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http://laws.findlaw.com/4th/011779pv3.html |
Petition for cert granted by order
filed 3/10/03
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
------------------------------------------------*
In Re: EQUIPMENT SERVICES,
INCORPORATED,
Debtor.
UNITED STATES TRUSTEE, No. 01-1779
Plaintiff-Appellant,
v.
EQUIPMENT SERVICES, INCORPORATED,
Defendant-Appellee.
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------------------------------------------------*
In Re: EQUIPMENT SERVICES,
INCORPORATED,
Debtor.
UNITED STATES TRUSTEE, No. 01-1780
Plaintiff-Appellee,
v.
EQUIPMENT SERVICES, INCORPORATED,
Defendant-Appellant.
------------------------------------------------*
Appeals from the United States District Court for the Western District of Virginia, at Abingdon. James P. Jones, District Judge. (CA-00-143, BK-98-4851)
Argued: April 2, 2002
Decided: May 31, 2002
Before NIEMEYER, WILLIAMS, and MICHAEL, Circuit Judges.
____________________________________________________________
Affirmed in part and reversed in part by published opinion. Judge
Niemeyer wrote the opinion, in which Judge Williams joined. Judge
Michael wrote an opinion concurring in part and dissenting in part.
____________________________________________________________
COUNSEL
ARGUED: P. Matthew Sutko, Office of the General Counsel, Execu-
tive Office for United States Trustees, UNITED STATES DEPART-
MENT OF JUSTICE, Washington, D.C., for Appellant. John Michel
Lamie, BROWNING, LAMIE & GIFFORD, P.C., Abingdon, Vir-
ginia, for Appellee. ON BRIEF: Joseph A. Guzinski, Acting General
Counsel, Office of the General Counsel, Executive Office for United
States Trustees, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C.; Margaret K. Garber, Trial Attorney, Office of the
United States Trustee, UNITED STATES DEPARTMENT OF JUS-
TICE, Roanoke, Virginia; David R. Duncan, Regional Assistant
United States Trustee, Office of the United States Trustee, UNITED
STATES DEPARTMENT OF JUSTICE, Columbia, South Carolina,
for Appellant.
____________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
John M. Lamie, an attorney retained to represent Equipment Ser-
vices, Inc. in bankruptcy, applied to the bankruptcy court for the pay-
ment of his legal fees incurred (1) pre-petition, (2) during the Chapter
11 proceeding, and (3) after conversion to a Chapter 7 proceeding.
Applying the current version of the Bankruptcy Code (as amended in
1994), 11 U.S.C. § 330(a) (2000), we affirm the district court's
approval of fees incurred before the conversion to Chapter 7 and
reverse its approval for fees incurred after. In reaching this conclu-
sion, we reject Lamie's argument that § 330(a) included a "scrivener's
2
error" when it was amended in 1994 to delete the "debtor's attorney"
from the list of persons eligible to be paid from bankruptcy estate, and
we join two circuits that have reached the same conclusion. Regret-
fully, this decision also widens the split on this issue with three other
circuits.
I
Equipment Services, Inc. retained John Lamie to prepare for the
company a voluntary petition for relief under Chapter 11 of the Bank-
ruptcy Code and to represent the company in the bankruptcy proceed-
ings. Equipment Services paid Lamie a $6,000 "retainer," of which
$1,000 was used to pay the fees and costs of filing the Chapter 11
petition. Consistent with the arrangement reached with Equipment
Services, Lamie deposited the remaining $5,000 in his client escrow
account, to be drawn upon as Lamie earned fees. This retainer
arrangement was not documented, but Lamie explained it to the bank-
ruptcy court as follows:
The Court: What was your understanding, as far as the
retainer was concerned?
Mr. Lamie: Well, the retainer was to pay me in advance
for fees that I would earn during the case,
Your Honor. And it was to assure some pay-
ment of those fees. That is the reason. That is
the way we explained to the client.
The Court: Was it your understanding that any unused fees
at the end of the case would be, in effect,
refunded back to the Debtor?
