Summary
finding Acevedo "prohibits the court from approving the professionals’ employment nunc pro tunc ..."
Summary of this case from In re WellingtonOpinion
Case No. 17-23606-B-7
10-13-2020
IN RE: Joan Arlene MILLER, Debtor(s).
J. Russell Cunningham, Desmond, Nolan, Livaich & Cunningham, Sacramento, California, for Chapter 7 Trustee.
J. Russell Cunningham, Desmond, Nolan, Livaich & Cunningham, Sacramento, California, for Chapter 7 Trustee.
OPINION REGARDING RETROACTIVE EMPLOYMENT AND COMPENSATION
JAIME, Bankruptcy Judge:
The matter before the court is a request by the chapter 7 trustee to retroactively employ attorneys as special counsel under 11 U.S.C. § 327 pursuant to a nunc pro tunc order and an exercise by the bankruptcy court of its equitable discretion to compensate the professionals under 11 U.S.C. § 330 for pre-employment services. Although Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ––– U.S. ––––, 140 S. Ct. 696, 206 L. Ed. 2d 1 (2020), prohibits the court from approving the professionals' employment nunc pro tunc , or effective on the date before employment is actually approved, it does not prohibit the court from exercising its equitable discretion to compensate the professionals for pre-employment services. The court's conclusion is consistent with long-standing Ninth Circuit precedent which remains unchanged by Acevedo.
Background
The facts are relatively straightforward and are not disputed.
On March 3, 2013, debtor Joan Miller entered into a 40% contingency fee agreement with Mostyn Law, Arnold & Itkin, and Pulaski Law Firm, PLLC (collectively, "Special Counsel") to investigate, prepare, and prosecute any claim or suit for personal injuries arising out of the surgical placement of a medical device implant. Since that time Special Counsel has represented the debtor in litigation pending in the United States District Court for the Southern District of West Virginia.
More than four years later, on May 30, 2017, and at the age of 87, the debtor filed a voluntary chapter 7 petition. Neither the debtor's medical device claim nor her contingency fee agreement with Special Counsel were listed in the initial or in any amended schedules. According to the chapter 7 trustee, the debtor "forgot" about both when she filed her bankruptcy petition. Unsecured claims were scheduled at $31,999.00. A discharge was entered on September 11, 2017. The bankruptcy case was closed as a no-asset case on September 15, 2017.
In May 2019, the claims administrator in the debtor's medical device litigation communicated an offer to settle the debtor's claim for $165,000.00. Nobody disputes that the omission of the debtor's medical device claim from the bankruptcy schedules means it was not administered as an asset and it therefore remains property of the estate.
On the motion of the United States trustee, the chapter 7 case was ordered reopened on August 1, 2019, to administer the asset. The chapter 7 trustee was re-appointed on August 5, 2019. And the chapter 7 trustee's motion to employ general bankruptcy counsel was granted in an order filed on August 13, 2019.
The chapter 7 trustee identified Special Counsel and Special Counsel's contingency fee agreement with the debtor in a September 24, 2019, motion to approve a stipulation that allowed the debtor a $30,000.00 exemption in the settlement proceeds of the medical device claim without litigating the fact-intensive basis for the claimed exemption under state law. The court approved the stipulation as a fair and equitable compromise by order entered on October 30, 2019.
Timely proofs of claim filed by the December 9, 2019, bar date totaled $32,270.66. No tardy claims have been filed.
Although the debtor's bankruptcy case was reopened on August 1, 2019, and the chapter 7 trustee disclosed Special Counsel and the contingency fee agreement shortly thereafter, the chapter 7 trustee did not file an application to employ and compensate Special Counsel until July 14, 2020. The application requests the employment of and compensation for Special Counsel "retroactively to March 3, 2013." The application was filed with a motion to approve the $165,000.00 settlement of the debtor's medical device claim and the chapter 7 trustee's attorneys' application for compensation.
