In re Banhalmi
| Decision Date | 15 April 1988 |
| Docket Number | Bankruptcy No. 83 B 7160. |
| Citation | 84 BR 123 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re George & Kornelia BANHALMI, Debtors. |
Max Chill and Steven Radtke, Chicago, Ill., for trustee.
Glen H. Kanwit, Hopkins & Sutter, Chicago, Ill., for Hopkins & Sutter.
Morton H. Cohon, Chicago, Ill., for debtors.
AMENDED MEMORANDUM OPINION AND ORDER DISALLOWING ADMINISTRATIVE CLAIM
The issue in this case is whether the attorneys who represented the Debtors in an appeal may be compensated from the estate notwithstanding the fact that they did not obtain an order from the Court authorizing their employment.
The law firm of Hopkins & Sutter has filed an administrative expense claim in the amount of $69,252.67 for the professional services it rendered and the legal expenses it incurred in representing the Debtors in post-judgment proceedings and appeals. On April 26, 1983, the Circuit Court of Cook County entered a $375,000.00 judgment against the Debtors, George and Kornelia Banhalmi, for tortious interference with the expectancy of an inheritance. Shortly thereafter, the Banhalmis retained the law firm of Hopkins & Sutter to represent them in the post-trial proceedings. Approximately six weeks later, the Banhalmis filed a Chapter 11 bankruptcy petition. Even after this filing, Hopkins & Sutter continued to work on the Banhalmis' appeal of the Circuit Court judgment. Hopkins & Sutter now seeks to recover attorneys' fees for the appellate work it performed as a cost of administration in this estate. The Banhalmis' case was converted to a Chapter 7 on May 23, 1985. The trustee objects to the payment of these fees on the grounds that Hopkins & Sutter never obtained the Bankruptcy Court's approval, as required under 11 U.S.C. § 327, to undertake the post-petition appellate work.
Vera Nemeth, the plaintiff in the Circuit Court action, and Kornelia Banhalmi, one of the defendants in that case, are stepsisters. In 1975, Vera's Mother, Rose, and her stepfather, Paul, executed identical wills under which the testator's estate was left to the surviving spouse. Each will further provided that if at the time of the testator's death the other spouse were no longer living, the estate would be equally divided between Vera and Kornelia.
Rose died in December of 1975. Under her will, Paul was left with her estate. Paul, then 86, decided to live with Kornelia Banhalmi and her husband George.
In the summer of 1976, Paul executed a new will, again providing that, upon his death, his estate would be divided equally between Vera and Kornelia. Paul died in November, 1978. Vera undertook the task of locating his 1976 will, but was unable to find the original. Vera submitted a copy of the 1976 will to the probate court under the theory that the original had been lost.
Upon submitting the 1976 will, Vera learned that Paul had executed a subsequent will on January 31, 1977. Under that will, Vera would receive a three-unit apartment building that Rose and Paul had owned and 50% of any corporate stock remaining at the time of Paul's death. The balance of Paul's estate was left to Kornelia. In the probate proceedings, however, it was later determined that Paul had destroyed the 1977 will shortly after it was executed, effectively revoking it. Since Paul had never adopted Vera and all prior wills had been revoked, Paul's entire estate passed under the law of intestacy to Kornelia Banhalmi, his only natural born child, as the sole heir.
On November 27, 1979, Vera Nemeth filed an action against the Banhalmis in the Circuit Court of Cook County, Illinois. In the suit, Vera alleged both malicious interference with the expectancy of an inheritance and abuse of a confidential relationship. The trial in the Circuit Court lasted thirteen days.
On April 26, 1983, the court entered judgment in favor of Vera Nemeth and against Kornelia and George Banhalmi. In the thirty-eight page opinion, the court assessed compensatory damages of $300,000.00. The court found that the Banhalmis owed a fiduciary duty to Paul, that they breached that duty, and that their actions were fraudulent while acting in a fiduciary capacity. The court further found the Banhalmis liable for tortious interference with the expectancy of an inheritance, and that the conduct of the Banhalmis was both malicious and conspiratorial. Therefore, the court awarded punitive damages of $75,000.00. On June 7, 1983, the court increased the award of punitive damages on the plaintiff's motion to $79,667.25 to include certain expenses incurred by Nemeth which were not available as costs. The court also assessed costs of $545.96.
