Court Opinion

ID: 3151618
Source: CourtListenerOpinion
Date Created: 2015-11-03 17:01:03.616082+00
Date Added: 2024-06-11T12:15:27.052139
License: Public Domain

FILED
                                                                 United States Court of Appeals
                                        PUBLISH                          Tenth Circuit

                        UNITED STATES COURT OF APPEALS                November 3, 2015

                                                                     Elisabeth A. Shumaker
                                 FOR THE TENTH CIRCUIT                   Clerk of Court

In re: SCHUPBACH INVESTMENTS,
L.L.C.,

       Debtor.
                                                           No. 14-3277
------------------------------

MARK J. LAZZO, P.A.; MARK J.
LAZZO; SCHUPBACH
INVESTMENTS, L.L.C.,

       Appellants,

v.

ROSE HILL BANK; CARL B. DAVIS,
Trustee of the Schupbach Investments
Liquidation Trust,

       Appellees.

              APPEAL FROM THE UNITED STATES BANKRUPTCY
                APPELLATE PANEL FOR THE TENTH CIRCUIT
                     (BAP Nos. 13-077-KS and 13-078-KS)

Submitted on the briefs:*

       *
       After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument.
Mark J. Lazzo, Mark J. Lazzo, P.A., Wichita, Kansas, for Appellants.

J. Michael Morris, Klenda Austerman, LLC, Wichita, Kansas, for Appellees.

Before TYMKOVICH, Chief Judge, HOLMES and McHUGH, Circuit Judges.

TYMKOVICH, Chief Judge.

      Mark J. Lazzo served as legal counsel for Schupbach Investments, L.L.C.

(Debtor), in its Chapter 11 bankruptcy case. After confirming a liquidation plan for

the Debtor, the bankruptcy court entered a final fee order approving certain disputed

fee applications filed by Mr. Lazzo. Rose Hill Bank (RHB), a creditor of the estate,

and Carl B. Davis, the trustee of the Schupbach Investments Liquidation Trust

(Trust), appealed the final fee order to the Bankruptcy Appellate Panel (BAP). The

BAP reversed those portions of the bankruptcy court’s order that (1) confirmed post

facto approval of Mr. Lazzo’s employment, and allowed fees incurred prior to

approval of his employment, and (2) allowed postconfirmation fees.1 The Debtor,

Mr. Lazzo, and his law firm, Mark J. Lazzo, P.A. now appeal from the BAP’s

decision. We affirm.

      1
          Reference to “fees” in this opinion includes expenses, where applicable.

                                          -2-
                                   BACKGROUND

      The Debtor’s business involved the purchase, renovation, rental, and sale of

residential real estate in Wichita, Kansas. Its primary assets included rental

properties that were mortgaged to creditors. Jonathan and Amy Schupbach

(Schupbachs) owned and operated the Debtor. RHB was its largest creditor.

      In March 2011, the Debtor retained Mark J. Lazzo, P.A., as bankruptcy

counsel.2 The Debtor filed its Chapter 11 petition on May 16, 2011. At the time it

filed the petition, it failed to submit an application to employ Mr. Lazzo as its

attorney. Mr. Lazzo did submit a signed “Disclosure of Compensation of Attorney

for Debtor” form at the time of filing, in which he disclosed his representation of the

Debtor, the agreed hourly rate, and the retainer he had received. Aplt. App. at 128.3

      I. The Employment Applications

      One month after Debtor filed its Chapter 11 petition, the United States Trustee

notified Mr. Lazzo that an application for approval of his employment had not yet

been filed. Mr. Lazzo later explained that he had prepared an employment

application along with the petition, but he had neglected to file it because he had to

      2
        In the remainder of this order and judgment, we refer to Mr. Lazzo personally
as the party employed by the Debtor and seeking fees for legal services.
      3
         The Appellant’s Appendix is not consecutively paginated as required by
10th Cir. R. 30.1(D)(1). Instead, the 197-page appendix is numbered and indexed by
its table of contents to documents that contain non-consecutive page numbers from
100 to 970. See Aplt. App. at ii. We have followed this approach in citing to the
appendix, but have found this form of pagination unhelpful to our review.

