Estate of Virgil B. LaRosa and Joan LaRosa

1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
ESTATE OF VIRGIL B. LAROSA, and ) Case No. 03-4115
JOAN LAROSA )
)
Debtors. ) Chapter 11
)
MEMORANDUM OPINION
On June 17, 2006, Virgil B. LaRosa died. His Chapter 11 bankruptcy case is continuing to be
jointly administered with that of his spouse, Joan LaRosa. Judy L. Shanholtz and the law firm of McNeer,
Highland, McMunn and Varner, L.C. (“MHMV”), counsel for the Chapter 11 debtors-in-possession Virgil
and Joan LaRosa (the “Debtors”), filed an application with the court to approve the employment of
MHMV as special counsel for the administration of Virgil B. LaRosa’s death estate. That application is
opposed by Joseph and Dominick LaRosa (“JDL”) on the basis that the Debtor’s bankruptcy estate ought
not have to pay the costs of unrelated probate and/or non-probate proceedings, and that, if the court
approved the application, MHMV would be representing interests adverse to that of the bankruptcy estate,
which is prohibited by 11 U.S.C. § 327(e).
The court held a telephonic hearing on the application on September 27, 2006, in Wheeling, West
Virginia, at which time the court ordered the parties to submit supplemental briefing. That briefing is now
complete, and for the reasons stated herein, the court will deny MHMV’s application.
I. BACKGROUND
Dated: Wednesday, February 28, 2007 4:13:05 PM
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 1 of 8

2
On November 19, 2003, the Debtors filed their Chapter 11 bankruptcy petition, listing assets in
excess of $3.3 million and liabilities of $5 million. JDL filed the only unsecured proof of claim in the case
stating that they were owed about $4.5 million based on a pre-petition judgment. The Debtors have been
disputing the amount and validity of that claim since the beginning of this case.
After Virgil B. LaRosa’s death on June 17, 2006, Joan LaRosa was named executrix of his death
estate. As part of her duties as executrix, Joan LaRosa is required to file Federal Form 706 – which
requires that an appraisal be done on all property of Virgil’s death estate. On September 29, 2006, by the
consent of the parties, this court granted the Debtors authorization to employ MHMV for the limited
purpose of notifying State and County agencies about the current status of the bankruptcy case and to
request a continuance of the requirement that Joan LaRosa make an appraisement of Virgil B. LaRosa’s
death estate.
II. DISCUSSION
JDL asserts that the non-exempt property of the Debtors’ bankruptcy estate may not be charged
with the fees associated with administering Virgil B. LaRosa’s death estate. Moreover, JDL asserts that
a conflict of interest would exist should the court approve the retention of MHMV as special counsel for
the administration of Virgil’s death estate as well as being counsel for the Debtors inasmuch as MHMV
owes a fiduciary duty to maximize recovery for creditors of the Debtors’ bankruptcy estate and, if the
application is approved, would also owe a duty to maximize recovery for the beneficiaries of Virgil’s death
estate.
A. Deceased Debtors
Federal bankruptcy courts do not administer the estates of deceased debtors. E.g., Marshall v.
Marshall, 126 S. Ct. 1735, 1748 (2006) (“[T]he probate exception [to federal court jurisdiction] reserves
to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it
also precludes federal courts from endeavoring to dispose of property that is in the custody of a state
probate court.”). Indeed, the Commission on the Bankruptcy Laws of the United States recommended
as part of the Bankruptcy Reform Act of 1978 that “the Bankruptcy Act not be extended to administration
of decedents’ estates other than to the extent necessary to wind up the administration of the estate of
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 2 of 8

