Pro-Snax Distributors, Inc., Matter of

• Decision Date: 20 October 1998
• Docket Number: No. 97-11128,PRO-SNAX,97-11128
• Citation: 157 F.3d 414
• Parties: 40 Collier Bankr.Cas.2d 1218, 33 Bankr.Ct.Dec. 463, 12 Tex.Bankr.Ct.Rep. 517 In the Matter ofDISTRIBUTORS, INC., Debtor. ANDREWS & KURTH L.L.P., Appellant, v. FAMILY SNACKS, INC. doing business as Guy's Foods, Mission Foods/Fiesta Jiminez, a division of Gruma, Inc., and Guiltless Gourmet, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 414

157 F.3d 414

40 Collier Bankr.Cas.2d 1218, 33 Bankr.Ct.Dec. 463,

12 Tex.Bankr.Ct.Rep. 517

In the Matter of PRO-SNAX DISTRIBUTORS, INC., Debtor ANDREWS & KURTH L.L.P., Appellant, v. FAMILY SNACKS, INC. doing business as Guy's Foods, Mission Foods/Fiesta Jiminez, a division of Gruma, Inc. and Guiltless Gourmet, Appellees.

No. 97-11128.

United States Court of Appeals Fifth Circuit.

Oct. 20, 1998.

James Van Oliver, James P. Muenker, Andrews & Kurth, Dallas, TX, for Appellant.

J. Maxwell Tucker, Winstead, Sechrist & Minick, Dallas, TX, for Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before DUHE, BENAVIDES and STEWART, Circuit Judges.

STEWART, Circuit Judge:

This case, one of first impression in this circuit, calls for us to determine whether a Chapter 11 debtor's attorney may be compensated for work done after the appointment of a trustee under § 330(a) of the Bankruptcy Code. It arises from a lengthy and acrimonious dispute between a debtor, Pro-Snax Distributors, Inc. ("Pro-Snax" or "Debtor"), and several of its creditors in the wake of the filing of an involuntary Chapter 7 petition. Mission Foods/Fiesta Jiminez, a division of Gruma, Inc., Family Snacks, Inc. d/b/a Guy's Foods, and Guiltless Gourmet (together, the "Petitioning Creditors" or "Appellees") seek to restrict the payment of fees to the law firm of Andrews & Kurth L.L.P. ("A&K" or "Appellant"), contending that the legal services rendered by A&K after the appointment of a Chapter 11 trustee were barred by statute. Deciding the case on the equities, the bankruptcy court found in favor of A&K and awarded fees for some of the services rendered. The district court reversed, ruling that, notwithstanding legislative history suggesting a contrary intent, the plain language of the statute at issue precluded an award of fees to A&K. A&K timely appealed this ruling. While sympathizing with A&K's plight and acknowledging reports that Congress plans to amend the statute at issue to cover an award of fees in exactly this situation, we are bound by the language of the statute precluding such an award at present and thus affirm the judgment of the district court.

BACKGROUND

I. Procedural History

On August 10, 1995, the Petitioning Creditors filed an involuntary petition under Chapter 7 against Pro-Snax, and an interim Chapter 7 trustee was appointed on August 31, 1995. ¹ From the earliest stages of the bankruptcy proceeding, it was obvious to the bankruptcy court that this case would present "a constant litigation background" because mutual suspicions between the Debtor and the Petitioning Creditors would prohibit any meaningful negotiations between them. On September 13, 1995, the Debtor exercised its statutory right by consenting to relief under Chapter 11 and converted the proceeding thereto. Prior to the filing of the involuntary petition and through the conversion to a Chapter 11 action, A&K had provided legal services to the Debtor.

On October 16, 1995, the bankruptcy court denied the Petitioning Creditors' motion to reconvert the proceeding to Chapter 7 and appointed a Chapter 11 trustee to oversee the case. Concurrently, the Debtor filed its first plan of reorganization and disclosure statement. A&K assisted in the preparation of this plan. ² Hearings on the re-organization plan were held on February 13, 1996, and, based largely on the objections of the Petitioning Creditors, the plan was denied confirmation. ³ Immediately thereafter, the Petitioning Creditors again moved for reconversion to Chapter 7, and this time, on February 20, 1996, the bankruptcy court granted the motion.

A&K's employment as counsel for the Debtor was authorized by the bankruptcy court nunc pro tunc on July 1, 1996, the date on which A&K filed its Application for Compensation and Reimbursement ("Fee Application"), for the period September 13, 1995 through May 31, 1996. In the Fee Application, A&K sought payment of $44,638 in fees and $10,725.37 in expenses. The Petitioning Creditors objected to the payment of fees, but on September 30, 1996, after a hearing on the subject, the bankruptcy court awarded fees and expenses to A&K. ⁴

On October 2, 1996, the Petitioning Creditors filed a Motion for Reconsideration of the Order. The motion was denied on November 20, 1996, and the trustee paid A&K's fees and expenses out of the estate. At no time did the trustee or any other creditor object to A&K's Fee Application or the bankruptcy court's order.