Mr. Lamie: Oh, it would be the Debtor's property at the
end of the case, yes, Your Honor.
The Court: So, the effect it [sic] to protect you . . . you
know, your ability to get paid, is that what you
were doing?
3
Mr. Lamie: Yes. Yes, the money was put into trust and is
billed against it. That is the way we have han-
dled it.
Lamie filed the Chapter 11 petition on December 24, 1998, and,
pursuant to Federal Rule of Bankruptcy Procedure 2016(b), he
informed the bankruptcy court that he had received the remaining
$5,000 from Equipment Services. He also obtained the bankruptcy
court's permission to represent Equipment Services as the debtor-in-
possession. Thereafter, during the Chapter 11 proceeding and before
it was converted into a Chapter 7 proceeding, Lamie earned $1,325
in fees and incurred $3.85 in costs.
On March 17, 1999, on the motion of the United States Trustee,
Equipment Services' Chapter 11 proceeding was converted into a
Chapter 7 proceeding, and Robert E. Wick, Jr., was appointed to
administer the bankruptcy estate. Lamie earned another $1,000 repre-
senting Equipment Services during the Chapter 7 proceeding. On June
5, 2000, Lamie filed an application with the bankruptcy court, seeking
approval of attorneys fees in the amount of $2,325 ($1,325 earned
during the Chapter 11 proceeding and $1,000 earned during the Chap-
ter 7 proceeding) and $3.85 in costs incurred during the Chapter 11
proceeding. The United States Trustee objected to the award of fees
to the extent that they included compensation for services rendered
after the case was converted to a Chapter 7 proceeding. The Trustee
argued that 11 U.S.C. § 330(a) "makes no provision for counsel of the
debtor to be compensated by the estate" in a Chapter 7 proceeding.
Moreover, the Trustee asserted that the application for fees did not
specify what benefit the estate, as distinct from Equipment Services,
received as the result of Lamie's work.
The bankruptcy court agreed with the Trustee that, under 11 U.S.C.
§ 330(a), a debtor's attorney is not authorized to be paid funds from
the bankruptcy estate for services rendered after the case is converted
to a Chapter 7 proceeding. The court nonetheless awarded Lamie all
of his requested fees, in the amount of $2,325, plus $3.85 in costs,
concluding that the pre-petition retainer held by Lamie was property
of the bankruptcy estate only to the extent that it exceeded the total
fees allowed to the debtor's counsel for all services rendered in the
case, including services rendered after the Chapter 7 conversion.
4
The United States Trustee appealed this ruling to the district court,
and Lamie cross-appealed the bankruptcy court's ruling that 11
U.S.C. § 330(a) prohibits a debtor's attorney from obtaining compen-
sation from a Chapter 7 estate. The district court affirmed the bank-
ruptcy court on both issues, and the parties filed these cross-appeals,
raising two issues: (1) whether 11 U.S.C. § 330(a) (2000) allows a
Chapter 7 debtor's attorney to be compensated from the estate; and
(2) whether Lamie was entitled to deduct his post-Chapter 7 fees from
the retainer notwithstanding any lack of authorization from § 330(a)
to pay the debtor's attorney from the bankruptcy estate.
II
We first resolve whether 11 U.S.C. § 330(a) (2000) allows a Chap-
ter 7 debtor's attorney to be compensated from the bankruptcy estate,
an issue on which the courts of appeals have split. Both the bank-
ruptcy court and the district court concluded that the plain language
of § 330(a) does not authorize a debtor's attorney to be compensated
from the estate in a Chapter 7 proceeding. Lamie contends that these
courts' conclusions fail to recognize that when the Bankruptcy Code
was amended in 1994, Congress made a scrivener's error in omitting
authorization to pay fees to the debtor's attorney from a Chapter 7
estate - an authorization that existed prior to the 1994 revisions.
