Ara Eric Hunanyan

• Court: United States Bankruptcy Court, C.D. California
• Decided: June 10, 2021
• Docket: 1:21-bk-10079
• Status: Unknown

Opinion

2 FILED & ENTERED

4 JUN 10 2021

5 CLERK U.S. BANKRUPTCY COURT 6 C Be Yn g t r a a s l p D a i rs i at r i c Dt E o Pf UC Ta Yli f Cor Ln Eia RK 7

8 UNITED STATES BANKRUPTCY COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 SAN FERNANDO VALLEY DIVISION 11

13 In re: Case No.: 1:21-bk-10079-MT

14 Ara Eric Hunanyan CHAPTER 7

15 MEMORANDUM OF DECISION ON THE

CHAPTER 7 TRUSTEE’S APPLICATION TO 16 EMPLOY GROBSTEIN TEEPLE LLP

17 Date: May 19, 2021 Debtor(s). 18 Time: 10:30am Courtroom: 302 (Via ZoomGov) 19

20 On January 19, 2021, Ara Eric Hunanyan (the “Debtor”) filed a voluntary 21 petition under Chapter 7 of the Bankruptcy Code. On February 17, 2021, Nancy 22 Zamora ("Chapter 7 Trustee") filed her Application for Authorization to Employ 23 Grobstein Teeple LLP (“GT”) as Accountants Effective as of January 28, 2021. 24 The Chapter 7 Trustee proposes to retain GT to evaluate assets and liabilities of the 25 Debtor, evaluate tax issues related to the Debtor and estate, and prepare tax returns, 26 among other things. This is a routine application to employ for the usual necessary 27 estate services brought within a reasonable time following an evaluation of the 28 estate’s needs. 1 The United States Trustee (“UST”) does not object to the Chapter 7 Trustee 2 employing GT as accountants but asserts that the effective date of the employment 3 should be the hearing date or the date the Court signs the order, if there is no 4 hearing. Any actions taken before that date would be compensated as “reasonable, 5 necessary, and beneficial services.” The UST does not object to the need for such 6 professionals or raise any conflict or disinterestedness issues but objects to any 7 order retroactive to a date that precedes approval of the employment application. 8 These objections stem from a recent Supreme Court ruling, Roman Catholic 9 Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696, 700- 10 01 (2020). 11

12 In Acevedo, on February 6, 2018, the Roman Catholic Archdiocese of San 13 Juan, Puerto Rico (the "Archdiocese") removed the case from a Puerto Rico court 14 to the federal district court. Acevedo, 140 S. Ct. at 699-700. On March 16, March 15 26 and March 27, 2018, after the case had been removed to the federal district 16 court, the Puerto Rico court entered certain payment and seizure orders against the 17 Archdiocese (the "Puerto Rico Orders"). Id. at 700. Approximately five months 18 later, the federal district court remanded the case to the Puerto Rico court. Id. The 19 remand order was nunc pro tunc, stating that the remand was effective March 13, 20 2018. Id. at 700. One of the issues before the Supreme Court of the United States 21 was whether the Puerto Rico Orders were effective despite the fact that, at the time 22 the Puerto Rico Orders were entered, the federal district court had jurisdiction over 23 the case. The Supreme Court held that the Puerto Rico court lacked jurisdiction to 24 enter the Puerto Rico Orders, and that the federal district court could not provide 25 nunc pro tunc relief, stating: 26

27 Federal courts may issue nunc pro tunc orders, or "now for 28 then" orders, Black's Law Dictionary, at 1287, to "reflect the reality" 1 of what has already occurred, Missouri v. Jenkins, 495 U.S. 33, 49, 110 S.Ct. 1651, 109 L.Ed.2d 31 (1990). "Such a decree presupposes a 2 decree allowed, or ordered, but not entered, through inadvertence of 3 the court." Cuebas y Arredondo v. Cuebas y Arredondo, 223 U.S. 376, 390, 32 S.Ct. 277, 56 L.Ed. 476 (1912). 4

5 Put colorfully, "[n]unc pro tunc orders are not some Orwellian vehicle for revisionist history—creating ‘facts’ that never occurred in 6 fact." United States v. Gillespie, 666 F.Supp. 1137, 1139 (N.D. Ill. 7 1987). Put plainly, the court "cannot make the record what it is not." 8 Jenkins, 495 U.S. at 49, 110 S.Ct. 1651.

