In re 245 Associates, LLC

• Decision Date: 09 November 1995
• Docket Number: Bankruptcy No. 95-B-41698.
• Citation: 188 BR 743
• Parties: In re 245 ASSOCIATES, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

188 B.R. 743 (1995)

In re 245 ASSOCIATES, LLC, Debtor.

Bankruptcy No. 95-B-41698.

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

November 6, 1995.

As Corrected November 9, 1995.

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Rosenman & Colin, LLP (David J. Mark, of counsel), New York City, for Debtor.

Seiden, Stempel & Bennett (Richard L. Claman, of counsel), New York City, for Steven Klein.

Backenroth & Grossman, LLP (Robert E. Grossman, Mark A. Frankel, of counsel), New York City, for 245 Seventh Avenue Associates, LLC.

MEMORANDUM DECISION AND ORDER DENYING RECEIVER'S APPLICATION FOR AUTHORIZATION TO RETAIN COUNSEL

STUART M. BERNSTEIN, Bankruptcy Judge.

The Applicant, Steven Klein, is the state court-appointed receiver of the debtor's real property whom we briefly continued in possession under 11 U.S.C. § 543(d)(1). The law firm of Seiden, Stempel & Bennett (the "Firm") represented him in connection with the receivership, but Klein delayed in asking for bankruptcy court approval of that retention. He now seeks to cure this omission by asking for approval of the retention nunc pro tunc to an earlier date.

Klein's application presents two issues: (1) must the receiver, continued in possession by the bankruptcy court, obtain its authorization to retain an attorney, and if he must, (2) can the court authorize the retention nunc pro tunc. For the reasons that follow, we conclude that Klein required a prior court order to retain counsel, but he can cure his prior failure through a nunc pro tunc retention order. The current application, however, suffers several deficiencies which he must cure. We grant him leave to file a new application, but because we have already confirmed a plan and Klein's legal fees and expenses will be administrative claims, he must submit his revised application within fifteen days of this order.

FACTS

On April 18, 1995, 245 Seventh Avenue Associates, LLC ("Associates") commenced this case by filing an involuntary chapter 7 petition against the debtor. The debtor thereafter converted the case to a chapter 11, and the Court entered an order for relief on May 22, 1995. On the commencement date, Klein was acting as receiver of the debtor's sole asset — a building located at 245 Seventh Avenue — pursuant to a prior state court order entered in the foreclosure proceeding that the debtor's mortgagee, East New York Savings Bank, had instituted. The bank subsequently assigned the note and mortgage to Associates who, apparently preferring the bankruptcy court forum, filed the involuntary case.

Following the commencement of the case, Klein failed to surrender possession or turn over any property to the debtor. Consequently, on June 9, 1995, the debtor moved for an order under 11 U.S.C. § 543¹ to compel Klein to turn over the debtor's property and file an accounting. Associates objected, and moved on June 19, 1995, inter alia, for an order under 11 U.S.C. § 543(d)(1) to continue the receivership and excuse compliance with the receiver's duty to turn over and account. After hearing the parties on June 21, 1995, the Court continued the receivership pending an evidentiary hearing scheduled to begin on July 25, 1995.

The Court commenced but did not complete the evidentiary proceeding on that day, and adjourned it to August 14, 1995. On the adjourned date, the debtor and Associates announced a consensual protocol for dealing with the reorganization and the termination of the receivership. The parties memorialized their agreement in a September 6, 1995 stipulation, which provided, inter alia, that Klein should turn over the estate's property to the debtor, and file his accounting.

In the meantime, on or about August 23, 1995, Klein submitted an application to retain the Firm as his attorneys, nunc pro tunc to May 22, 1995.² The Firm had represented Klein in connection with the receivership, and had appeared on his behalf in the bankruptcy court. The proposed scope of the retention included landlord-tenant and related matters but was broad enough to reach virtually any matter affecting the receivership. The debtor objected to the nunc pro tunc aspect of the proposed retention.

DISCUSSION

A. Effect of Bankruptcy on Receiverships

The issues require that we first parse the rules governing the receiver's duties once bankruptcy ensues, and his corresponding right to recover his attorney's fees and expenses. State court receivers are "custodians" within the meaning of the Bankruptcy Code. 11 U.S.C. § 101(11)(A); accord In re Snergy Properties, Inc., 130 B.R. 700, 703 (Bankr.S.D.N.Y.1991); In re Posadas Assocs., 127 B.R. 278, 280 n. 6 (Bankr. D.N.M.1991). Ordinarily, the commencement of the case "supersedes" the custodianship. Once the receiver becomes aware of the filing of the petition, including an involuntary petition,³ he cannot make any further disbursements or take any action except to do what is necessary to preserve the property, 11 U.S.C. § 543(a); he must deliver to the trustee any property of the debtor, 11 U.S.C. § 543(b)(1); and he must file an accounting. 11 U.S.C. § 543(b)(2); Fed.R.Bankr.P. 6002(a).

