Opinion
Case No. 19-52569
07-15-2020
IN RE: Kenneth Lee ROBERTS and Michelle Dawn Montgomery-Roberts, Debtors.
Robert Ellis, Marietta, OH, for Debtors.
Robert Ellis, Marietta, OH, for Debtors.
MEMORANDUM OPINION AND ORDER ON APPLICATION OF DEBTORS TO EMPLOY SPECIAL COUNSEL (NUNC PRO TUNC )
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for consideration of the Application of Debtors to Employ Special Counsel (Nunc Pro Tunc) (Doc. #34) (the "Application") filed by the Debtors on March 2, 2020. The Application seeks to employ the Law Office of Bruce M. White, L.C. ("Special Counsel") to prosecute the claim of Kenneth Lee Roberts arising out of injuries sustained in an automobile accident on June 14, 2019.
I. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Amended General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(A).
II. FACTS
On April 22, 2019, the Debtors, Kenneth Lee Roberts and Michelle Dawn Montgomery-Roberts, filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. On June 14, 2019, Kenneth Lee Roberts and his daughter were involved in a car accident in which they sustained certain injuries. On June 21, 2019, Mr. Roberts retained Special Counsel to represent him and his daughter with respect to the personal injury claims against the responsible parties. Although Debtors' counsel was made aware of the accident and the retention of the Special Counsel, Debtors' counsel did not immediately file the Application because he mistakenly believed that only the daughter sustained injuries in the accident. After learning that Mr. Roberts also sustained injuries, Debtors' counsel filed the Application to authorize employment of the Special Counsel nunc pro tunc to prosecute Mr. Roberts's personal injury claim. On the same day, the Debtors filed a Motion for Approval of Insurance Settlement and to Retain Proceeds (Doc. #35), seeking approval of a settlement of the claim with Progressive Insurance and for the Special Counsel's fees.
III. DISCUSSION
A. Employment of Professional Persons under 11 U.S.C. § 327
"A trustee or debtor-in-possession may not employ an attorney, accountant, or other professional person without the court's express approval." Farinash v. Vergos (In re Aultman Enters.), 264 B.R. 485, 489 (Bankr. E.D. Tenn. 2001) (citing 11 U.S.C. § 327(a) ). The trustee or debtor-in-possession must obtain court approval to employ a professional person to represent the bankruptcy estate. 11 U.S.C. § 327 ; Fed. R. Bankr. P. 2014(a) ; In re WDS, Inc., 336 B.R. 301 (Bankr. W.D. Ky. 2006). The procedure for obtaining approval of employment of a professional is governed by Bankruptcy Rule 2014, which requires the application set forth certain facts regarding the need for and the terms of the employment, and establish that the applicant is disinterested. Section 327(a) of the Bankruptcy Code states as follows:
(a) Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
The purpose of 11 U.S.C. § 327 of the Bankruptcy Code is to provide notice to all creditors and parties in interest that the trustee is hiring a professional and is proposing to pay the professional from estate funds. Section 327 also gives the Court the ability to perform a screening process, verify the necessity of employment, ensure the neutrality of the person employed, and control and limit estate expenses, thereby promoting efficient administration of the bankruptcy estate.
In re McKenzie, 449 B.R. 306, 318 (Bankr. E.D. Tenn. 2011).
This Court has expressed concern regarding parties seeking authority to employ professionals only after a claim has been settled or when it is time to pay professional fees. In re Carter, 533 B.R. 632, 638 (Bankr. S.D. Ohio 2015).
When a cause of action involves post-petition occurrences or events, it constitutes a newly acquired asset that is property of the bankruptcy estate. The debtor then has the responsibility to seek Court authority to hire a professional to represent her and the bankruptcy estate's interests. Attorneys that represent debtors in bankruptcy cases need to be sure to communicate the significance of seeking Court approval before engaging a professional to represent the interests of the bankruptcy estate because as described above, the Court has a strong interest in preventing volunteerism and controlling administrative expenses.
Id.
B. Nunc Pro Tunc Applications for Employment
The Application seeks approval of the Special Counsel's appointment nunc pro tunc, to June 14, 2019—around nine months prior to the filing of the Application. In this district, parties (and the Court) have typically used orders authorizing employment nunc pro tunc as a vehicle to employ professionals retroactively when there has been a delay between the retention of the professional and the filing of the application for authority to do so, or entry of an order granting the application. Evidently, this has been inappropriate use of the term "nunc pro tunc " and the concept that it represents: the Supreme Court recently articulated the proper meaning of nunc pro tunc, compelling this Court to reconsider the entry of these nunc pro tunc orders to employ professionals. In Roman Catholic Archdiocese of San Juan v. Feliciano, the Supreme Court held that "[f]ederal courts may issue nunc pro tunc orders ... to ‘reflect the reality’ of what has already occurred." ––– U.S. ––––, 140 S. Ct. 696, 700-01, 206 L.Ed.2d 1 (2020) (quoting Missouri v. Jenkins, 495 U.S. 33, 49, 110 S.Ct. 1651, 109 L.Ed.2d 31 (1990) ). An order granting relief nunc pro tunc "presupposes a decree allowed, or ordered, but not entered, through inadvertence of the court." Id. at 701 (quoting Cuebas y Arredondo v. Cuebas y Arredondo, 223 U.S. 376, 390, 32 S.Ct. 277, 56 L.Ed. 476 (1912) ).
It has been generally accepted that bankruptcy courts possess "the inherent power to issue an order nunc pro tunc appointing counsel... under extraordinary circumstances and upon a proper showing." In re McDaniels, 86 B.R. 128 (Bankr. S.D. Ohio 1988).
Accordingly, the retroactive legal effect of a nunc pro tunc order should be reserved for those occasions when the Court has, in fact, already passed judgment that is not reflected in the record. Based on the Supreme Court's ruling, the use of nunc pro tunc orders to retroactively seek employment of professionals is an improper use of the mechanism and this Court will no longer enter such orders.
This Court's decision to belay entry of nunc pro tunc orders (unless valid under Feliciano ) does not mean that services rendered prior to entry of an order authorizing the employment will be uncompensated. Undoubtedly, the bankruptcy court must sanction employment of a professional before the professional may be awarded compensation for any services rendered. The Sixth Circuit Court of Appeals made this crystal clear in Michel v. Federated Dep't Stores, Inc. (In re Federated Dep't Stores, Inc.), 44 F.3d 1310 (6th Cir. 1995), and that court appeared disinclined to countenance any exceptions to that rule. But the court did not articulate any standards for the timing of an authorization for employment in the context of an application for compensation. Moreover, the applicable bankruptcy statutes and rules laying the foundations for employment and compensation do not require employment to be authorized prior to performance of services. Section 327 of the Bankruptcy Code states, in pertinent part: "Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title." 11 U.S.C. § 327(a). Federal Rule of Bankruptcy Procedure 2014 and Local Bankruptcy Rule 2014-1 set forth the procedural requirements (i.e., filing of an application) and mandate the content of such an application.
Notwithstanding the court's fervent insistence that authorization be approved as a condition precedent to an award of compensation, the court carved out a limited exception for this particular circumstance and awarded compensation to the professional because the law determining the professional's qualifications had not been settled up to that point. Federated Dep't Stores, Inc., 44 F.3d at 1320.
Section 328 provides that the trustee may employ professional persons upon reasonable terms and conditions, including various modes of compensation, but also reserves to the Court discretion to allow compensation on an alternative basis, prohibits legal fees to the trustee for performance of trustee duties, and specifies that the Court may deny compensation if the professional was not disinterested at any time during the employment. Section 330 provides in pertinent part:
After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award [to an
officer of the estate] or a professional person employed under section 327 or 1103—(A) reasonable compensation for actual, necessary services rendered by the... professional person ...; and (B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1). That section additionally reserves to the Court the discretion to award less than the amount requested, and lists criteria to consider in determining appropriate compensation. Federal Rule of Bankruptcy Procedure 2016, and to some extent, Local Bankruptcy Rule 2016-1, set forth the procedural requirements (e.g., filing of an application) and mandate the content of such an application. Bankruptcy Rule 5004 prohibits a judge from authorizing compensation to a professional who is related to the judge or when it would be improper for the judge to do so. None of these or related authorities address timing of an authorization of employment and performance of services by a professional. Thus, while authority to employ a professional must be granted in order for the professional to be awarded compensation, neither the Sixth Circuit Court of Appeals nor the applicable statutes and rules require that the Court approve employment before compensable services are rendered.
Absolutely, trustees and debtors should endeavor to file required applications to employ professionals as promptly as possible, but sometimes entry of an order may not be possible prior to the professional rendering services. Indeed, it would be difficult to find or envision a case where no services are rendered prior to entry of such an order, in light of the twenty-one (21) days allowed parties in this district to object to a request for relief. In this district, most motions and applications seeking relief, including applications for authority to employ a professional, must be accompanied by a notice to parties in interest, the debtor, the case trustee and the United States Trustee, of the filing of the document and of the twenty-one (21) day notice period within which parties in interest may object to the relief sought. Local Bankruptcy Rule 9013-1(a)(1)(C).
