UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JOHN ROBERT THOMER
DAWN ALEXIS THOMER
DEBTORS CASE NO. 99-20983
The court has before it two applications for compensation and reimbursement of expenses and an application for allowance of administrative expense in this case which was filed as a Chapter 11 on June 17, 1999, and converted to a Chapter 7 on June 16, 2000. The conversion to Chapter 7 is the basis for several of the issues which arise in regard to these applications. Further, this case has a companion case, Thomer Excavating, Inc., No. 99-21073 (sometimes referred to herein as Athe corporate case@), with which it was consolidated for administration purposes on January 24, 2000. That case also converted to Chapter 7 on June 16, 2002. Two of the applicants have performed work in both cases. The three applications and objections thereto were heard on April 16, 2002, and were submitted for decision by order entered on June 5, 2002.
The three applicants are Sally J. Herald, original attorney for the Chapter 11 debtors (AHerald@); Andrew J. Bertke, CPA, an accountant hired by the Chapter 11 debtors (ABertke@); and Greenebaum Doll & McDonald, a law firm which replaced Herald in November 2000 (AGDM@). The court will consider each application in turn:
1. Application of Sally J. Herald
Herald originally filed her fee applications on November 26, 2001, in this case and 99-21073, the corporate case. She sought $24,700.00 plus $2,286.75 in expenses, for a total of $26,986.75 in each case. The itemizations did not identify the work done as being for one case or the other. In response to objections by the debtors herein and the United States Trustee (AUST@) concerning the vague and confusing nature of these applications, Herald separated out the work performed for these debtors from the work performed for the corporate debtor.
Her application in 99-21073 was approved by order entered May 24, 2002, wherein she was allowed an administrative expense for legal services rendered in the Chapter 11 case in the amount of $21,920.00, plus expenses incurred, less $4,747.50 previously paid, for a total of $19,529.97. She performed no work in 99-21073 after it converted to Chapter 7.
Herald filed a supplement to her application in this case on April 11, 2002. It seeks $15,479.28 ($14,450.00 in fees, plus $929.28 in expenses) less $4,747.50 previously received, for a total of $10,731.78. Of the fees requested, $3,160.00 in charges appears to be for work performed after the case was converted to Chapter 7. The UST contends that Herald cannot be compensated from the Chapter 7 estate for work done after the conversion to Chapter 7 because 11 U.S.C. ' 330 does not allow such compensation. Section 330(a) provides in pertinent part that a trustee, examiner, or professional person may be awarded Areasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person[.]@ The UST=s position is based on the fact that the 1994 amendment of ' 330(a) deleted the language Aor the debtor=s attorney@ which was found at the end of the pre-1994 version of the statute.
This issue has been addressed in In re Eggleston Works Loudspeaker Co., 253 B.R. 519, 522-23 (6th Cir. BAP 2000). There the panel acknowledged that there is a split of authority concerning the change, with some circuits holding that the change precludes compensation of a debtor=s attorney from estate assets, and others holding that the omission of the subject language was inadvertent. (The Sixth Circuit has not yet addressed the issue.) The panel agreed with the courts holding that the omission was inadvertent and that Congress did not intend to prohibit compensation to Chapter 7 debtors= attorneys. This court agrees with the panel=s reasoning, and holds that ' 330(a) does not preclude Herald=s compensation from the Chapter 7 estate.
Determination of this issue is not the end of the inquiry, however. The debtors here did not apply for Herald=s retention in the Chapter 7 case, but she continued to represent them. In In re Brierwood Manor, Inc., 239 B.R. 709 (Bankr. D.N.J. 1999), the court, which also held that the omission of the subject language from ' 330(a) was inadvertent, went on to examine the fee applicant=s continued post-conversion representation of a Chapter 11 corporate debtor in possession (ADIP@). The court pointed out that once a Chapter 11 case converts to Chapter 7 and a trustee is appointed, the role and duties of the former DIP change as set out in 11 U.S.C. ' 521. That section requires the former DIP to cooperate with the trustee to enable the performance of the trustee=s duties in the Chapter 7 case, and a corporate DIP may only appear in court by an attorney.
The role of the former DIP=s counsel therefore changes as well:
The former debtor in possession may require assistance of counsel to perform these duties and such counsel should be compensated from the estate. Once the necessary transition matters are accomplished, debtor=s counsel should immediately conclude its service to the former debtor in possession or seek further authorization from the bankruptcy court as to its appropriate role in the Chapter 7 case.