3
debtors who die after the date of the petition.” Report of the Commission on the Bankruptcy Laws of
the United States, H.R. Doc. No. 137, 93rd Cong., 1s t Sess. (1973). Federal Rule of Bankruptcy
Procedure 1016 implements this policy by stating:
If a reorganization . . . is pending under chapter 11, . . . the case may be dismissed; or if
further administration is possible and in the best interest of the parties, the case may
proceed and be concluded in the same manner, so far as possible, as though the death .
. . had not occurred.
Fed. R. Bankr. P. 1016.
In this case, the deceased debtor’s spouse, Joan LaRosa, who is also a co-debtor, is the executrix
of the decedent’s estate, and the case is proceeding, so far as possible, as if the death of Virgil B. LaRosa
had not occurred. No plan has yet been filed in this case inasmuch as it is largely a two creditor dispute,
and depending on the outcome of that dispute, the proposed plan will likely involve the disposition of
property rather than being dependent on the future income of the deceased debtor. See, e.g., 9 Collier
on Bankruptcy, ¶ 1016.03 (Alan N. Resnick & Henry J. Sommer, eds. 15th ed. rev. 2006) (“[I]n many
cases a successful plan will not depend on the future earnings or involvement of the debtor. . . . [I]t is
conceivable that the debtor’s estate could continue to be administered notwithstanding the death or insanity
of the debtor.”).
B. Property of the Bankruptcy Estate and Property of a Debtor’s Death Estate
As defined by statute, property of the bankruptcy estate includes “all legal or equitable interests of
the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). What constitutes
property of the bankruptcy estate is to be interpreted broadly. United States v. Whiting Pools, 462 U.S.
198, 204-05 (1983). What constitutes property of the bankruptcy estate for a Chapter 11 individual
debtor after the commencement of the case is the subject of some controversy – especially in cases filed
before the effective date of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. See,
e.g., In re Prince, 85 F.3d 314, 322-23 (7th Cir. 1996) (classification of post-petition goodwill); In re
FitzSimmons, 725 F.2d 1208, 1211 (9th Cir. 1984) (distinguishing an individual Chapter 11 debtor’s post-
petition personal services from property of the estate). The bankruptcy estate does not include, however,
any property, or the value of such property, to the extent it is exempted by the debtor. 11 U.S.C. § 522(b)
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 3 of 8

4
(“Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate .
. . .”).
Thus, after the filing of a Chapter 11 petition, two estates exist – the bankruptcy estate, and the
estate of the debtor to the extent that any legal or equitable interest of the debtor did not become property
of the bankruptcy estate, and to the extent that post-petition property is not property of the bankruptcy
estate. Importantly, the creation of a bankruptcy estate is to fulfill the purposes of the Bankruptcy Code,
which “aims, in the main, to secure equal distribution among creditors.” Howard Delivery Serv., Inc. v.
Zurich Am. Ins. Co., 126 S. Ct. 2105, 2109 (2006). To achieve this goal, the bankruptcy estate is
treated as a separate entity from the debtor. This separate treatment is evident in the Bankruptcy Code.
For example, special rules apply to creditors that seek to obtain property of the estate as opposed to
property of the debtor, the bankruptcy estate acquires interests in property beyond that which the debtor
had as of the petition date, a debtor is allowed to remove specified property from the ambit of the
bankruptcy estate, and the bankruptcy estate has a separate tax identification number. See §§ 362(a)
(separating the effects of the automatic stay as between the debtor and the estate); 522 (allowing the debtor
to exempt certain property to the exclusion of the estate); 541(a) (defining property of the estate, which
extends beyond that of the individual debtor); 544 (granting the trustee, as the representative of the
bankruptcy estate, certain rights to property that are not available to the debtor); In re Mirman, 98 B.R.
742, 745 (Bankr. E.D. Va. 1989) (“[W]hen an individual's Chapter 7 or Chapter 11 proceeding
commences, a separate taxable entity is created . . . and [it] is completely distinct from the individual[’]s
[estate] for income tax purposes.”). Furthermore, the Bankruptcy Code specifically defines an estate to
be an “entity” 11 U.S.C. § 101(15). This background gives context to the comments made in the legislative
history to § 541 of the Bankruptcy Code concerning the difference between the bankruptcy estate and a
decedent’s estate:
Once the estate is created, no interests in property of the estate remain in the debtor.
Consequently, if the debtor dies during the case, only property exempted from property
of the estate or acquired by the debtor after the commencement of the case and not
included as property of the estate will be available to the representative of the debtor’s
probate estate. The bankruptcy proceeding will continue in rem with respect to property
of the estate, and the discharge will apply in personam to relieve the debtor, and thus his
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 4 of 8

