Opinion
No. 11-01-17804 MA.
July 28, 2006
William Davis, former, Albuquerque, NM, Counsel for Debtor.
Walter Reardon, Albuquerque, NM, Attorney for Michael Sanchez.
ORDER GRANTING, IN PART, AND DENYING, IN PART FIRST INTERIM APPLICATION BY ATTORNEYS FOR THE DEBTOR FOR ALLOWANCE AND PAYMENT OF COMPENSATION
THIS MATTER is before the Court on the First Interim Application by Attorneys for the Debtor for Allowance and Payment of Compensation ("Fee Application") filed by Davis Pierce, P.C., Debtor's former counsel of record. Michael Sanchez, a shareholder and director of the Debtor, Sanchez Southwest, Ltd. ("SSW"), by and through his attorney of record, Walter L. Reardon objected to the Fee Application, asserting generally that because certain actions were taken in connection with the bankruptcy on behalf of SSW without authorization from its board of directors, the fees associated with those actions should not be compensable from the bankruptcy estate. Michael Sanchez also asserts that fees related to litigation with Michael Sanchez should not be allowed, and that because the initial plan was filed untimely and was not feasible, the fees associated with preparing the initial plan should not be allowed because the estate did not benefit from such services.
An Order Approving First Interim Application by Attorneys for the Debtor for Allowance and Payment of Compensation was entered on May 30, 2003 (Docket #215), but that order was set aside on April 13, 2006. See Order Setting Aside Order Approving First Interim Fee Application (Docket # 383).
The Fee Application seeks approval of compensation for services and costs for the period between November 21, 2001 and July 31, 2002 in the total amount of $22,927.48, consisting of fees in the amount of $21,453.50, costs in the amount of $226.97, and applicable New Mexico gross receipts taxes in the amount of $1,247.01. The amount of $15,500.00 has already been applied to the requested fees, leaving a balance of $7,427.48. Michael Sanchez requests that the amount requested in the Fee Application be reduced by approximately $5,500.00. Upon review of the Fee Application and the objection thereto, and being sufficiently informed, the Court finds that a portion of the fees requested should be denied.
BACKGROUND
Michael Sanchez and his brother, Steven Sanchez, owned and operated SSW. Both Michael Sanchez and Steven Sanchez were officers and directors of SSW. See Statement of Financial Affairs (Docket # 38). Shortly prior to the filing of the bankruptcy, SSW was served with a levy by the State of New Mexico. At that time Michael Sanchez was incarcerated. Steven Sanchez, as president of SSW, signed the voluntary petition for bankruptcy on behalf of SSW and authorized the emergency filing. ( See Docket # 10 — Statement Regarding Authority to Sign and File Petition and Resolution of Board of Directors ("Statement Regarding Authority"). The Statement Regarding Authority was not signed by Michael Sanchez, and recites that Michael Sanchez did not consent to the filing of the bankruptcy. The Chapter 11 petition was filed November 21, 2001. No board of directors resolution authorizing the filing of the petition and signed by both Steven Sanchez and Michael Sanchez was obtained prior to the filing of the bankruptcy. Debtor filed a disclosure statement and plan of reorganization on September 30, 2002, and the Court entered an order conditionally approving the disclosure statement. (See Docket # 100, #101, and #105). Michael Sanchez filed a motion to set aside the order conditionally approving disclosure statement, asserting, inter alia, that the plan was filed without approval of the board of directors. ( See Docket # 108). On April 2, 2003, the Debtor's First Amended Plan of Reorganization ("First Amended Plan") was filed. (Docket # 174) Both Michael Sanchez and Steven Sanchez signed the First Amended Plan on behalf of the Debtor. Michael Sanchez also objected to the employment of Davis Pierce, P.C. by the Debtor. By order entered February 15, 2002, the employment of Davis Pierce, P.C. by the Debtor was approved, effective November 21, 2001. (Docket # 44).
