In re Shirley
| Decision Date | 08 January 1992 |
| Docket Number | Bankruptcy No. 281-042420A-11.,BAP No. EC-90-1389-RPJ |
| Citation | 134 BR 940 |
| Parties | In re Rosemary Hill SHIRLEY, Debtor. John A. DeRONDE, Jr., Appellant, v. Rosemary Hill SHIRLEY, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
John A. DeRonde, Jr., in pro. per.
Rosemary Hill Shirley, in pro. per., not present.
Before RUSSELL, PERRIS, and JONES, Bankruptcy Judges.
The bankruptcy court denied payment of fees to an attorney for legal services allegedly rendered to the debtor and her Chapter 11 estate because court approval for the employment of counsel was never obtained. The attorney brought a motion for relief from the automatic stay to pursue a state court action to recover these fees from the debtor. The bankruptcy court denied the motion. The attorney appeals. We affirm.
Appellant John A. DeRonde Jr. ("DeRonde"), a member of the California Bar, seeks to collect legal fees for services allegedly performed from February 13, 1989 to June 30, 1989 for Rosemary Hill Shirley ("Shirley"), the Chapter 111 debtor in possession and appellee in propria persona. These post-petition services, as DeRonde explains in his brief, were "for representation associated with then pending bankruptcy proceedings . . . and other related matters." A document entitled "Substitution of Attorney" purportedly signed by both DeRonde and Shirley was filed with the bankruptcy court on April 27, 1989. This document stated in its entirety: "Notice is hereby given that Debtor, Rosemary Hill Shirley, hereby substitutes John A. DeRonde, Jr. as her Attorney of Record, in place and in stead sic of herself, acting in pro per." No motion or other request was made to the bankruptcy court for approval of the substitution, nor was there any order authorizing the appointment of DeRonde as counsel.
DeRonde did, at an unspecified time, prepare an ex parte application to employ attorneys nunc pro tunc which Shirley did not sign.
On July 27, 1989, DeRonde filed a motion for final allowance of attorney's fees which was heard August 28, 1989, and was opposed by Shirley appearing in propria persona. This fee application was DeRonde's only fee application. The bankruptcy court denied DeRonde's motion in an order issued September 15, 1989 on the basis that § 327 requires court approval of the employment of professionals. The bankruptcy court, in that order stated: "Neither the Bankruptcy Code nor the Bankruptcy Rules authorize an award of attorney's fees and costs for services benefiting the estate, absent a prior order of the court authorizing the same." The bankruptcy court in the order further stated: "Normally in the absence of an order of retention, the applicant must look to its own client for compensation." (quoting from 2 Collier on Bankruptcy, ¶ 327.02 at 327-12 (15th ed. 1991)). DeRonde, believing this to mean that state law action against Shirley in state court was allowed, filed an action in the Solano County Municipal Court to recover these fees on theories of quantum meruit, breach of contract, fraud and account stated.
On November 22, 1989, Shirley filed an amendment to her bankruptcy schedules to include debts for the unpaid services. The Municipal Court, upon receiving notice of the amended schedule, took the matter off calendar.
On February 16, 1990, DeRonde filed a motion for relief from the automatic stay in order to proceed with his state court action. The bankruptcy court denied the motion in an order dated April 5, 1990 stating that the previous order denying DeRonde's fee application "has become final and is res judicata on the subject." The court further stated that no showing had been made by DeRonde as to why he should be relieved from the automatic stay. DeRonde appeals this order.
1. Whether the bankruptcy court erred in denying appellant DeRonde's motion for relief from the stay to pursue a state court action to recover attorney's fees where no court approval to appoint counsel was obtained under § 327.
2. Whether an attorney may pursue a state court action to recover fees for services allegedly performed for the debtor in possession where a fee application for those services was denied by the bankruptcy court.
An order denying relief from the automatic stay is reviewed under the abuse of discretion standard. In re Can-Alta Properties, Ltd., 87 B.R. 89, 91 (9th Cir. BAP 1988); In re Mac Donald, 755 F.2d 715, 716 (9th Cir.1985). A bankruptcy court's determination regarding fees will not be disturbed on appeal absent abuse of discretion. In re Film Ventures Intern., Inc., 75 B.R. 250 (9th Cir.BAP 1987). Under the abuse of discretion standard the Bankruptcy Appellate Panel must have "a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached before reversal is proper." In re Tong Seae (U.S.A.), Inc., 81 B.R. 593, 597 (9th Cir. BAP 1988).
