Memorandum of Decision Re: Retroactive Employment

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re DENNIS T. FLYNN,                                               No. 95-11204      Debtor. ___________________________/
Memorandum of Decision
     Debtor Dennis T. Flynn commenced this Chapter 11 case in May, 1995. He remained a debtor in possession until October 27, 1995, when the case was converted to Chapter 7 due to his failure to comply with court rules and U.S. Trustee guidelines.      On December 19, 1995, Flynn's counsel made application to employ Lynn A. Friedman as a tax specialist to deal with a large IRS claim. The application falsely represented that the case was still in Chapter 11 and that Flynn was a debtor in possession. Friedman, who has little experience in bankruptcy matters, was not a party to the misrepresentations. On December 26, 1995, the court signed the order approving Friedman's employment.      Friedman was successful in reducing the IRS claim by approximately $400,000. The reduction of this claim enabled the Flynn to avoid liquidation of all of his assets and permitted him to obtain financing as a means of paying his creditors and the expenses of administration in full. The reduction benefitted both the estate and Flynn personally.      Friedman did not realize until Flynn objected to her request for payment that there was any problem with the order appointing her. Friedman had worked with Flynn's attorney on a previous bankruptcy matter. In that matter, the attorney had handled all of the paperwork to get Friedman appointed by the Court. Friedman relied upon the attorney to do so in the instant case as well. Friedman knew that she had a court order appointing to represent the debtor estate and believed that she would be paid.      Considering the benefit rendered to the estate, the trustee has rightly moved the court for a retroactive order making Friedman his employee so that she can be paid. Flynn and the U.S. Trustee have objected.      Flynn is clearly estopped from objecting to the motion. His attorney obtained the order upon which Friedman relied by making serious misrepresentations to the court. A party may not profit by his counsel's misdeeds.      The U.S. Trustee correctly notes that retroactive orders may not be made absent exceptional circumstances. In Re Atkins, 69 F.3d 970, 974 (9th Cir. 1995). However, the U.S. Trustee goes on to argue that no exceptional circumstances have been shown here. The court quite disagrees. This is not a case where the professional never obtained an order. An order was obtained, but it was invalid through no fault of Friedman. Since Friedman rendered valuable services to the estate in reliance on the order, the court finds that exceptional circumstances do exist and that equity not only permits but in fact demands that Friedman be paid from the estate.      For the foregoing reasons, the trustee's motion will be granted. Counsel for the trustee shall submit an appropriate form of order. Any party objecting to the amount of Friedman's fees may set an appropriate hearing.1
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     1. The court will not consider Flynn's "counterclaim" against Friedman for allegedly disclosing confidential information. However, any award will be without prejudice to Flynn's right to bring a civil action against Friedman in state court.
Dated: July 27, 1998                                                _______________________                                                                                Alan Jaroslovsky                                                                                U.S. Bankruptcy