In Re Klaas Talsma D

• Decision Date: 17 September 2010
• Docket Number: Nos. 10-43790-DML-11, 10-43791-DML-11, 10-43792-DML-11.,s. 10-43790-DML-11, 10-43791-DML-11, 10-43792-DML-11.
• Citation: 436 B.R. 908
• Parties: In re Klaas TALSMA d/b/a Klaas Talsma Dairy d/b/a Frisia Farms, Frisia Farms, Inc., Frisia Hartley, LLC, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Texas

436 B.R. 908

In re Klaas TALSMA d/b/a Klaas Talsma Dairy d/b/a Frisia Farms, Frisia Farms, Inc., Frisia Hartley, LLC, Debtors.

Nos. 10-43790-DML-11, 10-43791-DML-11, 10-43792-DML-11.

United States Bankruptcy Court,N.D. Texas,Fort Worth Division.

Sept. 17, 2010.

St. Clair Newbern, III, Law Offices of St. Clair Newbern III, P.C., Fort Worth, TX, for Debtor.

Meredyth Kippes, United States Trustee, Dallas, TX, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER

D. MICHAEL LYNN, Bankruptcy Judge.

Before the court is the United States Trustee's (the “UST”) limited objection (the “Objection”) to the Application to Employ Boucher, Morgan and Young, P.C., Accountants (the “Application”), filed by Klaas Talsma d/b/a/ Klaas Talsma Dairies d/b/a Frisia Farms (“Talsma”); Frisia Farms, Inc. (“Frisia Farms”); and Frisia Hartley, LLC (“Frisia Hartley,” and, collectively with Talsma and Frisia Farms, “Debtors”). The court held a hearing on the Application and Objection on July 19, 2010, and, at the court's suggestion, Debtors and the UST thereafter submitted supplemental briefs respecting the Application. ¹

The court exercises core jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A). This memorandum opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 9014 and 7052.

I. BACKGROUND

Debtors are three related entities engaged in dairy farming. Frisia Farms owns the cows that are milked. Frisia Hartley raises heifers in Hartley County, Texas. Talsma cares for and milks the grown cows in Hico, Texas.

As the price of milk and dairy cows dropped during the months preceding their chapter 11 filings, Debtors encountered financial difficulties. As a result, on June 1, 2010, each filed for relief under chapter 11 of the Code. The court has entered an order directing joint administration of the three cases.

Boucher, Morgan & Young, P.C., Accountants (“BMY”), is an accounting firm located in Stephenville, Texas, near Hico. The firm is one of only a few accounting firms in the Hico area and specializes in accounting for the dairy business. By the Application, Debtors seek to employ BMY to perform routine accounting work, including compiling financial statements, preparing payroll, and preparing income tax returns. BMY performed this type of work for Debtors prior to Debtors' chapter 11 filings. BMY is thus familiar with Debtors' operations, and Debtors have indicated it would be expensive and time-consuming to hire another firm to perform Debtors' accounting work. BMY is one of the 20 largest creditors of both Talsma and Frisia Farms, ² see Fed. R. Bankr.P. 1007(d), and is owed a combined total of $11,700 by Debtors. The UST does not argue-nor is there any suggestion in the record-that BMY's loyalty to Debtors or its performance of its duties would be in any way affected by its status as a creditor.

Because BMY is a prepetition creditor of Debtors, however, the UST will only agree to BMY's employment if BMY waives its prepetition claims. BMY would thus become disinterested by definition under section 101(14) of the Bankruptcy Code (the “Code”) ³ and, in the UST's view, be eligible for employment under section 327(a) of the Code. ⁴ Debtors, on the other hand, contend section 1107(b) of the Code allows the debtor in possession to employ a prepetition creditor despite section 327(a) if the creditor's claim arose as a result of prepetition professional work for the debtor.

II. DISCUSSION

The issue before the court requires consideration of the interrelation of sections 327 and 1107 of the Code. Section 327(a) sets out the requirements for employment of a professional by a trustee. Section 1107(b) modifies these requirements with respect to employment of a professional by a debtor in possession.

A. Section 327(a)

Section 327(a) of the Code establishes the eligibility of professionals for employment by a trustee: “[T]he 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.” 11 U.S.C. § 327(a) (emphasis added). A “disinterested person” is, among other things, “a person that ... is not a creditor.” 11 U.S.C. § 101(14)(A). Thus, the language of section 327(a), as explained by section 101(14)(A), means that a debtor's prepetition creditors are ineligible to be employed by a trustee because these creditors are “not [ ] ‘disinterested’ person[s].” In re Viking Ranches, Inc., 89 B.R. 113, 114 (Bankr.C.D.Cal.1988).