The 1986 version of § 330(a) stated in relevant part:
(a) After notice to any parties in interest and to the United
States trustee and a hearing, and subject to sections 326,
328, and 329 of this title, the court may award to a trustee,
to an examiner, to a professional person employed under
section 327 or 1103 of this title, or to the debtor's attorney
-
(1) reasonable compensation for actual, necessary
services rendered by such trustee, examiner, pro-
fessional person, or attorney, as the case may be,
and by any paraprofessional persons employed by
such trustee, professional person, or attorney, as
the case may be, based on the nature, the extent,
and the value of such services, the time spent on
5
such services, and the cost of comparable services
other than in a case under this title.
11 U.S.C. § 330(a) (1988) (emphasis added). The Bankruptcy Reform
Act of 1994 amended § 330(a) to read in relevant part as follows:
(a)(1) After notice to the parties in interest and the United
States Trustee and a hearing, and subject to sections 326,
328, and 329, the court may award to a trustee, an examiner,
a professional person employed under section 327 or 1103
-
(A) reasonable compensation for actual, necessary
services rendered by the trustee, examiner, profes-
sional person, or attorney and by any paraprofes-
sional person employed by any such person.
11 U.S.C. § 330(a) (2000). Thus, § 330(a), as revised in 1994, omits
the phrase "or the debtor's attorney" from the list of persons to whom
a court may award "reasonable compensation" from the bankruptcy
estate for services rendered in a Chapter 7 proceeding.
Lamie argues that the deletion of the reference to debtor's attorneys
was inadvertent and that the omission renders the statute ambiguous,
permitting courts to look to the legislative history in interpreting the
statute. He maintains that the ambiguity arises from the fact that the
1994 version, while omitting "debtor's attorney" from its enumeration
of persons whom bankruptcy courts can compensate from the estate,
nonetheless retains a reference to attorneys in subpart (A). See 11
U.S.C. § 330(a)(1)(A) (2000) (allowing "reasonable compensation for
actual, necessary services rendered by the trustee, examiner, profes-
sional person, or attorney . . ."). Lamie also argues that a grammatical
error supports his conclusion that the 1994 version of § 330(a) is
ambiguous. He notes that there is no conjunction "or" between "ex-
aminer" and "a professional person" in the list of persons authorized
to receive fees in § 330(a)(1), supporting the conclusion that the dele-
tion of "or the debtor's attorney" was inadvertent. Based on this
ambiguity, he maintains that the court should look to the legislative
history and conclude that Congress expressed no intent to omit debt-
or's attorneys from § 330(a) when it enacted the Bankruptcy Reform
6
Act of 1994. Lamie's argument is supported by decisions in three cir-
cuits. See In re Top Grade Sausage, Inc., 227 F.3d 123, 130 (3d Cir.
2000) (holding that Chapter 7 debtor's attorneys may be compensated
from the estate because the current version of § 330 is ambiguous and
"the legislative history does not manifest an intent by Congress to
change the long-standing practice of compensating debtors' attor-
neys"); In re Century Cleaning Servs., Inc., 195 F.3d 1053, 1056-61
(9th Cir. 1999) (finding § 330 to be "substantially ambiguous" and
concluding that Chapter 7 debtor's attorney may be compensated
from the estate based on legislative history and policy consider-
ations); see also In re Ames Dep't Stores, Inc., 76 F.3d 66, 72 (2d Cir.
1996) (holding that the omission of debtor's attorney from § 330 was
inadvertent and noting that "[w]here the benefits of services to the
estate are the same, it makes no sense to treat performances of such
benefits by debtors' attorneys differently than performances by other
retained professionals").
On the other hand, the Trustee argues that the plain language of
§ 330(a), as it is now written, does not authorize compensation from
the estate for the debtor's attorney in a Chapter 7 proceeding and that
we should enforce the statute in its current form. As written,
§ 330(a)(1) plainly limits recovery of fees to "trustees," "examiners,"
and "professional persons employed under section 327 and 1103."
While an attorney may be compensated from the estate as a profes-
sional person employed by the Trustee under § 330(a)(1)(A), he is not
directly payable as the debtor's attorney.
