Critical Ruling on Compensation from Supreme Court

John Lamie, a bankruptcy attorney, sought compensation under that amended Section for legal services he provided to a bankrupt debtor after its proceeding was converted to a Chapter 7 bankruptcy. His fee application was denied by the Bankruptcy Court, the District Court, and the Fourth Circuit Court of Appeals, each holding that the plain language of the Section does not authorize payment of attorney fees unless the attorney has been appointed under Bankruptcy Code Section 327. Because Lamie was not so appointed, his fee request was denied. The Supreme Court granted certiorari to review the holding.

The Supreme Court's Decision

If this case was an opportunity for the court to veer off its “plain language” path, it did not take it. “[W]hen the statute's language is plain, the sole function of the court ' at least where the disposition required by the text is not absurd ' is to enforce it according to its terms,” the Court announced again as its guiding principle.

Lamie argued that the existing statutory text was ambiguous on its face. That ambiguity was most apparent when comparing the present statute with its predecessor. Subsection (A)'s “attorney” reference is on it face irreconcilable with the Section's first part, since either Congress inadvertently omitted the “debtor's attorney” from the payee's list, or it inadvertently retained the reference to the attorney in the latter part of the Section. Logically, there is no reason, other than a drafting error, that Congress would have rewritten the statute to produce a grammatically incorrect section. This ambiguity, therefore, required the Court to consult the legislative history to determine that in fact Congress intended to allow fees for services rendered by Chapter 7 debtor's attorney even when that attorney's retention is not authorized under Section 327.

Unfortunately for counsel, the Supreme Court was not convinced by that logic: “The statute is awkward, and even ungrammatical; but that does not make it ambiguous on the point at issue.” In the first part, the Court continued, the statute authorizes an award of compensation to one of three types of persons ' trustees, examiners, and Section 327 professional persons. Thus, a debtor's attorney not engaged as provided by Section 327 is simply not included within the class of persons eligible for compensation. The fact that there is a missing conjunction “or” that makes any reading of this Section awkward does not change this result.

Further, this plain meaning analysis, the Court noted, does not lead to such absurd results as would require it to ignore the plain meaning rule. Under the Court's interpretation, compensation remains available to debtor's attorneys through various permitted means – such as when they are retained by Chapter 7 trustees, for example. Further, its plain meaning reading of this Section merely limits debtors from incurring debts for professional services without the Chapter 7 trustee's approval ' a result that is certainly not absurd, but rather advances the trustee's responsibility for preserving the estate.

On top of all that, the Court pointed out that the bankruptcy system was apparently functioning quite soundly in the Fifth and Eleventh Circuits, where the plain meaning interpretation had already been established.

Finally, even though analysis of the legislative history was not required, the Court found that any such analysis created more confusion rather than clarity. In its view, both history and policy considerations apparent in the Congressional record lend support to their ultimate holding of the case.

“If Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent … it is beyond our province to rescue Congress from its drafting errors and to provide for what we might think … is the preferred result.'” With that, the Court firmly shut the door on this dispute.

Conclusion

Given the Court's uncompromising decision, the choices for bankruptcy counsel are fairly clear. The Court is powerless to compensate them in the Chapter 7 ' whether it's post-conversion or otherwise ' unless counsel is properly retained under Section 327. Unless counsel takes other measures to ensure payment ' such as a security retainer or a guaranty of payment by a third party ' they will certainly be working for free.

The Supreme Court has held that Bankruptcy Code Section 330(a)(1) does not allow a Chapter 7 debtor's attorney to be compensated from the estate unless the attorney is employed by the Trustee with the approval of the Bankruptcy Court. Lamie v. United States Trustee, 2000 WL 110846 (U.S. 2004). This decision conclusively ends the controversy over the 1994 amendments to that Section, and puts Chapter 7 debtors' counsel on notice that, if not retained pursuant to Section 327, they are on their own with respect to fees.

