Victor P. Kearney

UNITED STATES BANKRUPTCY COURT

DISTRICT OF NEW MEXICO

In re:

VICTOR P. KEARNEY, Case No. 17-12274 t11

Debtor.

OPINION

Before the Court is the debtor’s application to employ criminal defense counsel to defend

him against tax fraud and conspiracy charges. The unsecured creditors’ committee objected,

arguing that the proposed representation would not benefit the estate and therefore cannot be

approved. After a final hearing on the matter, the Court concludes that the application must be

denied.

I. FACTS

The Court finds the following facts for the limited purpose of ruling on the application:1

Debtor Victor Kearney filed this chapter 11 case on September 1, 2017. At the time, he

was embroiled in a state court lawsuit he had brought against the trustees of two trusts of which

he was the income beneficiary (the “Abruzzo Trusts”). Debtor had accused the trustees of

breaching their fiduciary duties to him by taking actions that wrongfully reduced his trust income.

The trustees asserted counterclaims. Debtor lost his suit against the trustees (subject to a pending

appeal) while the trustees prevailed in their counterclaims against him.

1 The Court took judicial notice of its docket in the main case as well as the dockets in the state

court action and the criminal proceeding. See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins.

Corp., 605 F.2d 1169, 1172 (10th Cir. 1979) (holding that a court may sua sponte take judicial

notice of its docket); LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d

1, 8 (1st Cir. 1999) (same).

On or about July 28, 2017, the state court judge sent a letter to the Internal Revenue Service

and the New Mexico Taxation and Revenue Department, alerting them to trial evidence that Debtor

had not properly reported or paid his income taxes for several years.

On December 6, 2017, the IRS filed an amended proof of claim in this case for

$596,164.75.

An unsecured creditors’ committee (“UCC”) was formed in this case. On February 28,

2019, the Court confirmed a plan of reorganization filed by the UCC. Debtor appealed the

confirmation order. The appeal is pending.

On August 27, 2019, the United States of America issued and filed an indictment against

Debtor, asserting counts for conspiring to commit fraud on the IRS and for making and subscribing

false income tax returns.

Debtor entered a not guilty plea at his initial appearance, held September 12, 2019. Amy

Sirignano appeared for Debtor at the initial appearance.2

Debtor signed an engagement letter with Ms. Sirignano on September 16, 2019. The terms

of the engagement include a $5,000 retainer, payment of $4,000 a month, and the pledge of certain

estate property (art work) to secure payment of the attorney fees.

On September 27, 2019, Debtor filed an application to employ Ms. Sirignano as special

counsel under § 327(e)3 to defend him against the tax fraud and conspiracy charges. The UCC and

one creditor objected.

Debtor is not currently employed, nor has he been employed during this chapter 11 case.

His sole source of income is from the Abruzzo Trusts. Nothing in the record of this heavily litigated

2 From what the Court has gathered from its limited contact with Ms. Sirignano, she is a very

skilled criminal defense attorney with an excellent reputation.

3 All statutory references are to 11 U.S.C. unless otherwise indicated.

bankruptcy case indicates that Debtor has worked in many years. He has managed to accrue huge

debts, both pre- and post-petition, but has not earned any income. None of the Debtor’s proposed

plans of reorganization filed in the case ever proposed that Debtor would get a job to help pay his

creditors.

II. DISCUSSION

A. Ms. Sirignano Cannot Be Employed Under Section 327(e).

As an initial matter, Ms. Sirignano cannot be employed under § 327(e) because she did not

represent the debtor pre-petition. § 327(e) provides:

(e) The 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.

(emphasis added). This subsection has four requirements: (a) the attorney must be employed for a

specified, special purpose other than representing a debtor/trustee in conducting the case; (b) the

attorney must have previously represented the debtor, (c) the attorney’s employment must be in

the best interest of the estate, and (d) the attorney must not have any interest adverse to the debtor

or the estate with respect to the matter on which the attorney is to be employed. In re Johnson, 433

B.R. 626, 635 (Bankr. S.D. Tex. 2010), citing In re Potter, 2009 WL 2922850, at *1 (Bankr.

