The facts of the situation are not in dispute. The Debtor in a Chapter 11 case needed to hire a forensic accountant. The Debtor applied for permission to hire the accountant under § 327(a) of the Bankruptcy Code. The employment application did not contain any special provisions but the engagement letter contained the following clause:
In the event we are requested or authorized by Debtor or are required by government regulation, subpoena, court order, or other legal process to produce our documents or our personnel as witnesses with respect to our engagements for Debtor, Debtor will, so long as we are not a party to the proceeding in which the information is sought, reimburse us for our professional time and expenses, as well as the fees and expenses of our counsel, incurred in responding to such requests.
No objection to employment was filed and the Court entered an order approving the application.
Flash forward and after the forensic accountant had finished preparing its report, the Bank decided to subpoena and depose the accountant. Debtor’s counsel refused to defend the accountant so the accountant was forced to hire an attorney for the deposition. The attorney cost the accountant about $8,000.
The Court did not allow the expense. It reasoned that under § 330(a)(1)(B) only reimbursement of actual, necessary expenses would be allowed. Under the standard articulated by the court, only those expenses necessary to accomplish the task the professional is hired to accomplish are compensable. The Court’s reason was that Without such a limitation, potentially, whenever a bankruptcy court-approved professional deems it necessary to employ another professional to protect its interests in the bankruptcy case, that cost would be taxed to the bankruptcy estate, effectively negating the Code’s regimen requiring prior notice to other interested parties, and the necessary scrutiny by the court, before committing the limited resources of the bankruptcy estate to the payment of professional compensation.
Author’s comments: The case noted a split of authority in the Southern District of New York and no binding law in the 9th Circuit which necessarily means there is a lot more room to litigate this matter.
The Court focused on the fact that the retainer agreement contained a clause which would allow the accountant to be paid by the debtor but focused on the fact that the employment application itself did not contain the language or allude to it. One workaround for this rule may be to clearly articulate any special clauses for attorney fees inside the application to employ the professional.
In my experience as debtor’s counsel, most professionals rely on me to obtain court approval of their employment. At the same time, my duty is to the Estate. So what am I supposed to do?
You can find the full case here.
This was a good post, Michael; I had read the case as well. The ruling was unfortunate for the accountant, but right on – I learned a few years ago that when a bankr professional needs to hire counsel, get authority from the bankruptcy court that is on point and very explicit. Courts will entertain emergency applications like this, and will either allow the professional to hire a professional (and be paid) or will not (in which case the professional at least knows what will happen – or can quit and take steps to disengage). Or the Bankruptcy Court can come up with another solution. Unfortunately, by not seeking immediate court approval, the professional lost out. If I was debtor’s counsel, I would have told the professional that we need to go to court asap as soon as the subpoena was issued.
Those are some great practice pointers!