When Byron David filed a Chapter 7 bankruptcy case in July of 2018, Donald King was appointed Chapter 7 trustee. King filed an application to retain a law firm as his counsel. The bankruptcy court granted that application.
In April of 2019, David’s case was converted to a case under Chapter 11. King was appointed Chapter 11 trustee. The law firm that had been approved as King’s counsel in the Chapter 7 case, with the knowledge of both David and the bankruptcy court, continued to represent King as Chapter 11 trustee. However, King did not file an application to retain the law firm in his capacity as Chapter 11 trustee.
In May of 2020, David’s case was converted to a case under Chapter 13. The order converting the case provided that the Chapter 11 trustee was “authorized to file…an application to approve the chapter 11 administrative expenses, subject to the rights of all parties to object to such…application.”
King filed applications seeking approval of: (a) employment of the law firm as counsel to the Chapter 11 case retroactive to the conversion of David’s case from Chapter 7 to Chapter 11; and (b) $43,598 in attorneys’ fees and $70 in expenses of the law firm, most of which had been incurred during the Chapter 11 phase of David’s case. David objected on the grounds that the law firm’s engagement terminated when his case was converted from Chapter 7 to Chapter 11 and that King had not sought or obtained the bankruptcy court’s approval of the employment of the firm by King in his capacity as Chapter 11 trustee. The bankruptcy and district courts overruled David’s objection, approved the employment of the firm as counsel to the Chapter 11 trustee, and awarded the requested fees and expenses.
In its July 26, 2024 decision in David v. King, the United States Court of Appeals for the Fourth Circuit reversed the lower court decisions. Looking to the plain language of the Bankruptcy Code, the Court noted that Code Section 348(e) provides that conversion of a case from one Bankruptcy Code Chapter to another “terminates the service of any trustee or examiner that is serving in the case before such conversion.” It then said that the language in Code Section 327(a) providing that “the trustee, with the court’s approval, may employ one or more attorneys” “contemplates that one trustee might employ professionals.” In the Court’s view, “Interpreting ‘the trustee’ to mean a single, current officeholder also makes sense from a temporal standpoint.” Had Congress intended for both a current trustee and a former trustee to be able to apply to employ professionals, “it easily could have used words pointing backwards, like ‘the current or former trustee,’ to make that intent clear.”
These Code Sections, taken together, resulted in King being “a day late and a dollar short” in seeking to employ the law firm as counsel to the Chapter 11 trustee and to have fees and expenses incurred during the Chapter 11 phase of David’s case approved. King’s services as “the” Chapter 7 trustee terminated when David’s case was converted from Chapter 7 to Chapter 11. King’s services as “the” Chapter 11 trustee terminated when David’s case was converted from Chapter 11 to Chapter 13. As Section 327(a) authorizes only “the” trustee to employ professionals and King was not “the” Chapter 11 trustee when he sought approval of the law firm’s employment as counsel to the Chapter 11 trustee, the Bankruptcy Code did not permit King to employ the firm as counsel to the Chapter 11 trustee or to have its fees and expenses approved.
King argued that courts regularly approve the employment of professionals in bankruptcy cases retroactively, relying on their equitable powers. The Fourth Circuit said that “if we were permitted to use equity to resolve this appeal, King’s argument might be compelling.” However, the Fourth Circuit said that all of the cases cited by King in which employment had been approved retroactively involved “a current and active trustee filing an after-the-fact application seeking retroactive approval, not a former trustee like King.” As equitable powers “must and can only be exercised within the confines of the Bankruptcy Code” and the Code only authorizes “the trustee” to employ professionals, King’s appeals to equity were unavailing.
In a dissenting opinion, Judge Wilkinson said that the majority “makes too much of the words ‘the trustee.'” He said:
The majority’s reading [of Section 327(a)], in my view, extends a faux textualism to the point of hollow formalism, which, paradoxically, forecloses more natural textual readings. When equity merges with textualism, we shouldn’t pass it up.
In Judge Wilkinson’s view:
Rather than divest bankruptcy courts of their equitable discretion when considering fee applications like the one before us, I would leave open a path to fair compensation for work fairly done. An honest day deserves an honest dollar.
The majority opinion acknowledges that neither the Fourth Circuit nor any other Circuit had previously addressed the issue of whether a former trustee may apply for “retroactive approval to employ professionals and seek their compensation under §330 for work performed while he was the acting trustee.” Time will tell whether the Fourth Circuit’s first word on the issue will be the last word.