By: Christopher Atlee F. Arcitio
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In general, a debtor may, subject to court approval, retain and pay professionals, including attorneys, under section 327 of the chapter 11 Bankruptcy Code.[1] It is unclear, however, who is responsible for paying a professional retained by a debtor’s professional. The United States Bankruptcy Court for the District of Idaho held in a chapter 11 bankruptcy case that a court-approved accountant can be statutorily barred from recovering legal fees from the debtor.[2] Debtor, Walker Land & Cattle, L.L.C., filed for chapter 11 bankruptcy and requested permission to use cash collateral. Upon the request of Creditor, Wells Fargo Bank, the court required the debtor to provide audited financial statements. The court approved the employment of accountant Judith K. Bower (“Bower”) to conduct the audit.[3] Bower conducted the audit within five months.[4] After the audit, the creditor issued a notice to depose Bower. The creditor subsequently issued a subpoena for Bower to testify at the debtor’s confirmation hearing.[5] Bower retained counsel for both the deposition and hearing. Bower subsequently sought $7,735 for reimbursement of her attorney’s fees from the debtor.[6] The court denied the request, finding that Bower did not prove the legal fees were necessary expenses under section 330 of the Bankruptcy Code. Therefore, Bower could not recover such fees as reimbursement expenses.[7]
The court in In re Walker Land & Cattle, L.L.C. applied the settled approach of “strict compliance” to procedures under the Bankruptcy Code.[8] The court’s conclusion ultimately hinged on the reconciliation between existing, conflicting case law.[9] In analyzing cases in favor of Bower’s claim, the court considered rationale such as the legal fees being “incidental costs”[10] to the work performed and court rulings that the denial of legal fees would be “fundamentally unfair”[11] to professionals. In particular, the courts have pointed to the absence in the statute’s language that could specifically bar reimbursement of legal fees incurred by a professional.[12] In analyzing cases contrary to Bower’s claim, the court considered the statute’s purpose of “control[ling] serious abuses”[13] as dispositive evidence to rule against Bower. Given the “scant” case law on professionals seeking reimbursement of legal fees, the court turned to a Ninth Circuit case, Max Rouse & Sons, Inc. v. Speciality Plywood, Inc., as its guide in holding that “necessary” under section 330 of the Bankruptcy Code means expenses “required to accomplish the task for which the professional was employed.”[14] Under this standard, the court ruled Bower’s argument to be insufficient under section 330.[15]
The court’s adoption of the reasoning in Specialty Plywood, Inc. to the case at bar implicates future debate, confusion among the courts, and increased litigation on the issue of whether a section 327 profession may recover legal fees under section 330. Here, the bankruptcy court failed to reconcile the existing case law; therefore, contrasting analytical approaches to chapter 11 bankruptcy petitions continue to exist, and, the likelihood of a circuit spit becomes more eminent. Moreover, the court’s cherry-picking approach could implicate forum shopping for parties who employ professionals, but wish to avoid paying the professional’s legal fees. Additionally, In re Walker Land & Cattle, L.L.C. serves as a catalyst in deterring skillful professional persons from agreeing to employment under section 327. In noting that Bower “did not demonstrate that Radford’s legal expenses were necessary,”[16] the court’s adoption of “necessary” may also discourage professionals from performing services for parties seeking to file for chapter 11 bankruptcy because of the unlikely recovery of possible legal fees. As a result, professional persons now take the risk of a reduced pay-check. It is worth noting that the court provides no solid examples as to what may qualify as “necessary.” Indeed, the court recognizes Bower’s justification for hiring her attorney,[17] but did not reconcile the justification with a professional’s difficulty of recovering legal fees.
[1] 11 U.S.C. §327 (2012) (stating persons employed by section 327 may seek reimbursement for “actual, necessary expenses” under section 330).
[2] See In re Walker Land & Cattle, L.L.C., 535 B.R. 348, 358 (Bankr. D. Idaho 2015).
[3] Id. at 349.
[4] Id. at 350.
[5] Id.
[6] Id.
[7] Id. at 358.
[8] Id. at 351.
[9] Id. at 352-56.
[10] See In re Am. Preferred Prescription, Inc., 218 B.R. 680, 686 (Bankr. E.D.N.Y 1998) (noting the professional only seeks defense costs “necessarily incurred” in relation to the work done for the trustee).
[11] See In re Geneva Steel Co., 258 B.R. 799, 803 (Bankr. D. Utah 2001) (noting the absence of an express provision but ruling that the financial advisor should not “absorb the cost of representation.”).
[12] See In re Borders Group, Inc., 456 B.R. 195, 195 (Bankr. E.D.N.Y. 2007). The parties similarly objected because the professional’s legal counsel was not approved by the bankruptcy court. Id.
[13] See In re Crafts Retail Holding Corp., 378 B.R. 44, 49 (Bankr. E.D.N.Y 2007). The court listed other policies such as the need for a court’s independent determination of the professional’s compliance with section 327, the professional’s disinterestedness, the professional’s lack of adverse interest, and the court’s determination if such service was a necessary expense under section 327. Id.
[14] See Max Rouse & Sons, Inc. v. Specialty Plywood, Inc. (In re Specialty Plywood, Inc.), 160 B.R. 627, 632 (B.A.P. 9th Cir. 1993) opinion withdrawn, 166 B.R. 153 (B.A.P. 9th Cir. 1994).
[15] Id.
[16] Id.
[17] Id.