                                          -3-
prepare and file a “whole bunch of first day motions . . . regarding rents involving

eight different creditors” and the application “got lost in that work.” Aplee. Supp.

App., Vol. I at 166-67. On June 17, 2011, shortly after he received the notice from

the United States Trustee, Mr. Lazzo filed his initial employment application. This

initial application, however, did not explicitly request post facto approval of his

employment from the filing date of the petition.

      Mr. Lazzo did not clarify that he sought approval of his employment post facto

to the petition date until several months later, on September 1, 2011, when he filed a

supplemental employment application. Various creditors objected to Mr. Lazzo’s

request for post facto employment. After a hearing, the bankruptcy court granted the

application, reasoning that Mr. Lazzo had “substantially complied” with the

requirement to seek approval because (1) he filed his disclosure form at the time of

the Debtor’s petition, (2) “[a]ll the facts and circumstances surrounding the filing of

this case and everything that was going on are sufficient justification for not [timely]

filing the application,” and (3) the United States Trustee had not objected to the

application. Id., Vol. II at 256-57.

      II. The Creditors’ Liquidation Plan

      On October 3, 2011, the Debtor filed a proposed Chapter 11 plan, which would

have permitted the Schupbachs to retain their ownership and control of the Debtor. A

number of secured creditors filed a competing plan calling for liquidation of the

Debtor. The Creditors’ Plan of Liquidation (Creditors’ Plan) called for the transfer

                                          -4-
of the Debtor’s secured property to the secured creditors; the cancellation of the

Schupbachs’ ownership interest; the dissolution of the Debtor; and the creation of a

liquidation trust vested with the Debtor’s other property and rights. The Debtor and

the Schupbachs initially objected to the Creditors’ Plan, but they later withdrew their

objections to the plan as amended, and the bankruptcy court confirmed it.

      III. The Fee Applications

      The Debtor filed a total of seven fee applications, plus two supplemental

seventh applications, which together covered Mr. Lazzo’s work from May 13, 2011

through March 14, 2013. Various creditors objected to all or part of the fourth

through supplemental seventh applications. The bankruptcy court held a hearing on

the unresolved fee issues and on October 3, 2013, it entered its final fee order. In the

final fee order, the bankruptcy court determined that Mr. Lazzo was entitled to

payment for his services on behalf of the Debtor after confirmation of the Creditors’

Plan; declined to reconsider its post facto approval of Mr. Lazzo’s employment;

allowed the disputed portions of the fee applications; and allowed all fees and

expenses, both those previously awarded on an interim basis and those allowed by

virtue of the final fee order, as administrative expenses of the Debtor’s estate.

                                          -5-
      IV. The BAP Appeal

      RHB and Mr. Davis appealed to the BAP. In rulings pertinent to this appeal,4

the BAP determined that (1) Mr. Lazzo had not shown the “extraordinary

circumstances” required to justify the approval of his employment post facto; and

(2) the confirmation of the Creditors’ Plan, which terminated Debtor’s status as

debtor-in-possession and stripped the Debtor of all rights, powers, and duties of a

bankruptcy trustee, also ended the bankruptcy court’s ability to award compensation

from estate assets for post-confirmation work performed by Mr. Lazzo. (One BAP

judge dissented concerning the disallowance of post-confirmation fees.)

Accordingly, the BAP reversed the bankruptcy court’s allowance of fees incurred

prior to the approval of Mr. Lazzo’s employment and after the confirmation of the

Creditors’ Plan, and remanded to the bankruptcy court to adjust the amount of the

final fee award.5

      4
        In its order, the BAP also upheld the bankruptcy court’s allowance of certain
fees that RHB and Mr. Davis had contended did not benefit the Debtor’s estate. RHB
and Mr. Davis have not cross-appealed the BAP’s decision affirming the allowance
of these fees.
      5
        Although the BAP remanded to the bankruptcy court for further proceedings,
that court’s only task on remand was to adjust the amount of the final fee award by
subtracting the disallowed fees. Appellants have therefore appealed from a final
decision that we may review. See Clark v. Zwanziger (In re Zwanziger), 741 F.3d 74,
75 n.1 (10th Cir. 2014) (“The BAP’s final decision is appealable when the BAP does
not remand for significant further proceedings.” (internal quotation marks omitted)).