The Code's restrictions applicable to a trustee also generally apply when the estate is managed by a debtor in possession under chapter 11. See 11 U.S.C. § 1107(a) (subject to certain limitations not relevant to this case, “a 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 this chapter”). Debtors remain in possession of and continue to operate Debtors' business, acting in lieu of a trustee. Therefore, absent relinquishment of BMY's claims, Debtors may not employ BMY if no exception to section 327(a)' s “disinterested person” requirement exists.

B. Section 1107(b)

Section 1107(b) alters the requirements of section 327(a) where the debtor in possession seeks to employ a professional who performed prepetition work for the debtor: “ Notwithstanding section 327(a) of this title, a person is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person's employment by or representation of the debtor before the commencement of the case.” 11 U.S.C. § 1107(b) (emphasis added). The UST contends that the law is clear that section 1107(b) does not permit the debtor in possession to employ a professional who is also a prepetition creditor. In fact, the case law construing sections 1107(b) and 327(a) is unsettled and not uniform. See generally 7 Collier on Bankruptcy ¶ 1107.04[3] (16th ed. 2009).

Case law offers two interpretations of section 1107(b). A minority of courts read sections 1107(b) and 327(a) to allow a debtor in possession to employ a creditor professional so long as the professional's prepetition claim arose from prior professional work for the debtor. See, e.g., In re Microwave Prods. of Am., Inc., 94 B.R. 971, 974 (Bankr.W.D.Tenn.1989) (a professional is not disqualified under section 327(a) when its creditor status arose as a result of prepetition employment); In re Viking Ranches, Inc., 89 B.R. at 115 (same); In re Best W. Heritage Inn P'ship, 79 B.R. 736, 740-41 (Bankr.E.D.Tenn.1987) (a professional should not be automatically disqualified from postpetition employment solely because that professional is owed a fee for prepetition, non-bankruptcy work); In re Heatron, 5 B.R. 703, 705 (Bankr.W.D.Mo.1980) (attorney's status as creditor “has less significance when his service to the estate will be only a continuation” of prior service to the debtor).

On the other hand, more courts hold that section 1107(b) bars a debtor in possession from employing a professional holding a prepetition claim arising from prior employment by the debtor. These courts read section 1107(b) to unambiguously exempt professionals from disqualification based on prior employment alone, but not where the debtor owes the professional fees for prepetition work. See, e.g., E. Charter Tours, 167 B.R. 995, 996 (Bankr.M.D.Ga.1994) (Congress has not exempted prepetition fee claims as a basis for disqualification of professionals); In re Pierce, 809 F.2d 1356, 1362-63 (8th Cir.1987) (Congress did not intend section 1107(b) to prevent disqualification of any professional who is a prepetition creditor). Courts following the majority approach allow a debtor in possession to employ a professional who is a prepetition creditor only if the professional waives the prepetition claim. See, e.g., E. Charter Tours, 167 B.R. at 998. ⁵

The Fifth Circuit has not directly addressed this issue, nor have the courts of this district focused on it. The UST cited an opinion of this court, In re Hargis, 148 B.R. 19 (Bankr.N.D.Tex.1991), in its brief in support of the majority rule. That case, however, deals with disgorgement of fees paid to a professional, approval for the employment of which professional was never sought. Id. at 22. Hargis only explains that a prepetition creditor is not disinterested under the Code. Id. It does not address how section 1107(b) affects section 327(a)'s requirement that a professional be disinterested.

1. Construing Section 1107(b)

The question before the court is whether section 1107(b) alters section 327(a)'s requirement that a professional retained by a debtor in possession not be disinterested by reason of holding a prepetition claim. The court concludes that the minority interpretation of section 1107(b), which allows the debtor in possession to employ a creditor professional, is the better way to construe the statute.

The court must look first to the language of the statute. If the meaning of section 1107(b) is clear, then the court need go no further in construing it. See, e.g., Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (“ ‘[W]hen the statute's language is plain, the sole function of the courts ... is to enforce it according to its terms.’ ” (citations omitted)); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (same).

The court does not find section 1107(b)'s language, read in isolation, to mandate either requiring or not requiring professionals employed by the debtor in possession to be perfectly disinterested. In the court's view, the majority's construction of section 1107(b) places undue weight on the adverb “solely” and so fails to give...