The Trustee also asserts that there are policy reasons supporting the
1994 change. He points out that in Chapter 7 proceedings, unlike pro-
ceedings under Chapters 11, 12, and 13, the debtors and creditors do
not act like a team. Moreover, in a Chapter 7 proceeding, the Trustee
is authorized to hire attorneys at estate expense as needed to help liq-
uidate the estate, negating the need for the assistance of the debtor's
attorney. Finally, the Trustee points out that in a Chapter 7 proceed-
ing, a debtor's attorney cannot do the type of good work that could
enlarge the estate in a Chapter 11 proceeding because a Chapter 7
proceeding is a zero-sum game. Inherent in the Trustee's argument is
the fact that, unlike a proceeding under Chapter 11, where the debtor-
in-possession is the trustee of the estate, in a Chapter 7 proceeding the
debtor and the Trustee are distinct. In sum, the Trustee argues that
7
Congress deliberately, and for good reason, excluded the debtor's
attorney from the list of parties that may be compensated from the
debtor's estate in a Chapter 7 proceeding. The Trustee's argument is
supported by decisions in two circuits. See In re Am. Steel Products,
Inc., 197 F.3d 1354, 1355-56 (11th Cir. 1999) (finding § 330 to be
unambiguous and holding that a debtor's attorney cannot be compen-
sated from the estate in a Chapter 7 proceeding); In re Pro-Snax Dis-
tributors, Inc., 157 F.3d 414, 424-26 (5th Cir. 1998) (recognizing the
likelihood that Congress inadvertently deleted debtor's attorneys from
§ 330, but nonetheless finding the language of the statute to be unam-
biguous in its exclusion of debtor's attorneys from those parties that
may be compensated from the estate).
While we recognize that the circuits are split and that arguments
may reasonably be made that Congress made an inadvertent error in
amending § 330(a), we conclude that we should follow the plain lan-
guage of the 1994 version of § 330(a), particularly because applica-
tion of that plain language supports a reasonable interpretation of the
Bankruptcy Code. The 1994 version clearly omits the prior authoriza-
tion to compensate the debtor's attorney from a Chapter 7 estate. And
the reference to "attorney" in § 330(a)(1)(A) does not make the statute
ambiguous. "[A] professional person employed under section 327 or
1103," 11 U.S.C. § 330(a)(1) (2000), could be the antecedent to "at-
torney" as used in § 330(a)(1)(A), because the Trustee is authorized
to hire an attorney as a professional person. Section 327(a) specifi-
cally states that "the trustee, with the court's approval, may employ
one or more attorneys, accountants, appraisers, auctioneers, or other
professional persons . . . to represent or assist the trustee in carrying
out the trustee's duties under this title." 11 U.S.C. § 327(a) (emphasis
added). While the reference in § 330(a)(1)(A) to "attorney" may be
superfluous, it does not render the statute ambiguous. In addition, the
omission of the conjunction "or" in § 330(a)(1) after the word "exam-
iner," is an oversight that is as consistent with the deliberate deletion
of the words "debtor's attorney" as it is with the inadvertent deletion
of those words from that section. Thus, this oversight does not render
the language ambiguous.
We agree with the Fifth Circuit, that "[w]e must presume . . . that
Congress intended what it said when it revised § 330 to delete any
8
provision for the award of compensation to a debtor's attorney in
. . . a Chapter 7 . . . case." Am. Steel Products, 197 F.3d at 1356.
When a statute is unambiguous, canons of construction prevent us
from considering outside sources, such as legislative history, to
attempt to discern what Congress may or may not have intended to
do. Id.; Pro-Snax Distributors, 157 F.3d at 425.
The current version of § 330(a) has been in force now for eight
years and Congress has not elected to recognize that it made a scriv-
ener's error when it amended the statute in 1994. If Congress did
indeed make an error, the error should be corrected by Congress, not
by us. Because the plain language of § 330(a) as it is now written is
unambiguous and is reasonable in application, we are constrained to
enforce the language as written. Hartford Underwriters Ins. Co. v.
Union Planters Bank, N.A., 530 U.S. 1, 6 (2000). In doing so, we join
the Fifth and the Eleventh Circuits that have done likewise.
