UNITED STATES BANKRUPTCY
COURT
EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
IN
RE:
JOHN
ROBERT THOMER
DAWN
ALEXIS THOMER
DEBTORS CASE
NO. 99-20983
MEMORANDUM
OPINION
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
[503](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.
Dated:
By the court -
Judge William S. Howard
Copies
to:
Debtors
Sally
J. Herald, Esq.
Charles
L.J. Freihofer, Esq.
C.R.
Bowles, Jr., Esq.
Michael
L. Baker, Esq., Trustee
Dinsmore
& Shohl, LLP
U.S.
Trustee