In re Engel
| Decision Date | 20 December 1995 |
| Docket Number | Bankruptcy No. 94-30017. |
| Citation | 190 BR 206 |
| Parties | In re William ENGEL, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
COPYRIGHT MATERIAL OMITTED
Wasserman, Jurista & Stoltz, Robert B. Wasserman, Daniel J. Yablonsky, Millburn, NJ, Ferrara & Hantman, Robert J. Hantman, Jersey City, NJ, for Debtor.
Nicolette & Perkins, David A. Nicolette, Oradell, NJ, for Creditor Jesus Alvarez, Administrator Ad Prosequendum and Administrator of the Estate of Xiomara Alvarez.
Rem, Zeller & Associates, Joseph E. Rem, Jr., Hackensack, NJ, Myron D. Milch, Hackensack, NJ, for Creditor Estate of Xiomara Alvarez.
PROCEDURAL BACKGROUND
This case arises from an objection to a $291,458 fee application made by debtor's special criminal counsel, Ferrara & Hantman, heard on September 6, 1995. This court has jurisdiction over the matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(A), (B) and (O).
Debtor, William Engel ("debtor"), is serving a life sentence in Trenton State Prison for the murder of his former wife, Xiomara Alvarez (Engel), in 1984. The debtor was also a defendant in a civil action for wrongful death commenced by the Estate of Xiomara Alvarez. The criminal conviction was appealed to the Appellate Division of the Superior Court of the State of New Jersey. In 1991, the Appellate Division issued a 67 page opinion which considered all of the numerous legal issues raised by the debtor and affirmed the conviction.
The Appellate Division made the following statement concerning the defendant's guilt:
We have previously characterized the trial record in this case as "fairly reeking of defendants\' guilt." A fair examination of the transcript admits of no other conclusion . . . We find no sound basis to vitiate defendants\' well deserved convictions.
State v. Engel, 249 N.J.Super. 336, 402-403, 592 A.2d 572 (App.Div.1991), cert. denied 130 N.J. 393, 614 A.2d 616 (1992).
Debtor's appellate counsel, sought certiorari to the Supreme Court of the State of New Jersey in 1992, which denied certiorari in State v. Engel, 130 N.J. 393, 614 A.2d 616 (1992).
The debtor filed a voluntary chapter 11 petition on January 6, 1994. The issue of the retention of special criminal counsel was raised as early as March 21, 1994. During the course of argument on an unrelated matter, debtor's counsel raised the issue of criminal counsel and this court responded that debtor would have to pay criminal counsel from debtor's personal funds and not estate funds.
Debtor made a formal application for retention of Ferrara & Hantman ("F & H") as special criminal counsel on April 13, 1994. Debtor sought the retention so that F & H could file and prosecute a petition for post-conviction relief and a request for a new trial. This court held a telephonic hearing on the objection of the Estate of Xiomara Alvarez on May 16, 1994. The court stated that F & H could not be paid from estate funds. The court entered an order which held that debtor could retain special counsel but "compensation to such special counsel shall be determined by this court upon proper application."
It was later discovered that F & H had been paid $30,000 from estate funds in disregard of this court's order and F & H was ordered to disgorge that sum on October 31, 1994. The court held that the test for allowing the fee is whether the allowance is in the best interest of the estate. The debtor appealed and the district court affirmed this court's ruling. This court also heard and denied a motion to reconsider that ruling on April 6, 1995.
The petition for post-conviction relief was filed with the Superior Court of the State of New Jersey on March 29, 1995. Honorable Jonathan Harris heard a preliminary motion on July 14, 1995. Judge Harris agreed to hold a hearing on September 27, and September 28, 1995 on only two of the nine issues raised by debtor. — (i) ineffective assistance of counsel and (ii) whether debtor's trial counsel, Miles Feinstein, had a conflict of interest because he had represented Herbert Engel, the debtor's brother.1 As of the date that this fee matter was heard, the post-conviction relief motion was pending.
Meanwhile, the Estate of Xiomara Alvarez has obtained a favorable jury verdict in the civil wrongful death case and a judgment was entered on July 21, 1995 for $5,154,197.