Id., at 716-17. Post-conversion efforts of counsel for the former DIP in Brierwood were directed mostly to the sale of the former DIP=s sole asset. The court pointed out that nothing prevented the trustee and his counsel from handling this matter, that the trustee had not requested the assistance of the former DIP=s counsel nor applied for his retention under 11 U.S.C. ' 327(e), and that it was unfair to burden the estate with the cost of legal services provided by the applicant. Id., at 717-18. The court did allow compensation for legal services provided in transition.
Assuming that the same reasoning applies in the case of individual, as opposed to corporate, DIP=s, the work Herald performed in this case after the conversion to Chapter 7 must be scrutinized to determine whether it was the sort of Atransition@ work contemplated by ' 521. Of the $3,160.00 claimed for work performed after conversion, only $595.00 appears to be in any way attributable to the transition from Chapter 11 to Chapter 7. Herald will be allowed $595.00 for work performed after conversion, and $2,565.00 will be disallowed. Herald=s final allowance will therefore be $11,885.00 in fees plus $929.28 in expenses, less $4,747.50 previously paid, for a total of $8,066.78.
2. Andrew J. Bertke, CPA
Bertke filed his application for compensation for accounting work on January 25, 2002, seeking $65,752.25. The majority of the work consisted of preparation of several years worth of the debtors= tax returns. The first issue to be resolved in regard to his application is the effect of a nunc pro tunc order appointing him as accountant for the debtors. The order was tendered in the Chapter 11 case, but not entered by the court until the case was converted to Chapter 7. The record in this case shows that the application for appointment was filed October 4, 1999. A hearing on the application took place on October 5, 1999. The docket entries for the application and the hearing shows that an order was tendered along with the application when it was filed. The order, however, was not entered until November 19, 2001, more than two years after it was tendered and more than one year after the case was converted to Chapter 7. In any event, it seems reasonable to assume that the order tendered herein was misplaced, and should have been entered within days of the October 5, 1999 hearing. This appears to be a clerical error, and the court will consider the nunc pro tunc order effective as of the date it heard the matter and when it should have been entered.
The same application and order entry process went forward in the corporate case, but Bertke has not requested compensation in that case. Objections to the application, however, raise the issue of whether and how much of the work was done for these debtors. Creditor Water Works Supplies, Inc., an unsecured creditor of the debtors, maintains that most of the accounting work was done for the corporate debtor and should not be paid for from this estate. The Chapter 7 trustee also objected to the application on the basis that it was unclear what work was done for which debtor. The trustee has specifically requested that Bertke be required to allocate billing for accounting work between this case and the corporate case. The affidavit in support of Bertke=s application states that time records were not specifically allocated to the corporate case because it was a subchapter-S corporation, and any benefits would only accrue to the individual debtors.
The UST has objected to the application on the basis that all the work performed by Bertke and his firm, Bertke & Sparks, CPA=s, Inc. (Athe firm@), was done after the case converted to Chapter 7, and cannot be compensated out of the Chapter 7 estate. The UST cites several cases which stand for the proposition that a professional must have a valid appointment pursuant to 11 U.S.C. ' 327 before he can be compensated from the estate. That section provides in pertinent part that Athe trustee, with the court=s approval, may employ one or more ... accountants, ... or other professional persons[.]@ The UST maintains that because the Chapter 7 trustee did not seek Bertke=s appointment, he cannot be compensated from the Chapter 7 estate under ' 330.
Bertke had been validly appointed under ' 327 in the Chapter 11 case pursuant to the nunc pro tunc order referred to above. Bertke=s affidavit states that commencement of the work was delayed, however, because attempts to retrieve the debtors= financial records from their prior accounting firm were unsuccessful, even after court relief was sought. Bertke=s time records indicate that once the work commenced, it was completed in approximately eight months. If Bertke had not been prevented from obtaining the debtors= financial records, all of the work could have been performed before the case converted. Barring that, if the work had been performed in Atransition,@ Bertke could have been compensated from the Chapter 7 estate.
Unfortunately for Bertke and his firm, however, none of the work performed may be classified as Atransition@ work so as to allow compensation from the Chapter 7 estate in this situation. All the work was for the Chapter 11 debtors, but was not performed until after the conversion to Chapter 7. The work was necessary, it was apparently performed competently and at a fair rate. It resulted in considerable tax savings to the debtors. Bertke was apparently unaware, however, that it was not possible for a professional hired in a Chapter 11 case to continue (and in this case not even begin) to provide services after a conversion to Chapter 7 without application for his retention being made by the Chapter 7 trustee pursuant to ' 327.
