On Appeal from the United States District Court for the District of New Jersey
BEFORE: BECKER, McKEE and GARTH, Circuit Judges
The question we must answer on this appeal is whether an appointment of special counsel under Section(s) 327(e) of the Bankruptcy Code requires that compensation for special counsel's services be paid from estate funds where no benefit to the bankruptcy estate has been achieved. We hold that Section(s) 330 of the Bankruptcy Code requires that services rendered by special counsel benefit the estate before payment from estate funds may be authorized. Hence, we affirm the district court's order, which had affirmed the bankruptcy court's order denying compensation to special counsel.
In 1985 William Engel was convicted of the murder of his former wife, Xiomara Alvarez. *fn1 The New Jersey Superior Court upheld his conviction, noting that "the voluminous trial record fairly reeks of defendants' guilt." *fn2 In 1986, Jesus Antonio Alvarez, the Administrator of the estate of Xiomara Alvarez, filed a wrongful death action against Engel.
In 1992, Engel settled a dispute over his interest in a partnership with another brother, Richard. Pursuant to that settlement, William Engel is to be paid more than $5 million, payable in monthly installments of approximately $43,000, with a balloon payment of $4.2 million in the year 2004. He is also to receive $1 million in monthly installments of $16,666.66.
Engel's liability in the wrongful death action was established in April 1993.
Late in 1993, in the hopes of securing post-conviction relief from his conviction for murder, Engel sought the services of Robert Hantman, of the law firm Ferrara & Hantman. *fn3 On January 6, 1994, Engel filed for Chapter 11 bankruptcy, retaining the firm of Wasserman, Jurista & Stolz (Wasserman) as counsel for Engel as debtor-in-possession.
On March 21, 1994, when the issue of Hantman's retention was first raised by Jurista of the Wasserman firm, the bankruptcy court warned that criminal services would not be payable from the estate.
On April 13, 1994, debtor-in-possession Engel applied through Wasserman, for bankruptcy court approval of his retention of Hantman as special counsel. On April 14, 1994, David A. Nicolette, attorney for the Alvarez estate, wrote to the bankruptcy court objecting to Hantman's proposed retention. He argued that the criminal services that Hantman would perform would benefit Engel personally, but not the bankruptcy estate. He contended that estate funds could not be used to pay for such criminal services. He also reminded the bankruptcy court of the warning given on March 21, 1994.
On April 19, 1994, Hantman reviewed Nicolette's objections.
On May 16, 1994, the bankruptcy court held a telephone conference to discuss the proposed retention of Hantman and the objections raised by Nicolette. Yablonsky of the Wasserman firm, and Nicolette, on behalf of the Alvarez estate, participated in the conference call.
The next day, on May 17, 1994, the bankruptcy court issued an order approving of the retention of Hantman as special counsel. The May 17 Order reads in pertinent part:
It is, on this 17th day of May, 1994,
Ordered, that the Debtor's proposed retention of the law firm of Ferrara and Hantman, 920 Bergen Avenue, Trust Company Building, Suite 806, Jersey City, New Jersey, as special counsel herein, be and the same is hereby approved; and it is further Ordered, that compensation to such special counsel shall be determined by this Court upon proper application.
Order May 17, 1994 (emphasis added).
In May 1994 Engel paid a retainer of $30,000 from the estate to Hantman. In September 1994, after discovering that the payment had been made, the Alvarez estatefiled a motion to compel Hantman to disgorge the retainer.
Subsequent to an October 13, 1994 hearing on the disgorgement motion, the bankruptcy court ordered Hantman to disgorge the retainer on October 31, 1994. Engel appealed the order to the district court, and the district court affirmed the order of the bankruptcy court.
On May 31, 1995, Hantman filed his first interim fee application for services provided as special counsel in Engel's criminal case. The application sought fees in the amount of $258,667.00, and costs in the amount of $32,791.33.
In July 1995, more than one year after Hantman sought to be retained as special counsel for Engel, Engel's liability in the wrongful death action was established at $5.154 million. On March 15, 1996, the New Jersey Superior Court denied Engel's petition for post-conviction relief and his motion for a new trial.
