In re Knudsen Corp., BAP No. CC 86-2132 JMoV
| Decision Date | 31 March 1988 |
| Docket Number | BAP No. CC 86-2132 JMoV,LA 86-14505-BR,Bankruptcy No. LA 86-12940-BR,LA 86-17344-BR and LA 86-17345-BR.,CC 87-1045 JMoV and CC 87-1355 JMoV |
| Citation | 84 BR 668 |
| Parties | In re KNUDSEN CORPORATION and affiliates, Debtor. U.S. TRUSTEE, Appellant, v. KNUDSEN CORPORATION and affiliates; Official Creditors' Committee of Knudsen Corp.; Official Creditors' Committee of Foremost Dairies, Inc., Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Peter C. Anderson, Office of the U.S. Trustee, Los Angeles, Cal., for appellant.
George C. Webster, II, Stutman, Treister & Glatt, Los Angeles, Cal., for appellees.
Before JONES, MOOREMAN and VOLINN, Bankruptcy Judges.
The United States Trustee appeals an order authorizing a fee payment and application procedure whereby professionals employed by the debtor and its creditors' committee would be paid each month without prior court approval of billing statements. We conclude that the trial court has authority, in certain cases, to implement such a procedure and affirm.
After involuntary proceedings were commenced against them, the debtors, Knudsen Corporation, Foremost Dairies and Affiliates ("Debtors"), filed voluntary Chapter 11 petitions on September 17, 1986. The case has essentially been a liquidating Chapter 11 and the Debtors' principal secured creditor, Citicorp Industrial Credit, Inc. ("Citicorp"), has been providing funding to the Debtors to pay administrative obligations and other expenses. The Debtors have employed the law firms of Stutman, Treister & Glatt and Irell & Manella, as their bankruptcy and corporate counsel, respectively.
In November, 1986, the Debtors filed and noticed an application for an order authorizing the following fee application and payment procedure: At the end of each month, counsel submits to the Debtors statements for compensation and reimbursement of expenses for the prior month. The statements, based upon counsel's customary hourly rates, are paid promptly if acceptable to the Debtors. At least ten days before the first interim payment is sought, each law firm files a schedule of rates with the bankruptcy court and serves it on the Debtors, on counsel for Citicorp, on the United States Trustee, on the Securities and Exchange Commission, and on counsel for the creditors' committees. Within fifteen days following the end of each three month period, counsel files with the bankruptcy court and serves on the above parties-in-interest, an application for court approval of the statements filed during the three month period. If quarterly statements are not timely filed, the Debtors do not pay either law firm until the quarterly statements are approved by the bankruptcy court.
Although Citicorp approved the above procedure, the United States Trustee ("Trustee") objected to it. The Trustee argued that the bankruptcy court lacked authority to approve a procedure whereby counsel would be paid prior to receiving court approval of the fees sought. The bankruptcy court rejected the Trustee's argument and, on November 24, 1986, entered an order approving the Procedure.
In January and March of 1987, the bankruptcy court approved virtually identical fee payment and application procedures for the Debtors' accountants, Peat, Marwick, Mitchell & Co., and for counsel for the Knudsen creditors' committee, Shea & Gould. The Trustee timely appealed the three orders authorizing the use of the above procedure.1 Because they all address the same issue, the appeals have been consolidated.
Whether the bankruptcy court has authority to approve a fee payment and application procedure that permits periodic postpetition payments to professionals without prior court approval of the payments.
Generally, a bankruptcy court's award of attorneys fees or similar compensation is reviewed on appeal for an abuse of discretion. See In re Nucorp Energy, Inc., 764 F.2d 655, 657 (9th Cir.1985). The case at bar, however, presents a question of statutory construction which we review de novo. See Trustees of the Amalgamated Ins. Fund v. Geltman Indus., Inc., 784 F.2d 926, 929 (9th Cir.1986).
