Arkansas Co., Inc., Matter of

• Decision Date: 24 July 1986
• Docket Number: No. 85-5841,85-5841
• Citation: 798 F.2d 645
• Parties: , 14 Bankr.Ct.Dec. 1112, Bankr. L. Rep. P 71,400 In the Matter of ARKANSAS COMPANY, INC., a New York Corporation, Debtor. Appeal of BENENSON & SCHER, P.A., Attorneys for the Creditors Committee of Arkansas Co., Inc. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 645

798 F.2d 645

55 USLW 2110, 14 Bankr.Ct.Dec. 1112,

Bankr. L. Rep. P 71,400

In the Matter of ARKANSAS COMPANY, INC., a New York

Corporation, Debtor.

Appeal of BENENSON & SCHER, P.A., Attorneys for the

Creditors Committee of Arkansas Co., Inc.

No. 85-5841.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit Rule 12(6) July 24, 1986.

Decided Aug. 13, 1986.

Elliot Scher, Benenson & Scher, P.A., Millburn, N.J., pro se.

Novalyn L. Winfield, Hugh M. Leonard, Trustee, U.S. Dept. of Justice, Newark, N.J., for appellee.

Before GIBBONS, WEIS and SLOVITER, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

I. Introduction

This case raises two issues. First, does the bankruptcy court have the power to grant retroactive approval of the employment of an attorney by a creditors committee in Chapter 11 bankruptcy proceedings? Second, if such power exists, what standard should govern the grant of retroactive approval? We hold that bankruptcy courts may, in extraordinary circumstances, grant retroactive approval of professional employment. We also hold, however, that in this case no extraordinary circumstances were alleged to justify retroactive approval.

II. Facts

Arkansas Company, Inc. filed a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code. At the first meeting of the Unsecured Creditors Committee on November 28, 1983, the Committee recommended the employment of Benenson & Scher as the Committee's counsel.

Through Benenson & Scher's own oversight, it apparently failed to obtain the return of an affidavit certifying its retention which it had mailed to the Committee chairman, and it failed to file an application for court approval of its employment as Committee counsel. Benenson & Scher rendered legal services to the Creditors Committee for thirteen months before discovering in January 1985 that it had failed to obtain the requisite court approval. It then promptly prepared and submitted to the court an application for approval of its employment as counsel. On January 28, 1985, Benenson & Scher's employment by the Committee from that date forward was approved by the bankruptcy court.

Benenson & Scher subsequently moved the bankruptcy court to approve retroactively its employment from November 28, 1983. In his affidavit Elliot Scher attributed his firm's failure to file the affidavit of the chairman of the creditors committee selecting Scher's firm as counsel only to "inadvertance." App. at 8. The bankruptcy court denied the motion in an order without opinion. However, during the hearing on the motion, the bankruptcy court asserted its belief that under the Bankruptcy Code and this court's decision in In re Hydrocarbon Chemicals, Inc., 411 F.2d 203 (3d Cir.) (in banc), cert. denied, 396 U.S. 823, 90 S.Ct. 66, 76, 24 L.Ed.2d 74 (1969), it was without power to grant retroactive approval of professional employment. It also expressed its disapproval of the excuse given by Benenson & Scher for its failure to obtain prior court approval.

Benenson & Scher appealed to the district court. That court stated that, although this circuit had never actually recognized the power of bankruptcy courts to exercise their discretion to grant retroactive approval, it found persuasive the decision in In re Triangle Chemicals, Inc., 697 F.2d 1280 (5th Cir.1983), that there was such discretion in rare or exceptional circumstances. The district court then considered whether retroactive approval should have been granted in this case. The district court construed the bankruptcy judge's comments at the hearing as suggesting that even if he had had the power to grant authorization nunc pro tunc, he would not have done so if the only reason given was "I forgot." The district court stated that bankruptcy court control over attorneys practicing before it, and over the expenditure of assets to employ those attorneys would be significantly reduced were counsel's own oversight allowed to justify failure to obtain prior approval. The court therefore affirmed the denial of retroactive approval, suggesting that such approvals "be limited to cases in which the party seeking approval shows that it would otherwise be subject to an extraordinary hardship not of its own making." In re Arkansas Co., Inc., 55 B.R. 384, 386 (D.N.J.1985). Benenson & Scher appeals.

III. Discussion

The Bankruptcy Code provides that "with the court's approval, [a creditors] committee may select and authorize the employment by such committee of one or more attorneys." 11 U.S.C. Sec. 1103(a) (emphasis added). The United States Trustee, appearing here as the appellee, concurs with the appellant that the language of the statute does not preclude the bankruptcy court from exercising its equitable powers to grant an order authorizing retention of counsel for the creditors committee nunc pro tunc in an appropriate case. Nonetheless, we must decide if that proposition of law is correct.

