Edward Kohout vs. United States Trustee

Filing 14

MEMORANDUM OPINION AND ORDER AFFIRMING THE ORDER OF THE BANKRUPTCY COURT: It is ORDERED that the Court AFFIRMS the order of the bankruptcy court. Signed by District Judge Irene M. Keeley on 8/4/14. (cnd)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

EDWARD R. KOHOUT,
Appellant,
v.

//

Civil Action No. 1:13CV183
Bk. No. 1:10BK303
(Judge Keeley)

UNITED STATES TRUSTEE,
Appellee.
MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
The appellant, Edward R. Kohout (“Kohout”), appeals from an
order of the United States Bankruptcy Court for the Northern
District

of

West

Virginia

(dkt.

no.

1-43),

denying

his

fee

application and motion for nunc pro tunc employment, and ordering
the

disgorgement

of

his

$24,000

Apartments, LLC (“the Debtor”).

retainer

fee

from

Augusta

For the reasons that follow, the

Court AFFIRMS the order of the bankruptcy court.
I. FACTUAL AND PROCEDURAL BACKGROUND
On February 19, 2010, the Debtor filed a Chapter 11 bankruptcy
petition.

Pursuant to 11 U.S.C. § 327(a), the Debtor retained the

Lampl Law Firm to serve as bankruptcy counsel for the estate and
Kohout to serve as local counsel. (Dkt. No. 78).

Kohout, however,

did not file an application to be employed as counsel for the
Debtor at that time.

KOHOUT v. UNITED STATES TRUSTEE

1:13CV183

MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
On February 18, 2010, the day before filing for bankruptcy,
the Debtor paid the Lampl Law Firm a $100,000 retainer fee.

Of the

$100,000, the firm retained $76,000 and paid the remainder to
Kohout.

The

retention,
writing.

Debtor

but

did

and

not

Kohout

discussed

memorialize

their

the
fee

terms

of

arrangement

his
in

The parties agreed that Kohout would serve as local

counsel for the Debtor and be responsible for litigating at least
one adversary proceeding.
Upon filing for bankruptcy under Chapter 11, the Debtor, as a
debtor in possession, filed an application to employ the Lampl Law
Firm

as

its

counsel.

The

application

listed

a

variety

of

bankruptcy services to be rendered, the hourly rates of the
attorneys, and connections with the Debtor.

The Debtor also filed

a motion for the Lampl Law Firm to appear pro hac vice with Kohout
acting as local counsel.

The bankruptcy court approved the

Debtor’s application and granted its motion.
On July 21, 2010, pursuant to 11 U.S.C. § 1104(a), the
bankruptcy court

granted the appointment of a Chapter 11 trustee,

and on the same day, the United States Trustee (“UST”) appointed
Robert L. Johns (“Johns”) as trustee of the bankruptcy estate.
July

17,

2012,

the

Debtor’s

Chapter

11

bankruptcy

case

On
was

converted to a Chapter 7 bankruptcy case, with Johns still acting
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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
as trustee.1
More than two years later, on November 16, 2012, the UST filed
a motion to examine attorney employment and compensation of Kohout
pursuant to 11 U.S.C. § 329(b), seeking a determination of whether
Kohout was properly employed under § 327(a) or (e), and an order
requiring Kohout to disgorge the $24,000 retainer fee he received
from the Debtor.

On February 15, 2013, Kohout filed a fee

application and moved for nunc pro tunc employment– nearly three
years after the Debtor had filed for bankruptcy relief.

The UST

objected to Kohout’s application, arguing that he 1) was never
employed under § 327 to represent the bankruptcy estate, 2) had
failed to disclose his receipt of the money from the Debtor as
required by § 329 and Bankruptcy Rule 2016(b), and 3) did not
present a justifiable reason for his failure to file a timely
employment application.
On March 21, 2013, the bankruptcy court held an evidentiary
hearing to consider Kohout’s application and the UST’s objections.
During that hearing, Kohout acknowledged that he had never filed an
employment application or compensation disclosure statement.

He

argued that his failure to do so was excused by the fact that he is
1

Johns never sought to employee Kohout on behalf of the
bankruptcy estate.
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1:13CV183

MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
unfamiliar with Chapter 11 practice and the Bankruptcy Code.
Kohout also testified that the $24,000 retainer he received
was a payment from the Lampl Law Firm, not the Debtor.

The UST,

however, later filed an addendum to its objections, verifying that
the Debtor was the source of the funds.
On July 3, 2013, the bankruptcy court entered a Memorandum
Opinion and Order denying Kohout's fee application and motion for
nunc pro tunc employment, and ordering him to return the $24,000
retainer fee he had received from the Debtor.

In its order, the

bankruptcy court explained that Kohout’s ignorance of the Chapter
11 bankruptcy rules and practices did not excuse him from filing a
timely employment application.

It also explained that Kohout had

not demonstrated extraordinary circumstances justifying his delay.
The court went on to find that Kohout had violated section 11
U.S.C. § 329 and Bankruptcy Rule 2016(b) by not disclosing the
retainer fee he had received from the Debtor, which constituted
grounds to deny his fee application and require him to disgorge the
$24,000 retainer fee.2

Kohout appealed the order of the bankruptcy

2

The bankruptcy court also found it important to note that
Kohout had admitted the only reason he filed a nunc pro tunc
application was because the UST notified the court about his
compensation. The court further noted that Kohout had admitted
he had spent the $24,000 fee years ago, instead of placing it in
a trust account.
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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
court on August 14, 2013. (Dkt. No. 2).
II. Legal Standard
Pursuant to Fed. R. Bankr. P. 8013, this Court functions as an
appellate court whenever it reviews a bankruptcy court’s order. It
may affirm, modify, reverse, or remand with instructions for
further proceedings.

While the bankruptcy court’s conclusions of

law are reviewed de novo, its findings of fact are reversed only
for clear error.

In re Deutchman, 192 F. 3d 457, 459 (4th Cir.

19999).
Kohout assigns the following errors to the bankruptcy court’s
factual findings and legal conclusions:
1.

The bankruptcy court erred in concluding that it had
jurisdiction over the $24,000 retainer fee paid to him by
the Debtor in February 2010;

2.

The bankruptcy court erred in considering the UST’s
untimely

objections

to

his

fee

and

employment

application;
3.

The bankruptcy court erred in denying his application for
nunc pro tunc employment; and

4.

The bankruptcy court erred in denying his fee application
and requiring him to disgorge the $24,000 retainer fee.

5

KOHOUT v. UNITED STATES TRUSTEE

1:13CV183

MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
III. Analysis
A. Jurisdiction Over Retainer Fee
Kohout contends that the bankruptcy court erred in concluding
that it had jurisdiction over the $24,000 retainer fee the Debtor
paid him in February 2010.

He argues that, because the fee was

unrelated to the bankruptcy estate, the bankruptcy court did not
have

jurisdiction

over

this

matter.

Kohout’s

argument

is

completely without merit.
A

bankruptcy

court

has

subject

matter

jurisdiction

over

disputes “related do” a pending bankruptcy case. Spartan Mills v.
Bank of America, 112 F.3d 1251, 1256-57 (4th Cir. 1997).

The test

for determining if a proceeding is related to a bankruptcy case is
whether “the outcome of the civil proceeding could conceivably have
any effect on the estate being administered in bankruptcy.” New
Horizon of NY, LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir. 2000).
This broad definition of jurisdiction encompasses any proceeding
that could affect the ultimate distribution of property among
creditors.

See In re A.H. Robins Co., Inc., 86 f.3d 364, 372 (4th

Cir. 1996).
Here, Kohout’s services were directly related to the Debtor’s
bankruptcy case.

Despite Kohout’s argument to the contrary, the

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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
fact that he was paid prior to the Debtor filing for bankruptcy is
irrelevant to a determination as to whether the fee was related to
the bankruptcy case.3

Kohout was hired specifically to serve as

local bankruptcy counsel and to assist with the Debtor’s imminent
bankruptcy case.

In fact, in his appellate brief, Kohout concedes

that the $24,000 retainer fee he received was “for attorney
services related to the bankruptcy.” (Dkt. No. 4).
directly affected the bankruptcy estate.

Thus, the fee

New Horizon, 231 F.3d at

151. The bankruptcy court therefore had jurisdiction over this
matter.
B. Timeliness of UST’s Objection
Kohout

next

argues

that

the

bankruptcy

court

erred

in

considering the UST’s untimely objections to his fee and employment
application.

