In re Kearney

• Decision Date: 24 October 2019
• Docket Number: Case No. 17-12274 t11
• Parties: IN RE: Victor P. KEARNEY, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

609 B.R. 383

IN RE: Victor P. KEARNEY, Debtor.

Case No. 17-12274 t11

United States Bankruptcy Court, D. New Mexico.

Signed October 24, 2019

Jason Michael Cline, Jason Cline, LLC, Don F. Harris, Albuquerque, NM, Debbie E. Green, Marcus A. Helt, Frank Jennings Wright, Foley & Lardner LLP, David Benjamin Thomas, Reid Collins & Tsai LLP, Dallas, TX, for Debtor.

Pete V. Domenici, Jr., Lorraine Hollingsworth, Domenici Law Firm, PC, Albuquerque, NM, for Special Counsel.

Chris W. Pierce, Samuel I. Roybal, Thomas D. Walker, Walker & Associates, P.C., Albuquerque, NM, for Creditor Committee.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

Before the Court is the debtor's application to employ criminal defense counsel to defend him against tax fraud and conspiracy charges. The unsecured creditors' committee objected, arguing that the proposed representation would not benefit the estate and therefore cannot be approved. After a final hearing on the matter, the Court concludes that the application must be denied.

I. FACTS

The Court finds the following facts for the limited purpose of ruling on the application:¹

Debtor Victor Kearney filed this chapter 11 case on September 1, 2017. At the time, he was embroiled in a state court lawsuit he had brought against the trustees of two trusts of which he was the income beneficiary (the "Abruzzo Trusts"). Debtor had accused the trustees of breaching their fiduciary duties to him by taking actions that wrongfully reduced his trust income.

The trustees asserted counterclaims. Debtor lost his suit against the trustees (subject to a pending appeal) while the trustees prevailed in their counterclaims against him.

On or about July 28, 2017, the state court judge sent a letter to the Internal Revenue Service and the New Mexico Taxation and Revenue Department, alerting them to trial evidence that Debtor had not properly reported or paid his income taxes for several years.

On December 6, 2017, the IRS filed an amended proof of claim in this case for $596,164.75.

An unsecured creditors' committee ("UCC") was formed in this case. On February 28, 2019, the Court confirmed a plan of reorganization filed by the UCC. Debtor appealed the confirmation order. The appeal is pending.

On August 27, 2019, the United States of America issued and filed an indictment against Debtor, asserting counts for conspiring to commit fraud on the IRS and for making and subscribing false income tax returns.

Debtor entered a not guilty plea at his initial appearance, held September 12, 2019. Amy Sirignano appeared for Debtor at the initial appearance.²

Debtor signed an engagement letter with Ms. Sirignano on September 16, 2019. The terms of the engagement include a $5,000 retainer, payment of $4,000 a month, and the pledge of certain estate property (art work) to secure payment of the attorney fees.

On September 27, 2019, Debtor filed an application to employ Ms. Sirignano as special counsel under § 327(e)³ to defend him against the tax fraud and conspiracy charges. The UCC and one creditor objected.

Debtor is not currently employed, nor has he been employed during this chapter 11 case. His sole source of income is from the Abruzzo Trusts. Nothing in the record of this heavily litigated bankruptcy case indicates that Debtor has worked in many years. He has managed to accrue huge debts, both pre- and post-petition, but has not earned any income. None of the Debtor's proposed plans of reorganization filed in the case ever proposed that Debtor would get a job to help pay his creditors.

II. DISCUSSION

A. Ms. Sirignano Cannot Be Employed Under Section 327(e).

As an initial matter, Ms. Sirignano cannot be employed under § 327(e) because she did not represent the debtor pre-petition. § 327(e) provides:

(e) The trustee, with the court's approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor , if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.

(emphasis added). This subsection has four requirements: (a) the attorney must be employed for a specified, special purpose other than representing a debtor/trustee in conducting the case; (b) the attorney must have previously represented the debtor, (c) the attorney's employment must be in the best interest of the estate, and (d) the attorney must not have any interest adverse to the debtor or the estate with respect to the matter on which the attorney is to be employed. In re Johnson , 433 B.R. 626, 635 (Bankr. S.D. Tex. 2010), citing In re Potter , 2009 WL 2922850, at *1 (Bankr. D.N.M. 2009).