The Banhalmis, through their appellate counsel, Hopkins & Sutter, filed an appeal in the Illinois Appellate Court alleging numerous defects in the state court findings. Vera Nemeth filed a cross-appeal. On April 19, 1984, the Illinois Appellate Court affirmed the trial court judgment. The Appellate Court held, however, that Paul's estate should have been valued at $367,572.00 and thus amended the trial court order to reflect modified compensatory damages in the lesser amount of $183,781.00. The appellate court also affirmed the award of $79,667.25 as punitive damages. The Banhalmis' petition for leave to appeal to the Supreme Court was denied.
Vera Nemeth began to execute on the Banhalmis' assets after the April 26, 1983, trial court judgment had been entered. On May 3, 1983, the Banhalmis retained Hopkins & Sutter to represent them in post-trial proceedings. On May 6, 1983, the Banhalmis filed a motion to modify or vacate the $375,000.00 judgment. When the Circuit Court denied their motion to modify or vacate the judgment and set the supersedeas bond at $200,000.00, the Banhalmis filed a petition for relief under Chapter 11 of the Bankruptcy Code on June 7, 1983. The schedules filed in the case show unsecured debts of $377,426.00 of which $375,000.00 was the Nemeth judgment. The judgment increased the Debtors' total liabilities to $469,146.00 while total assets were listed on their schedules as $243,216.79. It appears that the only reason the Banhalmis filed the bankruptcy petition was to stall collection of the Nemeth judgment.
The Banhalmis retained Morton H. Cohon to represent them in the bankruptcy proceedings. Hopkins & Sutter did not represent the Banhalmis in their Chapter 11 case. The firm continued to represent them, however, as counsel in the Nemeth v. Banhalmi appeal, according to the terms set forth in an engagement letter dated May 9, 1983. The Banhalmis subsequently converted their Chapter 11 proceeding to a Chapter 7 case.
Although Hopkins & Sutter was aware of the Chapter 11 proceeding from its inception, at no time did the law firm request court approval to continue to represent the Banhalmis in the appellate matters. It is for this reason that the Chapter 7 trustee objects to the law firm's administrative claim.
Generally, in order to be compensated from the bankruptcy estate, an attorney representing the debtor-in-possession or trustee must be employed pursuant to an order of the court. 11 U.S.C. § 327; Fed. R.Bankr.P. 2014. Without the requisite court approval, there is no right to compensation. In re Willamette Timber Systems, Inc., 54 B.R. 485 (Bankr.D.Or.1985); In re The Rene Press, Inc., 23 B.R. 381, 383 (Bankr.D.Mass.1982).
Hopkins & Sutter argues that 11 U.S.C. § 327 is inapplicable in this case because it had been rendering services to the Banhalmis for approximately one month before they filed their Chapter 11 petition. This argument is without merit. The filing of a Chapter 11 petition creates a new entity, namely, a debtor-in-possession. The Banhalmis, as debtors-in-possession, had new rights and obligations under the Bankruptcy Code once their petition was filed.
Under 11 U.S.C. § 1107, the "debtor-in-possession shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case" under Chapter 11. Section 1107 makes the language in 11 U.S.C. § 327 regarding the employment of professional persons applicable to the debtor-in-possession.
Section 327 of the Bankruptcy Code provides in pertinent part:
(a) Except as otherwise provided in this section, the trustee, with the court\'s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, 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.
Similarly, Rule 2014(a) of the Bankruptcy Rules states that "An order approving employment of an attorney, . . . or other professional persons pursuant to § 327 . . . shall be made only on application . . ." Fed.R.Bankr.P. 2014. It is clear that the Banhalmis were required to obtain court approval for the continued employment of Hopkins & Sutter. Matter of Triangle Chemicals, Inc., 697 F.2d 1280, 1283-84 (5th Cir.1983).
Many courts have strictly construed these provisions. These courts have denied compensation to attorneys who perform services for a debtor during the pendency of a Chapter 11 proceeding without first obtaining approval of the court. In re Futuronics Corp., 655 F.2d 463 (2d Cir. 1981), cert. denied, 455 U.S. 941, 102 S.Ct. 1435, 71 L.Ed.2d 653 (1982); In re Hargis, 73 B.R. 622 (Bankr.N.D.Tex.1987); In re Lewis, 30 B.R. 404 (Bankr.E.D.Pa.1983); In re Morton Shoe Companies, Inc., 22 B.R. 449 (Bankr.D.Mass.1982). Other courts have taken a more flexible approach and have entered nunc pro tunc orders approving the employment of the professionals in order to approve their...
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