Augusta Apartments, LLC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
AUGUSTA APARTMENTS, LLC,
Debtor.
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Case No. 10-303
Chapter 7
MEMORANDUM OPINION
Before the court is Edward R. Kohout’s Application to Employ Counsel Nunc Pro Tunc
and Fee Application. Mr. Kohout seeks retroactive approval of his employment and approval of
$24,000 in fees for legal services rendered on behalf of Augusta Apartments, LLC (“Debtor”).
The United States Trustee (“UST”) objects to Mr. Kohout’s fee application based on the
untimeliness of his disclosure of compensation and nunc pro tunc employment application. For
the reasons stated herein, the court denies Mr. Kohout’s motion to employ nunc pro tunc and fee
application.
BACKGROUND
On February 18, 2010, the day before the Debtor filed bankruptcy, the Debtor paid
Robert O. Lampl, John P. Lacher, and Elsie R. Lampl (“Lampl Law Firm”) a $100,000 retainer
for representation in its Chapter 11 case. 	Of the $100,000, the firm retained $76,000; the
remainder was paid to Mr. Kohout.1 The Debtor and Mr. Kohout discussed the terms of his
retention but did not memorialize their fee arrangement. 	The parties agreed that Mr. Kohout
would serve as local bankruptcy counsel for the Debtor and be responsible for litigating at least
1 The Lampl Law Firm’s Disclosure of Compensation indicates that they received $75,000 from
the Debtor for legal services relating to its bankruptcy case. And according to section nine of the
Debtor’s Statement of Financial Affairs (“SOFA”), the Debtor paid the Lampl Law Firm
$75,000 and Mr. Kohout $24,000. However, according to the Lampl Law Firm, they received
$76,000, and the $1,000 differential is an error.
Dated: Wednesday, July 03, 2013 4:50:33 PM
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one adversary proceeding. 	The Debtor paid Mr. Kohout $24,000; the amount being based on
paying him $2,000 per month for his anticipated legal services.
On February 19, 2010, the Debtor filed for bankruptcy relief under Chapter 11. 	The
Debtor, as a debtor in possession, filed an application to employ the Lampl Law Firm. 	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 admission for the
Lampl Law Firm to appear pro hac vice with Mr. Kohout acting as local counsel. 	The court
approved these motions. 	On July 21, 2010, the court granted the appointment of a Chapter 11
trustee pursuant to 11 U.S.C. § 1104(a), and on the same date, the UST appointed Robert L.
Johns as trustee. 	Mr. Johns never sought to employ Mr. Kohout on behalf of the bankruptcy
estate. On July 17, 2012, the Debtor’s bankruptcy case was converted to a case under Chapter 7
with Mr. Johns acting as trustee.
On November 16, 2012, the UST filed a motion to examine attorney employment and
compensation of Mr. Kohout. 	The UST’s motion was the first time a party asked the court to
address Mr. Kohout’s compensation and precipitated Mr. Kohout’s motion to employ nunc pro
tunc and fee application which was filed February 15, 2013 — nearly three years after the Debtor
filed for bankruptcy relief. 	The UST objected to Mr. Kohout’s motion and the court held an
evidentiary hearing on March 21, 2013 to consider the matter.
At the start of the evidentiary hearing, Mr. Kohout stated that the hearing was
“disgusting” and he was “disgusted” by having to appear. He stated that the only reason he filed
a nunc pro tunc employment application was because the UST notified the court about his
compensation. 	Mr. Kohout acknowledged that he never filed a statement disclosing his
compensation or an application for employment. 	His excuses for failing to do so were
numerous: He was unfamiliar with Chapter 11 practice; he only works on consumer Chapter 7
cases; he is not familiar with the Bankruptcy Code; he has little knowledge of the rules
governing Chapter 11 cases; and he was “way out of his element” acting as counsel in a Chapter
11 case. 	With respect to the $24,000 fee he was paid, Mr. Kohout stated that the money is not
sitting in a trust account and that he spent it years ago.2 At the conclusion of the hearing, the
court took the matter under advisement.