5
probate representative, of liability for dischargeable debts.
HR Rep. No. 595, 95th Cong., 1st Sess. 367-68; S. Rep. No. 989, 95th Cong., 2nd Sess. 82-83 (1978).
See also In re Gridley, 131 B.R. 447, 451 (Bankr. D.S.D. 1991) (finding no violation of the automatic
stay by opening a probate proceeding after the filing of a Chapter 7 case because “[p]robate is concerned
with exempt assets and any assets that have come into existence after the bankruptcy petition has been
filed” and “everything up to the time of bankruptcy filing is handled by the bankruptcy court and everything
post-petition and after death is administered by the probate court.”)
C. Bankruptcy Estate Payment for Legal Fees Incurred in Administration of a Decedent’s
Estate
Joan LaRosa seeks to have this court approve the application for employment of MHMV as legal
counsel for Virgil B. LaRosa’s death estate, and to approve the payment of those legal expenses and costs
out of funds belonging to the bankruptcy estate, i.e., at the expense of the bankruptcy estate’s only
unsecured creditor – JDL. The contemplated services to be performed by MHMV include: providing
assistance to Joan LaRosa as it relates to the administration of Virgil B. LaRosa’s death estate under West
Virginia law; preparation of a federal estate transfer tax return (Form 706); preparation of appraisals,
inventories, and reports for West Virginia authorities pursuant to W. Va. Code § 44-1-14; and such other
legal services as may be necessary on behalf of Virgil B. LaRosa’s death estate in the pending bankruptcy
case and related adversary proceedings. Additionally, MHMV contends that all transfers of real and
personal property that occurred within three years of the decedent’s death for less than adequate
consideration must be reported. MHMV asserts that a debtor-in-possession has the obligation to file these
reports on the basis that the estate is in possession of property of the decedent’s estate, and that Virgil B.
LaRosa’s transfer of property to the bankruptcy estate was not related to a bona fide sale for the adequate
and full consideration in money or money’s worth, which would otherwise permit that transfer to be
excluded under Internal Revenue Code § 2035(d).
JDL asserts that the bankruptcy estate will not receive any benefit from the approval of MHMV’s
application to be appointed as special counsel for the administration of Virgil B. LaRosa’s death estate.
The court agrees.
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 5 of 8

6
Section 327(e) of the Bankruptcy Code allows special purpose employment, the purpose of which
is generally to allow the continuation of an attorney’s employment when the debtor is involved in complex
litigation before the petition date and changing attorneys in the middle of the case would be detrimental to
the progress of the pre-petition litigation. 11 U.S.C. § 327(e); H.R. No. 95-595 (1978). When a
bankruptcy estate may benefit from the administration of a deceased debtor’s death estate, however, the
trustee may seek the appointment of special counsel pursuant to § 327(e). In re Schuler, 354 B.R. 37,
44 (Bankr. W.D.N.Y. 2006); see also Vining v. Taunt (In re M.T.G., Inc.), 298 B.R. 310, 318 (Bankr.
E.D. Mich. 2003) (holding that no requirement exists that the proposed attorney must have previously
represented the debtor with respect to those specified special purposes). To hire special counsel under
§ 327(e), the trustee, or debtor-in-possession, must show, inter alia, that the representation is in the best
interest of the estate, and the attorney does not represent or hold an interest adverse to the debtor or the
debtor's estate. Stapleton v. Woodworkers Warehouse, Inc. (In re Woodworkers Warehouse, Inc.),
323 B.R. 403, 406 (Bankr. D. Del. 2005).
An attorney’s employment under § 327(e) is in the best interests of the bankruptcy estate when:
(1) “property of the estate is threatened and the need for services is real;” and (2) special counsel provides
some benefit to the estate – not merely to the debtor – which benefit is “gauged by needs of the estate and
whether it is directly related to the debtor in possession’s performance of duties under the bankruptcy
code.” Ferrara & Hantman v. Alvarez (In re Engel), 124 F.3d 567, 575 (3rd Cir. 1997). Retention
of counsel under § 327(e) is merely the preliminary step – compensation of special counsel requires a
separate analysis under § 330(a), and compensation is only to be awarded for the “actual, necessary
services rendered by the . . . attorney . . . .” 11 U.S.C. § 330(a)(1)(A). No compensation is appropriate
for “services that were not – (I) reasonably likely to benefit the debtor’s estate; or (II) necessary to the
administration of the estate.” § 330(a)(4)(A)(ii)(I-II).
In this case, property of the Debtors’ Chapter 11 bankruptcy estate came into existence as of the
petition date. The only property that Virgil B. LaRosa was possessed of as of the date of his death was
that which was exempted under the Bankruptcy Code, or acquired after the petition was filed (to the extent
it was not post-petition property of the estate under § 541). In addition, Virgil B. LaRosa had a contingent
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 6 of 8

