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Lawrence Morrison, P.C. v. United States Trustees

June 24, 2010

LAWRENCE MORRISON, P.C., PLAINTIFF/APPELLANT,
v.
UNITED STATES TRUSTEES, DEFENDANT/APPELLEE.



The opinion of the court was delivered by: Amon, United States District Judge.

MEMORANDUM & ORDER

Appellant Lawrence Morrison, P.C. ("Morrison"), counsel to Chapter 11 debtor Larry Bresnick ("Bresnick" or "Debtor"), appeals an order of the United States Bankruptcy Court for the Eastern District of New York, Brooklyn Division (the "bankruptcy court"), entered on June 23, 2009 (the "Order"). The Order denied Morrison's fee application (the "Fee Application") to the extent that it sought an award of fees incurred after the appointment of a Chapter 11 trustee in Bresnick's case.

The bankruptcy court's Order relied on Lamie v. United States Trustee, 540 U.S. 526 (2004), in which the Supreme Court unanimously ruled that federal bankruptcy law prohibits the use of bankruptcy estate funds to pay a debtor's attorney for work that the attorney performs after the appointment of a Chapter 7 trustee, unless the trustee specifically re-employs the attorney under 11 U.S.C. § 327(a). The issue on appeal is whether the bankruptcy court erred when it denied the Fee Application. For the reasons set forth below, the decision of the bankruptcy court is affirmed.

I. Procedural History

On March 30, 2007, Bresnick filed a Chapter 11 petition in the Bankruptcy Court for the Eastern District of New York, Brooklyn Division. Among his listed personal property, Bresnick disclosed that he held a fifty percent interest in Block 7094, LLC ("Block 7094") and Tower Hill at Springville, LLC ("Tower Hill"). Tower Hill, a non-debtor, owns an undeveloped parcel of real property in Staten Island, New York (the "Tower Hill Property"). As managing member of Block 7094, Bresnick also filed a Chapter 11 petition on behalf of Block 7094.

On April 24, 2007, Bresnick filed an application to retain Lawrence Morrison as debtor's bankruptcy counsel pursuant to 11 U.S.C. § 327(a). On May 15, 2007, the bankruptcy court approved Morrison's retention effective as of March 30, 2007. The United States Trustee appointed official committees of unsecured creditors for both the debtor's case and the Block 7094 matter. The bankruptcy court also approved the retention of Pick & Zabicki LLP as counsel to both creditors' committees.

On June 25, 2007, the bankruptcy court granted the United States Trustee's motion for the appointment of a Chapter 11 trustee for cause pursuant to 11 U.S.C. § 1104(a)(1). After consulting with parties in interest, the United States Trustee filed a notice of appointment of Gregory Messer, Esq. as Chapter 11 trustee (the "Trustee"), and the bankruptcy court approved the appointment on June 28, 2007.

On July 3, 2007, the Trustee filed an application to employ the firm of LaMonica, Herbst & Maniscalco, LLP ("LH&M") as bankruptcy counsel under 11 U.S.C. § 327(a). The bankruptcy court approved LH&M's retention on July 20, 2007. The Trustee did not retain any other bankruptcy counsel.

On April 4, 2008, the bankruptcy court entered an order authorizing the sale of the Block 7094 property for $7.1 million and the sale of the Tower Hill Property for $1 million.

On March 13, 2009, the bankruptcy court approved a stipulation of settlement (the "Stipulation") resolving all claims against Bresnick's estate and dismissing the case. Under the Stipulation, estate funds in the Trustee's possession would be used to pay professional fees and expenses approved by the court, and the proceeds of the Tower Hill Property sale would be paid to the estate to satisfy any shortfall with respect to fee awards. Bresnick's case was dismissed pursuant to the Stipulation on June 29, 2009. It is undisputed that Morrison, as debtor's counsel, played an instrumental role in achieving a global settlement.

On April 23, 2009, Morrison filed the Fee Application with the bankruptcy court, seeking $11,455.00 in fees for time incurred prior to the appointment of the Trustee and $103,792.83 for work performed after the appointment of the Trustee. The United States Trustee objected to the request for fees incurred after the appointment of the Trustee on the grounds that, under the decision of the Supreme Court in Lamie, Morrison was not entitled to compensation from estate funds after appointment of the Trustee. On June 23, 2009, the bankruptcy court denied the Fee Application with respect to any work performed after the appointment of the Trustee. The court held that "§ 330(a)(1) does not authorize compensation awards to debtors' attorneys from estate funds, unless they are employed as authorized under § 327(a)." The court reasoned that, because the appointment of the Trustee terminated Bresnick's status as debtor in possession, Morrison's appointment as counsel for the estate also terminated. The court accordingly denied Morrison's fee application in the amount of $103,792.83. Subsequently, Morrison filed a timely notice of appeal.

DISCUSSION

On appeal, a district court reviews a bankruptcy court's conclusions of law de novo. Asbestosis Claimants v. U.S. Lines Reorganization Trust (In re U.S. Lines, Inc.), 318 F.3d 432, 435 (2d Cir. 2003). The sole issue on appeal is whether the bankruptcy court properly applied the United States Supreme Court decision of Lamie v. U.S. Trustee, 540 U.S. 526 (2004), to the circumstances of this case when it denied Morrison compensation from estate funds for all work done after the appointment of the Trustee. In order to answer this question, it is helpful to review the relevant provisions of the bankruptcy code.

When an entity initiates bankruptcy proceedings, all of its assets are transferred by operation of law into a bankruptcy estate. 11 U.S.C. § 541(1) (The commencement of a bankruptcy action "creates an estate . . . comprised [with various exceptions] of all legal or equitable interests of the debtor in property as of the commencement of the case"). Chapter 11 debtors retain control of the bankruptcy estate and business operations as "debtors in possession." See 11 U.S.C. §§ 1101(1) and 1108. Debtors in possession are required to undertake various duties, including accounting for estate property, disclosing assets, liabilities and financial affairs, timely filing tax ...


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