Does § 327(e) apply to a chapter 13 debtor’s request to employ special counsel? In In re Blume,[1] the U.S. Bankruptcy Court for the Eastern District of Michigan concluded it does not.
In Blume, the debtors sought to employ special counsel to represent them in a pending state court matter regarding an allegedly fraudulent transfer of real property. The debtors sought to incur post-petition debt to employ special counsel and sought to grant special counsel a mortgage lien on their real estate to secure payment. The creditor (against whom the state court action was filed) objected to the application to employ special counsel and to the debtors’ motion to incur debt.
The court concluded that it would violate the Michigan Rules of Professional Conduct and public policy for the debtors to give special counsel and his firm a lien on their real property, as the real property was part of the subject matter of the state court litigation. The court, however, authorized the debtors to incur post-petition debt to special counsel with the provision that the debtors would not pay the debt during the pendency of their chapter 13 case.
The creditor opposed the debtors’ application to employ special counsel, arguing that the application violated § 327(e) of the Bankruptcy Code, which provides:
The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.[2]
The court found that there was a split of authority as to whether § 327(e) applies to a chapter 13 debtor’s request for approval to employ special counsel. Some courts have held § 327(e) does apply, while others have held that the requirements do not and a chapter 13 debtor does not need to obtain court approval to hire special counsel. This second group of cases reason that § 327 governs the employment of professionals by trustees, not debtors, and that a chapter 13 debtor (unlike a debtor in a chapter 11 or chapter 12 case) is not charged with performing the functions and duties of a trustee. Thus, because § 327 addresses the retention of professionals by a trustee, it does not by its terms apply to the retention of professionals by a debtor that is not a debtor in possession, and a debtor in a case under chapter 13 does not need court approval before retaining counsel.
The court agreed with the latter set of cases and concluded that § 327(e) does not apply in chapter 13 cases. Accordingly, the court found that the debtors did not need to obtain court approval to employ special counsel for the purposes stated in their motion. The court denied the debtors’ motion to employ special counsel as being unnecessary.
While Blume provides that chapter 13 debtors do not need to file a motion to employ special counsel, debtors and counsel should be mindful that a chapter 13 debtor’s special counsel is not free from bankruptcy court oversight, as their compensation is still subject to court approval under § 330. Bankruptcy counsel should also be aware that not all cases follow Blume; other courts have held chapter 13 debtors do need to file a motion to approve to employ special counsel.[3] As always, bankruptcy counsel should review applicable precedent to determine whether a motion is necessary.
[1] 591 B.R. 675 (Bankr. E.D. Mich. 2018).
[2] 11 U.S.C. § 327(e).
[3] See, e.g., In re Goines, 465 B.R. 704 (Bankr. N.D. Ga. 2012).