                                         -6-
                                    DISCUSSION

      I. Standard of Review

      “When an appeal is taken from a BAP decision, this court independently

reviews the underlying bankruptcy court’s decision.” Market Ctr. E. Retail Prop.,

Inc. v. Lurie (In re Mkt. Ctr. E. Retail Prop., Inc.), 730 F.3d 1239, 1244 (10th Cir.

2013) “[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not

entitled to any deference (although they certainly may be persuasive).” Davis v.

Pham (In re Nguyen), 783 F.3d 769, 772 (10th Cir. 2015) (internal quotation marks

omitted). We review the bankruptcy court’s legal determinations de novo, its factual

findings for clear error, Market Ctr., 730 F.3d at 1244, and its award of attorney’s

fees for an abuse of discretion, Barron & Newburger, P.C. v. Texas Skyline, Ltd.

(In re Woerner), 783 F.3d 266, 270 (5th Cir. 2015).

      II. Post Facto Approval of Employment

      With court approval, a bankruptcy trustee or debtor-in-possession may employ

professional persons, including attorneys, to assist them in their duties. 11 U.S.C.

§ 327(a).6 Where an attorney has been “employed under section 327,” a bankruptcy

court is empowered to award him compensation from the estate. Id. § 330(a)(1). But

“any professional not obtaining approval is simply considered a volunteer if [he]

      6
         Section 327(a) refers to employment by a bankruptcy trustee. A
debtor-in-possession has the rights and responsibilities of a trustee, including the
ability to employ professional persons. 11 U.S.C. § 1107(a).

                                          -7-
seeks payment from the estate.” Interwest Bus. Equip., Inc. v. U.S. Tr. (In re

Interwest Bus. Equip., Inc.), 23 F.3d 311, 318 (10th Cir. 1994).

      Although neither § 327(a) nor Fed. R. Bank. P. 2014—which implements that

statute—expressly requires that the approval must precede the attorney’s

engagement, courts have generally read such a requirement into the statute as a

matter of judicial administration. See, e.g., Matter of Singson, 41 F.3d 316, 319

(7th Cir. 1994) (“Prior approval is strongly preferred because it permits close

supervision of the administration of an estate, wards off ‘volunteers’ attracted to the

kitty, and avoids duplication of effort.”). Moreover, D. Kan. Local Bankruptcy Rule

2014.1(a) expressly requires that in order to employ an attorney under § 327 to

conduct a Chapter 11 case, the debtor-in-possession “must file with the petition an

application to employ [the] attorney[].”

      We have assumed that a bankruptcy court may approve an attorney’s

employment post facto, thereby entitling him to seek fees for work performed prior to

approval. See In re Albrecht, 233 F.3d 1258, 1260 (10th Cir. 2000) (collecting

cases); Land v. First Nat’l Bank of Alamosa (In re Land), 943 F.2d 1265, 1267

(10th Cir. 1991). But Mr. Lazzo argues that we have not yet adopted a standard for

evaluating whether such a post facto application should be approved. He contends

that the appropriate standard for such an application is “excusable neglect.”

      In Land, we stated that retroactive approval of an attorney’s employment “is

only appropriate in the most extraordinary circumstances” and that “[s]imple neglect

                                           -8-
will not justify nunc pro tunc approval.” Land, 943 F.2d at 1267-68. Mr. Lazzo

argues that our statements in Land were dicta. We disagree. The appellants in Land

challenged the bankruptcy court’s order requiring their attorney to return certain fees

he had received from third parties. They argued that this result was incorrect because

the bankruptcy court did not conduct an evidentiary hearing and did not determine

that the fees were excessive. See id. at 1267. But we rejected this articulation of the

issue on appeal, observing that the bankruptcy court ordered the attorney to return the

fees not because they were excessive, but because the attorney “had never obtained

the bankruptcy court’s approval of his employment by the debtors.” Id. After stating

the extraordinary circumstances standard, we noted that “[t]his appeal does not

present any extraordinary circumstances,” and determined that the appellants had

therefore not shown that the bankruptcy court abused its discretion in denying post

facto approval to hire the attorney. Id. at 1268.