The settlement terms and Special Counsel's role in settling the debtor's medical device claim are not at issue. If Special Counsel is employed under the contingency fee agreement with the debtor, it would receive $62,700.00 in attorney's fees, and $1,151.54 in expenses, for a total of $63,851.54. The debtor would also be allowed a $30,000.00 exemption. And after mandatory litigation deductions, the estate would recover approximately $54,001.06. That amount is sufficient to pay administrative expenses consisting of compensation for the chapter 7 trustee and his attorneys of approximately $15,500.00, pay 100% of unsecured claims in the approximate amount of $32,270.66, and provide the debtor with a surplus.
The issues concern the chapter 7 trustee's request for a nunc pro tunc order that approves Special Counsel's appointment retroactive to a March 3, 2013, effective date and compensates Special Counsel for services they provided from the retroactive date forward. In the absence of nunc pro tunc employment, the court must also address the issue of Special Counsel's compensation for its pre-employment services.
Jurisdiction
Jurisdiction is founded on 28 U.S.C. § 1334(a). Employment of professional persons under 11 U.S.C. § 327(e) is a matter of exclusive jurisdiction. 28 U.S.C. § 1334(e)(1). Employment and compensation of professionals is a core proceeding concerning the administration of the estate that a bankruptcy judge may hear and determine. 28 U.S.C. § 157(b)(2)(A).
Analysis
I
As a general matter, authority for federal courts to make retroactive orders derives either from inherent authority, statute, or rule.
A
The "nunc pro tunc" or "now for then" order is the paradigm example of a retroactive order issued under the court's inherent authority. Acevedo effectively ends federal courts use of nunc pro tunc orders to the extent such orders rewrite history to retroactively make the record reflect something that never occurred in the first instance.
Acevedo arose in a jurisdictional context. Acevedo, 140 S. Ct. at 699-700. In March 2018, and thus after the Archdiocese removed the case against it from the Puerto Rico Court of First Instance to the United States District Court for the District of Puerto Rico in February 2018 and before the district court remanded by nunc pro tunc order in August 2018, the Court of First Instance issued certain payment and seizure orders against the Archdiocese. Id. Concluding that the payment and seizure orders were void because the Court of First Instance lacked jurisdiction to enter the orders after removal and before remand, the Supreme Court explained:
The Court of First Instance issued its payment and seizure orders after the proceeding was removed to federal district court, but before the federal court remanded the proceeding back to the Puerto Rico court. At that time, the Court of First Instance had no jurisdiction over the proceeding. The orders are therefore void.
Id. at 700.
The Supreme Court also rejected the idea that the district court's nunc pro tunc remand order, made effective to a few days before the payment and seizure orders were entered, created the non-federal jurisdiction necessary to validate the orders. Id. at 700. Noting that the applicable remand statute prohibited the local court from exercising jurisdiction "unless and until" there was an actual remand, id. at 700, and further noting that nothing occurred in the district court on the purported effective date of the nunc pro tunc remand order, id. at 701, the Supreme Court stated:
Federal courts may issue nunc pro tunc orders, or ‘now for then’ orders, to ‘reflect the reality’ of what has already occurred[.] ‘Such a decree presupposes a decree allowed, or ordered, but not entered, through inadvertence of the court.’ Put colorfully, ‘nunc pro tunc orders are not some Orwellian vehicle for revisionist history - creating ‘facts’ that never occurred in fact.’ Put plainly, ‘the court cannot make the record what it is not.’
Id. at 700-01 (emphasis in original, internal citations omitted).
In this respect, Acevedo is consistent with what has been the Ninth Circuit position regarding nunc pro tunc orders for effectively 50 years. See Wirum v. Warren (In re Warren), 568 F.3d 1113, 1116 n.1 (9th Cir. 2009) (inherent limited power to be used only to correct the record to reflect actual events); Sherman v. Harbin (In re Harbin), 486 F.3d 510, 515 n.4 (9th Cir. 2007) (used to correct errors in the record, are extremely limited in scope, and refer to situations where the court, after discovering the record does not accurately reflect its actions, corrects the record to accurately show what happened); United States v. Sumner, 226 F.3d 1005, 1009-10 (9th Cir. 2000) (limited to making the record reflect what the trial court actually intended to do at an earlier date, but which it did not sufficiently express or did not accomplish due to some error or inadvertence); Martin v. Henley, 452 F.2d 295, 299 (9th Cir. 1971) (Bankruptcy Act § 17 - nunc pro tunc power may be used only where necessary to correct clear mistake and prevent injustice).