Ms. Sirignano has not previously represented the Debtor so she does not qualify for § 327(e) employment. See In re Champ Car World Series, LLC , 411 B.R. 619, 624 (Bankr. S.D. Ind. 2008) (clear language of the section requires prior representation of the debtor); In re J.S. II, LLC , 371 B.R. 311, 319 (Bankr. N.D. Ill. 2007) (most courts hold that special counsel must have represented the debtor at some point prior to the commencement of the case); Meespierson, Inc. v. Strategic Telecom, Inc. , 202 B.R. 845, 848-50 (D. Del. 1996) (special counsel application could not be approved because there was no prior representation); In re Black & White Cab Co. Inc. , 175 B.R. 24, 26 (Bankr. E.D. Ark. 1994) (attorney must have previously represented debtor); In re French , 139 B.R. 485, 489 (Bankr. D.S.D. 1992) (counsel with no prior connection to debtor could not be retained under § 327(e)); In re Ginco Inc. , 105 B.R. 620, 621 (D. Colo. 1988) (§ 327(a) applies, rather than § 327(e), where attorney did not represent the debtor pre-petition). While there is some contrary case law, see, e.g. , In re Scranton Electric Constr. Co. , 105 B.R. 1 (Bankr. M.D. Pa. 1989) ; and In re Sonya D. Int'l, Inc. , 484 B.R. 773, 780 (Bankr. C.D. Cal. 2012), the Court does not find it persuasive. The plain textual requirement that the "attorney ... has represented the debtor" must be given effect.

B. Under § 327(a), the Proposed Representation Must be Reasonably Necessary.

Ms. Sirignano could be employed under § 327(a), however, which provides:

(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.⁴

The difference between the § 327(a) and § 327(e) relates primarily to conflicts of interest, not the scope of representation. It is the Court's view that "special counsel" can be retained under § 327(a) so long as she represents or assists the trustee in carrying out the trustee's duties under the Code.

When ruling on an employment application under § 327(a), the Court must decide "whether it is reasonably necessary during the administration of the estate" to employ the proposed professional person. 3 Collier on Bankruptcy ¶ 327.02[1] (16th ed.), citing In re Computer Learning Ctrs., Inc. , 272 B.R. 897 (Bankr. E.D. Va. 2001) ; In re Kingsway Purchasing , 69 B.R. 713 (Bankr. E.D. Mich. 1987) ; In re The Bible Speaks , 67 B.R. 426 (Bankr. D. Mass. 1986) ; see also In re Jarvis , 53 F.3d 416 (1st Cir. 1995) (when dealing with a nunc pro tunc application for employment, court should in the first instance determine whether the services were reasonably necessary).

Employment cannot be "reasonably necessary" unless it would benefit the estate. As stated in Collier:

The determinative question in approving the employment of a professional person is whether it is reasonably necessary during the administration of the estate to have professional persons, such as attorneys or accountants, employed. An attorney for a trustee should not be employed unless the attorney's special professional skills are necessary for the protection and benefit of the estate or will further the aims of the case.

3 Collier on Bankruptcy, ¶ 327.02[1] (16th ed.). In In re Harold & Williams Development Co. , the Fourth Circuit stated:

Thus, once the trustee meets the burden of demonstrating that an applicant for professional employment is qualified under § 327, see Bankr. Rule 2014(a), the discretion of the bankruptcy court must be exercised in a way that it believes best serves the objectives of the bankruptcy system. Among the ultimate considerations for the bankruptcy courts in making these decisions must be the protection of the interests of the bankruptcy estate and its creditors , and the efficient, expeditious, and economical resolution of the bankruptcy proceeding.

977 F.2d 906, 910 (4th Cir. 1992) (emphasis added); see also In re AroChem Corp. , 176 F.3d 610, 621 (2d Cir. 1999) (citing and quoting Harold & Williams ); Computer Learning Centers, Inc. , 272 B.R. at 903 (same); In re Ballard , 2013 WL 5924984, at *1 (Bankr. E.D.N.C. 2013) (same); In re Biddle , 2012 WL 6093926, at *3 (Bankr. D.S.C. 2012) (same); In re Persaud , 496 B.R. 667, 671 (E.D.N.Y. 2013) (same).

The discussion of this issue in In re Rheam of Indiana, Inc. , 111 B.R. 87 (Bankr. E.D. Pa. 1990), aff'd in part, vacated in part , 133 B.R. 325 (E.D. Pa. 1991) is instructive:

we conclude that it is clearly not the function of a court to blindly appoint counsel first, upon request, and then ask questions or cut compensation later. Entry of an order appointing counsel is a judicial act, not to be exercised lightly. See In re Arlan's Department Stores , 615 F.2d 925, 932 (2d Cir. 1979). It is never presumed that a request for counsel is justified. Rather, it is hornbook law that "[a]n attorney for the trustee should not be employed unless the attorney's special professional skills are necessary for the protection and benefit

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