Can Attorney For A Dispossessed Subchapter V Debtor Get Paid? (Athena Medical v. Wound Care Specialists)

Getting paid for valuable services? (Photo by Marilyn Swanson)

By: Donald L Swanson

There is a hole in the Bankruptcy Code: a dispossessed Subchapter V debtor has the exclusive right and power to file a plan, but there is no specific provision for compensating the dispossessed debtor’s attorney for doing so.

A way needs to be found to pay that attorney for doing so.  And the U.S. District Court for Arizona has found a way that makes sense (in my humble opinion), as explained in:

What follows is a summary of (i) the Bankruptcy Court’s analysis in denying compensation, and (ii) why and how the District Court finds a way to reverse.

Facts—From Bankruptcy Court Opinion

Debtor is a medical group providing wound care services to patients, grossing more than $25,000,000 annually.

Debtor has no secured creditors and has only a modest amount of unsecured debt, with one exception: Creditor asserts an unsecured claim exceeding $12,000,000.

On March 15, 2023, Debtor files Subchapter V bankruptcy, and the employment of Debtor’s Attorney is approved by the Bankruptcy Court.

The Subchapter V case is contentious from the start, and Creditor files a Motion for Appointment of Chapter 11 Trustee or, in the Alternative, for the Removal of the Debtor-in-Possession and Expansion of the Subchapter V Trustee’s Powers.

On June 28, 2023, (“Debtor’s Removal Date”) the Court orders removal of Debtor as debtor-in-possession.

Debtor’s Attorney continues representing Debtor after Debtor’s Removal Date and files Debtor’s first Subchapter V plan on July 13, 2023.

The Subchapter V Trustee supports Debtor’s plan, but confirmation is a grueling process with a series of plan objections by Creditor, three different plans filed by Debtor, a multitude of other pleadings, several hearings, and two multi day trials.

Debtor’s Third Amended Plan is ultimately confirmed. The confirmation order is not appealed, and the Plan becomes effective on February 12, 2025.

A month later (on March 14, 2025), Debtor’s Attorney files an Application requesting allowance of $1,251,277 in fees and $25,865.40 in expenses, for work performed on Debtor’s behalf after Debtor’s Removal Date to confirmation of Debtor’s Plan.

Creditor objects to the Application, arguing that an attorney for a dispossessed Subchapter V debtor is not entitled to an award of attorney fees from the estate as a matter of law.

Legal Framework & Ruling—From Bankruptcy Court Opinion

Under Subchapter V, a debtor remains in possession of its assets and operations as a “debtor in possession,” unless and until removed from possession under § 1185, and has many of the powers of a trustee, including the right to retain professionals under § 327(a).

However, approval of a professional’s employment does not guarantee payment.

In a traditional Chapter 11, a debtor has the exclusive right to file a plan for the first 120 days.  When a debtor is removed from possession, the Chapter 11 trustee may file a plan, as may any other party in interest.

But under Subchapter V only a debtor may file a plan. No one else may do so: not the trustee nor any other party in interest—even after debtor is dispossessed.

So, should Debtor’s Attorney be entitled to compensation for presenting and obtaining confirmation of a Subchapter V plan after Debtor is removed from possession?

According to the Bankruptcy Court, the answer is, “No.”

Reversal By District Court

The District Court Reverses on appeal.  Here’s why.

–Issue on Appeal

The issue on appeal is whether an attorney employed by a Subchapter V debtor is entitled to compensation for services rendered after the debtor is dispossessed under § 1185.

–Appellant’s Arguments

Appellant argues in favor of awarding compensation because:

  • a dispossessed debtor has a lingering obligation under § 1189 to file a plan—an attorney is needed to do so and should be compensated for such services under § 327(a); or
  • § 503(b)(1)(A) provides for paying “the actual, necessary costs and expenses of preserving the estate.”

–Preliminary Agreement with Bankruptcy Court

The District Court’s opinion begins by agreeing that § 327(a) cannot authorize compensating Debtor’s Attorney for post-removal services because (i) § 327(a) applies only to trustees, and (ii) a dispossessed Subchapter V debtor does not hold any of the powers of a trustee.

