In re: Malcolm D. Owens

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 6, 2014
• Docket: CC-13-1252-TaDKi
• Status: Unpublished

Opinion

FILED AUG 06 2014 1 NO FO PUBL A IO T R IC T N SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-13-1252-TaDKi ) 6 MALCOLM D. OWENS, ) Bk. No. 13-14740-WJ ) 7 Debtor. ) ______________________________) 8 ) MALCOLM D. OWENS, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) UNITED STATES TRUSTEE, ) 12 ) Appellee. ) 13 ) 14 Argued and Submitted on June 26, 2014 at Pasadena, California 15 Filed – August 6, 2014 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Wayne E. Johnson, Bankruptcy Judge, Presiding 19 Appearances: David Akindele Akintimoye for Appellant Malcolm D. 20 Owens; Noah M. Schottenstein of the Executive Office for U.S. Trustees for Appellee United 21 States Trustee. 22 Before: TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges. 23 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1.

1 1 Debtor Malcolm Owens retained David Akintimoye as bankruptcy 2 counsel in a chapter 111 case that culminated in case dismissal. 3 Debtor filed a second chapter 11 case and again sought court 4 approval of Akintimoye’s employment. The bankruptcy court denied 5 the employment application without prejudice; Akintimoye, 6 facially on behalf of Debtor, appealed. 7 We determine that the bankruptcy court did not abuse its 8 discretion in denying the employment application without 9 prejudice; we, thus, AFFIRM. 10 FACTS 11 The Debtor filed a chapter 11 bankruptcy petition; it was 12 his second chapter 11 case in approximately eight months.2 The 13 Debtor previously retained Akintimoye as counsel in his first 14 case. In his second case, he again moved for an order approving 15 Akintimoye’s employment. In support of the employment 16 application, he submitted Akintimoye’s declaration and statement 17 of disinterestedness. 18 The United States Trustee (“UST”) objected, arguing that 19 Akintimoye was not disinterested as he appeared to hold a claim 20 against the Debtor for unpaid legal fees owing from the first 21 case. The UST also asserted that the oral retention agreement 22 between the parties precluded approval of the employment based on 23 § 528 and § 526 and that notice of the application failed to 24 1 Unless otherwise indicated, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 26 2 We exercised our discretion to take judicial notice of the 27 Debtor’s first chapter 11 case and documents electronically filed in that case. See Atwood v. Chase Manhattan Mortg. Co. 28 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

2 1 clearly state whether Akintimoye sought compensation under § 328 2 or § 330. 3 Akintimoye, facially on behalf of the Debtor, contested the 4 UST’s objection. He argued that the UST incorrectly assumed that 5 he held a prepetition claim for “post-petition services rendered 6 in the [first] case even though the [employment] application [] 7 state[d] otherwise.” ECF No. 34 at 5. Akintimoye pointed out 8 that both his declaration and statement of disinterestedness 9 expressly provided that neither he nor his firm held a 10 prepetition claim against the Debtor or the estate for fees 11 incurred in the first case. As a result, he argued that it was 12 reasonable to infer his intent not to seek compensation in 13 connection with the first case, based on both his declaration and 14 statement of disinterestedness and the fact that he did not file 15 a compensation application in the first case. 16 At the hearing on the matter, Akintimoye clarified that the 17 Debtor sought approval to employ him as chapter 11 general 18 counsel under § 328. The bankruptcy court then indicated that it 19 likely would require additional briefing on the § 328 issue and, 20 accordingly, it was not inclined to rule on the employment 21 application that day. In response, Akintimoye expressed 22 reluctance to continue to work on the case if the issue of his 23 employment was “dicey” and stated that he was not prepared to 24 continue working “in vain.” Hr’g Tr. (May 14, 2013) at 10:17-18, 25 24-25; 11:1-2. The bankruptcy court then denied the application 26 without prejudice and expressly allowed Akintimoye to file 27 another and better supported employment application. 28 The bankruptcy court subsequently entered an order denying

