Even though the Supreme Court has virtually prohibited the entry of orders nunc pro tunc, a bankruptcy court is not precluded from granting a fee application for work performed before the entry of a retention order, according to Bankruptcy Judge C. Kathryn Preston of Columbus, Ohio.

Three months after a couple filed a chapter 13 petition, the husband and the couple’s daughter were in an auto accident. The husband retained a personal injury lawyer to pursue a claim for himself and his daughter.

The debtor’s bankruptcy counsel mistakenly believed that the daughter alone was injured and thus did not seek retention of the PI lawyer as special counsel, Judge Preston said in her July 15 opinion.

Learning that the debtor-husband also was injured, bankruptcy counsel filed a motion for nunc pro tunc retention of the PI lawyer. The application sought retention effective nine months before the application was filed. At the same time, the bankruptcy lawyer filed a motion to approve a settlement with the PI defendant and payment of a fee to the PI lawyer.

Judge Preston said that nunc pro tunc orders “have typically been used” to authorize employment when there has been a delay in filing a retention application. But in February, the Supreme Court handed down Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020).

Acevedo, a per curiam opinion, strictly limited the ability of federal courts to enter orders nunc pro tunc.

Quoting one of its prior decisions, the Supreme Court said that a nunc pro tunc order must “‘reflect[] the reality’” of what has occurred. A nunc pro tunc order, the Court said, “presupposes” that a court has made a decree that was not entered on account of “inadvertence.” Id. at 700-701.

In other words, the high court will allow nunc pro tunc orders only if the court had made a ruling but failed to enter an order at the time. To read ABI’s report on Acevedo, click here.

Following Acevedo, Judge Preston said that “the use of nunc pro tunc orders to retroactively seek employment of professionals is an improper use of the mechanism and this Court will no longer enter such orders.”

The inability to enter orders nunc pro tunc, Judge Preston said, “does not mean that services rendered prior to entry of an order authorizing the employment will be uncompensated.” In terms of the ability of the court to compensate a professional for services performed before retention, she said that neither the Sixth Circuit nor the Bankruptcy Code or Rules “require that the Court approve employment before compensable services are rendered.”

Judge Preston alluded to several commonly occurring circumstances when services are rendered before court approval of retention. The 21-day notice requirement for retention applications means that professionals will be performing services before court approval of retention. She also mentioned the “not uncommon” situation where pre-bankruptcy counsel will not know that the client filed a bankruptcy petition and continued performing necessary services that protected the estate’s interest.

Judge Preston held that a retention order “does not have to be entered before services are rendered in order for a professional to be compensated.” When there has not been timely retention, she cited one of her own decisions from 10 years earlier laying out 11 factors to be considered when deciding whether to enter “tardy orders of employment.”

In the case at hand, Judge Preston did not decide whether retroactive employment was appropriate. She denied retention without prejudice because the application did not lay out the proposed compensation arrangement or the PI attorney’s customary billing rates.

Observation

Because it was not necessary, Judge Preston did not reach the more sticky question of when (if at all) orders in other contexts may be made retroactive in the wake of Acevedo.

This month we reported on a decision by the Ninth Circuit Bankruptcy Appellate Panel allowing the annulment of the automatic stay. Merriman v. Fattorini (In re Merriman), 19-1245, 2020 BL 261359 (B.A.P. 9th Cir. July 13, 2020). To read ABI’s report, click here.

Section 362(d) explicitly allows the court to annul the automatic stay. In Merriman, the BAP therefore had a statutory basis for granting retroactive effect to an order. Similarly, Judge Preston’s analysis of the Code and Rules provided reason for retroactive relief.

More difficult questions will arise when, for instance, a debtor seeks rejection of an executory contract to be effective before entry of the order or the date of the filing of the motion.