Opinion ID: 317782
Heading Depth: 1
Heading Rank: 3

Heading: Fundamental Error of Bankruptcy Court

Text: 34 The basic mistake of the Bankruptcy Court involves an issue of law and procedure. The fundamental error of the Bankruptcy Judge grew out of his mistaken conception that, even though the same party is both debtor and debtor-in-possession, separate counsel must be appointed to represent the debtor-in-possession in all cases. 35 The Bankruptcy Judge expresses this concept in his opinion as follows: 36 'Since, in the opinion of this Court, there is always a possibility, however remote, of conflict of inerest between the separate entities of debtor and debtor-in-possession, this Court has always appointed, upon proper application, separate counsel from that of the debtor. The possibility of conflict is thereby removed to the satisfacton and peace of mind of both entities, the creditors, the public and the Court. The economical spirit of the Bankruptcy Act is also preserved because when one attorney wears two hats by serving two masters, in addition to the possibility of conflict, his fees are based upon the performance of two separate functions.' 37 Appellants assert that the practice of appointing and compensating separate attorneys for the debtor-in-possession and also compensating the privately-retained attorneys for the debtor is unique to the Northern District of Ohio. This court is aware of the distinction between the duties of counsel for the debtor and counsel for a debtor-in-possession, as discussed more fully below, but we disagree with the practice in the Northern District of Ohio. Bankruptcy Judges in other Circuits and Districts also reject this practice. 38 For example, Bankruptcy Judge Asa S. Herzog of the Southern District of New York finds 'absolutely nothing' to support the practice employed in the Northern District of Ohio, saying: 39 'A debtor is defined as a person who could become a bankrupt under 4 of the Act and who files a petition for an arrangement. Where there is no receiver or trustee, the debtor 'shall' continue in possession of his property and 'shall' have the title and exercise the powers of a bankruptcy trustee. Thus, unless there is a receiver or trustee, the debtor automatically becomes a debtor in possession. The debtor and debtor in possession are treated as separate and distinct entities. 40 'But the debtor does not cease to exist as such when he files his petition for arrangement and spontaneously becomes a debtor in possession. The two entities exist side by side until the conclusion of the proceeding. The debtor in possession may be authorized to operate the business and manage the property of the debtor (343), and may be authorized to borrow money, etc. and issue certificates of indebtedness therefor (344), or to lease or sell property of the debtor (313(2)); but it is the debtor who proposes the arrangement (323), is examined at the meeting of creditors (336(3)), and makes the deposit necessary to effect the arrangement (337(2); 362(2)). 41 'Thus the attorney retained to file the petition usually acts in two capacities, concurrently representing the debtor in effecting an arrangement and the debtor in possession in the exercise of the powers of a bankruptcy trustee and in all things in connection with the conduct of the business. 42 'I do not think it was intended that the debtor be represented by one attorney and that in his capacity as debtor in possession, he must be represented by an entirely different attorney. There is absolutely nothing to support such a view. The fact remains, as I have indicated, that the debtor in possession is not a trustee. He may possess the title and powers of a trustee and his position may be 'for all practical purposes' that of a trustee; he may be a 'court officer analogous' to a trustee; but he is not the independent trustee appointed pursuant to 44 of the Act. I cannot conceive of the debtor so dimidiated that he requires different counsel each time he changes hats. 'As a matter of common practice, the attorney representing the debtor and the debtor in possession files a single application reciting all the professional services rendered by him in both capacities.' 43 Herzog, 'Bankruptcy Law-- Modern Trends'. 37 Ref.J. 110-12 (1963). 44 Bankruptcy Judge William Rudin of the Eastern District of New York, states that 'I fix one fee to cover all the services rendered' by the attorney for the debtor and the attorney for the debtor-in-possession. Although there is a statutory distinction between the person designated as attorney for the debtor and the attorney for the debtor-in-possession, Judge Rudin says, 'He is, of course, one and the same person . . .' Rudin, 'Allowance in Chapter XI Proceedings,' 40 Ref.J. 29, 30 (1966). 45 This court strongly disapproves the practice of appointing separate counsel as attorney for the debtor-in-possession and at the same time compensating another attorney at the expense of the bankrupt estate in his capacity as counsel for the debtor for services rendered after the filing of a petition for a plan of arrangement. Hereafter we will not approve this procedure as a general practice in the Sixth Circuit. Only in exceptional circumstances, which we do not now foresee, will this procedure be allowed by this court. The debtor and the debtor-in-possession is one and the same person, although 'wearing two hats' We see no valid reason why, as a general rule, his legal representation in both capacities should not be limited to one attorney or one set of attorneys. In the ordinary situation, as in the instant case, there is no actual or potential conflict of interest requiring or justifying payment for services of separate attorneys. 46 In the present case, however, we are confronted by a situation where an able and experienced Bankruptcy Judge has followed this practice in accodance with previously established precedent in his District at a time when there was no precedent to the contrary in this Circuit. Two sets of attorneys have devoted considerable time and effort in this Chapter XI proceeding which resulted in the confirmation of a Plan of Arrangement continuing the economic life of Cle-Ware and its subsidiaries. The Bankruptcy Judge avoided the considerable expenses of a receivership, yet kept the debtor corporations functioning as a continuing enterprise. 47 Appellants contend that no fee should be allowed to counsel for the debtor. This appears to be a question of first impression in this Circuit and we apply today's rule only prospectively. We are unwilling to make this rule applicable in the present case because of the obvious inequities that would result. 48 Instead we reverse the decision of the District Court and remand with directions to fix a reasonable fee in this particular case for counsel for the debtor and a reasonable fee for counsel for the debtor-in-possession, the total of which shall not exceed a reasonable fee which would be allowable to one attorney, representing the debtor corporations in their capacities as both debtor and the debtor-in-possession. 49 On remand, we direct that an evidentiary hearing be conducted on the objections of the debtor corporation, that counsel be required to substantiate their fee requests under the guidelines set forth in this opinion, and that the objecting parties be afforded the right of cross examination of the claimant attorneys. 50 The procedure to be followed on remand with regard to the respective fees in this particular case is set forth more fully in Sections V and VI of this opinion.