III
Despite the district court's conclusion that § 330(a) does not autho-
rize Lamie, as the debtor's attorney, to be compensated from the
bankruptcy estate, the court concluded that the pre-petition retainer
was property of the estate only to the extent that it exceeded the total
fees and services allowed to the debtor's counsel for all services ren-
dered in the case, including services rendered after its conversion to
a Chapter 7 proceeding.
The Trustee appeals this ruling, contending that the retainer
became the property of the bankruptcy estate at the time the original
Chapter 11 petition was filed because it was a "security retainer" and
thus remained the property of the debtor until it was earned by Lamie.
The Trustee therefore argues that any unearned portion of the retainer
became property of the estate when the initial petition was filed, and
Lamie was not entitled to fees from the estate with respect to services
rendered after the Chapter 7 conversion. Lamie, on the other hand,
responds by arguing that all fees with respect to the bankruptcy pro-
ceeding were paid in advance by Equipment Services in the form of
the retainer. Thus, he was entitled to bill all of his fees, including
those incurred after the Chapter 7 conversion, against the retainer. He
asserts that only the portion of the retainer remaining after payment
9
of all attorneys fees and costs belongs to the estate, i.e., $5,000 minus
$2,328.85, or $2,671.15.
The parties do not dispute the general principle that, at the time the
Chapter 11 proceeding was filed, the property of Equipment Services,
"wherever located and by whomever held," became the bankruptcy
estate. 11 U.S.C. § 541(a). And Equipment Services' property inter-
ests at the time it filed the petition are generally determined as a mat-
ter of state law; both parties recognize that "courts look to state law
when determining a debtor's interest in property." See In re Shearin,
224 F.3d 346, 349 (4th Cir. 2000). In this case, the applicable Vir-
ginia law is simply the law of contracts under which fee arrangements
between clients and lawyers are enforced, subject to ethical and pub-
lic policy restrictions not applicable here.
Thus, the question becomes what the arrangement between Lamie
and Equipment Services was, because only with that understood can
we determine whether any amount of the retainer constituted property
of Equipment Services at the time the Chapter 11 petition was filed.
Retainer agreements can take various forms. For example, a retainer
can be paid simply to ensure an attorney's availability to represent the
client, whether or not services are ever performed. Or a retainer can
be a prepayment for all future services to be performed, amounting
to a flat fee. Under either one of these arrangements, the attorney
acquires title to the retainer fee at the time he receives it, regardless
of whether he thereafter performs legal services for the client. See
Indian Motocycle Assocs. v. Mass. Housing Finance, 66 F.3d 1246,
1254 (1st Cir. 1995). On the other hand, if the relationship is a trust
arrangement in which the attorney holds the retainer for the client as
security for the payment of future fees, then the retainer so held, less
any fees charged against it, constitutes the property of the client. See
Indian Motocycle, 66 F.3d at 1255; see also 11 U.S.C. § 541(a).
Indeed, Virginia's disciplinary rules demand that an attorney hold a
retainer of this type in trust for the client. See In re Prudoff, 186 B.R.
64, 67 (Bankr. E.D. Va. 1995) (citing Va. Rules Discip. P. § 9-102).
In this case, the facts relating to the fee arrangement are not in dis-
pute. Lamie was paid $6,000 to secure fees that he thereafter earned,
and under the arrangement, as he earned fees, he became entitled to
pay himself from the $6,000 sum. But until he earned fees, the
10
account remained the property of Equipment Services so that in the
end, if any of the $6,000 remained, Lamie would be required to return
the balance to Equipment Services.
Accordingly, at the commencement of this action, Lamie had
earned, charged, and paid himself $1,000 in fees for the preparation
and filing of the Chapter 11 petition. The remaining $5,000 in
Lamie's trust account therefore became property of the bankruptcy
estate, under 11 U.S.C. § 541(a), when the Chapter 11 petition was
filed.
During the Chapter 11 proceeding, Lamie worked for the debtor-in-
possession, and the bankruptcy court authorized that arrangement.
