By Scott G. Stout and Wayne P. Novick

So, you think the Bankruptcy Code does not impact your practice. Think again. Bankruptcy is one area of the law that can reach far and wide and can impact numerous other areas of law. The most important question you can ask your client is: “Are you in a bankruptcy, and have you ever filed a bankruptcy before?”

It does not matter if you are handling contracts, divorce, personal injury, social security, workers’ compensation or criminal matters. You may lose your fee or you may lose your case if you are not properly and timely appointed by the Bankruptcy Court.

Clients do not always understand or remember that they have filed a bankruptcy. Most clients do not understand that a Chapter 13 is a bankruptcy. PACER is a tool you must definitely have and utilize. PACER and its use is described later in this article. Suffice it to say that the Bankruptcy Court must approve professional services, fees and settlements in a timely fashion.

First, a little background. Employment of Professional Persons is found at 11 U.S.C. § 327 of the Bankruptcy Code, and in particular 11 U.S.C. § 327(e) states:

(e) The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.

Also, see Bankruptcy Rule 2014 for further guidance. In particular, B.R. 2014(a) states:

(a) Application for and Order of Employment
An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professional pursuant to §327, §1103, or §1114 of the Code shall be made only on application of the trustee or committee. The application shall be filed and … a copy of the application shall be transmitted by the applicant to the United States trustee. The application shall state the specific facts showing the necessity for the employments, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, any other party interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.

L.B.R. 2014-1 further breaks down the Application requirements. In particular, Part (a) of the Local Rule subjects the professional persons to the jurisdiction of the Court for approval of that person’s fees. Part (b) of the Rule adds three (3) additional requirements to the Application not contained in B.R. 2014.Part (c) of the Rule adds three (3) additional requirements to the Affidavit not contained in B.R. 2014.

Sample forms of the Application and Affidavit requesting the appointment of special counsel are included in the Forms section of the Local Rules under L.B.R. Forms 2014-1(g) – 1 and 2.

A reading of the above Code sections and Rules lays out the process, and who is affected.

As always, the Application must be served with a twenty-one (21) day notice to object before an order is issued.

At one time, Special Counsel filed their own Applications and orders or hired a bankruptcy attorney to file them on their behalf. The problem was that special counsel, for the most part, did not have bankruptcy experience, and really did not want to file anything in the Bankruptcy Court. Then, with the advent of Electronic Case Filing (“ECF”), many special counsel tried to file paper applications, which is not permitted by the Rules. Many applications, orders and the follow-up motions and orders to settle, distribute, and to pay attorney fees and costs (Rule 9019 motions and orders that will be dealt with below) contained substantive and procedural errors.

Furthermore, as the Code and Rules above indicate, these applications should be filed by the Trustee or Debtor. Judge Humphrey, Bankruptcy Judge for the Southern District of Ohio, Western Division at Dayton has issued Policies and Procedures on who may file Applications to retain special counsel. Use the link:
https://www.ohsb.uscourts.gov/OHSB/hearingschedules/Dayton/humphrey,guyr/131606953078958185.pdf.

Based on these policies and procedures, either the Trustee or Debtor shall file the Application to retain. However, since the Chapter13 Trustee, in most instances, has insufficient information on the reason to appoint Special Counsel, and has not personally retained Special Counsel, he defers to the Debtor’s bankruptcy attorney to perform this task.

Once the Application has been filed, noticed and served, and the time for filing objections to the Application has run without an objection having been filed, the bankruptcy attorney must then submit an order to the Court approving the retention of special counsel.

Once the matter for which special counsel has been employed has been either settled or adjudicated, it is necessary to file an Application to settle, distribute, pay attorney fees and costs, which is commonly called a Rule 9019 compromise or settlement. The relevant rule is Bankruptcy Rule 9019(a).

(a) Compromise
On Motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.

This 9019 Application or motion must be prepared, filed and served by the Trustee or Debtor’s bankruptcy attorney, and again, the Trustee, for the most part, will defer this task to Debtor’s bankruptcy attorney. This motion/application will also require a twenty-one (21) day notice and be served on all parties. This process is how special counsel will receive payment and be reimbursed for expenses, once the order is approved by the Court. As stated in Judge Humphrey’s Policies and Procedures on this subject, if special counsel (as opposed to the Trustee or Debtor’s bankruptcy attorney) files either of these motions/applications the Court will deny same without prejudice.

The second part of Judge Humphrey’s Policies and Procedures on this subject is when to file these applications to retain special counsel, and when to file the 9019 motion/application to approve settlement.

This issue recently came to a head as numerous applications to employ were filed, and immediately upon an entry of an order approving the retention of special counsel the 9019 motion to settle/compromise was filed (and in some cases the 9019 motion was filed before special counsel was appointed).

Judge Humphrey’s Policies and Procedures were recently revised to remind all counsel, not only bankruptcy counsel, but special counsel, of all types (personal injury, workers’ compensation, social security or other attorneys pursuing a claim on behalf of the Debtor or other affected professional people)of the statutory requirement that the employment of special counsel must receive court approval before they begin or continue work once a bankruptcy case is filed.

If the cause of action was pre-petition, the claim should be disclosed in Schedule B of the Bankruptcy Schedules when the case is filed. If Debtor has already retained special counsel, this information should be disclosed; and, at the very least: if the cause of action was pre-petition, the claim should be disclosed in Schedule B of the Bankruptcy Schedules when the case is filed. If Debtor has already retained special counsel, this information should be disclosed. The application to retain should be filed as soon as possible, if not contemporaneously with the Petition and Plan. At the very least a letter sent by bankruptcy counsel to special counsel informing said special counsel of the bankruptcy filing and the need to be appointed by the Bankruptcy Court should be sent to special counsel. In fact, at the §341 Meeting of Creditors this question is asked by the Trustee or Staff Attorney, and this advice given.

Again, the Application to Retain Special Counsel should be filed as soon as practicable after the bankruptcy filing or after the claim arises. This is especially true if the case is close to settlement at the time of filing, so as not to jeopardize special counsel’s fee.

A problem may arise when the Debtor has a cause of action that arises post-petition. Per the Plan and Code, this cause of action is still property of the bankruptcy estate. Special counsel must pay attention, and must make sure to quiz the Debtor (or any potential client for that matter), as to whether they have filed a bankruptcy or are currently in a chapter 13. If the answer is yes, special counsel needs to immediately contact bankruptcy counsel to prepare and filed the necessary application to retain.

Special counsel can also obtain a PACER account, and should run a query on their clients to see if: 1) they are currently in a chapter 7 or 13; 2) periodically check to see if a client has filed chapter 7 or 13 after the retention of special counsel; and, 3) when getting ready to settle a case before distribution, and/or before distribution to see if there is an intervening chapter 7 or 13 filed. It does not cost that much to use the PACER system, and is worth the investment so as not to lose fees.

Judge Humphrey’s Policies and Procedures set forth the risk special counsel take in failing to get appointed in a timely manner. He cites In re Jarvis, 53 F.3d 416 (1st Cir. 1995), and In re Carter, 533 B.R. 632 (Bankr. S.D. Ohio 2015). Special counsel might not receive payment for work performed prior to the appointment by the Bankruptcy Court.

Furthermore, as Judge Humphrey states: “Any distribution of funds from such a settlement without the prior approval of the bankruptcy court may be set aside or avoided by the bankrupt court and returned to the bankruptcy estate.” The relevant Bankruptcy Code section is 11 U.S.C. §549(a):

§549. Postpetition transactions
(a) Except as provided in subsection (b) or (c) of this section, the trusteed may avoid a transfer of property of the estate—
1) That occurs after the commencement of the case; and
2) (A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.

By now you should be acutely aware that bankruptcy can affect your practice, and impact your ability to get paid not only on your fees, but the expenses incurred in the prosecution of the action. It is strongly recommended that if you are not sure whether you need to be appointed by the Bankruptcy Court, immediately contact an experienced bankruptcy practitioner of your choice; contact the client’s bankruptcy attorney, if known; or contact the Chapter 13 Trustee’s office. Do not be that attorney that has to forfeit fees and expenses due to your failure to follow the Bankruptcy Code and Rules.

_______________________

Scott G. Stout – Staff attorney first for George W. Ledford and then Jeffrey M. Kellner, Chapter 13 Trustee’s in Dayton, Ohio for the last 20 years. Debtor attorney for 15 years prior to present position. Member of the American Bankruptcy Law Forum located in Dayton, Ohio and Member of the Dayton Bar Association. Lectured at National Association of Chapter 13 Trustees annual conference, and regional seminars; Region Nine United States Trustee Seminar (Michigan and Ohio); various seminars for the Dayton Bar Association, American Bankruptcy Law Forum and other educational organizations. Member of the bar for the United States Supreme Court, Sixth Circuit Court of Appeals, Southern District of Ohio Federal Bar and Ohio State Bar. Obtained B.A. and J.D. degrees from Ohio Northern University.

Wayne Novick of Wayne P Novick and Associates has represented debtors in consumer bankruptcy since 1981. He has served as Chairman of The Dayton Bar Association Bankruptcy and Commercial Law Committee since 2007 and as Ohio South State Chair for National Association of Consumer Bankruptcy Attorney since 2008. He is a graduate of the University of New York at Albany and the University of Dayton School of Law. Mr. Novick is a frequent speaker for the Dayton Bar Association, blogs weekly at www.bankruptcylawnetwork.com, and is a contributor to the NACTT Academy.