9 Nothing occurred in the District Court case on March 13, 2018. 10 See Order Granting Motion to Remand in No. 3:18–cv–01060 (noting, on August 20, 2018, that the motion is "hereby" granted and ordering 11 judgment "accordingly")…. [T]he case remained in federal court until 12 that court, on August 20, reached a decision about the motion to remand that was pending before it. The [Puerto Rico court’s] actions 13 in the interim, including the payment and seizure orders, are void. 14 Id., at 700-01. 15 16 The UST urges the court to adopt the reasoning of courts recently applying 17 Acevedo to applications for employment in bankruptcy cases and finding that 18 approval of employment before the hearing date must be done on a nunc pro tunc 19 basis. See In re Miller, 620 B.R. 637 (E.D. Cal. Bankr. 2020) citing In re Roberts, 20 618 B.R. 213, 217 (Bankr. S.D. Ohio 2020) and In re Benitez, 2020 WL 1272258, 21 *2 (Bankr. E.D.N.Y. March 13, 2020). 22 23 The objection is overruled because Acevedo does not change the existing 24 authority of the court to approve employment that has commenced before the 25 motion was brought. Acevedo reiterates a long-established principle “that 26 jurisdiction in the federal courts must emanate from the United States Constitution 27 or a statute and cannot be created by the actions of a court.” In re Merriman, 616 28 B.R. 381, 391-95 (B.A.P. 9th Cir. 2020). As the Ninth Circuit BAP explained with 1 respect to § 362(d) of the Bankruptcy Code, a specific statute conferring authority 2 on the court does not exceed the court’s jurisdiction in the way the language of the 3 removal statute prohibited the court from exercising jurisdiction in Acevedo. Id. at 4 392. The court has explicit authority under 11 U.S.C.§ 327 to approve this 5 employment application without resorting to equitable principles or issuing nunc 6 pro tunc orders. 7 Statutory Scheme Governing Employment and Approval of Fees 8 9 11 U.S.C § 327(a) provides that “the trustee, with the court’s approval, may 10 employ one or more attorneys, accountants, appraisers, auctioneers, or other 11 professional persons, that do not hold or represent an interest adverse to the estate, 12 and that are disinterested persons, to represent or assist the trustee in carrying out 13 the trustee's duties under this title.” The remainder of § 327 goes on to enumerate 14 various special situations related to employment or authorization to act on behalf 15 of the estate. 16

17 Employment approval is further implemented through F.R. Bankr. P. 18 2014(a) which requires the employment application to be served on certain parties 19 and to “state the specific facts showing the necessity for the employment, the name 20 of the person to be employed, the reasons for the selection, the professional 21 services to be rendered, any proposed arrangement for compensation, and, to the 22 best of the applicant’s knowledge, all of the person’s connections with the debtor, 23 creditors, any other party in interest, their respective attorneys and accountants, the 24 United States trustee, or any person employed in the office of the United States 25 trustee.” In order to provide more detail for determining any conflicts of interest, 26 the application also must be “accompanied by a verified statement of the person to 27 28 be employed setting forth the person’s connections with the debtor, creditors, any 1 other party in interest, their respective attorneys and accountants, the United States 2 trustee, or any person employed in the office of the United States trustee.” Id. 3 4 Section 330 then addresses the subsequent compensation of those employed 5 by the estate under § 327, as compensation can be approved only after the 6 professional has been properly employed under § 327. See § 330(a)(1); DeRonde 7 v. Shirley (In re Shirley), 134 B.R. 940, 943-44 (B.A.P. 9th Cir. 1991); see 8 also Shapiro Buchman LLP v. Gore Bros. (In re Monument Auto Detail, Inc.), 226 9 B.R. 219, 224 (B.A.P. 9th Cir. 1998). In addition to approval of the employment, 10 § 330 also details a list of considerations governing compensation such as whether 11 the compensation sought is reasonable, was necessary, the rates charged, what is 12 customary, whether there was duplication of services, and whether the services 13 were performed in a reasonable amount of time. See 11 U.S.C. § 330(a)(1) – (a)(4). 14