D.N.M.).

Ms. Sirignano has not previously represented the Debtor so she does not qualify for

§ 327(e) employment. See In re Champ Car World Series, LLC, 411 B.R. 619, 624 (Bankr. S.D.

Ind. 2008) (clear language of the section requires prior representation of the debtor); In re J.S. II,

LLC, 371 B.R. 311, 319 (Bankr. N.D. Ill. 2007) (most courts hold that special counsel must have

represented the debtor at some point prior to the commencement of the case); Meespierson, Inc. v.

Strategic Telecom, Inc., 202 B.R. 845, 848-50 (D. Del. 1996) (special counsel application could

not be approved because there was no prior representation); In re Black & White Cab Co. Inc., 175

B.R. 24, 26 (Bankr. E.D. Ark. 1994) (attorney must have previously represented debtor); In re

French, 139 B.R. 485, 489 (Bankr. D.S.D. 1992) (counsel with no prior connection to debtor could

not be retained under § 327(e)); In re Ginco Inc., 105 B.R. 620, 621 (D. Colo. 1988) (§ 327(a)

applies, rather than § 327(e), where attorney did not represent the debtor pre-petition). While there

is some contrary case law, see, e.g., In re Scranton Electric Constr. Co., 105 B.R. 1 (Bankr. M.D.

Pa. 1989); and In re Sonya D. Int’l, Inc., 484 B.R. 773, 780 (Bankr. C.D. Cal. 2012), the Court

does not find it persuasive. The plain textual requirement that the “attorney . . . has represented the

debtor” must be given effect.

B. Under § 327(a), the Proposed Representation Must be Reasonably Necessary.

Ms. Sirignano could be employed under § 327(a), however, which provides:

(a) Except as otherwise provided in this section, the trustee, with the court’s

approval, may employ one or more attorneys, accountants, appraisers, auctioneers,

or other professional persons, that do not hold or represent an interest adverse to

the estate, and that are disinterested persons, to represent or assist the trustee in

carrying out the trustee’s duties under this title.4

The difference between the § 327(a) and § 327(e) relates primarily to conflicts of interest,

not the scope of representation. It is the Court’s view that “special counsel” can be retained under

§ 327(a) so long as she represents or assists the trustee in carrying out the trustee’s duties under

the Code.

When ruling on an employment application under § 327(a), the Court must decide “whether

it is reasonably necessary during the administration of the estate” to employ the proposed

4 In chapter 11 cases, a debtor in possession has most of the rights of a trustee, including the right

to retain professional persons. See § 1107(a).

professional person. 3 Collier on Bankruptcy ¶ 327.02[1] (16th ed.), citing In re Computer

Learning Ctrs., Inc., 272 B.R. 897 (Bankr. E.D. Va. 2001); In re Kingsway Purchasing, 69 B.R.

713 (Bankr. E.D. Mich. 1987); In re The Bible Speaks, 67 B.R. 426 (Bankr. D. Mass. 1986); see

also In re Jarvis, 53 F.3d 416 (1st Cir. 1995) (when dealing with a nunc pro tunc application for

employment, court should in the first instance determine whether the services were reasonably

necessary).

Employment cannot be “reasonably necessary” unless it would benefit the estate. As stated

in Collier:

The determinative question in approving the employment of a professional person

is whether it is reasonably necessary during the administration of the estate to have

professional persons, such as attorneys or accountants, employed. An attorney for

a trustee should not be employed unless the attorney’s special professional skills

are necessary for the protection and benefit of the estate or will further the aims of

the case.

