Estate Professionals Can Be Compensated for Services Performed Before Entry of a Retention Order, Even Without Nunc Pro Tunc Orders

Judge Grossman directly confronted and dismissed contrary precedent and policy considerations. First, Judge Grossman rejected the interpretation by some that Bankruptcy Rule 2014 prohibits "compensation under section 330 for services rendered prior to court approval." In re Benitez, 19-70230 (REG), 2020 WL 1272258, 3-4 (Bankr. E.D.N.Y. Mar. 13, 2020) ("[T]he rule does not explicitly require prior approval for the rendered services to be subject to court review under section 330 and prior approval should not be read into the rule.") (citing In re Jarvis, 53 F.3d 416, 419-20 (1st Cir. 1995); Matter of Singson, 41 F.3d 316, 319 (7th Cir. 1994)). Second, in response to the policy concern that court approval of a professional's retention prior to accepting services is necessary to "control costs, prevent[] volunteerism, and serve[] as a gatekeeper for potentially non-disinterested parties," Judge Grossman pointed out that such volunteers or non-disinterested parties proceed at their own risk (i.e., there is no guarantee they will be retained and, therefore, will not be able to seek compensation under 330), and even if they are eventually retained, their fees remain subject to court approval and a requirement that they be reasonable. Id. Third, in response to the alleged "per se rule that 'denies compensation to a professional who renders pre-appointment services to a debtor,'" In re Household Merit, Inc., No. 94-62969 (SDG), 1995 WL 936707, at 2 (Bankr. N.D.N.Y. 1995), Judge Grossman relied in part on a 1992 decision from the U.S. Bankruptcy Court for the Western District of New York, In re Piecuil, and held that prior Second Circuit cases were simply misinterpreted. Id., at 5 ("[M]ost courts that have recited a need for strict adherence to the requirement of prior court approval have typically done so only in dictum or in a context in which either (1) they would have denied approval of the employment had application been made prior to the rendering of services, or (2) applicant consciously avoided the requirement of prior approval.'") (quoting In re Piecuil, 145 B.R. 777, 779 (Bankr. W.D.N.Y. 1992)).

This Does Not Mean that Late-Filed Retention Applications Will be Routinely Granted

Judge Grossman's decision in Benitez should not be interpreted as a go-ahead to file retention applications at any point in the case: "This does not mean that a professional providing services to the estate should delay in seeking court approval of retention. … [I]t is this Court's view that late-filed retention applications should be subject to heightened scrutiny." In re Benitez, 19-70230 (REG), 2020 WL 1272258, at 1 (Bankr. E.D.N.Y. Mar. 13, 2020).

While his warning against late-filed retention applications seems reasonable, one of the reasons offered in his decision seems inconsistent with prior case law. Specifically, Judge Grossman warned that late-filed applications "run the risk that court approval may be withheld on the basis that, in hindsight, the services performed by the proposed professional did not benefit the estate." Id. Although Judge Grossman's warning applies to retention applications, an analogy could easily be drawn to fee applications, (especially because Judge Grossman's solution relies upon compensating bankruptcy professionals under Bankruptcy Code section 330 for reasonable services provided) where hindsight review is expressly discouraged, if not prohibited. See, e.g. In re Nicholas, 496 B.R. 69, 77 (Bankr. E.D.N.Y. 2011) ("[C]ourts are 'not [to] penalize attorneys by viewing the efforts of counsel with the benefit of '20/20 hindsight.'") (quoting In re Korea Chosun Daily Times, Inc., 337 B.R. 758 (Bankr. E.D.N.Y. 2005) (additional citations omitted)); In re Tribeca Market, LLC, 516 B.R. 254 (Bankr. S.D.N.Y. 2014) ("To be sure, when determining the amount of reasonable compensation to be awarded under Section 330, a bankruptcy court may 'not determine 'reasonableness' through hindsight' because a 'decision reasonable at first may turn out wrong in the end.'") (quoting In re Brous, 370 B.R. 563, 570 (Bankr. S.D.N.Y. 2007)).

This does not mean that a bankruptcy judge could not easily find another reason to deny a late-filed retention application though, so it remains best practice to file a retention application as early as possible in the case.

Acevedo's Prohibition Against Using Nunc Pro Tunc Orders Will be Enforced in the U.S.B.C. E.D.N.Y.

One might read the Benitez decision to mean that the U.S. Bankruptcy Court for the Eastern District will, where it wants to, find a workaround Acevedo, but that would be incorrect. On April 30, 2020, Judge Grossman issued a second decision post-Acevedo denying a motion seeking relief from the automatic stay nunc pro tunc. See, In re Telles, 20-70325 (REG), 2020 WL 2121254, at 4 (Bankr. E.D.N.Y. April 30, 2020) ("The landscape of the law is different post-Acevedo, and this Court is bound to follow the precedent set by the Supreme Court. The Supreme Court has clarified that nunc pro tunc relief cannot be used to confer jurisdiction where not existed."). This article does not review or analyze the Telles decision, but highlights Judge Grossman's holding in that case for illustrative purposes.

Conclusion

The Benitez decision concludes stating: "this Court finds that there is no per se prohibition, in the statute or precedential caselaw [sic], against awarding reasonable compensation to an estate professional for actual and necessary services rendered to the estate prior to the date of court approval of retention." In re Benitez, 19-70230 (REG), 2020 WL 1272258, at 5 (Bankr. E.D.N.Y. Mar. 13, 2020). Accordingly, at least in the U.S. Bankruptcy Court for the Eastern District of New York, bankruptcy practitioners need not worry that the loss of nunc pro tunc retention orders is necessarily a loss compensation for services rendered during that "gap period" between filing and entry of a retention order.

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Sheryl P. Giugliano is a partner in Diamond McCarthy LLP's New York office. Her experience includes advising financially distressed business clients both in and out of bankruptcy, including representing debtors, creditors, and estate fiduciaries in all aspects of bankruptcy or other insolvency cases. Giugliano earned her LL.M. in Bankruptcy and her J.D. from St. John's University School of Law, and her B.A. in Political Science from the University of Michigan, and can be reached at [email protected].