The compensation of professionals is generally determined under the standard provided in 11 U.S.C. § 330(a) which provides that:
". . . the court may award . . . to a professional person . . . (1) reasonable compensation for actual, necessary services rendered by such . . . professional . . . based upon the nature the extent, and the value of such services, the time spent on such services, and the cost of comparable services other than in a case under this title; and (2) reimbursement for actual, necessary expenses." (Emphasis added).2
The majority of courts which have interpreted this code section have held that an element of whether such services are "necessary" is whether they benefitted the bankruptcy estate. In re Lederman Enterprises, Inc., 997 F.2d 1321 (10th Cir.1993); In re Alcala, 918 F.2d 99 (9th Cir.1990); In re Sound Radio, 145 B.R. 193 (Bankr.D.N.J. 1992); In re Dixon, 143 B.R. 671 (Bankr. N.D.Tex.1992); In re Latham, 131 B.R. 238 (Bankr.S.D.Fla.1991); In re Jessee, 77 B.R. 59 (Bankr.W.D.Va.1987); In re Deihl, 80 B.R. 1 (Bankr.S.D.Me.1987); In re Cleveland, 80 B.R. 204 (Bankr.S.D.Cal.1987).3
A careful distinction must be made between those services which benefit the debtor personally and those which benefit the bankruptcy estate. In re Sound Radio, 145 B.R. at 196. Upon filing a chapter 11 petition, a new entity is created, the debtor in possession. The debtor in possession marshals assets, uses law to further increase them through avoiding powers, administers the business of the estate and distributes assets to creditors. In re Duque, 48 B.R. 965, 969 (S.D.Fla.1984). The individual debtor, William Engel, becomes subject to certain duties. "He gives up his property except for that which is exempt, files schedules of assets and liabilities, files periodic reports, . . . may share in assets if any remain after satisfying creditors' claims, and in absence of proven objections to discharge is discharged of his pre-petition liabilities, thus receiving the so-called fresh start." Id.
Estate assets may be used to further the above goals of the bankruptcy estate or debtor in possession, but not the individual debtor. In re Sound Radio, 145 B.R. at 211-212. Thus only those fees which benefit the estate or increase the assets of the estate may be compensable from the estate — not those fees which further personal interests of the individual, William Engel.
There is an entire body of case law dealing with the appointment and compensation of criminal counsel by a bankruptcy debtor. The cases hold almost unanimously, that criminal counsel may not be compensated out of the bankruptcy estate. In re French, 139 B.R. 485 (Bankr.D.S.D.1992) (); In re United Church of Ministers of God, 84 B.R. 50 (Bankr.E.D.Pa.1988) (); In re Duque, 48 B.R. 965 (S.D.Fla.1984) (); In re Official Committee of Disputed Litigation Creditors, 42 B.R. 981 (N.D.Tex.1984) (); In re Tashof, 33 B.R. 225 (Bankr.D.Md.1983) (); In re Warner, 141 B.R. 762 (M.D.Fla. 1992) (). Curiously, until oral argument, the debtor did not cite to or attempt to distinguish a single case dealing with the issue of criminal counsel.
The seminal case on the issue of criminal counsel is In re Duque, 48 B.R. 965 (S.D.Fla. 1984). In that case, the district court reversed the bankruptcy court for awarding fees for debtor's special criminal counsel and conducted a thorough and persuasive analysis of the statute, the existing case law, and the policy implications.
In re Duque started its analysis with the legislative history to the bankruptcy code, which states that "the bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension." Id. at 971 (citing H.R.Rep. No. 95-595 95th Congr. 1st Sess. 342 (1977)) (discussing the automatic stay, and that criminal actions may proceed in spite of the bankruptcy).
The opinion next explored the existing case law and found that the cases held unanimously, although, without analysis, that debtors may not be compensated for criminal counsel. Id. .
In re Duque, then turned to the statute, 11 U.S.C. §§ 330 and 327(e) (appointment of professionals), and relying on the language "actual, necessary services," found that the statute only permits compensation to criminal counsel where the services benefit the estate. 48 B.R. at 970-971. Duque noted that the potential threat to the bankruptcy estate, that criminal counsel was allegedly protecting, could not be "speculative or conjectural." Id. at 975.
The court adopted a three-part standard which has been uniformly followed in the area of criminal counsel. See In re French, 139 B.R. 485 (Bankr.D.S.D.1992); In re United Church of Ministers, 84 B.R. 50 (Bankr.E.D.Pa.1988). The standard provides as follows:
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