08 B 06424
This is a case stressing the importance of counsel representing a debtor in an underlying state court action to get approval, even if retroactive, of the Bankruptcy Court under 11 U.S.C. § 327 for such representation in order to be paid from the bankruptcy estate.
Freeborn & Peters LLP (“Freeborn”) represented the debtor in a pre-petition state court action for defamation brought by a real estate developer against the debtor and two local newspaper organizations in late 2007. The case was litigated and appealed up to the Illinois Supreme Court, which remanded the case to the trial court to award the debtor reasonable attorney’s fees and costs. Ultimately, the trial court entered judgment in the amount of $339,010 in favor of the debtor and against the developer. Freeborn proceeded to attempt collection on the judgment.
Unbeknownst to Freeborn, six months after the lawsuit was filed, the debtor filed for Chapter 13 bankruptcy relief, converted his case to Chapter 7 before the judgment had been entered and eventually received a discharge. However, the debtor failed to disclose the state court lawsuit in both his Schedules and his Statement of Financial Affairs. The developer discovered the debtor’s bankruptcy filing and moved to have the judgment vacated on the basis that the debtor was judicially estopped from enforcing the judgment because he failed to disclose the lawsuit in his bankruptcy case. Rather than contact the Chapter 7 Trustee and get authorization to be employed as special counsel, Freeborn continued to litigate the case and actually argued that the judgment was not property of the bankruptcy estate.
After the developer appealed the state trial court’s denial of its motion to vacate, its counsel notified the Trustee of the civil case. The debtor’s bankruptcy case was reopened. More than a year later, in 2014, the Illinois Appellate Court dismissed the appeal and determined that the debtor’s claim against the developer belonged to the Trustee and the judgment was an asset of the bankruptcy estate. Only then did Freeborn file an application for fees and reimbursement of expenses related to services performed during the debtor’s Chapter 13 case and requested that such fees and expenses be allowed as a secured administrative expense under 11 U.S.C. § 503(b)(1)(A) or (b)(2). Both the Chapter 7 Trustee and the condominium association, which had indemnified the debtor for legal fees, objected to the fee application.
After a hearing, the Court denied Freeborn’s fee application and request for an administrative claim because it did not secure approval of its employment before performing services.