Several Bankruptcy Code provisions authorize the Court to compensate and reimburse the superseded custodian for certain pre-petition and post-petition services. Section 503(b)(3)(E)⁴ grants the superseded receiver an administrative claim for his actual, necessary costs and expenses, and for his compensation, and section 503(b)(4)⁵ covers the reasonable compensation payable to the superseded custodian's attorney or accountant. Section 503(b)(3)(E) (and hence, section 504(b)(4)) does not distinguish between pre-petition and post-petition services, but its legislative history explains that it is confined to the former, codifying the common law rule that accorded a priority to the services rendered by a pre-petition custodian to the extent those services actually benefitted the estate. 124 Cong. Rec. H 11,094-95 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); 124 Cong. Rec. S 17,411 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini); see, e.g., In re American Motor Club, Inc., 125 B.R. 79, 81-82 (Bankr.E.D.N.Y.1991); In re Kenval Mktg. Corp., 84 B.R. 32, 35 (Bankr.E.D.Pa.1988); In re Jensen-Farley Pictures, Inc., 47 B.R. 557, 589 (Bankr. D.Utah 1985); In re North Port Dev. Co., 36 B.R. 19, 21 (Bankr.E.D.Mo.1983). But see In re Posadas, 127 B.R. at 281 (holding that sections 503(b)(3)(E) and 503(b)(4) also grant administrative status to the "winding up" costs and expenses allowable under section 543(c)(2)).

Section 543(c)(2) deals with certain of the receiver's post-petition services. It directs the court to "provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian," but this subsection is limited to the "winding up" duties imposed under sections 543(a) and (b). In re Posadas Assocs., 127 B.R. at 281-82; In re Kenval Mktg. Corp., 84 B.R. at 34 n. 2. Accordingly, the superseded receiver need not obtain a retention order for the lawyer that assists him in performing these duties. See, e.g., In re Snergy Properties, Inc., 130 B.R. at 704-05; In re Posadas Assocs., 127 B.R. at 281-82.

While the commencement of the case ordinarily supersedes the receivership, there is an exception to this rule. After notice and hearing, the court may continue the receivership, and relieve the receiver from the duty to comply with the turnover and accounting requirements of section 543(b), if this better serves the interests of the creditors (and the solvent debtor's equity security holders). 11 U.S.C. § 543(d)(1). Section 543(d)(1) is a modified abstention provision that reinforces the policies set forth in 11 U.S.C. § 305. Dill v. Dime Sav. Bank, FSB (In re Dill), 163 B.R. 221, 225 (E.D.N.Y. 1994); In re Constable Plaza Assocs., L.P., 125 B.R. 98, 103 (Bankr.S.D.N.Y.1991); In re Pine Lake Village Apartment Co., 17 B.R. 829, 833 (Bankr.S.D.N.Y.1982). The bankruptcy case, however, continues while the receiver remains in possession, and the debtor's property remains subject to the bankruptcy court's jurisdiction⁶. Thus, despite the continuation of the receivership, the debtor and, if exclusivity has ended, any party in interest can file a plan.

Unlike the superseded receiver, where the receiver is continued, the Bankruptcy Code does not expressly provide for the reimbursement and compensation of the receiver or his attorneys. In re Posadas Assocs., 127 B.R. at 280-81.⁷ Nevertheless, continuation of the receivership surely implies that the receiver can recover his compensation, reimbursement for expenses and payment of his legal fees from the estate. The first question then is whether the continued receiver, like the trustee or the debtor-in-possession, must obtain a bankruptcy court order approving the retention of his attorney as a condition to the estate having to bear his legal fees.

B. Retention of Professionals Under the Bankruptcy Code

The Bankruptcy Code provides that the trustee and the official creditors' committee may employ a professional, including an attorney, with the bankruptcy court's approval. 11 U.S.C. §§ 327(a), 1103(a). Further, the bankruptcy court cannot award interim or final compensation unless it has authorized the attorney's employment under sections 327 or 1103. The bankruptcy court must, therefore, formally approve an attorney's retention prior to the time that the attorney renders services compensable by the estate. In re Robotics Resources R2, Inc., 117 B.R. 61, 62 (Bankr.D.Conn.1990); In re Brown, 40 B.R. 728, 730 (Bankr. D.Conn.1984); In re Sapolin Paints Inc., 38 B.R. 807, 817 (Bankr.E.D.N.Y.1984).

In the Second Circuit, this represents a per se rule, and forbids allowing compensation to any professional for services rendered prior to the attorney's retention by an order of the bankruptcy court. See, e.g., Futuronics Corp. v. Arutt, Nachamie & Benjamin (In re Futuronics Corp.), 655 F.2d...