Petition for Writ of Certiorari — Simon v. F/S Airlease, II, Inc., 109 S. Ct. 137 (1988) (No. 88-125)
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Supreme Court, U.S.
2©O 7) DK FILED
88 <1 5
~ Noo JUL 18 1988
JOSEPH F. SPANIOL, JR,
In Che CLERK
Supreme Court of the United States
LEWIS SIMON
and
S-J FINANCIAL CORPORATION,
Petitioners,
F/S AIRLEASE II, INC., GREYCAS, INC. and
THE SWIG INVESTMENT COMPANY
AIRCRAFT TRUST NO. 1,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
PHILIP J. NATHANSON
NATHANSON & WRAY
333 West Wacker Drive
Suite 330
Chicago, Illinois 60606
(312) 606-0771
Counsel for Petitioners
American Reprographics Management, Inc.™ © (312) 332-ARMI (800-999-6239)
\or4
QUESTIONS PRESENTED
Section 503(b) (1) (A) of the
Bankruptcy Code authorizes the payment of
"commissions" to persons for "preserving
the estate." Section 327(a) of the
Bankruptcy Code allows for employment
of professional persons "with the court's
approval" pursuant to the petition of the
trustee or debtor-in-possession, and
sections 330(a) and 503(b)(2) authorize
the payment of "compensation" to such
professional persons based upon the
value of, and time spent in providing
the services.
The questions presented are:
ls Whether aircraft leasing agents
who admittedly preserved the
sole asset of the estate are
precluded from receiving their
agreed commission under
§503(b) (1) (A) because the
debtor-in-possession failed to
obtain a court order employing
petitioners as professional
persons prior to that
preservation, thus’ rendering
§503(b)({(1})(A) inoperative and
making the professional person
sections of the Bankruptcy Code
the sole and exclusive remedy
for business people who
rehabilitate the business of
the debtor-in-possession?
Whether the procedure for
professional person approval
(§327(a) and Bankruptcy Rule
ii
2014(a)) which requires’ the
debtor~-in-possession to
petition for and obtain "the
court's approval", but does not
specify prior approval, may be
used aS a complete bar to
compensating aircraft leasing
agents who rehabilitated the
business of the debtor-in-
possession, where the debtor-
in-possession promised, but
failed through its own
oversight, to obtain an order
Signifying the Bankruptcy
Court's approval of the agents’
services prior to the agents'
rehabilitation of the business?
iii
LIST OF PARTIES *
The Appellants and Cross~-Appellees
in the United States Court of Appeals for
the Third Circuit were respondents F/S
Airlease II, Inc., a debtor-in-possession
lease company under Chapter 11 of the
Bankruptcy Code, the Swig Investment
Company Aircraft Trust No. 1, the owner
of the aircraft, and Greycas, Inc., the
secured lender or mortgagee of the
aircraft.
The Appellees and Cross-Appellants
in the Third Circuit (petitioners here)
were Lewis Simon and S-J Financial
Corporation, the aircraft leasing agents
who negotiated and procured an aircraft
lease for the parties in the Bankruptcy
Court.
iv
* Petitioner S-J Financial
Corporation states that
there are no parent
companies, subsidiaries or
affiliates to list
pursuant to Rule 28.1 of
this Court.
TABLE OF CONTENTS
QUESTIONS PRESENTED ....... i-iii
Cae Ge Bee. (es .e-e sls e ew ae
hm Oe; ee
TABLE OF AUTHORITIES .......e. Wi
Granaweee GEE 6 6 ow ete te eet ee eC
VORA 6 6 6.0 6 o.6 6 «6 ee a
STATUTE AND RULE INVOLVED ...... 9
STATEMENT OF THE CASE ........11
REASON FOR GRANTING THE WRIT... .. 35
I. Significance Of The Case ..... 35
II. The Opinion Of The Court
Of Appelas Renderes A Section Of
The Bankruptcy Code Inoperative
And is Therefore Contrary To
The Decisions of This Court ... 41
III. The Court Of
Appeals' Decision
to Render §503(b) (1) (A)
Inoperative Creates A
Conflict among The Circuits ... 46
IV. Petitioners Should Not Be
Precluded From Employment
And Compensation By An
Estate That They Rehabilitated. . 47
Vo. Guapeeenee sé «es 8 Se ee ee
Cases:
Bank of Marin v. England, 385 U.S.
99, 109 (2008) «© ew sc ea evueeee es
, 420 U.S. 723,
756 (1975) . . . >. . . . >. . * . .
, 439 U.S.
379, 392 (3979) ce ec ec ev eevee @
F/S Airlease II, Inc.
v. Simon, 844 F.2d 99 (3rd
Cir. 1988) .. 2, 27, 37, 43, 45,
Enterprises, Inc., 809 F.2d 228,
231 at n. 4 (4th Cir. 1987) ...
In_re Arkansas Co., Inc., 798
F.2d 645 (3rd Cir. 1986) .... .
In re Ewing 54 B.R. 952
(D. Col. ) . >. . . >. . * . . . *
In_re Mammoth Mart, Inc., 536
F.2d 950, 954 (1st Cir. 1976) ..
In re F/S Airlease II, Inc.,
84 B.R. 389 (W.D. Pa. 1986) ...
vi
48, 50
2, 26
in._the Matter of
769 (Bkrtcy. W.D.
ie 0. s 04 0 « « Sp 83, 8 2
’
367 U.S. 303, 307-308 (1961) ..... 42
, 419
U.S. 43, S7 (32974) . «2 ew we we ec oe 0 c 40
Mountain State Tel. & Tel.
vy. Pueblo of Santa Ana, 472 U.S.
SOURCE Sb @estetecsrececce &
Pepper v. Litton, 308 U.S.
295, 304-305 (1939) ......224.2-. 41
’
391 U.S. 471, 481 (1968) ..... 40, 47
’
348 U.S. 528, 538-539 (1955) ..... 42
Trustees of Amalgamated
ins. Fund v. McFarlin's, 789
F.2d 98, 101 (2nd Cir. 1986) ... 38-39
Statutes:
ae wenmeue Beene «6 «.e 6 6 6 6 6s a
11 U.S.C. §102(3) es © 6 &: 3 ee ee
11 U.S.C. §327(a) .....i4, ii, 4, 44
48-49, 51-52
11 U.S.C. §330(a) . .. i, 4, 23, 44, 52
vii
11 U.S.C. §503 (a) . >. . . . . > . . . 49
11 U.S.C. §503(b)(1)(A) ... i, ii, 4,
22, 35-39,
43-46, 53
43 U.8.C. 98630) (2) .« « « « 4, 4 23,
43-44, 52-
53
43 U.8.G@. $2307 (a) «. « © © eo eo8 0 o o GS
28 U.8.C. §$1284(1) . «- © eee e ee Bz
Legislative History:
1978 U.S. Code Cong. &
Ad News 5787, 5963, 6053 ....+ + 32-33
Rules:
Bankruptcy le 2014(a) . ii-iii,
48-49
viii
No.
IN THE
SUPREME COURT OF THE UNITED STATES
LEWIS SIMON
and
S-J FINANCIAL CORPORATION,
Petitioners,
Vv.
F/S AIRLEASE II, INC.,
GREYCAS, INC. and
THE SWIG INVESTMENT COMPANY
AIRCRAFT TRUST NO. 1
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
The Petitioners request this Court to
issue a writ of certiorari to review the
opinion of the United States Court of
Appeals for the Third Circuit filed on
March 21, 1988, the denial by that court
2
of a petition for rehearing on April 19,
1988, and its judgment entered in
accordance therewith on May 20, 1988.
OPINIONS BELOW
The decision of the Court of Appeals
for the Third Circuit, to which the
issuance of a writ of certiorari is
sought, is dated March 21, 1988. That
decision is reported at 84 F.2d 99 (3rd
Cir. 1988) and it reversed the judgment
of the United States District Court for
the Western District of Pennsylvania
approving petitioners' employment. The
Court of Appeals' decision, and denial of
rehearing, appear as Appendix A hereto.
The decision of the United States
District Court for the Western District
of Pennsylvania is reported at 84 B.R.
389 (W.D. Pa. 1986). The District
Court's decision affirmed the Bankruptcy
an ND
3
Court's approval of petitioners'
employment, but vacated the monetary
award and remanded for further
documentation. It appears as Appendix B
hereto.
The decision of the United States
Bankruptcy Court for the Western District
of Pennsylvania is reported at 59 B.R.
769 (Bankr. W.D. Pa. 1986). The
Bankruptcy Court entered an order, nunc
pro tunc, approving petitioners'
employment, and awarded petitioners
$450,000 for their services. That
decision appears as Appendix C hereto.
JURISDICTION
The judgment of the United States
Court of Appeals for the Third Circuit
was entered on May 20, 1988, reversing
the decision of the District Court. The
Court of Appeals issued an order on April
6
19, 1988 denying petitioners' petition
for rehearing. The jurisdiction of this
Court is invoked pursuant to 28 U.S.C.
§1254(1).
STATUTES AND RULE INVOLVED
Bankruptcy Code sections 327(a),
330(a), 503(b)(1)(A), and 503(b)(2), 11
U.S.C. §§327(a), 330(a), 503(b) (1) (A) and
503(b) (2). Bankruptcy Rule 2014(a). The
relevant portions of the foregoing
statutes appear as Appendix D hereto.
5
STATEMENT OF THE CASE
This is a reorganizaticn proceeding
under Chapter 11 of the Bankruptcy Code.
The debtor-in-possession, F/S Airlease
II, Inc., is a lease company whose sole
asset consists of the leasehold rights in
a Boeing 737 aircraft. F/S Airlease II,
Inc. originally came into existence in
the spring of 1980. At that time, the
aircraft was purchased by its current
owners, the Swig Investment Company
Aircraft Trust No. 1. Financing for the
purchase was supplied by a= secured
lender, Greycas, Inc. The owners in turn
leased the aircraft to F/S Airlease II,
Inc. for a term of eighteen (18) years.
F/S Airlease II, Inc. (hereinafter
sometimes referred to as "the lease
company" or the "debtor-in-possession")
6
thus possesses the leasehold rights to
the aircraft until August 31, 1998.
The lease company initially leased
the aircraft to Air Florida in 1980.
After Air Florida filed for bankruptcy in
the summer of 1984, the lease company
regained possession of the aircraft.
Because the secured lender sought to
foreclose on its security interest
following Air Florida's demise, due to
non-payment under its note and security
agreement the lease company itself filed
for reorganization in the Bankruptcy
Court for the Western District of
Pennsylvania in August of 1984.
From the outset of the lease
company's reorganization, it faced a
major problem: Air Florida had
cannibalized the aircraft. The number
two engine was missing, as well as
numerous other parts. The lease company,
~
as a debtor-in-possession, therefore
retained an appraiser to place a value on
the aircraft and to determine the
necessary cost of repair. That appraiser
determined the value of the aircraft in
August of 1984 as $5,252,000 "where is-
as is" in its non-airworthy condition (A.
1502-1504). Moreover, the appraiser
determined at that time that the cost of
repair to replace the missing engine and
return the aircraft to airworthy
condition would be $763,500. Despite the
condition of the aircraft, the owner of
the aircraft refused to expend that
amount to repair the aircraft, and the
lease company was unable to do so.
Instead of taking by itself the
necessary steps to rehabilitate its
business, the lease company, through its
president, Mr. Uhl, requested petitioner,
8
Lewis Simon,+ to find a new lessee for
the aircraft while it was in its non-
airworthy condition. Mr. Uhl thereafter
assured Mr. Simon that his compensation
for his services would be a priority
claim, and that the Bankruptcy Court
was aware of and permitted Mr. Simon's
services and activities (A. 1250-1251;
1274-1275, 1335).
Without disclosure to the
petitioners, Mr. Uhl "just overlooked"
obtaining court approval of petitioner's
employment and financial arrangement
because Mr. Uhl was so busy with another
corporation's reorganization for which he
was also responsible. Mr. Uhl testified
at trial that the lease company's failure
to seek such approval was "simply an
1, Petitioner Lewis Simon
conducts his aircraft leasing
activities through S-J
Financial Corporation, a
Closely held corporation.
9
oversight" (A. 675-676, 753-754, 1346-
1349).
However, when petitioner Lewis Simon
questioned Mr. Uhl, regarding his
services for the lease company and
payment for those services, Mr. Uhl
represented to Mr. Simon the following:
S, « »« 88, im fact, no new
lease were bought here there
would be no fee; furthermore .
- «+ it had been my general
experience, having been before
this bankruptcy court, at that
time, for three plus years,
that if sid. j Pact
bring value to the estate, that
they would be entitled to be
compensated for having brought
value to the estate." (A. 1335)
(emphasis added) .?
2. Mr. Uhl's representations
regarding the practice of the
two bankruptcy judges, Judge
Gibson and Judge Cosetti, in
the Bankruptcy Court for the
Western District of
Pennsylvania, accurately stated
the prevalent practice there,
as Judge Cosetti confirmed (A.
457-458). Mr. Uhl conceded at
trial that the lease procured
by petitioners was valuable to
the estate (A. 742).
10
During this period when petitioners
were attempting to locate a new lessee
for the aircraft, petitioner Lewis Simon
attended a Pittsburgh meeting that was
held at the offices of counsel for the
lease company, on October 3, 1984 (A.
1237-1238). Representatives of and
attorneys for the lease company, the
owner of the aircraft, and the secured
lender also attended. The agreement
reached at that meeting regarding the
remarketing of the aircraft was disclosed
to the Bankruptcy Judge at the hearing on
the approval of the aircraft lease
obtained by petitioners. One of the
lease company's attorneys, who also
attended the October 3, 1984 meeting at
his office, informed the Bankruptcy Judge
of the agreement:
", . . while cooperation
has been off and on between the
Debtor and Greycas, there was
compromising as ae result of
:
11
a meeting held in Pittsburgh
- + » When it was agreed that
single spokesman for the
.) : thi
airplane. That way, the people
in the business of leasing
airplanes would not be
assuming that they could trade
one negotiator off against
another.
Airlines with which, I believe,
the Judge is familiar." (A.
186).
Mr. Lehman, the vice-president and
treasurer of the lease company, also
attended that October 3, 1984 meeting and
agreed that there was a "general
consensus" that Mr. Simon would be the
remarketing "agent" for the aircraft (A.
635-636). Neither Mr. Pink nor Mr. Roth
from Greycas objected to that consensus
(A. 636, 720-724).
12
The agreement reached in Pittsburgh
in October 1984 is amply confirmed and
evidenced by the subsequent conduct of
the parties. Greycas, the secured
lender, invited Mr. Simon to fly out to
Phoenix and meet with America West
Airlines, a prospective lessee for the
aircraft, during which meeting the
Greycas people introduced and represented
Mr. Simon as ". . . the representative of
the owners of the aircraft. . ." and the
person who ". . . was handling the
marketing of the aircraft" (A. 517-520;
1239-1243, 1362, 1390-1393). That
meeting at America West occurred on
October 5, 1984, in Phoenix, just two
days after the Pittsburgh meeting. Only
Mr. Simon made a proposal to America West
at this meeting, and Greycas did not
object to him doing so (A. 519-524, 548-
549). Much of the discussion at the
_
13
America West meeting concerned the
serious fact that the plane only had one
operable engine and was therefore not
airworthy (A. 519-522).
On October 25, 1984, Mr. Simon
obtained a signed letter agreement for
the aircraft from Aloha Airlines, Inc.,
an established and financially sound
carrier (A. 1266-1267), for a ten year
lease at $90,000 per month, under which
Aloha would furnish another operable
engine with no credit or rental rebate
for supplying a missing engine (A. 778-
780; 1245). Absent Aloha's agreement to
furnish another operable engine itself,
the owner, the lease company or the
secured lender would have been required
to spend more than $500,000 for a
substitute engine. Mr. Simon further
obtained Aloha's agreement to return the
aircraft at the end of the lease term
14
with two operable engines (A. 535-537;
638-640, 695-696; 1258-1260). Both the
lease company and the secured lender were
notified that Mr. Simon had procured
Aloha as a new lessee (A. 1678). The
Aloha letter agreement over the following
month was converted into a draft lease,
the terms of which were negotiated by
Mr. Simon, and put into final form by the
lease company's attorneys with the
assistance of Mr. Simon (A. 335-336;
1234, 1251-1254).
Aloha's “high regard" for Mr. Simon
was a “principal reason for Aloha being
willing to go forward with this
transaction and a principal cause of
Aloha's consummation of this transaction
was the involvement of Lewis Simon as
the representative and negotiator for the
lease of Aircraft." (A. 794). Mr. Simon
had dealt with Aloha Airlines for 18
—— “eae
15
years (A. 794; 1230-1231). Aloha learned
of the availability of this Boeing 737-
200 through Mr. Simon's efforts. Due to
the bankruptcies of F/S Airlease II, Inc.
and Air Florida, Inc., and the presence
of only one engine on the aircraft, Aloha
was “unwilling to proceed" without
Simon's participation. (A. 794; 1255-
1258).
The lease company, as a debtor-in-
possession, filed a motion to approve the
Aloha lease and Bankruptcy Judge Gibson
set a hearing thereon for November 28,
1984. Prior to the hearing, counsel for
the lease company assured petitioners'
counsel, who had not yet appeared in the
case, that Mr. Simon's involvement with
initiating, procuring and negotiating
this lease would be “spread of record"
and included “in any order approving the
lease .. ." (A. 792), and that any
16
questions as to the distribution of funds
to be generated by the lease would be
postponed for later determination. 3
Based on these assurances, Mr. Simon
brought the signed lease from Chicago,
Illinois to the lease approval hearing
in Pittsburgh Pennsylvania, testified as
a proponent thereof during the hearing
and communicated with Aloha by phone when
proposed modifications were suggested at
the hearing (A. 1254-1258). The
m, The opinion of the court of
appeals implies, without any
evidentiary support other than
this letter, that petitioners
agreed to postpone the issue of
their employment until after
the lease was approved. 844
’.26 8 wp. i262, i007. The
letter, however, in the context
of. the prior representations
made to Mr. Simon, and the
meetings he attended with the
parties in question, shows that
petitioners wanted a _ record
made on Mr. Simon's role in
procuring the lease, and also
did not want funds distributed
before petitioners could seek
compensation for their own efforts.
a
17
attorneys for the lease company debtor-
in-possession made specific
representations to Bankruptcy Judge
Gibson, before Mr. Simon testified at the
lease approval hearing, as follows:
MR. SNYDER: ou onor
would it be possible for us to
ut M u_ Si :
He as bee egotiatin wit
Aloha. He has brought the
signed lease to us this
ornin own ji om icago
as it was flown into him
yesterday. t eanme 26 i8
important that the Court might
hear the urgency of the matter
in the terms of Aloha's
situation. ink we should
hear rom the entleman that
negotiated the lease.
MR. MCCULLOUGH: I would
ask for a clarification, Your
Honor, because I keep hearing
that we are going to go back
and discuss and look at what
the deal is. I have dealt with
and the Court knows we have
dealt with people before and
they negotiated this deal in
good faith. Lou Simon has been
hammered it out. He is
representing [the debtor-in-
possession] and 1m 8 = Fat
18
respect, Greycas." ? Wile bt 3?
218-219) (emphasis added).
No lawyer in the courtroom at the
lease approval hearing objected to any of
these representations, including the
representations regarding the agreement
reached at the previous month's meeting
when alli of the parties agreed that the
petitioners would be the leasing agent
for the aircraft. Counsel for the
secured lender, Greycas, Inc., knew how
to object, however, when they felt it
appropriate to do so. (A. 204) (see
subsequent opinion of Bankruptcy Court,
A. 1556; 59 B.R. at 772).
Bankruptcy Judge Gibson approved the
Aloha lease by order of Court on
November 30, 1984. No party appealed
that order. Indeed, the secured lender's
attorneys told the Bankruptcy Court that
the lease should go forward:
19
MR. BARENHOLTZ: Your
Honor, speaking for Greycas, we
fully desire to cooperate with
the Debtor and with any third
parties who wish to deal with
the Debtor-In-Possession. We
do not wish to upset this
particular deal or any deals in
general of the Debtor-In-
Possession.
MR. EPSTEIN: Someone
said, “Welcome to Bankruptcy."
Your Honor, I think Greycas'
position with respect to the
us e roceeds under the
lease, we want to see the
lease get done (A. 189-190,
2843) (emphasis added).
The parties to this’ proceeding
believe the Aloha lease payments will
cover the Greycas mortgage on the
aircraft (A. 560; 647). Mr. Uhl, the
president of the lease company, candidly
conceded that the approximate $6 million
residual value for the aircraft at the
conclusion of the Aloha lease, projected
by the recognized source in the aircraft
industry, would result in all parties to
20
this proceeding being paid (A. 689-690,
695-696, 716-717; 793).
Two months after petitioners
procured the Aloha lease, and Bankruptcy
Judge Gibson approved that lease, the
lease company prepared a list of
"priority and administrative amounts
payable." (A. 1696-1698). That list was
transmitted to Greycas and other
interested parties to this proceeding,
and was represented to include "amounts
now due _ as priority and administrative
claims and expenses." (A. 668-669; 672-
673; 1696-1697). The amount listed as
due to petitioner S-J Financial
Corporation as a priority, administrative
expense is "$450,000", the amount
mandated by Mr. Simon's’ regular
commission percentage (A. 1344-1345;
1697). While certain individuals
proposed in writing to pay Mr. Simon in
21
installments, the total amount of
commission due was recognized to be
$450,000.
After Aloha Airlines took possession
of the aircraft at the end of 1984 under
its lease, the owner and the lease
company again asked their appraiser to
appraise the aircraft. This time,
however, he was appraising the aircraft
in the airworthy condition attributable
to Mr. Simon's efforts and negotiations
with Aloha Airlines. Significantly, the
appraiser appraised the fair market value
of the aircraft at $6,500,000 in its
airworthy condition (A. 1500-1501).
Therefore, Mr. Simon's efforts from July,
1984 to December, 1984, resulted in a
damaged asset increasing in value from
$5,242,000 "where is - as is," to a value
of $6,500,000 under FAA certificate with
a solvent airline: a difference and
22
benefit of $1,258,000. (A. 1437-1458).
That increased asset value was an
additional benefit to the $10,800,000
lease rental stream petitioners obtained.
The lease company promised to file a
reorganization plan after the aircraft
lease was approved. But that debtor-in-
possession instead filed several motions
in the Bankruptcy Court requesting a
continuance of the time to file a
reorganization plan (A. 421). When no
such plan was forthcoming, the
petitioners filed a petition for
compensation under §503 of the
Bankruptcy Code, ii 68.8... §503.
Petitioners principally relied on
§503(b)(1)(A), which authorizes’ the
payment of "commissions" for "preserving
the estate." The owner, debtor-in-
possession and the secured lender
asserted, as a defense to that request
23
for payment, that petitioners’ were
professional persons, who could only
possibly qualify for compensation under
§330 and 503(b)(2) of the Code. The
reason they asserted that defense was
that, in their view, the Third Circuit,
at that time, enforced a strict per se
rule against compensating professional
persons without the entry of a court
order approving the professional person's
employment before servcies were rendered.
In response to that defense, the
Bankruptcy Court found that it was the
fault of the debtor-in-possession that
such a prior order was not entered, and
therefore ordered petitioners' employment
approved, nunc pro tunc. The Bankruptcy
Court also awarded petitioners
compensation of $450,000, In the Matter
of F/S Airlease, II, Inc., 59 B.R. 769
24
(Bkrtcy. W.D. Pa. 1986), and further
found, inter alia, the following:
", . . it must be realized
that the total amount brought
into the estate by this lease,
which is $10,800,000.00 over
the course of the 10-year
lease, is the sole asset of the
Debtor's estate. Were it not
Fo t) ‘fort . s-J j
obtaining this lease, there
wou Oo es wi whi
eo ani ti ou be
effected. Additionally, it
should be recognized that the
aircraft in question was not in
airworthy condition at the
time the lease was procured.
he leasin ak Cc with
on one o engine ust b
considered a difficult deal to
arrange. Given the fact that
S-J was able to convince Aloha,
a highly reputable airline, to
lease said aircraft and also to
supply the additional,
necessary engine without any
rental rebate, shows this Court
that S-J ssesses igh leve
of ski and expertise in this
field." 59 B.R. oS «sees
(emphasis added).
Bankruptcy Judge Markovitz, who
presided over the trial of this matter
after the death of Bankruptcy Judge
Gibson, also found that Judge Gibson
|
25
"...was aware from early in these
proceedings that [the petitioner] was
involved in the releasing and remarketing
of the aircraft," and that at the lease
approval hearing before Judge Gibson,
which was later on in these bankruptcy
reorganization proceedings, "...the
parties made the Court aware that the
debtor had requested [the petitioner] to
procure a lease, that [the petitioner]
had procured same, and that Greycas, [the
secured lender] while nominally objecting
to [the petitioner's] involvement, wanted
the lease, secured by [the petitioner] to
be approved." In re F/S Airlease II,
Inc., 59 B.R. 769 (Bankr.W.D.Pa. 1986).
Because these matters were not set forth
in a court order, due to the fault of
the debtor-in-possession, Bankruptcy
Judge Markovitz entered an order of
employment, nunc pro tunc. Id.
26
The owner of the aircraft, the
debtor-in-possession and the secured
lender appealed the judgment of the
Bankruptcy Court. The District Court
affirmed the nunc pro tunc employment
order, but vacated the $450,000
commission awarded to petitioners and
remanded for further documentation of
petitioners' time expended in obtaining
the aircraft lease. In Re F/S Airlease
il, Inc., 84 B.R. 389 (W.D. Pa. 1986).
Thereafter, the owner, debtor-in-
possession and secured lender appealed to
the court of appeals. The petitioners
cross-appealed the vacatur of their
monetary award. The Court of Appeals for
the Third Circuit reversed the Bankruptcy
Court and the District Court on the
employment issue, and held that the
petitioners are entitled to no
compensation, because petitioners'
ee
27
employment was not set forth in a court
order before petitioners performed the
services in question. fF/S Airlease II,
Inc. v. Simon, 844 F.2d 99 (3rd Cir.
1988). The opinion agrees that the
statutory responsibility for obtaining
such a prior order belonged tohehedebtor-
in-possession, not the petitioners. The
opinion also recognizes that the debtor-
in-possession admitted, and the
Bankruptcy Court found as a fact, that
the failure to obtain the prior approval
order was due to an oversight of the
debtor-in-possession. Nevertheless, the
opinion decided, without any support in
the words of the Bankruptcy Code, or its
legislative history, that the
petitioners were under a federal legal
duty to somehow see to it that the
debtor-in-possession complied with its
statutory obligation to obtain court
28
approval of petitioners’ employment. And
even though the Court of Appeals
recognized that it was reaching a “harsh
result" where “some unjust enrichment"
may be involved, that court nevertheless
concluded that it should visit such
consequences on petitioners in order to
preserve a "bright-line position" on the
failure to obtain "prior" court
approval.
29
I. Significance Of The Case
The interaction of the particular
Bankruptcy Code sections involved in this
case is not a mere technical matter.
Rather, the issues raised in this case go
to the very essence of the Bankruptcy
Code, and are of great importance to the
administration of that Code throughout
the Federal Judicial System. The purpose
of the Chapter 11 reorganization
provisions of the Code, and the operation
thereunder of a business undergoing
reorganization by a debtor-in-
possession, is to accomplish the
rejuvenation of a financially troubled
enterprise. Congress recognized that, if
an insolvent business is to be
reorganized and rehabilitated, third
30
parties must be willing to provide the
necessary services and goods to bring
about that rehabilitation. Because such
parties will not provide the necessary
services to an insolvent debtor-in-
possession absent a statutory
compensation incentive, Congress set out
a series of priority compensation
remedies under the various subsections of
§503 of the Bankruptcy Code. Third
parties whose claims come within one of
those remedial subsections are accorded a
priority over the claims of pre-petition
debts and liabilities of the debtor-in-
possession. It is undeniable, however,
that the debtor-in-possession is carrying
on the business for the benefit of the
pre-filing creditors and therefore
fairness requires that any claims
incident to the debtor-in-possession's
operation of the business post-petition
31
should be paid before those of the pre-
petition creditors for whose benefit the
continued operation of the business was
allowed. See generally, In re Mammoth
Mart, Inc., 536 F.2d 950, 954 (ist Cir.
1976).
The opinion of the Third Circuit in
this case sends an unmistakable message
to business people such as the
petit”’oners that their efforts to
rehabilitate insolvent debtors-in-
possession are undertaken at their own
peril. Rather than provide an incentive
to induce business people to assist in
rehabilitating insolvent businesses, the
Court of Appeals, with its admittedly
"harsh result" has built in a
disincentive. The Court of Appeals
places business people in the hands of
bankruptcy litigators, bankruptcy lawyers
and bankruptcy administrators, and
32
compels business’ people to retain
private counsel and fend for themselves
in adversary proceedings in the
Bankruptcy Court if they desire to do
business with an insolvent debtor-in-
possession and be compensated for such an
effort.
The foregoing result not only
frustrates the congressional desire to
induce business people to participate in
the rehabilitation of insolvent
businesses, but it is also directly
contrary to the congressional intent to
wrestle control of bankruptcy cases from
bankruptcy attorneys and the "bankruptcy
ring.* Indeed, the House Report on the
Bankruptcy Code specifically criticizes
such control and states that "in practice
- »« » the bankruptcy system operates more
for the benefit of attorneys than for the
benefit of creditors." H.R. No 595, 95th
se
33
Cong., 2d Sess. 92, reprinted in 1978
U.S. Code Cong. & Ad. News 5787, 5963,
6053.
This legislative history shows
unmistakably that the Congress did not
want bankruptcy cases pursued for the
benefit of bankruptcy lawyers who
administrate bankruptcy estates. Yet the
Court of Appeals in this case has
rewarded the bankruptcy attorneys who
failed to obtain what the court of
appeals later deemed to be the requisite
court approval and court order approving
the petitioner's employment. Those
bankruptcy lawyers submitted fee
petitions for hundreds of thousands of
dollars, seeking compensation for
litigating the issues their own inaction
created prior to petitioners' request for
compensation (A. 330, 1141, 1509). If
the opinion of the Court of Appeals
34
stands, then the bankruptcy lawyers will
be paid huge fees out of the lease
proceeds generated by the petitioners,
and the petitioners will receive nothing
but a lesson to stay away from the
Bankruptcy Court.
The significance of this state of
affairs transcends the "unjust
enrichment" that the Court of Appeals
acknowledged would be granted to the
owner, secured lender and lease company
of the aircraft who decided to rely on
the petitioners, rather than upon
themselves, to obtain the repair of the
damaged aircraft and a new lessee for
that aircraft. The opinion of the Third
Circuit sends a message to the business
community that the bankruptcy lawyers and
"bankruptcy ring" still control the
rehabilitation of insolvent businesses in
the Bankruptcy Court. Any business
35
person that places himself or herself in
their hands is either at their mercy or
obligated to undertake a litigious,
adversary proceeding in order to do
business with the insolvent debtor-in-
possession. This, of course, will
further multiply the fees of bankruptcy
lawyers and dissipate bankruptcy estates.
It is hard to imagine how a single
opinion in a bankruptcy case could more
effectively frustrate congressional
intent and objectives and portend
failure in the rehabilitation of
insolvent businesses.
II. The Opinion Of The Court
Of Appeals Renders A Section Of
The Bankruptcy Code Inoperative
And Is Therefore Contrary To
The Decisions Of This Court.
The opinion of the Third Circuit
concluded that to enforce the literal
terms of §503(b)(1)(A) of the Bankruptcy
36
Code, 11 U.S. C. §503(b)(1)(A), would
"circumvent" the professional person
sections of the Bankruptcy Code, render
them “nugatory" and destroy Congress'
prior approval requirement. The opinion
did not analyze the significance of
Congress' omission of the word prior from
its "approval" requirement. Nor did the
opinion consider that its conclusion
rendered §503(b)(1)(A) nugatory instead,
at the same time that the court was
supposedly trying to avoid making the
judicially constructed prior approval
requirement "nugatory." The court of
appeals' approach, therefore, elevated a
judicial construct (the prior approval
requirement) over the specific words
chosen by Congress in §503(b) (1) (A).
There is no doubt that petitioners
sought "commissions" and that the
Bankruptcy Court found that petitioners
i eee
37
"preserved" the sole property of the
estate. The literal terms of
§503(b)(1)(A) authorize the payment of
"commissions" for "preserving the
property" of the estate. The court of
appeals nevertheless decided that it
would not enforce §503(b)(1)(A), because
the court felt that enforcement of
Congress' words, as written, would
"circumvent" the professional person
approval sections and render’ them
"nugatory." F/S Airlease II, Inc. v.
Simon, 844 F.2d 99, 109 (3rd Cir. 1988).
The court of appeals' opinion
ignored, however, the well settled rule
that the interpretation of a statute
begins with the language chosen by
Congress. i m Vv ano ru
Stores, 420 U.S. 723, 756 (1975) (J.
Powell, concurring).
38
Section 503(b) (1) (A) of the
Bankruptcy Code, 11 U.S.C. §503(b) (1) (A),
provides in relevant part:
§503. Allowance of
administrative expenses ...
