Honorable Jim D. Pappas, United States Bankruptcy Judge.
Both the United States Trustee ("UST") and the chapter 11
The Court conducted a hearing on the Final Application, and heard oral argument from the parties, on May 6, 2015., at which hearing the parties invited to supplement their briefing on the issues. Dkt. No. 779. Only Brower filed a brief. Dkt. No. 789. Having taken the issues under advisement, and now having considered the record, the parties' submissions, as well as the applicable law, this Memorandum constitutes the Court's findings of fact and conclusions of law, and resolves those issues. Fed. R. Bankr.P. 7052; 9014.
The material facts are not contested.
Debtor filed a chapter 11 bankruptcy petition on November 15, 2013. Dkt. No. 1. In connection with Debtor's requests to use cash collateral in the case, secured creditor Wells Fargo Bank, N.A. sought, and the Court approved, a requirement that Debtor obtain audited financial statements of its financial affairs prepared by a certified public accountant. Dkt. Nos. 42, 106. To address this requirement, on March 6, 2014, Debtor filed an application to approve the employment ("Employment Application") of Brower, a CPA, to serve as an auditor.
Id. at 4.
No objection to the Employment Application was filed, and the Court entered an order approving Brower's employment by Debtor on April 16, 2014. Dkt. Nos. 297.
After application, notice and a hearing, and without objection from any party, the Court authorized Debtor to pay interim compensation and expenses to Brower on June 24, 2014, in the amount of $26,364.50. Dkt. No. 385. The information submitted with this application showed that Brower worked on the audit during April, May, and June 2014, and that she submitted the completed audit report in early July 2014. Dkt. Nos. 344, Exh. B; 766, Exh. E; 789.
On October 14, 2014, a notice of intent to take Brower's deposition in connection with the bankruptcy case was filed by Wells Fargo. Dkt. No. 517. A subpoena was issued by Wells Fargo's counsel directing Brower to appear on November 10, 2014 at 9:00 a.m. to testify, and to produce, in general, "[a]ll Documents used or relied upon in support of and in preparation of the Financial Statements and Independent Auditor's Report[s]. . . ." Dkt. No. 517-1 at 4. Apparently, after receiving the subpoena, Brower was informed by Debtor's counsel that he could not represent her in connection with the deposition and document production, and that she should obtain other counsel. The affidavit Brower submitted to support the Final Application indicates that, by November 1, 2014, Brower had hired attorney Lee Radford to assist with the production of documents, and to act as her counsel as she appeared and offered testimony pursuant to the subpoena. Dkt. No. 749, Exh. C. On November 25, 2014, Brower was again subpoenaed by Wells Fargo, this time to appear and testify before this Court at the consolidated confirmation hearing concerning the Debtor's and Wells Fargo's proposed chapter 11 plans, which she did on December 17, 2014. See, Hearing Minutes, Dkt. No. 644.
Radford billed Brower $7,735 for his legal services, which was paid. On April 10, 2015, Brower filed her Final Application. Dkt. No. 748. It was prepared by Radford, and seeks $38,797.25 in professional fees, and $7,735 as reimbursement for Radford's charges. Id. The UST objected to some of Brower's time entries,
In the normal course of a bankruptcy case, to competently perform its duties, a trustee, or a chapter 11 debtor in possession,
As an initial matter, estate professionals must have their employment approved by the bankruptcy court in advance of performing any compensable services:
§ 327(a). As can be seen, the conditions on approval of the employment of a professional under § 327(a) include that the trustee or debtor in possession show, and that the bankruptcy court be persuaded, that the professional's employment is necessary, and that the person proposed to be employed is disinterested and does not hold an interest which is adverse to the estate. If the employment is approved, the Code requires the professional to return to the Court, after further application, notice to parties, and a hearing, to secure approval of any payment from the estate, with any such amounts limited to only those representing "reasonable compensation for actual, necessary services rendered. . . and reimbursement of actual, necessary expenses." § 330(a)(1); see also Baker Botts L.L.P. v. ASARCO LLC, ___ U.S. ___, 135 S.Ct. 2158, 2163, 192 L.Ed.2d 208 (2015).
