Involuntary Fee Slaughter The Perils of Professional Fees for Representing a Debtor During the Gap Period

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Apr 2002

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There appears to be a recent trend of creditors using involuntary bankruptcies to
resolve their disputes with debtors. This increase in involuntary bankruptcies has given
rise to a large number of problems for both debtor and creditor attorneys. In the
first of what hopefully will be a three-part series discussing the ethics of
representing parties in involuntary bankruptcy proceedings, this article addresses fee
problems faced by professionals representing parties faced with an involuntary bankruptcy
petition between the involuntary petition's filing and the adjudication or consent to the
entry of the Order of Relief (gap period).<a href="#1" name="1a">1</a> These fee issues related to representing
parties subject to involuntary bankruptcy proceedings (potential debtors) arise from the
lack of certainty as to how professional fees accrued and/or paid during the gap
period are treated in the subsequent bankruptcy.

<h3>Can Anyone Tell Me What the Ordinary Course of Business Is?</h3>

In a voluntary bankruptcy proceeding, the Bankruptcy Code offers a clear, if not
particularly precise, statutory framework as to how and when the debtor's professional
can be hired to represent the bankruptcy estate.<a href="#2" name="2a">2</a> In involuntary bankruptcies, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §327</a> does not govern professionals' employment during the gap period.<a href="#3" name="3a">3</a>
Instead, the process for being paid while representing an alleged debtor in an
involuntary bankruptcy petition is indirectly governed by four separate statutes: <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §§303(f), 502(f), 507(a)(2)</a> and 549.

The primary Bankruptcy Code section addressing how a debtor may hire and pay
professionals during the gap period is <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §303(f)</a>, which authorizes
an alleged debtor to operate its business and use, acquire and dispose of its property
as if an involuntary case had not been commenced, unless a court orders otherwise.<a href="#4" name="4a">4</a>

This provision generally permits a debtor to continue to operate in the ordinary course
of its business under the restrictions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §363</a>, which requires court
authorization for the sale, use or lease of property of the debtor other than in
the ordinary course of its business.<a href="#5" name="5a">5</a>

However, a debtor's ability to operate its business and pay its gap period creditors
is also limited by <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§502(f)</a> and 507(a)(2), which govern
the allowance of claims during the gap period.<a href="#6" name="6a">6</a> Section 502(f) allows claims
"arising out of the ordinary course of the debtor's business or financial affairs"
during the gap period to be allowed as a pre-petition claim in a bankruptcy case.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §507(a)(2)</a> grants claims allowed under §502(f) a second
priority status, behind administrative expenses. Read together, §§502(f) and
507(a)(2) mean that unsecured claims that arise in the ordinary course of the
debtors' business during the gap period are entitled to a second priority status.
Unsecured claims, which do not arise in the ordinary course of the debtor's business
during the gap period, if allowed at all, will be treated only as general unsecured
claims.<a href="#7" name="7a">7</a>

Finally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §549</a> provides a final limitation on paying professional
fees during the gap period.<a href="#8" name="8a">8</a> It also provides that the trustee may avoid the
property transfers that occur after the commencement of a bankruptcy case, including an
involuntary proceeding if the transfer is only authorized under §303(f), unless said
transfer is (1) made after the commencement of the involuntary case, (2) before
the entry of an Order of Relief and (3) made to the extent of any value of goods
or services rendered to a debtor after the commencement of the case.<a href="#9" name="9a">9</a> The "safe harbor" provisions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §549(b)</a> do not include providing
security or paying any debt that arose before the commencement of the case.

Based on this patchwork quilt of statutes, it appears that if a potential debtor
ultimately files bankruptcy, any professional fees earned or paid during the gap period
are at risk. Unless a court is willing to approve the application of a chapter 11
debtor's professionals on a nunc pro tunc basis, then that professional will be
entitled to at best a second-level priority claim under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§507(a)(2)</a> for any services rendered "in the ordinary course of the debtor's
business." However, even entitlement to that second-tier priority claim is uncertain
as courts are generally split as to whether these gap period professional fees arise
"in the ordinary course" of a debtor's business.

<h3>Since When Is an Involuntary Bankruptcy Ordinary?</h3>

Although there is little direct case law on the subject, courts have still managed
to split on the issue of whether payments or accrual of gap period professional fees
arise in the ordinary course of a potential debtor's business for purposes of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §§303(f)</a> and 507(a)(2).

One line of bankruptcy cases, a minority view, holds that generally the professional
fees accrued or paid by a debtor during the gap period do not arise in the ordinary
course of business and are not entitled to priority under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§507(a)(2)</a>.