After holding a hearing on September 6, 1995 on Hantman's fee application, the bankruptcy court found that the services which Hantman had provided in Engel's criminal case had provided no benefit to the bankruptcy estate, and could not, therefore, be paid from estate funds. Hantman filed a motion for reconsideration, which was likewise denied by the bankruptcy court. On December 20, 1995, the bankruptcy court issued opinions on the denial of fees and the motion for reconsideration, and on the following day, December 21, 1995, entered an order denying Hantman's fee request. Hantman appealed that denial to the district court, which affirmed the December 21, 1995 order of the bankruptcy court on April 17, 1996.
Hantman appeals from the April 17, 1996 order of the district court. This court has jurisdiction over the appeal pursuant to 28 U.S.C. Section(s) 158(d).
Our review of the district court's disposition is plenary. The bankruptcy court's legal interpretations are subject to plenary review, the factual findings of the bankruptcy court are reviewed for clear error, and the bankruptcy court's decisions regarding the awarding of fees are reviewed for abuse of discretion. Zolfo, Cooper & Co. v. Sunbeam-Oster Co., 50 F.3d 253, 257 (3d Cir. 1995).
The essence of Hantman's argument on appeal is that "an order under Section(s) 327(e) establishes a legal right to be paid from the estate." *fn4 He argues that it is implicit in the appointment of special counsel that there is a "benefit-to-the-estate."
We reject Hantman's argument, and hold that an order approving of a professional's retention under Section(s) 327 does not establish a right to be paid from the bankruptcy estate under Section(s) 330. Approval under Section(s) 327 establishes only that an attorney may be employed by the debtor in-possession, *fn5 and not that his employment will therefore or thereafter be compensated from estate funds. Compensation from the estate, as we discuss infra, depends on the second look taken by the bankruptcy court as mandated by Section(s) 330, for a determination of "benefit-to-the-estate."
Any debtor-in-possession -- in this case Engel -- must receive court approval in order to employ an attorney or other professional. Otherwise he is not permitted or authorized to retain counsel. This is true regardless of the source of compensation for the attorney so engaged. An attorney whose employment is approved under Section(s) 327 enjoys no presumption that his compensation will be paid from the estate under Section(s) 330. Even if compensation is to come from some source other than the estate, employment of an attorney by the debtor-in-possession must still be approved by the bankruptcy court. *fn6 An attorney whose employment has not been approved under Section(s) 327 can be required to return compensation for the services provided to the debtor-in-possession, *fn7 even though they were paid by third parties and not by the estate. *fn8
A bankruptcy court, even though it has approved employment under Section(s) 327, must once again review any application for compensation. The text of the statute makes this clear. This review must be made under Section(s) 330, when the estate has been benefited and is to pay for the beneficial services, and under Section(s) 329 when compensation is to come from some source outside the estate. Section 330 provides that after "notice to any parties in interest and to the United States trustee and a hearing . . . the court may award . . . to a professional person employed under section 327 . . . reasonable compensation for actual, necessary services rendered," *fn9 and which benefit the estate. *fn10 In the case of compensation which is to come from some non-estate source, the determination would be made solely under Section(s) 329, which empowers the court to review any compensation arrangement between a debtor and an attorney. *fn11
We have consistently rejected the contention that compensation from the estate under Section(s) 330 and approval under Section(s) 327 can be compressed into one step, and we have upheld scrutiny under Section(s) 330 as the mandatory second part of a two-step process. Thus, in In re Arkansas Company, Inc., 798 F.2d 645, 648-49 (3d Cir. 1986), we rejected "the notion that a complete and thorough post-application review may substitute for prior approval in most cases. This approach [i.e., such a substitution] would render meaningless the structure of the Bankruptcy Code and Rules which contain provisions requiring both approval of employment and after the fact approval of compensation. 11 U.S.C. Section(s) 327(a), 1103(a), 330; Bankruptcy Rules 2014(a) [pertaining to disclosure requirements imposed on trustee or debtor-in-possession seeking Section(s) 327 approval], 2016 [pertaining to application for compensation from the estate under Section(s) 330], 2017 [pertaining to bankruptcy court's examination under Section(s) 329 of payments made by debtor to attorney]." *fn12 This concept was best expressed by the court writing in In re Johns-Mansville Corp., 32 B.R. 728 (S.D.N.Y. 1983): "The fact that the Bankruptcy Court, in the later Section 330 proceeding, may choose to award no fees to the five law firms for the services rendered means that the Section 327 approvals are merely preliminary `go aheads' rather than conclusive determinations." Id. at 731.