Here, all parties acknowledge that Brower's employment by Debtor as an estate professional was properly sought and approved by the Court. However, it is also clear that Brower's lawyer, Radford, was not employed as an estate professional under § 327(a), because it is undisputed that he was to represent Brower, not
Distinct from any claim for her own compensation in this case, Brower's request to recover Radford's fees comes to the Court via an alternate route: as a claim for a reimbursable expense she incurred in connection with her employment by Debtor. Brower reminds the Court that her engagement letter with Debtor authorized her to retain her own lawyer if the need arises, and that it allows Brower to recover from Debtor any fees she incurs for that representation. Brower insists that, because § 330(a)(1)(B) provides for reimbursement to her for any "actual, necessary expenses" incurred as an estate-employed professional, Debtor should reimburse her for the attorneys fees she paid Radford.
In opposition, both the UST and Debtor contend that, as a matter of law and bankruptcy policy, professional fees simply cannot constitute a proper "expense" for purposes of reimbursement under § 330(a)(1)(B). Because a professional bears the burden of proving entitlement to the fees and costs requested under § 330(a), In re Leed Corp., 97 IBCR 95, 96 (Bankr.D.Idaho 1997), they urge the Court to reject Brower's request for reimbursement.
So should Brower, as an approved estate professional, be able to recover the attorneys fees she paid to Radford as an "expense" under § 330(a)?
The case law is scant on this subject. While the Court was able to locate decisions exploring this question generally, there is no controlling authority in this Circuit, and the holdings by the courts are not uniform in either their outcome or analytical approach.
For example, in In re Am. Preferred Prescription, Inc., 218 B.R. 680 (Bankr. E.D.N.Y 1998), the chapter 11 debtor, whose auditor "BDO" had been properly employed and had completed most of the audit services work, moved to disqualify BDO. Id. at 687. BDO retained counsel to oppose the debtor's motion. Ultimately, the bankruptcy court concluded that the debtor's disqualification motion was baseless. When BDO's fee application was filed, it included a request for reimbursement of about $23,000 for its counsel's legal fees as an expense. In approving this request, the bankruptcy court rejected the debtor's argument that BDO's counsel's employment needed to be separately approved under § 327(a) as a condition of allowance, stating:
Id. at 686 (internal citation omitted). The bankruptcy court, relying heavily on the fact that it was the debtor's own actions that caused BDO to incur the legal fees associated with defending the motion to disqualify, held that, under § 330(a)(1)(B), the fees were an actual and necessary expense incurred by BDO in order to perform its duties, and granted reimbursement in full. Id. at 688.
In In re Geneva Steel Co., 258 B.R. 799 (Bankr.D.Utah 2001), Blackstone, a financial advisor whose employment by the debtor was approved by the bankruptcy court, retained legal counsel to defend its second and third fee applications in response to objections by the chapter 11 trustee and the bondholder's committee. In response to the objecting parties' point that the employment of Blackstone's legal counsel had not been approved by the bankruptcy court pursuant to § 327(a), the bankruptcy court noted that there is "no provision in the Code for a professional appointed pursuant to Section 327 to seek appointment of another professional to represent its interests at a fee hearing." Id. at 803. It observed:
Id.
In In re Borders Grp., Inc., 456 B.R. 195 (Bankr.S.D.N.Y.2011), the bankruptcy court authorized Mercer to provide "compensation consultant" services to the chapter 11 debtor. Mercer's engagement letter, referenced in the bankruptcy court's retention order, provided that Mercer may charge the debtor for "legal fees associated with our retention as a professional and subsequent fee application[s] with the U.S. bankruptcy court if required." Id. at 201. When Mercer later filed its fee application, it included a request for reimbursement of over $16,000 in legal fees, incurred for retention matters, preparing fee applications, and for a small amount of time expended by counsel to advise Mercer regarding implementation of the debtor's employee program.
When Mercer sought to recover its legal expenses, the United States Trustee objected because Mercer's counsel's employment had not been approved by the bankruptcy court. When it considered Mercer's fee application, including the challenged legal expense component, the bankruptcy court held that Mercer's law firm's employment did not have to be separately approved by the bankruptcy court to allow for the reimbursement to Mercer for counsel's charges. In doing so, the Borders Grp., Inc. court noted the existence of a split in the case law in the Southern District of New York on this issue.
Id. at 208. Declining to follow the other local cases advocating for a per se rule providing that, unless a professional is employed by the estate, for whatever purposes, it cannot receive any payment from the bankruptcy estate, the court summarized its reasoning:
Id. at 213.
