Appointing a chapter 11 trustee automatically and immediately cuts off compensation for the debtor’s counsel, and appealing the order appointing the trustee does not continue the right to compensation, as Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., explains in his November 18 opinion.
In a chapter 11 case, a law firm was authorized to serve as counsel for the debtor in its capacity as debtor in possession. Six months later, Judge Klein called for the appointment of a chapter 11 trustee.
The firm appealed the order approving appointment of the chapter 11 trustee but voluntarily dismissed the appeal three months later. One year after the trustee took over, Judge Klein confirmed a liquidating chapter 11 plan.
Counsel for the debtor filed an application for approval of some $25,000 in fees for services performed after appointment of the trustee. The trustee objected.
Finality
Counsel contended that it was entitled to compensation because the order appointing the trustee was not final until the appeal was withdrawn, citing California law. Judge Klein disagreed and denied the application, in significant part based on Lamie v. U.S. Trustee, 540 U.S. 526 (2004).
Judge Klein said that federal law prescribes the effect of federal judgments. Under the Restatement (Second) of Judgments and Ninth Circuit precedent, he said that the “effective date of a federal judgment for purposes of the rules of res judicata is the date of its rendition.”
A stay pending appeal is required to delay enforcement of a judgment. “Unless stayed, a federal judgment retains all of its preclusion effects and may be enforced during the pendency of an appeal,” Judge Klein said, citing the Ninth Circuit.
Furthermore, the idea that “the debtor remained as DIP until it dismissed its appeal contradicts § 1101(1),” which says that a debtor is not a debtor in possession when a trustee has qualified under Section 322. “It follows,” Judge Klein said, “that the debtor ceased to be the representative of the estate the moment the trustee qualified.”
Counsel’s finality argument “lacks merit,” Judge Klein said.
Lamie
Judge Klein cited Lamie for the proposition “that the Bankruptcy Code does not authorize compensation for debtor’s counsel once DIP status terminates upon conversion from chapter 11 to chapter 7 unless counsel is separately employed [by the trustee] pursuant to § 327.”
Counsel argued that Lamie did not apply because the debtor had been superseded by a chapter 11 trustee. There was no conversion to chapter 7, as occurred in Lamie.
Judge Klein disagreed. After conversion, he said that the trustee has three options: (1) employ the debtor’s counsel under Section 327; (2) employ debtor’s counsel for a specific purpose; or (3) not employ debtor’s counsel. The trustee took the third option, the judge said.
“The distinction between appointment of a chapter 11 trustee or conversion to chapter 7 makes no difference,” Judge Klein said. He sustained the objection based on Lamie.
No Benefit to the Estate
Even if Lamie were not grounds for denying the fee application, Judge Klein cited Section 330 as “an adequate independent reason to sustain the objections to the fee application for services rendered after appointment of the chapter 11 trustee.”
To be compensable under Section 330, the services must have been beneficial or necessary to the administration of the estate.
Rather than being beneficial, Judge Klein said that the appeal from the trustee order “was an exercise in obstruction” with “no reasonable likelihood of benefitting the estate.” Even absent Lamie, Judge Klein denied the fee application under Section 330.
Appointing a chapter 11 trustee automatically and immediately cuts off compensation for the debtor’s counsel, and appealing the order appointing the trustee does not continue the right to compensation, as Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., explains in his November 18 opinion.
In a chapter 11 case, a law firm was authorized to serve as counsel for the debtor in its capacity as debtor in possession. Six months later, Judge Klein called for the appointment of a chapter 11 trustee.
The firm appealed the order approving appointment of the chapter 11 trustee but voluntarily dismissed the appeal three months later. One year after the trustee took over, Judge Klein confirmed a liquidating chapter 11 plan.
Counsel for the debtor filed an application for approval of some $25,000 in fees for services performed after appointment of the trustee. The trustee objected.