Acevedo's significant limit on the use by federal courts of nunc pro tunc orders has necessitated a change in bankruptcy practice. Nunc pro tunc orders have been common, particularly with respect to employment under § 327. Bankruptcy courts have recognized that practice must now stop. In re Roberts, 618 B.R. 213, 217 (Bankr. S.D. Ohio 2020) ; In re Benitez, 2020 WL 1272258, *2 (Bankr. E.D.N.Y. March 13, 2020).
Acevedo is, however, not a per se prohibition of all retroactive relief in all instances. Acevedo curtails only the inherent authority of federal courts to grant retroactive relief by nunc pro tunc orders which purport to create facts or rewrite history to support the retroactive relief granted. There is a distinct difference between retroactive relief granted by nunc pro tunc orders which purport to create facts and rewrite history, as with the remand order in Acevedo, and discretionary grants of retroactive compensation in orders that do neither—as explained below.
B
Statutes may also serve as a basis, express or implied, for orders that have retroactive effect without need for inherent power nunc pro tunc orders.
Express retroactive authority is exemplified by the power within the bankruptcy court's discretion to "annul" the automatic stay under 11 U.S.C. § 362(d). Merriman v. Fattorini (In re Merriman), 616 B.R. 381, 391-93 (9th Cir BAP 2020). Annulling the automatic stay typically operates retroactively to validate acts that violated the stay.
Implied retroactive authority reposes in Bankruptcy Code provisions that require court approval but that do not mandate that such approval actually precede the statutory activity. Two Ninth Circuit opinions illustrate this point.
In Harbin, the Ninth Circuit contrasted nunc pro tunc orders with the equitable discretion that remains with bankruptcy courts to grant retroactive approval under provisions of the Bankruptcy Code which do not expressly require approval to precede the approved act. Harbin, 486 F.3d at 515 n.4, 521-22. As an example of this distinction in the context of the case before it, the Ninth Circuit stated that "[s]ection 364(c)(2) does not, by its express terms, require the bankruptcy court to authorize the financing transaction before the debt is incurred." Id. at 522. The salient point is that retroactive approval of the postpetition debt did not depend on the fact of prior authorization by the bankruptcy court to enter into the financing transaction. In other words, there was no need to create facts or rewrite history with a nunc pro tunc order in order support the retroactive relief granted.
The same distinction exists in the specific context of employment under § 327 and compensation under § 330. In Atkins v. Wain, Samuel & Co., 69 F.3d 970 (9th Cir. 1995), the Ninth Circuit reaffirmed the long-recognized principle that "[t]he bankruptcy courts in this circuit possess the equitable power to approve retroactively a professional's valuable but unauthorized services." Id. at 973. Harbin described Atkins as an example under § 327 of "circumstances that warrant an equitable exception to the prior authorization requirement." Harbin, 486 F.3d at 522 (citing Atkins, 69 F.3d at 973 ).
See also Law Offices of Ivan W. Halperin v. Occidental Fin. Group, Inc. (In re Occidental Fin. Group), 40 F.3d 1059, 1062 (9th Cir. 1994) ("A bankruptcy court may sometimes exercise discretion to make an award for attorneys fees not authorized in advance[.]"); Jerrel v. Martinson (In re Jerrel), 24 F.3d 247, 1994 WL 171166 at *4 (9th Cir. May 5, 1994) ("Jerrel is correct that this circuit allows a bankruptcy court to award retroactive fees for services rendered without court approval.") (Table).
Harbin amplifies Atkins' conclusion that although an order authorizing employment under § 327 is a prerequisite to awarding compensation under § 330, there is no requirement that compensated services must have been performed only after the effective date of an employment order. These circumstances distinguish Acevedo from circuit precedent, which means circuit precedent that recognizes the power to award pre-employment compensation remains unchanged by Acevedo.
C
Retroactive authority to compensate estate professionals under § 330 for services provided before employment is formally approved under § 327 also derives from federal rules of procedure without need for inherent power nunc pro tunc orders.
The concept of retroactive compensation is incorporated into the Federal Rules of Bankruptcy Procedure, as prescribed by the Supreme Court. Under Bankruptcy Rule 6003(a) an application for employment may not be approved within the first 21 days of a bankruptcy case, absent a need to avoid immediate and irreparable harm. Fed. R. Bankr. P. 6003(a).
The first 21 days of a chapter 11 case usually require significant postpetition professional services that will be eligible for compensation under § 330 after employment is approved. This necessarily entails retroactive compensation for pre-employment services to avoid the absurdity of the need to find immediate and irreparable harm regarding employment in virtually every chapter 11 case. Bankruptcy Rule 6003(a) thus contemplates employment orders that provide for an effective retroactive date of compensation. See Fed. R. Bankr. P. 6003, Advisory Committee Note to 2011 Amendment. Nothing in Acevedo suggests the Supreme Court intended to undermine the vitality of Bankruptcy Rule 6003(a).
The Judicial Conference Advisory Committee on Bankruptcy Rules has clarified that a degree of retroactivity is implicit in Bankruptcy Rule 6003 :
The rule is amended to clarify that it limits the timing of the entry of certain orders, but does not prevent the court from providing an effective date for such an order that may relate back to the time of the filing of the application or motion, or to some other date. For example, while the rule prohibits, absent immediate and irreparable harm, the court from authorizing the employment of counsel during the first 21 days of a case, it does not prevent the court from providing in an order entered after expiration of the 21-day period that the relief requested in the motion or application is effective as of a date earlier than the issuance of the order. Nor does it prohibit the filing of an application or motion for relief prior to expiration of the 21-day period. Nothing in the rule prevents a professional from representing the trustee or a debtor in possession pending the approval of an application for the approval of the employment under Rule 2014.
Fed. R. Bankr. P. 6003, Advisory Committee Note to 2011 Amendment.
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II
The Ninth Circuit standard for an award of compensation under § 330 for pre-employment services is found in Okamoto v. THC Fin. Corp. (In re THC Fin. Corp.), 837 F.2d 389 (9th Cir. 1988), and Atkins, 69 F.3d at 973-74. Notably, both are retroactive compensation and not nunc pro tunc employment cases.
In THC, Bankruptcy Rule 215, § 327's predecessor, required the court to approve a professional's employment in order for the professional to be compensated by the estate. THC, 837 F.2d at 391. At the request of the bankruptcy trustee, an attorney provided services to the estate over a four-year period without prior court approval of her employment. Id. at 390. The attorney then filed a fee application with the district court which the bankruptcy trustee opposed because the attorney had not sought prior approval of her employment. Id. Although the Ninth Circuit noted that the attorney's employment should have been approved before services were provided, it also concluded that the absence of prior approval did not necessarily preclude compensation, stating: "In this circuit, a retroactive award of fees for services rendered without court approval is not necessarily barred." Id. at 392. The court further noted that a court may exercise its discretion to compensate for valuable pre-employment services and it set the standard for such an award as follows: "[S]uch awards should be limited to exceptional circumstances where an applicant can show both a satisfactory explanation for the failure to receive prior judicial approval and that he or she has benefitted the bankrupt estate in some significant manner." Id.
Professionals who request retroactive compensation must also satisfy the criteria for employment pursuant to § 327, other than the usual requirement of pre-employment approval. Atkins, 69 F.3d at 976.
Fee applicants bear the burden of proof in all such instances, and the ultimate decision is within the discretion of the court. See Neben & Starrett v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880-81 (9th Cir. 1995).
And of course, the length of the delay in seeking judicial approval of employment affects the analysis of extraordinary circumstances—the longer the delay, the more difficult to explain. Emergency services early in a case followed by prompt application for employment are better explanations than neglect and inattention. In re B.E.S. Concrete Products, Inc., 93 B.R. 228, 232 n.5 (Bankr. E.D. Cal. 1988).
