Opinion
Case No. 01-40461 Chapter 13
August 21, 2002
OPINION
Now before the Court for consideration is the Application For Employment As Special Counsel For Trustee Nunc Pro Tunc ("Application Nunc Pro Tunc") filed by Sommerman, Moore Mitchell, L.L.P. ("Sommerman"). This opinion constitutes the Court's findings of fact and conclusions of law required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
Arnaldo Rivera ("Debtor")filed his voluntary petition under Chapter 13 of Title 11 with his proposed Chapter 13 Plan on February 8, 2001. The Debtor's schedule of assets included his claims in a personal injury lawsuit filed on his behalf by Sommerman pre-petition. Schedule B of personal property indicated an exemption in $22,563.83 and a rejected offer of $50,000 to settle. The Debtor's monthly income constituted the source of funding for the plan. On September 26, 2001, the Court entered the Order of Confirmation. The Order provides that the Debtor's discharge be postponed until the outcome of the personal injury lawsuit has been determined. The Order further provides that any proceeds received from the lawsuit over the amount exempted ($22,563.83) would be added to the Plan for the benefit of creditors.
On October 11, 2001, Sommerman filed an Application For Employment as Special Counsel ("First Application"). The First Application seeks approval of Andrew B. Sommerman and Sommerman, Moore and Mitchell's employment under a 40% contingency fee contract and approval of an award for expenses to Sommerman. The First Application states that a $150,000 settlement of the personal injury lawsuit is anticipated. Appended as exhibits to the Application are copies of the Original Petition initiating the personal injury lawsuit, an itemization of expenses and a copy of the Debtor's engagement agreement entered into on January 21, 1999 with Sommerman. The First Application was dismissed by this Court because it did not contain a certificate of service indicating it had been served upon any of the parties to the action. Sommerman then filed an Amended Application followed the next day, November 21, 2001, by a Second Amended Application. The Second Application was granted by this Court. Notice of entry of the Order Approving Andrew B. Sommerman's Application For Employment was served December 26, 2001.
The United States Trustee promptly filed a Motion To Reconsider the Order Approving Sommerman's Employment as well as an Emergency Motion To Stay such order. Both Motions were granted. Pursuant to those orders, the Court vacated its order allowing employment and required the proceeds of any settlement to be paid to the Standing Chapter 13 Trustee pending further orders. The Court, at the request of the U.S. Trustee, also ordered Sommerman to file a nunc pro tunc application, a fee application and to serve same upon the matrix, proper service having been cause for the dismissal of the First Application.
The U.S. Trustee properly pointed out that the application sought retroactive approval of employment, but did not comply with Local Rule of Bankruptcy Procedure 2004 concerning Nunc Pro Tunc applications.
The Application Nunc Pro Tunc is now before the Court for consideration. Attached to the Application Nunc Pro Tunc is Sommerman's Affidavit Pursuant to Bankruptcy Rule 2014(a) (attached as Exhibit "B") disclosing that the engagement was referred by one Ken Kirby, a Texas attorney to whom Sommerman agreed to pay "a 1/3 referral fee as permitted under Texas law" from the gross contingent fees paid to Sommerman. Notably, no disclosure statement was filed with the original First Application, the Amended Application or the Second Application. The United States Trustee objected to approval of the Application Nunc Pro Tunc and the matter came on for hearing pursuant to regular setting. After trial, it was taken under advisement. This opinion constitutes the Court's findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052 and disposes of all issues before this Court.
DISCUSSION
When considering an application for nunc pro tunc approval of employment, the bankruptcy court must first determine that it would have granted approval pursuant to § 327(a) in that the applicant must be disinterested and not have an adverse interest and that the services rendered were necessary under the circumstances. In re Pica Systems, Inc. 124 B.R. 30, 32-33 (E.D.Mich. 1991) citing to In re Arkansas Co., 798 F.2d 645, 650 (Third Cir. 1986). Then the bankruptcy court should consider equitable factors, which include, inter alia, time constraints, delay and prejudice to third parties.
Finally, in the application of its discretionary power, the bankruptcy court must assess the individual facts and circumstances of each case. Pica, Supra, citing to In re Microwave Prods. of America, Inc., 104 B.R. 900, 905 (Bkrtcy.W.D.Tenn. 1989).
The first determination is decided in Sommerman's favor. The Court would have granted approval of Sommerman's employment upon a proper application and, in fact, the U.S. Trustee concedes that it has no objection to Sommerman's employment on the basis of his qualifications or his disinterestedness. The Trustee's objections are based on the tardiness of the employment application and Sommerman's failure to abide by the well established rules of procedure in seeking employment to represent a debtor in any bankruptcy proceeding. The U.S. Trustee questions the propriety of a referral fee allegedly to be paid to the attorney who referred the Rivera personal injury lawsuit to Sommerman, especially absent evidence of such attorney's disinterestedness, qualifications or of the benefit of services he provided to the estate. The U.S. Trustee argues that the Sommerman employment application should not be granted under the standards of 11 U.S.C. § 328(a). In effect, approval of the employment application and ensuing fee application under the standards of 11 U.S.C. § 328(a) would be approval of the contingency fee contract and would not trigger an inquiry into the amount and nature of the work done and the reasonableness of the fee requested. The Trustee argues that the fees should be reviewed under 11 U.S.C. § 330. Finally, the U.S. Trustee challenges the propriety of granting nunc pro tunc employment. Otherwise, the U.S. Trustee does not object to Sommerman's employment and agrees that Sommerman's work benefitted the estate.
