Bodenstein, Ira v. Maier, McIlnay

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-3738
In the Matter of:
Milwaukee Engraving Company, Incorporated,
Debtor.
Appeal of:
Ira Bodenstein, United States Trustee
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 98-C-806--John W. Reynolds, Judge.
Argued May 16, 2000--Decided July 13, 2000
Before Easterbrook, Ripple, and Rovner, Circuit
Judges.
Easterbrook, Circuit Judge. When Milwaukee
Engraving Co. entered bankruptcy, it was
represented by Maier McIlnay & Kerkman, Ltd.
(MMK). Section 327(a) of the Bankruptcy Code, 11
U.S.C. sec.327(a), permits a trustee or debtor in
possession to "employ one or more attorneys . .
. that do not hold or represent an interest
adverse to the estate, and that are disinterested
persons". Milwaukee Engraving filed an
application seeking to use MMK’s services in the
bankruptcy proceeding. An accompanying affidavit
asserted that MMK was disinterested but revealed
that MMK represented Black Hawk Label, Inc., which
owed Milwaukee Engraving some $78,000. This would
not have been an interest "adverse to the estate"
if Black Hawk had been flourishing, but it was
not. Black Hawk (under joint ownership with
Milwaukee Engraving) was arranging to liquidate.
MMK represented Black Hawk in that endeavor and
had first dibs on the proceeds of any sale,
before the balance was distributed to Milwaukee
Engraving and Black Hawk’s other creditors. The
United States Trustee objected to MMK’s
employment, and the bankruptcy court concluded
that the law firm’s interest in the proceeds from
the sale of Black Hawk’s assets meant that MMK
represented an interest adverse to Milwaukee
Engraving. See 11 U.S.C. sec.101(14)(E).
Milwaukee Engraving acquiesced and engaged
another law firm.
Section 330(a)(1)(A) of the Code conditions
payment of "reasonable compensation for actual,
necessary services rendered by . . . [an]
attorney and by any paraprofessional person
employed by any such person" on approval under
sec.327, which MMK lacked. Nonetheless, MMK asked
the bankruptcy judge to approve payment of some
$15,000 for the professional services it had
rendered to Milwaukee Engraving between the
commencement of the case and the approval of its
replacement, about 20 days after the judge
concluded that MMK was not disinterested.
Bankruptcy Judge McGarity granted this
application, 230 B.R. 370 (Bankr. E.D. Wis.
1998), relying on 11 U.S.C. sec.503(b)(1)(A),
which permits the court to award as
administrative expenses "the actual, necessary
costs and expenses of preserving the estate,
including wages, salaries, or commissions for
services rendered after the commencement of the
case". The bankruptcy judge noted that MMK
provided legal services for a month between
filing and the decision under sec.327, observed
that these services were beneficial to the estate
despite MMK’s interest in Black Hawk, and
concluded that it would be inequitable to deny MMK
compensation. She recognized, however, that
payment for legal services usually depends on
sec.sec. 327 and 330, and that sec.503(b)(2)
grants administrative priority to "compensation
and reimbursement awarded under section 330(a) of
this title". By making express provision for
employment under sec.327, payment under sec.330,
and priority under sec.503(b)(2), the Code
logically forecloses the possibility of treating
sec.503(b)(1)(A) as authority to pay (and give
priority to) claims that do not meet its
substantive requirements. Statutes directly
addressing a subject prevail over silences and
implications of other provisions. We so held, for
sec.sec. 327, 330, and 503 in particular, in In
re Singson, 41 F.3d 316, 320 (7th Cir. 1994), and
the bankruptcy judge acknowledged that the
language of Singson bars an award to MMK.
Nonetheless, she stated, Singson must be read
together with In re Grabill Corp., 983 F.2d 773,
777 (7th Cir. 1993), which raised the possibility
that sec.503(b)(1)(A) might provide independent
authority to compensate attorneys. Grabill added
that the sort of claim MMK makes--a request for
compensation by a firm disqualified by interest--
would not qualify under any approach, 983 F.2d at
777 ("The scattered cases, none at the court of
appeals level, that allow a lawyer to be
compensated who, lacking the requisite
disinterest, could not have been appointed seem
to us just plain wrong."), but the bankruptcy
judge thought that the "equities" of this case
justified disregarding this observation. The
district judge affirmed, concluding that for two
reasons he need not follow Singson. First, the
judge stated, Singson "made no mention of Grabill
in its discussion of sec.503." Second, Singson
involved an untimely request for approval, while
MMK sought approval at the outset of the case and
bore the effects of congestion in the bankruptcy
court’s calendar.