Basis for Reversal

However, Debtor’s Attorney also claims entitlement to compensation under § 503(b)(1)(A), which provides: “After notice and a hearing, there shall be allowed administrative expenses including the actual, necessary costs and expenses of preserving the estate.” 

The Bankruptcy Court rejected this § 503(b)(1) theory, based on the interplay between § 503(b)(1)(A) and § 503(b)(2): finding that “allowing the fees under § 503(b)(1) would improperly circumvent more specific provisions of the Code that do not allow for such fees.”

It is true that courts generally find that a professional cannot use § 503(b)(1)(A) to circumvent their inability to claim compensation under § 530(b)(2):

  • the Seventh Circuit notes, for example, that “[o]ne might as well erase § 503(b)(2) from the statute if attorneys may stake their claims under § 503(b)(1)(A) even when ineligible under §§ 327, 330, and 503(b)(2)”[Fn. 1]; and
  • the Third Circuit declares that, if a professional were able to be compensated under section 503(b)(1)(A), § 327(a) would be rendered “a nugatory.”[Fn. 2]

The District Court finds such seventh and third circuit authorities inapplicable in Subchapter V cases when an approved attorney assists a dispossessed debtor in filing and confirming a plan under § 1189. Here’s why:

  • an attorney for such a debtor, seeking payment under § 503(b)(1)(A), would not be circumventing §§ 327, 330 or § 503(b)(2), because such statutes don’t apply;
  • in the seventh and third circuit cases cited above, the professional is hired by a debtor in possession to assist in carrying out trustee derived duties, but § 327(a) does not apply here because Debtor has been stripped of its trustee derived duties; and
  • since Debtor’s Attorney filed and confirmed the Plan under § 1189, which is not a trustee duty, § 327 does not apply.

So, when the professionals in the seventh and third circuit cases cited above sought payment under § 503(b)(1)(A):

  • they were attempting to circumvent §§ 327, 330, and 503(b)(2) because those statutes specifically govern their compensation; and
  • an actual determination was made that they were not entitled to employment under § 327 because they failed to abide by § 327(a) requirements.

Here, Debtor’s Attorney is not circumventing § 503(b)(2) because Debtor’s Attorney could not use that statute in the first instance. §§ 327, 330, and 503(b)(2) simply do not govern the employment or potential compensation of Debtor’s Attorney because:

  • Debtor had no ability to hire Debtor’s Attorney under § 327(a); and
  • Debtor’s Attorney was not otherwise assisting in carrying out a trustee duty.

Compensation Under § 503(b)(1)(A)

Under § 330(a), a professional is entitled to compensation and reimbursement for “actual” and “necessary” services and expenses after “notice to the parties in interest and the United States Trustee and a hearing.” And § 503(b)(1)(A) employs a materially similar standard, allowing payment for “the actual, necessary costs and expenses of preserving the estate” after “notice and a hearing.”

In this case, Debtor’s Attorney can make a decent argument for meeting the § 503(b)(1)(A) standard, by assisting Debtor in filing and prosecuting and confirming a bankruptcy plan.

Further, to the extent equities are of any tangential concern here, the equities favor Debtor’s Attorney. As the Bankruptcy Court noted, the work performed by Debtor’s Attorney “unquestionably resulted in a successful confirmation.”

And these are not mere auxiliary services: the proposal, negotiation, and confirmation of a plan is the focal point of this Subchapter V bankruptcy.

The District Court, therefore, declares, (i) the Bankruptcy Court’s order is reversed, and (ii) the matter is remanded for further proceedings consistent with this order.

Conclusion

Here’s a “thank you” to the U.S. District Court in Arizona for its Athena Medical v. Wound Care Specialists opinion that finds a sensible way to provide compensation to the attorney for a dispossessed debtor who obtained confirmation of a Subchapter V plan.

———————————-

Footnote 1. In re Milwaukee Engraving Co., Inc., 219 F.3d 635, 637 (7th Cir. 2000).

Footnote 2. F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 109 (3d Cir. 1988).

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

Leave a comment

Blog at WordPress.com.

Up ↑