UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
WHITE CLOUD MINING COMPANY, INC. CASE NO. 92-10195
MEMORANDUM OPINION AND ORDER
Before the Court is a matter concerning compensation of attorneys for services rendered to the debtor in possession. A brief recitation of the history of the case is necessary.
The debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on May 14, 1992. Pending at that time, and apparently filed only a few days prior, was an action in the Floyd Circuit Court, Kentucky, wherein Elk Horn Coal Corporation (AElk Horn@) was attempting to have that court adjudicate that the debtor had defaulted under the terms of its lease agreement concerning certain mineral properties that the debtor was mining under a lease with Elk Horn.
Shortly after filing the case, Elk Horn moved for relief from the automatic stay in order to be allowed to prosecute the pending action in the Floyd Circuit Court. That relief was granted and, after a Motion for Reinstatement of Automatic Stay by the debtor was overruled, that action proceeded in state court. In that action, the debtor filed a counterclaim against Elk Horn and, after the litigation was finished, obtained a recovery against Elk Horn in excess of $1,500,000.
Meanwhile, the Chapter 11 case proceeded to proposal and confirmation of a plan of reorganization and, eventually, to settlement of the disputes between the debtor and Elk Horn, as approved by this Court, which allowed a claim of Elk Horn and provided a very significant recovery from Elk Horn for the debtor. In proceedings before this Court, the debtor was initially represented by attorneys Morgan and Stavros and later, pursuant to appropriate application and order, the firm of Wyatt, Tarrant & Combs.
On August 9, 1996, the debtor filed its Motion for Order Allowing and Authorizing Debtor to Pay Class I Claims Pursuant to Plan of Reorganization and Notice wherein it sought to pay its Class I claims pursuant to the confirmed plan which were the administrative expenses incurred in the Chapter 11 proceeding. As a part of that motion, debtor sought to pay for legal services the sums of $21,937.50 to Earl Martin McGuire, an attorney, and $16,556.77 to Daniel King, III, also an attorney. No application for retention of these individuals under any provision of the Bankruptcy Code had been filed during the proceeding to that date and, when the matter was called for hearing on August 28, 1996, the Court, by order from the bench, ordered that appropriate applications to employ the attorneys be filed with additional time for objections by Elk Horn after which the Court would take the matter under submission. At the hearing, the Court directed attorney Leathers for Elk Horn to prepare an order and submit the order for signature by the attorney for the debtor and McGuire. Apparently, based upon representations in the briefs, attorney Leathers prepared such an order and forwarded to other counsel for signature but that order apparently did not arrive in the Clerk=s office.
On November 26, 1996, a motion was filed by the debtor to employ attorneys McGuire and King, nunc pro tunc, and to allow compensation as sought in the previous application. Also filed on that date was the first interim application for compensation by McGuire and his affidavit, and the application of King for compensation and his affidavit. Elk Horn subsequently filed its memorandum of law in support of the objections. Because no order was entered reflecting that the parties had completed the briefing of the matter and that the matter should stand submitted to the Court, as per the Court=s order from the bench on August 28, 1996, no computer entry was made putting the matter on the list of submitted cases and the matter lay dormant in the file until McGuire renewed his application by refiling his First Interim Application for Allowance of Reasonable Compensation and Reimbursement of Actual Necessary Expenses on September 16, 1997. McGuire also filed an additional affidavit at that time, Elk Horn renewed its objection and the matter was heard on October 8, 1997.
The first question to be answered is whether nunc pro tunc appointments of counsel are permitted. The statute does not address the particular question and the circuit courts of appeal are divided on the issue.
One of the early reported and oft cited cases in this area in which the Second Circuit United States Court of Appeals adopted a per se rule is Futuronics Corporation v. Arutt, Nachamie & Benjamin, 655 F.2d. 463 (2nd Cir. 1981), cert denied, 455 U.S. 941 (1982). In this case, the egregious violations of ethics and provisions of the Bankruptcy Act and the deliberate concealment from the bankruptcy court of a fee splitting arrangement among counsel, led the Court of Appeals to adopt a per se rule prohibiting nunc pro tunc approval of employment of counsel although the descent would have allowed partial compensation to one firm. A reading of the case leaves one with the impression that the wholesale violations of ethics and law involved in the case led the court to adopt a rule more strict than might have been the case if presented with a more compelling fact pattern favoring nunc pro tunc orders. Another case considering the matter and denying nunc pro tunc employment of counsel is Lavender v. Wood Law Firm, 785 F.2d. 247 (8th Cir. 1986) which is cited as adopting a per se rule. Collier on Bankruptcy, Fifteenth Edition Revised, Volume 3, page 330-19, footnote 26. However, a reading of the Lavender case does not lead to the conclusion that the 8th Circuit has adopted a per se rule, because the court states:
AWithout such prior approval, ordinarily subsequent applications for fees should be denied and the funds received should be ordered returned to the estate. However, in limited circumstances, the Bankruptcy Court as a matter of fundamental fairness may exercise its discretion and enter a nunc pro tunc order authorizing compensation. ...@ at page 248.
This latter result has been reached by several other courts. Matter of Arkansas Co., Inc., 798 F.2d. 645 (3rd Cir. 1986) (retroactive approval may be granted by bankruptcy court only under extraordinary circumstances excusing failure to have sought prior approval); In re Occidental Financial Group, Inc., 40 F.3d. 1059 (9th Cir. 1994) (fees may be awarded which were not authorized in advance only in exceptional circumstances where a satisfactory explanation is provided and there is a demonstration that the services significantly benefitted the estate); In re Land, 943 F.2d 1265 (10th Cir. 1991) (nunc pro tunc approval is appropriate only in extraordinary circumstances which do not include simple neglect); In re Jarvis, 53 F.3d. 416 (1st Cir. 1995) (since the Bankruptcy Code provision was ambiguous as to whether post facto authorization of outside professional services was permissible, and in light of the position of bankruptcy courts as courts of equity, bankruptcy courts may entertain post facto applications and applicants must demonstrate existence of extraordinary circumstances sufficient to excuse failure to file timely application); In re Anderson, 936 F.2d. 199 (5th Cir. 1991) (no per se rule against nunc pro tunc employment and award of attorney=s fees applies); Matter of Singson, 41 F.3d. 316 (7th Cir. 1994) (prior approval of engagement of attorneys and other professionals is strongly preferred but nothing in the Bankruptcy Code forbids belated authorization).
While no binding authority in this circuit has been found, our sister court in the Western District of Kentucky has considered the matter and has held that nunc pro tunc orders are permissible under certain circumstances. In re Kentucky Threaded Products, Inc., 49 B.R. 118 (Bkrtcy.W.D.Ky. 1985).
Clearly the prohibition of compensation without prior court approval serves the clear purpose of providing for court supervision of the distribution of the assets of a debtor. There is no good answer in a case of this nature since allowing nunc pro tunc retention of professionals and the commensurate fees can be argued to promote disregard of the requirements of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and disallowance, certainly in the present case, can serve to punish attorneys who have rendered valuable services to the estate. This Court adopts the rule of the vast majority of courts who have considered this matter and holds that nunc pro tunc orders, or post facto orders as the First Circuit has pointed out in Jarvis above, may be authorized only in unusual circumstances. This Court expressly declines to adopt a per se rule against approving such belated applications to employ counsel.
The attorneys in question in this matter, McGuire and King, have both filed affidavits setting forth the circumstances of their employment, their services rendered and various other matters. It is unquestioned that they rendered services to the debtor in possession in this matter and that, by dent of the efforts of all of the attorneys, including the Wyatt firm, who have already been compensated in this matter, a very successful conclusion was reached in the Elk Horn litigation. While both McGuire and King are sophisticated attorneys, they are not sophisticated bankruptcy attorneys nor do they claim to be. It is hard to imagine what sorts of reasons might be given to constitute the unusual or exceptional circumstances in which courts allow nunc pro tunc orders. Is the attorney too busy to file a three or four page application and affidavit? Are there so many fires to put out that ten minutes are not available to dictate, sign and file the appropriate application? The Court doubts that any of these constitute the real reason that these applications are not timely made. The real reason, normally, is simple oversight or the lack of the knowledge on the part of the attorney employed for a special litigation that any such application is required in a bankruptcy matter. The Court here is persuaded by the results obtained and the fact that the objector in this matter is the same party against whom these attorneys obtained those results. Elk Horn, of course, sees it as adding insult to injury that they lost in the circuit court action and now, as a creditor, their recovery will be diminished by attorney=s fees allowed to those very attorneys who prevailed over them earlier.
For these reasons, the Court believes that nunc pro tunc orders employing McGuire and King are appropriate in these circumstances and will proceed to consider their applications for compensation under the Lodestar analysis. In re Boddy, 950 F.2d. 334 (6th Cir. 1991).
A review of the King application reveals that, while invoices total $16,371.77, $14,000 has been paid to King by Broken Hill Mining Company, Inc., aAsister corporation@ of the debtor during the pendency of the bankruptcy. King now wishes payment of the entire attorney fee, and the Court assumes this is with the intent of reimbursing Broken Hill for the payments it made. Additionally, objection has been made by Elk Horn to certain portions of Mr. King=s fees which clearly outline legal work other than the Elk Horn litigation. From a review of the record, it appears that Mr. King has been compensated in the amount of $14,000 already from another source and that the valid objections of Elk Horn to certain portions of the King invoices exceed the remaining balance due to King. Thus, the Court declines to award any further compensation to King than he has already received.
With respect to the McGuire application, the application lists in excess of 164 hours of services performed. Although the detail provided of the work performed leaves much to be desired, it is clear that substantial work was performed by McGuire. The rate reflected in his billing of $100 per hour is reasonable for services of this nature.
It appears clear that the likelihood of collecting attorney=s fees was small in the absence of a recovery after prevailing in the case. The case required good skills for trial practice. While there is a dispute concerning the actual fee agreement, this Court will apply the Lodestar method to determine applicable compensation. The amount in controversy in this proceeding, several million dollars, certainly warrants the retention of capable and experienced counsel. Mr. McGuire clearly qualifies. Apparently no previous compensation was paid to Mr. McGuire concerning this matter.
A review of all of the factors leads the court to conclude that McGuire should be compensated for 110 hours at $100 an hour, or the sum of $11,000, plus reimbursement of expenses he advanced on behalf of his client in the amount of $665.65.
The attorney for the debtor in possession is directed to prepare appropriate orders on the within rulings.
Dated this ______ day of ____________________, 1997.
BY THE COURT
Earl Martin McGuire, Esq.
Daniel King III, Esq.
John R. Leathers, Esq.
Soloman Van Meter, Esq.