1 MHMV asserts that the bankruptcy estate is like a trust that the debtor has the power to
revoke. That analogy is inaccurate. While a debtor has prudential standing to move to dismiss a
Chapter 11 case, that dismissal may only be granted by the court for cause, and a court’s determination
that a case should be dismissed is guided by the best interest of the creditors test. 11 U.S.C. §
1112(b).
7
interest in the bankruptcy estate to the extent that a surplus may exist after his creditors will either be paid
in full, or to the extent that his creditors may agree to some other treatment pursuant to the terms of a
confirmed Chapter 11 plan that can be approved by the court. It is axiomatic that the bankruptcy court
administers property of the bankruptcy estate pursuant to the provisions of the Bankruptcy Code – the
court is not guided by state probate and nonprobate law on how to distribute assets that do not belong to
the deceased debtor.1
The employment of MHMV as special counsel for the administration of the estate of Virgil B.
LaRosa will serve to benefit the beneficiaries of his death estate – not the bankruptcy estate. MHMV has
not proven how its assistance to Joan LaRosa in administering Virgil’s death estate would protect the
bankruptcy estate from threatened actions, or further the performance of a debtor-in-possession’s duties
under the Bankruptcy Code. The court doubts that MHMV would have any “claim” against the
bankruptcy estate for its contemplated services. See 11 U.S.C. § 101(5)(A) (defining a “claim” to be a
“right to payment” from the bankruptcy estate); In re Schuler, 354 B.R. at 44 (stating that counsel for the
deceased debtor’s estate really served the interests of the deceased debtor’s spouse; therefore, counsel’s
“claim” against the bankruptcy estate was disallowed and the court directed counsel to seek compensation
from either the spouse or from assets that were exempted from property of the estate).
Moreover, MHMV is already approved as counsel to the debtors-in-possession. To the extent
that property of the bankruptcy estate overlaps with that of Virgil B. LaRosa’s death estate for probate,
non-probate and/or tax purposes (no overlap exists for purposes of the Bankruptcy Code), MHMV
already has the opportunity to request approval of fees and expenses for services that benefit the
bankruptcy estate, such as, if applicable, obtaining updated appraisals of property, and/or obtaining a higher
basis for property to be sold under the plan. At that time, MHMV will have the opportunity to demonstrate
that the performed service was actual and necessary to the administration of the bankruptcy case pursuant
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 7 of 8

8
to 11 U.S.C. § 330. In sum, MHMV has failed to demonstrate that the creditors of the Debtors’
bankruptcy estate should bear the burden of paying for the administration of Virgil B. LaRosa’s death estate
when property of the bankruptcy estate is separate from the property that Virgil B. LaRosa owned at his
death, and when the administration of the death estate has not been proven to have any impact on the
administration of the bankruptcy estate for purposes of the Bankruptcy Code.
III. CONCLUSION
For the above stated reasons, the court will deny MHMV’s application to be employed as special
counsel to the Debtors for the purpose of administrating the death estate of Virgil B. LaRosa. Given the
court’s disposition of this issue, it is not necessary to address whether MHMV would hold any interest
adverse to the bankruptcy estate under § 327(e) that would prohibit their employment as special counsel.
The court will enter a separate order pursuant to Fed. R. Bankr. P. 9021.
Case 1:03-bk-04115 Doc 326 Filed 03/01/07 Entered 03/01/07 15:04:16 Desc Main
Document Page 8 of 8