Chapter 7 Debtors’ Attorneys Must Be Employed Pursuant to §327 In Order to Receive Post-petition Compensation Under §330(a)(1)
By the Hon. Dennis R. Dow¹

In Lamie v. United States Trustee, 540 U.S. ___ (2004), the Supreme Court affirmed the Fourth Circuit and held that a chapter 7 debtor’s attorney must be appointed by the trustee, and approved by the court, pursuant to 11 U.S.C. §327, in order to receive post-petition (or post-conversion) compensation. The Court held that awkwardness created by the 1994 amendment to 11 U.S.C. §330(a)(1) did not render it ambiguous and that its plain language deprived the courts of authority to compensate debtor’s counsel, whether or not that was what Congress intended.² The Court went on to note that even if it did look at the legislative history, that history is unclear and would not necessarily lead to a different decision.

Congress amended the Bankruptcy Code in 1994. Prior to the amendment, §330(a)(1) read as follows:

(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, . . ., the court may award to a trustee, to an examiner, to a professional person, or to the debtor’s attorney employed under Section 327 or 1103-
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney. . .

11 U.S.C. §330(a)(1).

In Lamie, the appellant represented the debtor-in-possession in a chapter 11 case that later converted to chapter 7. After conversion, the appellant continued to represent the debtor, but failed to seek employment pursuant to §327. Subsequently, the appellant applied to be compensated from the bankruptcy estate for services rendered after conversion. The trustee argued that §330(a)(1) only allowed compensation to be paid to the listed persons and professionals employed pursuant to §327. The appellant contended that the statute was ambiguous, so legislative history should have been consulted, which indicated that the deletion of “or to the debtor’s attorney” was a mistake, and that Congress’s intent was for that language to remain in the statute, as evidenced by §330(a)(1)(A), which retained a reference to “attorney.” The bankruptcy court found that §330(a)(1) was unambiguous and its plain language only provides for compensation to professional persons employed by the trustee pursuant to §327.³ The appellant appealed to the District Court and the Fourth Circuit, both of which affirmed the bankruptcy court’s holding.⁴ The Fourth Circuit determined that current §330 is unambiguous and that in a chapter 7 proceeding, a debtor’s attorney must be employed by the trustee, pursuant to §327, in order to receive post-petition (or post-conversion) compensation.

The Supreme Court agreed with the Fourth Circuit. In support of its finding that §330 was unambiguous, the Supreme Court reviewed the pre- and post-amendment statute. The 1994 amendment deleted five words at the end of what was §330(a) and is now §330(a)(1): “or to the debtor’s attorney.” This deletion affects both the grammar and the parallelism between §§330(a)(1) and 330(a)(1)(A). The Court, however, found that the existing statutory text is the relevant text in discerning congressional intent, not the statute’s previous language.

The Court observed that §330(a)(1) authorizes an award of compensation to three types of persons: trustees, examiners and §327 professional persons. The fact that §330(a)(1)(A) further defines what type of persons may render service that is eligible for compensation is irrelevant if such person does not fall into one of the named classes of persons in §330(a)(1). The Court further determined that neither the missing “or” in §330(a)(1) nor the additional fourth category of persons who can render compensable services in subsection (A) alters the text’s substance or meaning, because subsection (A)’s “attorney” can be read to refer to those attorneys whose fees are authorized by §330(a)(1), i.e., employed pursuant to §327. In addition, the Court reasoned that although the word “attorney” in subsection (A) may be surplusage since subsection (A)’s “professional persons” already includes attorneys, that was not controlling and surplusage does not always produce ambiguity. Ultimately, the Court held that the text can be interpreted in two ways – one that creates surplusage, but renders the text clear, and another that solves the surplusage problem, but creates ambiguity. In this context, the Court preferred surplusage over ambiguity.

Ultimately, the Court refused to read the absent word “attorney” into §330(a)(1) in deference to the legislature. The Court also noted that although it was unnecessary to rely on legislative history, that history in this case only created more confusion about Congress’s intent because it lends support both to appellant’s interpretation and to the Court’s holding. For example, the elimination of the phrase “or to the debtor’s attorney” could have been the result of overzealous deletion by a scrivener modifying a previous draft to reflect agreed changes in the text. On the other hand, the fact that Congress added an authorization to make a fee award to debtors’ attorneys in chapter 12 and 13 bankruptcies lends support to the interpretation that Congress intended to require debtors’ attorneys in a chapter 7 to seek approval of the trustee. Thus, adhering to the “conventional doctrines of statutory interpretation,” the Court held that the plain language of §330(a)(1) does not authorize compensation awards to debtors’ attorneys from estate funds, unless they are employed as authorized by §327. As the Court stated, “[i]f Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent.”

The Court found that compensation remains available to some debtors’ attorneys under some circumstances under the text of §330 as so interpreted and offered several suggestions. First, compensation for debtors’ attorneys in chapter 12 and 13 bankruptcies is not affected. See, e.g., 11 U.S.C. §330(a)(4)(B). Secondly, compensation for chapter 7 debtors’ attorneys is not altogether prohibited so long as the attorney has been approved by the chapter 7 trustee per §327. Finally, the Court noted that its interpretation has operated soundly in the Fifth and Eleventh Circuits by debtors paying reasonable fees or retainers for legal services before filing for bankruptcy, which it noted was common practice. Thus, the Court said, it is appropriate for a debtor to engage counsel before a chapter 7 filing or conversion and to pay reasonable compensation to counsel in advance of the chapter 7 filing or conversion.

These suggestions may present practical difficulties, including: Pursuant to §327(b), can the debtor’s attorney be employed by the trustee if the trustee is not operating a business? In a case converted to chapter 7, is it practical for a debtor’s attorney to be paid prior to the conversion? Can most chapter 7 debtors afford to pay all of the required attorney’s fees in a lump sum prior to filing? If a debtor cannot afford to pay the fees prior to filing and a debtor’s attorney is willing to enter into a retainer agreement permitting the fees to be paid over time, under Bethea v. Robert J. Adams and Associates, 352 F.3d 1125 (7th Cir. 2003), the obligation created by the pre-petition retainer agreement is discharged, rendering the balance of the fees uncollectible. These are just a few of the practical issues that may arise from the Supreme Court’s holding in Lamie, especially when read in conjunction with Bethea.

¹ Judge Dow would like to acknowledge the assistance of his law clerk, Lori O’Keefe Locke, in preparing this article.
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² This was also the view the Fifth and Eleventh Circuits had previously adopted, but was contrary to holdings in the Second, Third, and Ninth Circuits which held the provision was ambiguous, requiring consideration of legislative history.
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³ In re Equipment Services, Inc., 253 B.R. 724 (Bankr. W.D. Va. 2000).
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⁴ In re Equipment Services, Inc., 260 B.R. 273 (W.D. Va. 2001), aff’d 290 F.3d 739.
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