15 When interpreting a statute, the court's "task is to construe what Congress 16 has enacted." Duncan v. Walker, 533 U.S. 167, 172 (2001). Courts will "look first 17 to the plain language of the statute, construing the provisions of the entire law, 18 including its object and policy, to ascertain the intent of Congress." Nw. Forest 19 Res. Council v. Glickman, 82 F.3d 825, 830 (9th Cir. 1996). "A primary canon of 20 statutory interpretation is that the language of a statute should be enforced 21 according to its terms, in light of its context." ASARCO, LLC v. Celanese Chem. 22 Co., 792 F.3d 1203, 1210 (9th Cir. 2015) (citing Robinson v. Shell Oil Co., 519 23 U.S. 337, 340 (1997). "If the terms are ambiguous, [the Court] may look to other 24 sources to determine congressional intent, such as the canons of construction or the 25 statute's legislative history." United States v. Nader, 542 F.3d 713, 717 (9th Cir. 26 2008) (citing Jonah R. v. Carmona, 446 F.3d 1000, 1005 (9th Cir. 2006). 27

28 1 Although sections 327 and 330 are necessarily intertwined, they have 2 separate statutory requirements and serve separate purposes. Approval of 3 employment is necessary initially to be sure the professionals are truly necessary, 4 disinterested, qualified and reasonably priced. Approval of fees, on the other hand, 5 is contemplated to take place significantly after employment was approved, and 6 usually when all or most of the work has been completed. Fee approval involves 7 other considerations that can only be evaluated after the work is done and its value 8 to the estate observed. See § 330(a)(1) – (a)(4). 9 10 Unlike many sections of the Bankruptcy Code, neither section has a 11 temporal requirement for when the application should be filed. Fed. Bankr. R. 12 2014(a) also has no deadline for filing the employment application. Compare, e.g., 13 § 362(c)(3)(A) (automatic stay expires 30 days after case was filed where a case 14 was pending in the previous year); § 365(d)(1) (60-day deadline to assume or reject 15 a lease). Although there is no stated time limit in § 327, the implication is that the 16 employment application should occur quickly. Logically, if Congress has required 17 approval of employment to ensure that estate resources are not wasted and that 18 professionals are qualified and not conflicted, this should generally occur before 19 the administration of the estate proceeds very far. Accord, In re Jarvis, 53 F.3d 20 416, 419 (1995) (§ 327(a) neither expressly sanctions nor expressly forbids the 21 post facto authorization of outside professional services.) Courts have repeatedly 22 remarked on this ambiguity. See, e.g., In re Singson, 41 F.3d 316, 319 (7th Cir. 23 1994); In re Triangle Chems., Inc., 697 F.2d 1280, 1289 (5th Cir. 1983) (The most 24 that can be fairly said is that the language of both statute and rule contemplates 25 prior authorization).1 26

27 11 The court recognizes there is a statement in Sherman v. Harbin, 486 F.3d 510, 521(9th Cir. 2007) that the court in In re Atkins, 69 F.3d 970 (9th Cir 1995), interpreted § 327 “as requiring 28 prior court authorization of professional services rendered to the bankruptcy estate.” Harbin citing Atkins, 69 F.3d at 973. As explained later, the Atkins court addressed approval of services 1 2 Adding to this situation, every employment application where work must 3 start immediately seeks a form of retroactive approval because an employment 4 application cannot get approved until it is noticed pursuant to Fed. R. Bankr. P. 5 9013, requiring a written motion done within the time requirements of Fed. R. 6 Bankr. P. 9006(d) which requires at least 7 days-notice. Fed. R. Bankr. P. 6003(a) 7 specifically prohibits an order granting an application under Fed. R. Bankr. P. 2014 8 within the first 21 days of a case without a showing of immediate and irreparable 9 harm. See Miller, 620 B.R. at 643 (‘The concept of retroactive compensation is 10 incorporated into the Federal Rules of Bankruptcy Procedure as prescribed by the 11 Supreme Court.”). 12

