The Supreme Court’s decision in Baker Botts does not preclude counsel for an interim chapter 7 trustee from being compensated for time spent in successfully contesting the election of a “permanent” trustee under Section 702, according to Bankruptcy Judge Craig T. Goldblatt of Delaware.
Faced with multimillion-dollar judgments, the debtor filed a chapter 11 petition. The judgment creditors sought dismissal of the chapter 11 case as a bad faith filing, but Judge Goldblatt instead converted the case to chapter 7.
The U.S. Trustee appointed a panel trustee to serve as interim trustee. To clarify the status of the interim trustee, Section 701(c) says that an “interim trustee . . . is a trustee in a case under this title.”
At the Section 341 meeting, the judgment creditors called for an election. They seemingly prevailed in electing an attorney to be the trustee in place of the panel trustee. The allegedly elected trustee had an office in Washington, D.C., and was a member of a large law firm with many offices, including one in Delaware.
Through counsel, the interim trustee contested the election, raising a plethora of objections to the election and the judgment creditors’ right to vote.
In a decision in July 2022, Judge Goldblatt rejected all of the objections except one. He ruled that the lawyer was ineligible under Section 321(a)(1) because the allegedly elected trustee did not have an office in the district or in an adjacent district. [For interesting reading, click here to read Judge Goldblatt’s opinion about the contested election. He rejected the idea that the firm’s office in Delaware met the requirements of Section 321(a)(1).]
Having successfully contested the election, the interim trustee became “the” trustee under Section 702(d).
A year later, counsel for the trustee filed an application for an interim allowance of compensation. Unsuccessful in electing their own trustee, the judgment creditors objected to the fee application.
In his August 16 opinion, Judge Goldblatt rejected all of objections, focusing most on the creditors’ argument based on Baker Botts LLP v. Asarco LLC, 576 U.S. 121 (2015), where the Supreme Court held that successful defense of a professional’s fee application is not compensable under Section 330(a).
“While circumstance[s] [in Baker Botts] may appear at first blush to be analogous, the analysis does not withstand scrutiny,” Judge Goldblatt said. He pointed out how “the work that was at issue in Baker Botts . . . was work that the law firm performed on behalf of itself,” not work “on behalf of the trustee or the bankruptcy estate.”
Contrary to the creditors’ argument, Judge Goldblatt noted how the Baker Botts opinion authorized compensation “for all manner of work done in service of the estate administrator.” Id. at 128.
“Work done by counsel for the trustee in a contested trustee election, however, is different from work done by a law firm in defending its own fee application,” Judge Goldblatt said. The interim trustee “has the duties and responsibilities of the trustee during the course of a disputed trustee election.”
As the “official representative of the estate” with authority to retain counsel, Judge Goldblatt said that contesting the election was work done “in service of the estate administrator,” quoting Baker Botts. Id.
Having determined that the work was “performed at the behest of the trustee,” Judge Goldblatt next considered whether the services were actual and necessary, as Section 330(a) requires. He held “that ensuring compliance with requirements that Congress has enacted into law counts as providing a benefit to the bankruptcy estate.”
With regard to benefit to the estate, the creditors contended there was little because Judge Goldblatt rejected most of the interim trustee’s counsel’s objections to the election. Evidently concluding that “the decision to litigate was reasonable,” he granted counsel’s interim fee application because counsel had overturned the election.
Question
What if the interim trustee’s counsel had failed to overturn the election? Would counsel be compensated for contesting the election?
Without guessing how Judge Goldblatt might have ruled, note that he said:
So long as the decision to litigate was a reasonable one and the litigation was conducted in a reasonable matter, § 330(a) does not operate to convert an engagement that is undertaken on an hourly basis into an after-the-fact contingency matter.
The Supreme Court’s decision in Baker Botts does not preclude counsel for an interim chapter 7 trustee from being compensated for time spent in successfully contesting the election of a “permanent” trustee under Section 702, according to Bankruptcy Judge Craig T. Goldblatt of Delaware.
Faced with multimillion-dollar judgments, the debtor filed a chapter 11 petition. The judgment creditors sought dismissal of the chapter 11 case as a bad faith filing, but Judge Goldblatt instead converted the case to chapter 7.
The U.S. Trustee appointed a panel trustee to serve as interim trustee. To clarify the status of the interim trustee, Section 701(c) says that an “interim trustee . . . is a trustee in a case under this title.”
At the Section 341 meeting, the judgment creditors called for an election. They seemingly prevailed in electing an attorney to be the trustee in place of the panel trustee. The allegedly elected trustee had an office in Washington, D.C., and was a member of a large law firm with many offices, including one in Delaware.