Opinion
Case No. 05-07432-B11.
March 1, 2006
Thomas J. Polis, Esq., Polis Associates, Irvine, CA, Attorney for Debtor.
David A. Ortiz, Attorney, Office of the U.S. Trustee, Department of Justice, San Diego, CA, Attorney for U.S. Trustee.
ORDER ON PROPOSED COUNSEL'S MOTION FOR EMPLOYMENT NUNC PRO TUNC
This case was originally filed as an involuntary Chapter 7 by petitioning creditors on August 12, 2005. Attorney Polis filed an answer for the alleged debtor on August 24. The Court set the matter for a status conference, subsequently held on October 3. Mr. Polis appeared on behalf of the alleged debtor and advised that A Trucking was considering converting the case to a voluntary Chapter 11.
On October 13, Mr. Polis submitted a motion to convert to a voluntary Chapter 11, and the filing fee difference was paid. The order converting the case was signed and filed on October 18, and entered on October 19. The first meeting of creditors was noticed for November 15. A further status conference on the case was held by the court on November 21, and Mr. Polis filed a status report on November 18.
Finally, on December 16, Mr. Polis filed an ex parte application to be employed as general counsel for the debtor in the case. With the application, Mr. Polis included his own declaration of disinterestedness, asserting in part that neither he nor any member of his firm was a creditor of the debtor. He did not attach a copy of any retainer agreement although obliged to do so pursuant to Bankruptcy Local Rule 2014-1(c). Nor did he obtain or submit a Statement of Position from the United States Trustee pursuant to BLR 2014-1(d) and 9034-1.
Subsequently, Mr. Polis had discussions with the Office of the United States Trustee about his ex parte application, and agreed to file a noticed motion for employment and to serve it on all creditors since he was seeking employment nunc pro tunc to the date of filing of the order for conversion and order for relief, October 18. That motion was filed January 24.
Mr. Polisf application for approval of his firm's employment, retroactive to October 18 drew opposition only from the Office of United States Trustee. That opposition asserted that the motion failed to "satisfactorily explain the firm's failure to obtain prior judicial approval before providing services"; and, second, that the motion was not signed by the debtor's principal, as required by Rule 2014(a), Fed.R.Bankr.P. The latter objection was remedied by a declaration of the debtor's president submitted with the reply papers.
The focus of the argument at the hearing was whether there was a satisfactory explanation of the firm's failure to earlier seek authorization of employment under 11 U.S.C. § 327. The controlling authority, recognized by both sides is In re Atkins, 69 F. 3d 970 (9th Cir. 1995). There, the court discussed the issue:
In bankruptcy proceedings, professionals who perform services for a debtor in possession cannot recover fees for services rendered to the estate unless those services have been previously authorized by a court order. (Citations omitted.) The bankruptcy courts in this circuit possess the equitable power to approve retroactively a professional's valuable but unauthorized services. (Citations omitted.) We have held that such retroactive approval should be limited to situations in which "exceptional circumstances" exist. . . .
To establish the presence of exceptional circumstances, professionals seeking retroactive approval must satisfy two requirements: they must (1) satisfactorily explain their failure to receive prior judicial approval; and (2) demonstrate that their services benefitted the bankrupt estate in a significant manner.
After discussing additional factors which some other courts have considered, the Ninth Circuit stated:
We conclude that the two requirements of THC Financial must be met in order for a professional to establish "exceptional circumstances." Moreover, the professional must have satisfied the criteria for employment pursuant to 11 U.S.C. § 327, other than the usual requirement of pre-employment approval. The other factors set forth in Twinton Properties may be, but need not be, considered by the court in exercising its discretion.
There is no issue in this case as to the second element. The Polis firm has rendered valuable and significant services to the estate. The issue in controversy, in a sense, is whether the fact of substantial service can mitigate an arguably less than satisfactory explanation for why court approval of employment was not earlier sought.
In the instant case, the only explanation proffered by the firm is that the firm was unfamiliar with this district's requirement for obtaining a Statement of Position from the Office of United States Trustee. But that did not become an issue until December 16, almost two months to the day after the order for conversion and for relief was filed. No explanation whatsoever has been offered for why a firm, employed by the alleged debtor in August, which filed an answer for the alleged debtor in August, which appeared for the alleged debtor at a status conference in early October, and which filed a motion to convert on October 13, waited until December 16 to submit an application for employment. As valuable as the firm's services appear to have been, the Court cannot ignore the requirement of a satisfactory explanation under the test for retroactive approval in this Circuit.
Consequently, without any explanation at all, the Court cannot, on the present record, approve employment for the firm prior to December 16. The firm is free to supplement its application to offer a satisfactory explanation, with notice and opportunity to be heard afforded to all creditors and to the Office of the United States Trustee.
The period from December 16 to January 24, when the present motion was filed, is more difficult. Atkins involved an accounting firm which had been assured an application for their employment would be submitted. Even in that case, fees were not allowed for a period of time after the "emergency" period when their services were immediately needed. Here, the only explanation offered is that the firm never looked at the Bankruptcy Local Rules, nor asked what the district's procedures or requirements are.
The United States Trustee, in his opposition seems to conflate the overall requirement of "exceptional circumstances" with the requirement of "satisfactory explanation", which is one of the components of "exceptional circumstances". That does not appear to be the Ninth Circuit's test as defined by Atkins. Nor doesAtkins define the minimum threshold for what constitutes a "satisfactory explanation". Rather, Atkins affirmed the circumstances that came to it, holding those circumstances were sufficient, while not speaking to what lesser circumstances might also constitute a "satisfactory explanation". Nor is there any indication that an excusable neglect standard, such as in Pioneer Inv. Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380 (1993), would fall below the threshold for a "satisfactory explanation".
Given the amount and pace of services rendered by Mr. Polis' firm, coupled with the insufficient ex parse application filed December 16, the Court would be inclined to approve employment as of December 16 based on the current record, except that during the hearing on the motion Mr. Polis disclosed that his firm advanced the fees paid on October 13 for the conversion. After taking the matter under consideration, and reflecting on both that fact and the fact that the firm worked for A Trucking from early August 2005, providing services both in respect to a foreclosure and the involuntary petition which began this case, the Court now has questions about whether the firm is a creditor of this estate for services rendered before the order for relief. Mr. Polis' declaration of disinterestedness asserts that neither he nor any member of the firm is a creditor of the debtor. That may well prove to be the case. However, the moving papers are silent as to any compensation paid or reimbursement made by or on behalf of the debtor for the two or more months before the order for relief, including dealing with the foreclosure matter in August.
Accordingly, the application of the Polis firm to be employed, retroactively and prospectively, is taken off calendar. The Polis firm may reapply for employment under 11 U.S.C. § 327, and any such application should address the concerns the Court has raised.
IT IS SO ORDERED.