Former trustee’s authority to hire attorneys for estate challenged

Because employing a law firm on behalf of a bankruptcy estate amounts to acting for the estate, the bankruptcy court must determine whether a Chapter 11 trustee has standing to hire professional persons on behalf of an estate after the bankruptcy proceedings have converted from Chapter 11 to Chapter 13.

Background

The appeal from the bankruptcy court presents a straightforward question of law: whether a Chapter 11 trustee has standing to hire professional persons on behalf of a bankruptcy estate after the bankruptcy proceedings have converted from Chapter 11 to Chapter 13. The bankruptcy court held that standing exists in such circumstances, where the retention relates to professional services rendered pre-conversion.

Standard of review

A court’s interpretation of what 11 U.S.C. § 327(a) permits is a matter of statutory construction subject to de novo review. Even so, it is well settled “that the decision under § 327 rests within the discretion of the bankruptcy court,” and “[d]ecisions committed to the discretion of the bankruptcy court are reviewed for abuse of discretion.”

A close reading of the language in § 327(a) and the cases interpreting it suggests that the discretion afforded to the bankruptcy court in this area focuses on decisions to approve (or not) a trustee’s choice of lawyers, accountants or other professional persons whose competency, necessity and/or “disinterested” status are at issue. But the issue presently before this court does not implicate similar considerations; it requires no factual investigation that would place the bankruptcy court in the best position to render a decision.

Instead, the issue presently before this court turns on a purely legal question that asks whether § 327(a) permits a former trustee, with the court’s approval, to “employ one or more attorneys” on behalf of the bankruptcy estate. Because answering that question requires only a conclusion of law, the court will review the bankruptcy court’s decision de novo.

Reconsideration

The parties at the Nov. 12, 2020, hearing focused on whether Donald King—as former trustee—had standing to (a) “seek the Court’s approval under 11 U.S.C. § 327 to employ professional persons” and (b) file a reconsideration motion requesting the same. The bankruptcy court rejected debtor Bryon David’s argument that standing does not exist in such instances as “overly formalistic” and endorsed King’s argument that a former trustee retained “the right . . . to appeal or file pleadings on matters relevant to the administration of the case during the period in which the trustee was serving.”

Both arguments, however, assumed that any authorization the bankruptcy court granted to King under § 327 would be retroactive “to the date of the conversion of this case from Chapter 7 to Chapter 11.” As such, neither party addressed whether— assuming he obtained court authorization—King had the capacity to employ Odin Feldman on a date after which he ceased serving as the bankruptcy estate’s trustee.

On Dec. 8, 2020, David asked the bankruptcy court to correct what he believed was a “clear error of law” that permitted King to “employ the law firm of Odin, Feldman & Pittleman, P.C., generally, as attorneys for the Trustee and the estate, effective as of November 12, 2020.” The basis for David’s motion was, among other things, his belief that “[a] Former Chapter 11 Trustee cannot retain professionals following conversion of a case from one chapter to another.” The bankruptcy court erred in finding that this was not a “new argument.”

De novo review

The question David put before the bankruptcy court in his Rule 59(e) motion was whether a trustee “act[s] for the bankruptcy estate” when he hires a law firm for that estate under § 327(a). This court finds the answer is yes—employing a law firm on behalf of a bankruptcy estate amounts to acting for the estate.

Thus, in allowing King to “employ the law firm of Odin, Feldman & Pittleman, P.C., generally, as attorneys for the Trustee and the estate, effective as of November 12, 2020,” the bankruptcy court permitted King to act on behalf of the bankruptcy estate despite his status as former trustee. This was clear error that should have been corrected on reconsideration.

The court, therefore, will vacate the bankruptcy court’s February 1 order and remand the case back to the bankruptcy court to reconsider its Nov. 24 order in light of this decision.

Bankruptcy court’s order vacated.

David v. King, Case No. 1:21-cv-00174, Jan. 24, 2022. EDVA at Alexandria (Nachmanoff). VLW 022-3-032. 15 pp.