Singson disposes of the question at hand. True,
the facts of Singson differ from the facts of
this case, but the legal issue is the same: may
a bankruptcy court compensate an attorney for
services despite denying an application under
sec.327? That issue was resolved in Singson,
which answered "no." Singson concluded that it
would vitiate the limitations of sec.327 if a
bankruptcy court could deny an application under
that section and order the estate to pay for the
legal services anyway. Moreover, the structure of
sec.503(b) strongly implies that professionals
eligible for compensation must receive it under
sec.503(b)(2)--which depends on authorization
under sec.330 or sec.1103(a) (and thus on
approval under sec.327). One might as well erase
sec.503(b)(2) from the statute if attorneys may
stake their claims under sec.503(b)(1)(A) even
when ineligible under sec.sec. 327, 330, and
503(b)(2). Our opinion in Singson did not spell
this out at length, but there was no need to do
so, for the subject had been covered by another
circuit, whose conclusion we endorsed. See In re
F/S Airlease II, Inc., 844 F.2d 99, 108-09 (3d
Cir. 1988), cited with approval in Singson, 41
F.3d at 320. Appellate opinions need not rehash
settled law to enjoy respect by district courts.
Brevity in stating a holding is a virtue, and a
decision’s central conclusion is no less a
"holding" for being succinct.
Although the bankruptcy judge believed that
applying the Code literally would be inequitable,
"[b]ankruptcy courts are not authorized in the
name of equity to make wholesale substitution of
underlying law . . . but are limited to what the
Bankruptcy Code itself provides." Raleigh v.
Illinois Department of Revenue, 120 S. Ct. 1951,
1957 (2000). To the extent equity matters, the
claim here is weaker than the one rejected in
Singson, for in Singson the obstacle to payment
was delay in submitting an application for
approval. We held that only "excusable neglect"
justifies failure to present an application for
approval before performing legal services. We
concluded that the law firm in Singson had not
established "excusable neglect" and therefore
could not receive approval under sec.327. (It was
this conclusion that made it necessary to decide
whether the firm could be paid anyway under
sec.503(b)(1).) A timely application in Singson
likely would have been approved. Here, by
contrast, MMK is forbidden to represent the
debtor. Using sec.503(b)(1)(A) even to overcome
a procedural glitch was disapproved by Singson;
that holding logically entails the impropriety of
using sec.503(b)(1)(A) to defeat the principal
function of sec.327 by requiring the estate to
compensate a law firm that labored under a
conflict of interest.
The district judge believed that Singson need
not be followed because the portion of the
opinion dealing with sec.503(b)(1)(A) did not
discuss Grabill. This seriously misunderstands
the relation between holding (Singson) and dictum
(Grabill). A court need not rehash all prior
mentions of a topic. What the panel said in
Grabill was:
It is a much more orderly system in which the
lawyer applies for approval before he starts
running up a large bill. Orderliness may not be
the highest value and there may be cases in which
time is so short that the lawyer must start work
before he can file the application--and perhaps
some bankruptcy judges, unlike the one in this
case, sit on such applications for a long time,
which could create great awkwardness. Perhaps in
a case in which the lawyer filed his application
as early as was practicable, could not defer
performing critical legal work for the debtor,
and had no reason to believe that his application
would be turned down--but it was, much later--
section 330 could be bent to allow compensation.
Conceivably section 503 of the Bankruptcy Code,
the general administrative-claims section, could
be used as a safety valve to relieve the rigidity
of section 330 in cases in which it would be
highly inequitable to deny a lawyer all
compensation for services that had conferred a
benefit on the debtor’s estate and hence on the
unsecured creditors seeking to deny him that
compensation. Section 503(b)(1)(A), the only
possibly relevant subsection, authorizes payment
of the actual, necessary costs of preserving the
estate. This subsection might, in the context of
a Chapter 11 proceeding such as this, authorize
the payment of a claim that arose from a
transaction with the debtor in possession (that
is, a transaction after bankruptcy has been
declared) and was beneficial to the debtor in
possession. In re Jartran, Inc., 732 F.2d 584,
586 (7th Cir. 1984); see also In re Hemingway
Transport, Inc., 954 F.2d 1, 5-7 (1st Cir. 1992).
