David v. King

• Docket Number: 1:22-cv-1053 (PTG/IDD)
• Decision Date: 04 August 2023
• Parties: BYRON F. DAVID, Appellant, v. DONALD F. KING, Appellee.
• Court: U.S. District Court — Eastern District of Virginia

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BYRON F. DAVID, Appellant,
v.
DONALD F. KING, Appellee.

No. 1:22-cv-1053 (PTG/IDD)

United States District Court, E.D. Virginia, Alexandria Division

August 4, 2023

MEMORANDUM OPINION & ORDER

PATRICIA TOLLIVER GILES UNITED STATES DISTRICT JUDGE

This matter comes before the Court on Debtor-Appellant Byron F. David's appeal from United States Bankruptcy Judge Klinette H. Kindred's September 2, 2022 Order Reconsidering and Amending Employment and Fee Order. Dkt. 1. The appeal presents the following question of law: whether a bankruptcy court has the authority to approve, nunc pro tunc, a retention application for a former Chapter 11 trustee to employ professional persons on behalf of a bankruptcy estate, effective only for the Chapter 11 time period. Following a remand from this court, U.S. Bankruptcy Judge Kindred (“the Bankruptcy Court”) approved, nunc pro tunc, an application for Chapter 11 trustee Donald F. King to employ a law firm-retroactively applying the approval to dates prior to the bankruptcy proceedings' conversion from Chapter 11 to Chapter 13. This appeal is fully briefed and ripe for disposition. The Court heard oral argument on June 2,2023. Dkt. 7. For the reasons that follow, the Court affirms the Bankruptcy Court's September 2, 2022 Order.

I. BACKGROUND

A. Initial Proceedings in the Bankruptcy Case (Case No. 18-12396-KHK)

On July 10, 2018, Debtor-Appellant Byron David (“David” or “Appellant”) filed a

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Voluntary Petition under Chapter 7 in the Bankruptcy Court. Appellee's Appendix (“Appellee's App.”) at 1. Thereafter, the United States Trustee appointed Donald King (“King,” “Chapter 11 trustee,” or “Appellee”) to serve as Chapter 7 trustee for the bankruptcy estate. Id. at 2. King selected Odin, Feldman & Pittieman (hereinafter the “law firm”) as his counsel, and on November 20, 2018, the Bankruptcy Court entered an order approving such. Id. at 24-30. On February 27, 2019, David moved to convert the case to Chapter 11. Id. at 2, 31-32. On April 10,2019, the case was converted from Chapter 7 to Chapter 11. Id. at 36-37. In the order converting the case from Chapter 7 to Chapter 11, the Bankruptcy Court ordered the Chapter 7 trustee (King) to file a report with the court and file proof of any claims for outstanding expenses incurred during the administration of the Chapter 7 case. Id. The United States Trustee appointed King to serve as Chapter 11 trustee and the Bankruptcy Court approved such. Id. at 38-49. David then moved to convert his case to Chapter 13. Id. at 53-54. On May 21,2020, the case was converted to Chapter 13, terminating King's appointment as trustee. Id. at 72-73. Following the conversion, Thomas P. Gorman was appointed Chapter 13 trustee. Id. at 13.

After the termination of his fiduciary office, King applied for approval of Chapter 11 administrative expenses pursuant to the May 21, 2020 conversion order, id. at 75-93, which included professional services rendered by the law firm. David objected to the application, asserting the law firm was not properly employed once the case was converted from Chapter 7 to Chapter 11, because no additional employment application was filed. The Bankruptcy Court resolved the dispute by requiring an additional application for court approval of the firm's employment during the Chapter 11 portion of the case. Id. at 161-65. David did not object to this order. After King filed the additional application for court approval, David again objected to the application, arguing (1) retroactive approval was inappropriate; (2) the application included

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excessive fees; and (3) the Chapter 11 trustee lacked standing to seek employment of counsel. Id. at 199-211. On November 12, 2020, the Bankruptcy Court held a hearing on King's application for court approval of the law firm. Id. at 231-72. At the hearing, the Bankruptcy Court indicated it would approve the employment application effective that day. Id. at 270. On November 24, 2020, the Bankruptcy Court entered an order granting King's motion to reconsider, approving King's application to employ counsel through November 12, 2020, and approving his requested compensation and expense reimbursement. Id. at 285-86. The Court found the employment application and the request for compensation reasonable. Id. at 269-71, 285-86. On December 8,2020, David filed a motion to reconsider. Id. at 289-305. On February 1, 2021, the Bankruptcy Court entered an order denying David's motion to reconsider. Id. at 365.

