Engel, In re, 96-5256
| Decision Date | 03 September 1997 |
| Docket Number | No. 96-5256,96-5256 |
| Citation | 124 F.3d 567 |
| Parties | 38 Collier Bankr.Cas.2d 1105 In re: William ENGEL, Debtor. FERRARA & HANTMAN; Robert J. Hantman, Appellants, v. Jesus Antonio ALVAREZ; Theodore J. Liscinski, Jr., Trustee; United States Trustee. |
| Court | U.S. Court of Appeals — Third Circuit |
Michael R. Perle (argued), Michael R. Perle, P.C., New York City.
Robert J. Hantman, Hantman & Associates, New York City, for Appellants.
David A. Nicolette (argued), Jeanette A. Odynski, Nicolette & Perkins, Oradell, NJ, for Appellee, Jesus Antonio Alvarez, as Administrator ad Prosequendum and as Administrator of the Estate of Xiomara Alvarez, also known as Xiomara Engel, Deceased.
Theodore J. Liscinski, Jr., Lanfrit, Liscinski & Rosenwasser, P.C., Somerset, NJ, for Appellee, Trustee, Theodore J. Liscinski.
Before: BECKER, McKEE and GARTH, Circuit Judges.
The question we must answer on this appeal is whether an appointment of special counsel under § 327(e) of the Bankruptcy Code requires that compensation for special counsel's services be paid from estate funds where no benefit to the bankruptcy estate has been achieved. We hold that § 330 of the Bankruptcy Code requires that services rendered by special counsel benefit the estate before payment from estate funds may be authorized. Hence, we affirm the district court's order, which had affirmed the bankruptcy court's order denying compensation to special counsel.
In 1985 William Engel was convicted of the murder of his former wife, Xiomara Alvarez. 1 The New Jersey Superior Court upheld his conviction, noting that "the voluminous trial record fairly reeks of defendants' guilt." 2 In 1986, Jesus Antonio Alvarez, the Administrator of the estate of Xiomara Alvarez, filed a wrongful death action against Engel.
In 1992, Engel settled a dispute over his interest in a partnership with another brother, Richard. Pursuant to that settlement, William Engel is to be paid more than $5 million, payable in monthly installments of approximately $43,000, with a balloon payment of $4.2 million in the year 2004. He is also to receive $1 million in monthly installments of $16,666.66.
Engel's liability in the wrongful death action was established in April 1993.
Late in 1993, in the hopes of securing post-conviction relief from his conviction for murder, Engel sought the services of Robert Hantman, of the law firm Ferrara & Hantman. 3 On January 6, 1994, Engel filed for Chapter 11 bankruptcy, retaining the firm of Wasserman, Jurista & Stolz (Wasserman) as counsel for Engel as debtor-in-possession.
On March 21, 1994, when the issue of Hantman's retention was first raised by Jurista of the Wasserman firm, the bankruptcy court warned that criminal defense services would not be payable from the estate.
On April 13, 1994, debtor-in-possession Engel applied through Wasserman, for bankruptcy court approval of his retention of Hantman as special counsel. On April 14, 1994, David A. Nicolette, attorney for the Alvarez estate, wrote to the bankruptcy court objecting to Hantman's proposed retention. He argued that the criminal defense services that Hantman would perform would benefit Engel personally, but not the bankruptcy estate. He contended that estate funds could not be used to pay for such criminal defense services. He also reminded the bankruptcy court of the warning given on March 21, 1994.
On April 19, 1994, Hantman reviewed Nicolette's objections.
On May 16, 1994, the bankruptcy court held a telephone conference to discuss the proposed retention of Hantman and the objections raised by Nicolette. Yablonsky of the Wasserman firm, and Nicolette, on behalf of the Alvarez estate, participated in the conference call.
The next day, on May 17, 1994, the bankruptcy court issued an order approving of the retention of Hantman as special counsel. The May 17 Order reads in pertinent part:
It is, on this 17th day of May, 1994,
Ordered, that the Debtor's proposed retention of the law firm of Ferrara and Hantman, 920 Bergen Avenue, Trust Company Building, Suite 806, Jersey City, New Jersey, as special counsel herein, be and the same is hereby approved; and it is further
Ordered, that compensation to such special counsel shall be determined by this Court upon proper application.
