Opinion ID: 3151618
Heading Depth: 2
Heading Rank: 3

Heading: Post-Confirmation Legal Services8

Text: The bankruptcy court determined that confirmation of the Creditors’ Plan did not bar the allowance of attorney’s fees incurred after the confirmation date. It reasoned that the Debtor retained its status as debtor-in-possession even after plan confirmation and could therefore continue to employ Mr. Lazzo under § 327. The court relied primarily on 11 U.S.C. § 1101(1), which defines “debtor in possession” as the “debtor except when a person that has qualified under section 322 of this title is serving as trustee in the case.” It determined that because the liquidating trustee did not qualify as a “trustee” under section 322, the Debtor therefore retained debtor-in-possession status even after confirmation of the Creditors’ Plan. The bankruptcy court further found that Mr. Lazzo’s post-confirmation services remained “necessary to the administration” of the estate. 11 U.S.C. § 330(a)(3)(C). A majority of the BAP disagreed. It concluded that although the bankruptcy court’s construction of § 1101(1) was reasonable, if one considered Title 11 as a whole there were other ways to terminate a debtor’s status as debtor-in-possession besides appointment of a qualified trustee. The BAP reasoned that “[t]o remain a 8 Mr. Lazzo contends that appellant RHB lacks standing to challenge the portion of his requested fee award that exceeds RHB’s pro rata responsibility for allowed administrative claims under the Creditors’ Plan. The trustee, who is defending this appeal and previously appealed to the BAP, is responsible for payment of all allowed administrative claims and therefore has standing to challenge the entire amount. Moreover, if Mr. Lazzo’s fees were not allowed, the funds would be re-vested in the Trust and used to pay creditors, including RHB. We conclude that the entire amount of the requested fee award is before us on appeal. - 12 - debtor-in-possession after confirmation, the debtor must have at least some rights, powers, and duties of a bankruptcy trustee under [11 U.S.C.] § 1107.” BAP Opinion at 24. It concluded that under the terms of the Creditors’ Plan and Confirmation Order, the Debtor’s status as debtor-in-possession terminated upon confirmation, whereupon the Debtor was stripped of all rights, powers, and duties of a bankruptcy trustee, including the ability to seek payment from the estate for postconfirmation attorney’s fees. The BAP’s analysis is persuasive. The Supreme Court has held that when a debtor’s status as debtor-in-possession terminates, this also terminates an attorney’s authorization under § 327 to provide service as an attorney for the debtor-in-possession. Lamie v. U.S. Tr., 540 U.S. 526, 532 (2004).9 Thus, as the BAP recognized, the relevant issue here is whether the Debtor retained its status as debtor-in-possession after confirmation of the Creditors’ Plan. The bankruptcy court appears to have assumed that the appointment of a qualified trustee was the only way to terminate the debtor’s status as debtor-in-possession. But that is not what § 1101(1) says. 9 This reasoning effectively undercuts the bankruptcy court’s alternative reasoning, that even if “the confirmation of the liquidating plan terminated Debtor’s ability as the debtor-in-possession to take actions beneficial to the estate, the Code nevertheless allows for compensation for the post-confirmation services of counsel appointed under § 327 that are necessary for the administration of the estate.” Aplt. App. at 883-84. To be compensated from the estate, such services must be both authorized and necessary. See 11 U.S.C. § 330(a)(1), (a)(3)(C). Here, even if necessary, they were not authorized. - 13 - By its plain language § 1101(1) eliminates the debtor-in-possession’s ability and duty to perform the functions and duties of a trustee in cases where a qualified trustee is serving those functions. Section 1101(1) thus serves the salutary purpose of avoiding the logistical difficulties inherent in having two different and possibly conflicting “trustees” serving simultaneously. But to read § 1101(1) as empowering the debtor with perpetual debtor-in-possession status in every case where a trustee has not been formally appointed reads more into the statute than is actually there. As case law makes clear, debtor-in-possession status terminates not only upon appointment of a qualified trustee, but also upon confirmation of a Chapter 11 plan. See, e.g., Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008) (“Upon confirmation of the plan, the estate ceased to exist, and [the reorganized debtor] lost its status as a debtor ‘in possession.’”). Mr. Lazzo attempts to distinguish United Operating, reasoning that it “involved a reorganized debtor, not a liquidating agent.” Aplt. Reply Br. at 8. But that is not a significant distinction under the circumstances of this case, particularly given the provisions of the Creditors’ Plan.10 10 Mr. Lazzo argues that a liquidation trust is different from a reorganized debtor because “a liquidation plan does not create a second, separate entity” upon confirmation that is no longer administered by the debtor-in-possession. Aplt. Reply Br. at 9. But there is authority that a liquidating trust can do just that. See Holywell Corp. v. Smith, 503 U.S. 47, 55 (1992) (stating that where liquidating trust was established by Chapter 11 reorganization plan and vested with estate assets, “[t]he plan did not simply substitute the trustee for [the debtor-in-possession] as the (continued) - 14 - “[F]or purposes of Chapter 11 bankruptcies, a ‘debtor-in-possession’ is a debtor who remains in possession of the pre-petition assets and administers them for the benefit of the creditor body pursuant to 11 U.S.C. § 1107.” Bowers v. Atlanta Motor Speedway, Inc. (In re SE Hotel Props. Ltd. P’ship), 99 F.3d 151, 152 n.1 (4th Cir. 1996) (emphasis added). Once the Creditors’ Plan was confirmed, the Debtor (which had been dissolved) no longer satisfied this description of a debtor-in-possession. Nor has Mr. Lazzo made a persuasive case that the Debtor continued to perform the essential duties of a trustee as described in 11 U.S.C. § 704. The Creditors’ Plan called for all of the Debtor’s secured property to be transferred to the secured creditors, and the unsecured property to be placed into the Trust. It vested the Trust with “all rights and powers of a trustee under the Bankruptcy Code,” Aplt. App. at 458, and charged it with paying “all allowed administrative and priority claims,” id. at 615. It further provided that the Trustee would have the authority to liquidate the unsecured property and to employ attorneys to assist him, without the need for court approval. The Debtor was deemed dissolved as of the plan’s confirmation date. The Creditors’ Plan as amended did assign the Debtor (acting through the Schupbachs) responsibility for certain functions in connection with liquidation of the Trust property. The plan provided that: fiduciary of the estate. Rather, it created a separate and distinct trust holding the property of the estate and gave the trustee control of this property.”). - 15 - The Schupbachs will cooperate with all secured creditors to whom properties are transferred by inter alia (i) turning over all records as to the properties, including but not limited to all written leases, lease applications and documents/information, property tax statements, correspondence from government agencies respecting condition of the properties and/or eminent domain, records as to collection of past due and current rents, and documents on any collection or eviction lawsuits; (ii) meeting with and responding to questions of the creditors respecting the properties; and (iii) such cooperation will be extended to all agents of the secured creditors, including any rental agents as may be designated. The Debtor will also, through the Schupbachs, execute quit claim deeds to the various properties transferred . . . to the extent such deeds are provided by the secured creditors. Creditors receiving such deeds will promptly file the same. Id. at 617. But these mostly ministerial duties fell far short of encompassing the responsibilities of a debtor-in-possession. The bankruptcy court erred in concluding that “[w]hen the liquidating plan was confirmed and the liquidating trust created, Debtor as the debtor-in-possession was not relieved of the duties . . . [of a trustee, as applicable to debtors-in-possession],” Id. at 883. The Debtor’s obligation to cooperate with the Trustee and the bankruptcy court to carry out the terms of the Creditors’ Plan, see 11 U.S.C. § 1142, did not allow the Debtor to retain its status as debtor-in-possession. For the foregoing reasons, we affirm the BAP’s decision reversing the bankruptcy court’s determination allowing an award of post-confirmation fees.