Opinion ID: 504391
Heading Depth: 1
Heading Rank: 3

Heading: Retroactive Approval

Text: A. 22 Our analysis of whether the bankruptcy court, as affirmed by the district court, properly approved Simon's appointment under section 327(a) 7 nunc pro tunc is informed in large measure by our recent decision in In re Arkansas, 798 F.2d 645 (3d Cir.1986), handed down after the bankruptcy court's decision in this case. In Arkansas, we held that bankruptcy courts may, in extraordinary circumstances, grant retroactive approval of professional employment. Id. at 646 (emphasis added). We adopted a two-part test to determine the propriety of such retroactive approval: first, the bankruptcy court must find, after a hearing, that the applicant satisfies the disinterestedness requirements of section 327(a) and would therefore have been appointed initially; and, second, the court must, in the exercise of its discretion, determine that the particular circumstances presented are so extraordinary as to warrant retroactive approval. Id. at 650. 23 To guide the bankruptcy court in the exercise of its discretion regarding the existence of extraordinary circumstances, we directed it to consider such factors as: 24 whether the applicant or some other person bore responsibility for applying for approval; whether the applicant was under time pressure to begin service without approval; the amount of delay after the applicant learned that initial approval had not been granted; the extent to which compensation to the applicant will prejudice innocent third parties; and other relevant factors. 25 Id. 26 Applying these factors in Arkansas, we upheld the district court's decision that no extraordinary circumstances justified the retroactive approval of attorneys for a creditors committee, where the attorneys were experienced in bankruptcy practice and had alleged no time pressure that would justify their failure to apply for approval, but simply, through oversight, had neglected to do so. Id. at 650-51. Noting that we had previously stated that the prior approval requirement is a means of 'ensuring that the court may know the type of individual who is engaged in the proceeding, their integrity, their experience in connection with work of this type, as well as their competency concerning the same,'  id. at 648, (quoting In re Hydrocarbon Chemicals, Inc., 411 F.2d 203, 205 (3d Cir.) (in banc), cert. denied, 396 U.S. 823, 90 S.Ct. 66, 24 L.Ed.2d 74 (1969)), we concluded in Arkansas that the prophylactic statutory rule that approval must be sought in advance of performance of services is too strong to be overcome by a mere showing of oversight. Id. at 651. 27 AirLease, Swig, and Greycas contend that Simon would not have met the requirements of section 327(a) for appointment of professionals even had approval of his appointment been sought in a timely fashion. 8 They argue that because Simon has a potential claim against AirLease arising out of his 1983 settlement agreement with AirLease's parent, he is not a disinterested person eligible for appointment under section 327(a). 9 Such a dispute demonstrates the congressional wisdom in requiring prior approval of professional persons with the attendant notice to creditors. Had prior approval been sought in this case, the issue of Simon's disinterestedness would have been brought out in the open during the hearing and resolved prior to his having performed the services for which he now seeks a fee. Because we conclude, after applying the relevant factors in this case, that there were no extraordinary circumstances to support his nunc pro tunc appointment, we do not reach the issue of Simon's disinterestedness. B. 28 The two factors enumerated in Arkansas of particular relevance here are who bore the responsibility for compliance with the statutory mandate that prior approval be sought from the court for employment of a professional and whether the applicant was under such time pressure to begin services that prior approval could not reasonably be sought. Simon argues that under the Bankruptcy Code and Rules AirLease bore the responsibility for seeking court approval of the appointment of professional persons, and that it was only through AirLease's oversight that the petition for approval was never filed. Although Bankruptcy Rule 2014(a) states, in relevant part, that [a]n order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professional persons pursuant to Sec. 327 or Sec. 1103 of the Code shall be made only on application of the trustee or committee, this requirement cannot relieve the professional person who seeks appointment from responsibility to know that such approval is necessary and to insure that it has in fact been sought. See In re Carolina Sales Corp., 45 B.R. 750, 755 (Bankr.E.D.N.C.1985). Otherwise, the prior approval requirement of the Code could be avoided for all non-attorney professional persons merely by citing the debtor's oversight, with the attendant difficulty of determining whether it was inadvertent or not. To the extent that the bankruptcy court held that Simon, as a non-attorney, cannot be held to be charged with the knowledge of this requirement, AirLease, 59 B.R. at 775, it committed legal error. 29 Simon is a sophisticated businessman who was represented by attorneys throughout the course of his dealings with AirLease. This is not a case in which a person, completely ignorant of the requirements of the Bankruptcy Code and without legal representation, justifiably relied on the superior expertise of another. See In re Freehold Music Center, Inc., 49 B.R. 293 (Bankr.D.N.J.1985). The evidence here suggests that Simon's attorney was familiar with the requirements of the Bankruptcy Code, including the requirements of section 327(a). In the November 28, 1984 letter written by his attorney to AirLease, Simon agreed to limit the request for court approval to the lease only, reserving questions regarding the distribution or allocation of the proceeds from the Aloha Airlines lease. App. at 792. Even if Simon believed that AirLease had the responsibility for filing the application, we see no basis to relieve Simon from his obligation under section 327(a) to insure that the application was timely filed. 30 Simon argues that the second factor articulated in Arkansas--whether the applicant was under time pressure to begin services--supports the nunc pro tunc approval because Aloha Airlines needed the use of the plane for the 1984 Christmas season. The bankruptcy and district courts also found that Simon operated under severe time pressures to locate another lessee for the aircraft. In re F/S AirLease II, Inc., 84 B.R. 389, 393 (W.D.Pa.1986). This finding reflects a misunderstanding of the time pressure factor, which relates solely to whether there is sufficient time to request court approval before the professional's services must begin. 31 Simon began negotiating with AirLease in July 1984 regarding his services and compensation therefor. AirLease declared bankruptcy on August 3, 1984. Simon first contacted Aloha in September 1984, and the approval of the lease was sought from the bankruptcy court in the end of November 1984. Simon did not seek the requisite prior approval from the court when AirLease's bankruptcy began, nor did he seek approval at any time during the four-month period in which he was performing his services. Not until June 3, 1985--almost a year from when he had commenced his services and a full seven months from the date he had concluded them--did Simon petition the court for payment of administrative expenses. The estate's need to have the plane expeditiously remarketed can hardly excuse Simon's extreme laxity in seeking approval. 32 The time pressures on which Simon and the courts below rely are simply not the sort of exigencies contemplated by Arkansas. In Arkansas we were referring to an emergency situation in which services had to be initiated within a very short period before approval could be sought. We cited, as an example, In re Bible Deliverance Evangelistic Church, 39 B.R. 768 (Bankr.E.D.Pa.1984), in which counsel was retained by a creditors committee only two weeks before a crucial meeting and was required to begin immediate preparation. Under these circumstances, the bankruptcy court found that counsel had acted with reasonable promptness in seeking court appointment within two weeks of being retained. 39 B.R. at 772. The facts of this case do not approximate the exigent time pressures presented in Bible, and, indeed, do not indicate that Simon was faced with any time pressure at all with respect to seeking the court's approval of his prospective services. 33 Simon contends that his appointment should be approved because of his successful efforts in securing the Aloha lease. The bankruptcy court stated, in a finding amply supported by the record, that, [w]ere it not for the efforts of S-J [Simon] in obtaining this lease, there would be no estate with which a reorganization could be effected. 59 B.R. at 777. 34 In most cases in which nunc pro tunc approval has been sought, the applicant has performed services of value. To this extent, there will be some unjust enrichment if compensation is not authorized. Because that is the unavoidable consequence of the statutory requirement of prior approval, we agree with the statement by the court in In re Mason, 66 B.R. 297, 307 (Bankr.D.N.J.1986), that the fact that the applicant's services were beneficial to the debtor's estate is immaterial to this court's decision regarding nunc pro tunc approval. 35 Simon treats the prejudice factor referred to in Arkansas as relating to prejudice vel non to any party from Simon's failure to seek prior approval. Simon and Greycas thus dispute whether Greycas, if permitted to do so by the bankruptcy court, could have performed equivalent services to Simon's at less cost. This issue is irrelevant because the statutory requirement of prior approval is not limited to those cases in which there would otherwise be prejudice. The prejudice factor to which we referred in Arkansas was only whether, in extraordinary circumstances cases, there would be prejudice if compensation were paid after nunc pro tunc employment were approved. Arkansas, 798 F.2d at 650. We do not reach that factor in this case because a review of the relevant factors shows that there is no evidence in this record of the extraordinary circumstances that would warrant nunc pro tunc approval of Simon's employment.