Chapter 11 trustee allowed to employ law firm retroactively

Listen to this article

Where the bankruptcy court entered a nunc pro tunc order to retroactively permit the former Chapter 11 trustee to employ the law firm specifically for the Chapter 11 phase, it did not err.

Background

The appeal presents the following question of law: whether a bankruptcy court has the authority to approve, nunc pro tunc, a retention application for a former Chapter 11 trustee to employ professional persons on behalf of a bankruptcy estate, effective only for the Chapter 11 time period.

Analysis

The court’s inquiry begins with its de novo determination of whether a Chapter 11 trustee has the authority to employ professionals during Chapter 11 proceedings. The court finds the answer is yes. Bankruptcy Code § 327 permits bankruptcy trustees to “employ … professional persons … to represent or assist the trustee in carrying out the trustee’s duties under this title.”

Appellant argues that appellee lost his authority when the case converted to Chapter 13, and argues that because of that fact, the bankruptcy court erred in empowering the former trustee to appoint the law firm. While it is true that conversion terminates fiduciary office, the bankruptcy court’s Sept. 2, 2022, order permitted the hiring of the firm retroactively, covering the time period before the trustee’s fiduciary office was terminated by the case’s conversion to Chapter 13.

Next the court finds the bankruptcy court did not err in utilizing a nunc pro tunc order to retroactively permit the former Chapter 11 trustee to employ the law firm specifically for the Chapter 11 phase. The bankruptcy court’s September 2022 order combined its authority under 11 U.S.C. § 327(a) and its ability to issue nunc pro tunc orders to “approve[] the prior employment of the law firm Odin Feldman & Pittleman, P.C., by the Chapter 11 Trustee during the Chapter 11 phase of this case only, with such representation ending on May 21, 2020, the date this case was converted to Chapter 13.” In effect, this allowed the former Chapter 11 trustee to act on behalf of the bankruptcy estate only for the period he was the acting Chapter 11 trustee.

Appellant cites no binding authority to support the proposition that the bankruptcy court cannot use its discretion to grant, or abuses its discretion when it grants, a former trustee leave to file an application covering only the time period during which they were an active trustee and/or prior to conversion. To the contrary, bankruptcy courts have recognized a trustee’s authority to pursue certain claims following conversion resulting in termination of fiduciary office. Thus, it is clear that courts recognize that a former trustee has inherent authority to close out the affairs of an estate post-conversion.

Even further, the court notes that in its April 10, 2019, order converting the Chapter 7 case to Chapter 11, the bankruptcy court ordered that King, the then-Chapter 7 trustee, file a report with the court and file proof of any claims for outstanding expenses incurred during the administration of the Chapter 7 case. Thus, King was being instructed, as former Chapter 7 trustee, to wrap up the affairs of the estate post-conversion.

Similarly, on Sept. 30, 2020, the bankruptcy court directed King, the then-former Chapter 11 trustee, to file an application for court approval of the law firm’s employment during the Chapter 11 portion of the bankruptcy proceedings. This order occurred as the case was converted from Chapter 11 to Chapter 13. However, appellant did not appeal that order.

Appellant’s own actions (or, inaction) suggests that he, too, was aware that even post-conversion, former trustees may pursue expenses and fees and conduct some administrative duties relating to the time period during which they were an active trustee. Accordingly, the court finds the Bankruptcy Court did not violate 11 U.S.C. §§ 327, 330 348(e) in its nunc pro tunc approval of the employment application, covering only the time period during which King was Chapter 11 trustee.

Bankruptcy court’s Sept. 2, 2022, order affirmed.

David v. King, Case No. 1:22-cv-1053, Aug. 4, 2023. EDVA at Alexandria (Giles). VLW 023-3-464. 15 pp.