2 At the evidentiary hearing, Mr. Kohout disputed for the first time that the $24,000 he received
came from the Debtor. But in his nunc pro tunc application, he stated in paragraph one that the
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DISCUSSION
Mr. Kohout seeks retroactive approval of his employment and approval of $24,000 in
compensation. 	His application notes that the Debtor paid the Lampl Law Firm $100,000, of
which he received $24,000 from the Lampl Law Firm by check. Mr. Kohout alleges that he was
working as an adjunct member of the Lampl Law Firm and that he did not “feel” that he had to
file an employment application. 	His only other explanation for not filing an employment
application was that he was unaware the Bankruptcy Code required court approval of his
employment. 	In response, the UST argues that Mr. Kohout’s motion should be denied on two
grounds such that the court should order him to disgorge his $24,000 fee: first, he violated 11
U.S.C. § 327 by failing to demonstrate that extraordinary circumstances exist warranting
approval of his nunc pro tunc application because simple oversight does not justify retroactive
employment; and second, he violated Bankruptcy Rule 2016(b) and 11 U.S.C. § 329(a) by not
disclosing his compensation with the court.3
Attorneys must seek prior court approval before they can be employed on behalf of the
bankruptcy estate. 11 U.S.C. § 327(a); Fed. R. Bankr. P. 2014(a) (detailing the requirements of
employment applications under § 327). 	Section 327(a) provides that a trustee may employ an
attorney that does not hold an “interest adverse to the estate” and that person must be
“disinterested.” 	§ 327(a). 	Attorneys seeking compensation for legal services cannot be paid
from the bankruptcy estate until approval of their application for employment. 	E.g., In re
Shirley, 134 B.R. 940, 943 (B.A.P. 9th Cir. 1992) (“Court approval of the employment of
counsel for a debtor-in-possession is the sine qua non to counsel getting paid.”). 	Even if an
Debtor paid Lampl Law Firm $100,000. And in an exhibit to his motion, he attached a copy of
the $24,000 check he received; the check description section notes “Augusta Apts., LLC.” At
the hearing, the court found paragraph one to be a judicial admission. Although the dispute was
technically resolved, Mr. Kohout stipulated that he would concede that the Debtor was the source
of the $100,000 if the UST furnished the $100,000 check paid to the Lampl Law Firm. The UST
filed with the court a copy of the $100,000 check paid to Lampl Law Firm’s trust account. The
check was written on the Debtor’s Clear Mountain Bank account and signed by an officer of the
Debtor.
3 The UST also questioned Mr. Kohout’s failure to make any disclosure regarding certain
“property transfers for attorney fees” involving him and individuals or entities connected with
the related bankruptcy cases of McCoy 6, LLC, Square at Falling Run, LLC, and Grand Central
Building, LLC. The court perceives no connection between those allegations and, if proven,
their application to the matter before the court. Thus, without prejudice to the UST’s pursuit of
her allegations regarding the transfers in any related case, the court will not address them as part
of the UST’s objection in this case.
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attorney is not seeking compensation from the bankruptcy estate, attorneys representing the
debtor must seek court approval under § 327. 	In re Engel, 124 F.3d 567, 571 (3d Cir. 1997).
Without court approval under § 327, the attorney will “be treated as a volunteer notwithstanding
that the services rendered may have been beneficial to the bankruptcy estate.” 	In re Rennie
Petroleum Corp., 384 B.R. 412, 415 (Bankr. E.D. Va. 2008). Denial of requested compensation
and disgorgement of any money received is an appropriate remedy for noncompliance with §
327. In re Land, 943 F.2d 1265, 1267-68 (10th Cir. 1991).
Bankruptcy 	courts, 	however, 	are 	empowered 	to 	grant 	a 	retroactive 	employment
application which may permit payment to debtor’s counsel for services rendered on behalf of the
bankruptcy estate. 	Approval of retroactive employment applications is equitable in nature and
“the court’s ultimate decision to grant or deny such applications is necessarily discretionary.” In
re Jarvis, 53 F.3d 416, 421 (1st Cir. 1995). 	Although the Fourth Circuit has yet to address the
applicable standard in determining whether to grant a retroactive employment application, the
majority of circuit courts require the applicant to demonstrate that the court would have
authorized the appointment under § 327, and the delay in seeking court approval resulted from
extraordinary circumstances. 	See In re Cong. Hotel Corp., No. 11-26732-PM, 2012 WL
1144421, at *4 (Bankr. D. Md. Apr. 4, 2012) (collecting cases). This court joins the majority of
courts, and holds that granting retroactive employment is limited to those situations where an
applicant can demonstrate that § 327 would have been satisfied if a timely application were
made, and the delay in seeking court approval stemmed from extraordinary circumstances. E.g.
In re Keren Ltd. P’ship., 189 F.3d 86, 87 (2d Cir. 1999) (employing extraordinary circumstances
standard); In re Jarvis, 53 F.3d at 420 (same); In re Land, 943 F.2d at 418 (same); In re
Arkansas, 798 F.2d 645, 649-60 (3d Cir. 1986) (same). But see In re Singson, 41 F.3d 316 (7th
Cir.1994) (adopting “excusable neglect” standard for retroactive employment applications).
Courts apply an array of factors in deciding whether extraordinary circumstances exist.4 But one
prevalent common denominator — recognized even under the more elastic excusable neglect
4 In assessing whether extraordinary circumstances exist, courts often look to the non-exhaustive
formulation expressed in In re Arkansas, 798 F.2d 645 (3d Cir. 1986). In Arkansas, the Third
Circuit instructed bankruptcy courts to consider “whether the applicant or some other person
bore responsibility for applying for approval; whether the applicant was under time pressure to
begin service without approval; the amount of delay after the applicant learned that initial
approval had not been granted; the extent to which compensation to the applicant will prejudice
innocent third parties; and other relevant factors.” 798 F.2d at 650.
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standard — is that simple oversight or neglect in timely filing an employment application does
not warrant retroactive approval of employment. See In re Aultman Enterprises, 264 B.R. 485,
493 (E.D. Tenn. 2001) (“Even those courts that have adopted a more lenient ‘excusable neglect’
standard have held ‘simple neglect’ is insufficient to excuse non-compliance with section 327.”);
3 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.”).
Debtor’s counsel must also file a statement with the court disclosing, among other things,
the amount of compensation paid or agreed to be paid. 	11 U.S.C. § 329(a); Fed. R. Bankr. P.
2016(b) (providing the disclosure requirements required by § 329). Section 329(a) provides that
“any attorney representing a debtor . . . in connection with” the debtor’s bankruptcy case must
file with the “court a statement of compensation paid” if such payment was made within one year
prior to the filing of the bankruptcy petition. 	§ 329(a). 	Section 329(a) disclosure requirements
are mandatory and require forthright disclosure of the precise nature of the fee arrangement.
Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th
Cir. 1995); see In re Saturley, 131 B.R. 509, 517 (Bankr. D. Me. 1991) (“Counsel’s fee
revelations must be direct and comprehensive.”). 	And the disclosure statement must be filed
regardless of the source of compensation or whether the attorney applies for compensation. Fed.
R. Bankr. P. 2016(b); In re Engel, 124 F.3d at 571. Bankruptcy Rule 2016(b) requires the filing
of a disclosure statement within 14 days after the order for relief; timeliness is critical under §
329(a) and Bankruptcy Rule 2016(b), see In re Whaley, 282 B.R. 38, 41 (Bankr. M.D. Fla. 2002)
(“If every attorney waited until he or she is caught to file a statement of disclosure, the entire
concept of mandatory disclosure would become a farce.”). Belated disclosure due to negligence
or inadvertent omissions does not justify failing to timely comply with the prescriptions of §
329(a). See, e.g., Park–Helena Corp., 63 F.3d at 882 (“Even a negligent or inadvertent failure to
disclose fully relevant information [in a Bankruptcy Rule 2016 statement] may result in a denial
of all requested fees.”); Jensen v. U.S. Trustee (In re Smitty's Truck Stop, Inc.), 210 B.R. 844,
849 (B.A.P. 10th Cir. 1997) (“Even a negligent or inadvertent failure to disclose the retainer is
sufficient to deny fees.”). Attorneys that fail to comply with § 329 and Bankruptcy Rule 2106(b)
risk forfeiting the “right to receive compensation for services rendered on behalf of the debtor
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and may be ordered 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) (citations omitted).
The court cannot grant Mr. Kohout’s nunc pro tunc application because he failed to
demonstrate extraordinary circumstances exist justifying his delay in filing an employment
application. 	Mr. Kohout contends that the court should construe the Lampl Law Firm’s
employment application as his employment application because he was an “adjunct” member of
the firm. 	The Lampl Law Firm, however, emphatically denies any professional affiliation with
Mr. Kohout, and he did not offer any evidence suggesting any connection with them. Moreover,
the Lampl Law Firm’s employment application does not seek to employ Mr. Kohout: the
application does not mention his name, state his professional services to be rendered, or note any
connections he may have with the Debtor. 	See Fed. R. Bankr. P. 2014(a). 	Mr. Kohout was
responsible for filing his own employment application and bore that responsibility alone.5 He
was simply unaware that § 327 required him to seek approval of his employment: At the
evidentiary hearing, he stated that he was unfamiliar with the Bankruptcy Code and that he was
“out of his element” acting as counsel in a Chapter 11 case. 	Mr. Kohout’s oversight of § 327
does not warrant retroactive approval of his employment application. 	E.g., Land, 943 F.2d at
1268 (“Simple neglect will not justify nunc pro tunc approval of a debtor's application for the
employment of a professional.”); In re Shirley, 134 B.R. 940, 943 n.4 (B.A.P. 9th Cir. 1992)
(“Mere negligence does not constitute an exceptional circumstance justifying the entry of a
retroactive order.”). 	The court cannot ignore that Mr. Kohout’s application came nearly three
years after the commencement of the case and three months after the issue of his employment
was raised by the UST’s motion to examine his employment and compensation. 	These sort of
lengthy delays militate against equitable relief. 	Thus, the court finds that the delay before Mr.
5 Mr. Kohout filing an application for admission pro hac vice on behalf of the Lampl Law Firm
does not constitute an employment application. Of course, an application for admission pro hac
vice and application for employment under § 327 serve entirely different purposes. Bankruptcy
Rule 2014(a) requires applicants to state, among other things, “the specific facts showing the
necessity for the employment, the name of the person to be employed, the reasons for the
selection, the professional services to be rendered” and connections with the debtor. Fed. R.
Bankr. P. 2014(a); see § 327. Applications for pro hac vice admission have no such
requirements.
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Kohout 	sought 	court 	approval 	of 	his 	employment 	did 	not 	stem 	from 	extraordinary
circumstances.6
Mr. Kohout also violated § 329 and Bankruptcy Rule 2016(b) by not disclosing that he
was paid by the Debtor. 	Mr. Kohout’s $24,000 payment was made “in contemplation of or in
connection with” the Debtor’s bankruptcy case.7 § 329(a). Mr. Kohout was paid on the eve of
bankruptcy with the intention that he would act as local bankruptcy counsel for the Debtor and
litigate at least one adversary proceeding on its behalf. 	See In re Blackburn, 448 B.R. 28, 42
(Bankr. D. Idaho 2011) (finding that representation in adversary proceedings clearly has a
“connection with” the bankruptcy case). As of entry of this memorandum opinion, Mr. Kohout
has yet to file a disclosure statement under Bankruptcy Rule 2016(b).8 In fact, by Mr. Kohout’s
own admission, the only reason he finally informed the court of his compensation was because
the UST challenged the propriety of his legal fees. 	Mr. Kohout requests the court excuse his
noncompliance under § 329 because he was unaware of his statutory obligation to file a
statement with the court. 	His ignorance does not absolve his noncompliance: 	Negligent or
inadvertent omissions do not justify failing to comply with the mandates of § 329(a). E.g., In re
Park-Helena Corp., 63 F.3d at 881; Jensen v. U.S. Trustee (In re Smitty’s Truck Stop, Inc.), 210
B.R. 844, 849 (B.A.P. 10th Cir. 1997). Mr. Kohout therefore violated Bankruptcy Rule 2016(b)
6 Because the court finds that Mr. Kohout failed to demonstrate extraordinary circumstances
justifying his delay, the court will not consider whether he could have been employed under §
327.
7 Although section nine of the Debtor’s SOFA reflects this pre-bankruptcy payment to Mr.
Kohout, this does not elide Mr. Kohout’s duty under § 329. If the Debtor’s SOFA satisfied Mr.
Kohout’s duty under § 329, it would eviscerate an attorney’s separate responsibility to disclose
under § 329 and Bankruptcy Rule 2016(b). 	See In re Blackburn, 448 B.R. 28, 40 (Bankr. D.
Idaho 2011) (“[T]he disclosure requirements under the Code and Rules are not merely
aspirations, they are mandatory.”). 	Indeed, the Debtor’s SOFA is a statement required by the
Debtor, it is not Mr. Kohout’s disclosure. See id. (“They [§ 329 and Bankruptcy Rule 2016(b)]
impose an independent duty on an attorney to disclose the precise nature of the fee arrangement
with the debtor . . . .”).
8 Mr. Kohout was required to file a disclosure under Bankruptcy Rule 2016(b) regardless of the
type of retainer he received — flat fee, security, and “classic” retainers are all subject to the
disclosure requirement under § 329. See Barron v. Countryman, 432 F.3d 590, 597 (5th Cir.
2005) (“A classic retainer, paid prepetition, is outside the estate and the purview of § 330, though
it remains subject to disclosure and reasonableness review under § 329 of the Bankruptcy
Code.”); In re Woodcraft Studios, Inc., 464 B.R. 1, 13 (N.D. Cal. 2011) (“[A]ll retainers,
regardless of type and when they are received, are subject to disgorgement in response to
disclosure violations.”).
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and § 329(a) by failing to make a timely disclosure after the Debtor filed for bankruptcy relief.
His violation of § 329(a) is grounds for denying his entire fee. 	E.g., In re Hooper, No. 93-
11599-AB, 2001 WL 34054526, at *10 (Bankr. E.D. Va. Oct. 29, 2001) (“‘[I]n cases involving
an attorney's failure to disclose his fee arrangement under § 329 or Rule 2016 . . . the courts have
consistently denied all fees.’”) (quoting Mapother & Mapother v. Cooper (In re Downs), 103
F.3d 472, 478 (6th Cir. 1996)); see also In re J.T. Thompson, USA, 2012 WL 4461650, at *5.
CONCLUSION
The court is well aware that disgorgement is a severe remedy and takes no delight in its
imposition. 	But see In re Kroeger Prop. and Dev., Inc., 57 B.R. 821, 822-23 (B.A.P. 9th Cir.
1986) (“Since professionals are charged with knowledge of the law, there is no unjust hardship in
requiring them to observe the strict requirements of Section 327.”). 	But the court cannot
overlook the nature and extent of Mr. Kohout’s noncompliance with the Bankruptcy Code: Mr.
Kohout ignored both his duty to disclose under § 329 and the requirement to seek approval for
his employment under § 327.9 Under the circumstances of this case, either of these failures
warrants denial of all fees. 	The court discerns no mitigating facts upon which a less drastic
remedy can be fashioned; Mr. Kohout’s lack of compliance with the Bankruptcy Code is an
abject failure. 	For the above-stated reasons, Mr. Kohout must disgorge the $24,000 fee he
received to Mr. Johns, the Chapter 7 trustee.
Finally, it is evident to the court, based largely upon Mr. Kohout’s own admissions, but
based also on the record developed in connection with the court’s disposition of this matter, that
Mr. Kohout’s familiarity with and appreciation of Chapter 11 bankruptcy practice is woefully
lacking.10 He is hereby sternly admonished by the court for taking on the duties and
9 Even if the court granted Mr. Kohout’s application for employment nunc pro tunc to the date of
the Debtor’s bankruptcy filing and ignored his § 329 violation, his entitlement to compensation
would be cut off as of the date Mr. Johns was appointed as Chapter 11 trustee. As of that date,
July 21, 2010, Mr. Kohout’s billing statements submitted in conjunction with his application for
employment indicates he only accrued $3,975 in fees for services rendered to the Debtor.
10 The court also has some concern as to whether Mr. Kohout properly handled the $24,000
retainer he received. “The general rule is that, unless shown to be otherwise, a retainer
constitutes funds held in trust for the benefit of the debtor, i.e., a security retainer.” In re
Pannebaker Custom Cabinet Corp., 198 B.R. 453, 459-60 (Bankr. M.D. Pa. 1996). If the fee
arrangement was in the form of a security retainer, then, as aptly noted by the UST, ethical issues
may arise because a debtor retains an interest in the funds until services are rendered and
approved pursuant to § 330; funds unearned or unapproved at the conclusion of the case remain
property of the debtor’s estate. See In re McDonald Bros. Constr., 114 B.R. 989, 999 (Bankr.
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responsibilities of counsel to a Chapter 11 debtor without possessing the requisite knowledge and
experience necessary to ably perform that role.
A separate order will be entered contemporaneously with this Memorandum Opinion
pursuant to Fed. R. Bankr. P. 9021.
N.D. Ill.) (Wedoff, J.). See generally W. Va. Rule Prof. Conduct 1.15(a) (“A lawyer shall hold
property of clients or third persons that is in a lawyer’s possession in connection with
representation separate from the lawyer’s own property. Funds shall be kept in a separate
account designated as a ‘client’s trust account’ . . . .”); Lawyer Disciplinary Bd. v. Kupec, 505
S.E.2d 619, 631-32 (W. Va. 1998). At the evidentiary hearing, Mr. Kohout unequivocally stated
that he never held the $24,000 payment in a trust account and spent the money years ago.
Notwithstanding these observations, the court declines to find that the Debtor and Mr.
Kohout entered into a security retainer fee arrangement given that such a finding is unnecessary
to the court’s disposition and the record regarding the issue was not sufficiently developed by
either party.
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