DeRonde seeks relief from the automatic stay to continue his action for fees in state court. Bankruptcy Code § 362(d)(1) allows relief from the automatic stay "for cause." Exactly what constitutes cause under § 362(d)(1) is not clearly defined. It must be determined on a case by case basis in the court's discretion: "Because there is no clear definition of what constitutes `cause,' discretionary relief from the stay must be determined on a case by case basis." In re Mac Donald, 755 F.2d 715, 717 (9th Cir.1985) (citation omitted). DeRonde asserts his action to recover fees under state law as cause justifying relief from the stay.
Although we recognize that "a clear congressional policy exists to give state law claimants a right to have claims heard in state court," In re Castlerock Properties, 781 F.2d 159, 163 (9th Cir. 1986), See, 28 U.S.C. § 1334(c), DeRonde's services were admittedly rendered in connection with Shirley's bankruptcy2 and therefore the entire matter falls squarely within the governance of the Bankruptcy Code provisions concerning employment of professionals and payment of fees. Section 327 states in relevant part:
Section 327. (Callaghan 1991-92 ed.) This section is made equally applicable to a debtor in possession as it is to a trustee by § 1107(a).3
Court approval of the employment of counsel for a debtor in possession is sine qua non to counsel getting paid.4 Failure to receive court approval for the employment of a professional in accordance with § 327 and Rule 2014 precludes the payment of fees. See, e.g., In re THC Financial Corp., 837 F.2d 389 (9th Cir. 1988); Robinson, Wolas & Hagen v. Gardner, 433 F.2d 1104 (9th Cir.1970); In re Downtown Investment Club III, 89 B.R. 59, 63-64 (9th Cir.BAP 1988) (); In re B.E.S. Concrete Products, Inc., 93 B.R. 228 (Bankr.E.D.Cal.1988); In re Crook, 79 B.R. 475 (9th Cir.BAP 1987); In re Arkansas Co., 798 F.2d 645 (3rd Cir.1986). Commentators agree:
When there is no compliance with the Code or rules, a professional may forfeit his right to compensation. The services for which compensation is requested should have been performed pursuant to appropriate authority under the Code and in accordance with an order of the court. Otherwise, the person rendering services may be an officious intermeddler or a gratuitous volunteer. . . . Thus an attorney who acts for a trustee or on behalf of a trustee without approval by the court may be denied any compensation even though valuable services were rendered in good faith. Normally in the absence of an order of retention, the applicant must look to its own client for compensation. (Footnotes omitted)
2 Collier on Bankruptcy, ¶ 327.02 at 327-9—327-13 (15th ed. 1991). The above section was cited in the bankruptcy court order5 of September 15, 1989, denying DeRonde's motion for fees. DeRonde understood the last sentence of the quotation ("the applicant must look to its own client for compensation") as a directive to pursue an action in state court6.
We hold that the Bankruptcy Code and Federal Rules of Bankruptcy Procedure operate to preclude fee awards for services performed on behalf of a bankruptcy estate based upon state law theories not provided for by the Code. A dissatisfied attorney, allegedly representing a debtor in possession having been denied fees in bankruptcy court, may not pursue alterative recovery in state court. To allow such a reading would be to circumvent the operation of provisions of the Code and Rules concerning the employment of professionals and the payment of fees in connection with bankruptcy cases.
The rationale behind the requirement of prior court approval for the employment of professionals is to guard against abuses: "The reason for the rules relating to retention of professional personnel and the setting of their fees is to protect the estate and its creditors from unwarranted and gratuitous claims." In re Cummins, 15 B.R. 893, 896 (9th Cir.BAP 1981). As one court has stated:
The court must make the initial determination of the propriety of hiring consultants to assure that the costs of such services will not outweigh the benefits, and to insure that the door is not opened to the costly problems invited by the terrific opportunity for abuses which...
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In re Grant, Case No. 12-19109-A-7 DRJ-1
...Negligence is not an exceptional circumstance that warrants nunc pro tunc approval of employment. DeRonde v. Shirley (In re Shirley), 134 B.R. 940, 944 n.4 (B.A.P. 9th Cir. 1992) ("The failure of counsel to procure court approval through inadvertence is not one such [extraordinary] circumst......