13 Where professional assistance is needed before the noticed hearing can be 14 held, the trustees must determine if action is needed quickly to properly carry out 15 required duties under 11 U.S.C. § 704(a), and a court review is necessarily done 16 later of both the employment criteria and the fees incurred. Reading Acevedo as 17 adding the word “prior” before the words “court’s approval” under § 327(a)) not 18 only adds a requirement Congress did not include but may function as contrary to 19 the duties of the trustee or debtor in possession to protect the interests of the 20 bankruptcy estate from the time a bankruptcy petition is first filed. Nothing in the 21 language of § 704 or § 327 requires the trustee to wait for the court’s approval 22 before exercising her duties. Any subsequent disapproval of employment must be 23 based on the criteria enumerated in § 327 and Fed. R. Bankr. P. 2014. Proferring a 24 “satisfactory explanation for a failure to receive pre-employment approval,” Atkins 25 26 27 under § 330 and was referring to the prior approval requirement under § 327 required for 28 approval of services under § 330. Atkins is consistent with Jarvis, Singson and Triangle Chems. on this issue. 1 v. Wain, 69 F.3d 970, 975 (9th Cir. 1995), makes no sense when the rules 2 themselves provide for it. 3 4 Retroactive or nunc pro tunc approval is required where the language of the 5 statute actually provides for court approval before the action is taken. In Sherman 6 v. Harbin (In re Harbin), 486 F.3d 510 (9th Cir. 2007), a debtor secured financing 7 without first obtaining bankruptcy court approval under § 364(c)(2). Section 8 364(c)(2) provides specifically that “the court, after notice and a hearing, may 9 authorize the obtaining of credit or the incurring of debt.” (emphasis added.) This 10 section is written in a way that the debt may not be incurred until the court has 11 given its approval, and the Ninth Circuit has authorized the court to rescind the 12 transaction if prior authorization is not obtained. Thompson v. Margen (In re 13 McConville), 110 F.3d 47, 50 (9th Cir. 1997) (court has authority to cancel the 14 transaction but should consider the equities.) Section 327 contains no such 15 sequencing of approval before the action is taken. 16

17 Given the lack of any temporal requirement in either § 327 or Fed. R. Bankr. 18 P. 2014, the question is still how to address employment applications brought after 19 work has started. Although the work may commence before the application is filed, 20 this is not license to wait indefinitely for court approval. Waiting delays court 21 oversight and makes the review more difficult. As discussed below, caselaw 22 adequately addresses this situation and consistently recognizes the ability of courts 23 to approve both employment and compensation where there were long delays in 24 employment applications with a requirement that professionals show 25 “extraordinary” or “exceptional” circumstances. In re Jarvis, 53 F.3d at 421; 26 Atkins, 69 F. 3d at 974. 27

28 1 2 Approving Pre-employment Fees Separately 3 The UST and cases following Miller’s reasoning interpret the delayed 4 application cases after Acevedo as only granting employment approval going 5 forward from the hearing, regardless of how timely the application for employment 6 is. Any compensation sought for pre-approval work must then be reviewed 7 separately solely under a reasonable and necessary standard, and not under § 330. 8 See Miller, 620 B.R. at 644. This is an understandable approach as bankruptcy 9 courts do possess the equitable power to retroactively approve a professional's 10 valuable but unauthorized services. See Halperin v. Occidental Fin. Group, Inc. 11 (In re Occidental Fin. Group, Inc.), 40 F.3d 1059, 1062 (9th Cir. 1994). These 12 approaches, however, were developed where there were lengthy delays and not 13 routine timely employment applications. The argument for applying “nunc pro 14 tunc” approval to employment applications brought timely after commencement of 15 services seems to be saying “no harm, no foul” if Acevedo is interpreted so 16 broadly. As discussed below, this approach confuses the court’s authority under 17 § 330 and is not appropriate for employment applications brought timely. 18