B. Litigation in the Eastern District of Virginia (Case No. 1:21-cv-174-MSN-JFA)

On February 12, 2021, David appealed the Bankruptcy Court's February 1, 2021 Order to the United States District Court for the Eastern District of Virginia. That appeal “present[ed] a straightforward question of law: whether a Chapter 11 trustee has standing to hire professional persons on behalf of a bankruptcy estate after the bankruptcy proceedings have converted from Chapter 11 to Chapter 13.” David v. King, 638 B.R. 561, 563 (E.D. Va. 2022). On January 24, 2022, District Judge Michael S. Nachmanoff vacated and remanded the Bankruptcy Court's February 1, 2021 Order, finding that the Bankruptcy Court erred in denying the Debtor's motion to reconsider its November 24, 2020 Order. Id. at 571. Judge Nachmanoff emphasized the fact that the November 24, 2020 Order (which approved King's application to employ counsel) indicated counsel's employment was effective through November 12, 2020-months after the proceedings were converted to Chapter 13. Id. at 569-71. In doing so, the court found that the Bankruptcy Court allowed “King to act on behalf of the bankruptcy estate despite his status as

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former trustee.” Id. at 569. Accordingly, the court held that the Bankruptcy Court committed “clear error that should have been corrected on reconsideration.” Id. Notwithstanding that fact, the court did not disturb the Bankruptcy Court's November 24,2020 Order. Id. at 563 n. 1. Rather, Judge Nachmanoff vacated the February 1, 2021 Order and remanded the matter back to the Bankruptcy Court for it to “reconsider its November 24 Order in light of this decision.” Id. at 571.

C. September 2, 2022 Order Reconsidering and Amending Employment and Fee Order

On September 2,2022, the Bankruptcy Court entered an order reconsidering and amending its November 24, 2020 Order. Appellant's Appendix (“Appellant's App.”) at 256-57. In that order, the Bankruptcy Court amended its February 1,2021 Employment and Fee Order, approving the prior employment of the law firm only through May 21,2020 (the date the case was converted to Chapter 13). Appellee's App. at 399-400. On September 13, 2022, David appealed the Bankruptcy Court's September 2, 2022 Order to the United States District Court for the Eastern District of Virginia. Dkt. 1. On June 2, 2023, this Court held oral argument on the appeal. Dkt. 7.

IL LEGAL STANDARD

Federal district courts are empowered to hear appeals from “final judgments, orders, and decrees” issued by the bankruptcy court. 28 U.S.C. § 158(a)(1). When considering an appeal from the bankruptcy court, the district court reviews the bankruptcy court's factual findings for clear error and its legal conclusions de novo^[1] Shin v. Lee, 550 F.Supp.3d 313, 318 (E.D. Va. 2021) (citing In re Taneja, 743 F.3d 423, 429 (4th Cir. 2014)). When conducting de novo review, the

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appellate court applies the same standards of review that were applied in the court being reviewed. See In re Merry-Go-Round Enterprises, Inc., 400 F.3d 219, 224 (4th Cir. 2005).

III. DISCUSSION

This appeal of the September 2, 2022 Order presents the following question: whether a bankruptcy court has the authority to approve, nunc pro tunc, a retention application for a former Chapter 11 trustee to employ professional persons on behalf of a bankruptcy estate, effective only for the Chapter 11 time period. Nunc pro tunc orders allow courts to rule on “a determination previously made, but for some reason improperly entered or expressed, [which] may be corrected and entered as of the original time when it should have been, or when there has been an omission to enter it at all.” Glynne v. Wilmed Healthcare, 699 F.3d 380, 383 (4th Cir. 2012) (quoting Maksymchuk v. Frank, 987 F.2d 1072, 1075 n.2 (4th Cir. 1993)). The term literally means “now forthen.” Id.

Thus, the Court's inquiry begins with its de novo determination of whether a Chapter 11 trustee has the authority to employ professionals during Chapter 11 proceedings. The Court finds the answer is yes-Bankruptcy Code Section 327 permits bankruptcy trustees to “employ ... professional persons ... to represent or assist the trustee in carrying out the trustee's duties under this title.” 11 U.S.C. § 327(a). Appellant argues that Appellee lost his authority^[2] when the case

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converted to Chapter 13, and argues that because of that fact, the Bankruptcy Court erred in empowering the former trustee to appoint the law firm. While it is true that conversion terminates fiduciary office, see 11 U.S.C. § 348(e), the Bankruptcy Court's September 2, 2022 Order permitted the hiring of the firm retroactively, covering the time period before the trustee's fiduciary office was terminated by the case's conversion to Chapter 13. See Appellant's App. at 256-57. Explained further below, this significantly differs from the Bankruptcy Court's February 1, 2021 Order, which was subsequently vacated by this court. Compare id. at 168-69, 208 with id. at 256-57.

Next, as explained further below, the Court finds the Bankruptcy Court did not err in utilizing a nunc pro tunc order to retroactively permit the former Chapter 11 trustee to employ the law firm specifically for the Chapter 11 phase. The Bankruptcy Court's September 2, 2022 Order combined its authority under 11 U.S.C. § 327(a) and its ability to issue nunc pro tunc orders to “approve[] the prior employment of the law firm Odin...