In its decision in Lazzo v. Bank (In re Schupach Investments, L.L.C.), 2015 WL 6685416 (10th Cir. 2015), the Tenth Circuit sent a clear message to attorneys representing debtors-in-possession: make sure you have authority to represent the debtor if you want to be compensated from the estate.
In this case, Mark Lazzo, debtor’s counsel, failed to file an application seeking appointment as counsel for the debtor-in-possession until about one month after the case was filed. Lazzo stated that his application “got lost in the shuffle” of other first day motions which he had filed. In addition, Lazzo did not specifically request post facto approval of his appointment when he did get around to filing the application. He claimed his failure to timely file the application was the result of excusable neglect.
Several of the debtor’s secured creditors filed a plan of liquidation which provided for the transfer of the debtor’s secured property to the secured creditors, the cancellation of members’ interests, the dissolution of the debtor, and the transfer of the debtor’s unencumbered assets to a liquidating trust. The plan also required the debtor to cooperate post-confirmation in effecting various administrative tasks required by the plan. The debtor consented to the creditors’ plan, and the bankruptcy court confirmed it. Although the plan empowered the liquidating trustee to retain counsel, and the liquidating trustee did not retain Lazzo, Lazzo continued to perform services for the debtor after confirmation. Lazzo filed fee applications seeking payment of his fees, including fees incurred before the bankruptcy court approved his appointment as and after confirmation of the creditors’ plan of liquidation. The bankruptcy court allowed these fees, but the Bankruptcy Appellate Panel reversed. The Tenth Circuit affirmed the decision of the BAP, agreeing that Lazzo was not entitled to fees for services performed before his appointment was approved or after the plan was confirmed.
In connection with the issue of entitlement to fees for services performed before Lazzo’s retention as debtor’s counsel was approved by the bankruptcy court, the Tenth Circuit revisited its prior decision in Land v. First Nat’l Bank of Alamosa (In re Land), 943 F.2d 1265 (10th Cir. 1991). In Land the court assumed that a bankruptcy court may approve an attorney’s employment post facto, thereby entitling him to seek fees for work performed prior to approval. In Land, the court held that retroactive approval of an attorney’s employment “is only appropriate in the most extraordinary circumstances” and that “[s]imple neglect will not justify pro tunc approval.” Land 943 F.2d at 1267-68. Lazzo argued that this language in Land was dicta and that the appropriate standard for post facto approval of employment applications should be excusable neglect. The Tenth Circuit noted the minority view, as set out in the Seventh Circuit’s opinion in Matter of Singson, 41 F.3d 316, 319 (7th Cir. 1994), that excusable neglect is the proper standard. The Tenth Circuit panel, however, reaffirmed its language in Land, stating that it was not dicta and further represented the prevailing approach among the circuits. The court went on to state that the reasons provided by Lazzo for failing to timely seek appointment as debtor’s counsel did not rise to the “extraordinary circumstances” required to supportpost facto approval.
In connection with the issues of entitlement to fees for services performed post-confirmation, the court looked to both the provisions of the Bankruptcy Code and the provisions of the confirmed plan. As the court noted, because termination of a debtor’s status as a debtor-in-possession also terminates debtor’s counsel’s authorization under § 327 to provide service as an attorney for the debtor-in-possession,Lamie v. U.S. Tr., 540 U.S. 526, 532 (2004), the Tenth Circuit framed the question as “whether the Debtor retained its status as debtor-in-possession after confirmation of the Creditors’ Plan.” The court held that § 1101(1) of the Bankruptcy Code eliminates the debtor-in-possession’s ability to perform the functions and duties of a trustee where a qualified trustee has been appointed and is serving those functions. The court stated that § 1101(1) “serves the salutary purpose of avoiding the logistical difficulties inherent in having two different and possibly conflicting trustees serving simultaneously.” Although the plan trustee in the case was not qualified under § 322 of the code, the court found that § 1101(1) does not entitle permanent debtor-in-possession status in those instances where a trustee is appointed pursuant to a plan. In addition, the court noted well-settled case law holding that debtor-in-possession status terminates on confirmation of a plan. In the present case, the plan provided that all of the debtor’s unencumbered assets vested on confirmation in the liquidating trust, and vested the trustee of the liquidating trust with all rights and powers of a trustee under the Bankruptcy Code. Further, the plan dissolved the debtor as of the confirmation date. The court believed the plan’s provisions obligating the debtor to cooperate with the plan trustee in connection with various ministerial and administrative aspects of the plan “fell far short of encompassing the responsibilities of a debtor-in-possession.” Because the debtor lost its debtor-in-possession status when the plan was confirmed, Lazzo had no authority to seek compensation from the post-confirmation trust for services he performed post-petition.