Thomas J. Tucker, United States Bankruptcy Judge.
This case came before the Court for a hearing on September 27, 2018, on the Debtors' application entitled "Application for Order Authorizing Debtor, Nicole Blume's Employment of Loren Mannino and Mannino Martin for Non-Bankruptcy Legal Matters and Payment of Legal Fees and Costs," (Docket # 128, the "Special Counsel Application") and the Debtors' Motion to Incur Debt (Docket # 129). The creditor Alisa Peskin-Shepherd, PLLC ("Peskin-Shepherd") objects to the Special Counsel Application and the Motion to Incur Debt.
Confirming action taken during the September 27 hearing, and for the reasons stated by the Court on the record during the hearing, the Court entered an Order on September 28, 2018 (Docket # 140), which permitted further briefing on a specified issue, and which scheduled a further hearing on the Debtors' motions, to be held on October 11, 2018 at 2:00 p.m. In an Order entered on October 3, 2018 (Docket # 142), the Court added an additional issue to the further briefing permitted by the parties. The briefs were due on October 9, 2018, and were filed by each side on the afternoon of that date (Docket # # 143, 145). Then, in an Order entered on October 11, 2018 (Docket # 146), the Court permitted the Debtors to file a further brief, limited to discussing one additional issue that has been raised by Peskin-Shepherd, and adjourned the October 11 hearing to October 25, 2018. The Debtors filed their brief, with exhibits attached, as permitted by the October 11 Order (Docket # 147).
Having reviewed all the briefs and other papers filed by the parties, the Court concludes that a further hearing is not required, and has decided to rule on the pending matters in writing, in this Opinion and the order to follow. For the following reasons, the Court (1) will deny the Motion
This Court has subject matter jurisdiction over this bankruptcy case, and over these contested matters, under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). These contested matters are core proceedings, under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(D), 157(b)(2)(M), and 157(b)(2)(O).
In addition, these contested matters each fall within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). These are proceedings "arising under title 11" because they are "created or determined by a statutory provision of title 11," see id., including the issues of whether and to what extent Bankruptcy Code § 327(e) applies. And these are proceedings "arising in" a case under title 11, because they are proceedings that "by [their] very nature, could arise only in bankruptcy cases." See Allard v. Coenen, 419 B.R. at 27.
In their Motion to Incur Debt, the Debtors seek authorization from this Court (1) to incur post-petition debt to attorney Loren Mannino and his firm, Mannino Martin (collectively, "Mannino"), to represent the Debtors in pending state court litigation against Peskin-Shepherd; and, (2) in order to secure payment of such post-petition debt, to grant to Mannino a mortgage lien in the Debtors' real estate located at 330 E. Avon Road, Rochester, Michigan (the "Rochester Property").
In its supplemental brief filed October 9, 2018, Peskin-Shepherd argued, among other things, that it would violate Rule 1.8(j) of the Michigan Rules of Professional Conduct,
Rule 1.8(j) states:
Mich. Rules Prof'l Conduct R. 1.8 (2018) (emphasis added).
Although the Debtors argue otherwise, the Court finds and concludes that the Rochester Property is part of "the subject matter of" the state court litigation in which Mannino represents the Debtors. This is clear from, among other things, Counts III and IV of Peskin-Shepherd's Third Amended Complaint in the state court action, and the relief sought for those counts.
This Court will not authorize the Debtors to grant the proposed lien in the Rochester Property, because doing so would violate Rule 1.8(j) of the Michigan Rules of Professional Conduct, and therefore would violate public policy.
The Court will authorize the Debtors to incur post-petition debt to Mannino, without the granting of the proposed lien. This authorization is based on the assumption that, as the Debtors' counsel has made clear in the Motion to Incur Debt and in the hearing on that motion, the Debtors will not be required to pay, and will not pay, such debt during the pendency of this Chapter 13 bankruptcy case, as part of any Chapter 13 plan or otherwise.
The Court will enter an order granting the Motion to Incur Debt in part, and denying it in part, consistent with this Opinion
The Debtors's Special Counsel Application seeks an order authorizing the Debtors to employ Mannino to represent them in the pending state court litigation against Peskin-Shepherd. Peskin-Shepherd objects to this application, arguing among other things that Mannino's employment would violate Bankruptcy Code § 327(e).
Section 327(e) states:
11 U.S.C. § 327(e).
In its Order filed September 28, 2018 (Docket # 142), the Court raised the issue of whether § 327(e) applies at all, and allowed the parties to brief that issue. The Order noted the following:
Based on the Jones, Scott, Gilliam, and Maldonado cases cited above, the Court concludes that, at least under the circumstances of this case, § 327(e) and its requirements do not apply to the Debtors' proposed employment of Mannino. The circumstances include the fact that, as noted above, the Debtors do not seek authority to pay, and will not pay, Mannino during the pendency of this Chapter 13 bankruptcy case, as part of any Chapter 13 plan or otherwise, and therefore will not be paying or seeking to pay Mannino from any property of the bankruptcy estate.
Under these circumstances, and given that § 327(e) does not apply here, the Court concludes that the Debtors need not obtain this Court's approval or authorization to employ Mannino for the purposes stated. To the extent the Special Counsel Application also seeks authority to grant a lien in favor of Mannino in the Rochester Property, it will be denied, for the reasons stated in Part III of this Opinion. Otherwise, the Special Counsel Application will be denied as unnecessary. The Court will enter an order to this effect.
For the reasons stated in this Opinion, the Court will enter an Order denying the Debtors' Motion to Incur Debt in part, and granting that motion in part; and denying the Debtors' Special Counsel Application.
This case came is before the Court on two matters: (1) the Debtors' application entitled "Application for Order Authorizing Debtor, Nicole Blume's Employment of Loren Mannino and Mannino Martin for Non-Bankruptcy Legal Matters and Payment of Legal Fees and Costs," (Docket # 128, the "Special Counsel Application"); and (2) the Debtors' Motion to Incur Debt (Docket # 129). The creditor Alisa Peskin-Shepherd, PLLC objected to the Special Counsel Application and the Motion to Incur Debt. Today, the Court has filed a written opinion regarding these two matters. For the reasons stated by the Court in its written opinion filed today,
IT IS ORDERED that: