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4th Cir.: David v. King- Former Trustee Has No Authority to Act Following Conversion, Including to Seek Compensation for Professionals

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By Ed Boltz, 30 July, 2024

Summary:

Byron David filed for Chapter 7 bankruptcy in July 2018, with Donald King appointed as the Chapter 7 Trustee.  While still a Chapter 7 case,  King obtained approval under 11 U.S.C. § 327 to employ his own law firm to represent him as the Trustee.    The case was converted to Chapter 11 in April 2019, with King again appointed as the Chapter 11 Trustee. King did not, however,  apply for court approval to retain his law firm for Chapter 11 work.  The case was converted again, this time  to Chapter 13 in May 2020, ending King’s role as trustee.  After the final conversion, King sought retroactive approval to employ the law firm for work done during the Chapter 11 phase.

The Court of Appeals determined that "the trustee" (Emphasis  kinda in the original) in § 327(a) refers to the currently serving, active singular trustee, not a former trustee.  Upon conversion of the bankruptcy case, King’s authority to act as trustee was terminated under § 348(e), meaning he could not apply to retroactively employ professionals.  The court rejected King’s arguments based on equity and previous cases where current trustees were allowed to file after-the-fact applications, emphasizing that those cases did not involve former trustees.

Judge Wilkinson, dissenting, argues that bankruptcy courts, recognized as courts of equity, should retain the discretion to grant after-the-fact authorizations for professional services performed under § 327(a). He disagrees with the majority's interpretation that limits such authority to current trustees only. 

Commentary:

While the impact of this case is likely to be largely just an admonition to  trustees and their attorneys to not make this same $43,668  mistake as the Chapter 7/11 trustee made here,  it does also both indicate that the conversion of a case to another chapter should serve as a "hard stop" for the previous trustee (with even  post-conversion obligations and residual duties almost certainly being administrative  "trustee time" and not legal services)  but also that the possibility of conversion should always restrain trustees from being so overly hungry or adversarial that the debtor seeks escape.

businessman standing at 7/11

And, as this opinion also relies on Lamie v. U.S. Tr., 540 U.S. 526 (2004),  which notoriously departed from long-standing pre-Code bankruptcy practice that allowed the debtor's attorney to be paid from assets of the estate because of scrivener's errors,  perhaps trustees,  which have previously shown little interest in helping the debtor's bar with a legislative correction,  might now see some need for supporting that sort of change from Congress for everyone's benefit.  (Including a fair and reasonable fix for Chapter 13 trustees in cases dismissed before confirmation.)  I would be happy to participate in that  discussion.

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4th Circuit Court of Appeals

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