District Court Upholds Georgia Bankruptcy Court’s Restrictions On Ch...

In this lengthy post, we discuss Judge Paul Bonapfel’s 73-page Order in which he skewered the fee application of a Chapter 7 Trustee and effectively changed the way all judges in the Northern District of Georgia view fee applications for Trustees’ counsel. In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019).  Many of the judges have required that attorneys now include in employment orders language such as this –  “The approval of employment of counsel is limited to those duties that are not trustee duties. See generally, In re McConnell, 19-67128-PWB, 2021 WL 203331 (Bankr. N.D. Ga, Jan. 4, 2021)”  (this is an actual note I received from chambers after submitting an employment order).  Judges have scrutinized fee applications from the bench, asking lawyers if they have complied with McConnell.  You can read the full, very detailed opinions – the initial twenty-four page Order and Notice (click here for .pdf) and the seventy-three page Final Order (click for .pdf or the Westlaw link). The Trustee appealed Judge Bonapfel’s Order to the District Court and on March 11, 2022 the District Court entered its Order. Gordon v. McConnell and Gargula, Civil Action No. 1:21-cv-304-AT (N.D. Ga. March 11, 2022) (click here for .pdf of District Court Order).

The short #tldr summary of the 38-page District Court Order is that it is not good for Chapter 7 Trustees and their attorneys.  The District Court essentially upheld Judge Bonapfel’s analysis of what are, or are not, “Trustee duties” that are included in the Trustee commission and not separately compensable as attorneys’ fees. See January 4, 2021 Bonapfel Order at pp. 20-34.  After reviewing the facts of the Bankruptcy Case at pp. 2-10, the District Court identified the issues on appeal.

Appellant [Trustee] raises eleven issues in his brief on appeal. However, by Appellant’s own admission, these eleven issues can be distilled into three general grounds for error: that the bankruptcy court erroneously concluded

1. that the firm be denied compensation for services that were the performance of the Trustee’s statutory duties;

2. that the firm’s services in opposing conversion to chapter 13 are not allowable because they were not necessary or beneficial to the estate; and

3. that the firm should be denied compensation for services in connection with Appellant’s retention of the firm and its application for compensation.

I.     Trustee Duties vs. Legal Tasks

The discussion of Trustee duties begins on page 18, with the District Court noting that it is the Trustee’s burden to show that the fees in question are legal services rather than Trustee duties.  In short, the District Court found that there was no clear error in Judge’ Bonapfel’s ruling that the following tasks were Trustee duties:

• Drafting of “legal work action memo.”
• Review documents, including title report, tax and deed records and requesting title examination.
• Preparing and filing a Section 549(c) notice.
• Retaining real estate broker, drafting and filing the employment application, and sending a demand/settlement letter to the debtor for the equity in real property.

Importantly, both Courts determined that the Trustee and counsel had not met their burden of showing the above tasks were “legal work” for lawyers, not that the tasks fall into the category of Trustee duties in every case.  The Trustee argued that the decision to retain and use counsel for these tasks fell within the business judgement rule

On this point, the bankruptcy court acknowledged that even when the trustee does not have to use a lawyer, the trustee may nevertheless be entitled to compensation for legal services if “the Trustee and his law firm have established that the circumstances of this case justified the use of a lawyer, in the exercise of the Trustee’s reasonable business judgment.” (Bankruptcy Order at 32.) At the same time, as the bankruptcy court noted, “when the trustee and the lawyer are the same person, § 328(b) requires that the trustee-attorney justify separate compensation for legal services by showing the existence of ‘unique circumstances’ or issues involving ‘unique difficulties’ that require legal work.” (Id.) In other words, the business judgment rule does not override the restrictions imposed by Section 328(b) of the Bankruptcy Code, and when a trustee-attorney fails to identify any unique difficulties that would justify retaining counsel in the performance of a trustee’s ordinary statutory duties, the trustee’s request to be compensated for those services in a legal capacity must be denied. Simply put, “[t]here is no question that a trustee may serve as the attorney for the trustee under Section 327(d), but the attorney for the trustee cannot be compensated for administering the estate under Section 704.” In re Lexington Hearth Lamp, 402 B.R. at 141–42 (internal citations omitted). “The attorney for a Chapter 7 trustee may not be compensated for services that the Bankruptcy Code requires the trustee to perform.” Id. at 142…

If attorneys could be compensated for trustee duties, “[a] trustee could delegate most or all of her duties to an attorney or accountant and still receive her § 326(a) commission, while the attorney or accountant would also receive their hourly rate for time spent performing the trustee’s duties.”