Accordingly, the sum of $1,325 in fees earned and the $3.85 in costs
incurred by Lamie while Equipment Services was "in Chapter 11"
was payable from the $5,000 held by Lamie as part of the bankruptcy
estate. Payment of that amount has been approved by the bankruptcy
court and the district court, and it is not disputed by the Trustee. Thus,
at the time the Chapter 11 proceeding was converted to a Chapter 7
proceeding, the $5,000 escrow account was subject to charges of
$1,328.85, leaving the remaining $3,671.15 as part of the bankruptcy
estate.
When the Chapter 11 proceeding was converted to a Chapter 7 pro-
ceeding, however, the bankruptcy estate became committed to the
custody and control of the United States Trustee, and the $3,671.15
in Lamie's escrow account remained part of that estate. Under 11
U.S.C. § 330(a), as we have construed it, Lamie could not be paid
fees from the estate while the proceeding was under Chapter 7. More-
over, the Trustee did not exercise his authority to retain Lamie during
the Chapter 7 proceeding. Accordingly, even though Lamie incurred
an additional $1,000 in fees on behalf of Equipment Services after the
Chapter 7 conversion, he was not entitled to recover that amount from
the estate. See Indian Motocycle, 66 F.3d at 1255; In re Prudoff, 186
B.R. at 67.
In sum, of the $6,000 retainer held by Lamie on behalf of Equip-
ment Services, $1,000 was properly paid to him for pre-petition work;
$1,328.85 is payable to him for work performed during the Chapter
11 proceeding; and $3,617.15 belongs to the estate. The judgment of
11
the district court is, accordingly, affirmed in its construction of 11
U.S.C. § 330(a) and insofar as it awarded Lamie fees before the
Chapter 7 conversion and is reversed insofar as it awarded Lamie fees
for work performed after the Chapter 7 conversion.
AFFIRMED IN PART, REVERSED IN PART
MICHAEL, Circuit Judge, concurring in part and dissenting in part:
I respectfully dissent from part II of the majority's opinion, but oth-
erwise concur. Specifically, I agree with the majority's conclusion in
part III of its opinion that the unearned portion of Lamie's retainer
became property of the bankruptcy estate when Equipment Services
filed its Chapter 11 petition. It follows that if Lamie can be compen-
sated at all for the legal services he rendered after the conversion of
the company's bankruptcy proceeding from Chapter 11 to Chapter 7,
his compensation must come from the bankruptcy estate. As the
majority acknowledges, the question of whether 11 U.S.C. § 330(a)
allows a Chapter 7 debtor's attorney to be paid professional fees from
the bankruptcy estate is a close one. Because the arguments on both
sides of this question have been well developed by the majority and
by panels from other circuits, there is nothing left for me to do but
choose a side. I cannot side with the majority. Rather, I agree with the
Third and Ninth Circuits, which hold that when Congress amended
§ 330(a) in 1994, it inadvertently deleted debtors' attorneys from the
existing statutory list of those who could be paid from the bankruptcy
estate for services rendered in bankruptcy proceedings. See In re Top
Grade Sausage, Inc., 227 F.3d 123, 130 (3d Cir. 2000); In re Century
Cleaning Servs., Inc., 195 F.3d 1053, 1061 (9th Cir. 1999). This draft-
ing error should not prevent a Chapter 7 debtor's attorney from being
paid with funds from the estate, just as he could be before the error
occurred.
Here, Lamie is entitled to reasonable compensation from the bank-
ruptcy estate for the legal services he rendered after the Chapter 7
conversion to the extent that those services were "reasonably likely to
benefit the debtor's estate" or were "necessary to the administration
of the case." 11 U.S.C. § 330(a)(4)(ii). Because neither the bank-
ruptcy court nor the district court regarded Lamie's post-Chapter 7
fees as compensation from the bankruptcy estate, they did not evalu-
12
ate his fee application under this standard. Accordingly, I would
vacate the award of attorney's fees to Lamie for his post-Chapter 7
services and would remand for the bankruptcy court to evaluate
Lamie's fee application under the proper standard. I concur in the
majority's opinion insofar as it affirms the award of attorney's fees
to Lamie for his services before the Chapter 7 conversion.
13