Under Bankruptcy Code section 328(a), 11 U.S.C. § 328(a), bankruptcy courts may authorize the employment of professionals "on any reasonable terms and conditions of employment, including a retainer, on an hourly basis, or on a contingent fee basis."2 Bankruptcy Code section 331, which incorporates by reference section 330, regulates the allowance of fees for, inter alia, professionals employed by the debtor.3 11 U.S.C. §§ 331, 330. Under these provisions, the court may allow and disburse fees to professionals in accordance with specific criteria and "after notice and a hearing". The instant case requires us to reconcile section 328's broad language which includes the term "retainer" with section 331's specific requirements including notice and hearing.
At the outset, we note that the issue presented here is one of first impression. Judge Matheson of the U.S. Bankruptcy Court in Colorado has, in at least two cases, used a fee payment procedure similar to the one here. See In re Frontier Airlines, Inc., 74 B.R. 973 (Bankr.D.Colo. 1987); In re Kaiser Steel Corp., 74 B.R. 885 (Bankr.D.Colo.1987). In neither case, however, was the issue of the court's authority to implement such a procedure discussed. In our view, Congress' inclusion of the term "retainer" in section 328(a) indicates that in certain rare circumstances where adequate safeguards are taken, a bankruptcy court may implement a fee payment procedure such as the one used here. This is especially true where, as here, the bankruptcy case is essentially a controlled liquidation for the benefit of a secured creditor.
In challenging the instant procedure, the Trustee first argues that section 328(a) does not authorize payment of compensation to professionals. The Trustee points to the legislative history of Bankruptcy Code sections 328, 330, and 326.4 According to the Trustee, this legislative history indicates that Congress intended that section 328 only authorized bankruptcy courts to approve compensation agreements establishing maxima and guidelines for professional compensation. See S.Rep. No. 95-989, 2d Sess. 39 (1978); H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 327-330 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. See also In re Tom Carter Enterprises, 49 B.R. 243, 245 (Bankr.C.D.Cal. 1985) (). Therefore, the Trustee asserts, sections 326 and 328 establish the methods and limitations for calculating compensation and reimbursement to trustees and to professionals employed by the Debtor. Allowance and disbursement of compensation, however, is allowed only in accordance with sections 330 and 331 ().
The Trustee further argues that three policy considerations support its interpretation of the Code: (1) the Bankruptcy Code's policy is to permit payment of professionals only after application to the court and notice to creditors; (2) procedures such as the one authorized in this case could be used in a discriminatory fashion in favor of large affluent law firms which can guarantee return of funds; and (3) the fee procedure used here reduces the court's control over funds taken from the estate.
We agree with the Trustee that allowance and disbursement of fees is permitted only in accordance with sections 330 and 331. We disagree, however, that sections 330 and 331 absolutely prohibit the transfer of funds to professionals prior to compliance with those sections. Section 328(a) specifically states that a bankruptcy court may authorize a retainer as part of a compensation agreement. A retainer contemplates payment of a lump sum at the beginning of a case or periodically thereafter. Periodic retainer payments could be either set amounts or a percentage of fees incurred in prior months. Legal fees and costs may then be deducted from the retainer as they accrue and are allowed by the court. It makes little sense that the court could allow payment of a lump sum or periodic retainer before fees are earned, but not after. The critical factor is that the fees must not be finally allowed (i.e., they must be subject to repayment) until a detailed application is filed, an opportunity for objection has been provided, and the court has reviewed the application. Moreover, we note that the retainer fee procedure proposed in this case was, itself, noticed to creditors.
Therefore, although we find the Trustee's policy arguments meritorious, they do not persuade us that the instant fee procedure is prohibited by the Bankruptcy Code. First, the Trustee misinterprets the Code's policy regarding payment of professionals. The fee application procedure and the notice and hearing requirement are not policies in themselves; they are a method of implementing the Code's policy of having the bankruptcy court scrutinize attorneys' fees in order to avoid overreaching and waste of estate assets. See In re Nucorp Energy, Inc., 764 F.2d at 658 (). Because the procedure used here fully allows for scrutiny of fees by creditors and the court, this policy is intact.
Second, there is no evidence that this procedure will be used in a discriminatory manner. So long as the court is certain that fees paid but not allowed can, if necessary, be recovered, there is no reason why discrimination would occur. The ability to recover fees may be assured by a variety of methods including, without limitation, the following:
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