(b) After notice and a
hearing, there shall be allowed
administrative expenses. . .,
including
(1) (A) the actual,
necessary costs and
expenses of preserving the
estate, including wages,
salaries, or commissions
fe) servi
after the commencement of
the case; (emphasis
added).
Congress' intent in enacting
§503(b)(1)(A) was elaborately discussed
in Trustees of Amalgamated Ins. Fund v.
McFarlin's, 789 F.2d 98, 101 (2nd Cir.
1986), as follows:
Section 507 gives first
priority to “administrative
expenses allowed under [11
3.3.¢.} section 503(b)."
Section 503(b)(1)(A) defines
administrative expenses as
including "the actual,
necessary costs and expenses of
39
preserving the estate,
including wages, salaries or
commissions for services
rendered after the commencement
of the case."
Congress granted priority
to administrative expenses in
order to facilitate the efforts
of the trustee or debtor in
possession to rehabilitate the
business for the benefit of all
the estate's creditors. . .
Congress reasoned that unless
the debts incurred by the
debtor in possession could be
given priority over the debts
which forced the estate into
bankruptcy in the first place,
persons would not do business
with the debtor in possession,
which would inhibit
rehabilitation of the business
and thus harm the creditors."
(citations omitted).
There is no evidence that Congress
intended the professional person sections
of the Bankruptcy Code to operate to the
exclusion of §503(b)(1)(A) or other Code
sections. Neither the words used in the
Bankruptcy Code nor the legislative
history preceding its passage suggest
40
such a construction. Given the total
absence of any congressional intent to
support its construction, the court of
appeals should have heeded this Court's
rule of construction in bankruptcy cases
involving predecessor statutory sections:
"there is nothing impossible about
construing the sections here involved to
mean what they say. . ." Reading Company
Vv. Brown, 391 U.S. 471, 481 (1968); Otte
v. United States, 419 U.S. 43, 57 (1974).
The opinion of the court of appeals
concluded that it must reach a "harsh"
result in order to preserve a "bright-
line position" under the Bankruptcy Code.
This approach to statutory construction
in bankruptcy cases is directly contrary
to time-honored decisions of this Court
that posited an equitable, rather than a
technical, method of construction. Thus,
41
in Pepper _v. Litton, 308 U.S. 295, 304-
305 (1939), this Court stated:
"The bankruptcy courts
have exercised these equitable
powers in passing on a wide
range of problems arising out
of the administration of
bankrupt estates. They have
been invoked to the end that
fraud will not prevail, that
substance will not give way to
forn, that technical
considerations will not prevent
substantial justice from being
done."
Indeed, when confronted with a
technical statutory argument under the
Bankruptcy Act, this Court held in Bank
of Marin _v. England, 385 U.S. 99, 103
(1966), as follows:
". . « we do not read these
statutory words with the ease
of a computer. There is an
overriding consideration that
equitable principles govern the
exercise of bankruptcy
jurisdiction.
The court of appeals similarly
ignored the fundamental rule of
statutory construction, embodied in
a tiatasinliatiatiaietenineenianenonniilll
42
numerous decisions of this Court, that
each provision of a statute should be
enforced, and that judicial construction
should not render a statutory section
inoperative, as was done here. Mountain
States Tel. & Tel. v. Pueblo of Santa
Ana, 472 U.S. 237, 249 (1985); Colautti
v. Franklin, 439 U.S. 379, 392 (1979);
Jarecki v. G.D. Searle & Co., 367 U.S.
303, 307-308 (1961). This Court in
United States v. Menasche, 348 U.S. 528-
538-539 (1955), described and condemned
the type of statutory interpretation used
by the court of appeals in this case:
"The cardinal principle of
statutory construction is to
save and not to destroy." It
is our duty "to give effect, if
possible, to every clause and
word of a statute," rather than
to emasculate an entire
section. . -" (citations
omitted).
The court of appeals' opinion
recognized that petitioners' compensation
iteintniidiemninnial
43
constituted a "commission." 844 F.2d 101.
But that opinion does not explain why
such a “commission" cannot be recovered
under a statutory provision that
authorizes the recovery of
"commissions." Instead, the opinion
simply announced its jipse dixit that
petitioners could not rely on
§503(b)(1)(A) because the professional
person compensation provision,
§503(b) (2), is, according to that court,
the exclusive remedy for petitioners.
Giving preclusive effect to one
compensation section does not, however,
further the intent of Congress where, as
here, Congress did not make the
applicability of one section exclusive of
the applicability of other Code sections.
Congress specifically evidenced its
intent against exclusivity when it used
the word “including” as a preface to the
44
subsections of §503(b), and then defined
"including" in 11 U.S.C. §102 as "not
limiting."
The court of appeals was obviously
woncerned that professional persons who
administrate bankruptcy cases, such as
attorneys or accountants, could possibly
look to §503(b)(1)(A) and thereby avoid
the professional person approval and
compensation requirements of §§327(a),
330(a) and 503(b)(2). But it is hard to
see how attorneys or accountants would
necessarily be successful if they
asserted that their fees were "wages,
salaries, or commissions" for "preserving
the estate." In any event, it is harder
to see how the parade of horribles
approach adopted by the court of appeals
45
justifies ignoring the specific words and
provisions enacted by Congress. 4
III. The Court Of
Appeals' Decision to
Render §503(b) (1) (A)
Inoperative Creates A
Conflict Among The Circuits.
The opinion of the Third Circuit
also conflicts with the opinion of the
Fourth Circuit in Goodman v. Philip R.
Curtis Enterprises, Inc., 809 F.2d 228,
231 at n. 4 (4th Cir. 1987). The Fourth
Circuit concluded that attorney's fees
may be recoverable under §503(b) (1) (A).
Because attorneys are specifically stated
*, The court of appeals implied
that petitioners' right to
remarket the aircraft created
aon issue oon
"disinterestedness," 844 F.2d
at 101, 106, because the breach
of that right could have
created a pre-petition claim.
Of courtse, the parties agreed
for Simon to remarket post-
petition. Hence there was no
breach that could have led to
such a claim.
46
to be professional persons under §327(a)
of the Bankruptcy Code, the opinion of
the Fourth Circuit in the Goodman case
stands for the proposition that
professional persons may indeed be
compensated under §503(b) (1) (A).
In further contrast to the holding
of the court of appeals in this case,
other federal courts have recognized
that §503(b)(1)(A) applies to persons who
might also qualify for employment as
professional persons under §327(a).
Thus, in the case of In re Ewing 54 B.R.
952, 956 (D. Col.), the District Court
held:
", . . this case is remanded to
the bankruptcy court for
determination of whether [the
broker] is entitled to payment
of an administrative expense
pursuant to 11 U.S.C. §503. If
the Court determines that [the
broker] is entitled to payment
of an administrative expense,
it does not need to appoint him
broker nunc pro tunc. It only
47
needs to pay him pursuant to 11
U.S.C. §503."
As discussed at length throughout
this Petition, these conflicts are not
mere technical conflicts. This Court
granted certiorari in the Reading Company
case ". . . because the issue is
important in the administration of the
bankruptcy laws and is one of first
impression in this Court." 391 U.S. at
475. Petitioners request this Court to
grant review in this case for the same
reasons.
IV. Petitioners Should Not Be
Precluded From Employment
And Compensation By An
Estate That They Rehabilitated.
Both the Bankruptcy Court and the
District Court found that the debtor-in-
possession was at fault for failing to
obtain court approval of petitioners'
employment prior to petitioners'
procurement and negotiation of the court-
ee
48
approved aircraft lease. Both the
Bankruptcy Court and the District Court
ordered the approval of petitioners'
employment, nunc pro tunc. Those orders
fell within the exact words chosen by
Congress, because Bankruptcy Rule 2014 (a)
requires the trustee or debtor-in-
possession to seek an “order of
approval," and §327(a) of the Code
requires employment "with the Court's
approval," but does not mandate prior
approval.
The Court of Appeals reversed the
orders of the Bankruptcy Court and the
District Court for what it characterized
as "legal error." 844 F.2d at 107. It
ruled, without any support in the
Bankruptcy Code or its legislative
history, that petitioners were under a
federal legal duty "to insure" that
"prior approval" had been sought and
49
obtained. Id. It further ruled that
petitioners were guilty of "extreme
laxity in seeking approval" because they
filed their petition for payment or
compensation seven months) after
concluding their services. Id.
The court of appeals confused a
petition for "approval" of employment
under §327(a), and Bankruptcy Rule
2014(a), with a petition for compensation
under §503. A petition for approval may
only be brought by the trustee or debtor-
in-possession. In contrast, any "person"
ot "entity may file a request for payment
of an administrative expense." 11 U.S.C.
§§101(14), 503(a) (emphasis added).
Petitioners invokcd the "payment"
procedure, and the debtor-in-possession
failed to invoke the "approval"
procedure. When the debtor-in-possession
raised its own inaction as a defense to
50
petitioners' request for "payment," the
Bankruptcy Court and the District Court
granted the statutorily required "court's
approval" to petitioners' efforts.
Accordingly, petitioners did not delay in
petitioning for approval of their
employment because only the debtor-in-
possession is’ statutorily required to
file such a petition. Petitioners
properly filed a petition for payment
when the promised reorganization plan was
not forthcoming.
The court of appeals purported to
apply an "extraordinary circumstances"
test to petitioners' retroactive
approval. 844 F.2d at 105. This test
emanated from its prior opinion in In re
Arkansas Co. Inc., 798 ¥F.2€@ 645 (3rd
Cir. 1986). While this test supposedly
springs from equitable considerations, it
is clear that it has no statutory basis.
44
oy
I
Moreover, its application to this case
certainly failed to lead to an equitable
result. A focus on Congress' actual
words and provisions shows that’ the
"extraordinary circumstances" test is
nothing but an articfical judicial
construct designed to foreclose
retroactive approval of employment, no
matter how beneficial the services in
question happened to be.
The professional person sections of
the Bankruptcy Code, 11 U.S.C. §§327(a),
330(a) and 503(b)(2), provide in relevant
part as follows:
§327. Employment of
professional persons.
(a) Except as otherwise
provided in this section, the
trustee,” with the court's
approval, may employ one or
more attorneys, accountants,
5. The debtor-in-possession
has the powers of a
trustee under 11 U.S.C.
§1107(a).
52
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.
§330. Compensation of
officers.
(a) After notice and
hearing, . . . the court may
award toa trustee, [or] to
- «+ a professional person
employed under section 327 or
1103 of this title,
(1) reasonable compensation
for actual, necessary services
rendered by such . ° .
professional person,. . . based
on the nature, the extent, and
the value of such services, the
time spent on such services,
and the cost of comparable
services other than a case
under this title; and
(2) reimbursement for
actual, necessary expenses.
7 * 7
§503. Allowances of
administrative
expenses.
(a) * * *
53
(b) After notice and a
hearing, there shall be allowed
administrative expenses, other
than claims allowed under
section 502(f) of this title,
including --
* * *
(2) compensation and
reimbursement awarded under
section 330(a) of this title;
(emphasis added)
The foregoing professional person
sections allow "compensation" to be paid
to approved professionals. These
sections do not require prior approval,
and should not be used, as the court of
appeals did here, to bar compensation for
business people who rehabilitate an
insolvent business.
Nor should they be deemed sole and
exclusive remedies. The court of appeals
did not explain why the payment of
"commissions" to leasing agents under
§503(b) (1) (A) for "preserving the
property" of the estate would render
"“nugatory" the professional person
54
sections allowing “reasonable
compensation . . . based on the nature,
the extent, and the value of such
services . . ." to be recovered by court
approved professionals. These statutory
provisions are, on their own terms,
reconcilable, not contradictory. Paying
a “commission” to a leasing agent is not
inconsistent with compensating a lawyer
or accountant for his time on an hourly
basis.
55
For each and all of the foregoing
reasons, petitioners Lewis Simon and s-J
Financial Corporation respectfully
request this Court to issue a writ of
certiorari to the United States Court of
Appeals for the Third Circuit and
thereafter to reverse that court's
opinion and judgment in this matter.
LEWIS SIMON and
S-J FINANCIAL
CORPORATION
Philip J. Nathanson
Nathanson & Wray
333 West Wacker Drive
Suite 330
Chicago, Illinois 60606
(312) 606-0771
‘Coe
» rah ni
—_ #A, . ig" ee
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NOS. 86-3712, 86-3715, 86-3718, and 86-3731
IN RE: F/S AIRLEASE II, INC.
v.
LEWIS SIMON and S-J CORPORATION
GREYCAS, INC.,
Appellant in No. 86-3712
THE SWIG INVESTMENT COMPANY
AIRCRAFT TRUST NO. 1, one of
the creditors above named in
this bankruptcy proceeding,
Appellant in No. 86-3715
F/S AIRLEASE II, INC.,
appellant-debtor above named,
Appellant in No. 86-3718
LEWIS SIMON and S-J
FINANCIAL CORPORATION,
Appellants in No. 86-3731
On Appeal from the United States District
Court for the Western District
of Pennsylvania
(D.C. Civil No. 86-1047)
|
NOS. 86-3713, 86-3716, 86-3719 and 86-3732
IN RE: F/S AIRLEASE II, INC.
v.
GREYCAS, INC.
, Appellant in No. 86-3713
THE SWIG INVESTMENT COMPANY
AIRCRAFT TRUST NO. 1, one of the
creditors above named in this
bankruptcy proceeding,
Appellant in No. 86-3716
F/S AIRLEASE II, INC.,
appellant-debtor above named,
Appellant in No. 86-3719
LEWIS SIMON and S-J
FINANCIAL CORPORATION,
Appellants in No. 86-3732
On Appeal from the United States District
Court for the Western District
of Pennsylvania j
(D.C. Civil No. 86-1048)
NOS. 86-3714, 86-3717, 86-3720 and 86-3733
F/S AIRLEASE II, INC.
v.
SWIG INVESTMENT COMPANY,
GREYCAS, INC..,
Appellant in No. 86-3714
THE SWIG INVESTMENT COMPANY
AIRCRAFT TRUST NO. 1, one of the
creditors above named in this
bankruptcy proceeding,
Appellant in No. 86-3717
F/S AIRLEASE II, INC.,
appellant-debtor above named,
; Appellant in No. 86-3720
LEWIS SIMON and S-J
FINANCIAL CORPORATION,
Appellants in No. 86-3733
On Appeal from the United States District
Court for the Western District
of Pennsylvania
(D.C. Civil No. 86-1050)
4
Argued September 9, 1987
Before: SLOVITER and STAPLETON, Circuit Judges,
and FISHER, District Judge*
(Opinion filed March 21, 1988)
Thomas S. Galey (Argued)
Pamela J. Giarla
Pittsburgh, PA 15238
Attorneys for F/S AirLease II; Inc.
Jack Weinberg (Argued)
Graubard Moskovitz Dannett Horowitz
& Mollen
New York, New York 10016
Kirkpatrick & Lockhart
Pittsburgh, PA 15222
Of Counsel:
George M. Cheever
Stoddard D. Platt
Robert K. Gross
Attorneys for the Swig Investment Company
Aircraft Trust No. 1
Alan M. Epstein (Argued)
Kelley Drye & Warren
New York, New York 10178
Reed, Smith, Shaw & McClay
Pittsburgh, PA 15230
Attorneys for Greycas, Inc.
? Hon. Clarkson S. Fisher. Chief Judge. United States District
Court for the District of New Jersey, sitting by designation.
5
Philip J. Nathanson (Argued)
Kasdin & Nathanson
Chicago, Illinois 60603
Dickie, McCamey & Chilcote
Pittsburgh, PA 15222
Attorneys for Lewis Simon and
S-J Financial Corporation
OPINION OF THE COURT
SLOVITER, Circuit Judge.
The debtor in a Chapter 11 bankruptcy and its two
principal creditors appeal from an order of the district
court affirming the bankruptcy court's nunc pro tunc
appointment of a broker for professional services
rendered to debtor. The broker cross-appeals from that
portion of the district court's order vacating the
bankruptcy court’s monetary award and remanding
the case to the bankruptcy court for recalculation of
the amount due the broker. We must first decide
whether we have jurisdiction. If so, we will reach the
issue whether this case presents such “extraordinary
circumstances” as set forth in In re Arkansas, 798
F.2d 645 (3d Cir. 1986), to warrant non-compliance
with the prior approval rule of section 327(a) of
Chapter 11 of the Bankruptcy Code.
I.
