Over a dissent, the majority on a Fourth Circuit panel laid down a bright-line rule in holding that “Section 327(a) does not authorize former trustees, following conversion, to file an after-the-fact application to employ professionals for the period they were trustees.”

Once a trustee is out of office under any chapter of the Bankruptcy Code, the opinion means that a “former” trustee cannot rectify an oversight by applying for retroactive retention of a professional.

The dissenter said that the “majority’s reading . . . extends a faux textualism to the point of hollow formalism, which, paradoxically, forecloses more natural textual readings.” “When equity merges with textualism,” the dissenter said, “we shouldn’t pass it up.”

A Parade Though the Chapters

The individual debtor made a tour of almost every chapter in the Bankruptcy Code. The debtor originally filed in chapter 7, where a trustee was appointed. The trustee applied for and obtained court authority to retain an attorney.

When the debtor converted the case to chapter 11, the chapter 7 trustee was appointed to serve as the chapter 11 trustee. Although the law firm continued to serve the trustee in chapter 11, the trustee never filed an application to retain the firm as his chapter 11 counsel.

Later still, the debtor converted the case to chapter 13 where a different person was tapped to serve as the chapter 13 trustee.

After conversion to chapter 13, the former chapter 11 trustee filed an application to retain the firm for the chapter 11 case and to pay the firm some $44,000, mostly for services during the chapter 11 case. Initially, the bankruptcy court approved a small part of the fee application for services that the law firm had performed during the initial chapter 7 case.

Ultimately, the bankruptcy court granted the former chapter 11 trustee’s application to retain the firm retroactively for the chapter 11 case and to pay for the work performed during the chapter 11 case. The district court affirmed.

The debtor appealed. For himself and Circuit Judge Julius N. Richardson, Circuit Judge A. Marvin Quattlebaum, Jr., reversed in an opinion on July 26.

The Question

Judge Quattlebaum stated the question as:

[M]ay a former trustee — whose services were terminated by virtue of conversion under § 348(e) — apply under § 327(a) for retroactive approval to employ professionals and seek their compensation under § 330 for work performed while he was the acting trustee?

Judge Quattlebaum said there were no answers in any circuit. The only reported cases, he said, were those where a trustee obtained retroactive approval to retain lawyers while the trustee was still serving as trustee.

The Word ‘The’

Judge Quattlebaum based his conclusion on the idea that the chapter 11 trustee was “terminated” under Section 348(e) when the case converted from chapter 11 to chapter 13. Once the case converted and the former chapter 11 trustee was no longer the trustee, Judge Quattlebaum held that “that neither § 327(a) nor Rule 2014(a) authorized [the former chapter 11 trustee] to employ professionals.”

Judge Quattlebaum based his holding primarily on the word “the” appearing in Section 327(a). The subsection provides in relevant part:

[T]he trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons . . . to represent or assist the trustee in carrying out the trustee’s duties under this title.

From the word “the,” Judge Quattlebaum first deduced “that one trustee might employ professionals.” [Emphasis in original.] “Interpreting ‘the trustee’ to mean a single, current officeholder also makes sense from a temporal standpoint,” he said.

“Second,” Judge Quattlebaum said, “context clarifies that ‘the trustee’ refers to the acting trustee at the time the application is made.” Third, he said, “[c]ommon sense suggests that someone whose fiduciary office has ended should not be able to employ professional persons to assist them in that office.”

Judge Quattlebaum held “that § 327(a)’s reference to ‘the trustee’ means only the currently serving, active trustee . . . . Since [the former chapter 11 trustee] wasn’t the current trustee when he sought to employ the law firm, he fell outside of the statute’s parameters.”

Judge Quattlebaum conceded that “many of our sister circuits have affirmed approvals of after-the-fact § 327(a) applications by bankruptcy courts.” However, he said, “all the cases . . . involve a current and active trustee filing an after-the-fact application seeking retroactive approval, not a former trustee.”

If he “were permitted to use equity,” Judge Quattlebaum said, the former trustee’s argument “might be compelling,” because the firm “actually did work . . . . We cannot find any basis in the text of § 327(a) or case law to permit such an application” and “cannot use equitable principles to contravene statutory requirements.”

Judge Quattlebaum reversed the district court and remanded with instructions to send the case to bankruptcy court to set aside the fee allowance, because “[n]othing in § 327(a) permits a former trustee to employ a professional.”

The Dissent

Circuit Judge J. Harvey Wilkinson, III, “respectfully” dissented. He said, “Bankruptcy courts across the country have exercised their equitable discretion to grant after-the-fact authorizations of professional services already performed under § 327(a).”

Believing that the majority “makes too much of the words ‘the trustee,’” Judge Wilkinson saw “the majority [as] read[ing] into the statute a nonexistent limitation on bankruptcy courts’ broad discretion over the employment and compensation of professionals.” Although the case had converted and the chapter 11 trustee was “automatically terminated,” he said that the former trustee “was still ‘the trustee’ over the chapter 11 case” with continuing responsibilities.

Judge Wilkinson said he would “not adopt that rigid reading of § 327(a), which firmly closes off the path to fair compensation for attorney work already performed simply because the trustee who oversaw that work is no longer the active trustee . . . . Rather than divest bankruptcy courts of their equitable discretion when considering fee applications like the one before us, I would leave open a path to fair compensation for work fairly done.”