Background

Before the 1994 amendments, Bankruptcy Code Section 330(a) allowed a court to “award to a trustee, to an examiner, to a professional person employed under Section 327, or to the debtor's attorney … 1) reasonable compensation for … services rendered by such trustee, examiner, professional person, or attorney[.]” But the 1994 amendments altered Section 330(a) by deleting the above-highlighted “ or to the debtor's attorney.” This odd deletion ' which created an awkward grammatical structure and eliminated the neat parallelism that once marked the Section ' gave strong indications of being a scrivener's error.

John Lamie, a bankruptcy attorney, sought compensation under that amended Section for legal services he provided to a bankrupt debtor after its proceeding was converted to a Chapter 7 bankruptcy. His fee application was denied by the Bankruptcy Court, the District Court, and the Fourth Circuit Court of Appeals, each holding that the plain language of the Section does not authorize payment of attorney fees unless the attorney has been appointed under Bankruptcy Code Section 327. Because Lamie was not so appointed, his fee request was denied. The Supreme Court granted certiorari to review the holding.

The Supreme Court's Decision

If this case was an opportunity for the court to veer off its “plain language” path, it did not take it. “[W]hen the statute's language is plain, the sole function of the court ' at least where the disposition required by the text is not absurd ' is to enforce it according to its terms,” the Court announced again as its guiding principle.

Lamie argued that the existing statutory text was ambiguous on its face. That ambiguity was most apparent when comparing the present statute with its predecessor. Subsection (A)'s “attorney” reference is on it face irreconcilable with the Section's first part, since either Congress inadvertently omitted the “debtor's attorney” from the payee's list, or it inadvertently retained the reference to the attorney in the latter part of the Section. Logically, there is no reason, other than a drafting error, that Congress would have rewritten the statute to produce a grammatically incorrect section. This ambiguity, therefore, required the Court to consult the legislative history to determine that in fact Congress intended to allow fees for services rendered by Chapter 7 debtor's attorney even when that attorney's retention is not authorized under Section 327.

Unfortunately for counsel, the Supreme Court was not convinced by that logic: “The statute is awkward, and even ungrammatical; but that does not make it ambiguous on the point at issue.” In the first part, the Court continued, the statute authorizes an award of compensation to one of three types of persons ' trustees, examiners, and Section 327 professional persons. Thus, a debtor's attorney not engaged as provided by Section 327 is simply not included within the class of persons eligible for compensation. The fact that there is a missing conjunction “or” that makes any reading of this Section awkward does not change this result.

Further, this plain meaning analysis, the Court noted, does not lead to such absurd results as would require it to ignore the plain meaning rule. Under the Court's interpretation, compensation remains available to debtor's attorneys through various permitted means – such as when they are retained by Chapter 7 trustees, for example. Further, its plain meaning reading of this Section merely limits debtors from incurring debts for professional services without the Chapter 7 trustee's approval ' a result that is certainly not absurd, but rather advances the trustee's responsibility for preserving the estate.

On top of all that, the Court pointed out that the bankruptcy system was apparently functioning quite soundly in the Fifth and Eleventh Circuits, where the plain meaning interpretation had already been established.

Finally, even though analysis of the legislative history was not required, the Court found that any such analysis created more confusion rather than clarity. In its view, both history and policy considerations apparent in the Congressional record lend support to their ultimate holding of the case.

“If Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent … it is beyond our province to rescue Congress from its drafting errors and to provide for what we might think … is the preferred result.'” With that, the Court firmly shut the door on this dispute.

Conclusion

Given the Court's uncompromising decision, the choices for bankruptcy counsel are fairly clear. The Court is powerless to compensate them in the Chapter 7 ' whether it's post-conversion or otherwise ' unless counsel is properly retained under Section 327. Unless counsel takes other measures to ensure payment ' such as a security retainer or a guaranty of payment by a third party ' they will certainly be working for free.