Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., described a circumstance when an individual debtor is entitled to pursue an appeal after conversion of a chapter 11 case to chapter 7.

The individual debtor operated a restaurant and was sued in New York State court for failing to pay tips to employees for six years. The state trial court entered a $6.8 million judgment, which the debtor appealed before filing a chapter 11 petition.

The debtor’s chapter 11 lawyer was also representing the debtor in the state court appeal.

In bankruptcy, the judgment creditor filed an adversary proceeding, alleging that the debt was nondischargeable for fraud in a fiduciary capacity or as a willful and malicious injury. While in chapter 11, the debtor objected to the allowance of the claim based on the judgment.

After the case converted to chapter 7, the chapter 7 trustee decided not to pursue the appeal. The debtor’s mother agreed to pay counsel fees for the debtor’s appeal in New York.

In his April 24 opinion, Judge Jacobvitz stated the question as whether “the Debtor has authority to prosecute the appeal of a New York state court judgment against him independently of the Chapter 7 Trustee, and [whether the debtor’s counsel] may continue to represent the Debtor at no expense to the bankruptcy estate without Bankruptcy Court approval.”

Judge Jacobvitz said there “is no bankruptcy law impediment to the Debtor’s authority to prosecute the New York Appeal independently of the Chapter 7 Trustee because of the Debtor’s personal interest in its outcome.”

There were two facets to the appeal. One concerned the validity of the judgment and the liability of the estate for the resulting claim. The second concerned dischargeability of the debt as a personal obligation of the debtor. Judge Jacobvitz said that “the Chapter 7 Trustee represents the estate with respect to [the judgment creditors’] claims against the bankruptcy estate; she does not represent the interests of the Debtor with respect to the Debtor’s personal liability for the same debt.”

Because the dischargeability suit involved the debtor’s personal liability, Judge Jacobvitz decided “that the Debtor has authority to prosecute the appeal of a New York state court judgment against him independently of the Chapter 7 Trustee, and [the debtor’s counsel] may continue to represent the Debtor at no expense to the bankruptcy estate without Bankruptcy Court approval.”

In addition, Judge Jacobvitz held:

Court approval is not required for the Debtor to retain the [debtor’s attorney] to continue to represent him personally in the appeal because § 327, which governs retention of professional persons by the trustee, does not apply to a chapter 7 debtor’s retention of a professional person to represent his personal interests.

Judge Jacobvitz noted that neither the chapter 7 trustee nor judgment creditor objected to the debtor’s continued prosecution of the appeal. Similarly, neither objected to the law firm’s retention by the debtor on the appeal, as long as the fees were not paid by the estate.

Judge Jacobvitz permitted the debtor to pursue the appeal with representation by the firm that had been the debtor’s chapter 11 counsel.