Bankrutpcy and Personal Injury

On March 27, 2019 the Bankruptcy Court for the Southern District of Alabama denied a fee request by Debtor’s personal injury (PI) attorney.

Prior to filing bankruptcy Debtor was involved in a car accident. She hired a PI attorney to represent her. When her bankruptcy case was filed, she listed the car accident on her schedules. Subsequently the PI case settled, and the Debtor signed a settlement agreement that indicated she was not in a bankruptcy. The Debtor filed a motion to approve the settlement in the Bankruptcy Court. The trustee demanded that the attorney’s fee be turned over to the bankruptcy estate.

The PI attorney stated he relied upon the Debtor’s statement in the settlement that she was not in a pending bankruptcy and therefore didn’t seek approval of the settlement and proceeds himself.

In In re Fisher, No. 16-1911, 2019 Bankr. LEXIS 1325 (Bankr. S.D. Ala. Mar. 27, 2019), the bankruptcy court found the PI attorney’s reliance on the Debtor’s statement “wholly inadequate.”

The bankruptcy court ruled that “[e]very trial attorney has or should have a PACER account with which to check federal court pleadings, including bankruptcy court pleadings. It takes only a few moments to check a client’s name on PACER before distributing settlement proceeds to determine whether that client is in bankruptcy. To rely on a client’s representation that he or she is not in bankruptcy is not enough. The client may not notice or understand the “not in bankruptcy” language; the client may be confused as to whether he or she is in bankruptcy; and (not surprisingly) sometimes clients will lie, particularly if they think that answering correctly may cause them to get less money. In this court’s view, if a lawyer fails to check PACER to confirm that a client is not in bankruptcy immediately before distributing settlement proceeds, the lawyer runs the risk of being held liable for the settlement funds that would have otherwise gone into the bankruptcy estate. Of course, a prudent lawyer should also check PACER upon initial retention as well so that his or her employment can be approved by the bankruptcy court on a timely basis.” Fisher at 6-7.

The bankruptcy court set out the general rules for employing counsel in matters outside the bankruptcy court. Counsel must seek approval of his employment as an attorney for the debtor as required by 11 U.S.C. § 327 or to have their fees approved as required by 11 U.S.C. § 330. The attorney must also seek bankruptcy court approval to settle the claim as required under 11 U.S.C. § 363(b) and Bankruptcy Rule 9019.

Generally bankruptcy courts require that court approval of the retention of a professional must be made before the professional has been employed. See In re Jarvis, 53 F.3d 416 (1st Cir. 1995). There is a circuit split on whether employment should be permitted on a nunc pro tunc basis. See Matter of Concrete Products, Inc., 208 B.R. 1000, 1008 (Bankr. S.D. Ga. 1996) (citing 3 Collier on Bankruptcy ¶ 327.02, n. 5 (16th 2018)). Some courts have recognized a “per se” rule against retroactive approval of a professional’s employment, see Matter of Futuronics Corp., 655 F.2d 463 (2d Cir. 1981), and some courts have concluded that such approval is permissible. See Matter of Concrete Products, 208 B.R. at 1008 (collecting cases). The undersigned adopts the ruling of the court in Matter of Concrete Products, Inc., and follows the more lenient line of cases holding that a movant seeking retroactive approval of a professional’s employment must demonstrate that the professional would have been qualified for employment at the onset, and throughout the period of time for which the services are to be compensated; and, that the movant’s failure to obtain prior approval at an earlier time is excusable. Id. at 1008.

Fisher at 3-4.

The bankruptcy court concluded that the PI attorney had not shown its neglect was sufficiently excusable to justify the untimely application for employment. The bankruptcy court approved the settlement but directed the PI attorney’s fees be paid to the chapter 13 trustee to increase the disbursements to unsecured creditors.