3 Collier on Bankruptcy, ¶ 327.02[1] (16th ed.). In In re Harold & Williams Development Co., the

Fourth Circuit stated:

Thus, once the trustee meets the burden of demonstrating that an applicant for

professional employment is qualified under § 327, see Bankr. Rule 2014(a), the

discretion of the bankruptcy court must be exercised in a way that it believes best

serves the objectives of the bankruptcy system. Among the ultimate considerations

for the bankruptcy courts in making these decisions must be the protection of the

interests of the bankruptcy estate and its creditors, and the efficient, expeditious,

and economical resolution of the bankruptcy proceeding.

977 F.2d 906, 910 (4th Cir. 1992) (emphasis added); see also In re AroChem Corp., 176 F.3d 610,

621 (2d Cir. 1999) (citing and quoting Harold & Williams); Computer Learning Centers, Inc., 272

B.R. at 903 (same); In re Ballard, 2013 WL 5924984, at *1 (Bankr. E.D.N.C.) (same); In re Biddle,

2012 WL 6093926, at *3 (Bankr. D.S.C.) (same); In re Persaud, 496 B.R. 667, 671 (Bankr.

E.D.N.Y. 2013) (same).

The discussion of this issue in In re Rheam of Indiana, Inc., 111 B.R. 87 (Bankr. E.D. Pa.

1990), aff’d in part, vacated in part, 133 B.R. 325 (E.D. Pa. 1991) is instructive:

we conclude that it is clearly not the function of a court to blindly appoint counsel

first, upon request, and then ask questions or cut compensation later. Entry of an

order appointing counsel is a judicial act, not to be exercised lightly. See In re

Arlan's Department Stores, 615 F.2d 925, 932 (2d Cir. 1979). It is never presumed

that a request for counsel is justified. Rather, it is hornbook law that “[a]n attorney

for the trustee should not be employed unless the attorney's special professional

skills are necessary for the protection and benefit of the estate or for the furtherance

of the aims of the case.” 2 COLLIER ON BANKRUPTCY, ¶ 327.01, at 327–3

(15th ed. 1989).

111 B.R. at 100; see also In re Kearney, 2018 WL 6443993, at *3 (Bankr. D.N.M.)

(employment applications denied when the bankruptcy court finds that the estate would

not benefit).

C. Benefit to the Debtor is Not Enough.

Courts have denied professional employment applications if the representation would

benefit the debtor but not the estate. See, e.g., Lewis v. Fitzgerald, 295 F.2d 877 (10th Cir. 1961)

(attorney fees incurred resisting an objection to the granting of a discharge benefited the debtor

but not the estate and therefore cannot be paid from estate assets); In re Jones 665 F.2d 60 (5th

Cir. 1982) (fees incurred defending the discharge not compensable from the estate); In re

Weingarden, 84 B.R. 691 (Bankr. S.D. Cal. 1988) (same); In re Ryan, 82 B.R. 929 (N.D. Ill. 1987)

(same); In re Cleveland, 80 B.R. 204 (Bankr. S.D. Cal. 1987) (same).

D. Criminal Defense Counsel Rarely Benefits the Estate.

Almost all courts that have addressed the issue have held that criminal defense counsel

does not benefit the estate. In re Engel, 124 F.3d 567, 574-76 (3d Cir. 1997); In re Miell, 2009 WL

2590515 at *4 (N.D. Iowa); French, 139 B.R. at 490; In re Gherman, 101 B.R. 367, 368 (Bankr.

S.D. Fla. 1989) (“a bankruptcy debtor-in-possession cannot employ and use estate funds to pay

criminal counsel in connection with the defense of criminal charges arising out of prebankruptcy

activities”); In re Spurgeon, 2008 WL 4372762, at *3 (Bankr. E.D. Tenn.) (no choice but to deny

the application to employ criminal defense counsel); In re Stoecker, 114 B.R. 965, 970 (Bankr.