District Court Order, pp. 23-24. The Trustee also argued that the Bankruptcy Court’s Orders “effectively directs non-attorneys to engage in the unauthorized practice of law.”

But as the bankruptcy court noted, the activities Appellant and his firm engaged in, such as document review and the filing of “routine papers” are not the sort of tasks for which an attorney would be required, even if an attorney theoretically could perform any of these tasks. Moreover, as the bankruptcy court noted, “chapter 7 trustees regularly sell residential real estate in a consumer bankruptcy case,” and nothing in the records suggests that the tasks described above entailed “any unique or complex legal issues.” (Bankruptcy Order at 26–27.) Significantly, Appellant did not mention any of these tasks for which he now claims he required a lawyer within his application to hire the firm.

District Court Order, pp. 26.  Thus ends the discussion of the “Trustee duties” vs. “legal tasks,” with the District Court upholding Judge Bonapfel’s Order in its entirety on this issue.

II.     Fees for Opposing Debtor’s Motion to Convert to Chapter 13.

The second issue on appeal was whether the law firm’s services in opposing conversion to chapter 13 are not allowable because they were not necessary or beneficial to the estate. District Court Order, pp. 27-30.  Judge Bonapfel held, in short, that because the Trustee’s opposition would clearly fail, the services were not beneficial to the estate.  The Trustee, again, argued that the decision to oppose conversion was protected by the business judgment rule.  On this, the District Court agreed –

Although the Court has some concerns about the amount of time Appellant spent on the opposition and how much he seeks to charge the estate in connection therewith, the Court agrees that Appellant’s decision to use a lawyer for that purpose fell within the scope of the business judgment rule. See In re Lexington Hearth Lamp, 402 B.R. at 146 (finding that “a determination of if, when, and how a response should be made requires legal acumen that few laymen possess,” and that “[u]nless it is clear from the context of such an entry that no legal skill or knowledge is involved, this Court will allow a Chapter 7 trustee-attorney to receive compensation for such services in his capacity as an attorney.”)…

Though the bankruptcy court here may have disagreed with Appellant’s decision to file the opposition, the opposition “was not wholly unfounded” given that — at the time Appellant filed the opposition — the Debtor did not have any disposable income through which he could establish a repayment plan to compensate creditors… Further, the negotiations Appellant engaged in with the Debtor’s counsel ultimately culminated in the consent order granting the conversion motion subject to several contingencies. Appellant drafted the consent order in his capacity as a lawyer, and the terms of that consent order appear to have provided at least some benefit to the estate.

Under the circumstances, the Court finds that the bankruptcy court’s decision to award no compensation whatsoever in connection with that entire process was an abuse of discretion.

This matter was remanded to Bankruptcy Court for further review of the specific services rendered by Trustee’s counsel on the conversion issue.

III.     Fees for Preparing and Filing Employment Application and Fee Application.

Finally, the District Court reviewed the denial of the fees charged for preparing the employment application and fee application.  District Court Order, pp. 36. The Bankruptcy Court denied these fees on the grounds that none of the other fees were allowed. “As the bankruptcy court put it, the firm ‘is not entitled to fees for seeking compensation that is not allowed.’ (Bankruptcy Order at 51).”  Because the District Court was remanding the issue of fees for opposing conversion, it reversed the Bankruptcy Court on this issue as well.

Because the Court finds that at least some of the legal work Appellant and the firm performed in opposing the conversion motion was beneficial to the estate, the court finds that it was clear error for the bankruptcy court to deny Appellant any compensation for preparing the application to retain the firm or for preparing the fee application, at least to the extent the fee application sought compensation for those specific services. On remand, the bankruptcy court should consider the appropriate amount of compensation for the time Appellant and his firm spent preparing the fee application to the extent doing so was necessary to recover expenses incurred in connection with the Debtor’s conversion motion.

Thus, the case will go back to Judge Bonapfel for a more detailed review of the services relate to the opposition of the debtor’s conversion motion and the Trustee’s lawyers’ employment application and fee application.  It is certainly possible the Court will still deny all the fees. We shall see.

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or [email protected].  For more information, click here.