      Our statement concerning the need to show extraordinary circumstances

therefore was not dicta (i.e., a statement not necessarily involved or essential to the

resolution of the appeal, see Rohrbaugh v. Celotex Corp., 53 F.3d 1181, 1184

(10th Cir. 1995)), but instead provided a reason to affirm the bankruptcy court’s

denial of post facto approval for the disputed fees. But even if our statement in Land

were dicta, we would still apply the extraordinary circumstances test here, because it

is the appropriate standard and represents the prevailing approach in the circuits.

See 3 Collier on Bankruptcy ¶ 327.03[3], at p. 327-25 (Alan N. Resnick & Henry J.

                                          -9-
Sommer, eds., Jun. 2015) (“The prevailing approach is that a bankruptcy court should

grant retroactive retention orders [only] in extraordinary or exceptional

circumstances to deter attorneys and other professionals from general nonobservance

of section 327.”).

         In arguing for a lesser, “excusable neglect” standard, Mr. Lazzo primarily cites

the minority viewpoint expressed by the Seventh Circuit in Singson, 41 F.3d at

319-20. We note that the Singson court expressly rejected our approach in Land.

See id. at 319 (“We are not persuaded by, and do not follow, cases such as

[Land] . . . , that adopt an ‘extraordinary circumstance’ requirement.”).7 Even if we

found the minority approach in Singson persuasive (which we do not), we would not

repudiate Land in its favor, as a panel of this court generally cannot overrule the

judgment of a prior panel. United States v. White, 782 F.3d 1118, 1126-27 (10th Cir.

2015).

         Having determined that the bankruptcy court applied an improper, “substantial

compliance” standard rather than the appropriate “extraordinary circumstances” test,

and that the “excusable neglect” standard contended for by Mr. Lazzo is not the

proper standard, we are left to determine the appropriate remedy. Mr. Lazzo argues

that we should remand to the bankruptcy court for application of the “extraordinary

circumstances” standard in the first instance. We decline to do so. Although we
         7
        The Seventh Circuit’s express rejection of the test it found we adopted in
Land provides further evidence that the use of the “extraordinary circumstances” test
in Land was not dicta.

                                           - 10 -
recognize that as a general matter the bankruptcy court is vested with discretion in

determining whether an applicant has shown extraordinary circumstances, see Land,
943 F.2d at 1268, here the BAP’s conclusion that Mr. “Lazzo’s inadvertent neglect in

failing to timely file his employment application is not an extraordinary

circumstance,” BAP Opinion at 19, is correct as a matter of law. See, e.g., Ibbetson

v. U.S. Tr., 100 B.R. 548, 551 (D. Kan. 1989) (affirming bankruptcy court’s order

denying post facto retention where attorney asserted that his failure to seek initial

approval of employment was due to a combination of factors including the “farm

financial crisis” and “other pressures” along with the necessity of relying on

“inexperienced, underpaid, and overworked young associates for details not affecting

the welfare of clients” and the “confusion surrounding the departure of the young

associate handling the details of the case,” determining that such factors merely

showed inadvertence or neglect and did not constitute extraordinary circumstances);

In re Lillian Lawrence, Ltd., 136 B.R. 1, 3-4 (Bankr. D.C. 1992) (stating law firm’s

belief that its application was “either misplaced or returned by the clerk’s office for

some reason” did not constitute extraordinary circumstances warranting post facto

employment); and see generally 3 Collier on Bankruptcy ¶ 327.03[3], at p. 327-26

n.40 (collecting cases applying extraordinary circumstances standard). We therefore

affirm the BAP’s decision reversing the bankruptcy court’s allowance of post facto

employment and fees.

                                         - 11 -
      III. Post-Confirmation Legal Services8

      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.

                                    CONCLUSION

       The BAP’s judgment is affirmed.

                                          - 16 -