Getting Paid: Retention and Compensation of Special Counsel in Bankruptcy
| Publication year | 2023 |
| Pages | 0018 |
By Danielle Mashburn-Myrick
Ignorance of the law is no excuse. We all learned that in law school. Still, you don't know what you don't know. And when it comes to bankruptcy law, too many of us just don't know some basics, like how to protect your fee. Non-bankruptcy lawyers routinely represent debtors or their litigation opponents in non-bankruptcy disputes, such as personal injury claims. To comply with your duty to competently represent clients who are in bankruptcy or litigating against a debtor, and to protect your fee, know these fundamentals.
Filing a voluntary petition creates an estate consisting of "all legal or equitable interests of the debtor in property."1 Claims of the debtor arising prepetition are property of the estate [hereinafter "POTE"].2 In a case under Chapter 12 or 13, or an individual case under Chapter 11, claims arising after the petition date, but before the case is closed, dismissed, or converted are also estate property.3 Proceeds of estate claims (i.e. settlement funds) are, similarly, estate property.4
In a Chapter 7 case, the Chapter 7 trustee, as the real party in interest, has authority and responsibility for prosecuting and resolving prepetition claims.5
In Chapters 11 and 12, the debtor-in-possession has all rights and powers of a trustee, including the right and power to prosecute and resolve estate claims.6
In Chapter 13, the debtor has authority and responsibility for prosecuting and resolving estate claims.7 When working on a matter involving an estate claim or a potential estate claim, do the following.
Before Representing An Estate Fiduciary, Have Your Employment Approved by the Bankruptcy Court
Before an attorney may represent an estate fiduciary, such as a trustee or debtor-in-possession, the fiduciary must obtain court approval of the terms of the professional's engagement. The Bankruptcy Code [the Code] provides that only attorneys "that do not hold or represent an interest adverse to the estate, and that are disinterested persons" may be employed to assist the estate fiduciary in carrying out his duties under the code.8 A "disinterested person" is a person who (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.9
With court approval, under section 327(e), an estate fiduciary may employ an attorney that has represented the debtor, for a specified special purpose, if the attorney "does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed."10 Rule 2014 of the Federal Rules of Bankruptcy Procedure sets out the information that must be included in an employment application. It provides that such application must set forth specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee11 or any person employed in the office of the United States trustee.
The application must be accompanied by a verified statement of the person to be employed setting forth "the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee or any person employed in the office of the United States trustee."12
Special counsel should communicate with bankruptcy counsel or the trustee at the beginning of the representation or commencement of the bankruptcy about having his employment and terms of engagement approved by the court. Too often, special counsel waits until settlement has been reached and then seeks to have his employment, compensation and the settlement all approved in one go, with the employment approved nunc pro tunc to the date of engagement. This practice is frowned upon and, considering a recent United States Supreme Court ruling, arguably impermissible.13
Before Settling an Estate Claim, Have the Settlement Approved By the Bankruptcy Court
In order to be enforceable, any settlement of estate claims must be approved by the bankruptcy court after notice and a hearing under Rule 9019.14 In other words, the compromise of estate claims has no effect until approved by the bankruptcy court. Rule 9019 provides that "[o]n motion by the trustee and after notice and a hearing, the court may...
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