To accept Hantman's claim that Section(s) 327 approval creates a legal entitlement to payment from estate funds would be to subvert the clear and express intent of Section(s) 330. That section of the Code requires a finding of "benefit-to-the-estate" before estate compensation may be paid to appointed special counsel. This two-step process -- i.e., appointment under Section(s) 327 and then compensation under Section(s) 330, if and only if, "benefit-to-the-estate" is found -- was adopted by Congress to eliminate "abuses and detrimental practices" attributable to "attorney control of bankruptcy cases." *fn13 Such a policy, moreover, comports with the purposes of allowing the bankruptcy court the broad power under Section(s) 329, see n.11 supra, to review payments made by debtors to attorneys, even when those payments are made prior to the filing of a bankruptcy petition. The Revision Notes and Legislative Reports to Section(s) 329 explain that "Payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny."
The scrutiny mandated by Section(s) 329 is stricter still under Section(s) 330. The attorney -- such as Hantman -- whose employment is approved under Section(s) 327 and who seeks fees from the estate under Section(s) 330 must show that his services were necessary and benefited the estate, see n.10 supra, despite the approval of his retention under Section(s) 327(e). See In re Arkansas; In re Johns-Mansville, supra.
Indeed, although Hantman argues on appeal that the issue of whether his services were in the interest of the estate was decided when he was approved as special counsel under Section(s) 327, in the proceedings before the bankruptcy and district courts, members of the Wasserman firm agreed that the question of whether Hantman's services actually benefited the estate would ultimately determine the issue of compensation from the estate.
Thus, at the June 5, 1995 hearing on disgorgement of Hantman's $30,000 retainer, in district court, Wasserman conceded that the initial Section(s) 327 approval did not guarantee that Hantman would be paid from the estate: "We are not arguing before you this morning that [the bankruptcy judge] might not, at some point in the proceedings, have the power and the jurisdiction to say that the $30,000 retainer should be disgorged should he find that the retention was inappropriate or that the services performed were not in the best interest of the estate." *fn14 As Wasserman further explained to the district court, Hantman had just filed his interim fee application with the bankruptcy court, and that court would "have an opportunity then, to pass upon the work performed and make a determination with respect to what I believe is the only real issue, and that is, best interests of the estate." *fn15
In a similar vein, Wasserman's brief in opposition to the motion to disgorge the $30,000 retainer explained that the bankruptcy court had made plain that the ultimate decision on entitlement to fees from the estate would not be made until later in the case: "In ruling on the initial objection raised by Alvarez to the retention of special criminal counsel, this Court made clear that, as with the retention of any counsel, the ultimate issue of the allowance of fees are [sic] reserved by the Court until the conclusion of the case." *fn16 In arguing that Hantman should not be required to return the $30,000 retainer, Wasserman -- far from contending that the "best interest" determination had already been made in the court's decision to grant Section(s) 327 approval -- maintained that the issue of compensation was "not yet ripe for adjudication." *fn17
Hantman made a similar argument in support of his motion for reconsideration of the denial of the fee application: "[I]t would be premature to enter an order denying Ferrara and Hantman's Fee Application based in part on the assumption that Judge Harris [of the New Jersey Superior Court] will deny the motion for a new trial in the [post-conviction relief] criminal case." *fn18
Thus, the argument urged upon the bankruptcy court by Hantman at that point was not that it had been determined once and for all that the estate had been benefited at the time of the order granting Hantman Section(s) 327 approval, and that Hantman would be paid from the estate. Rather, Hantman was contending that the bankruptcy court did not yet have enough information regarding the outcome of the criminal case to deny fees.
In the instant case, the bankruptcy court was clearly correct in holding that Hantman, regardless of how he was to be paid, required Section(s) 327 approval before he could be employed by Engel as debtor-in-possession, and in holding that fees could not be awarded pursuant to Section(s) 330, absent a showing of benefit to the estate. In fact, the bankruptcy court specifically referred to our Arkansas decision in explaining the necessity of Section(s) 327 approval before Hantman could perform any services on Engel's behalf:
I felt -- and in case it's not clear on the record, and I think it is, and I -- in every hearing that this issue has come up. But I have felt that it was inappropriate to use estate funds to defend or to affirmatively try to prove a -- a criminal matter. And yet I have consistently said, look, to the extent that Section 327, and following, of the Bankruptcy Code, says you can't do any work without being authorized. And I think there's good law that that is at least to be considered in -- in Arkansas -- the Arkansas case. To that extent, I'll allow them to work. I'm just not going to allow them the money. *fn19
Questions as to who would pay Hantman -- Engel individually *fn20 or the estate -- how much Hantman would be paid, and when, were appropriately deferred by the bankruptcy court until Hantman's fee application was reviewed. We hold that the bankruptcy court did not err in holding that Section(s) 327 approval established only that Engel was permitted to retain Hantman, and not that Hantman would be paid from estate funds for criminal services to be provided to Engel.
Thus, Hantman cannot successfully maintain that the denial of his fee application under Section(s) 330 was inconsistent with his retention as special counsel under Section(s) 327. Nor can he contend that the bankruptcy court's finding that Hantman's services had provided no benefit to the estate, was clearly erroneous.
First, we reject Hantman's argument that the bankruptcy court's denial of compensation under Section(s) 330 was inconsistent with the Section(s) 327 order approving his retention. Apart from the fact that reexamination of Hantman's services for "benefit-to-the-estate" was required under Section(s) 330, the bankruptcy court made clear that it was not, in denying fees under Section(s) 330, also revoking its Section(s) 327 order of retention. *fn21
The circumstances under which the bankruptcy court approved of Hantman's retention, in addition, reveal that the May 17, 1994 order was well within the discretion of the court, even though the court might later deny an application for fees under Section(s) 330. The bankruptcy court had been advised by Wasserman and Hantman that there were sufficient funds to pay all Engel's creditors and obligations, including the fees to be sought by Hantman. *fn22 Under the circumstances of this case the action of the bankruptcy court did not exceed its discretion.
Second, the bankruptcy court did not clearly err in finding that Hantman's services in Engel's criminal case produced no benefit to the estate. *fn23
On March 15, 1996, Judge Harris denied Engel's motion for a new trial, as well as his untimely petition for post-conviction relief, in terms that show that there had never been any chance of post-conviction relief. *fn24 The issue of "benefit-to-the-estate" has thus been put to rest. The view that Engel would obtain a new trial, given Judge Harris's decision, was obviously fanciful:
[B]ecause both Brady [v. Maryland, 373 U.S. 83 (1963)] and Strickland [v. Washington, 466 U.S. 668 (1984)] analyses inquire into probable effects on trial outcomes, I begin by emphasizing this conclusion: my complete reading of the record . . . demonstrates that Engel faced overwhelming evidence of guilt. *fn25
The court concluded that "Engel received a superior defense in a trial environment that scrupulously honored his rights." *fn26 The bankruptcy court properly anticipated such a result in finding that Hantman's services in the criminal matter had not benefited the estate.
Nor did the bankruptcy court reach its conclusion, that Hantman was not entitled to estate monies, casually. In its December opinions the court carefully and meticulously analyzed the three-part standard which evolved from In re Duque, 48 B.R. 965 (S.D. Fla. 1984), In re French, 139 B.R. 485 (Bankr. D.S.D. 1992), and In re United Church of the Ministers of God, 84 B.R. 50 (Bankr. E.D. Pa. 1988), before holding that the services of Hantman in representing Engel as criminal counsel, did not benefit the estate.
The standard to which the bankruptcy court referred, provided:
1. The attorney's employment must be in the best interest of the estate, which means property of estate is threatened and the need for services is real. Employment cannot be based on some `hypothetical or speculative benefit.'
2. Special counsel must provide a benefit to the estate, not merely a personal benefit to the debtor. The benefit is gauged by needs of estate and whether it is directly related to the debtor in possession's performance of duties under the bankruptcy code.
3. Issues regarding debtor's constitutional right to counsel are of concern to the criminal forum and not the bankruptcy court.
Application of that standard to Engel's situation led inexorably to the bankruptcy court's denial of Hantman's fee application. *fn27
The bankruptcy court's finding that Hantman's services did not benefit the estate, in short, ...