19 Initially, this approach substitutes the phrase “with prior court approval” for 20 “with the court’s approval” to § 327, something Congress did not legislate. It also 21 may present other complications. There are important reasons employment and 22 compensation are separately authorized beyond the practicalities of timing. The 23 purpose of a trustee employing a professional is “to represent or assist the trustee 24 in carrying out the trustee's duties.” § 327(a). These can be significant in the early 25 days and weeks of a case. Not every estate can wait until an employment 26 application is prepared, noticed for hearing and ruled on before the professional 27 can commence work. 28 1 A professional hired by the trustee needs the authority of an estate 2 representative to be effective without a question as to the legitimacy of 3 employment. For example, what is the professional’s capacity to enter into a 4 contract before employment is authorized? Will rents, receivables, and other 5 proceeds be irretrievably lost where an agent cannot take action quickly on behalf 6 of the trustee? How can a professional adequately secure disappearing books and 7 records where her employment can be questioned? This uncertainty just 8 encourages litigation for tactical advantage over a non-issue. In the early days of 9 some cases, only those professionals willing to take on work at their own financial 10 risk may make the difference as to whether estate assets and records are secured 11 for creditors. 12

13 The professional always faces the risk that her employment will not be 14 compensated under § 330(a)(1)(A) if, at a later date, the work is found to have not 15 been reasonable and necessary. Bankruptcy professionals also face the risk that 16 there will be no assets from which they can be paid. This places an inherent 17 discipline on the analysis of whether to spend time and money working on behalf 18 of the estate. Any professional working on behalf of the estate must receive court 19 approval at some time even where the estate itself is not compensating the 20 professional. See Ferrara & Hantman v. Alvarez (In re Engel), 124 F.3d 567, 571 21 (3d Cir. 1997) (court approval required regardless of source of compensation; 22 failure to obtain approval can result in disgorgement even of third-party funds). 23 These situations all illustrate why the statutory scheme separates court 24 authorization for estate professional’s activities regardless of compensation source 25 or later evaluation of compensation. 26

27 The timeliness of submission of an employment application has previously 28 arisen only when the employment application was filed long after the employment 1 commenced, and usually where it is at the same time as fees are sought under 2 § 330. A body of law has developed determining when a delay is too long to 3 warrant the payment of fees or denial of employment. Because it was not 4 necessary in those situations to distinguish between “employment” under § 327 5 and “compensation” under § 330, cases have used the terms ‘employment’ and 6 ‘services’ somewhat interchangeably to the detriment of understanding the 7 different functions of employment approval and compensation awards.2 8 9 Atkins v. Wain, 69 F.3d 970 (9th Cir. 1995), a key Ninth Circuit case on the 10 issue, is a prime example of the way dicta confusing the two functions has 11 confused approval of employment and approval of compensation, two separate 12 functions. The case concerned approval of tax accounting services where there was 13 a delay of 14 months between commencement of services and the filing of both an 14 employment and compensation application. The case notes that approval of 15 employment must be authorized under § 327 for compensation to be approved. Id. 16 at 973. Atkins then clarifies the standards for approving compensation where the 17 employment application is brought late along with the compensation request. 18 Courts may approve these compensation requests where exceptional circumstances 19 are shown. To establish the presence of exceptional circumstances, professionals 20 seeking retroactive approval must satisfy two requirements: they must (1) 21 22 2 These cases also seem to be where the use of the phrase nunc pro tunc came into common use 23 in the employment context as it refers to retroactive approvals. Nunc pro tunc generally operates to give retroactive effect to an order or other act. Black's Law Dictionary explains it as “[a] 24 phrase applied to acts allowed to be done after the time when they should be done, with a 25 retroactive effect, i.e., with the same effect as if regularly done.” It “signifies now for then, or, in other words, a thing is done now, which shall have same legal force and effect as if done at time 26 when it ought to have been done. State v. Hatley, 72 N.M. 377, 384 P.2d 252, 254.” Id. Nunc pro tunc amendments are permitted primarily so that errors in the record can be corrected. It does not 27 imply the ability to alter the substance of that which actually transpired. Harbin at 514, fn 4. See 28 also Mitchell v. Overman, 103 U.S. 62, 64 (1880)(“the judgment or the decree may be entered retrospectively, as of a time when it should or might have been entered.”) 1 satisfactorily explain their failure to receive prior judicial approval; and (2) 2 demonstrate that their services benefitted the bankrupt estate in a significant 3 manner. Atkins, 69 F.3d at 974. Although the discussion of compensation refers to 4 §327(a) and Fed. R. Bankr. P. 2014(a), the opinion focuses on the ability of the 5 court to “approve retroactively a professional’s valuable but unauthorized 6 services,” which are only approved under §330. There was never any discussion of 7 the criteria at issue under § 327 or F. R. Bank. P. 2014. The standard established by 8 the Circuit looks at whether the services were valuable, in part, to determine 9 whether employment should be approved retroactively. The ability to eliminate or 10 reduce compensation is a powerful incentive to file employment applications as 11 early as possible, but it does not change whether the employment was proper under 12 §327. 13

