Bankruptcy

Amended Bankruptcy Rule 6003 And Chapter 11 Applications For Employment

By Scott Riddle

On December 1, 2007, amended Federal Rule of Bankruptcy Procedure 6003 became effective. It states the following:

Except to the extent that relief is necessary to avoid immediate and irreparable harm, the  court shall not, within 20 days after the filing of the petition, grant relief regarding the following:

(a) an application under Rule 2014;
(b) a motion to use, sell, lease, or otherwise incur an obligation regarding property
of the estate, including a motion to pay all or part of a claim that arose before the
filing of the petition, but not a motion under Rule 4001; and
(c) a motion to assume or assign an executory contract or unexpired lease in
accordance with § 365.

Because of this new Rule, the U.S. Trustee has been objecting to employment applications in Chapter 11 cases to the extent they request that an order be granted immediately.  In the past, it was common for Courts in the Northern District to authorize employment after the motion was filed, subject to any objections that may be filed within twenty days of the order.  The US Trustee has also filed motions for reconsideration when the Court has entered these orders.

Judge Massey recently entered an Order clarifying the Rule, in In re Smith, Ch. 11 Case No. 08-63990 (click here for Order).  The Court granted the US Trustee's Motion for Reconsideration of the original order approving debtor's counsel.

These motions raise a few questions. The first one is whether section 327(a) and
Bankruptcy Rule 6003 mean that in the absence of Court approval, an attorney for a trustee or DIP not yet approved by the Court is disabled from appearing in court, giving legal advice or otherwise representing the estate until after the Court enters an order authorizing the employment. 

A related question is whether a court may retroactively bless the choice of counsel. The short  answers are “no” to the first question and “yes” to the second question. A third question is what to do about the Order entered on March 4. The short answer to that question is to vacate it, even though it will not likely make the slightest bit of difference in this case to Debtor or to his counsel or to any creditor or the U.S. Trustee. ...

This Court has not been able to find a single case that states that even though the trustee filed a timely application to employ, such work  undertaken prior to the entry of the order granting the application is without legal effect or  otherwise improper or may not be compensated. Rather, it has been generally accepted for many  years that bankruptcy courts have the authority to retroactively authorize employment of  professionals. See, e.g., Matter of Arkansas Co., Inc., 798 F.2d 645, 648 (3rd Cir. 1986) (“bankruptcy courts have the power to authorize retroactive employment of counsel and other  professionals under their broad equity power.”). Thus, a delay in entering an order granting such  an application should not concern either the trustee or DIP or counsel, so long as services  rendered in the interim “were reasonably necessary for the due performance of the trustee's duties,
that the professional is licensed or otherwise qualified to render such services, and that the disinterestedness requirements of section 327(a) are not at risk.”

Full post as published by Georgia Bankruptcy Blog on March 18, 2008 (boomark / email).