The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:

The U.S. Bankruptcy Court for the Eastern District of New York ruled that nunc pro tunc employment of counsel for the chapter 7 trustee was not appropriate following a recent decision by the Supreme Court which cast doubt on nunc pro tunc orders. However, the bankruptcy court determined that professionals employed in bankruptcy cases may still be paid for work performed prior to the date of employment, subject to court approval. In re Benitez, 2020 WL 1272258 (Bankr. E.D. N.Y. March 13, 2020).

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Facts

The chapter 7 trustee for the bankruptcy estate of the debtor filed a motion (employment application) to employ general counsel nunc pro tunc to approximately eleven months prior to the filing of the employment application. Prior to the bankruptcy court’s decision on the employment application, the Supreme Court issued its opinion in Roman Catholic Archiodiocese of San Juan, Puerto Rico v. Acevedo Feliciano, ___ S.Ct. ___, 2020 WL 878715 (S.Ct. February 24, 2020)(Acevedo), with part of opinion discussing nunc pro tunc orders. The bankruptcy court denied the employment application without prejudice.

Reasoning

This decision is one of the first regarding requests for nunc pro tunc employment in a bankruptcy case following the Supreme Court’s decision in Acevedo. The bankruptcy court cited to the Supreme Court’s statements casting doubt on nunc pro tunc orders in Acevedo, stating “[p]ut colorfully, ‘[n]unc pro tunc orders are not some Orwellian vehicle for revisionist history—creating ‘facts’ that never occurred in fact’” and “[p]ut plainly, the court ‘cannot make the record what it is not.’” The court stated that the Supreme Court’s decision “requires this Court to, sua sponte, review its practice of nunc pro tunc retentions”, that “[t]his Court’s reading of Acevedo is that utilizing nunc pro tunc orders to approve the retention of estate professionals retroactive to some date prior to the actual date of court approval is inappropriate” and “[b]ased upon its analysis of the law this Court will no longer require or grant nunc pro tunc retentions.”

Although the court determined that it could not approve employment of professionals nunc pro tunc, the court stated that “neither the Code nor the Rules state that the professional may not be compensated under section 330 for services provided to the estate prior to court approval of their retention.” The court reviewed what some have viewed as a per se rule denying compensation for services prior to employment in In re Household Merit, Inc., 1995 WL 936707 (Bankr. N.D.N.Y. 1995) and determined that “there is no per se prohibition, in the statute or precedential caselaw, against awarding reasonable compensation to an estate professional for actual and necessary services rendered to the estate prior to the date of court approval of retention.”

Aside from the issues regarding nunc pro tunc employment in the wake of the Supreme Court’s decision in Acevedo, the court also stated that employment applications filed well after commencing services to the bankruptcy estate subject applications to “heightened scrutiny.” The court also noted that something akin to a sliding scale might be advisable where the longer professionals wait to obtain court approval of their employment, the more scrutiny the application will face from the court. The court encouraged counsel to obtain court approval of employment before providing services to the estate “because it permits close supervision of the administration of an estate, wards off ‘volunteers’ attracted to the kitty, and avoids duplication of effort.”

The court determined that most of the services performed in the bankruptcy case were part of the trustee’s duties rather than work that should be performed by counsel. Based on the nunc pro tunc issues and the actions taken to date in the bankruptcy case, the court denied the employment application without prejudice.

Author’s Comment

Courts have routinely approved nunc pro tunc employment in bankruptcy cases, a practice that will likely change following the Supreme Court’s decision in Acevedo. The Supreme Court’s decision will undoubtedly continue to be explored by bankruptcy courts, with courts likely adopting work-arounds such as the one in Benitez. As the Benitez court pointed out, there are practical reasons why courts permit delays in obtaining employment in bankruptcy cases, including that “[i]n most cases it is impractical and possibly detrimental to the estate for the professional to delay providing what may be critical services until entry of the order approving their retention.” Permitting payment before the date of approved employment is one way in which bankruptcy courts can work within the confines of the Supreme Court’s decision regarding nunc pro tunc orders.

In the Ninth Circuit, the standard applied by bankruptcy courts has been that nunc pro tunc employment “should be limited to situations in which ‘exceptional circumstances’ exist” and that “professionals seeking retroactive approval must satisfy two requirements: they must (1) satisfactorily explain their failure to receive prior judicial approval; and (2) demonstrate that their services benefitted the bankrupt estate in a significant manner.” See In re Atkins, 69 F.3d 970, 973–974 (9th Cir. 1995). The Ninth Circuit has not yet revisited this standard post-Acevedo.

Other issues regarding nunc pro tunc relief are also only beginning to be addressed by bankruptcy courts following Acevedo, with some courts distinguishing Acevedo and other courts raising issues or adopting work-arounds. See, e.g., In re Goldberg, 2020 WL 1526926, (Bankr. E.D. N.C. March 27, 2020) (in regard to a consent order as to relief from stay, in a footnote, the court stated that “unlike the order at issue there, the FCB consent order did not ‘change history,’ but rather solidified for the record an actual set of events. Usage of the term nunc pro tunc here is superfluous as the actual effect of the consent order is to protect FCB from needless collateral attack and bolster rather than change history.”) See also, In re Berk, 2020 WL 1651228 (Bankr. W.D. Mich. April 2, 2020) (in regard to dismissal of a chapter 13 case, “[t]he Debtor asks the court to ‘vacate’ the Dismissal Order, presumably implying that the court and others should treat it as if it never happened, but after the recent decision of the Supreme Court in the Puerto Rico insolvency proceeding, it is not entirely clear that the court has authority to grant nunc pro tunc relief under the circumstances, or at least the court must hesitate before doing so.”)

These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.