Bankruptcy/In The News: Bankruptcy Court Retained Ancillary Jurisdiction To Resolve Attorneys’/Financial Advisor’s Entitlement To Fee Recovery Even Though Bankruptcy Case Dismissed

 

Seventh Circuit Disagrees That Bankruptcy Judge Lacked Jurisdiction To Decide Fee Entitlement Issue.

     In Sweports, Ltd. v. Much Shelist, Case No. 12-14254 (7^th Cir. Jan. 9, 2015), bankruptcy counsel and a financial advisor to the Official Committee of Unsecured Creditors (“claimants”) in a Chapter 11 proceeding filed to recover fees of at least $780,000 after the bankruptcy case was dismissed when the U.S. Trustee moved to convert it to a Chapter 7 proceeding. The bankruptcy judge denied fees based on the notion he did not have jurisdiction because the bankruptcy case had been dismissed.

     Claimants appealed, and Circuit Judge Posner on behalf of a Seventh Circuit panel reversed the fee denial.

     The Seventh Circuit decided, under ancillary jurisdiction principles, that the bankruptcy judge had the ability to determine fee entitlement in post-dismissal proceedings so that claimants could purse state court collection remedies against the debtor (given that the bankruptcy case dismissal revested assets in the debtor rather than the debtor’s estate). Claimants’ delay in not moving for fees pre-dismissal was reasonable because the counsel involved did not want to delay other unsecured creditors’ wish that the case be dismissed so they could post haste sue debtor in state court for collection of debts owed. (Obviously, fairness was also at play here—it was unfair for other creditors to pursue their debts, but then adjudge that claimants could not get similar speedy entitlement rulings post-dismissal so they could pursue state court collection remedies.)

     Circuit Judge Posner observed that there was no final judgment resolving the controversy between the parties. “The order dismissing the bankruptcy didn’t do that. There was a loose end, left dangling—[claimants’] claim for fees.” However, the Seventh Circuit was careful to distinguish post-dismissal fee entitlement (a ruling the bankruptcy judge could make) from an order to pay fees (something which couldn’t be done because there was nothing in the bankruptcy case from which to order payment, so the route to go was state court collection efforts against debtor).