Facts
F/S AirLease II, Inc. is a Delaware corporation
engaged solely in the business of buying, selling,
financing, and leasing a Boeing airplane. It purchased
that plane in 1980 and then leased it to Air Florida for a
ten-year term. Greycas, Inc. provided the financing for
that transaction: its interest in the plane was secured
by a first mortgage. and Greycas also was entitled to an
6
assignment of rental proceeds from the Air Florida
lease as partial security. In 1980, AirLease sold the
plane to Comet Leasing Corporation, which then sold it
to Swig Investment Company, which in turn leased it
back to AirLease for an eighteen-year term. These
transactions were each carried out subject to Greycas’
security interest. |
The Air Florida lease had been negotiated and
procured for AirLease by Lewis Simon, a broker who
does business through S-J Financial Corporation
(collectively referred to as “Simon”), and who
performed brokerage services for AirLease’s affiliated
companies as well. As a result of a dispute over
commissions, Simon sued AirLease’s parent
corporation to obtain commissions allegedly due for,
inter alia, his brokerage services in obtaining the Air
Florida lease. A settlement agreement was reached in
May of 1983 which gave Simon “the exclusive right to
remarket” the Boeing aircraft, subject to the rights of
the owner and other creditors, for a commission of
one-half of one month's rent for each year of the
re-leasing term, net of expenses.
In July 1984, Air Florida filed for bankruptcy
under Chapter 11 of the Bankruptcy Code, thereby
terminating its lease with AirLease and depriving
AirLease of its sole source of income to Satisfy its
obligations to Swig and Greycas. According to an
appraisal conducted at that time by AirLease’s
appraiser, the plane, which was missing one of its two
engines, was valued at $5,242,000 and would require
$763.500 worth of repairs to restore it to an airworthy
condition.
Upon Air Florida's bankruptcy, AirLease
immediately contacted Simon and enlisted his services
for the remarketing of the plane. In response, on July
20. 1984, Simon wrote a letter to AirLease’s Vice
President and Treasurer, offering to remarket the
RTT EET SI
7
plane for a flat fee of $100,000, net of expenses, “in lieu
of the re-leasing fee set forth in [the May 1983
settlement agreement].” App. at 1664. This letter also
requested a $20,000 advance from AirLease to cover
expenses. On July 23, 1984, AirLease responded with a
letter proposing additional terms and enclosing both a
check for $20,000 and an escrow agreement.
In a second letter to AirLease, dated July 30, 1984.
Simon confirmed that he would undertake to remarket
the plane for a $100,000 flat fee. Simon also stated that
he understood that AirLease would use its best efforts
to obtain Swig’s agreement to pay him the $100,000
fee if he was successful in releasing the plane. Simon
made this offer on the condition that he be notified of
Swig's decision by August 3, 1984. AirLease accepted
Simon's July 30, 1984 offer on August 21, 1984, but
apparently Swig did not consent to this arrangement.
On August 3, 1984, AirLease filed a voluntary
bankruptcy petition under Chapter 11 of the
Bankruptcy Code. Greycas, the first mortgagee.
asserted that it had a right to possession of the plane:
on August 30, 1984, the bankruptcy court enjoined
Greycas from instituting any action to obtain
possession of the plane other than in AirLease’s
bankruptcy proceedings. The bankruptcy court
subsequently awarded possession of the plane to
AirLease and Greycas jointly.
Throughout the months of September and October
1984, Simon attempted to remarket the plane. At this
time Greycas also was attempting to secure a new
lessee, and Greycas did, in fact, make a proposal to
America West Airlines which did not culminate in an
agreement.
Thereafter. Simon reached an agreement with
Aloha Airlines, which was memorialized in a letter
agreement dated October 25, 1984, and finalized in a
lease agreement at the end of November. That
agreement provided for a ten-year lease term, with
—- ee ee es
8
monthly rental payments of $90,000. The agreement
further provided that Aloha would furnish the
necessary engine at its own expense, and would return
the plane to AirLease at the end of the lease term with
two operable engines. The deal was contingent on the
lease being executed by mid-December 1984, because
the December holiday season was Aloha’s busiest time.
AirLease quickly filed a motion in the bankruptcy
court for approval of the lease to Air Florida. On the day
before the bankruptcy court was to hold a hearing on
the motion, counsel for Simon, in a letter dated
November 28, 1984 to counsel for AirLease, confirmed
his understanding reached in a telephone conversation
between them that day that in the forthcoming
bankruptcy court hearings AirLease would not seek to
obtain any ruling from the bankruptcy court
“regarding the distribution or allocation of the
proceeds from the Aloha Airlines lease,” but, rather,
would only seek approval of the lease itself. App. at 792.
The issue of “allocation and distribution of the
payment derived from the lease [was to] be resolved at a
later date.” However, Simon understood that AirLease
would “spread of record and include in any order
approving the lease the fact that [Simon] initiated,
procured and negotiated the Aloha Airlines lease.” App.
at 792.
After two days of hearings held on November 29
and 30, 1984, at which AirLease “spread of record”
Simon's role in the transaction, the bankruptcy court
approved the Aloha lease over Greycas’ objections,
finding it to be in the estate's best interests. Simon
testified at the hearing about the lease: however, he did
not seek his appointment as broker or approval of his
services at that time. Rather, as Simon and AirLease
had agreed, the sole issue raised at that hearing was
the confirmation of the lease.
9
In June 1985, ten months after he began his
efforts to remarket the plane and seven months after
the Aloha lease was executed and approved by the
bankruptcy court, Simon filed a petition in the
bankruptcy court for payment of administrative
expenses pursuant to 11 U.S.C. § 503 (1982 & Supp.
IV 1986). He requested $450,000, which amounted to
one-half of one month's rent for each year of the Aloha
lease. The bankruptcy court approved his employment
nunc pro tunc and awarded him the $450,000 fee he
requested. In re F/S AirLease II, Inc., 59 B.R. 769
(Bankr. W.D. Pa. 1986).
AirLease, Greycas, and Swig appealed to the
district court which affirmed the nunc pro tunc
approval of Simon's appointment but vacated the
$450,000 award, finding the amount to be
insufficiently substantiated. The district court
therefore remanded the case to the bankruptcy court
on the issue of the amount of the award. In re F/S
AirLease II, Inc., Nos. 86-1047, 86-1048, 86-1050
(W.D. Pa. October 21, 1986). These appeals followed.'
We review the bankruptcy court's ruling by the
same standards the district court should apply.
Universal Minerals, Inc. v. C.A. Hughes & Co., 669
F.2d 98, 102 (3d Cir. 1981). District court review of the
bankruptcy court's factual findings is under the
“clearly erroneous” standard. See In re Baron v. Allied
Artists Pictures Corp., 717 F.2d i100 (3d Cir. 1983); see
also Universal Minerals, 669 F.2d at 102. A decision
to grant nunc pro tunc approval is in the discretion of
i. AirLease and Swig appeal from so much of the district court's
order that affirms the bankruptcy court's nunc pro tunc approval:
Greycas appeals from both the nunc pro tunc approval and the
remand: and Simon cross-appeals from that portion of the order
vacating the monetary award and remanding the case to the
bankruptcy court.
10
the bankruptcy court, see Arkansas, 798 F.2d at 650.
and is reviewed for abuse of discretion only. We have
plenary review over legal questions. See Universal
Minerals, 669 F.2d at 102.
Il.
Appealability
All parties construe 28 U.S.C. § 158(d) (Supp. III
1985)? as giving us jurisdiction. We are obliged,
however, in every appeal presented to us to satisfy
ourselves not only of our jurisdiction but also of the
jurisdiction of the lower court. Bender v. Williamsport
Area School District. 475 U.S. 534, 541 (1986): see
also In re Walsh Trucking Co., No. 86-5811 (3d Cir.
Feb. 2, 1988).
2. Section 158(d) of title 28 of the United States Code provides
that:
The courts of appeals shall have jurisdiction of appeals
from all final decisions. judgments. orders. and decrees
entered under subsections (a) and (b) of this section.
28 U.S.C. 8 158id) (Supp. II 1985).
Subsection (a) of section 158 provides. in turn, that:
The district courts of the United States shall have
jurisdiction to hear appeals from final judgments.
orders, and decrees. and. with leave of the court. from
interlocutory orders and decrees, of bankruptcy judges
entered in cases and proceedings referred to the
bankruptcy judges under section 157 of this title. An
appeal under this subsection shall be taken only to the
district court for the judicial district in which the
bankruptcy judge is serving.
28 U.S.C. § 158(a) (Supp. III 1985). Subsection (b) of section 158.
governing appeals from bankruptcy appellate panels. is not relevant
here.
ll
Courts of appeals have jurisdiction over appeals in
bankruptcy cases in which district courts have entered
“final decisions, judgments. orders. and decrees.” 28
U.S.C. 8 158(d): see In re Brown, 803 F.2d 120, 122
(3d Cir. 1986). District courts. on the other hand, have
jurisdiction not only over such final judgments but
also, “with leave of the court.” over interlocutory orders
and decrees. 28 U.S.C. § 158(a). In this case. no
motion was filed for leave to appeal an interlocutory
order. see Bankruptcy Rule 8001(b), and thus it
appears that the district court and the parties treated
the bankruptcy court's order as final.
The unique characteristics of bankruptcy cases
have led us to-“consistently consider{| finality in a more
pragmatic and less technical way in bankruptcy cases
than in other situations.” In re Amatex Corp., 755 F.2d
1034, 1039 (3d Cir. 1985).* We have explained that
“[bjankruptcy cases frequently involve protracted
proceedings with many parties participating. To avoid
the waste of time and resources that might result from
reviewing discrete portions of the action only after a
3. Prior to 1984. the jurisdiction 2f the courts of appeals in
bankruptcy cases was governed by 28 U.S.C. § 1293(b). (omitted by
Pub. L. 98-353. tit. 1. § 113. 98 Stat. 333. 343 (1984)). which
provided that courts of appeals had jurisdiction “from a final
judgment. order. or decree of a bankruptcy court.” This provision
was superseded by section 158(d) when Congress enacted the
Bankruptcy Amendments & Federal Judgeship Act of 1984, Pub. L.
No. 98-353. tit. 1. § 104(a), 98 Stat. 333. 341 (1984). in response to
the Supreme Court's decision in Northern Pipeline Construction
Co. v. Marathon Pipe Line Co.. 458 U.S. 50 (1982). Because both
statutes contain the finality requirement. this court has stated that
Congress did not intend any substantive change when it enacted
section 158(d). and. indeed. the legislative history reveals none. In
re Pacor. Inc.. 743 F.2d 984. 987 n.4 (3d Cir. 1984). We may
therefore rely on cases decided under section 1293(b) to assess our
jurisdiction under section 158(d). See In re Brown. 803 F.2d 120.
122 n.3 (3d Cir. 1986).
12
plan of reorganization is approved, courts have
permitted appellate review of orders that in other
contexts might be considered interlocutory.” Id. at
1039. The factors that we have considered tn making a
decision on finality have included the impact of the
matter on the assets of the bankruptcy estate, the
preclusive effect of a decision on the merits, and
whether the interests of judicial economy will be
furthered. See, e.g.. In re Meyertech, 831 F.2d 410,
414 (3d Cir. 1987).
Applying these factors, we have found the requisite
finality in an order denying a right to appoint a legal
representative for potential future claimants, In re
Amatex Corp., 755 F.2d at 1039-41; an order lifting the
automatic stay of the bankruptcy code, In re Comer,
716 F.2d 168, 171-74 (3d Cir. 1983); an order staying
proceedings pending action by a state agency,
Wheeling-Pittsburgh Steel Corp. v. McCune, 836 F.2d
153. 157-58 (3d Cir. 1987); an order denying the
creditors’ motion to dismiss the debtor's Chapter 7
petition, In re Christian, 804 F.2d 46, 47-48 (3d Cir.
1986); and an order granting a creditors committee
leave to intervene in an adversary proceeding brought
by the bankruptcy trustee in a Chapter 11 proceeding.
In re Marin Motor Oil, Inc., 689 F.2d 445, 447-49 (3d
Cir. 1982), cert. denied, 459 U.S. 1207 (1983). See
also In re Walsh Trucking Co., No. 86-5811, slip op. at
4-8 (3d Cir. Jan. 4, 1988) (applying the same analysis
to appeals from the bankruptcy court to the district
court).
Application of this approach leads to our
conclusion in this case that the orders of both the
bankruptcy court and the district court granting nunc
pro tunc approval of Simon's employment as a broker
were final. See In re Arkansas, 798 F.2d 645 (3d Cir.
1986) (assuming without discussion that a
13
bankruptcy court order, affirmed by the district court,
denying nunc pro tunc approval of employment of a law
firm under 11 U.S.C. 8 327(a) was appealable).
A resolution of this discrete dispute at this time
would further the goal of judicial economy because it
could obviate the need for further action by the
bankruptcy court. Even more important, the order has
a significant impact on the assets of the bankruptcy
estate; the amount Simon seeks represents a
substantial portion of the assets of the estate, and an
award to him at this point will severely affect the rights
of the other creditors. In fact, a delay in the final
resolution of this matter could have an adverse impact
on the debtor's successful reorganization under
Chapter 11. In letter memoranda submitted to this
court in response to its request for briefing on the
issue of appealability, AirLease, Greycas, and Swig
expressed their belief that the remand of the case to the
bankruptcy court and subsequent payment of some fee
to Simon could transform this Chapter 11
reorganization into a Chapter 7 involuntary
bankruptcy. Richard Uhl, the president of AirLease,
testified to that effect in the hearing on Simon's
petition for payment of administrative expenses,
stating that, “if the available funds were hit as heavily
as we are talking about here today . . . there would be
no basis for a plan of reorganization.” App. at 1343. As
we stated In re Comer, 716 F.2d at 172, the fact that
determination of the disputed issue may require
conversion of the procedure from one under Chapter
11 to one under Chapter 7 demonstrated that, “[tJhe
matter ... is not one that can await final resolution of
the bankruptcy proceedings.”
The district court's remand of the portion of the
bankruptcy court's order dealing with the amount of
Simon's compensation does not affect our jurisdiction
14
over the portion of its order approving Simon's nunc
pro tunc employment.* In Universal Minerals, Inc. v.
C.A. Hughes & Co., 669 F.2d 98, 101 (3d Cir. 1981), we
held that we could review the district court's
determination in an adversary proceeding against the
debtor with respect to ownership of a certain coal mine
notwithstanding that the district court had remanded
to the bankruptcy court for an accounting. See also In
re Meyertech Corp., 831 F.2d at 414 (district court
order remanding to the bankruptcy court for
reconsideration of the amount and propriety of a
favorable award in an adversary proceeding is
appealable final order). In this case, as in those, “the
judgment of the district court conclusively determined
the question presented by this appeal.” Universal
Minerals, 669 F.2d at 101.° For these reasons, we
4. One authority has concluded that the issue of whether a
court of appeals has jurisdiction over an order of the district court
remanding to the bankruptcy court is “hopelessly unresolved.” 1 L.
King. Collier on Bankruptcy. para. 3.03 at 3-176 (15th ed. 1987)
(citing cases). This case is unlike those where courts of appeals
have dismissed appeals when the district court's remand to the
bankruptcy court involved the development of “further factual
findings related to a central issue raised on appeal.” In re Stanton.
766 F.2d 1283. 1287 (9th Cir. 1985) (citing In re Martinez, 721
F.2d 262. 265 (9th Cir. 1983)): see also In re Vekco, 792 F.2d 744
(8th Cir. 1986). Compare In re Bowman. 821 F.2d 245, 248 (Sth
Cir. 1987) (finding no final order when remand involves
“significant further proceedings”) with In re Lift & Equipment
Service. Inc.. 816 F.2d 1013. 1016 (finding final order when
remand involves “no more than a mechanical and ministerial
task”). modified in part on rehearing. 819 F.2d 546 (5th Cir.
1987).
5. The two instances in which we have dismissed appeals
because the district court had remanded are. on close examination.
inapposite here. In In re Jeanette Corp.. 832 F.2d 43 (3d Cir. 1987).
the district court had affirmed the bankruptcy court's order that
the debtor's attorney violated Fed. R. Civ. P. 11 and Bankruptcy
ER
15
conclude that the district court's order approving the
nunc pro tunc employment of Simon is a final order.®
and we turn to the merits of the appeal.
Ill.
Retroactive Approval
A.
Our analysis of whether the bankruptcy court, as
affirmed by the district court, properly approved
Simon's appointment under section 327(a)’ nunc pro
tunc is informed in large measure by our recent
decision in In re Arkansas, 798 F.2d 645 (3d Cir.
Rule 9011 and remanded for a hearing to determine whether
sanctions should be imposed. We dismissed the appeal because the
“liberal construction” of finality in bankruptcy proceedings “does
not apply in situations unrelated to the special needs of bankruptcy
litigation.” Jd. at 45. In In re Brown, 803 F.2d 120 (3d Cir. 1986).
the district court had reversed the bankruptcy court's order that a
creditor's letter violated the automatic stay of the Code and
remanded for a determination of damages due the debtor. We
explicitly predicated our dismissal of the appeal on the fact that the
district court's order did not “affect the distribution of the debtor's
assets or the relationship among the creditors.” Id. at 123.
6. Because of our resolution of the nunc pro tunc employment
issue, we have no occasion to reach the issue of the amount of
Simon's compensation, which is raised by the cross-appeals.
Therefore, we do not decide whether we have jurisdiction over the
cross-appeals.
ip 11 U.S.C. § 327(a) (1982) provides that:
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.
16
1986), handed down after the bankruptcy court's
decision in this case. In Arkansas, we held that
“bankruptcy courts may, in extraordinary
circumstances, grant retroactive approval of
professional employment.” Id. at 646 (emphasis
added). We adopted a two-part test to determine the
propriety of such retroactive approval: first, the
bankruptcy court must find, after a hearing, that the
applicant satisfies the disinterestedness requirements
of section 327(a) and would therefore have been
appointed initially: and, second, the court must, in the
exercise of its discretion, determine that the particular
circumstances presented are so extraordinary as to
warrant retroactive approval. Id. at 650.
To guide the bankruptcy court in the exercise of its
discretion regarding the existence of “extraordinary
circumstances”, we directed it to consider such factors
as:
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.
Id.
Applying these factors in Arkansas, we upheld the
district court's decision that no extraordinary
circumstances justified the retroactive approval of
attorneys for a creditors committee, where the
Under 11 U.S.C. 8 1107(a) (1982). AirLease. as a debtor in
possession. hfs substantially the same rights. powers, functions.
and duties of a trustee and is thereby entitled to employ
professional persons under section 327(a).
_— ee ee en
17
attorneys were experienced in bankruptcy practice and
had alleged no time pressure that would justify their
failure to apply for approval, but simply, through
oversight, had neglected to do so. Id. at 650-51. Noting
that we had previously stated that the prior approval
requirement is a “means of ‘ensuring that the court
may know the type of individual who is engaged in the
proceeding, their integrity, their experience in
connection with work of this type, as well as their
competency concerning the same,’" id. at 648,
(quoting In re Hydrocarbon Chemicals, Inc., 411 F.2d
203, 205 (3d Cir.) (in banc), cert. denied, 396 U.S. 823
(1969)), we concluded in Arkansas that ‘the
prophylactic statutory rule that approval must be
sought in advance of performance of services is too
strong to be overcome by a mere showing of oversight.”
Id. at 651.
AirLease, Swig, and Greycas contend that Simon
would not have met the requirements of section 327(a)
for appointment of professionals even had approval of
his appointment been sought in a timely fashion.®
They argue that because Simon has a potential claim
against AirLease arising out of his 1983 settlement
agreement with AirLease's parent, he is not a
“disinterested person” eligible for appointment under
section 327(a}.* Such a dispute demonstrates the
8. In light of this argument, we find the position of appellants
Swig and AirLease that Simon is entitled only to the $100,000 fee
described in his letter of July 20, 1984 and July 30. 1984 truly
mystifying. If Simon ho!ds interests adverse to those of the estate.
then he would not have been appointed under section 327(a), or
alternatively, would not have qualified for retroactive appointment
in any case and would not therefore be entitled to any fee
whatsoever.
9. 11 U.S.C. 8 101(13)(A) (1982) defines “disinterested person”
as a person who “is not a creditor.” A “creditor” is a person who
“has a claim against the debtor that arose at the time of or before
18
congressional wisdom in requiring prior approval of
professional persons with the attendant notice to
creditors. Had prior approval been sought in this case,
the issue of Simon's, disinterestedness would have
been brought out in the open during the hearing and
resolved prior to his having performed the services for
which he now seeks a fee. Because we conclude, after
applying the relevant factors in this case, that there
were no extraordinary circumstances *9 support his
nunc pro tunc appointment, we do not reach the issue
of Simon's disinterestedness.
B.
The two factors enumerated in Arkansas of
particular relevance here are who bore the
responsibility for compliance with the statutory
mandate that prior approval be sought from the court
for employment of a professional and whether the
applicant was under such time pressure to begin
services that prior approval could not reasonably be
sought. Simon argues that under the Bankruptcy Code
and Rules AirLease bore the responsibility for seeking
court approval of the appointment of professional
persons, and that it was only through AirLease’s
oversight that the petition for approval was never filed.
Although Bankruptcy Rule 2014(a) states, in relevant
part, that “[aln order approving the employment of
attorneys, accountants, appraisers, auctioneers..
agents, or other professional persons pursuant to
§ 327 or § 1103 of the Code shall be made only on
application of the trustee or committee,” this
requirement cannot relieve the professional person
the order for relief concerning the debtor.” 11 U.S.C. § 101(9)(A). A
claim includes a “right to payment. whether or not such right is
reduced to judgment. liquidated. unliquidated. fixed. contingent.
matured. unmatured. disputed. undisputed. legal. equitable.
secured or unsecured.” 11 U.S.C. § 101(4).
Seon bes
Deaiieiaat y
VS etl KPNI IRE IN
FEL IAD ASS SE STATE AOE BS
19
who seeks appointment from responsibility to know
that such approval is necessary and to insure that it
has in fact been sought. See In re Carolina Sales
Corp., 45 B.R. 750, 755 (Bankr. E.D.N.C. 1985).
Otherwise, the prior approval requirement of the Code
could be avoided for all non-attorney professional
persons merely by citing the debtor's oversight, with
the attendant difficulty of determining whether it was
inadvertent or not. To the extent that the bankruptcy
court held that Simon, as a non-attorney, “cannot be
held to be charged with the knowledge of this
requirement,” AirLease, 59 B.R. at 775, it committed
legal error.
Simon is a sophisticated businessman who was
represented by attorneys throughout the course of his
dealings with AirLease. This is not a case in which a
person, completely ignorant of the requirements of the
Bankruptcy Code and without legal representation,
justifiably relied on the superior expertise of another.
See In re Freehold Music Center, Inc., 49 B.R. 293
(Bankr. D.N.J. 1985). The evidence here suggests that
Simon's attorney was familiar with the requirements of
the Bankruptcy Code, including the requirements of
section 327(a). In the November 28, 1984 letter written
by his attorney to AirLease, Simon agreed to limit the
request for court approval to the lease only, reserving
questions “regarding the distribution or allocation of
the proceeds from the Aloha Airlines lease.” App. at
792. Even if Simon believed that AirLease had the
responsibility for filing the application. we see no basis
to relieve Simon from his obligation under section
327(a) to insure that the application was timely filed.
Simon argues that the second factor articulated in
Arkansas -- whether the applicant was under time
pressure to begin services -- supports the nunc pro
(unc approval because Aloha Airlines needed the use of
the plane for the 1984 Christmas season. The
20
bankruptcy and district courts also found that Simon
“operated under severe time pressures to locate
another lessee for the aircraft.” In re F/S AirLease II,
Inc.. Nos. 86-1047, 86-1048, 86-1050, slip op. at 10
(W.D. Pa. October 21, 1986). This finding reflects a
misunderstanding of the “time pressure” factor, which
relates solely to whether there is sufficient time to
request court approval before the professional's
services must begin.
Simon began negotiating with AirLease in July
1984 regarding his services and compensation
therefor. AirLease declared bankruptcy on August 3.
1984. Simon first contacted Aloha in September 1984,
and the approval of the lease was sought from the
bankruptcy court in the end of November 1984. Simon
did not seek the requisite prior approval from the court
when AirLease’s bankruptcy began, nor did he seek
approval at any time during the four-month period in
which he was performing his services. Not until June
3, 1985 -- almost a year from when he had commenced
his services and a full seven months from the date he
had concluded them -- did Simon petition the court for
payment of administrative expenses. The estate's need
to have the plane expeditiously remarketed can hardly
excuse Simon's extreme laxity in seeking approval.
The time pressures on which Simon and the
courts below rely are simply not the sort of exigencies
contemplated by Arkansas. In Arkansas we were
referring to an emergency situation in which services
had to be initiated within a very short period before
approval could be sought. We cited, as an example, In
re Bible Deliverance Evangelistic Church, 39 B.R. 768
(Bankr. E.D. Pa. 1984), in which counsel was retained
by a creditors committee only two weeks before a
crucial meeting and was required to begin immediate
preparation. Under these circumstances. the
bankruptcy court found that counsel had acted with
ETN FIRE LT TR
wate Mae'.2
21
“reasonable promptness” in seeking court
appointment within two weeks of being retained. 39
B.R. at 772. The facts of this case do not approximate
the exigent time pressures presented in Bible, and,
indeed, do not indicate that Simon was faced with any
time pressure at all with respect to seeking the court's
approval of his prospective services.
Simon contends that his appointment should be
approved because of his successful efforts in securing
the Aloha lease. The bankruptcy court stated, in a
finding amply supported by the record, that, “[wlere it
not for the efforts of S-J [Simon] in obtaining this
lease, there would be no estate with which a
reorganization could be effected.” 59 B.R. at 777.
In most cases in which nunc pro tunc approval has
been sought. the applicant has performed services of
value. To this extent, there will be some unjust
enrichment if compensation is not authorized.
Because that is the unavoidable consequence of the
statutory requirement of prior approval, we agree with
the statement by the court in In re Mason. 66 B.R. 297,
307 (Bankr. D.N.J. 1986), that the “fact that the
applicant's services were beneficial to the debtor's
estate is immaterial to this court's decision regarding
nunc pro tunc approval.”
Simon treats the “prejudice” factor referred to in
Arkansas as relating to prejudice vel non to any party
from Simon's failure to seek prior approval. Simon and
Greycas thus dispute whether Greycas, if permitted to
do so by the bankruptcy court. could have performed
equivalent services to Simon's at less cost. This issue is
irrelevant because the statutory requirement of prior
approval is not limited to those cases in which there
would otherwise be prejudice. The “prejudice” factor to
which we referred in Arkansas was only whether, in
“extraordinary circumstances” cases, there would be
prejudice if compensation were paid after nunc pro
i
22
tunc employment were approved. Arkansas, 798 F.2d
at 650. We do not reach that factor in this case because
a review of the relevant factors shows that there is no
evidence in this record of the “extraordinary
circumstances” that would warrant nunc pro tunc
approval of Simon's employment.
IV.
Simon's Additional Contentions
In addition to his contentions under section
327(a), Simon argues that nunc pro tunc approval is
unnecessary because he is entitled to a fee for his
brokerage services under either section 327(b) or
503(b)(1)(A) of Chapter 11 of the Bankruptcy Code. 11
U.S.C. 88 327(b), 503(b)(1)(A) (Supp. IV 1986).'® We
find both provisions inapplicable. Simon does not fall
within section 327(b)'' because he was not a “regularly
employed . . . professional person|] on salary.”
We likewise reject Simon's argument under section
503(b)(1)(A) of the Code, which permits priority
payment as an administrative expense of “the actual.
necessary costs and expenses of preserving the estate.
including wages, salaries, or commissions for services
rendered after the commencement of the case.” 11
U.S.C. §503(b)(1)(A). Section 503(b)(1)(A)
encompasses costs such as outlays for repairs, upkeep.
10. Neither the bankruptcy court nor the district court reached
these issues. as they decided the case in Simon's favor pursuant to
section 327(a).
ll. 11 U.S.C. § 327(5) (Supp. IV 1986) provides. in full. that:
If the trustee is authorized to operate the business of the
debtor under section 721. 1202. or 1108 of this title. and
if the debtor has regularly employed attorneys.
accountants, or other professional persons on salary. the
trustee may retain or replace such professional persons
if necessary in the operation of such business.
a eee ee
23
rent, taxes and “other costs incidental to protection
and conservation” of the estate. 3 L. King, supra, para.
503.04, at 503-20.
The authority to pay administrative expenses for
professionals, and a real estate broker, like an
attorney. is a professional, is found not in section
503(b)(1)(A) but in section 503(b)(2) which permits
payment as an administrative expense for
“compensation and reimbursement awarded under
section 330(a).” Section 330(a), in turn, empowers the
court to award “reasonable compensation” to, inter
alia, a “professional person employed under section
327.” Because Simon is a professional person who was
hired to “assist the |debtor-in-possession) in carrying
out the |debtor-in-possession’s] duties,” see 11 U.S.C.
§ 327(a). and he failed to comply with that section's
requirement to obtain prior approval of his
appointment, he cannot rely on section 503(b)(1)(A) as
a way of circumventing section 327(a). See In re
Mansfield Tire & Rubber Co.. 65 B.R. 446, 465-66
(Bankr. N.D. Ohio 1986). If Simon were able to be
compensated under section 503(b)(1)(A), it would
render section 327(a) nugatory and would contravene
Congress’ intent in providing for prior approval. '?
V.
Conclusion
We are mindful that the result may seem harsh in
this case. In Arkansas, we explained our formulation
of the “extraordinary circumstances” standard by
reference to the legislative history and the important
policies at stake. We noted that without such a
12. Several of the parties had filed a series of motions to strike
and for sanctions. We find each of these motions to be devoid of
merit. especially in light of our disposition of this case. and will
therefore deny them.
24
standard. “the bankruptcy court may be overly inclined
to grant such approval influenced by claims of
hardship due to work already performed.” 798 F.2d at
649. We stated that. “lilf retroactive approval were
freely granted, it would subvert the prophylactic
purpose underlying the statutory requirement of prior
approval.” Jd. Our holding in this case reiterates and
reinforces that bright-line position.
The bankruptcy court did not have the benefit of
Arkansas when it gave its nunc pro tunc approval, and
hence did not apply the appropriate legal standard. The
district court also erred as a matter of law because it
misapplied the Arkansas factors. For the reasons set
forth above. we will reverse the order of the district
court affirming the bankruptcy court's order granting
nunc pro tunc approval of Simon's employment and
remand to the district court for the entry of an
appropriate order consistent with this opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
A.O. U.S. Courts. G.M.C. Printing. Phila.. Pa. 215-568-4264)
PIERRE B68 80 on cor RRR TINE
25
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 86-3712-86-3720, 86-3731/33
F/S AIRLEASE, INC.
Vv.
GREYCAS, INC.,
Appellant.
SUR PETITION FOR REHEARING
Present: GIBBONS, Chief Judge, SEITZ,
HIGGINBOTHAM, SLOVITER, BECKER,
STAPLETON, MANSMANN, GREENBERG,
HUTCHINSON, SCIRICA, and
COWEN, i , and
FISHER, Pe
The petition for rehearing filed by
Appellees/Cross-Appellants, Lewis Simon
and S-J Financial Corporation, in the
above-entitled case having been submitted
to the judges who participated in the
decision of this court and to all the
other available circuit judges of the
circuit in regular active service, and no
weer
26
judge who concurred in the decision
having asked for rehearing, and a
majority of the circuit judges of the
circuit in regular active service not
having voted for rehearing by the court
in banc, the petition for rehearing is
denied.
By the Court,
Circuit Judge
Dated: April 19, 1988
* Hon. Clarkson S. Fisher, Chief Judge,
United States District Court for the
District of WNew Jersey, sitting by
designation, &% to panel rehearing only.
APPENDIX B
27
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
IN RE:
F/S AIRLEASE II,
INC. Bankruptcy No. 84-1628
Vv.
LEWIS SIMON and
S-J
FINANCIAL
CORPORATION,
eee ee ee ee ee ee eee ee ee
F/S AIRLEASE
II, INC.
Civil Action 86-1048
we
GREYCAS, INC.
eee ee ee ee ee eee ee
F/S AIRLEASE
ii, LNG.
Vv. Civil Action 86-1050
SWIG INVESTMENT
COMPANY.
ee ee eee eee eee ee ee”
MEMORANDUM OPINION
ZIEGLER, District Judge
Debtor and two creditors appeal the
bankruptcy court's approval and award of
$450,000.00 to Lewis Simon and S-J
iilaiiaasia itera
28
Financial Corporation, appellees, for
professional services rendered in
obtaining a lease for debtor's Boeing
737-222 aircraft. Appellants argue that
the bankruptcy court's nunc pro tunc
approval is contrary to applicable law in
ti.is jurisdiction and that the court's
award is unreasonable and not supported
by evidence of record. We hold that
appellees are entitled to nunc pro tunc
approval, but we shall remand the case
for a documented determination of
appellees' claims.
I. History of Case
Appellees do not dispute the
bankruptcy court's findings of the fact.
Our independent review of the record
indicates that the findings are not
clearly erroneous and are substantially
supported by the weight of credible
evidence. For the purposes of this
29
appeal, we adopt the following findings
of the bankruptcy court, as reported in
Matter of F/S Airlease II, Inc., 59 B.R.