3 1 the employment application. This appeal followed. 2 JURISDICTION 3 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 4 §§ 1334 and 157(b). We have jurisdiction under 28 U.S.C. § 158.3 5 ISSUE 6 Did the bankruptcy court err in denying the application to 7 employ Akintimoye as bankruptcy counsel? 8 STANDARD OF REVIEW 9 We review a decision regarding an application for the 10 employment of a professional for an abuse of discretion. Elias 11 v. Lisowski Law Firm, Chtd. (In re Elias), 215 B.R. 600, 603 (9th 12 Cir. BAP 1997), aff’d, 188 F.3d 1160 (9th Cir. 1999). A review 13 of an abuse of discretion determination involves a two-pronged 14 test; first, we determine de novo whether the bankruptcy court 15 identified the correct legal rule for application. See United 16 States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en 17 banc). If not, then the bankruptcy court necessarily abused its 18 discretion. See id. at 1262. Otherwise, we next review whether 19 the bankruptcy court’s application of the correct legal rule was 20 clearly erroneous; we will affirm unless its findings were 21 3 The UST moved to dismiss the appeal based on the fact that 22 the order denying the employment application was interlocutory. 23 A BAP motions panel denied that motion as the chapter 11 case had been dismissed; thus, the order became final. 24 Apparently, the case was subsequently reopened in order to “fully administrate” the case. Other than an order for stay 25 relief, the case has remained dormant. While it is unclear why 26 the case was reopened (and the entry of a stay relief order in a dismissed case is slightly mystifying), the order to reopen did 27 not vacate the dismissal order. The case, thus, remains dismissed and the order denying the employment application 28 remains a final order subject to review.

4 1 illogical, implausible, or without support in inferences that may 2 be drawn from the facts in the record. See id. 3 DISCUSSION 4 In an individual chapter 11 case, the employment or 5 retention of general bankruptcy counsel is governed by § 327. 6 Section 327(a) provides that, with the bankruptcy court’s 7 approval, a debtor-in-possession (pursuant to § 1107(a)) may 8 employ, among other professionals, an attorney to represent the 9 debtor-in-possession in carrying out statutory duties under the 10 Code. As a condition to approval, the attorney: (1) may not hold 11 or represent an interest adverse to the bankruptcy estate; and 12 (2) must be disinterested. Id.; see also Tevis v. Wilke, Fleury, 13 Hoffelt, Gould & Birney, LLP (In re Tevis), 347 B.R. 679, 687 14 (9th Cir. BAP 2006). 15 When so employed, an attorney is generally entitled to 16 compensation for services rendered to a debtor. The Code 17 addresses attorney compensation in various provisions, including 18 § 328. Employment under § 327 is, however, a condition precedent 19 to compensation under § 328(a). See Michel v. Federated Dep’t 20 Stores, Inc. (In re Federated Dep’t Stores, Inc.), 44 F.3d 1310, 21 1319 (6th Cir. 1995). 22 Importantly, § 328(a) permits a professional to seek 23 pre-approval from the bankruptcy court as to terms and conditions 24 of employment, including compensation, “such that the bankruptcy 25 court may alter the agreed-upon compensation only ‘if such terms 26 and conditions prove to have been improvident in light of 27 developments not capable of being anticipated at the time of the 28 fixing of such terms and conditions.’” Circle K Corp. v.

5 1 Houlihan, Lokey, Howard & Zukin, Inc. (In re Circle K Corp.), 2 279 F.3d 669, 671 (9th Cir. 2002) (quoting 11 U.S.C. § 328(a)); 3 see also Friedman Enters. v. B.U.M. Int’l, Inc. (In re B.U.M. 4 Int’l, Inc.), 229 F.3d 824, 829 (9th Cir. 2000) (“There is no 5 question that a bankruptcy court may not conduct a § 330 inquiry 6 into the reasonableness of the fees and their benefit to the 7 estate if the court already has approved the professional’s 8 employment under [] § 328.”). Pre-approval of an attorney’s 9 compensation, thus, is not lightly permitted. 10 To obtain § 328(a) compensation in the Ninth Circuit, the 11 employment application must unambiguously specify that 12 compensation pre-approval is sought under § 328. See 13 In re Circle K Corp., 279 F.3d at 671. Otherwise, an attorney’s 14 right to payment of fees, by default, is governed by § 330 and 15 subject to § 330 review. See id. 16 Here, Akintimoye’s continued reference to approval of 17 employment pursuant to § 328 is inapt. It may be a term drawn 18 from the bankruptcy lexicon, but the Code is clear that an 19 attorney’s retention is governed by § 327 while his or her 20 compensation is subject to either § 328 or § 330. Thus, while 21 Akintimoye’s stated goal was § 328 employment, what he really 22 sought was retention under § 327 and compensation under § 328, as 23 opposed to § 330.4 24 25 4 The confusion relating to § 328 is exacerbated by a local 26 Central District of California bankruptcy form. See F2081-1.5 Order RE Motion in Individual Chapter 11 Case For Order Employing 27 Professional, available at http://www.cacb.uscourts.gov/forms/local_bankruptcy_rules_forms 28 continue...

