Michael Goldstein and Bridget C. Goldstein

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5, BENKRUP TOY COURT
yee BISTRICT OF CALIFORNIA

Geputy Shark

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

In re

Michael Goldstein & Bridget Agabra
Goldstein,

Debtors.

os

BK. NO. LA 07-11878 SB

Chapter 11

OPINION ON APPOINTING
DIVORCE COUNSEL

DATE: April 25, 2007
TIME: 11:00 a.m.
CRTRM.: 1575 (Roybal)

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l. Introduction

This case involves two debtors,
husband and wife, who filed a joint chapter
11 bankruptcy petition and applied for
authorization to employ their respective
divorce counsel to perform legal services
in relation to their marital dissolution
proceeding pending in state court. The
court, after a hearing on notice, granted
both motions to authorize employment of
the divorce counsel pursuant to § 327(e)'
on the grounds that divorce counsel’s
services were for a specified special
purpose and that the services were for the
benefit of their two bankruptcy estates.

Il. Relevant Facts

Michael Goldstein (“Michael”) and
Bridget Goldstein (“Bridget”) jointly filed a
chapter 11 petition. The joint debtors are
in the process of seeking a dissolution of
their marriage. Each party retained
divorce counsel’ before the filing of the
bankruptcy petition and counsel for both
parties have performed legal services in
relation to the divorce proceeding prior to
the filing of the bankruptcy petition.*

Unless otherwise indicated, all chapters,
ection and rule references are to the
ankruptcy Code, 11 U.S.C. §§ 101-1532 and
o the Federal Rules of Bankruptcy

rocedure, Rules 1001-9036.

In support of their motions, both debtors
ave submitted the respective retainer
greements for each of the divorce counsel
s evidence of the existence of an
mployment agreement.

P Michael retained Ms. Rebecca J. Thyne as
ivorce counsel and Ms. Thyne’s firm has
eceived $6,874.50 for pre-petition legal
ervices performed in relation to the
issolution proceeding. Bridget retained
elms & Myers as divorce counsel and the
irm has received $7,911.00 for pre-petition
egal services performed in relation to the

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On the same day that the joint
debtors filed their bankruptcy petition,
bankruptcy counsel for the debtors filed
two motions for authorization to employ
divorce counsel. Debtors stated on their
employment applications that they each
need divorce counsel’s services to advise
the debtors concerning divorce issues that
may arise from the bankruptcy case and to
complete the dissolution process without
interfering with the administration of the
bankruptcy case. Both motions were
heard on April 25, 2007 and were
subsequently granted.

lll. Analysis
A. Section 1115(a)

Prior to the Bankruptcy Abuse
Prevention Consumer Protection Act of
2005 ("BAPCPA’), the postpetition
earnings of a chapter 11 debtor did not
become property of the bankruptcy estate.
A chapter 11 debtor thus could use
postpetition earnings for a variety of
purposes, including living expenses and
paying for divorce counsel.

In consequence, pre-BAPCPA
case law took a restrictive view on the
extent to which estate funds could be used
to compensate divorce counsel. For
example, in in re Colin, 27 B.R. 87, 89
(Bankr. S.D.N.Y. 1983), a chapter 11
debtor was permitted to retain special
counsel for marital dissolution so long as
the services concerned the dissolution of
marriage as well as the disposition of
estate property. /d. However, only
professional services relating to the
disposition of estate property were
reimbursable from the bankruptcy estate.
In contrast, services relating to the marital
dissolution could not be reimbursed from
the estate. /d. The Colin court required
special divorce counsel to prepare
professional fee applications in detail so
that the court could distinguish between

dissolution proceeding.

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legal services relating to the disposition of
estate property and representation
concerning the marriage dissolution. /d.

BAPCPA made a fundamental
change in how postpetition divorce actions
(and many other expenses in an
individual’s chapter 11 case) can be
funded. Section 1115(a), which BAPCPA
added to the bankruptcy cade, provides in
relevant part:

[i]n a case in which the debtor is
an individual, property of the
estate, in addition to the property
specified in section 541 —

(1) all property of the kind
specified in section 541° that the
debtor acquires after the
commencement of the case but
before the case is closed,
dismissed, or converted to a case
under chapter 7, 12, or 13,
whichever occurs first; and

(2) earnings from services
performed by the debtor after the
commencement of the case but
before the case is closed,
dismissed, or converted to a case
under chapter 7, 12, or 13,
whichever occurs first.