Specifically, Kohout argues that the UST waited over

two years to file objections, without providing a justification for
the delay.

As Kohout notes in his appeal brief, however, there is

nothing in the Bankruptcy Code or rules that specifies a deadline

3

The parties also dispute the source of the $24,000 retainer
fee paid to Kohout. Specifically, the parties disagree over
whether the fee was paid directly from Lampl Law Firm or from the
Debtor’s account. The source of the funds, however, is
irrelevant to a determination of whether the funds are related to
the Debtor’s pending bankruptcy case. In re Walters, 868 F.2d 665
(4th Cir. 1989).
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KOHOUT v. UNITED STATES TRUSTEE

1:13CV183

MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
for

filing

application.

objections

to

an

attorney’s

fee

or

employment

As such, Kohout’s argument in that regard is without

merit.
C. Denial of Nunc Pro Tunc Application
Kohout next argues that the bankruptcy court erred in denying
his application for nunc pro tunc employment.

He asserts that the

bankruptcy court’s finding that no “exceptional circumstances”
exist to allow nunc pro tunc employment is erroneous.

The UST

responds that the bankruptcy court correctly denied Kohout’s nunc
pro tunc application because Kohout’s oversight does not constitute
an extraordinary circumstance warranting retroactive employment.
The UST presents the more compelling argument.
In bankruptcy cases, attorneys must seek prior court approval
before they can perform services on behalf of the bankruptcy
estate.

11 U.S.C. 327(a); Fed. R. Bankr. P. 2014(a).

Attorneys

cannot receive compensation from the bankruptcy estate until after
their employment application is approved. Id.

Failure to obtain

approval prior to performing legal services may lead to the denial
of fee requests and required disgorgement of any compensation
received. Lamie v. United States Trustee, 540 U.S. 526, 529 (2004).
Bankruptcy courts, however, may grant nunc pro tunc approval

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KOHOUT v. UNITED STATES TRUSTEE

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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
of an attorney’s employment application in certain circumstances.
Although the Fourth Circuit has yet to address the applicable
standard

for

determining

when

nun

pro

tunc

employment

is

acceptable, the majority of circuit courts that have addressed the
issue have found that such employment is warranted only where (1)
the court would have authorized employment had the application been
timely submitted, and (2) the delay in seeking court approval
resulted from extraordinary circumstances. See

In re Keren Ltd.

Partnership, 189 F.3d 86, 87 (2d Cir. 1999); In re Arkansas, 798
F.2d 645, 649-60 (3rd Cir. 1986); In re Land, 943 F.2d 1265, 1267
(10th Cir. 1991); In re Jarvis, 53 F.3d 416, 421 (1st Cir. 1995).
But see In re Singson, 41 F.3d 316 (7th Cir. 1994) (adopting an
“excusable

neglect”

applications).

standard

for

retroactive

employment

Circuit courts have generally found that the

extraordinary circumstances prong of the nunc pro tunc employment
test requires that the applicant set forth clear and convincing
evidence

justifying

approval

of

their

retroactive

employment

application. See Id.
Kohout contends that extraordinary circumstances exist in this
case that warrant the approval of his application for nunc pro tunc
employment.

Specifically, he argues that his lack of Chapter 11

experience and unfamiliarity with the Bankruptcy Code’s requirement
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KOHOUT v. UNITED STATES TRUSTEE

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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
that attorneys seek prior court approval before performing services
on behalf of the bankruptcy estate constitute

extraordinary

circumstances.
The majority of courts, however, have held that ignorance,
negligence,

and

oversight

do

not

constitute

extraordinary

circumstances. See 2 Collier on Bankruptcy ¶ 327.03[3] (Alan N.
Resnick & Henry J. Sommer eds., 16th ed. 2013)(“The majority of
courts hold that simple neglect or inadvertence on the part of the
applicant in failing to file a timely retention application under
section 327 is not a sufficient basis for granting retroactive
approval of employment.”). If bankruptcy courts were to allow nunc
pro tunc employment in such cases, then the requirement that
attorneys seek prior approval before performing services on behalf
of the bankruptcy estate would have no effect.
Kohout has therefore failed to establish facts sufficient to
demonstrate the extraordinary circumstances required for nunc pro
employment.4

tunc

The

bankruptcy

4

court

correctly

denied

his

Even the minority of courts who apply the “excusable
neglect” standard to review nunc pro tunc employment applications
have found that factors such as oversight and neglect do not
warrant retroactive approval of employment. See In re Aultman
Enterprises, 264 B.R. 485, 493 (E.D. Tenn. 2001); 2 Collier on
Bankruptcy ¶ 327.03[3] (Alan N. Resnick & Henry J. Sommer eds.,
16th ed. 2013).
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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
retroactive employment application.
D. Denial of Fee Application
Kohout contends that the bankruptcy court erred in denying his
fee application and requiring him to disgorge the $24,000 retainer
fee the Debtor paid him in February 2010.

He argues that the fee

was reasonable and therefore should have been approved pursuant to
11 U.S.C. § 329.

The UST responds that the bankruptcy court

properly ordered Kohout to disgorge the $24,000 retainer fee
because he obtained it in violation of federal law.
Section 329 of the Bankruptcy Code provides that “any attorney
representing a debtor...in connection with” the debtor’s bankruptcy
case must file with the court a disclosure statement, pursuant to
Fed. R. Bankr. P. 2016(b), of compensation paid within 14 days of
payment.

11 U.S.C. § 329(a); Fed. R. Bankr. P. 2016(b).

Section

329 disclosure requirements are mandatory and give bankruptcy
courts

the

discretion

to

deny

fee

applications

submitted

by

attorneys in violation of this provision. See Neben & Starrett,
Inc. v. Chartwell Fin. Corp., 63 F.3d 877, 891 (9th Cir. 1995); In
re Saturley, 131 B.R. 509, 517 (Bankr. D. Me. 1991).

Belated

disclosure due to negligence or ignorance of the relevant law does
not justify failing to comply with the disclosure provisions of §

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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
329.

See e.g., Neben & Starrett, 63 F.3d at 882; Jensen v. US

Trustee, 210 B.R. 844, 849 (B.A.P. 10th Cir. 1997). (“Even a
negligent or inadvertent failure to disclose to disclose the
retainer is sufficient to deny fees.”)

Failing to comply with §

329 not only risks forfeiting the “right to receive compensation
for services rendered on behalf of the debtor” but also being
required to “disgorge fees already received.” In re J.T. Thompson,
USA, No. 2:12-BK-26473-PC, 2012 WL 4461650, at *5 (Bankr. C.D. Cal.
Sept. 25, 2012).
Here, Kohout violated § 329 and Fed. R. Bankr. P. 2016(b) by
failing to file a disclosure statement indicating that the Debtor
had paid him a $24,000 retainer fee. 11 U.S.C. § 329(a); Fed. R.
Bankr. P. 2016(b).

Kohout received the fee the day before the

Debtor filed for bankruptcy, on February 18, 2010, but has yet to
file a disclosure statement.

Kohout asks the Court to excuse his

noncompliance with § 329 because he was unaware of his statutory
obligation to file a disclosure statement with the bankruptcy
court.

However, his ignorance does not excuse his noncompliance.

Neben & Starrett, 63 F.3d at 882; Jensen v. US Trustee, 210 B.R.
844, 849 (B.A.P. 10th Cir. 1997).
Kohout, therefore, violated § 329 and Fed. R. Bankr. P.
2016(b), and his violations are grounds for requiring disgorgement
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MEMORANDUM OPINION AND ORDER
AFFIRMING THE ORDER OF THE BANKRUPTCY COURT
of the retainer fee he received from the Debtor.

Lamie v. United

States Trustee, 540 U.S. 526, 529 (2004). Although disgorgement is
a severe remedy, it is warranted in this instance because of the
nature and extent of Kohout’s noncompliance with the Bankruptcy
Code. Kohout not only ignored his duty to disclose under § 329, but
also his duty to seek approval for employment under § 327.

The

bankruptcy court therefore did not err when it denied Kohout’s fee
application and ordered him to disgorge the $24,000 retainer fee.
IV. Conclusion
For the reasons discussed, the Court AFFIRMS the order of the
bankruptcy court.
It is so ORDERED.
The Court directs the Clerk to transmit copies of this Order
to counsel of record and all appropriate agencies.
DATED: August 4, 2014.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE

13