Summary of a Recent
Judicial
Development in
Bankruptcy
Courts Can Retroactively Approve Hiring a Professional
Only Under "Exceptional Circumstances"
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Ball, No. 00-42223, 2004 Bankr. LEXIS 2501 (Bankr. D. Idaho July 8, 2004), the court denied the Chapter 12 Debtor's application to hire a realtor because there were no "exceptional circumstances" allowing the court to retroactively approve the employment.
Background
The Debtor filed her Chapter 11 petition in December of 2000, and converted to Chapter 12 in July 2001. Id. at *2. Her Chapter 12 plan was confirmed in November 2001. Id. In January 2004, she signed an exclusive listing agreement retaining Mr. Smith as her realtor. Id. He received an acceptable offer to purchase the Debtor's property in April 2004, and the Debtor submitted a motion to sell the property. Id. Mr. Smith stood to gain $10,000 commission from the sale. Id. The court approved the sale, but instructed the commission be withheld since the court did not approve the hiring of the realtor. Id. at *2-3. In May 2004, the Debtor filed an application to employ a realtor. Id. at *1. There were no objections, but the application contained no showing of "good cause" to justify retroactive relief, nor was it supported by any affidavits. Id. The court directed Debtor to file supporting affidavits, which she did in June 2004. Id. Mr. Smith testified in his affidavit that he was unaware the Debtor was involved in Chapter 12 bankruptcy at the time of signing the listing agreement. Id. at *3. The Debtor testified that she was unaware of the requirement of court approval before listing property. Id. The Debtor also testified that Mr. Smith charged only 5% instead of the customary 6% commission, and that the Debtor would not have been able to sell the property without his help. Id. at *4.
Arguments
Debtor argued that the court should retroactively approve the hiring of the realtor and allow the realtor to obtain his commission. Id.
Analysis and Holdings
Under 11 U.S.C. § 327(a), a Chapter 12 Debtor must have court approval to hire a "professional person." Id. Generally, a professional can only be compensated for his work if the debtor acquires court approval prior to hiring his services. Id. at *4-5. However, bankruptcy courts have the power to retroactively approve the employment when "exceptional circumstances" exist. Id. at *5. According to the court, "exceptional circumstances" exist when the professional: (1) satisfactorily explains his failure to receive prior judicial approval; and (2) demonstrates that his services benefitted the bankrupt estate in a significant manner. Id. The court pointed out that "a professional's inexcusable or unexplained negligence, or his inadvertence, in seeking prior approval of employment is an insufficient justification for retroactive relief, particularly when professionals may be charged with knowledge of the law." Id. at *6. The court reasoned that the Debtor, being a long-time Chapter 11/12 debtor, should have known to seek advice from the Trustee or her counsel concerning legal issues related to selling off a substantial portion of her real estate. Id. at *6-7. Mr. Smith, being a professional, could likewise not plead ignorance. Id. at *7. Lastly, the court pointed out that Debtor's counsel, being an experienced bankruptcy lawyer, had a duty to properly advise her of the requirements. Id. Therefore the court refused to retroactively approve the hiring of the realtor, because there was no "exceptional circumstances." Id. at *9.
The case was decided on July 8, 2004.