Sommerman offered no respectable defense regarding the tardiness of any of his applications or the procedural defects thereof. The thrust of the Sommerman defense is that where there is no showing of harm, the substantial benefit conferred upon the estate as a result of Sommerman's representation outweighs the "little errors" and "a few procedural irregularities". Sommerman argued that the referral payment issue was not ripe until an application or claim for Kirby's fee comes before the Court. Alternatively, Sommerman argues that local standards rather than Federal standards should apply to the referral fee because the underlying matter involved a pre-petition State law contract relating to engagement under State law in a State law case filed under the standards of the State of Texas Supreme Court.
This is not a case of first impression before this Court. As the attorney for the U.S. Trustee noted, this Court ruled on a similar matter in In re Hydro-Services, Inc., 277 B.R. 309 (Bkrtcy. E.D. 2001). The identical judicial principles apply to the case at bar. To wit:
The bankruptcy court has discretion, as a court of equity, to approve employment nunc pro tunc. In re Triangle Chemicals, 697 F.2d 1280 (5th Cir. 1983). However, such approval should not be granted without regard to the circumstances, facts and equities in the case or with such carte blanche as to render the procedural requirements of the Bankruptcy Code and Bankruptcy Rules meaningless formalities. Clear equitable principles govern exercise of its jurisdiction. In Matter of Triangle Chemicals, Inc., 697 F.2d 1280, 1289 (5th Cir. 1983), the court held "where through oversight the attorney has neglected to obtain . . . prior approval but has continued to perform services for the debtor/debtor in possession (many of them as here under the eye of the court itself), the bankruptcy court retains equitable power in the exercise of its sound discretion, under exceptional circumstances, [emphasis added here] to grant such approval nunc pro tunc, upon proper showing, and to award compensation for all or part of the services performed by such attorney that have subsequently benefitted the debtor's estate and, consequently, its creditors."
In re Hydro-services, Ibid at 311. Moreover, the Fifth Circuit Court ruled more than a decade ago expressly on the issue of compliance with the Bankruptcy Code and the Bankruptcy Rules of Procedure. In Matter of Consolidated Bancshares, Inc., 785 F.2d 1249, 1254 (5th Cir. 1986) shareholders of the Debtor filed a derivative suit in state court (the "Grubbs group"). The action was removed to the Bankruptcy Court after the filing of the petition. A committee was formed to represent the interests of all of the Debtor's shareholders. The Committee retained counsel and that counsel was approved by the Bankruptcy Court. A joint plan of reorganization was proposed to which the Grubbs group objected attacking the Bankruptcy Court's power to settle the derivative lawsuit under the Plan. The objection was overruled and the plan confirmed. Later, the Grubb's group attorneys filed a fee application. The Bankruptcy Court denied the application after finding that the Grubbs group had not made a substantial contribution to the proceeding. The District Court affirmed the bankruptcy Court's ruling and the Grubbs group appealed unsuccessfully. The Fifth Circuit Court held that:
The Grubbs group, despite being informed by debtor's attorney of the requirement to secure formal retention in order thereafter to seek compensation, [footnote omitted] failed to comply with the strict provisions of the Code and Rules. They never met with or advised the official Committee, much less the court of their activities until the objections to confirmation and filing of a quarter-million-dollar fee application. The conduct of activities parallel to but not coordinated with those of an official committee, wholly outside of supervision by the bankruptcy court and scrutiny by the debtor and other officially appointed professionals, cannot be compensated.
Since the Grubbs group eschewed compliance with the Code and Rules, the court was well within its discretion in denying them fees based on the competent representation afforded to all shareholders by the Committee. . . .
Matter of Consolidated Bancshares, Inc., 785 F.2d 1249, 1254 (5th Cir. 1986).