Order May 17, 1994 (emphasis added).
In May 1994 Engel paid a retainer of $30,000 from the estate to Hantman. In September 1994, after discovering that the payment had been made, the Alvarez estate filed a motion to compel Hantman to disgorge the retainer. Subsequent to an October 13, 1994 hearing on the disgorgement motion, the bankruptcy court ordered Hantman to disgorge the retainer on October 31, 1994. Engel appealed the order to the district court, and the district court affirmed the order of the bankruptcy court.
On May 31, 1995, Hantman filed his first interim fee application for services provided as special counsel in Engel's criminal case. The application sought fees in the amount of $258,667.00, and costs in the amount of $32,791.33.
In July 1995, more than one year after Hantman sought to be retained as special counsel for Engel, Engel's liability in the wrongful death action was established at $5.154 million. On March 15, 1996, the New Jersey Superior Court denied Engel's petition for post-conviction relief and his motion for a new trial.
After holding a hearing on September 6, 1995 on Hantman's fee application, the bankruptcy court found that the services which Hantman had provided in Engel's criminal case had provided no benefit to the bankruptcy estate, and could not, therefore, be paid from estate funds. Hantman filed a motion for reconsideration, which was likewise denied by the bankruptcy court. On December 20, 1995, the bankruptcy court issued opinions on the denial of fees and the motion for reconsideration, and on the following day, December 21, 1995, entered an order denying Hantman's fee request. Hantman appealed that denial to the district court, which affirmed the December 21, 1995 order of the bankruptcy court on April 17, 1996.
Hantman appeals from the April 17, 1996 order of the district court. This court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(d).
Our review of the district court's disposition is plenary. The bankruptcy court's legal interpretations are subject to plenary review, the factual findings of the bankruptcy court are reviewed for clear error, and the bankruptcy court's decisions regarding the awarding of fees are reviewed for abuse of discretion. Zolfo, Cooper & Co. v. Sunbeam-Oster Co., 50 F.3d 253, 257 (3d Cir.1995).
The essence of Hantman's argument on appeal is that "an order under § 327(e) establishes a legal right to be paid from the estate." 4 He argues that it is implicit in the appointment of special counsel that there is a "benefit-to-the-estate."
We reject Hantman's argument, and hold that an order approving of a professional's retention under § 327 does not establish a right to be paid from the bankruptcy estate under § 330. Approval under § 327 establishes only that an attorney may be employed by the debtor in-possession, 5 and not that his employment will therefore or thereafter be compensated from estate funds. Compensation from the estate, as we discuss infra, depends on the second look taken by the bankruptcy court as mandated by § 330, for a determination of "benefit-to-the-estate."
Any debtor-in-possession--in this case Engel--must receive court approval in order to employ an attorney or other professional. Otherwise he is not permitted or authorized to retain counsel. This is true regardless of the source of compensation for the attorney so engaged. An attorney whose employment is approved under § 327 enjoys no presumption that his compensation will be paid from the estate under § 330. Even if compensation is to come from some source other than the estate, employment of an attorney by the debtor-in-possession must still be approved by the bankruptcy court. 6 An attorney whose employment has not been approved under § 327 can be required to return compensation for the services provided to the debtor-in-possession, 7 even though they were paid by third parties and not by the estate. 8
A bankruptcy court, even though it has approved employment under § 327, must once again review any application for compensation. The text of the statute makes this clear. This review must be made under § 330, when the estate has been benefited and is to pay for the beneficial services, and under § 329 when compensation is to come from some source outside the estate. Section 330 provides that after "notice to any parties in interest and to the United States trustee and a hearing ... the court may award ... to a professional person employed under section 327 ... reasonable compensation for actual, necessary services rendered," 9 and which benefit the estate. 10 In the case of compensation which is to come from some non- estate source, the determination would be made solely under § 329, which empowers the court to review any compensation arrangement between a debtor and an attorney. 11
We have consistently rejected the contention that compensation from the estate under § 330 and approval under § 327 can be compressed into one step, and we have upheld scrutiny under § 330 as the mandatory second part of a two-step process. Thus, in In re Arkansas Company, Inc., 798 F.2d 645, 648-49 (3d Cir.1986), we rejected ...
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