The decision in In re Crafts Retail Holding Corp., 378 B.R. 44 (Bankr.E.D.N.Y. 2007), represents the other side of the coin, wherein the bankruptcy court adopts a per se rule prohibiting the reimbursement of non-retained professionals' fees as expenses. In that case, the chapter 11 debtor's court-approved financial advisor retained counsel to aid it in the retention process. The debtor's employment application referenced an engagement letter which included a provision that essentially provided for reimbursement to the advisor of up to a certain amount of "no-look" legal expenses incurred by the financial advisor. Following objections to the employment application by other parties, the engagement letter was largely revised, and was thereafter approved. The financial advisor later submitted a fee application which included $35,000 in legal expenses for its own legal bills, to which the United States Trustee and the unsecured creditor's committee objected.
The bankruptcy court rejected the financial advisor's expense request noting that the rule forbidding compensation to professionals for services rendered absent employment of that professional by the bankruptcy court was adopted to control serious abuses, and therefore should be strictly enforced. Id. at 49 (quoting In re Eureka Upholstering Co., Inc., 48 F.2d 95 (2d Cir.1931)). The court highlighted other policies supporting this rule, including that judicial approval "entails a court's independent, detached determination that the applicant satisfied the statutory requirements under § 327," including disinterestedness, lack of an adverse interest, and the court's finding that the proposed services are necessary under the circumstances. Id. at 49. The bankruptcy court observed that "there is no provision in the Bankruptcy Code authorizing a court approved professional like [the financial advisor] to, in turn, employ another professional." Id. (citing to Rule 2014(a)). The
The Crafts Retail Holding court also dismissed the financial advisor's argument based upon the parties' agreement in the engagement letter that its legal costs should be reimbursed, explaining that "absent statutory authority, claimed contractual rights or asserted principles of equity alone do not constitute cognizable bases for an award of compensation or reimbursement of expenses in bankruptcy cases." Id. at 50 (citing cases). And it offered an additional reason for denying reimbursement for the requested expenses worthy of mention here: "Moreover, the legal fees incurred did not relate to the completion of any financial advisory services provided by [the financial advisor] and were not necessary to the completion of tasks for which [the financial advisor] was responsible." Id. at 51.
At least one other court has reached the same conclusion as Crafts Retail Holding. In In re Auto Parts Club, the bankruptcy court concluded:
191 B.R. 848, 850 (Bankr.S.D.Cal.1996). As can be seen, the court was concerned that, by requiring the bankruptcy estate to "reimburse" its legal fees, a professional might elude the judicial inquiry associated with employment of estate professionals required by § 327(a).
As can be seen, these decisions are divided in their conclusions. And, as near as the Court can tell, there is no binding authority within the Ninth Circuit on this issue. Even so, the Court is guided by the reasoning of the Bankruptcy Appellate Panel in Max Rouse & Sons, Inc. v. Specialty Plywood, Inc. (In re Specialty Plywood, Inc.), 160 B.R. 627 (9th Cir. BAP 1993), opinion withdrawn following settlement, 166 B.R. 153 (9th Cir. BAP1994).
In that case, an auctioneer was hired by the chapter 11 debtor, with bankruptcy court approval, to sell its excess equipment. The equipment sold for substantially less than its estimated value, and the debtor thereafter objected to the auctioneer's fee request, insisting that the auctioneer should receive only a prorated share of the sale proceeds, along with other administrative claimants. At this point, the auctioneer retained an attorney to defend its fee application. The auctioneer requested approval of $1,900 in attorneys fees as a reimbursable expense. The bankruptcy court disallowed the legal fees in full, and the auctioneer appealed to the Bankruptcy Appellate Panel.
The BAP also rejected the auctioneer's argument that § 330(a) provided a statutory basis to recover the auctioneer's legal fees as compensation because those fees requested were not those of the approved professional, the auctioneer, but instead were to pay for services provided by a separate professional, the auctioneer's lawyer, whose employment had not been approved by the bankruptcy court. Id. at 632.