(We don’t suppose it matters whether the
transaction is with someone who had rendered
similar services to the debtor before
bankruptcy.) We need not decide whether this
provision can be invoked by a lawyer who renders
postpetition services to the debtor that are not
authorized by section 330, or whether the regime
created by 330 is exclusive so far as lawyers’
services to the debtor is concerned. [The law
firm involved in this case] does not cite section
503.
983 F.2d at 777 (emphasis in original). This
invited parties to later cases to investigate and
brief the question, as the parties to Grabill had
not. When Singson arose more than a year later,
the parties did investigate and brief it. What
they discovered--what the panel in Grabill had
not known, given the absence of adversarial
presentation--was that the question had been
answered in other circuits. It was unnecessary
for Singson to discuss Grabill’s ruminations.
That catalyst had its desired effect, the
question was briefed, and Singson was the result.
We cover Grabill now only to avoid the risk that
courts will ignore this decision, just as the
bankruptcy and district judges here decided that
they need not follow Singson, but by doing this
we do not mean to encourage lengthy explorations
of dictum.
Just as Grabill is irrelevant to the
authoritative status of the later decision in
Singson, so In re Crivello, 134 F.3d 831 (7th
Cir. 1998), another case the bankruptcy judge
mentioned, is beside the point. A law firm
received approval under sec.327 and performed
services, but it later came to light that the
firm had prior connections with the debtor and
related parties, plus prepetition claims against
the debtor for legal work. Section 328(c)
provides that a court "may deny allowance of
compensation for services and reimbursement of
expenses of a professional person employed under
section 327 or 1103 of this title if, at any time
during such professional person’s employment
under section 327 or 1103 of this title, such
professional person is not a disinterested
person, or represents or holds an interest
adverse to the interest of the estate with
respect to the matter on which such professional
person is employed." The legal dispute in
Crivello was whether sec.328(c) requires the
bankruptcy court to disallow all compensation for
legal work done. Emphasizing the word "may" in
sec.328(c), we held that a bankruptcy court has
discretion to allow some compensation for work by
a professional who was actually, but improperly,
engaged under sec.327. See 134 F.3d at 836-39. MMK
contends that if the law firm in Crivello could
receive payment despite a lack of disinterest, it
should be paid too; any other approach would
create an incentive to lie (or shade the truth)
in the initial application for employment. That
is worrisome--though the professional
consequences of deceit are not limited to a
reduction of fees in a single case, so Crivello
is unlikely to lead to fraud in order to get
around Singson. But whatever arguments one may
make as a matter of first principles, there is a
dispositive difference under the statute Congress
actually enacted. Crivello dealt with a firm
whose employment had been approved under
sec.327(a), and whose compensation then was
curtailed under sec.328(c). Section 330 expressly
permits payment in such cases, and sec.503(b)(2)
gives that debt administrative priority. MMK’s
application under sec.327(a) was denied, so
neither sec.330 nor sec.503(b)(2) assists it.
Only one possibility remains to be considered.
Should we overrule Singson? MMK does not ask us to
take this step; its submission rests on the
proposition that Singson should be ignored
because it did not "overrule" Grabill. (How can
speculation be overruled?) At all events, it
would not be appropriate to change our view of
the relation among sec.sec. 327, 330, and 503(b).
All other appellate decisions on the subject come
out the way Singson did. See In re Keren Limited
Partnership, 189 F.3d 86, 88 (2d Cir. 1999); In
re F/S Airlease II, supra. Bankruptcy appellate
panels in two additional circuits have reached
the same conclusion. In re Monument Auto Detail,
Inc., 226 B.R. 219 (9th Cir. B.A.P. 1998); In re
Albrecht, 245 B.R. 666 (10th Cir. B.A.P. 2000).
Accord, 6 Collier on Bankruptcy
sec.943.03[3][b][i] (15th ed., rev. 2000).
Reversed