Thus § 1115{a) gives rise to anew
issue that individual chapter 11 debtors
have never faced before, because it
deprives most individual debtors of any
non-estate assets that can be used for any
purpose. Essentially all property that an
individual debtor obtains while the chapter
11 case is pending is now property of the
bankruptcy estate (unless the debtor has
the good fortune of having non-estate
property, which is unlikely in most cases).
Now, individual chapter 11 debtors are no

HSection 541 broadly defines property of the

estate to include “all legal and equitable

of the filing of the bankruptcy petition (with
certain exceptions not relevant here).

nterests” of the debtor in property at the date

longer permitted to use their post-petition
income to pay divorce counsel unless such
an expense is authorized for property of
the bankruptcy estate.®

if the employment and payment
for divorce counsel were in the ordinary
course of business, these transactions
would likely be authorized by 363(c}, which
provides that a debtor in possession
(whom § 1107 grants most of the powers
of a trustee) “may enter into transactions

. in the ordinary course of business,
without notice or a hearing, and may use
property of the estate in the ordinary
course of business without notice or a
hearing.” This provision authorizes a
debtor to buy bread and probably to
purchase a ticket to travel to a court
hearing. However, the hiring of divorce
counsel is not typically a transaction in the
ordinary course of business.

If the filing of a joint petition
creates a single bankruptcy estate, §
1115fa) would appear to prevent individual
chapter 11 debtors from paying for their
divorce. However, preventing a debtor
from retaining counsel to get a divorce is
not one of the purposes of the bankruptcy
code. Furthermore, itis not at all clear that

‘It is not even clear whether the confirmation
of a chapter 11 plan can relieve a debtor of
the impact of § 1115. While § 1141(b)
provides that the confirmation of a plan “vests
all of the property of the estate in the debtor,”
and thus removes it from the estate (unless
the plan or the confirmation order provides
otherwise), § 1115 apparently provides that
the debtor's post-confirmation earnings
continue to be property of the estate until the

case is closed (or converted or dismissed).

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a joint petition creates a single bankruptcy
estate.

B. Joint Case — One Estate or Two?

The analysis in this case is
complicated (and perhaps simplified) by
the fact that this is a joint case, with two
debtors who are still spouses. No joint
cases may be filed with a single petition
under the bankruptcy code except where
the debtors are spouses.’ See § 302.

Itis not clear under the bankruptcy
code whether the filing of a joint petition
creates one or two estates. Section 541(a)
seems to favor the “one estate” alternative,
under which a joint filing creates a single
pcol of assets from which the debts of both
individuals will be paid. That section
states in relevant part, “[t]he
commencement of a case under section
301, 302, or 303 of this title creates an
estate” (emphasis added). If the filing of a
case under § 302 creates two separate
estates, this should be recognized in the
language of § 541, but it is not.

Further support for the “one
estate” analysis appears in § 541(a)(2),
which includes in a debtor's estate, “[alfl
interests of the debtor and the debtor's
spouse in community property as of the
commencement of the case....” If ajoint
petition under § 302 creates two separate
estates, there is nothing in § 541 (or
elsewhere in the bankruptcy code) to
determine which estate receives the
community property in a community
property state, such as California.’

On the other hand, the language
of § 302 favors a “two estate” analysis.
This section provides for the court to
determine the extent, if any, to which the
Debtors with other relationships, such as
arent corporation and subsidiary, a
artnership and one or more of its partners, or
limited partnership and its general! partner,
ay proceed as joint cases upon approval of

he court. See Rule 1015(b).

it appears that this particular problem does

ot arise in those states where community
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roperty is not the marital regime.

debtor's estates resulting from the joint
filing should be consolidated. The
legislative history states:

Subsection (b) requires
the court to determine the
extent, if any, to which
the estates of the two
debtors will be
consolidated; that is,
assets and _ liabilities
combined in a single pool
to pay creditors. Factors
that will be relevant in the
court’s determination
include the extent of
jointly held property and
the amount of jointly-
owed debts.

See S. REP. No. 95-989, reprinted in 1978
U.S.C.C.A.N. 5818. In further support of
the “two estate” analysis, Collier states,
“the filing of a joint petition does not in and
of itself create a single pool of assets out
of which all creditors of the two individuals
will be paid, but merely allows the two
estates to be jointly administered.” See 2
COLLIER ON BANKRUPTCY J 302.01 (15th
ed. rev. 2007).

The “two estate” analysis is further
supported by Rule 1015(b}, which provides
in relevant part, “[i]f a joint petition . . . [is]
pending ...by...a husband and wife. .
. the court may order a joint administration
of the estates.” In addition, Rule 1015(c)
provides in relevant part, “[w]Jhen an order
for consolidation or joint administration of
a joint case .. .is entered pursuant to this
rule, while protecting the rights of the
parties under the Code, the court may
enter orders as may tend to avoid
unnecessary costs and delay.” 11U.S.C.
§ 302(b) (2007); Feb. BANKR. R. 1015(a);
see also in re Estrada, 224 B.R. 132, 134
(Bankr. $.D. Cal. 1998) (“the joint petition
... creates two separate bankruptcy
estates”); In re Hicks, 300 B.R. 372, 376
(Bankr. D. Idaho 2003) (“the filing of a joint
petition actually creates two estates, not
one.”); In re Leys, 49 B.R. 852, 853
(Bankr. E.D. Wis. 1985) (“[t]he filing of a

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jcint petition by a husband and wife does
not create a joint bankruptcy estate.”)

The Collier treatise supports this
analysis. Generally, Collier states, the
estates of a husband and wife filing a joint
case should not be consolidated “when the
creditors of one estate will benefit to the
detriment of the other and when the affairs
and assets of the couple are not so
intermingled as to prevent the efficient
administration of the estates if they are co-
administered.” COLLIER, supra, J 302.6.
The typical practice in the Central District
of California is to administer jointly the two
separate bankruptcy estates when a
husband and wife file a joint bankruptcy
petition for the ease of administration and
judicial economy.

Adding support to the “two estate”
analysis, Rule 1015(b) further provides,
“‘[p]rior to entering an order [for joint
administration] the court shall give
consideration to protecting creditors of
different estates against potential conflicts
of interest.” No potential conflicts of
interest would arise if a joint petition
creates a single joint estate.

The court does not perceive itself
to be in a position to resolve for all
purposes the issue of whether a joint
petition creates one or two bankruptcy
estates. However, it may not be
necessary to decide this issue on a global
basis. For some purposes, it may be
appropriate to consider that a joint petition
creates a single bankruptcy estate, and
two estates for other purposes.

In the context before the court,
however, the proper resolution is clearer.
Where the interests of two joint debtors
are at odds with each other, such as
where they intend to divorce each other,
the interests of the respective spouses
differ in many respects. The court
concludes that, for purposes related to the
divorce proceedings, the estates should be
treated as separate for each spouse.

This “two estate” resolution in this
context facilitates the finding required that
the employment of legal counsel by each
spouse separately to proceed with the
divorce is in the best interests of their

® Section 327(e) provides:

respective estates. Michael and Bridget
filed a joint bankruptcy petition which
created two separate estates. It
necessarily follows that the dissolution of
their marriage will require the division of
their marital property in order to dispose of
the two bankruptcy estates at the
conclusion of their chapter 11 plan of
reorganization. Thereafter, a judicial
determination of their respective
community or separate property is
required in order to dispose of the two
bankruptcy estates.

C. Section 327(e)

Section 327{e) authorizes a
trustee to employ special counsel if (1)
employment is for a specified special
purpose, (2) itis in the best interest of the
estate and (3) counsel does not hold any
interest that is adverse to the debtor® with
Tespect to the matter in which counsel is to
be employed.’ /n re Black & White Cab
Co,, 175 B.R. 24, 25 (Bankr. E.D. Ark.
1994); in re Brennan, 187 B.R. 135, 155
(Bankr. D.N.J. 1995), rev'd on ofher
grounds, 180 F.3d 504 (Bankr. D.N.J.
1995).

[t]he trustee, with the court's
approval, may employ, for a
specified special purpose,
other than to represent the
trustee in conducting the
case, an attorney that has
represented the debtor, if in
the best interest of the estate,
and if such attorney does not
represent or hold any interest
adverse to the debtor or to
the estate with respect to the
matter on which such

attorney is to be employed.

* It is uncontested that the each divorce
counsel herein neither holds nor represents

any interest adverse to the debtor for whom

such counsel are to be employed.