The leading case in this line of authority is In re Hanson Industries Inc.<a href="#10" name="10a">10</a>
In Hanson, counsel for the alleged debtor applied in the potential debtor's bankruptcy
for an award of attorney's fees, both as an administrative expense under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §507(a)(1)</a> or as a second priority administrative expense under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §507(a)(2)</a>. The services for which the attorney sought reimbursement
primarily were related to "virtually every possible defense for filing an involuntary
petition."<a href="#11" name="11a">11</a> In reviewing the fee application, the court ultimately found that the
debtor's counsel actions were at best of extremely doubtful value to the bankruptcy
estate, and at worst, an obstruction to the bankruptcy trustee's efforts to administer
the estate. The bankruptcy court ultimately determined that most of the debtor's
counsel's work was not beneficial to the estate and denied $48,000 of the
$60,000 fee application. The court noted that "creditors would not ordinarily and
reasonably expect a company with virtually no assets and no business to expend more
than $60,000 over a period of 11 weeks in litigation of any sort. Thus,
while some reasonable amount of attorney's fees might be expected to minimally keep
certain of the claims of the company alive, sums in the amount and of the nature
involved, and efforts as zealous and determined as these, are not reasonably
justified."<a href="#12" name="12a">12</a> The court went on to find that where a debtor failed to convert its
involuntary to a voluntary chapter 11, or agree to an adjudication of bankruptcy and
ultimately had an order of relief entered against it, that the gap period professional
fees and expenses did not arise in the ordinary course of the debtor's business.<a href="#13" name="13a">13</a>

Perhaps the most troubling portion of the Hanson decision is its discussion of why
Hanson was distinguishable from the case of In re Sun Spec Industries,<a href="#14" name="14a">14</a> which
found professional fees earned during the gap period arose in the debtor's ordinary
course of business and were entitled to priority status. The Hanson court distinguished
Sun Spec by noting that "the debtor chose to voluntarily convert to a chapter 11,
an option this debtor rejected." This dicta is problematic as it seems to indicate
that professionals are more likely to get paid if a potential debtor voluntarily enters
bankruptcy than if it fights the petition.

Hanson was based on a group of somewhat similar rulings, including In re
Rocanville Marketing Corp.<a href="#15" name="15a">15</a> and In re JV Knitting Service Inc.,<a href="#16" name="16a">16</a> both of
which held that professionals working for potential debtors that opposed an involuntary
petition would not be awarded either an administrative expense under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§507(a)(1)</a> or an administrative expense under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §507(a)(2)</a>
for their work during the gap period. Hanson based its decision on the cases of

Kallen v. Litas<a href="#17" name="17a">17</a> and In re Peninsula Roofing & Sheet Metal Inc.<a href="#18" name="18a">18</a> The court
also ruled against professionals on preference actions for fees paid prior to a
bankruptcy filing that were found not to have been paid in the ordinary course of a
debtor's business.

The rationale behind the Hanson line of cases is that payments made to professionals
during the gap period, especially payments made to contest an involuntary bankruptcy
petition, rarely arise in the ordinary course of business and that such services are
not valuable to the debtor's bankruptcy estate. These cases take a rather strict
approach as to the concept of the ordinary course of business and make it difficult
for an attorney representing a potential debtor to be assured of being paid or even
having a priority claim for fees earned during the gap period, unless the potential
debtor agrees to convert to a chapter 11 or is successful in opposing the involuntary
bankruptcy petition.

<h3>Since When Is It Not Ordinary to Hire an Attorney to Fight a Lawsuit?</h3>

Other bankruptcy courts have rejected the reasoning of Hanson and have allowed
professionals to be paid, or at least be awarded a priority claim, for their services
during the gap period. Perhaps the most liberal position on this matter is taken by
the court in In re Rundlett.<a href="#19" name="19a">19</a> In Rundlett, the law firm was paid $50,000
during the gap period to represent the potential debtor in the involuntary chapter 7
petition filed against her. Approximately three weeks after they were retained, the
debtor converted her case to a chapter 11 proceeding and moved to employ the law
firm as her chapter 11 counsel. The proposed employment application permitted the
law firm to retain the $50,000 retainer paid to them during the gap period.

Shortly after the employment application was filed, the involuntary chapter 11
was converted to a chapter 7 proceeding, and the debtor's estate was liquidated. The
chapter 11 employment application was never ruled upon by the bankruptcy court before
the case was converted back to a chapter 7 proceeding. Certain bank creditors
objected to the $50,000 retainer and moved that it be returned to the bankruptcy
estate for distribution to creditors. The bankruptcy court rejected this motion, holding
that the retainer was authorized under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§303(f)</a> and 329 and was
subject only to a review for the reasonableness of the retainer, and any fees charged
by debtor's counsel during the gap period under the provisions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§329(b)</a>. The court held that it had no other duty or authority to regulate the
payment to professionals during the gap period. The Rundlett court ultimately ruled
against the creditors, finding that they had not proven that either the retainer or
the fees were excessive or improper under the provisions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§329(b)</a>.<a href="#20" name="20a">20</a> The court did not discuss the fees' priority under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§507(a)(2)</a> nor the possibility of having any of the retainer avoided under the
provisions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §549</a>.

The Rundlett standard has not been fully adopted by other courts. Instead, a
majority finding that gap period professional fees should be entitled to priority
treatment have adopted a "flexible standard"<a href="#21" name="21a">21</a> for determining whether gap period fees
are entitled to priority treatment under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §507(a)(2)</a>. The cases
of In re May Lumber Co.,<a href="#22" name="22a">22</a> In re Shah International Inc.<a href="#23" name="23a">23</a> and In re
McNair Inc.<a href="#24" name="24a">24</a> held that professionals were entitled to retain compensation earned
and/or retainers received<a href="#25" name="25a">25</a> from the alleged debtors during the gap period. These
courts, however, held that all fees billed and paid during the gap period were
subject to review by the bankruptcy court in the event a debtor "wound up" in
bankruptcy.<a href="#26" name="26a">26</a> These courts recognize the importance of an alleged debtor being allowed
to hire competent counsel to either defend itself against an involuntary petition or,
ultimately, to guide it through a chapter 11 proceeding. As noted by the Shah
International court:

For a debtor to be successful in chapter 11, it is imperative that the
debtor have skilled legal counsel. As was stated in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Martin, 817
F.2d 175, 181</a>, "It will sometimes be difficult to obtain competent
counsel in anticipation of a bankruptcy proceeding unless the lawyer's financial
well-being can be assured to some extent." Equitable principles govern the
exercise of bankruptcy jurisdiction (<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Marin v. England, 385 U.S.
99, 103, 87 S.Ct. 274, 277, 17 L.Ed.2d 197
(1966)</a>), and legal counsel have rights, as do other persons in the case.
One right is a reasonable opportunity to be paid in a bona fide case, whether
commenced by a voluntary or an involuntary petition. A putative debtor should
not be prevented from obtaining skilled counsel solely because the debtor is in
bankruptcy only because creditors succeeded in filing an involuntary petition prior
to the time the debtor filed a voluntary petition.<a href="#27" name="27a">27</a>

The May Lumber line of cases represents the middle ground between the strict
limitations on employment of counsel in Hanson and the virtually unfettered discretion
of potential debtors enjoyed under the Rundlett case. May Lumber places reasonable
limits on a potential debtor's ability to direct professionals to guard against the
overzealous advocacy decried in Hanson, yet still permits the potential debtor the
right to seek competent counsel to defend itself or guide it through a bankruptcy
in the event it must enter a chapter 11.

<h3>Conclusion: What's a Poor Debtor's Attorney to Do?</h3>

Given the wide divergence of case law, professionals for an alleged debtor must
carefully weigh their options before accepting the representation. The best of all
worlds would be to receive a fair retainer from the alleged debtor and apply that
retainer against all fees earned during the gap period before entering bankruptcy. Even
the Hanson line of cases does not discuss requiring the return of professional fees
or a retainer, except in the context of preference litigation. However, this course
of action does have the drawback of possibly presenting an alleged debtor's bankruptcy
counsel with an adverse interest to the debtor should the case ultimately be converted
to a chapter 11, unless counsel seeks specific approval of payments as part of the
employment application. However, this risk is not very different from the risk all
chapter 11 attorneys run every day by accepting any fee payment in the 90 days
prior to the bankruptcy filing, which could be challenged in any chapter 11
proceeding that bankruptcy attorneys routinely defend as being made in the ordinary course
of business.

Second, in a hotly contested case, the alleged debtor's counsel could move for
approval of their fees under the provisions of §363 of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Code. Under
11 U.S.C. §303(f)</a>, in unadjudicated involuntary cases <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §363</a>
still prohibits the sale, use or transfer of a debtor's assets outside the ordinary
course of business without court approval. If there is a question about paying a
retainer or fees during the gap period, a bankruptcy court could authorize the payment
to the debtor's <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… under 11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §363</a> during this gap period, thereby
giving some assurance of being paid for its work during the gap period. Unfortunately,
this is a rather cumbersome and untried procedure that, given the nature of a hotly
contested involuntary proceeding, may get lost in the shuffle and become just another
bargaining chip concerning the fate of the entire involuntary case.

Finally, in the event that the involuntary case ultimately becomes a chapter 11
proceeding, debtor's counsel can petition the bankruptcy court for approval of
employment nunc pro tunc to the date the involuntary petition was actually filed,
thereby converting the gap period fees to ordinary professional fees under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §§330</a> and 331. Alternatively, professionals could also seek implicit
approval of all payments made during the gap period by full disclosure in their
employment application. This final option is apparently one of the most often used by
counsel in involuntary cases, and offers a fair degree of protection. The bankruptcy
court will be apprised of all payments of gap period fees when the application is made
for employment, thereby fulfilling a professional disclosure requirement. The bankruptcy
court and all creditors-in-interest can object to those payments as part of the
employment application, and if they fail to do so, they could be estopped from
contesting the payment at a later date. However, absent a specific finding in a
bankruptcy court's order employing counsel that the payments made during the gap period
were made in the ordinary course of a debtor's business and are entitled to priority
under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §507(a)(2)</a>, the issue of any gap period retainer or
payments will still remain in doubt despite the implied approval.

In short, the travails of a potential debtor's professionals in an involuntary
bankruptcy case are in many instances far worse than those of professionals in a
voluntary case. Indeed, given the uncertainty surrounding the payment of gap period
fees, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §327</a> may appear to be an "easy" and reasonable standard for
debtor's counsel to meet as opposed to the rather threadbare patchwork quilt of statutes
governing employing and paying of counsel in gap period cases.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§303</a> and 502(f). <a href="#1a">Return to article</a>

<a name="2">2</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §327</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §327</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re McNair Inc., 116 B.R. 746 (Bankr. S.D. Cal. 1990)</a> (order approving
employment of counsel for potential debtor not required under either 11 U.S.C. §327 or 329). <a href="#3a">Return to article</a>

<a name="4">4</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §303(f)</a>, which provides: "Notwithstanding §363 of this title, except to the extent that the court orders
otherwise, and until an order for relief in the case, any business of the debtor may continue to operate, and the debtor may continue to
use, acquire or dispose of property as if an involuntary case concerning the debtor had not been commenced." <a href="#4a">Return to article</a>

<a name="5">5</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §363</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §502(f)</a>, which provides that in an involuntary case, a claim arising in the ordinary course of the debtor's
business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief
shall be determined as of the date such claim arises, and shall be allowed under subsection (a), (b) or (c) of this section or
disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the
petition. <a href="#6a">Return to article</a>

<a name="7">7</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Manufacturer's Supply Co., 132 B.R. 127 (Bankr. N.D. Ohio 1991)</a> (claims that arise in the gap period
that do not arise in the ordinary course of a debtor's business are general unsecured claims). <a href="#7a">Return to article</a>

<a name="8">8</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §549(a)(b)</a>, which provides: "Except as provided in subsections (b) or (c) of this section, the trustee
may avoid a transfer of property of the estate (1) made after the commencement of the case and (2)(a) that is authorized only under
§303(f) or 542(c) of this title; or (b) that is not authorized under this title or by the court. In an involuntary case, the
trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief
to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the
case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that
transferee has." <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 405 (Bankr. D. Minn. 1988)</a>. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 408</a>. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 408 n.2</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 414</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 703 (Bankr. S.D.N.Y. 1980)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 32 (Bankr. E.D. Pa. 1988)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 543 (Bankr. S.D. Fla. 1982)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 977 (N.D. Ill. 1985), rev'd. on other grounds, 790 F.2d 574 (7th Cir. 1986)</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 257 (Bankr. W.D. Mich. 1981)</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 144 (Bankr. S.D.N.Y 1992)</a>. <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 148</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re May Lumber Co., 135 B.R. 368 (Bankr. W.D. Mo. 1992)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Shah International Inc., 94
B.R. 136 (Bankr. E.D. Wis. 1988)</a>. <a href="#21a">Return to article</a>

<a name="22">22</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. at 368</a>. <a href="#22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. at 136</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 746 (Bankr. S.D. Cal. 1990)</a>. See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Matter of Sun Spec Industries, 3 B.R. 703
(Bankr. S.D.N.Y. 1980)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Labrum & Doals LLP, 1998 WL 34 1933 (Bankr. E.D. Pa. June 25, 1998)</a>. <a href="#24a">Return to article</a>

<a name="25">25</a> In Shah International, the debtor's counsel were permitted to retain mortgages as a retainer for their fee, although the court
held that the mortgages secured all administrative claims in the chapter 11 cases, not just the attorney fees of the debtor's counsel. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
B.R. at 138-139</a>. <a href="#25a">Return to article</a>

<a name="26">26</a> The May Lumber court explained the "flexible standard" as follows:

<ol>
<li>A gap debtor may engage counsel of choice;
</li><li>A gap debtor may pay counsel of choice what is mutually agreeable between debtor and counsel;
</li><li>The aforesaid payment is subject to the test of reasonableness under the circumstances, if the debtor winds up in bankruptcy; and
</li><li>The bankruptcy judge is (hopefully) an expert in the area of reasonableness and thus, all fees are subject to his tender mercies. <a href="#26a">Return to article</a></li></ol>

<a name="27">27</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. at 137-38</a>. <a href="#27a">Return to article</a>

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Journal Authors

C. R. Bowles

Journal Date

Monday, April 1, 2002 - 12:00

Bankruptcy Rule

2002