N.D. Ill. 1990) (“As a general rule, a debtor has no right to use estate assets to fund [a] criminal

defense.”); In re Duque, 48 B.R. 965, 974-75 (S.D. Fla. 1984) (criminal prosecutions for pre-

petition activity concern only the debtor personally and not the estate); Wootton v. Ravkind (In re

Dixon), 143 B.R. 671, 678 (Bankr. N.D. Tex. 1992) (courts in the Fifth Circuit and elsewhere have

generally refused to authorize the use of estate funds for payment of criminal counsel because the

expense did not benefit the estate); Official Committee of Disputed Litigation Creditors v.

McDonald Investments, Inc., 42 B.R. 981, 986 (N.D. Tex. 1984); In re Tashof, 33 B.R. 225, 227

(Bankr. D. Md. 1983); In re United Church of the Ministers of God, 84 B.R. 50, 55-56 (Bankr.

E.D. Pa. 1988); cf. In re Warner, 141 B.R. 762, 764 (M.D. Fla. 1992) (benefit to the estate shown

because criminal defense counsel challenged a $22,250,000 fine for which the estate was liable).

In this case, employment of Ms. Sirignano would not benefit the estate. As Debtor has

never worked and does not propose to work, incarceration would not deprive the estate of income.

Indeed, incarceration likely would benefit to the estate because Debtor’s monthly expenses would

be reduced.

E. Debtor’s Sixth Amendment Rights do not Trump the “Benefit to the Estate” Requirement.

While Debtor all but conceded that granting the application would not benefit the estate,

he argues that his Sixth Amendment right to defense counsel supersedes the “benefit to the estate”

requirement. The Court rejects this argument for two reasons.

First, Sixth Amendment issues are the concern of the court trying the criminal case, not the

bankruptcy court. In Duque, the court held:

[P]otential violations of the debtor’s constitutional rights posed by criminal

investigations or prosecutions occurring after the filing are of concern to the

criminal forum, not the bankruptcy court. No violation of such rights by authorities

charged with vindicating public interests through the criminal processes can give

the debtor any greater interest in the private rights surrounding the estate being

administered by a bankruptcy court.

48 B.R. at 975.

Similarly, in Wootton v. Ravkind (In re Dixon), the court stated:

Defendant has suggested that even if it was not in the estate’s best interest to employ

him as criminal counsel, Dixon has a Sixth Amendment right entitling him to spend

estate funds on his criminal defense. This argument is without merit. . . . The Sixth

Amendment guarantees that Dixon will not be imprisoned after conviction if he has

not had the assistance of counsel in his criminal proceeding. This entitles him to

court-appointed counsel in the event he is unable to employ counsel. Dixon’s Sixth

Amendment right does not entitle him to any greater rights in Bankruptcy Court or

any greater claims against the bankruptcy estate’s assets. Even if Texas courts

violated Dixon’s Sixth Amendment right to counsel, Dixon’s remedy would not be

in the Bankruptcy Court—any remedy for a Constitutional violation would have to

be brought in state or federal court.

143 B.R. at 679. See also Spurgeon, 2008 WL 4372762, at *1 (quoting Duque); French, 139 B.R.

at 490 (quoting Duque); McDonald Investments, 42 B.R. at 986 (Sixth Amendment argument is

“not even superficially plausible”); In re Rheuban, 121 B.R. 368, 384 (Bankr. C.D. Cal. 1990) (the

Sixth Amendment only guarantees defendants in criminal cases the right to adequate

representation, not representation by a particular attorney whom the defendant cannot afford).

Debtor argues that most of the cases cited above were decided before the enactment of

BAPCPA,5 which provided, inter alia, that an individual chapter 11 debtor’s post-petition income

is property of the estate. See § 1115. After BAPCPA, Debtor argues, he would be denied his Sixth

Amendment right to defense counsel if he can’t use estate funds to pay the lawyer, since he has no

5 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119

Stat. 23 (codified as amended in scattered sections of 11 U.S.C.).

money of his own. This argument has no merit. While it is true that after BAPCPA an individual

chapter 11 debtor’s post-petition income is estate property, it does not follow that his estate must

be burdened with nonbeneficial expenses. Before and after BAPCPA, if a debtor had enough

money to pay for criminal defense counsel, he would have to do so, while he otherwise would be

entitled to a public defender. BAPCPA might have made it more likely that individual chapter 11

debtors qualify for public defenders, but it did not render the “benefit to the estate” requirement

unconstitutional.

