Kun v. Mansdorf (In re Woodcraft Studios, Inc.)

In re Woodcraft Studios, Inc., No. NC-15-1143-WJuKu (9th Cir. B.A.P. July 22, 2016). Not-for-publication memorandum.
After a bankruptcy court has denied a request for compensation by the attorney for a debtor in possession, the attorney’s proof of claim for the denied compensation may also be disallowed.
Procedural context:
In prior concluded litigation, the bankruptcy court held that the court should not have approved the debtor in possession’s employment of its attorney, who had failed to make required disclosures and was not disinterested, and the bankruptcy court denied the attorney’s compensation request and ordered disgorgement of a retainer the attorney held. That order was affirmed on appeal. The attorney then filed a proof of claim (secured and priority) for the denied compensation. The bankruptcy court disallowed the proof of claim, and on appeal the BAP affirmed.
An estate professional may recover fees only in accordance with Bankruptcy Code provisions allowing fee awards. Fees may not be awarded based on state-law theories not reflected in the Code. Before an estate professional may be compensated, the professional must be properly employed under 327 and must make full and accurate disclosure about connections to the debtor, including whether the professional is a prepetition creditor. Here, the attorney failed to make full and accurate disclosure about being a prepetition creditor, and by holding a claim for prepetition services, the attorney was not disinterested and was not employable. The bankruptcy court’s order denying all fees and costs represented in the attorney’s fee application and directing disgorgement of the retainer meant that all of the fees and costs incurred in connection with the case were completely disallowed. The proof of claim was disallowed under 502(b)(1) as unenforceable because the fees and costs had already been disallowed in full. Once a determination has been made to deny fees and costs of an estate professional, there is no legal basis to revive those claims, including by filing a proof of claim.
Madeleine C. Wanslee, Bankruptcy Judge for the District of Arizona, sitting by designation, and Meredith A. Jury and Frank L. Kurtz, Bankruptcy Appellate Panel Judges.

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