Applications of Kurtzman

• Decision Date: 28 January 1998
• Citation: 220 BR 801
• Parties: In re Various Applications of Eric C. KURTZMAN, Chapter 7 Trustee, Seeking to Retain Kurtzman, Cohen, Matera & Gurock (formerly Kurtzman, Haspel & Stein) as Attorneys for Trustee.
• Court: U.S. Bankruptcy Court — Southern District of New York

220 B.R. 801 (1998)

In re Various Applications of Eric C. KURTZMAN, Chapter 7 Trustee, Seeking to Retain Kurtzman, Cohen, Matera & Gurock (formerly Kurtzman, Haspel & Stein) as Attorneys for Trustee.

United States Bankruptcy Court, S.D. New York.

January 28, 1998.

Eric C. Kurtzman, Rosemarie E. Matera, Howard M. Gurock, Thomas M. Scuderi, Kurtzman, Cohen, Matera & Gurock, Spring Valley, NY.

Eric Small, Albany, NY, Office of the United States Trustee.

DECISION ON RETENTION OF ATTORNEYS FOR TRUSTEE PURSUANT TO 11 U.S.C. § 327(d)

JEREMIAH E. BERK, Bankruptcy Judge.

I. INTRODUCTION

Eric C. Kurtzman, Chapter 7 Trustee, ("Trustee Kurtzman") seeks to retain the law firm of which he is a member, Kurtzman, Cohen, Matera & Gurock (the "Kurtzman firm"), as attorneys for himself as trustee, pursuant to 11 U.S.C. § 327(d), in thirteen bankruptcy estates.¹ Hearings on this most-recent batch of retention applications were held on June 17, 1997, August 21, 1997 and October 14, 1997. For the reasons stated on the record at these and prior hearings, the retention applications are denied.

II. FACTS

For a period of approximately three years, hearings have been held on various applications of Eric C. Kurtzman, Chapter 7 Trustee, seeking to retain his law firm, Kurtzman, Cohen, Matera & Gurock (formerly Kurtzman, Haspel & Stein) as attorneys for the Trustee. Hearings were held on February 28, 1995, July 6, 1995, August 30, 1995, September 14, 1995, September 20, 1995, November 21, 1995, May 9, 1996, June 17, 1997, August 21, 1997 and October 14, 1997. These hearings concerned Trustee Kurtzman's administration of various bankruptcy estates and, specifically, whether it was in the "best interest of the estate" to permit Trustee Kurtzman to continue to retain his law firm as attorneys for Trustee pursuant to 11 U.S.C. § 327(d).

In seven of the thirteen matters now pending, the court served a notice of hearing upon Trustee Kurtzman and the United States Trustee. The six remaining matters were set down for hearing by Trustee Kurtzman and notice was given to all creditors and parties in interest. The following is a list of each case, hearing date and date of service of notice of hearing:

                Case Name                   Hearing Date           Date of Service
                Baird 96-33215              June 12, 1997          June 3, 1997
                                            August 21, 1997        June 25, 1997
                                            October 14, 1997       August 25, 1997
                Balli 97-32137              October 14, 1997       September 3, 1997*
                Canpolat 93-30696           August 21, 1997        June 24, 1997
                                            October 14, 1997       August 25, 1997
                Davis 96-33246              October 14, 1997       August 25, 1997
                Fowler 97-32103             October 14, 1997       September 3, 1997*
                Judson 96-32814             October 14, 1997       August 25, 1997
                Kern 97-32144               October 14, 1997       October 1, 1997*
                Klybas 95-30068             October 14, 1997       September 26, 1997*
                Lask 96-32593               October 14, 1997       August 25, 1997
                McCue 97-31771              October 14, 1997       September 11, 1997*
                Rothman 97-32084            October 14, 1997       September 8, 1997*
                Sayres 97-31122             August 21, 1997        June 24, 1997
                                            October 14, 1997       August 25, 1997
                Woronoff 96-32561           October 14, 1997       August 25, 1997
                

III. DISCUSSION

A trustee holds a "fiduciary obligation to the debtor's estate and its creditors and therefore cannot place himself in a position which would give the appearance of impropriety or be a conflict of interest." In re Gem Tire & Serv. Co., 117 B.R. 874, 877 (Bankr.S.D.Tex.1990). Section 327 of the Bankruptcy Code is a manifestation of "Congress' concern for avoiding conflicts of interest as to employed professionals." Id. Under § 327(a), the trustee's professionals must not "hold or represent an interest adverse to the estate" and be "disinterested persons." 11 U.S.C. § 327(a) (1997). However, when a trustee wishes to employ himself as attorney to the trustee, Congress requires the additional showing that the representation is in "the best interest of the estate." 11 U.S.C. § 327(d) (1997). There is abundant authority to support the proposition that a trustee should be allowed to retain his own law firm only if the "best-interest-of-the-estate" test is affirmatively demonstrated. See In re Showcase Jewelry Design Ltd., 166 B.R. 205, 207 (Bankr.E.D.N.Y.1994); In re Cee Jay Discount Stores, Inc., 171 B.R. 173, 174 (Bankr. E.D.N.Y.1994); In re Gem Tire, 117 B.R. at 878; In re Butler Industries, Inc., 101 B.R. 194, 196 (Bankr.C.D.Cal.1989), aff'd, 114 B.R. 695 (C.D.Cal.1990); In re Michigan Interstate Railway Co., Inc., 32 B.R. 325, 326 (Bankr.E.D.Mich.1983). In none of the retention applications now pending has "best interest" been demonstrated.

