. Dec. 8, 2020), the court elucidated that Acevedo serves as a bar to courts issuing nunc pro tunc orders to retroactively declare a pleading as timely filed when it, in fact, was not timely, as such an action would amount to an alteration of the factual record. McNeill, 2020 WL 8617627 at *1.
The courts above, however, did not address the impact of Acevedo in the professional employment and compensation context. Regarding retention and employment applications, most courts have held that retroactively employing a professional to a date before the employment order‘s entry is prohibited. Those courts maintained, however, that compensation for services provided before the entry of an employment order could still be awarded. For example, in In re Miller, 2020 WL 8617627 (Bankr. E.D. Cal. 2020), the court determined that while bankruptcy courts could not approve a professional‘s employment nunc pro tunc, this did not prevent courts from using their equitable discretion to reimburse professionals for their preemployment services. Miller, 2020 WL 8617627 at *1. Similarly, in In re Roberts, 618 B.R. 213, 215 (Bankr. S.D. Ohio 2020), the court held that although bankruptcy courts must authorize a professional‘s employment before granting compensation for their preemployment services, this did not mean that services rendered before the employment
Further, in In re Benitez, 2020 WL 1272258 (Bankr. E.D.N.Y. Mar. 13, 2020), the court concluded that retroactive approval of a bankruptcy estate professional‘s retention, whether termed nunc pro tunc or “post-facto“, was not mandated by the Bankruptcy Code or Rules. Benitez, 2020 WL 1272258 at *2. The court there emphasized that neither the Bankruptcy Code nor the Rules prevented the court from awarding “reasonable compensation” or reimbursing “actual, necessary expenses” for services performed before an order approving the professional‘s retention. Id. The key requirement was that the professional must be retained as required under
The Court also finds instructive the analysis in another case grappling with the issue of retroactive professional employment in In re Hunanyan. In that case, the Chapter 7 trustee filed an application to employ an accounting firm and its accountants nunc pro tunc to evaluate the debtor‘s assets and liabilities, assess tax-related issues, and prepare tax returns, among other responsibilities. In re Hunanyan, 631 B.R. 904, 907 (Bankr. C.D. Cal. 2021). The United States Trustee objected to the employment application arguing that the retention should be effective as of the hearing date, or if no hearing is held, when the court entered the employment order based on the principles articulated in Acevedo. Id. The court disagreed and overruled the objection, holding that Acevedo did not alter the court‘s existing authority to approve employment that had already commenced before the application was filed. Specifically, the court found:
Acevedo reiterates a long-established principle that jurisdiction in the federal courts must emanate from the United States Constitution or a statute and cannot be created by the actions of a court.’ As the Ninth Circuit BAP explained with respect to
§ 362(d) of the Bankruptcy Code, a specific statute conferring authority on the court does not exceed the court‘s jurisdiction in the way the language of the removal statute prohibited the court from exercising jurisdiction in Acevedo. The court has explicit authority under11 U.S.C. § 327 to approve this employment application without resorting to equitable principles or issuing nunc pro tunc orders.
Id. at 908. The court went on to thoroughly explain the statutory scheme governing employment and compensation, stating that while other sections of the Bankruptcy Code have time limitations for filing,
In further discussing the timing of retention and compensation applications, the court acknowledged that its reading of
These delayed application cases are better understood as exercising the court‘s control of compensation as a tool to have timely oversight of the use of estate assets. The employment application must be reviewed for conflicts, but it is also a preview of whether the estate should be compensating certain professional services. Where that is unreasonably delayed, explanations and greater scrutiny are in order. Although approval of the employment was delayed and the authorization was needed before any compensation could be paid, the employment itself was not a fiction.
Id. at 913. Rounding out its discussion, the court recognized the importance of not delaying in seeking court approved employment because “waiting delays court oversight and makes review more difficult.” Id. at 910.25
After review of Acevedo and the cases which followed, there is disagreement about Acevedo‘s impact. Clearly, litigants may still seek entry of nunc pro tunc orders, but the Supreme Court made plain that the entry of nunc pro tunc orders is only acceptable if a court makes a ruling but simply fails to enter an order at the time. Based on this Court‘s experience, employment and compensation or fee applications do not typically fall under this category. In any event, it is also clear to this Court that the Supreme Court‘s decision is foremost jurisdictional:
At the same time, the Court believes that while the Supreme Court‘s decision may have narrowed when federal courts may issue nunc pro tunc orders, its reach should be limited in the bankruptcy context beyond mere definitional clarification because the Supreme Court did not address orders that provide retroactive relief under the Bankruptcy Code or Rules or the bankruptcy court‘s equitable power. Nothing in Acevedo prohibits bankruptcy courts from granting retroactive relief, even on equitable grounds, where jurisdiction exists. Other courts have reached the same conclusion, determining that Acevedo simply reiterates the well-understood distinction between a court “creat[ing] jurisdiction where none exists” and granting retroactive relief on equitable grounds when the court indisputably has jurisdiction to act. See Merriman v. Fattorini (In re Merriman), 616 B.R. 381, 391 (B.A.P. 9th Cir. 2020); see also, e.g., In re SS Body Armor I, Inc., 2021 WL 2315177, at *3 (Bankr. D. Del. June 7, 2021) (”Acevedo does not prohibit courts from entering nunc pro tunc orders where there are no jurisdictional defects.“).
