By: Donald L Swanson
On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.
This article is the third in a series summarizing and condensing the Task Force’s Final Report into “a nutshell.” The subject in this article is:
- whether debtor’s attorney can be compensated for services performed after removal of debtor from possession. [Fn. 1]
Task Force Proposal
An amendment to § 1185 is proposed, to allow debtor (after removal from possession) to retain and compensate professionals in limited circumstances.
Analysis
Before a Subchapter V debtor is removed from possession, debtor’s counsel can be compensated under § 327 from estate assets for services rendered.
Sec. 327 authorizes the “trustee” to retain professionals. In Subchapter V:
- § 1184 gives debtor in possession all the rights of a “trustee”; but
- when debtor is removed from possession and no longer has the rights of a “trustee,” § 327 arguably no longer authorizes the retention or compensation of debtor’s attorney.
So, an uncertainty exists on whether debtor’s attorney may be compensated for post-removal services from estate assets. For example:
- even after removal from possession, debtor retains the exclusive right to file a plan; but
- debtor’s attorney might not be able to be compensated from estate assets for post-removal, plan-related services.
For another example:
- § 1185(b) permits reinstatement of the debtor to possession after removal; but
- how can a debtor, unable to compensate its counsel, even attempt to gain reinstatement.
A significant legal authority is Lamie v. United States Trustee, 540 U.S. 526 (2004), in which the U.S. Supreme Court denied compensation to the Chapter 11 debtor’s counsel for services performed after conversion of the case to Chapter 7. Lamie holds:
- § 330 authorizes compensation only for counsel to the trustee;
- conversion ends the debtor’s tenure as trustee and ends the position of debtor’s counsel as a professional retained by the trustee; and
- so, debtor’s counsel cannot be compensated from estate assets for post-conversion services, unless retained by the Chapter 7 trustee.
Some courts are identifying potential solutions to the problem created by Lamie‘s rationale for Subchapter V cases after debtor’s removal from possession, but each solution is subject to counterarguments.
The Task Force heard repeated testimony that, if debtor is removed from possession but still wants to file a plan, debtor’s attorney should be compensated for plan-related services from estate assets.
Proposed Amendment
So, the Task Force proposes amending § 1185:
- by adding a new subsection (c), allowing the dispossessed debtor to seek court approval for retaining counsel who would then be compensated as an estate professional;
- limiting retention and compensation to enumerated services that are necessary and benefit the estate; and
- giving courts discretion thereon.
–Proposed New §Section 1185(c)
A new § 1185(c) would read as follows.
Retention and compensation of professionals.—After removal of the debtor in possession, the court may authorize the employment and compensation of professionals by the debtor in accordance with this subsection.
(1) The court after notice and a hearing may approve the debtor’s employment of one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, if the court finds—
(A) That there is a reasonable likelihood that the debtor can file a confirmable plan of reorganization within a reasonable period of time and the debtor requires the services of a professional to do so;
(B) The debtor requires the services of a professional to perform any duties of the debtor; or
(C) The debtor’s employment of a professional is in the best interests of creditors and the estate.
(2) The court after notice and a hearing may award to a professional employed under this subsection reasonable compensation for actual, necessary services rendered by the professional and by any paraprofessional person employed by such person and reimbursement for actual, necessary expenses based on a consideration of the necessity and benefit of such services and the other factors set forth in section 330.
(3) The court may limit the scope of the services of any such professional.
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Footnote 1. Discussion of this subject is on pages 47 to 51 of the Final Report.
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