6 1 A. The bankruptcy court did not abuse its discretion in denying 2 the employment application. 3 Akintimoye argues that the bankruptcy court erred in 4 determining that: the Debtor could not employ Akintimoye if his 5 compensation was based on an hourly fee rate; §§ 528 or 526 6 provided appropriate grounds for denial of employment; and 7 Akintimoye held a prepetition claim against the Debtor. He also 8 contends error in the bankruptcy court’s judicial notice of 9 events in his first case. 10 We conclude that the bankruptcy court did not abuse its 11 discretion in denying retention under § 327 without prejudice 12 based on questions regarding Akintimoye’s lack of 13 disinterestedness. There was also no error in its discussion of 14 the first case as it related to prospective compensation under 15 § 328. 16 1. Denial of the application was not based on §§ 528 and 17 526 or Akintimoye’s request for hourly compensation. 18 As a preliminary matter, we dispense with Akintimoye’s 19 assertions of error based on §§ 528 and 526 and his request for 20 hourly compensation. The record belies Akintimoye’s arguments. 21 At the hearing, the bankruptcy court expressly stated that 22 it was not addressing the § 528 issue (and, by extension, the 23 § 526 issue) unless and until other case status issues were first 24 resolved. The bankruptcy court’s denial of the employment 25 26 4 ...continue 27 (last visited Aug. 6, 2014). In particular, the form provides for only two options as to a debtor’s request to employ a 28 professional: § 327 or § 328.

7 1 application, thus, was not based on the UST’s §§ 526 and 528 2 objections. Nor does the record reflect that the bankruptcy 3 court made any determination as to Akintimoye’s proposed hourly 4 compensation structure, let alone that it denied the employment 5 application for that reason. As a result, we disregard these 6 arguments and do not consider this issue. 7 2. The bankruptcy court did not err in determining that 8 Akintimoye was not disinterested for § 327(a) purposes. 9 The Code defines a “disinterested person” as a person that 10 is not a creditor and “does not have an interest materially 11 adverse to the interest of the estate . . . by reason of any 12 direct or indirect relationship to, connection with, or interest 13 in, the debtor, or for any other reason.” 11 U.S.C. § 101(14); 14 see also First Interstate Bank of Nev., N.A. v. CIC Inv. Corp. 15 (In re CIC Inv. Corp.), 192 B.R. 549, 553 (9th Cir. BAP 1996). 16 Akintimoye alleges error in the bankruptcy court’s 17 determination that he held a prepetition claim against the Debtor 18 and, thus, that he was a creditor of the Debtor. He reiterates, 19 verbatim, his response to the UST’s opposition before the 20 bankruptcy court: that the UST erroneously assumed that he held a 21 prepetition claim and that, based on his declaration and 22 statement of disinterestedness, it was reasonable to infer that 23 he did not intend to claim the unpaid legal fees from the first 24 case. 25 The bankruptcy court correctly determined that Akintimoye 26 was a prepetition creditor. Akintimoye does not dispute that 27 there remained unpaid legal fees from the first case. As a 28 result, he was a prepetition creditor. See 11 U.S.C.

8 1 § 101(10)(A) (creditor is an “entity that has a claim against the 2 debtor that arose at the time of or before the order for relief 3 concerning the debtor.”); § 101(5)(A) (claim is a right to 4 payment). And, therefore, Akintimoye was not disinterested for 5 the purposes of § 327(a). See In re Kings River Resorts, Inc., 6 342 B.R. 76, 88 (Bankr. E.D. Cal. 2006) (“A professional holding 7 a potential prepetition claim against a debtor . . . is a 8 creditor of the estate and therefore not ‘disinterested’ 9 . . . .”). On this record, the bankruptcy court’s finding was 10 not clearly erroneous. 11 The bankruptcy court also found that, insofar as Akintimoye 12 purported to disavow his prepetition claim, he did not 13 sufficiently do so. At the hearing, the bankruptcy court stated 14 to Akintimoye: “I don’t see any way that you can get around the 15 disinterestedness requirement without unconditionally, 16 irrevocably waiving any claim that the Debtor or the estate owes 17 you from the prior case.” Hr’g Tr. (May 14, 2013) at 14:9-12 18 (emphasis added). Again, on this record, the bankruptcy court’s 19 finding was not clearly erroneous. 20 An attorney may rectify disqualifying creditor status by 21 waiver of his or her prepetition claim prior to court approval of 22 employment. See generally In re Pillowtex, Inc., 304 F.3d 246, 23 253 (3d Cir. 2002) (collecting cases). Waiver of the 24 prepetition claim, however, must be express, unconditional, and 25 unequivocal. See In re Princeton Med. Mgmt. Inc., 249 B.R. 813, 26 816 (Bankr. M.D. Fla. 2000); In re E. Charter Tours, Inc., 27 167 B.R. 995, 997 (Bankr. M.D. Ga. 1994). 28 The bankruptcy court here was well within its discretion to