While this Court may differ with other courts concerning the scope of Acevedo, the Court recognizes that “nunc pro tunc” relief should not be used synonymously with “retroactive” or “post facto” relief—even if the legal effect of nunc pro tunc orders has often been associated as providing retroactive relief in the employment application context. In that vein, the Court must also address retroactive relief concerning professional retention and compensation. In doing so, the Court is persuaded, in part, by the approach as laid out in Hunanyan. Although the court there was not faced with a delayed employment application as is the situation facing this Court, its legal analysis is sound regarding the interplay between
D. WBS‘s Employment
Having established the Court‘s position on retroactive relief, and before any discussion of WBS‘s compensation, the Court will first address the status of WBS‘s employment under the facts and circumstances of this case. Although not pled in the Employment Application, WBS is asking this Court to make its employment under
Notwithstanding the conversion issue, and under these circumstances, the Fifth Circuit has long held that bankruptcy courts have discretion to consider whether approval of an attorney‘s employment should be granted retroactively. Triangle Chemicals, 697 F.2d at 1289. Specifically, bankruptcy courts may approve an application to employ an attorney with retroactive effect so that the attorney may receive compensation, but only under “rare” or “exceptional circumstances” and upon a proper showing that, through oversight, the attorney failed to seek employment approval under
In addition to the above authority, our Local Rules provide guidance for attorneys seeking retroactive employment:
(c) Nunc Pro Tunc Application. (1) If an application for the approval of the employment of a professional seeks to make the authority retroactive to the commencement, the application must include: (A) An explanation of why the application was not filed earlier; (B) An explanation why the order authorizing employment is required nunc pro tunc; (C) An explanation, to the best of the applicant‘s knowledge, how approval of the application may prejudice any parties-in-interest.
Miss. Bankr. L.R. 2014-1(c).28
1. The Effect of Conversion
Despite this Court‘s ability to approve employment applications post facto, conversion
Since the Court took this matter under advisement, the Court has discovered one applicable case where a bankruptcy court, and district court on appeal, allowed retroactive approval of professional employment during the preconversion phase of the bankruptcy case. In David v. King (In re David), 2023 WL 50040309 (E.D. Va. August 3, 2023)29, the district court considered whether the bankruptcy court had the authority to approve an employment application for a former Chapter 11 trustee to employ a professional on behalf of the bankruptcy estate—effective only for the Chapter 11 phase of the case. David, 2023 WL 50040309 at *1. In the underlying bankruptcy case, the debtor filed a Chapter 7 petition on July 10, 2018, and the Chapter 7 trustee selected a
law firm to represent him, which the bankruptcy court approved on April 10, 2019. Id. The case was later converted from a Chapter 7 to Chapter 11, and the former Chapter 7 trustee was appointed as Chapter 11 trustee. Id. The case was then converted from Chapter 11 to Chapter 13 on May 21, 2020, terminating the Chapter 11 trustee‘s appointment. Id. Postconversion to Chapter 13, the former Chapter 11 trustee applied for approval of administrative expenses, which included professional services provided by the previously employed law firm during the pendency of the Chapter 11 bankruptcy case. The debtor objected to the application, asserting the law firm was not properly employed during the Chapter 11 case because no employment application had been filed. Id. The bankruptcy court then required the former Chapter 11 trustee to file an additional application for approval during the Chapter 11 phase of the case, and the debtor once again objected to that application on the basis that the former Chapter 11 trustee did not have standing to seek employment of counsel and retroactive approval was not appropriate. Id. The bankruptcy court approved employment and compensation as of the date of the hearing, and later denied the debtor‘s motion to reconsider. Id.