Aside from the noticing requirement, the situation presented may result in the professional undertaking services prior to an order authorizing employment. For instance, in a Chapter 7 case, a debtor may have on-going litigation or negotiations surrounding a claim pending at the time of commencement of the case. But the trustee requires time to review the case, perhaps conduct the section 341 Meeting of Creditors, evaluate the debtor's claim, consider whether he wishes to retain the same counsel, determine whether existing counsel is eligible to serve the bankruptcy estate, and whether the cost justifies the potential recovery to the estate. Meanwhile, counsel may be under deadlines to prosecute the case or strategy may dictate action. Another, simpler, example (and this one is not uncommon): the professional may be unaware that the debtor has commenced a bankruptcy proceeding and, as a result, lacks authority to undertake certain actions, including decisions pertaining to causes of action and claims which have become property of the bankruptcy estate. Consequently, this Court is of the opinion that the order does not have to be entered before services are rendered in order for a professional to be compensated.
Of course, if the professional undertakes services without an order authorizing his or her employment, the professional assumes the risk that the services may not be compensated. Federated Dep't Stores, Inc. , 44 F.3d at 1320. Moreover, if the professional takes direction from the debtor knowing that the debtor is not the real party in interest, the professional risks his or her professional standing with the Court and the trustee, which may result in the Court denying employment. See In re Boddie, No. 07-51645 (Bankr. S.D. Ohio Apr. 10, 2015), ECF No. 267.
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C. Late Applications and Compliance with Carter Requirements
Although this Court will no longer enter nunc pro tunc orders to employ professionals, it will continue to entertain, and, in appropriate circumstances, grant late-filed applications that comply with the Bankruptcy Code and Bankruptcy Rules. But, the Court will continue to require the applicant to demonstrate the requirements set forth in Carter, previously used to establish the basis for entry of tardy orders of employment:
1. The application must be one which would have been approved originally by the Court, measured by the requirements of 11 U.S.C. § 327 and Bankruptcy Rule 2014 at or before the time the services were actually commenced;
2. Evidence must appear in the record of the case which demonstrates that the Court and other interested parties had actual knowledge of the legal services being rendered by the applicant;
3. An application ... must be filed as soon as the matter is brought to the attention of the applicant;
4. The party for whom the work was performed approves the entry of the ... order;
5. The applicant has provided notice of the [late] application ... to creditors and parties in interest and has provided an opportunity for filing objections;
6. No creditor or party in interest offers reasonable objection to the entry of the ... order;
7. If the applicant is also seeking compensation at this point, the applicant must have provided notice of the application for fees to any parties in interest, thus providing an opportunity for objections as provided in 11 U.S.C. § 330 ;
8. A sustainable objection must not be filed to the applicants [sic] request for attorney fees;
9. No actual or potential prejudice will inure to the estate or other parties in interest;
10. The applicant's failure to seek pre-employment approval is satisfactorily explained;
11. The applicant exhibits no pattern of inattention or negligence in seeking judicial approval of employment of professionals, measured in some degree by the applicants [sic] experience in this field of law.
Carter, 533 B.R. at 637 (quoting In re Integrity Supply, Inc., 417 B.R. 514, 519 (Bankr. S.D. Ohio 2009) ).
In the instant case, the Debtors attempted to apply the Carter requirements, but they failed to comply with the first requirement. The Application fails to conform to the requirements of the Rules and would not have been approved originally. Bankruptcy Rule 2014(a) requires applications for employment of professionals to state "any proposed arrangement for compensation," and Local Bankruptcy Rule 2014-1(b)(1) requires applications to state "the professional's customary and proposed hourly rates of compensation or other proposed formula for determining compensation." The Application indicates that the Special Counsel is seeking approval of its fees pursuant to 11 U.S.C. § 330, but there is no discussion of the proposed compensation or fee arrangement. Without this information, the Court is unable to determine whether the employment of the Special Counsel is appropriate. Thus, the Debtors' request to employ the Special Counsel must be denied.
IV. CONCLUSION
In light of the foregoing, it is
ORDERED AND ADJUDGED that the Application of Debtors to Employ Special Counsel (Nunc Pro Tunc) (Doc. #34) is DENIED without prejudice.