769, 771-72 (Bankr. W.D. Pa. 1986):
"The Debtor is a_e single-asset
corporation, which has the sole purpose
of leasing and remarketing a _ certain
Boeing 737-222 aircraft. This aircraft
was purchased by the Debtor in July of
1980, and financing for the purchase was
obtained from Greycas, Inc. (debtor's
largest single creditor). The aircraft
was subsequently sold and repurchased
several times, the final purchaser being
the Swig Investment Company Aircraft
Trust No. 1 ("Swig"). Swig subsequently
leased the aircraft to the Debtor for an
18-year tern. At all times, Greycas
continued to hold a security interest and
was to be repaid from the rental proceeds
30
received as a result of the Debtor's
releasing of the aircraft.
"In February of 1980, the Debtor
entered into an initial agreement with
S-J, hiring it as a leasing agent to find
leases for various aircrafts. In July of
1986, S-J successfully arranged for the
lease of the Boeing 737-222 aircraft to
Air Florida. Soon thereafter, a
disagreement arose between the Debtor and
S-J as to the appropriate compensation
due S-J for its services. Litigation was
instituted in the United States District
Court for the Northern District of
Illinois, which ultimately was resolved
by a Settlement Agreement dated May 27,
1983. This Agreement directed that S-J
would be entitled to compensation in the
amount of one-half of one month's rent
for each year of releasing, and would
give S-J the remarketing rights to this
t
4
j
i
;
31
and other aircraft, subject to the rights
of the various owners and secured
lenders. Additionally, the Settlement
Agreement stated the S-J had a right to
payment only when the Debtor received
payment.
"On July 3, 1984, Air Florida, the
lessee of this aircraft, filed a Chapter
11 bankruptcy, which effectively
terminated the aircraft lease, leaving
the aircraft available for release or
sale. The Debtor immediately contacted
S-J, urging it to assist in the search
for a new lessee. On July 20, 1984, S-J
sent a letter to the Debtor proposing to
remarket the aircraft for a flat fee of
$100,000.00 plus expenses, irrespective
of the new lease terms. On July 30,
1984, S-J forwarded-a second letter to
the Debtor, again offering to act as the
leasing representative for the
32
$100,000.00 flat fee, plus expenses. S-J
specified that it needed a response by
August 3, 1984. On August 21, 1984,
almost three (3) weeks after the
expiration date, the Debtor wrote to S-J,
accepting the proposed arrangement. This
acceptance was conditioned upon. the
approval of Swig. Swig, for unspecified
reasons, categorically refused to approve
any flat fee arrangement, and accordingly
that offer was terminated. Only now,
after S-J has procured a 10-year lease
and requested $450,000.00, has Swig
inferred that the Court should imposed
the $100,000.00 fee upon S-J.
"On duhy 25, 1984, S-J and
representatives for the Debtor traveled
to Phoenix, Arizona, Greycas'
headquarters, to discuss possible leasing
of this aircraft to America West Airlines
("America West"). This joint trip was
33
the result of several meetings among the
Debtor, S-J, and Greycas, during which
time the possibilities of various leases
and lessees were discussed. Greycas'
proposal to lease the aircraft to America
West was contingent upon Greycas
obtaining possession of the aircraft,
which possession it did not have, and
could not have, pursuant to final court
order.
"With a general understanding as to
professional fees but no finalized
written agreement between them, the
Debtor requested that S-J proceed with
attempts to remarket the aircraft. At
that time the aircraft was not airworthy,
in that one of its engines had been
removed and was placed, disassembled, in
a box. Since the aircraft was not
airworthy, it was providing no revenue to
any of the parties. In September of
34
1984, Greycas made a proposal to America
West which called for a 6-month lease
with a 10-year option. The monthly
rental fee proposed was $85,000.00.
Additionally, since the aircraft was
missing an engine, Greycas proposed to
have America West lease an engine and
subtract the cost of the leased engine
from the monthly rental payments. Again,
this proposal was contingent upon
Greycas' receipt of the aircraft which it
did not and could not obtain.
"By October 25, 1984, S-J had
procured a Letter of Agreement with Aloha
Airlines ("Aloha"). The Agreement called
for a 10-year lease at a monthly rental
of $90,000.00. Further, Aloha, a more
solvent and stable airline, agreed to
supply the necessary second engine,
without receiving a rent rebate thereon,
and also agreed to return the aircraft at
35
the conclusion of the 10-year lease with
two operational engines instead of one.
"On November 29, 1984, the Debtor
and Aloha prepared a lease based on the
agreement procured by S-J. The following
day, and Order was entered in
[bankruptcy] Court approving this lease,
finding it to be in the best interests of
the estate. At that hearing the parties
made the Court aware that the Debtor had
requested S-J to procure a lease, that S-
J had procured same, and that Greycas,
while nominally objecting to S-J's
invclvement, wanted the lease, secured by
S-J, to be approved."
The bankruptcy court cited the
general rule that court authorization
before services are rendered is a
condition precedent to any _ fee
application, citing Bankruptcy Rule
2014(a) and In re Hydrocarbon Chemicals,
36
Inc., 411 F.2d 203 (3d Cir. 1969).
However, the court noted, a bankruptcy
court exercises powers of a court in
equity and equitable principles favor
Dunc pro tunc approval of fee
applications in certain extraordinary
cases. In a well-crafted opinion, Judge
Markovitz found that S-J qualified as a
professional person under 11 U.S.C. §327,
that S-J exercised a high degree of skill
and expertise in arranging the lease with
Aloha, that failure to apply for court
approval before S-J rendered its services
to debtor was not the fault of S-J, and
that S-J had no interest adverse to
debtor to bar equitable nunc pro tunc
approval. The court then considered the
commercial reasonableness of the
requested $450,000.00 fee based upon
expert testimony of the value of the
Aloha lease to debtor and standard fees
37
in the aircraft leasing industry. The
court awarded the requested compensation
of $450,000.00.
II. Discussion
Two basic issues have been presented
on appeal. First, appellants argue, S-J
and Lewis Simon are not entitled to nunc
pro tunc approval because they cannot
satisfy the statutory requirements of 11
U.S.C. §327(a) and have not presented the
required extraordinary circumstances to
justify such approval. The second issue
is whether the award to appellees was
documented sufficiently and was
reasonable.
A. Nunc Pro Tunc Approval
The Court of Appeais recently held
that bankruptcy courts have the power to
authorize retroactive employment of
counsel and other professionals under
their broad equity power. In the Matter
eaiiiiieiaiiaeaendiiecamill
38
of: Arkansas Company, Inc., 798 F.2d 645,
648 (3d Cir. 1986). As the court stated,
at 648: “Where equitable concerns weigh
in favor of granting retroactive approval
to enable deserving professionals to
recover compensation for work actually
done, we see nothing in the statute that
denies the bankruptcy court the power to
grant such retroactive approval."
Sowever, the court limited
retrwactive approval to certain
extraerdinary cases because "a lenient
[retroactive approval] rule would subvert
Congress' purposes in imposing a prior
approval requirement." Id. at 648. The
term, “extraordinary circumstances," was
defined as “cases where prior approval
would have been appropriate and the delay
in seeking approval was due to hardship
beyond the professional's control." Id.
at 650.
ee ee el A en
~~ =
39
The court then summarized the test
to be applied in determining whether nunc
pro tunc approval is warranted. The
bankruptcy court first must determine
whether the applicant qualifies as a
professional person under the statutory
provisions of 11 U.S.C. §§327(a) and
1103(a). Such a determination, to be
made after a hearing, entails a finding
that the applicant is disinterested and
without an adverse interest and that the
services performed were necessary under
the circumstances. Id. at 650. Our
review of this determination is plenary.
Second, the bankruptcy court, “in
exercising its discretion," must
determine whether the particular
circumstances of the case excuse the
failure of prior approval. Id. at 650.
Our review of this determination is
40
limited to an abuse of discretion
standard.
Section 327(a) permits the trustee
to 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
statutory duties. Appellant debtor
argues that Lewis Simon and S-J were not
employed as "professional persons" within
the meaning of section 327(a) because
appellees were creditors of debtor when
the bankruptcy petition was filed.
The bankruptcy court found that
appellees were not creditors of debtor.
Reviewing the May 27, 1983, settlement
agreement between debtor and S-J, the
court determined that the agreement
41
expired by its own terms before the
bankruptcy petition was filed, and that
debtor had no cause to list S-J as a
creditor based on an agreement no longer
binding on the parties. Our review of
the agrement and evidence of record
indicates that the court's finding is not
erroneous. The agreement was based on
the leasing of the Boeing aircraft to Air
Florida, Inc. See paragraph 1 of the
agreement, Appendix B to Memorandum of
Swig Investment Company. As the
bankruptcy court found, the July 3, 1984,
bankruptcy filing by Air Florida
effectively terminated the aircraft
lease, and S-J and Lewis Simon were no
longer creditors under the May 1983
agreement. S-J continued to seek a
lessee for the aircraft at debtor's
request. At the time of debtor's filing
42
on August 3, 1984, no lease had been
obtained.
The issue of law facing the
bankruptcy court was whether S-J acted as
a retained professional under section
327(a) after August 3, 1984. We agree
with the lower court that appellees
qualify as "professional persons" within
the meaning of section 327(a). S-J and
Lewis Simon were experienced in arranging
leases for aircraft; they set up a
lucrative, long-term lease with Aloha
Airlines, a reputable airline; and they
were able to obtain the lease despite the
fact that the Boeing aircraft was not
airworthy at the time. We further agree
that appellees were retained by debtor
following its August 3, 1984, bankruptcy
petition filing. As the bankruptcy court
correctly found, debtor retained
appellees to locate a lessee for the
43
aircraft under two agreements, dated
August 13 and 21, 1984. Ze. Ot 11;
Exhibits F and G to Affidavit of Fred
Pink, vice president of Greycas, Inc. We
also agree that retention of appellees
was “reasonably necessary in the
administration of the estate" and
"necessary for the protection and benefit
of the estate." 2 Collier on Bankruptcy,
9327.01 (1986). Appellant Greycas, which
held a security interest in the aircraft,
attempted to arrange a lease for the
aircraft after Air Florida filed for
bankruptcy. However, Greycas's deal with
America West Airlines was’ thwarted
because Greycas could not legally obtain
possession of the aircraft. The only
lease effort to bear fruit was by S-J
which, in November 1984, arranged a 10-
year lease with Aloha at a monthly rental
rate of $90,000.00. As the bankruptcy
ee ee
cae
court noted: "Further, it must. be
realized that the total amount brought
into the estate by this lease, which is
$10,800,000.00 over the course of the 10-
year lease, is the sole asset of the
Debtor's estate. Were it not for the
efforts of S-J in obtaining this lease,
there would be no estate with which a
reorganization could be effected." In
the Matter of F/S Airlease II, Inc.,
Supra, at 77.
The second part of the Arkansas
Company test for nunc pro tunc approval
is whether the particular circumstances
in the case adequately excuse the failure
of prior approval. As rehearsed, our
review is limited to the question of
whether the bankruptcy court abused its
discretion in excusing the _ failure.
According to the Court of Appeals, the
bankruptcy court must consider the
45
following factors: "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." Arkansas
Company, supra, at 650. In Arkansas
Company, the court held that nunc pro
tunc approval was not warranted because
the petitioner was a law firm with
experienced bankruptcy practitioners who
were aware of the need to apply for prior
approval of fees. The Arkansas Company
court, however, noted that failure to
seek court approval may be excused where
the professional justifiably relied on
:
46
another party to obtain court approval
(citing In re Freehold Music Center, 49
B.R. 293 (Bankr. D.N.J. 1985)).
In the instant case, Judge Markovitz
aptly characterized testimony as showing
that S-J had requested assurance that its
services would be permitted by the
bankruptcy court and that it was
reassured by debtor's officers that
appropriate measures would be taken.
Further, the court noted, "the Debtor's
president testified that no application
was made to this Court through an
oversight on the part of the Debtor." In
the Matter of F/S Airlease II, Inc.,
supra, at 775 (emphasis in original).
This finding, coupled with other lower
court findings that S-J and debtor
operated under severe time pressures to
locate another lessee for the aircraft
and that S-J's successful efforts
47
resulted in profit not prejudice for
third parties, indicates that the
bankruptcy court did not abuse its
discretion in excusing the prior failure
to seek approval for S-J's services.
B. Amount of Award
Finding that the fee requested by
S-J was fair and reasonable in light of
the value conferred on debtor, the
bankruptcy court awarded $450,000.00 to
S-J. Appellants argue that S-J's
petition for fees is woefully inadequate
under bankruptcy procedural rules and
does not adequately support the requested
award. Appellees rejoin that debtor had
admitted that $450,000.00 was owed to S-J
as an administrative claim and expense,
according to a letter debtor sent to
Greycas and other parties.
48
Under the Bankruptcy Code, the court
may award compensation to a professional
employed under section 327 "for actual,
necessary services rendered by such...
professional person . . . based on the
time, the nature, the extent, and the
value of such services and the cost of
comparable services ... ." 11 U.S.C.
§330(a) (1). According to Bankruptcy Rule
2016(a), such compensation may be awarded
only after the professional files an
application with the court "setting forth
a detailed statement of (1) the services
rendered, time expended and expenses
incurred, and (2) the amounts requested."
The Code requires a detailed
statement so that the court can determine
an award both compensating petitioner for
its services and protecting debtors and
creditors. The fact that debtor
represented that $450,000.00 was
,
49
appropriate compensation does not
abrogate the court's duty to protect
creditors such as Greycas and Swig.
Also, expert testimony that $450,000.00
is a reasonable award in light of the
benefit conferred by S-J on debtor does
not satisfy the requirements of Rule
2016(a).
We shall vacate the award and remand
the case to the bankruptcy court, with
directions to require S-J to file an
application satisfying Rule 2016(a) and
to hold a hearing on the application. In
so ruling, we urge the parties to bridle
their propensity for burdening the court
with unnecessary and irrelevant papers
and motions. The only matters to be
determined upon remand are the
documentation of S-J's time and expenses
50
in obtaining the Aloha lease and the
reascnable value therefor.4/
The final argument raised by Greycas
in this appeal, j.e., that S-J cannot
properly charge Greycas's collateral for
payment of its compensation, was resolved
properly by the bankruptcy court.
III. Summary
Because S-J and Lewis Simon qualify
as professional persons under 11 U.S.C.
§327(a) retained by debtor to perform
necessary services following its
bankruptcy petition filing and because
the bankruptcy court did not abuse its
1/ We recognize that some expenses of
negotiating the aircraft lease with
Aloha Airlines were incurred by S-J
and Lewis Simon before debtor's
bankruptcy petition was filed.
Although the argument has not been
raised by appellants, we foresee an
issue as to whether appellees are
entitled to compensation for work
performed before they were retained
under 11 U.S.C. §327. This issue is
properly reserved for determination
by the bankruptcy court upon remand.
51
discretion in excusing the failure to
seek court approval before appellees
rendered services, nunc pro tunc approval
of compensation is warranted under the
law of this circuit. In re: Matter of:
Arkansas Company, Inc., supra. Because
appellees' application for fees lacks the
required specificity under the Bankruptcy
Code, the award will be vacated the case
remanded for an amended application and a
hearing on the reasonableness of the
newly documented fees.
A written order will follow.
DATED: Oct. 21, 1986
Donald E. Ziegler
United States District Judge
52
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
IN RE:
F/S AIRLEASE II,
INC.
Vv.
LEWIS SIMON and
S-J
FINANCIAL
CORPORATION,
F/S AIRLEASE
II, INC.
Vv.
GREYCAS, INC.
F/S AIRLEASE
II, INC.
Vv.
SWIG INVESTMENT
COMPANY.
ee ee ee ee ee ee ee ee ee ee
ee ee ee ee ee ee ee ee”
ee ee eee ee ee ee ee
Bankruptcy No. 84-1628
Civil Action 86-1048
Civil Action 86-1050
ORDER OF COURT
AND NOW, this 21st day of October
1986,
53
IT IS ORDERED that the bankruptcy
court's nunc pro tunc approval allowing
compensation to appellees-petitioners be
and hereby is affirmed;
IT IS FURTHER ORDERED that’ the
bankruptcy court's award of $450,000.00
be and hereby is vacated and the case
remanded to the bankruptcy court for an
amendment of the fee petition to conform
to Bankruptcy Rule 2016(a) and for a
hearing thereon.
Donald E. Ziegler
United States District Judge
cc: Counsel of Record
APPENDIX C
54
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
IN THE MATTER OF:
F/S AIRLEASE
Zi» Eeeses Bankruptcy No. 84-1628
Debtor Motion No. 85-2157
MEMORANDUM OPINION
Before this Court is an application
For Professional Fees By Petitioner, Mr.
Lewis Simon and S-J Corporation ("S-J"),
averring that it procured a lease at the
Debtor's request, that said lease
constitutes the sole asset of the estate,
and that it should be compensated in the
amount of $450,000.00, based upon the
fees received in past conduct with the
Debtor and upon the fees charged for such
services in the marketplace.
F/S Airlease II, Inc. ("Debtor") has
objected to the payment of the
compensation requested, claiming, that
SS
while S-J should be compensated to some
degree for the services performed, the
amounts requested are excessive and would
deter the formulation of a proposed Plan
of reorganization.
Greycas, Inc. ("Greycas"), the
largest secured creditor, has objected to
the payment of any compensation to S-J,
asserting inter alia that S-J has no
legal basis for its claim as prior Court
approval was not secured.
Swig, the owner of the aircraft, now
requests that the Court impose a
$100,000.00 limit to S-J's compensation-
an amount which Swig refused to accept
during the initial negotiations.
The parties conducted an extensive
hearing on the various issues and offered
complete testimony, both at the hearing
and through depositions. The parties
have also submitted very complete and
56
thoroughly researched briefs, proposed
Findings of Fact and Conclusions of Law.
Based upon the various’ pleadings,
memoranda, and the hearing thereon, this
Court concludes that S-J is entitled to
compensation in the amount of $450,000.00
FACTS
The Debtor is a_- single-asset
corporation, which has the sole purpose
-of leasing and remarketing a_ certain
Boeing 737-222 aircraft. This aircraft
was purchased by the Debtor in July of
1980, and financing for the purchase was
obtained from Greycas. The aircraft was
subsequently sold and repurchased several
times, the final purchaser being the Swig
Investment Company Aircraft Trust No. 1
("Swig"). Swig subsequently leased the
aircraft to the Debtor for an 18-year
57
term. At all times, Greycas continued to
hold a security interest and was to be
repaid from the rental proceeds received
as a result of the Debtor's reieasing of
the aircraft.
In February of 1980, the Debtor
entered into an initial agreenent with S-
J, hiring it as a leasing agent to find
leases for various aircrafts. In July of
1980, S-J successfully arranged for the
lease of the Boeing 737-222 aircraft to
Air Florida. Soon thereafter, a
disagreement arose between the debtor and
S-J as to the appropriate compensation
due S-J for its services. Litigation was
instituted in the United States District
Court for the Northern District of
Illinois, which ultimately was resolved
by a Settlement Agreement dated May 27,
1983. This Agreement directed that S-J
would be entitled to compensation in the
=
= Dee wee.
58
amount of one-half of one month's rent
for each year of releasing, and would
give S-J the remarketing rights to this
and other aircraft, subject to the rights
of the various owners and _ secured
lenders. Additionally, the Settlement
Agreement stated that S-J had a right to
payment only when the Debtor received
payment.
On July 3, 1984, Air Florida, the
lessee of this aircraft, filed a Chapter
11 bankruptcy, which effectively
terminated the aircraft lease, leaving
the aircraft available for release or
sale. The Debtor immediately contacted
S-J, urging it to assist in the search
for a new lessee. On July 20, 1984, S-J
sent a letter to the Debtor proposing to
remarket the aircraft for a flat fee of
$100,000.00 plus expenses, irrespective
of the new lease terms. On July 30,
59
1984, S-J forwarded a second letter to
the Debtor, again offering to act as the
leasing representative for the
$100,000.00 flat fee, plus expenses. S-J
specified that it needed a response by
August 3, 1984. On August 21, 1984,
almost three (3) weeks after the
expiration date, the Debtor wrote to S-J,
accepting the proposed arrangement. This
acceptance was conditioned upon the
approval of Swig. Swig, for unspecified
reasons, categorically refused to approve
any flat fee arrangement, and accordingly
that offer was terminated. Only now,
after S-J has procured a 10-year lease
and requested $450,000.00, has Swig
inferred that the Court should impose the
$100,000.00 fee upon S-J.
Only July 25, 1984, S-J and
representatives for the Debtor traveled
to Phoenix, Arizona, Greycas'
60
headquarters, to discuss possible leasing
of this aircraft to America West Airlines
("America West"). This joint trip was
the result of several meetings among the
Debtor, S-J, and Greycas, during which
time the possibilities of various leases
and lessees were discussed. Greycas'
proposal to lease the aircraft to America
West was contingent upon Greycas
obtaining possession of the aircraft,
which possession it did not have, and
could not have, pursuant to final court
order.
With a general understanding as to
professional fees but not finalized
written agreement between them, the
debtor requested that S-J proceed with
attempts to remarket the aircraft. At
that time the aircraft was not airworthy,
in that one of its engines had been
removed and was placed, disassembled, in
61
a box. Since the aircraft was not
airworthy, it was providing no revenue to
any of the parties. In September of
1984, Greycas made a proposal to America
West which called for a 6-month lease
with a 10-year option. The monthly
rental fee proposed was $85,000.00.
Additionally, since the aircraft was
missing an engine, Greycas proposed to
have America West lease an engine and
subtract the cost of the leased engine
from the monthly rental payments. Again,
this proposal was contingent upon
Greycas' receipt of the aircraft which it
did not and could not obtain.
By October 25, 1984, S-J had
procured a Letter of Agreement with Aloha
Airlines ("Aloha"). The Agreement called
for a 10-year lease at a monthly rental
of $90,000.00. Further, Aloha, a more
solvent and stable airline, agreed to
62
supply the necessary second engine,
without receiving a rent rebate thereon,
and also agreed to return the aircraft at
the conclusion of the 10-year lease with
two operational engines instead of one.
On November 29, 1984, the Debtor and
Aloha prepared a lease based on the
agreement procured by S-J. The
following day, an Order was entered in
this Court approving this lease, finding
it to be in the best interests of the
estate. At that hearing the parties made
the Court aware that the Debtor had
requested S-J to procure a lease, that
S-J had procured same, and that Greycas,
while nominally objecting to S-J's
involvement, wanted the lease, secured by
S-J, to be approved. The rental proceeds
were to be, and have been, deposited in
an interest-bearing account pending
disposition of this matter.
63
LEGAL ARGUMENTS
Greycas, the Debtor, and S-J each
make several arguments either for or
against the allowance of compensation to
S-J. Each party's arguments will be
outlined seriatin.
Greycas’ Arguments
Greycas offers several arguments for
disallowing any compensation whatsoever
to S-J.
Pursuant to the May, 1983 Settlement
Agreement Greycas avers that:
1. The contract was not
executory at the time of
the Debtor's filing and it
could not be assumed.
2. Even if the contract was
executory, the time for
assumption of such a
contract had passed.
Be The contract cannot be
revived by the court.
64
4. The exclusive right to
remarket the aircraft had
expired.
5. Compensation under the
contract rate cannot be
allowed because S-J did
not comply with the
provisions requiring
consent of Swig and
Greycas.
Greycas claims that the Debtor and S-J
attempted to obtain Greycas' consent on
two separate occasions and failed.
Next, Greycas argues that no court
approval of S-J's retention was either
sought or obtained, as requi:ved by 11
U.S.C. §327(a), and that absent’ such
court approval, S-J is not entitled to
any compensation.
Additionally, Greycas argues that
the court should not approve S-J's
retention nunc pro tunc because: S-J has
not provided detailed records for the
court to determine the amount of work
done; it is not disinterested, as it
65
holds an interest adverse to the estate,
thereby precluding its appointment; and,
nunc pro tunc orders appointing
professional persons should not be
permitted.
Greycas also argues that S-J cannot
recover as a regular, salaried employee
pursuant to 11 U.S.C. §327(b) because:
Ae S-J was an independent
contractor, paid on
commission as opposed to a
salary.
2- The 10-year lease
agreement with Aloha does
not constitute work done
in the ordinary course of
business, as anticipated
by the Code.
as The lease required court
approval, which would not
be necessary if section
327(b) applied.
Finally, Greycas argues that since
it is secured in the funds which S-J
wishes to obtain, S-J must meet certain
requirements to attach those funds, and
S-J has not done so.
66
Specifically, S-J has not shown:
1. Its costs and expenses
were reasonable and
necessary.
y Its costs and expenses
were encountered in the
preservation of the
estate.
Ze It provided a benefit to
the estate which Greycas
could not have provided
without additional costs
to the estate.
Debtor's Arguments
The Debtor raises many of the same
arguments that Greycas raises. The
Debtor first states that S-J did not have
prior court approval for its employment,
thereby barring any compensation.
Additionally, the Debtor argues that S-J
cannot be approved nunc pro tunc as no
extraordinary circumstances exist
requiring the Court to equitably permit
such approval and, as S-J is not
67
disinterested, it could not have been
approved even if the application had been
timely submitted.
The Debtor also raises the argument
that the May, 1983 agreement is not
executory and cannot be assumed. The
Debtor's final argument is novel, in that
it avers that S-J has’ benefited the
estate, and equitably, should receive
some compensation. However, the Debtor
argues that if S-J is granted the full
amount it seeks, any hope for a Plan of
reorganization will fail. The Debtor
contends that all of the other parties
have agreed to reductions in the amounts
due them in order to put forward a
reorganization Plan, and that S-J should
be satisfied to do the same. It should
be recognized that the various counsel
have submitted fee applications, also to
be paid from the rent accruals. eS
68
interesting to note that there would have
been no estate for these attorneys to
divide if S-J had not procured the lease.
It would appear to be grossly inequitable
to pay the litigators more than the
creator.
S-J's Arguments
S-J initially asserts that no Court
order is required before it can be
compensated, because S-J carried out its
activities in the ordinary course of the
Debtor's business, operating in a
marketing capacity. Alternatively, S-J
argues that if approval is necessary, it
should be granted nunc pro tunc, in that:
i. That the Debtor assured S-
J would be compensated,
but that formal Court
approval was not obtained
due to an admitted
oversight on the part of
the Debtor.
Further, S-J states that it is a
disinterested party,
appro
presented by the Debtor in a timely
fashi
1983 Settlement Agreement,
that
prior
ved
on.
Upon
it had expired by its own terms
to
69
But for S-J's’ services,
there would be no estate
to administer and no
company to reorganize.
rte assistance in
obtaining the lease was
allowed, if not formally
accepted, by all parties
now objecting.
That the Court can
exercise its equitable
powers to approve the
employment nunc pro tunc
in extraordinary
circumstances, such as are
present here.
if the application had been
ANALYSIS
a careful reading of the May,
the filing of the Debtor's
and could have been
it is clear
70
petition. As such, it is not executory,
and affords no rights to S-J under i11
U.S.C. §365. It does, however, show the
prior course of performance between the
parties, including methods, mode and
amounts of compensation, and will be
recognized in that fashion by this Court.
We next address the issue of
required Court approval prior to the
compensation of professional persons
employed to assist the bankruptcy estate.
Bankruptcy code §327(a) and Bankruptcy
Rule 2014 specifically outline the law
and procedures surrounding the employment
of professional persons. Section 327(a)
states in pertinent part:
"[E]xcept 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
term
inter
71
disinterested persons, to
represent or assist the trustee
in carrying out the trustee's
duties under this title."
Pursuant to §1107 of the Code,
'debtor-in-possession'
the
is
changeable with the term ‘'trustee',
pursuant to §327. Bankruptcy Rule
2014 (
Many
a) states in pertinent part:
"(Aj]n order approving
appointment of attorneys,
accountants, appraisers,
auctioneers, agents, or other
professional persons pursuant
to §327 or §1103 of the Code
shall be made only on
application of the trustee or
committee, stating the specific
facts showing the necessity for
the employment, the name of the
person to be employed, the
reason for his selection, the
professional services to be
rendered, any proposed
arrangement for compensation,
and to the best of the
applicant's knowledge, all of
the persons' connections with
the debtors, creditors, or any
other party in interest, their
respective attorneys and
accountants."
courts have held that court
authorization prior to the services being
72
rendered is the one absolute basic
condition precedent to any _ fee
application. See In re Hydrocarbon
Chemicals, Inc., 411 F.2d 203 (3rd Cir.
1969); In re Calpa Products Company, 411
F.2d 1373 (3rd Cir. 1969); In re Garland
Corporation, 8 B.R. 826 (Bktcy. D.C.
Mass. 1981); In re Fountai inin
Compa c., 46 B.R. 122 (Bktcy W.D.
Va. 1985).
This rule has been enforced not only
as to attorneys but also as to non-legal
professionals. See In re Mork, 19 B.R.
947 (Bktcy. D.C. Mich. 1982); In re
Morton Shoe Company, 22 B.R. 449 (Bktcy.
D. Mass. 1982); e apli aints
inc., 38 B.R. 807 (Bktcy. E.D. N.Y.
1984).
This rule has often been held to be
hard and fast despite the fact that the
services rendered may have been highly
73
valuable to the estate and performed in
complete good faith. See In re Garland
Corporation, supra, at 828; In re Morton
Shoe Company, supra, at 450; In re
Sapolin Paints, Inc., supra, at 817.
Both the Debtor and Greycas argue to
this court that this inflexible per se
rule as to the court-approved employment
is the law in the Third Circuit, and that
therefore, S-J is not entitled to any
compensation for services performed, as
court approval was not obtained pricr to
the performance of the services.
S-J, on the other hand, argues that
this Court, as a court of equity, should
not hold fast to such an inflexible per
se rule in extraordinary cases, urging
this Court to approve the employment nunc
pro tunc.
It is true that a bankruptcy court
exercises powers of a court of equity and
74
equitable principles should govern the
exercise of its jurisdiction. While such
nunc pro tunc orders were originally
frowned upon, many courts in recent years
have allowed entry of nunc pro tunc
orders on a case-by-case determination.
Interestingly, the majority of the courts
which have denied nunc pro tunc orders of
employment have done so due to some other
form of misconduct on the part of the
applicant, which would have barred that
individual's appointment even had the
approval been requested in a timely
fashion.
In In re Mork, supra, the court
denied nunc pro tunc authorization of the
services rendered by an accounting firm
stating:
"T‘I}) conclude that as
here, not only absent an order,
but absent any communication
with the court whether or not
resulting in an order,
sufficient to appraise the
75
court as to the intended
retention and its necessity in
terms, the court is without
power to undue what has been
done." 19 B.R. at 949.
In the case at bar, however, it is
clear that the court was aware from early
in these proceedings, that S-J was
involved in the releasing and remarketing
of the aircraft. It is also clear that
the present day objectors had previously
been aware of the Applicant's activities
and in addition, had voiced their great
appreciation for his services. Had the
Debtor honored its agreement and
presented the Applicant's employment
application, this Court is hard pressed
to think of any reason why it would not
have been granted.
In In re Morton Shoe Company, supra,
the court disallowed nunc pro tunc
approval for a financial expert and for
accountants because the court determined
76
that no emergency existed warranting such
approval. In Morton, unlike here, the
court found that “hardship to the
unauthorized professional is of no
consequence since it is of his own
making." 22 B.R. at 450. That court
seemed to believe that hardship, if not
of the professional's own making, would
be an extraordinary situation which would
allow nunc pro tunc approval.
Testimony before this Court has
shown that S-J had in fact requested
several times that it be given some
assurance that its services would be
permitted by the court. Testimony also
indicated that S-J was assured by the
Debtor's officers that the appropriate
measures would be taken to assure that S-
J would be acknowledged by this Court.
Further, the Debtor's president testified
that no application was made to this
77
Court through an oversight on the part of
the Debtor.
It should be noted also, that the
Bankruptcy Code and Rules suggest that
the application for appointment of such
professional persons should be made by
the trustee or the debtor-in-possession
and that S-J is neither. Further, S-J as
a leasing agent does not hold itself out
to be knowledgeable in the area of
bankruptcy law. There is no indication
that Mr. Simon or anyone else involved
with S-J Corporation is an attorney and
therefore, S-J cannot be held to be
charged with the knowledge of this
requirement.
Both the Debtor and Greycas direct
the court's attention to In re Lewis, 30
B.R. 404 (Bktcy. E.D. Pa. 1983), in which
the court did not permit the nunc pro
tunc approval of the hiring of an
78
attorney for the debtor. In that case,
the court found:
"(T]o permit ex post facto
employment would exalt form
over substance to an
unreasonable extent. The court
also notes that both Mr.
Schildhorn and the members of
his firm are experienced
practitioners in this field of
law. We are not confronted
with an attorney who through
inexperience has failed to file
the necessary application, but
rather, with an attorney who
should be fully aware of this
requirement." 30 B.R. at 405-
6.
Again, the court seems to indicate
that if the circumstances surrounding the
absent approval were different, a nunc
pro tunc application might be granted.