III
Turning now to the chapter 7 trustee's application to employ Special Counsel in this case, the application references the THC standard to some degree. That reference permits the court to address whether the standard for awarding pre-employment compensation is satisfied in this case.
The court will grant the chapter 7 trustee's application to employ Special Counsel under § 327(e). However, the request for nunc pro tunc approval of employment effective March 3, 2013, will be denied. Special Counsel's employment under § 327(e) will be effective September 29, 2020, which is the application approval date. The court will also allow the chapter 7 trustee to compensate Special Counsel under § 330 for the reasonable, necessary, and beneficial services that Special Counsel provided to the trustee and the estate prior to approval of their employment. However, compensation is subject to the conditions explained below.
Special Counsel qualifies for employment under § 327 (e) in that it is well-qualified to serve the estate in the capacity of the debtor's litigation counsel.
There also has been a plausible representation that the debtor "forgot" about her medical device claim when she filed bankruptcy. The debtor is an octogenarian. And communications from counsel in mass tort cases are oftentimes sparse. All of this is consistent with good faith.
Special Counsel's services have provided a tremendous benefit to creditors and the estate. Settlement of the debtor's medical device claim will result in full payment to all creditors, permit the debtor to realize an exemption, and provide the debtor with surplus funds. A very rare outcome in a chapter 7 case. Certainly under these circumstances no one can complain about prejudice from the lack of prior approval of Special Counsel's employment. Moreover, under these circumstances, the contingency fee compensation requested is reflective of a reasonable value of the services that Special Counsel provided to the estate prior to the approval of their employment. And it is permissible under § 328(a).
The chapter 7 trustee has also provided a satisfactory explanation for the delay in seeking the approval of Special Counsel's employment. The debtor did not initially schedule her medical device claim so delay is measured from the time the case was reopened to administer the asset. That delay is approximately one year. Although not ideal, neglect in seeking Special Counsel's employment earlier is excusable.
The debtor's medical device claim was largely settled before the case was reopened. Special Counsel and the applicable contingency fee arrangement were also disclosed very shortly after the case was reopened. And during the months that followed the 2019 reopening and disclosure through mid-2020, the chapter 7 trustee worked with the litigation administrator to iron out details of the settlement and payment of the settlement award.
Further, although not relied on by the chapter 7 trustee, the court takes judicial notice that the COVID-19 pandemic struck shortly after the debtor's bankruptcy case was reopened and it continues to persist. The pandemic has resulted in a shutdown of most of the country with a significant number of individuals out of the office and subject to stay-at-home orders. As one court described the situation:
Meanwhile, the world is in the midst of a global pandemic. The President has declared a national emergency. The Governor has issued a state-wide health emergency. As things stand, the government has forced all restaurants and bars [ ] to shut their doors, and the schools are closed, too. The government has encouraged everyone to stay home, to keep infections to a minimum and help contain the fast-developing public health emergency.
Art Ask Agency v. Individuals. Corporations, et al., 2020 WL 1427085 at *1 (N.D. Ill. March 18, 2020). The story in California is similar. See In re Dudley, 617 B.R. 149 (Bankr. E.D. Cal. 2020).
Conclusion
For the foregoing reasons, the chapter 7 trustee's application will be granted in part and denied in part. The relief requested in the application will be granted as to Special Counsel's employment which shall be effective September 29, 2020, and as to compensation to Special Counsel in the amount of the contingency fee requested. Compensation to Special Counsel is conditioned on the requirement that the chapter 7 trustee and Special Counsel execute a contingency fee agreement substantially in the form of the contingency fee agreement between the debtor and Special Counsel which shall be signed by all parties and filed with the court. To be clear, there shall be no payment to Special Counsel (and no distribution of any settlement funds) unless and until the new contingency fee agreement is signed and filed.
The request for nunc pro tunc approval of Special Counsel's employment retroactive to March 3, 2013, will be denied.
A separate order will issue.