14 Atkins cites to Halperin v. Occidental Fin. Group (In re Occidental Fin. 15 Group, Inc.), 40 F.3d 1059 (9th Cir. 1994), as one of the early cases establishing 16 the standards for approval of fees where the employment application was filed long 17 after the work commenced. Occidental involved an employment application that 18 was filed seven months after services started. The bankruptcy court denied the 19 employment application, not because it was late, but because the professional had a 20 conflict of interest and was not serving the interests of the estate, classic 21 discussions of § 327’s conflict of interests considerations. The court found that the 22 attorney was representing the interests of the principals of the debtor and not the 23 debtor. The attorney argued that he should still be paid for substantial services to 24 the estate. The fees were ordered disgorged because the conflict of interest 25 prevented the services from being clearly beneficial to the estate to begin with. The 26 reasoning of the opinion details why knowing about a potential conflict of interest 27 is necessary early in the employment. The denial of compensation flowed from the 28 1 lack of employment approval, but employment was properly treated as a separate 2 question from compensation. Id. at 1062. 3 4 In re THC Fin. Corp., 837 F.2d 389 (9th Cir. 1988) is cited in Atkins and 5 other cases as one of the early cases establishing the standards for retroactive 6 approval of employment. See Atkins, 69 F.3d at 972. In THC Fin. Corp., an 7 attorney provided services to the trustee for four years before seeking court 8 approval of compensation, arguing that she was not required to seek approval of 9 employment because of the nature of the services she provided. The Ninth Circuit 10 found that approval of employment was indeed required under the predecessor to 11 § 327. Id. at 392. The court then analyzed whether the services could be 12 compensated anyway even if the services were not authorized. The denial of fees 13 was based on an analysis of a lack of benefit to the estate, not due to the lack of an 14 employment application or late filed application for compensation. While the case 15 has been cited in connection with late employment applications, there had never 16 been any effort to obtain approval of employment. The court set the standard for 17 compensation where there was a failure to receive prior judicial approval as 18 follows: "[S]uch awards should be limited to exceptional circumstances where an 19 applicant can show both a satisfactory explanation for the failure to receive prior 20 judicial approval and that he or she has benefitted the bankrupt estate in some 21 significant manner." Id. The opinion most definitely is warning to professionals 22 that getting early approval, whether they think they need it or not, is a more likely 23 way to be compensated, but the question of whether one should even be employed 24 is treated as a different issue than whether compensation should be paid. 25

26 These delayed application cases are better understood as exercising the 27 court’s control of compensation as a tool to have timely oversight of the use of 28 estate assets. The employment application must be reviewed for conflicts, but it is 1 ||also a preview of whether the estate should be compensating certain professional 2 || services. Where that is unreasonably delayed, explanations and greater scrutiny are 3 |/in order. Although approval of the employment was delayed and the authorization 4 || was needed before any compensation could be paid, the employment itself was not 5 fiction. 6 Understanding Acevedo this way honors both the Supreme Court’s ruling 8 and Congress’ statutory language. Unreasonable delays in bringing employment 9 applications do require explanation and the professionals must justify the delay. 10 Imposing any nunc pro tunc requirements here where the application was brought timely is too broad and not necessary under Acevedo. This is a common and 12 appropriate exercise of the trustee’s duties, performed without delay; it is 13 important not to start treating timely employment applications as something 14 . . wo . extraordinary and unnecessarily erect additional costs and risks on the estate. 15 16 . For all of these reasons, the employment of GT is approved effective 17 . January 28, 2021, the date work was commenced. Any question of whether work 18 was necessary and reasonable is saved for a review of the contemplated fee 19 application. 20 Ra 21 22 23 24 Muar A SY 25 Date: June 10, 2021 - Maureen A. Tighe United States Bankruptcy Judge 26 27 28