As stated in Hardy v. United States:

Indigence ‘must be conceived as a relative concept. An impoverished accused is

not necessarily one totally devoid of means.’ Attorney General’s Report, at 8. An

accused must be deemed indigent when ‘at any stage of the proceedings (his) lack

of means . . . substantially inhibits or prevents the proper assertion of a (particular)

right or a claim of right.’ Ibid. Indigence must be defined with reference to the

particular right asserted. Thus, the fact that a defendant may be able to muster

enough resources, of his own or of a friend or relative, to obtain bail does not in

itself establish his nonindigence for the purpose of purchasing a complete trial

transcript or retaining a lawyer.

375 U.S. 277, 289 n.7 (1964). Hardy was cited in McDonald Investments, 42 B.R. at 987. The

McDonald Investments court went on to hold:

Numerous courts have noted that a consideration of the accused’s debt situation is

appropriate in determining his eligibility for appointed counsel. See, e.g., In re

Smiley, 66 Cal. 2d 606, 58 Cal. Rptr. 579, 427 P.2d 179, 187–88 (1967);

Connecticut v. Harris, 5 Conn. Cir. Ct. 313, 250 A.2d 719, 720–21 (1968); Bolds

v. Bennett, 159 N.W. 2d 425 (Iowa 1968); Washington ex rel. Brundage v. Eide, 83

Wash. 2d 676, 521 P.2d 706, 708 (1974). The test, in short, “turn[s] not upon

whether an accused ought to be able to employ counsel, but whether he is in fact

able to do so.” Ohio v. Tymcio, 42 Ohio St. 2d 39, 325 N.E.2d 556, 560 (1975).

Thus a Minnesota court determining McDonald’s eligibility for appointed counsel

would probably take into consideration the unavailability of assets of the

bankruptcy estate for funding his criminal defense.

Even assuming, improbably, that McDonald’s Sixth Amendment right to counsel

will be violated by the Minnesota courts, that gives him no greater rights in the

bankruptcy court. His remedy for a constitutional violation must be sought in the

state and federal courts of Minnesota.

Id. (internal footnote omitted). Dugue’s conclusion that “potential violations of the debtor’s

constitutional rights . . . are of concern to the criminal forum, not the bankruptcy court” remains

true after BAPCPA. 48 B.R. at 975.°

Second, while Debtor, through his counsel, asserted his inability to qualify for a public

defender, he introduced no evidence to support the allegation. Arguments of counsel are no

substitute for evidence. See, e.g., Powell v. COBE Laboratories, Inc., 208 F.3d 227 (10th Cir.

2000) (counsel’s arguments are not evidence); Fritzsche v. Albuquerque Mun. Sch. Dist., 194 F.

Supp. 2d 1194, 1206 (D.N.M. 2002) (citing Powe//). Debtor did not carry his burden of proof on

this issue.

I. CONCLUSION

The proposed employment, which could only be allowed under § 327(a), would not benefit

the bankruptcy estate and therefore cannot be approved. If Debtor wishes to pay for his own

attorney, he must use non-estate assets at his disposal, if any he has. Otherwise, he must ask the

court presiding over the criminal case to appoint an attorney to represent him. The Sixth

Amendment, which is the concern of the court presiding over Debtor’s criminal trial, does not

prevent this Court from limiting the employment of counsel to those who would benefit the estate.

FAM An,

Hon. David T. Thuma

United States Bankruptcy Judge

Entered: October 24, 2019

6 It is worth noting that, to the best of the Court’s knowledge and experience, the Federal Public

Defender program in New Mexico is excellent, as are its attorneys.

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Copies to: Electronic notice recipients

Amy Sirignano

5901j Wyoming Blvd, NE #250

Albuquerque, NM 87109