In the case relied on by the district court, In re Triangle Chemicals, Inc., 697 F.2d 1280, 1284 (5th Cir.1983), the court held that the bankruptcy court is not compelled by a per se rule to deny retroactive approval of employment of counsel by a debtor in possession. Although the court construed the Bankruptcy Code and the applicable rules of bankruptcy procedure to require the debtor in possession to obtain approval of the bankruptcy court before employing an attorney, the court held that 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 ... warranting the approval." Id. at 1284 (emphasis omitted). See also In re Cormier, 35 B.R. 424, 425 (D.Me.1983); In re Twinton Properties Partnership, 27 B.R. 817, 819 (Bankr.M.D.Tenn.1983).

The bankruptcy court in this case believed that this court's decision in In re Hydrocarbon Chemicals, Inc., 411 F.2d 203 (3d Cir.) (in banc), cert. denied, 396 U.S. 823, 90 S.Ct. 66, 76, 24 L.Ed.2d 74 (1969), precluded it from exercising discretion to give retroactive approval. It is true that in Hydrocarbon we affirmed denial of a counsel fee and we pointed out that counsel had failed to seek prior approval of the court. However, our holding denying counsel fee was based on the absence of any provision in the Bankruptcy Act authorizing employment of the petitioning counsel, who had been retained by counsel for the debtor. We stated explicitly, "there is no provision in the Bankruptcy Act for paying more than one fee to counsel for the debtor, nor is there any provision in the Act for employment of other counsel for the counsel for the debtor." Id. at 205. Moreover, the debtor was out of possession, and the receiver who was managing the property had already appointed two law firms as well as an accountant to perform any necessary services for the estate. Thus, we stated, "there was no necessity whatsoever for counsel for the debtor employing counsel without the approval of the court." Id. It follows that even timely approval would have been denied. Understandably, in the later discussion of the failure to seek approval, the court did not discuss the possibility of a nunc pro tunc order, since it would have been fruitless.

It is evident, therefore, as the Triangle Chemicals court noted, that even though Hydrocarbon is sometimes cited among cases indicating an inflexible per se rule precluding compensation in the absence of prior court approval, in fact it is one of those cases where some reason other than the failure to obtain prior approval controlled the disallowance of payment of attorney's fees. See Triangle Chemicals, 697 F.2d at 1285-86.

The seemingly broad language of Hydrocarbon was further interpreted in our later opinion in In re Designaire Modular Home Corp., 517 F.2d 1015 (3d Cir.1975). By then the relevant Bankruptcy Rule had been revised, and we held that the new Rule did not preclude award of a fee out of the bankrupt's estate to an attorney representing a debtor out of possession who had not obtained prior court approval if the attorney had performed services useful to the estate which did not duplicate the services of the receiver or his attorney. We described the majority opinion in Hydrocarbon as "somewhat ambiguous", but remarked that the holding that an attorney for a corporate debtor has no general authority to retain co-counsel is "unexceptional." Id. at 1019. In discussing the need to obtain prior approval for appointment of counsel, we contrasted an attorney for the receiver or debtor in possession who has a fiduciary obligation toward the creditors and who therefore needs the prior approval of the bankruptcy court with the attorney for the debtor out of possession whose obligation is only to the debtor. Id. at 1018-19. Once again, we did not discuss the possibility of a nunc pro tunc order, since we held no prior approval was needed. ¹

It is therefore an open question in this court whether the bankruptcy court has the power to grant retroactive approval of the employment of an attorney in Chapter 11 proceedings. Some of the bankruptcy courts in this circuit have postulated such power and have acted accordingly. See In re Freehold Music Center, Inc., 49 B.R. 293 (Bankr.D.N.J.1985); In re Bible Deliverance Evangelistic Church, 39 B.R. 768, 771-72 (Bankr.E.D.Pa.1984). Contra In re Whitmere Development Corp., --- B.R. ---- No. 82-05797 (Bankr.D.N.J. July 23, 1986); In re Lewis, 30 B.R. 404 (Bankr.E.D.Pa.1983). We now express our agreement with those circuits that hold that the bankruptcy courts have the power to authorize retroactive employment of counsel and other professionals under their broad equity power. See In re Triangle Chemicals, Inc., 697 F.2d 1280 (5th Cir.1983); In re Laurent Watch Co., Inc., 539 F.2d 1231 (9th Cir.1976) (per curiam); Stolkin v. Nachman, 472 F.2d 222 (7th...