This Court disagrees with Sommerman's characterization of those events the U.S. Trustee complains of as "a few procedural irregularities". Congress purposefully established the system of administration of a bankruptcy case embodied in the Federal Rules of Bankruptcy Procedure and Bankruptcy Code. This Court, its officers and the office of the U.S. Trustee are charged with the responsibility of seeing that the administration of a bankruptcy case proceeds accordingly. Mr. Sommerman may not be a bankruptcy specialist, but he has been admitted to practice in the Courts in this State and in this District and will be held accountable for knowing how to acquit himself properly in those Courts in which he represents clients. This is not the situation the Fifth Circuit referred to in Triangle Chemicals where the Court should exercise discretion to accommodate an attorney who neglected to file an application through oversight. Based upon the overall case, Sommerman ignored the procedural requirements for a long period of time despite Sommerman's awareness of those requirements. That Sommerman was aware of the requirement became clear from the record, his testimony and the testimony of the Debtor's bankruptcy counsel. Debtor's bankruptcy counsel testified as to numerous occasions when she contacted Sommerman or his office and discussed the necessity of their filing of an employment application. In fact, on at least one occasion she offered her assistance in preparing such an application since she was aware of the necessity. These efforts were all rebuffed with a rather cavalier attitude as were the efforts of the United States Trustee's office when they made numerous requests to have a proper application filed. This behavior is not "excusable neglect". No extraordinary circumstances were demonstrated or even argued to mitigate Sommerman's failure with respect to compliance with the rules of procedure. Mr. Sommerman's patent disregard of the Federal Rules of Bankruptcy Procedure cannot be obfuscated by titillating arguments on States' Rights versus Federal Courts' rights issues as artfully posited by Sommerman's counsel. It is contempt in both the legal and colloquial use of the term. Mr. Sommerman was well aware that he was required to file an application, he simply refused to do so. This recalcitrance extended to Sommerman's compliance with this Court's January 2, 2002 order to pay the proceeds of the settlement of the personal injury suit to the Standing Chapter 13 Trustee. Sommerman testified he received the funds in January 2002 (no specific date): the Standing Chapter 13 Trustee received the funds six weeks later on February 19, 2002. (Defendant's Exhibit "M" is a copy of the insurance company's check dated Nov. 9, 2001. Defendant's Exhibit "N" is a copy of a page from the Ch. 13 Trustee's account ledger for this debtor.) Sommerman's testimony that he had difficulty communicating with the Debtor was not persuasive juxtaposed against contradictory testimony from the witness who followed him on the stand.
See In re Arkansas Co., Inc., 798 F.2d 645, 650 (3rd Cir. 1986) regarding the "metes and bounds of . . . extraordinary circumstances" ["Such circumstances do not include the mere neglect of the professional who was in a position to file a timely application."].
Contrary to the argument that there has been no showing of harm, this Court heard testimony that Debtor's counsel spent significant time in efforts (valued in excess of $3,500 in fees not including her time in Court the day of the trial) to have the settlement proceeds deposited with the Standing Chapter 13 Trustee and in resolving issues of Sommerman's employment deficiencies. It is clear to the Court that members of the office of the U.S. Trustee also were compelled to dedicate significant efforts to resolving the problems created by Sommerman's indifference.
Therefore, regardless of whether this Court reviews Sommerman's Application under § 328 as urged by Applicant or § 330 as urged by the U.S.Trustee, the threshold determination is whether Sommerman's employment should be approved and, if so, whether it should, be approved nunc pro tunc. In In re Hydro-services, Inc., Supra at 311 this Court relied upon Fifth Circuit precedent in In Matter of Triangle Chemicals, Inc., 697 F.2d 1280, 1289 (5th Cir. 1983) and held that the bankruptcy court has discretion, as a court of equity, to approve employment nunc pro tunc, upon demonstration of exceptional circumstances, and "to award compensation for all or part of the services performed by such attorney that have subsequently benefitted the debtor's estate and, consequently, its creditors." Neither Court intended to encourage circumvention of the rules requiring preemployment court approval. Ibid at 1289. This Court weighed heavily the fact that Sommerman's services yielded a substantial contribution to the estate. However, equity does not "trump" specific statutory provisions. The Courts have created an exception from strict compliance only upon a showing of exceptional circumstances. The exception is the subject of judicial discretion. Given that Sommerman has failed to demonstrate exceptional circumstances to mitigate his non-compliance, this Court refuses to exercise its discretionary power to reward counsel's disregard of the statutory requirements.
CONCLUSION
Based upon the foregoing, this Court must DENY the relief requested in the Application filed by Sommerman as to the nunc pro tunc relief, but approves Sommerman's employment otherwise, as of the date of the filing of the Application For Employment As Special Counsel For the Trustee, Nunc Pro Tunc, being January 28, 2002. The January 28, 2002 Application is the first properly filed application to employ insofar as its form and service conform with the requirements of the Code and comply with the Federal Rules of Bankruptcy Procedure, including the rules regarding disclosure and service upon the matrix. The Court will not consider an application for legal fees or expenses that accrued for services rendered prior to January 28, 2002. Insofar as the fee application seeks approval of the employment of Sommerman under the terms of the attached contingency fee contract the Court's ruling of necessity denies such request. The approval as special counsel now places Sommerman in a position where he is free to file a fee application detailing the services rendered and the benefit to the estate pursuant to the standards set forth in 11 U.S.C. § 330. The question of the propriety of payment of a fee to Ken Kirby need not be considered further by this Court until Mr. Kirby files a proper application for employment and a fee application. An order will be entered accordingly.