The debtor then appealed the bankruptcy court‘s denial of his motion to reconsider, and the appellate court considered whether the former Chapter 11 trustee had standing to hire a professional person
On remand, the bankruptcy court reconsidered and amended its employment and compensation order, which allowed the prior employment of the law firm only up to the date in which the bankruptcy case was converted to Chapter 13. Id. Nevertheless, the debtor still appealed that order. Id. On appeal, the district court considered whether a retention application could be approved for a former Chapter 11 trustee seeking to employ a professional effective only for the pendency of the Chapter 11. Id. The district court answered that question in the affirmative, holding that the Chapter 11 trustee had the authority to employ professionals while the bankruptcy case was pending as a Chapter 11 case under
The Court recognizes David is not binding, but the Court agrees with both the bankruptcy court and district court that retroactive employment is not precluded based on Acevedo. The Court also spent time including David in this Opinion and Order because, despite its status on appeal before the Fourth Circuit, there is precedent of a bankruptcy court‘s approval of employment retroactively for a certain period time prior to conversion. Like the first district court‘s holding and remand in David concerning the date of the retroactive employment, the Court cannot find any basis in statute or prior case law to approve a Chapter 11 debtor-in-possession‘s attorney‘s retroactive employment after a conversion to Chapter 7 where the attorney would seek to represent the bankruptcy estate in the Chapter 7 under these circumstances. Now that the bankruptcy case is a case under Chapter 7, the Bankruptcy Code and Rules are clear that the trustee is the only party who may seek to employ counsel on behalf of the Chapter 7 bankruptcy estate. See In re WDS, Inc., 336 B.R. 301, 304 (Bankr. W.D. Ky. 2006) (denying a retroactive professional employment application after conversion from a Chapter 11 bankruptcy case to a case under Chapter 7 and holding that, under
2. The Fifth Circuit Standard and Local Rule Applied
Considering the applicable standard for retroactive approval of WBS‘s employment during the Chapter 11 period of the bankruptcy case, WBS failed to make a proper showing of exceptional circumstances or present sufficient justification for the delay in filing its Employment Application. In fact, WBS failed to provide any explanation as to the timing of its filing or the reason for delay in its Employment Application, which is a violation of the Local Rules. While WBS attempted to explain in its later filed pleadings and at the hearing why its attorneys waited until May of 2023 to file the Employment Application, the Court does not find those arguments convincing. To begin, the Debtor filed the Petition on September 29, 2021, and the Court converted the bankruptcy case to Chapter 7 on March 2, 2023. WBS and its attorneys had approximately 520 days between the Petition date and the conversion date to seek this Court‘s approval for employment.
Even if WBS and its attorneys were still providing services during the pendency of the Chapter 11 bankruptcy case, this argument still fails to explain why an employment application could not have been filed sooner. Even if WBS and its attorneys believed the Court would have dismissed the bankruptcy case by way of the Debtor‘s voluntary dismissal motion, the Court denied that relief on January 12, 2022. Even worse, according to the WBS‘s Itemization, WBS‘s last time entry for services performed during the Chapter 11 case was on August 19, 2022—six months prior to conversion. The Court is also confused by WBS‘s dilatory filing of its Employment Application considering Geno filed his application to employ in April of 2022, which is over a year before WBS filed its Employment Application. It should have been clear to WBS that the Court‘s approval of its employment under
As to whether retroactive approval of WBS‘s employment at this stage would prejudice other parties, the Court has considered the fact that WBS provided valuable services to the bankruptcy estate facilitating the sale of multiple parcels of real property, including the Debtor‘s homestead. The Court is aware that the sale of those properties resulted in monetary recovery benefiting the bankruptcy estate. Despite WBS‘s unauthorized employment in that capacity, the reality is that payment of its fees and expenses at this juncture may very well prejudice other Creditors entitled to receive distribution from the Chapter 7 bankruptcy estate. If the Court approves WBS‘s employment (and its attorney‘s fees and expenses) retroactively, unsecured Creditors could receive less in distributions if WBS receives compensation.
As the Court stated at the hearing, it also appreciates WBS‘s disclosure filed of record showing its receipt of the $25,000.00 retainer under
E. WBS‘s Compensation and Expense Reimbursement
Having disapproved WBS‘s post facto Employment Application, the Court must still briefly address whether WBS is entitled to compensation and expense reimbursement for work performed pre- and postpetition and postconversion. The initial prerequisite to compensation under
Here, WBS‘s Fee Application should be disapproved in its entirety. At no point during the pendency of the Chapter 11 case, or now, has the Court approved such employment. As a result of WBS failing to obtain court-approved employment under
IV. CONCLUSION
In summary, the Court first recognizes that Acevedo does not prohibit the retroactive employment approval for bankruptcy estate professionals. Further, because
Based on the above findings, it is hereby ORDERED:
- The Application to Employ Attorneys (Dkt. #291) is DISAPPROVED; and
- The First Application for Allowance of Compensation and Reimbursement of Necessary Expenses for the Law Offices of Whittington, Brock & Swayze, P.A. (Dkt. #292) is also DISAPPROVED.
##END OF ORDER##