While this result is harsh in the extreme, and it is tempting to remedy it by the exercise of the court=s equitable powers, the court has no discretion to do so. The court in Michel v. Federated Dept. Stores, Inc. (In re Federated Dept. Stores, Inc.), 44 F.3d 1310, 1319-20(6th Cir. 1995) made it clear that a professional may not be compensated without a valid appointment pursuant to ' 327, that the professional is charged with the knowledge that this is the case (whether the professional has been so advised or not), and that the bankruptcy court has no discretion to award compensation in the absence of such valid appointment. See also Michel v. Eagle-Picher Indus., Inc. (In re Eagle-Picher Indus., Inc.), 999 F.2d 969 (6th Cir. 1993); Childress v. Middleton Arms, L.P. (In re Middleton Arms, L.P.), 934 F.2d 723 (6th Cir. 1991). This court must therefore deny the entirety of Bertke=s application for compensation.
3. Greenebaum Doll & McDonald, PLLC
Greenebaum Doll & McDonald, PLLC (AGDM@) filed a Revised Application for Allowance of Administrative Expense on April 9, 2002, seeking an award of $7,469.00 in fees for professional services from November 27, 2000 to December 20, 2001. GDM was hired by the debtors to take Herald=s place after the case converted to Chapter 7. GDM=s application is made pursuant to 11 U.S.C. ' 503(b), and couched as an Aactual, necessary expense of preserving the estate@ (' 503(b)(1)(A)). GDM maintains that this claim should be paid from the Chapter 7 estate pursuant to ' 330.
Only ' 503(b)(2), however, provides for the payment of Acompensation and reimbursement awarded under section 330(a) of this title@ as an administrative expense. As set out above, and as GDM=s own memorandum of support makes clear, the plain language of ' 330 presumes a valid appointment pursuant to ' 327 for a professional seeking fees. No one, certainly not the Chapter 7 trustee, applied for GDM=s appointment as a professional in this case. Further, the services do not appear to be Atransition@ services under the rationale set out above.
Fees for professional services cannot be claimed under ' 503(b)(1)(A). As stated by the court in In re Canton Jubilee, Inc., 253 B.R. 770, 779 (Bankr. E.D. Tex. 2000):
[Claimant] alternatively suggests that his claim for professional services in the post-conversion period can be considered for administrative expense status as an >actual, necessary expense of preserving the estate= under ' 503(b)(1)(A). However, it is clear that ' 503(b)(1)(A) cannot serve as a basis for awarding fees to professionals. See, e.g., F/S Airlease II, Inc. v. Simon, 844 F.2d 99 (3rd Cir. 1988); In re Weibel, Inc., 176 B.R. 209 (9th Cir. BAP 1994); and In re Concrete Products, Inc., 208 B.R. 1000 (Bankr. S.D. Ga. 1996). In explaining the rationale as to why professional compensation cannot be considered for administrative expense priority under ' 503(b)(1)(A), the court in the Concrete Products case noted that:
The rationale is clear. To apply Section 503(b)(1) to professional compensation would make the language of Sections 503(b)(2)[, 327 and 330(a)] superfluous. Congress enacted sections 327, 330(a), and 503(b)(2) to provide the exclusive method for a debtor=s retention of professionals, subject to numerous safeguards, including the requirement of disinterestedness. ... Section (b)(1)(A) is properly applicable only to authorize priority treatment of non-professional employee claims, including wages, salaries and commissions....In the compensation context, however, it [503(b)(1) priority status] must be limited to non-professional services of regularly employed persons, or Sections 503(b)(2), 330 and 327 are eviscerated.
Concrete Products, Inc., 208 B.R. at 1010.
GDM cannot get over the hurdle of not having an application for its appointment made by the Chapter 7 trustee any more than Bertke can. Its application for allowance of administrative expense will be denied in its entirety.
In conclusion, Sally Herald is awarded a final allowance of $8,066.78. The applications of Andrew Bertke, CPA and Greenebaum Doll & McDonald, PLLC are denied. An order in conformity with this opinion will be entered separately.
By the court -
Judge William S. Howard
Sally J. Herald, Esq.
Charles L.J. Freihofer, Esq.
C.R. Bowles, Jr., Esq.
Michael L. Baker, Esq., Trustee
Dinsmore & Shohl, LLP