On Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 85-4169
Before GIBBONS, WEIS and SLOVITER, Circuit Judges.
This case raises two issues. First, does the bankruptcy court have the power to grant retroactive approval of the employment of an attorney by a creditors committee in Chapter 11 bankruptcy proceeding? Second, if such power exists, what standard should govern the grant of retroactive approval? We hold that bankruptcy courts may, in extraordinary circumstances, grant retroactive approval of professional employment. We also hold, however, that in this case no extraordinary circumstances were alleged to justify retroactive approval.
Arkansas Company, Inc. filed a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code. At the first meeting of the Unsecured Creditors Committee on November 28, 1983, the Committee recommended the employment of Benenson & Scher as the Committee's counsel.
Through Benenson & Scher's own oversight, it apparently failed to obtain the return of an affidavit certifying its retention which it had mailed to the Committee chairman, and it failed to file an application for court approval of its employment as Committee counsel. Benenson & Scher rendered legal services to the Creditors Committee for thirteen months before discovering in January 1985 that it had failed to obtain the requisite court approval. It then promptly prepared and submitted to the court an application for approval of its employment as counsel. On January 28, 1985, Benenson & Scher's employment by the Committee from that date forward was approved by the bankruptcy court.
Benenson & Scher subsequently moved the bankruptcy court to approve retroactively its employment from November 28, 1983. In his affidavit Elliot Scher attributed his firm's failure to file the affidavit of the chairman of the creditors committee selecting Scher's firm as counsel only to "inadvertence." App. at 8. The bankruptcy court denied the motion in an order without opinion. However, during the hearing on the motion, the bankruptcy court asserted its belief that under the Bankruptcy Code and this court's decision in In re Hydrocarbon Chemicals, Inc., 411 F.2d 203 (3d Cir.) (in banc), cert. denied, 396 U.S. 823, 90 S. Ct. 66, 24 L. Ed. 2d 74, 90 S. Ct. 76 (1969), it was without power to grant retroactive approval of professional employment. It also expressed its disapproval of the excuse given by Benenson & Scher for its failure to obtain prior court approval.
Benenson & Scher appealed to the district court. That court stated that, although this circuit had never actually recognized the power of bankruptcy courts to exercise their discretion to grant retroactive approval, it found persuasive the decision in In re Triangle Chemicals, Inc., 697 F.2d 1280 (5th Cir. 1983), that there was such discretion in rare or exceptional circumstances. The district court then considered whether retroactive approval should have been granted in this case. The district court construed the bankruptcy judge's comments at the hearing as suggesting that even if he had had the power to grant authorization nunc pro tunc, he would not have done so if the only reason given was "I forgot." The district court stated that bankruptcy court control over attorneys practicing before it, and over the expenditure of assets to employ those attorneys, would be significantly reduced were counsel's own oversight allowed to justify failure to obtain prior approval. The court therefore affirmed the denial of retroactive approval, ...