A very recent case in the Third
Circuit that appears to be factually
similar to our case, is Matter of
Freehold Music Center, Inc., 49 B.R. 293
(Bktcy. D. N.J. 1985). In that case,
accountants'7 hired for the debtor
specifically requested protection before
79
commencing any work and were advised by
the attorneys for the debtor that the
appropriate application would be prepared
and submitted to the court. The
accountants were therefore aware that
court approval was necessary before they
could be paid, but in good faith relied
on the statements of the attorney that
authorization for their work had been
obtained or had been properly arranged.
The court stated:
"(Tjhe position of the
accountants in the instant case
is further made sympathetic by
the fact that the error, if
indeed there was one, was
occasioned not by their own
actions, but rather by the
action of another whose failure
was beyond their own control."
49 B.R. at 296.
In In re Century Food, Inc., 39 B.R.
602 (Bktcy. M.D. Pa. 1984), a real estate
broker who performed services for the
estate received nunc pro tunc approval
after the broker's work was completed.
80
There, the court stated:
"(Ajthough we realize that
nunc pro tunc orders should be
authorized sparingly, this
Court certainly has’ the
discretion to administer
equitable principles by
entering such orders." 39 B.R.
at 604.
It is clear therefore, that the
inflexible nature of the per se rule
once enunciated is presently being worn
away by the equitable principles of the
Bankruptcy Law on a case-by-case
determination.
If however, a nunc pro tunc order
for approval of appointment for the
employment of a professional person is to
be allowed, the part whose approval is
sought must show that had the application
been timely, the party would still have
met the other requirements for employment
as a professional person pursuant to
§327. Both the Debtor and Greycas argue
81
that S-J does not meet the other
requirements of §327.
Specifically, they claim that in
order for S-J to be qualified under
§327(a), it must meet two (2)
requirements:
1. It must not hold or
represent an interest
adverse to the estate.
2. It must be a disinterested
person within the meaning
of the Code.
To hold an interest adverse to the >
estate means: "(1) to possess or assert.
any economic interest that would tend to
lessen the value of the bankruptcy estate
or that would create either an actual or
potential dispute in which the estate is
a rival claimant; or, (2) to possess a
predisposition under circumstances that
render such a bias against the estate."
In re Roberts, 46 B.R. 815, 827 (Bktcy.
D. Utah 1985).
ee
82
To hold that fees for services
rendered to the debtor constitute an
interest adverse to the estate is a
position without logic. If such a
statement were held to be true, then the
attorneys representing the debtors who
are presenting petitions for fees would
also be held to have interests adverse to
the estate, and therefore, would also be
disqualified from compensation under
§327.
Further, it has previously been held
that an attorney who is a major creditor
of the debtor due to his prior
representation of the debtor and due to
his preparation of the petition in
bankruptcy, does not, without more, have
an interest adverse to the debtor. See
In re Heatron, 5 B.R. 703 (Bktcy. W.D.
Mo. 1980).
83
The Debtor and Greycas also claim
that S-J is not a disinterested person
pursuant to the Bankruptcy Code. They
base this claim on the fact that S-J has
been listed by the Debtor has having a
contingent disputed claim to funds
resulting from their exclusive
remarketing right under the Settlement
Agreement of May, 1983.
This Court has earlier found that
the May, 1983 Settlement Agreement
expired by its own terms and is therefore
no longer binding on any of the parties.
Therefore, it was no longer binding on
the parties at the time this bankruptcy
petition was’ filed. Since S-J's
exclusive remarketing right had expired
prior to the filing of the bankruptcy,
this Court can find no other cause for
listing S-J as a creditor of the Debtor
corporation.
84
As the court finds no reason to hold
that S-J has an adverse interest to the
Debtor, nor can the court find any reason
to find that S-J lacks the required
disinterestedness, the Court believes
that there are no obstacles barring its
equitable approval of the employment of
S-J nunc pro tunc.
There still remains to be considered
however, the reasonableness of the
$450,000.00 fee requested by S-J
Corporation for its services to the
Debtor's estate. There are many
standards which exist for determining
reasonableness of fees requested.
Some of these factors include:
i. The commercial
reasonableness of the fee
in light of what the
market would pay for such
a transaction outside the
Bankruptcy Court.
a. The funds available in the
Debtor's estate to pay
such a fee.
85
3. The amount brought into
the estate by the
Applicant.
4. The difficulty of the
services rendered by the
Applicant
At the hearing of January 21, 1986,
testimony was taken from Mr. Thomas Hiniker,
who is employed in much the same capacity as
Mr. Simon and S-J Corporation, in that he has
leased aircraft similar to the one in question.
Mr. Hiniker testified that a reasonable fee in
the aircraft leasing industry, when based upon
a percentage of the rentals received, would be
from five to ten percent of the total rentals
received, and that fees might be higher when a
transaction is exceptionally difficult. The
fee charged and requested by S-J is less than
five percent of the total rentals received over
the 10-year lease period, which is below the
bottom of the scale delineated by Mr. Hiniker.
The lease was approved and ordered on
November 30, 1984. Sixteen (16) months have
elapsed since that lease was ordered. The
P
86
rental fee of $90,000.00 per month was ordered
to be placed in an interest-bearing account.
The total rental payments which should be in
said interest-bearing account as of March 31,
1986, is $1,440,000.00, irrespective of
interest accrued thereon. It is clear
therefore, that the funds do exist for the
payment of $450,000.00 to be made to S-J.
Further, it must be realized that the total
amount brought into the estate by this lease,
which is $10,800,000.00 over the course of the
10-year lease, is the sole asset of the
Debtor's estate. Were it not for the efforts
of S-J in obtaining this lease, there would be
no estate with which a reorganization could be
effected. Additionally, it should be
recognized that the aircraft in question was
not in airworthy condition at the time the
lease was procured. The leasing of an aircraft
with only one of two engines must be considered
a difficult deal to arrange. Given the fact
87
that S-J was able to convince Aloha, a highly
reputable airline, to lease said aircraft and
also to supply the additional, necessary engine
without any rental rebate, shows this Court
that S-J possesses a high level of skill and
expertise in this field. It is further clear
that it would be highly difficult to lease such
an unairworthy aircraft to most other airlines,
given the fact that America West was to be
given a credit on each monthly rental payment
in order to supply an engine for use on the
plane, and that no engine would be returning
with the aircraft at the end of the 10-year
lease. If this were not enough, S-J was able
to get aloha to commit to a full 10-year lease
term with knowledge that the plane was not
airworthy. America West, on the other hand,
was offered only a 6-month lease with a 10-year
option. This gives the court reason to believe
that America West was unwilling to make such a
long-term commitment until it had the
88
opportunity to use the aircraft, and determin
if the aircraft would meet its needs.
Therefore, this Court is of the opinio
that the fee requested by S-J of $450,000.00 is
reasonable and should be granted.
The final argument presented by Greycas i:
that the expenses requested by S-J should no’
be paid from funds belonging to it as a secure
creditor. Specifically, Greycas contends tha‘
it received no benefit from the efforts by S-
and therefore, its security should not be
impinged by the fees and expenses.
The Code discusses the appropriateness o:
such a charge in §506(c) which states:
"(T)he trustee may recover
from property securing an
allowed secured claim the
reasonable, necessary costs and
expenses of preserving, or
disposing of, such property to
the extent of any benefit to
the holder of such claim."
The Advisory Notes accompanying
§506(c) state in pertinent part:
89
"Any time the trustee or
debtor-in-possession expends
money to provide for the
reasonable and necessary
costs and expenses of
preserving. . . . a secured
creditor's collateral, the
trustee or debtor-in-possession
is entitled to recover such
expenses from the secured party
or from the property securing
an allowed secured claim held
by such a party." (Emphasis
added. ) 124 Cong. Rec. H11089
(Sept. 28, 1978), reprinted in
1978 U.S. Code Cong. & Ad. News
6346, 6451 (statement by Rep.
Edwards); 124 Cong. Rec.
$17406, reprinted in 1978 U.S.
Code Cong. & Ad. News 6505,
6520 (statement by Sen.
DeConcini).
Traditionally, expenses for the
administration of the bankruptcy have not
been charged against a secured creditor.
The reason for this is that a trustee is
acting not only on the secured creditor's
interest, but for the interest of the
general creditors as well.
An exception to that general rule is
recognized when the expenses incurred in
preserving the estate are primarily used
90
to benefit the secured creditor or where
that secured creditor caused or consented
to the expense incurred. See Matter of
Trim-X, Inc., 695 F.2d 296, 301 (7th Cir.
1983). Further, the courts have held
that the secured creditor must be the
party to bear the expense of the
administration of the bankruptcy estate
when it is solely for his benefit or he
causes the expense incurred. See In re
Hotel Associates, Inc., 6 B.R. 108, 110
(Bktcy. E.D. Pa. 1980). The court in In
re Hotel Associates, Inc., supra, held
that:
"(Cjases under the former
Bankruptcy Act stress’ the
importance of the secured
creditor's consent to a charge
upon the secured assets. Early
decisions of the Court of
Appeals for the Third Circuit
held that a secured creditor
could be charged with the
costs of administration to
which he consented, expressly
or jmpliedly, or which he
caused. . . .consent was often
inferred from the circumstances
91
or from acquiescence,
especially where there were no
free assets for administrative
expenses." (Emphasis added.)
6 B.R. at 111.
The test for determining whether the
funds of the secured creditor may be
attached in order to be pay
administrative expenses of the estate is
as follows:
1. Are the costs and expenses
reasonable and necessary?
2. Are the costs and expenses
incurred for the purposes
of preserving or disposing
of the secured property?
3. Have the costs and
expenses benefited the
holder of the secured
claim?
See _ In re AFCO Enterprises, Inc., 35
B.R. 512, 514 (Bktcy. D. Utah 1983).
We believe that S-J has met this
burden. S-J procured a 10-year lease
with Aloha, a long standing and reputable
airline, which agreed to rental payments
of $90,000.00 per month for a full 10-
92
year term, in addition to furnishing the
aircraft with the necessary second engine
at its own expense. Aloha further agreed
to return the aircraft at the end of the
10-year lease period with engines at
half-life.
The contingent offer Greycas made to
America West, on the other hand, was not
nearly so lucrative. First, the
proposition Greycas made to America West
could not be consummated unless Greycas
obtained possession of the aircraft. As
has been stated earlier in this Opinion,
Greycas at no time has been given
possession of the aircraft; to the
contrary, had been permanently enjoined
from realizing such possession.
Therefore, the deal that Greycas proposed
to America West could never come to
fruition.
93
Even if it had come into being, the
unaccepted terms offered were not nearly
so lucrative.
First, the lease to America West was
to be for a 6-month term with a 10-year
option. Conceivably, the lease could
have been terminated at the end of six
months, and the Debtor's estate would be
in no better position than if the lease
had never been entered.
Also, the lease called for a rental
payment of $85,000.00 per month as
opposed to the rental payment procured by
S-J at $90,000.00 per month. Over the
course of the 10-year lease, this amounts
to a difference of $600,000.00
Furthermore, America West was to be
given a rental rebate each month in order
that it might proceed to lease a second
engine for use on this aircraft. Said
rebate would amount to approximately
94
$6,000.00 per month over the course of
the 10-year period, or an additional
difference of $720,000.00. This leased
engine would not be returned with the
aircraft at the end of the 10-year lease.
As Aloha had agreed to return the
aircraft with the engine at the end of
the 10-year period, this involves an
additional $600,000.00 increase to the
value of the S-J lease agreement.
It appears to this Court that if
Greycas had been able to achieve an
agreement based upon the proposal it made
to America West, that the proposal by S-J
would still have benefited the estate by
an amount of aimost $2,000,000.00 more
than that proposal made by Greycas.
Nomeves:, we cannot lose sight of the fact
that the proposal made by Greycas was
contingent upon Greycas obtaining equity
in the aircraft from which it was
95
permanently enjoined. Since that is-the
case, the $2,000,000.00 figure is
irrelevant; we must instead look to the
full value of the lease procured by S-J.
This Court believes therefore, that
the lease procured by S-J and the costs
and expenses incurred thereby were
necessary, did preserve the secured
property and did operate to benefit the
holder of the secured claim. Given this
determination, we hold that S-J is
entitled to the full compensation
requested of $450,000.00 by Order nunc
pro tunc.
An appropriate Order will be issued.
BERNARD MARKOVITZ
Bankruptcy Judge
96
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
IN THE MATTER OF:
F/S AIRLEASE
Ii, INC., Bankruptcy No. 84-1628
Debtor Motion No. 85-2157
ORDER OF COURT
AND NOW, at Pittsburgh in said
district this 14th day of April, 1986, in
accordance with the Memorandum Opinion
of this date, it is hereby ORDERED,
ADJUDGED and DECREED that the appointment
of Lewis Simon and S-J Corporation is
approved nunc pro tunc.
It is further ORDERED that Lewis
Simon and S-J Corporation is entitled to
compensation in the amount of $450,000.00
BERNARD MARKOVITZ
Bankruptcy Judge
APPENDIX D
97
STATUTES
§327. Employment of professional
person.
(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.
SECTION 330 (11 U.S.C. §330)
§330. Compensation of officers.
(a) After notice and a hearing, and
subject to sections 326, 328, and 329 of
this title, the court may award to a
trustee, to an examiner, co a
professional person employed under
section 327 or 1103 of this title, or to
the debtor's attorney-
(1) reasonable compensation for
actual, necessary services rendered
by such trustee, examiner,
professional person, or attorney, as
the case may be, and by any
paraprofessional persons employed by
such trustee, professional person,
or attorney, as the case may be,
based on the nature, the extent, and
the value of such services, the time
spent on such services, and the cost
of comparable services other than
in a case under this title; and
98
§503. Allowance of administrative
expenses.
(a) An entity may file a request for
payment of an administrative expense.
(b) After notice and a hearing, there
shall be allowed administrative expenses,
other than claims allowed under section
502(f) of this title, inciuding
(1) (A) the actual, necessary
costs and expenses of preserving the
estate, including wages, salaries,
or commissions for services rendered
after the commencement of the case:
(B) an tax---
(i) incurred by the
estate, except a tax
of a kind specified
in section 507(a) (6)
of this title; or
(ii) attributable to an
excessive allowance
of a tentative
carryback adjustment
that the estate
received, whether the
taxable year to
which such adjustment
relates ended before
or atter the
commencement of the
case; and
(C) any fine, penalty, or
reduction in credit relating to a
tax of a kind specified in
subparagraph (B) of this paragraph;
99
(2) compensation and reimbursement
awarded under section 330(a) of this
title;
(3) the act»al, necessary expenses,
other than comp-.isation and reimbursement
specified in paragraph (4) of this
subsection, incurred by--
(A) a creditor that files a
petition under section 303 of this
title;
(B) a creditor that recovers,
after the court's approval, for the
benefit of the estate any property
transferred or concealed by the
debtor;
(C) a creditor in connection
with the prosecution of a criminal
offense relating to the case or to
the business or property of the
debtor;
(D) a creditor, an indenture
trustee, an equity security holder,
or a committee representing
creditors or equity security holders
other than a committee appointed
under section 1102 of this title, in
making a substantial contribution in
a case under chapter 9 or 11 of this
title; or
(E) a custodian superseded
under section 543 of this title, and
compensation for the services of
such custodian;
(4) reasonable compensation for
professional services rendered by an
a ,
100
(4) reasonable compensation for
professional services rendered by an
attorney or an accountant of an entity
whose expense is allowable under
paragraph (3) of this subsection, based
on the time, the nature, the extent, and
the value of such services, and the cost
of comparable services other than in a
case under this title, and reimbursement
for actual, necessary expenses incurred
by such attorney or accountant;
(5) reasonable compensation for
services rendered by an indenture
trustee in making a_ substantial
contribution in a case under chapter 9 or
11 of this title, based on the time, the
nature, the extent, and the value of such
services other than in a case under this
title;
(6) the fees and mileage payable under
chapter 119 of title 28; and [sic]
SECTION 507 (11 U.S. §507)
§507. Priorities.
(a) The following expenses and claims
have priority in the following order:
(1) First, administrative
expenses allowed under’ section
503(b) of this title, and any fees
and charges assessed against the
estate under chapter 123 of title
28.
(2) Second, unsecured claims
allowed under section 502(f) of this
title.
101
§102. Rules of construction.
In this title-- ...
(3) “includes” and "including" are
not limiting;
§1107. Rights, powers, and duties in
possession.
(a) Subject to . . . to such
limitations or conditions as the court
prescribes, a debtor in possession shall
have all the rights, . . . and powers,
and shall perform all the functions and
duties, . . . of a trustee serving in a
case under this chapter.
Rules:
Bankruptcy Rule 2014. Employment of
Professional Persons.
(a) Application for and Order of
Employment. An order approving the
employment of attorneys, accountants,
appraisers, auctioneers, agents, or other
professionals pursuant to §327 of §1103
of the Code shall be made only on
application of the trustee or
committee. ..
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.