Triangle Chemicals, Inc., Matter of
| Citation | 697 F.2d 1280,8 C.B. C.2d 116,10 B.C.D. 325 |
| Decision Date | 18 February 1983 |
| Docket Number | No. 81-2453,81-2453 |
| Parties | , 8 Collier Bankr.Cas.2d 116, 10 Bankr.Ct.Dec. 325, Bankr. L. Rep. P 69,090 In the Matter of TRIANGLE CHEMICALS, INC., Debtor. Darryl FANELLI, Appellant, v. Nelson T. HENSLEY, Trustee, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
David F. Dulock, Houston, Tex., for Fanelli.
Ben B. Floyd, Jacalyn D. Scott, Houston, Tex., for Hensley.
Appeal from the United States Bankruptcy Court for the Southern District of Texas.
Before INGRAHAM, TATE and WILLIAMS, Circuit Judges.
This is an appeal from a bankruptcy court's final judgment denying attorney's fees. Jurisdiction of this appeal is asserted upon the basis of 28 U.S.C. Sec. 1293(b) (1978).
In what appears to be a case of first impression before this court, the narrow issue before us arises in the context of a requirement of bankruptcy statute and rule that no attorney shall be employed for a bankruptcy estate (here, a debtor in possession), except upon order by the court and upon compliance with certain procedural formalities. Here, an attorney for the debtor corporation continued to perform substantial services for his client after he filed a petition in bankruptcy court for the corporation's reorganization under Chapter 11 of the Bankruptcy Code, whereupon the corporation thus became a "debtor in possession" under such Code. When the attorney filed a claim for his services, the bankruptcy judge held that he was not authorized to award fees in the absence of a prior order authorizing the employment of counsel in advance of employment; he also indicated that he could not allow a nunc pro tunc order of appointment, as that would circumvent the object of the bankruptcy rule. In so holding, the bankruptcy court relied upon a jurisprudential rule principally established by decisions of the Second and Third Circuits and of numerous bankruptcy courts.
The issue of first impression for this court is whether the bankruptcy court is bound by a per se rule not to allow compensation for attorney's fees, however valuable they are to the debtor's estate and its creditors, in the absence of a prior court authorization of the attorney's employment, or whether, instead, the court has some discretion, upon proper showing and for good cause, to enter an order nunc pro tunc approving the employment of the attorney, as the court might routinely have done, had the court's approval been properly sought prior to the performance of the valuable services by the attorney. For reasons to follow, we do not think a per se rule is mandated by the statute or the rules, and we prefer to adopt the rationale of those decisions, principally of the Seventh and Ninth Circuits, that would permit nunc pro tunc relief in exceptional circumstances, such as the present, under the bankruptcy court's exercise of its powers as a court in equity. We therefore vacate the order and remand to the bankruptcy court for its exercise of its sound discretion (a) as to whether a nunc pro tunc order should be entered by it appointing the appellant as attorney for the debtor on possession relating back to the date of the filing of the petition and (b), if it determines to do so, as to whether the compensation sought should be allowed the attorney for all or part of the services.
In the instant case, Fanelli, an attorney for debtor corporation ("Triangle"), filed a petition for its reorganization under Chapter 11 of the Bankruptcy Code of 1978. Triangle simultaneously filed an application to continue its operation of the business; this alleged, inter alia, that the debtor would obtain the services of an attorney to represent it as debtor in possession--however, no court approval was obtained nor other formality complied with at the time, because of the attorney's misunderstanding of the law. Nevertheless, upon the court clerk's certification that same day that the debtor was authorized to operate its business as debtor in possession, the attorney Fanelli continued to act as attorney for the debtor (in possession) for the next seven months. At that time, he then filed an application for the allowance of attorney's fees, section 331 of the Code, 11 U.S.C. Sec. 331, for the two hundred hours of work thus far performed, as well as for reimbursement of some sixteen hundred dollars out of pocket expenses incurred (filing fees, certified copies, deposition copies, etc.)