Finally, turning to the auctioneer's contention that the legal fees were reimbursable as "actual, necessary expenses" incurred by the auctioneer under § 330(a)(2), now recodified as § 330(a)(1)(B), the Panel cited to cases holding that an expense is only "necessary" for purposes of this Code provision when it was required to accomplish the task for which the professional was employed. Id. at 632 (citing In re Gillett Holdings, Inc., 137 B.R. 462, 471 (Bankr. D.Colo.1992); and In re Grabill Corp., 110 B.R. 356, 362 (Bankr.N.D.Ill.1990)). The BAP pointed out that, in Specialty Plywood, the auctioneer had already completed the auction, and only afterward retained counsel and incurred attorney fees to secure payment for its work from the estate. The BAP stated:
Id. at 633; see also In re DN Assocs., 165 B.R. 344, 355 (Bankr.D.Me.1994); In re Edisto Res. Corp., 160 B.R. 736, 739 (Bankr.D.Del.1993); In re Columbia Gas Sys., 150 B.R. 553, 555 (Bankr.D.Del.1992). Accordingly, because the legal fees incurred by the auctioneer were not necessary to conducting the auction, they were not reimburseable, and the BAP affirmed the bankruptcy court's denial of the attorney fees claimed as expenses under § 330(a)(2). Id. at 633.
As pointed out above, the case law on this issue is a mixed bag. But while the BAP's opinion in Specialty Plywood was withdrawn following the parties' settlement of the underlying issues, the Court finds the Panel's reasoning in that decision sound, especially in light of the other decisions interpreting § 330(a)(1)(B) to require that "necessary" expenses are limited to those "required to accomplish the task for which the professional was employed." See In re Comput. Learning Ctrs., Inc., 285 B.R. 191, 226 (Bankr.E.D.Va.2002) (citing In re Mahaffey, 247 B.R. 823, 825 (Bankr.D.Mont.2000)); In re Grabill Corp., 110 B.R. at 362; see also 3 Collier on Bankruptcy ¶ 330.04[1] ("Expenses are `necessary' when incurred if they were properly required to accomplish the task for which the professional was employed."). Without such a limitation, potentially, whenever a bankruptcy court-approved professional deems it necessary to employ another professional to protect its interests in the bankruptcy case, that cost would be taxed to the bankruptcy estate,
Applying the rationale of Speciality Plywood to the facts presented here, the Court holds that the services provided by Radford were not required (i.e., "necessary") to accomplish the purpose for which Brower was employed—performing an audit of the Debtor's financial affairs. While the Court does not question Brower's good faith in deciding to retain counsel to advise her when she was later called upon to testify about the audit, and to produce the financial documents used in the process, the Wells Fargo subpoena was issued, and the Brower deposition took place, some three months after she had completed the audit and submitted her report. Moreover, it is telling that the discovery occurred at the behest of a secured creditor hoping to discredit Debtor's operations and proposed plan via the data contained and opinions expressed in Brower's audit report. Indeed, the creditor pursued the same strategy by calling Brower to testify at the confirmation hearing. Because Brower did not participate in the discovery process until after she finished the project for which Debtor employed her, and because the time she spent attending the deposition, testifying, and producing documents was not a necessary component of producing the actual audit, the Court concludes that the legal fees Brower incurred when she hired Radford to advise and represent her were not "necessary" to completion of the task Brower was hired to perform per the meaning of that term in § 330(a)(1)(B).
This result obtains despite the authority ostensibly granted to Brower in the engagement letter to hire a lawyer, and to charge Debtor for the fees Brower thereby incurred. While the terms of the engagement letter are clear enough to cover the Radford fees, as noted above, the Court's order approving Brower's employment limited her entitlement to payment of compensation and expenses to only those amounts allowed under § 330. Moreover, only the bankruptcy court, not the debtor in possession and professional, can determine, applying the standard embodied in § 330(a)(1)(B), as developed in the case law, what expenses were necessary. See Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir.2012) (quoting In re Pease, 195 B.R. 431, 434-35 (Bankr.D.Neb. 1996)) (in the context of a motion to compel arbitration pursuant to an underlying contract, the Ninth Circuit held that "any attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor's future bankruptcy filing is generally unenforceable. The Bankruptcy Code preempts the private right to contract around its essential provisions." Id. at 1026 (emphasis added); see also § 330(a)(2) (providing that, upon request of a party, or on its own motion, the Court may award compensation to an estate professional that is less than the amount requested).
Brower was perhaps justified to hire a lawyer. Whether she may recover the costs she thereby incurred in the highly-regulated
Dkt No. 279. Debtor later filed an amended application to employ Brower to serve as Debtor's accountant in addition to her employment as an auditor, so that she could assist Debtor in the preparation and filing of its 2013 tax returns. Dkt. No. 338. Again, no objection was filed, and the amended application was approved by the Court on June 17, 2014. Dkt. Nos. 379, 381.