DISCUSSION
"[T]he initiation of . . . [bankruptcy] proceedings, like the run of corporate activities, is left to the corporation itself, i.e., to those who have the power of management." Price v. Gurney, 324 U.S. 100, 104, 65 S.Ct. 513, 515, 89 L.Ed. 776, 780 (1945). State law determines which parties in a corporation have management powers. Id. at 106. Thus whether a corporation obtained appropriate corporate authority to file a voluntary petition for bankruptcy is governed by applicable state law. In re Audubon Quartet, Inc., 275 B.R. 783, 786 (Bankr.W.D.Va. 2002). In other words, "authority to file a bankruptcy depends upon the corporate documents and state law." In re Milestone Educ. Inst., Inc., 167 B.R. 716, 720 (Bankr.D.Ma. 1994) (citations omitted). In applying applicable state law, bankruptcy courts have generally held that a resolution of the board of directors is required to authorize the filing of a voluntary petition for bankruptcy on behalf of a corporation. See, e.g., In re Industrial Concerns, Inc., 289 B.R. 609, 618 (Bankr.W.D.Pa. 2003) ("It is a longstanding principle that a president or other officer of a corporation cannot on his or her own initiative file a voluntary petition for the corporation. Approval of its board of directors is required.") (citations omitted); In re Gen-Air Plumbing Remodeling, Inc., 208 B.R. 426, 431 (Bankr.N.D.Ill. 1997) (finding that under Illinois law, the filing of a voluntary petition in bankruptcy on behalf of a corporation requires authorization by a majority vote of the board of directors); In re American Int'l Indus., Inc., 10 B.R. 695, 697 (Bankr.S.D.Fla. 1981) (applying Florida law and finding that voluntary petition required authorization of the board of directors).
In this instance it is undisputed that counsel for the Debtor did not obtain a resolution from the board of the directors authorizing the filing of the voluntary petition prior to the filing of the petition. Michael Sanchez, one of the two members of the board of directors of the Debtor expressly did not consent to the filing of the petition. Under applicable New Mexico law governing corporations, corporate powers must be exercised by or authorized by the board of directors, except as may be provided otherwise in the articles of incorporation or elsewhere in the Business Corporation Act. N.M.S.A. 1978 § 53-11-35(A) (Cum. Supp. 2001). In addition, a sale or disposition of all or substantially all of the assets of the corporation not in the ordinary course of business requires resolution of the board of directors. N.M.S.A. 1978 § 53-15-2 (Cum. Supp. 2001). Filing a petition in bankruptcy is not within the ordinary course of the Debtor's business and would require authorization by its board of directors in accordance with applicable New Mexico law. Cf. American Intern, 10 B.R. at 696-697 (reasoning in part that because applicable state law governing corporations requires a resolution of the board of directors regarding a sale of corporate assets, and because the filing of a bankruptcy transfers the debtor's assets to a trustee in bankruptcy and results in the liquidation of the corporation, the filing of a voluntary petition on behalf of a corporation required a resolution of the board of directors authorizing the bankruptcy filing). The Court, therefore, finds that the voluntary petition was filed without the requisite corporate authority.
Counsel for the Debtor ultimately obtained a ratification for the filing of the bankruptcy by obtaining the signature of Michael Sanchez on the First Amended Plan and Disclosure Statement, but this did not occur until well after the period covered by the First Fee Application.
Counsel for the Debtor arguably should not be entitled to compensation from the bankruptcy estate for work performed prior to obtaining the ratification. However, Michael Sanchez ultimately consented to the employment of Davis Pierce, P.C. retroactive to the date of the filing of the voluntary petition. Moreover, even though the Fee Application seeks approval of compensation in the amount of $21,453.50, Michael Sanchez only requested disallowance of between $5,200.00 and $5,900.00. Testimony of Michael Sanchez. Michael Sanchez has, therefore, waived any argument that additional fees should be disallowed.
Based on the foregoing, and upon review of the Fee Application, the Court finds it appropriate to reduce the attorneys fees requested in the Fee Application by $5,200.00.
WHEREFORE, IT IS HEREBY ORDERED, that the Fee Application is GRANTED, in part, and DENIED, in part. Fees in the amount of $5,200.00 are disallowed, having been incurred during the time the Debtor lacked the requisite corporate authority to file a voluntary petition. Fees in the total amount of $16,253.50 are approved. After reducing the requested fees by $5,200.00, adjusting the applicable gross receipts taxes accordingly, and applying the retainer of $15,500.00, the balance of approved fees and costs to be paid as a result of the Fee Application is $1,924.80.
$21,453.50-$5,200.00 = $16,253.50.
Fees of $16,253.50 + Costs of $226.97 + Taxes of $944.33 ($16,253.50 X .0581) Less $15,500.00 payments already received = $1,924.80.