In a per curiam opinion on February 24, the Supreme Court effectively banned nunc pro tunc orders, which bankruptcy courts often use to make retention orders effective when the application or petition was filed. Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696, 206, L. Ed. 2d (Sup. Ct. Feb. 24, 2020).

Barred from entering retention orders that use the words nunc pro tunc, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., found nothing in the Bankruptcy Code, Bankruptcy Rules or caselaw to prohibit him from allowing compensation for work performed before the entry of a retention order.

It Was a Typical, Small Case

In an ordinary chapter 7 case, the trustee filed an application for authority to retain counsel nunc pro tunc to a day about 11 months earlier. The trustee’s attorneys had already performed services related to the turnover worth about $1,500.

For reasons to be explained below, Judge Grossman denied the retention application without prejudice in his March 13 opinion. However, the judge ruled that he could allow compensation for services rendered before the entry of the retention order, so long as the retention order had been entered before making the allowance.

But if the retention application had not been filed on time, Judge Grossman warned that approval of the engagement “may be denied considering the lack of benefit to the estate thus precluding any possibility of compensation.” In other words, Judge Grossman was not dispensing with the practice of requiring the immediate filing of retention applications.

The Holding of Acevedo Feliciano

In Acevedo Feliciano, the Supreme Court quoted one of its prior decisions to say that a nunc pro tunc order may “‘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.”

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

The Problem Presented by Acevedo Feliciano

Judge Grossman noted how there can be a delay of “several weeks” between the commencement of the rendition of professional services in a bankruptcy case and “the filing of a motion for court approval and the entry of the order approving the retention.”

In light of Acevedo Feliciano, Judge Grossman held “that utilizing nunc pro tunc orders to approve the retention of estate professionals retroactive to some date prior to the actual date of court approval is inappropriate.”

How to Solve the Problem

In short, professionals cannot be retained in an order using the words nunc pro tunc. So, how may a bankruptcy court ensure the allowance of compensation from the date professionals began providing services?

Judge Grossman had an answer. He found nothing in Section 327 (regarding the retention of professionals) nor in Section 330 (dealing with compensation) that “contain[s] a single temporal limitation.”

Indeed, he said that “neither the Code nor the Rules preclude[s] an award of ‘reasonable compensation’ or reimbursement for ‘actual, necessary expenses’ pursuant to section 330 for services rendered prior to an order approving retention of the professional.”

“The only temporal requirement in the Code and Rules is that a professional must have been retained pursuant to section 327 to successfully obtain a court award of compensation. Simply stated, a professional must be retained as required by the statute, but once having been retained, the bankruptcy court is free to [allow compensation] for services rendered to the estate at any time, pre- and post-court approval, in accordance with section 330 of the Code.”

Judge Grossman said that some courts have misinterpreted Second Circuit authority. In his view, the Second Circuit has no per se rule denying compensation for services rendered before entry of a retention order.

Finding “no per se prohibition” in the statute or rules against awarding compensation for services performed before the entry of a retention order, Judge Grossman concluded that “nunc pro tunc or retroactive retention is not necessary.”

The Warning by Judge Grossman

Standard practice in bankruptcy court calls for the immediate filing of retention applications. Judge Grossman is not changing the preferred practice after Acevedo Feliciano.

Judge Grossman warned that “[s]eeking court approval [of retention] after the fact subjects the professional to the possibility that approval of retention may be denied considering the lack of benefit to the estate, thus precluding any possibility of compensation under section 330.”

In other words, retention applications filed late may subject the professional to allowances in light of the benefit actually conferred on the estate. By contrast, Judge Grossman said that retention applications filed immediately “would at least allow the professional to seek compensation and prove the compensation was reasonable and necessary in light of the facts and circumstances of the case.”

In the case before him, Judge Grossman denied the belated retention application without prejudice. He directed counsel and the trustee to provide “more information” about the necessity for retaining legal counsel and “whether the delay in seeking retention of legal counsel was reasonable and whether, in retrospect, retention of legal counsel provided any net benefit to the estate.”

Open Questions

Judge Grossman was able to avoid deciding whether Acevedo Feliciano imposes a blanket prohibition on making orders effective as of an earlier date. Said another way, does Acevedo Feliciano only prohibit using the words nunc pro tunc, unless there had been an earlier decision not memorialized in a formal order?

After Acevedo Feliciano, may a court make an order effective as of an earlier date? In this writer’s opinion, the Supreme Court only prohibited the misuse of the words nunc pro tunc and did not proscribe orders made effective as of an earlier date.

For instance, take the case of a motion to reject executory contracts. Assume that the debtor’s prayer for relief asked the court to make rejection effective as of the date of the filing of the rejection motion.

May the court make rejection effective as of the date of the motion?

To begin with, the court would have subject matter jurisdiction, in rem jurisdiction over the res, and personal jurisdiction over the counterparties by the filing and service of the motion.

If the counterparties were given sufficient notice, they could not mount a successful objection based on deprivation of due process just because the order would be effective as of the date of the motion. And if the rights of the counterparties had not become fixed before the entry of the order, this writer cannot understand why the court would be prohibited from making rejection retroactive.

It would be a startling proposition if courts could not make orders retroactive, assuming the court possessed subject matter jurisdiction and there was no due process violation. Nonetheless, the concept may warrant further analysis by the Supreme Court.