Service of this application was made upon all creditors. According to the uncontradicted evidence at the hearing (at which, however, no opponent appeared), the attorney proved his itemized accounting of the services and expenses and showed that he had performed services that had preserved at least some five to six hundred thousand dollars for the estate of the debtor. (Triangle then had assets of $1,100,000 and liabilities of $1,800,000.) The record indicates Fanelli had engaged in numerous negotiations to reduce Triangle's liabilities and to conserve its assets, and that he had made numerous court appearances on behalf of Triangle, some before the bankruptcy judge who subsequently disallowed any fee. The evidence also shows that none of the creditors at the time of the hearing objected to the allowance of the fee sought.
At the conclusion of the hearing, the bankruptcy judge for the first time discovered that no order had been adopted appointing Fanelli as attorney for Triangle. The court noted sua sponte that there "must" be a court order of appointment before an attorney can be compensated and also held that it was without authority to enter a nunc pro tunc order. This appeal followed.
Subsequent to the appeal, upon the failure of efforts to secure additional financing to permit implementation of the plan of reorganization proposed, the Chapter 11 reorganization proceeding was converted into a Chapter 7 liquidation proceeding, and a trustee was appointed. The trustee appears before this court to argue, on behalf of the debtor's estate (and thus also of the unpaid creditors) that, in the absence of prior court order authorizing the employment, the bankruptcy court had no discretion (a) either to order payment or, even, (b) to hold a hearing to determine whether the appointment would have been made upon proper showing at the time the attorney commenced (or continued) to perform his services for the debtor, in order to determine whether to enter a nunc pro tunc order of appointment that might then permit it to consider whether to approve payment of all or part of the $20,050 fee and the reimbursement of $1,605.97 out-of-pocket expenses sought by the attorney.
The present proceeding was instituted under the Bankruptcy Code of 1978, 11 U.S.C. Secs. 101 et seq. 1 The proceeding was filed as a petition for reorganization of Triangle under Chapter 11 of the Code, Secs. 1101 et seq., 11 U.S.C. Secs. 1101 et seq.
The issue as to the allowance of the attorney's fees stems principally from the provision of section 327(a) of the Code, 11 U.S.C. Sec. 327(a), that
the trustee with the court's approval, may employ one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title. (Emphasis added.) 2
This provision had no precise counterpart under the former Bankruptcy Act (). 3
In the present case, of course, the debtor in possession was not a "trustee". In assuming that section 327 of the new Code did not statutorily require prior court approval for appointment of an attorney employed by other than the trustee, debtor's attorney Fanelli overlooked section 1107(a) of the new Code, 11 U.S.C. Sec. 1107(a), which provides that a debtor in possession shall generally have the rights and perform the functions of a trustee but subject to the limitations of a trustee (which, although not referred to, include the power to employ an attorney only with the Bankruptcy Court's approval). 4 Thus, section 1107(a) places the debtor in possession in the shoes of a trustee in every way. 2 Collier on Bankruptcy, p 327.05 (15th ed., 1982).
However, whatever lack of clarity of the statute might have been perceived as to the obligation of a debtor in possession to obtain prior court approval for employment of an attorney to represent him in Chapter 11 reorganization proceedings, the rules of bankruptcy procedure adopted by the Supreme Court make plain such obligation. The Interim Bankruptcy Rules, as amended September 27, 1979, provide that an order approving the employment of an attorney shall be made only on application of the trustee stating certain specific facts with regard to the necessity of the appointment and the person's connections with the debtors, creditors, or any other party in interest, Interim Bankruptcy Rule 2006 5; while "trustee" as used in these interim rules is defined to include a debtor in possession, Interim Bankruptcy Rule 1001(b). 6
Under both the Bankruptcy Code and the applicable rules of bankruptcy procedure prescribed by the Supreme Court, therefore, it is plain that the present debtor in possession was not authorized to employ an attorney without the approval of the bankruptcy court. Nevertheless, while the rules contemplate court approval prior to attorney's employment, they do not in terms or necessary implication prohibit the court in its discretion from granting its approval, nunc pro tunc, at a date subsequent to the employment and after the services are rendered, providing that the required showing is made (see section 327 of the Code, note 2 supra, and Interim Rule 2006, note 5, supra) warranting the approval. Undoubtedly, strong reasons against circumventing the...
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