9 1 determine that inferences, all Akintimoye offered, did not 2 constitute an express, unconditional, and unequivocal waiver of 3 his prepetition claim. The bankruptcy court also had discretion 4 to determine that Akintimoye’s representations at the hearing 5 were insufficient and to require additional, formal evidence of 6 Akintimoye’s purported disclaimer. See generally White v. Mintz, 7 Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (In re CK 8 Liquidation Corp.), 408 B.R. 1, 7-8 (1st Cir. BAP 2009) 9 (“Bankruptcy courts are accorded wide discretion in determining 10 whether a conflict of interest exists . . . and appellate courts 11 should give appropriate deference to the bankruptcy court's 12 'front line' position, because the bankruptcy judge is in the 13 best position to gauge the ongoing interplay of factors and to 14 make what is often a very fact driven judgment call.”) (internal 15 citation omitted). 16 Based on the foregoing, the bankruptcy court did not clearly 17 err in finding that Akintimoye held a prepetition claim or that 18 he failed to clearly and unconditionally waive the claim. It is 19 significant that the bankruptcy court offered to continue the 20 matter to allow Akintimoye to supply an unconditional waiver. 21 Akintimoye, however, declined this opportunity and, indeed, 22 affirmatively requested denial. Even then, the bankruptcy court 23 denied the application without prejudice and invited Akintimoye 24 to file a more complete employment application and express 25 waiver. Here, the bankruptcy court did not abuse its discretion. 26 3. On this record, the bankruptcy court’s reference to the 27 first case did not constitute error. 28 Akintimoye finally contends that the bankruptcy court erred

10 1 in considering the first case (and dismissal therein) when 2 evaluating the employment application. We disagree. 3 The record shows that the bankruptcy court emphasized 4 Akintimoye’s need to prove that the second chapter 11 case was 5 not simply a rehash of the first case, which it described as 6 “fruitless and only served to delay creditors.” Hr’g Tr. 7 (May 14, 2013) at 15:12-14. It stated to Akintimoye: 8 The prior Chapter 11 case [] was not fruitful. Nothing happened in the case except the Court had to deal with 9 about a dozen motions for relief from stay. There was no plan filed. There was no disclosure statement 10 prepared. There were no motions that I can recall that were filed at all. 11 It appears that you filed the [first] case just to park 12 [the Debtor] there for a year and get the benefit of the automatic stay. That’s not what Chapter 11 is for. 13 And the Court would be -- well, the Court is currently unconvinced that we won’t have a repeat of that this 14 time. 15 Id. at 10:3-13. 16 As previously discussed, an attorney’s employment or 17 retention is approved by the bankruptcy court pursuant to § 327. 18 Our review of the record makes clear that the bankruptcy court’s 19 discussion of the first case related to prospective compensation 20 under § 328, not proposed employment under § 327. It questioned 21 whether Akintimoye was competent to represent the Debtor in the 22 second case based on the events in the first case culminating in 23 case dismissal. In this respect, the bankruptcy court was 24 addressing the reasonableness of the terms and conditions of 25 Akintimoye’s prospective compensation as general bankruptcy 26 counsel and, in particular, the appropriateness of limiting its 27 ability to review compensation by allowing compensation under 28 § 328, as opposed to § 330.

11 1 Given that the bankruptcy court denied the employment 2 application based on lack of disinterestedness under § 327, it 3 was not required to address § 328 and reasonableness of 4 compensation. Its concerns, however, were reasonable. Further, 5 its comments were relevant to a future employment application 6 that the bankruptcy court’s denial without prejudice expressly 7 allowed. This discussion did not constitute error. 8 CONCLUSION 9 Based on the foregoing, we AFFIRM the bankruptcy court. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28