Lamie, John v. U.S. Trustee (01/26/2004)

Questions presented: Does 11 U.S.C. ? 330(a)(l) authorize a court to award fees to a debtor's attorney?

BY TERESA BLACK, MEDILL NEWS SERVICE

An alleged "scriveners error" in the Bankruptcy Reform Act of 1994 has pitted attorneys, debtors and courts against one another over how to interpret the law. At issue is whether the omission of "debtors attorney" from a list of people who can be paid from a bankruptcy estate was deliberate or inadvertent.

Why not just ask Congress if it was a typo? The courts have said once legislation is enacted, the answer does not matter.

Bankruptcy attorney John M. Lamie and the U.S. Trustee have argued about the supposed mistake for years.

Equipment Services, Inc. retained Lamie during Chapter 11 bankruptcy proceedings in 1998. The protection allows corporations to retain assets and continue operating as a business while developing a new plan for debt repayment, which can include the use of future profits and submitting to mergers.

After Lamie filed the Chapter 11 petition, he received a $5,000 retainer upon which to draw for his services as performed. He proceeded to earn $1,325 in fees.

In the meantime, the U.S. Trustee stepped in to successfully convert the case into a Chapter 7 proceeding, which would liquidate Equipment Services assets for dispersal among creditors and make the company a bankruptcy estate. Lamie claimed he earned another $1,000 during the Chapter 7 stage, but the U.S. Trustee argued the conversion had altered the rules governing Lamies payment.

The U.S. Trustee agreed to pay Lamie the $1,325 he earned in the Chapter 11 phase, but objected to the $1,000 to cover the Chapter 7 stage, citing 11 U.S.C. 330 (a) of the Bankruptcy Code.

The U.S. Trustee claimed that the section does not allow a debtors attorney to be paid in a Chapter 7 proceeding due to an omission in the Bankruptcy Code following the 1994 Bankruptcy Reform Act.

The bankruptcy court agreed. However, it authorized Lamies full payment requested since the retainer was supposed to be treated as money separate from a bankruptcy estate. The U.S. Trustee appealed, but the district court upheld the bankruptcy courts decision.

A divided 4th Circuit Court of Appeals reversed, ruling the retainer should, in fact, be considered part of the bankruptcy estate. As such, the retainer could not be touched for payment of the debtors attorney due to the "plain language" stated in the law. The court added that it must presume Congress "intended what it said."

Lamie was to forfeit the $1,000 he earned after the case was turned into a Chapter 7 proceeding.

Judge Paul V. Niemeyer wrote, "In reaching this conclusion, we reject Lamie's argument that 330(a) included a 'scriveners error' when it was amended in 1994 to delete the 'debtors attorney' from the list of persons eligible to be paid from bankruptcy estate, and we join two circuits that have reached the same conclusion." However, three other circuits had come out the other way, making a 3-3 split.

Judge M. Blane Michael dissented in part to the 4th Circuit's decision, pointing out that the situation simply represents a matter of choosing sides.

"As the majority acknowledges, the question of whether 11 U.S.C. 330 (a) allows a Chapter 7 debtors attorney to be paid professional fees from the bankruptcy estate is a close one," Judge Michael wrote. "Because the arguments on both sides of this question have been well developed by the majority and by panels of other circuits, there is nothing left for me to do but choose a side. I cannot side with the majority."

Lamie sought review by the U.S. Supreme Court, urging nuanced analyses of grammar in different versions of Section 330 (a), as well as consideration of legislative history.

"The question presented by this case is whether Congresss omission of that phrase in the 1994 recodification of Section 330 was purposeful and intended to deprive attorneys of compensation, or instead was an error in drafting," Lamie posed.

On March 10, 2003, the U.S. Supreme Court agreed to hear the case.

The Court was being asked to resolve the conflict among the circuits.

"The question presented has great significance for the more than one million Chapter 7 bankruptcy filings in this country each year, as well as for the administration of the bankruptcy laws generally," Lamie argued in his petition.

The case also underscored the respect for the separation of power between the legislative and judicial branches of government. It might have been tempting for the courts to call up former U.S. Representative Jack Brooks, now more than 80 years old, who initiated the Bankruptcy Reform Act of 1994 to determine what was intended. One might also note that Congress had not yet moved to amend 11 U.S.C. 330 (a). But courts can, and do, press on without appealing to Congress.

And so the Supreme Court did, on Jan. 26, 2004, holding that under the bankruptcy code's plain language, the statute does not authorize compensation awards to debtors' attorneys from estate funds, unless they are employed by theee and approved by the court.

Conceding that the code is awkward, and even ungrammatical, Justice Anthony Kennedy concluded nonetheless that it isn't ambiguous on the point at issue, and the debtor's lawyer does not fall within the eligible class of people entitled to fees.

Kennedy noted that the code's plain language allowed the Court to not have to rely on the code's legislative history, a good thing too, he wrote, because its history is more confusing than helpful.

Justice John Paul Stevens added a one-paragraph concurrence for himself and Justices David Souter and Stephen Breyer that argued for a a duty to examine the code's legislative history, which would have concluded that the scrivener had erred.