Human nature being what it is, courts have recognized the dangers attendant to a fiduciary's retention of himself to serve as his own paid employee. See Knapp v. Seligson (In the Matter of Ira Haupt & Co.), 361 F.2d 164, 167-68 (2d Cir.1966); S.E.C. v. Kenneth Bove & Co., 451 F.Supp. 355, 358-59 (S.D.N.Y.1978); In re Street Railways Adver. Co., 54 F.Supp. 577, 578 (S.D.N.Y.1941); In re Showcase Jewelry Design, 166 B.R. at 206-7; In re Cee Jay Discount Stores, 171 B.R. at 176; In re Gem Tire, 117 B.R. at 877-79; In re Butler Industries, 101 B.R. at 196; In re Chas. A. Stevens, 105 B.R. 866, 870-72 (Bankr.N.D.Ill.1989); In re Michigan Interstate Railway, 32 B.R. at 326. The Second Circuit has noted that a trustee may not have "the same objective and critical attitude toward the amount and quality of effort being put forward by his own law firm that he would toward another." Knapp v. Seligson, 361 F.2d at 168. Consider also the conflict which might arise between an estate's malpractice action against the trustee's law firm and the trustee's natural "disincentive to pursue such claim." In re Showcase Jewelry Design, 166 B.R. at 207.

The checks and balances inherent in the traditional attorney-client relationship become virtually meaningless when the client is permitted to review and pass upon the bills he submits to himself. "A trustee who is represented by his own firm disables himself from offering such assistance with respect to the application for counsel fees. Thus, although the trustee is not prohibited from utilizing his own firm, to do so causes serious problems when compensation is sought." In re Cee Jay Discount Stores, 171 B.R. at 176 (citing S.E.C. v. Kenneth Bove, 451 F.Supp. at 358-59).

Since a bankruptcy trustee is responsible for monitoring all fees requested in a case, and has a statutory duty to object to any inappropriate fees, a conflict develops when the trustee's own law firm is retained as his counsel and the trustee "is interested in obtaining the largest fee recovery on behalf of his firm." In re Butler Industries, 101 B.R. at 196. "The estate is not a cash cow to be milked to death by professionals seeking compensation for services rendered to the estate which have not produced a benefit commensurate with the fees sought." In re Chas. A. Stevens, 105 B.R. at 872.

The U.S. Trustee and this Court have too often questioned the accuracy of the Kurtzman firm's time and expense records submitted in various cases. Courts should not be put to the tedious task of second-guessing attorneys' classifications of billable time. In re Michigan Interstate Railway, 32 B.R. at 326. For example, when a trustee's law firm is retained as counsel to the trustee, "there is a substantial temptation for the trustee to charge administrative duties as legal services, and thereby attempt to obtain double compensation." In re Butler Industries, 101 B.R. at 197. "The temptation to describe time charges as legal rather than managerial is too tempting, especially when `legal' time can be compensated on an hourly basis and `managerial' time can not and . . . it would be naive to hold that on marginal matters, the trustee would not tend to classify the services as legal rather than as managerial." In re Michigan Interstate Railway, 32 B.R. at 326. If the fee application of the law firm does not carefully segregate between services rendered by the trustee and the services rendered by the law firm, a trustee may improperly profit from non-legal services billed as legal services, in violation of his fiduciary duties. S.E.C. v. Kenneth Bove, 451 F.Supp. at 359. Further, a trustee today customarily receives the maximum compensation for trustee duties based upon the size of the bankruptcy estate, starting at 25 percent on the first $5,000 or less up to 3 percent of $1,000,000 or more, as set forth in the sliding-scale commission schedule of 11 U.S.C. § 326(a).

The legislative history to the Bankruptcy Code indicates that Congress was aware of the possibility of a trustee receiving double compensation when he retains his own law firm. Congress did not intend to provide a trustee with a bonus by allowing him to serve as his own counsel and thereby "receive two fees for the same service or . . . avoid the maxima fixed in section 326." H.R.Rep. No. 95-595, at 694 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6285; S.Rep. No. 95-989, at 87, reprinted in 1978 U.S.C.C.A.N. 5787, 5825.

Leading bankruptcy practitioners have also recognized dangers attendant to a trustee's retention of his own law firm. "A trustee who represents himself has a built-in conflict in most cases in that his economic self interest will tempt him to characterize his work as legal, not managerial." Robin E. Phelan & John D. Penn, Bankruptcy Ethics, an Oxymoron, 5 Am. Bankr.Inst. L.Rev. 1, 40 (1997). Further, research shows that in most cases where professionals are retained, the cost of administration frequently results in a decrease in ultimate distribution to creditors. Marcy J.K. Tiffany, Is Chapter 7 Cost Effective?, Bankruptcy Court ...