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1. Specified Special Purpose

An attorney is authorized to
perform legai services as special counsel
in a bankruptcy case when the attorney is
employed with court approval for a
specified special purpose that would be
beneficial to the bankruptcy estate. See §
327(e) (2007). Typically, special counsel
is appropriate when an attorney is
employed to handle a specific legal action
that is unrelated to the reorganization and
the attorney is particularly suited for that
action. /n re Warner, 141 B.R. 762 (Bankr.
M.D. Fla. 1992).

Further, when counsel is very
familiar with the non-bankruptcy litigation
because counsel has previously performed
legal services for the debtor; it is obvious
that the continuation of counsel's special
services is in the best interest of the
estate. in re Black & White Cab Co., 175
B.R. at 26. Special counsel's familiarity
with a case would expedite the process of
resolving matters and will lead to
advantages for the estate and the
creditors. id. (special counsel's familiarity
with the case assisted in resolving the
matter more expeditiously and all parties
agreed that if the investigation was
delayed, it would lead to a greater risk of
non payment to creditors); /n re Brennan,
187 B.R. at 155 (“[aJny substitute counsel
would be required to duplicate a great deal
of [counsel's] efforts at this point, at a
substantial expense to the estate.”).
“Moreover, the ‘specified special purpose’
requirement serves the important policy of
avoiding an unnecessary duplication of
services at the further expense of the
estate.” in re NRG Resource, Inc., 64
B.R. 643, 647 (Bankr. W.D. La. 1986).

In the case at bar, divorce counsel
for the joint debtors were retained as
special counsel to perform legal services
for their marital dissolution prior to the
filing of the bankruptcy petition. Since
divorce counsel have already performed
legal services in the divorce case, they are
already familiar with the facts of the case.
To continue to retain them as divorce

counsel would avoid any unnecessary
expenses and duplicated efforts from
newly retained counsel.

Moreover, the divorce counsel for
both debtors in this case is particularly
appropriate. Counsel for both debtors are
family law specialists and both have had
more than twenty years of experience in
family law practice.’ Similar to any other
specialized non-bankruptcy _ litigation
where expertise is necessary; divorce
litigation requires counsel with expertise in
family law. Therefore, allowing the debtors
to retain special divorce counsel is
appropriate in order to allow the debtors to
proceed with their marital dissolution.

2. Best Interest of the Estates

In order for the court to authorize
employment for special divorce counsel, a
debtor must show that such employmentis
for the benefit of the estate and not for the
debtor's personal benefit. in re Warner,
141 B.R. at 762; see ai/so in re Black &
White Cab Co., 175 B.R. at 26. In this
case, authorizing each joint debtor to
employ respective divorce counselis in the
best interest of the two estates involved in
this case. Employing special divorce
counsel will assist the debtors in resolving
their differences in their marital dissolution
and in disentangling their domestic lives
during the bankruptcy proceeding.
Without the assistance of their respective
divorce counsel, Michael and Bridget will
remain legally married and will not be able
to dissolve their marriage.

IV. Conclusion

'0 Evidence of their respective divorce
counsel's experience is evidence by each of
their firm resumes submitted in support of the
motions. Michael's divorce counsel focuses
on family law issues and has more than
twenty years of experience in family law.
Bridget's divorce counsel has been certified in

the first class of family lawyers since 1980.

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For the foregoing reasons, the
motions for order authorizing the joint
debtors to employ divorce counsel are
both granted pursuant to § 327(e).

DATED: June 29, 2007
ip

L. Lt
ATES BANKRUPTCY
JUDGE

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CERTIFICATE OF MAILING

| certify that a true copy of this OPINION ON APPOINTING DIVORCE COUNSEL was mailed on
were __, 2007 to the parties listed below:

JUL - 2 2007

Michael Goldstein
1975 Liliano Drive
Sierra Madre, California 91024

Bridge Goldstein
5259 Gould Avenue
La Canada, California 91011

David A. Tilem, Esq.

Law Offices of David A. Tilem
206 North Jackson Street
Suite 201

Glendale, California 91206

Rebecca J. Thyne, Esq.

Lagerlof, Senecal, Gosney & Kruse, LLP
304 North Lake Avenue

10" Floor

Pasadena, California 91101-4108

U.S. Trustee’s Office

725 South Figueroa Street

Suite 2600

Los Angeles, California 90017 —

JUL -2 707 Gt lar

Deputy Clerk

DATED: