A district judge in Delaware firmly rejected the idea that the Supreme Court’s Acevedo decision “has suddenly declared that bankruptcy courts have no authority to retroactively approve retention of professionals.”
Sub silentio, the March 28 opinion by District Judge Leonard P. Stark could also be read for the proposition that a group of creditors will not succeed in disqualifying the law firm that has been their long-time adversary.
What Acevedo Meant
The focus of the opinion was Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020). In Acevedo, the Supreme Court virtually banned the entry of orders nunc pro tunc.
Quoting one of its prior decisions, the 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.
A per curiam opinion, Acevedo was not groundbreaking. As a matter of language, the Supreme Court explained what nunc pro tunc means, and it does not mean “retroactive.” Thus, it was not a prohibition on making orders retroactive. Rather, Acevedo means that a court cannot make an order effective as of an earlier date at which time the court had no subject matter jurisdiction.
Sadly, lawyers have continued submitting orders using the words nunc pro tunc when the orders more properly should say that they would be effective as of an earlier date. The nomenclature led to the principal issue on the appeal before Judge Stark.
The Special Counsel’s Retention
For more than two years before bankruptcy, a particular law firm had been representing a large drug wholesaler on FDA regulatory matters and in defense of claims being made by plaintiffs with regard to a particular drug. We shall refer to them as the drug plaintiffs.
Two days after the chapter 11 filing, the wholesaler filed an application to retain ordinary course professionals, who could be paid no more than $150,000 a month. The law firm that had been the adversary of the drug plaintiffs was one of the proposed ordinary course counsel.
The drug plaintiffs did not object to the ordinary course retention motion, and the bankruptcy court entered the appropriate order.
Before the ordinary course motion came on for hearing, the debtor realized that the drug plaintiffs’ adversary firm would routinely exceed the $150,000 monthly cap. So, the debtor filed a motion under Section 327(e) to retain the firm as special counsel about two months after the chapter 11 filing.
The retention motion proposed to make the retention effective nunc pro tunc as of the filing date. Over objection from the drug plaintiffs, the bankruptcy court approved the retention of special counsel nunc pro tunc.
The Section 327(e) Objections
The drug plaintiffs appealed, but Judge Stark rejected the drug plaintiffs’ arguments based on Section 327(e). Among other things, he upheld the bankruptcy court’s finding that special counsel had no adverse interest on the matters for which the firm was being employed.
The drug plaintiffs argued that special counsel’s $16,000 claim for prepetition fees was a disqualifying interest. Judge Stark disagreed. “Indeed,” he said, “prepetition claims or payments are expected for special counsel, as one statutory requirement is that counsel have previously represented the debtor.”
Acevedo Applied
Judge Stark turned to the drug plaintiffs’ principal argument, that Acevedo prohibited nunc pro tunc retentions and overruled Third Circuit authority. The Philadelphia-based appeals court had permitted retroactive retentions if prior approval would have been appropriate and the delay in seeking retention was beyond the professional’s control.
Judge Stark applied abuse of discretion as the standard of review of a nunc pro tunc order.
As background, Judge Stark said it was the “default rule” that counsel are retained effective as of the filing date and retroactive retentions are “routinely” authorized, largely because retention cannot be approved until a hearing on 21 days’ notice.
Judge Stark turned to the argument that “Acevedo effectively overruled Third Circuit precedent and now categorically precludes bankruptcy courts from retroactively approving the retention of professionals.” He said “that Acevedo’s limited discussion of nunc pro tunc orders is specific to jurisdiction.”
Judge Stark cited several cases where courts “have understood Acevedo as simply reiterating the well-understood distinction between a court ‘creat[ing] jurisdiction where none exists’ and granting retroactive relief on equitable grounds when the court indisputably has jurisdiction to act.” To read ABI’s reports on two of those opinions, click here and here.
The drug plaintiffs cited a slew of cases where they said that the courts had refused to approve retroactive retentions. Judge Stark said that none disapproved retroactive retentions but had only disagreed about the use of the words “nunc pro tunc.”
Judge Stark upheld retroactive retention, holding that “the type of nunc pro tunc relief at issue here falls comfortably within those traditional, equitable confines.”
A district judge in Delaware firmly rejected the idea that the Supreme Court’s Acevedo decision “has suddenly declared that bankruptcy courts have no authority to retroactively approve retention of professionals.”
Sub silentio, the March 28 opinion by District Judge Leonard P. Stark could also be read for the proposition that a group of creditors will not succeed in disqualifying the law firm that has been their long-time adversary.
What Acevedo Meant
The focus of the opinion was Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020). In Acevedo, the Supreme Court virtually banned the entry of orders nunc pro tunc.
Quoting one of its prior decisions, the 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.