The Petitioning Creditors filed a Notice of Appeal to the United States District Court for the Northern District of Texas. That court reversed the bankruptcy court's ruling that fees could be awarded for services provided after the appointment of the Chapter 11 Trustee, and remanded the case for a recalculation of the fee award. See Family Snacks, Inc. v. Andrews & Kurth, L.L.P., 212 B.R. 834, 835 (N.D.Tex.1997). A&K then timely filed this appeal.

II. Bankruptcy Court's Holding

The crux of this dispute centers on whether the Bankruptcy Code provides for an award of attorneys' fees to A&K for its services rendered to the Debtor in this case. The key statutory provision construing this issue is 11 U.S.C. § 330. After acknowledging that 11 U.S.C. § 503(b)(2) provides an administrative priority (i.e., over unsecured creditors) for fees awarded under 11 U.S.C. § 330, the bankruptcy court concluded--on the basis of extensive findings on the record--that A&K could be awarded compensation from the bankruptcy estate under § 330(a)(1) for work done as "the debtor's attorney" after the appointment of the Chapter 11 trustee. See In re Pro-Snax Distributors, Inc., 204 B.R. 492, 495-97 (Bankr.N.D.Tex.1996). Section 330(a)(1) provides, in pertinent part, that

[a]fter notice to the parties in interest and the United States Trustee and a hearing,

... the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103--

(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney ...; and

(B) reimbursement for actual, necessary expenses. ⁵

11 U.S.C. § 330(a)(1).

The bankruptcy court noted that the current version of § 330(a) did not explicitly provide for an award payable to the "debtor's attorney"--and indeed that the words "or to the debtor's attorney" were removed from the statute by the 1994 amendments--but nevertheless concluded that the statute was vague and did not preclude an award of compensation in A&K's favor. In particular, the court (1) distinguished two cases urged by the Petitioning Creditors as advocating a narrow reading of amended § 330(a)(1) (i.e., which precluded such compensation); ⁶ (2) voiced its reluctance to interpret vague statutory language to effect a major change in bankruptcy practice that was not the subject of some discussion in legislative history; and (3) noted that many courts and commentators have concluded that amended § 330(a)(1) should not be read to foreclose compensation to a debtor's attorney for work done after the appointment of a Chapter 11 trustee--i.e., because such an interpretation "would represent a fundamental change in the law that is clearly unintended and extremely unlikely." Id. at 496.

In holding as it did, the bankruptcy court rejected the Petitioning Creditors' argument that because § 330(a)(1) no longer contained the words "or to the debtor's attorney," a fee award to A&K could only be sustained if A&K qualified as "a professional person employed under section 327." Id. at 494. Section 327 provides, in pertinent part, that

(a) [e]xcept as otherwise provided in this section, the trustee, with the court's approval, may employee 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). Although by its terms § 327(a) applies only to professionals employed by the "trustee," 11 U.S.C. § 1107(a) provides that a "debtor-in-possession" has "all the rights ... of a trustee serving in a case under this chapter." While not denying that under these provisions Pro-Snax, as a debtor-in-possession, was empowered to retain counsel at the expense of the bankruptcy estate, the Petitioning Creditors argued that this right existed only so long as Pro-Snax qualified as a debtor-in-possession. In their view, (1) A&K's right to compensation at the expense of the estate (i.e., under § 330(a)(1)'s allowance for fees in favor of "professionals employed under section 327") ended with the appointment of the Chapter 11 trustee--which automatically terminated Pro-Snax's status as a debtor-in-possession; and (2) § 330 did not provide an alternative basis to award A&K compensation (e.g., for work done as "the debtor's attorney"). For these reasons, the Petitioning Creditors concluded that A&K was entitled only to $3,047 in fees, which represented the $13,047 earned by A&K prior to the appointment of the Chapter 11 trustee, reduced by A&K's $10,000 retainer. As discussed above, the bankruptcy court rejected this narrow interpretation of § 330(a)(1), as espoused by the Petitioning Creditors.

Finally, after determining that § 330(a)(1) did not preclude an award of fees in favor of A&K, the bankruptcy court identified the standard that "has evolved to determine when an attorney should be allowed compensation from the estate for work done after the appointment of a trustee." Id. at 496. Following the lead of other courts, the bankruptcy court determined that an attorney's work must benefit the estate before any compensation is payable, and that any fee request should be reduced for work that is duplicative of the trustee's efforts; obstructs or impedes the administration of the estate; or is inconsistent with the debtor's...