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 TLC HOSPITALS, INC.,                                                 No. 94-11430        Debtor. ___________________________/
Memorandum of Decision
     Donald Ring was the Chapter 11 trustee in this bankruptcy proceeding before it was converted to Chapter 7. Upon his appointment, he inherited three skilled nursing care facilities full of elderly patients needing attention. He immediately hired defendant The Hillsdale Group to manage the facilities and care for the patients. He did not obtain court approval of the hiring.      Hillsdale cared for the patients for several months while the case was in Chapter 11. There is no allegation that Hillsdale overcharged, performed its tasks poorly, or took any action against the best interests of the bankruptcy estate. Notwithstanding the lack of any sort of improper conduct, some parties to this case have taken the position that Hillsdale was a professional within the meaning of section 327 of the Bankruptcy Code and, because its employment was not approved, must disgorge all of the money it was paid for its services. While Hillsdale does not concede it was a professional, it seeks retroactive authorization of its employment as a precaution. For the reasons stated below, the court grants this request.      The court is deeply troubled by the attempt of some creditors, most notably the Internal Revenue Service, to create a dividend in this case at the expense of Hillsdale even while admitting, in open court, the unfairness to Hillsdale. While the definition of "professional" should be strictly applied to attorneys who are presumed to know the law and to accountants, brokers and others who regularly handle bankruptcy matters or would automatically think of themselves as professionals, there is no justice in demanding a forfeiture from an entity which does not clearly fall within the definition of "professional" and whose expertise is not in financial matters but rather the care of human beings. As a court of equity, this court will not easily be brought to the grossly unfair result urged upon it by those who object to the present application.      This court is in wholehearted agreement with In re First Sec. Mortg. Co., Inc., 117 B.R. 1001, 1007 (Bkrtcy.N.D.Okl. 1990), which noted, in approving retroactive employment of a professional:
           A court of equity is seldom justified in disregarding            quantum meruit. . . . The rule of automatic, in-            variable and total forfeiture of fee is made all the            more inappropriate in cases such as the present one by            the difficulty of deciding who is or is not a "profes-            sional person" subject to section 327(a) - this is a            terrible thing to do to one who has given good service            in good faith merely because his opinion on an obscure            and difficult point of law differs from that of the            judge.      There is no need, at this time, to delve into the issue of whether Hillsdale is a professional within the meaning of section 327. Assuming that Hillsdale is a professional without deciding the issue, the court will approve its employment retroactively in order to avoid the windfall the creditors seek at Hillsdale's expense.      Retroactive approval of employment is permitted where there is a satisfactory explanation of the failure to obtain timely employment and there has been a substantial benefit to the estate. In re THC Financial Corp., 837 F.2d 389, 392 (9th Cir.1988). Here, the benefit is clear and compelling. The explanation is equally clear; Hilldale was not a regular bankruptcy professional, and its status as an insider not clear. Lack of sophistication in bankruptcy law may be considered in deciding if there are appropriate circumstances excusing failure to get a timely order. In re Crest Mirror & Door Co., Inc., 57 B.R. 830, 833 (9th Cir.BAP 1986); Matter of Saybrook Mfg. Co., Inc., 108 B.R. 366, 369 (Bkrtcy.M.D.Ga.1989).      Numerous other factors excuse Hilldale's failure to obtain a timely order. These include the exigent need to provide care to the patients; the justifiable reliance on the trustee to take care of the formalities of employment; and the lack of prejudice to anyone (unless one calls failure to obtain a windfall prejudice) if retroactive employment is approved. See Crest Mirror, supra; Matter of Arkansas Co., Inc., 798 F.2d 645, 650 (3rd Cir.1986).      The objecting parties argue that even if extraordinary circumstances exist which justify retroactive approval of employment, the motion cannot be granted because Hillsdale was not eligible to be employed. The court sees no basis for this position.      Section 327(a) places two requirements on professionals who are to be employed by the estate. First, they must be disinterested persons. That phrase is defined by section 101(14); none of its provisions fit Hillsdale. Second, they must not hold or represent an interest adverse to the estate. No such adverse interest is apparent.      A few days prior to bankruptcy, Hillsdale was appointed by the state court to be a receiver for one of the debtor's nursing homes. As a result of the Chapter 11 filing, it never took possession of the home or its records. It performed no work as receiver, and has no claim against the debtor or any other principal party to this bankruptcy. It had no contacts with the secured creditor seeking a receiver prior to its appointment. The appointment of Hillsdale as receiver under such circumstances did not disqualify Hillsdale from being employed by the trustee.      For the foregoing reasons, the motion for retroactive approval of employment will be granted. Hillsdale of course serves at the pleasure of the trustee, who can terminate the employment at any time. Like any other order approving employment, the order the court will enter will be subject to vacation if it turns out that Hillsdale failed to disclose a connection with any of the parties to this case.      Counsel for Hillsdale shall submit an appropriate form of order.
Dated: June 30, 1995                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy