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Recent Case Development: In This District

Corporate officers are liable under Colorado law for unpaid wages to employees when corporation files for bankruptcy relief.

In Leonard v. McMorris, 2000 U.S. Dist. Lexis 9635 (D. Colo. June 29, 2000), Judge Edward W. Nottingham ruled that Colorado's Wage Claim Act (C.R.S. '' 8-4-101-127) is not preempted by federal bankruptcy law and therefore the officers of a corporation in bankruptcy may be personally liable for unpaid wages owed by the corporation to its employees. Employees of NationsWay Transport Service filed suit in Colorado state court against the company's officers shortly after the company filed for bankruptcy relief in Arizona seeking to recover unpaid earnings under the Wage Claim Act. The defendants responded by filing a summary judgment motion asserting, among other defenses, that the Act does not impose personal liability on officers for the corporation's wage liability, that the Act contains a bankruptcy "exception," and that the Code preempts the Wage Act. The Court quickly dispensed with the first defense on the basis that the statute's inclusion of officers as parties liable under the Act was clear and consistent with other state statutes which pierce the corporate veil and impose corporate liability on officers. The Court also concluded that the officers' liability was not contingent on the corporation's liability for unpaid wages. The defendants argued that if the corporation could not be held liable due to the filing of its bankruptcy petition, then the defendants' statutory contingent liability was not triggered. The Court rejected this argument by concluding that the "plain and explicit language" employed by the Wage Claim Act imposed liability "without exception." Lastly, the Court rejected the defendants' preemption argument, in part, by noting that the defendants had not themselves filed for bankruptcy relief. Because the defendants had not filed a bankruptcy petition, no actual conflict between the Code and the Wage Claim Act was present in the case and therefore preemption issue was properly disposed by summary judgment.

Bankruptcy Court review of a professional fee application is not dependent on a filed objection by the trustee, a creditor or other party-in-interest.

Allowance of professional fees remains an active area of judicial review, and two cases recently rendered by Senior District Court Judge John L. Kane, Jr. provide further insight into what practitioners can expect in obtaining court approval of their applications. In Bueno v. Bankruptcy Court (In re Bueno), 248 B.R. 581 (D. Colo. May 16, 2000), Judge Kane held that a bankruptcy judge's duty to review fee applications is not subject to waiver due to the failure of any party-in-interest to file an objection. Accordingly, the bankruptcy court's obligation to review fee applications requires the reviewing judge to act sua sponte even in the absence of an objection. In addition, the Bueno case provides clarification of the District Court's decision in In re Ingersoll, 238 B.R. 202 (D. Colo. 1999) (Matsch, C.J.) by stating while a bankruptcy court may not allow or disallow fees on "boilerplate objections not sufficiently specific to give the applicant notice of what may be thought to be adequate, nothing in that decision precludes a bankruptcy judge from formulating presumptively normal billing rates or normal expectations of the time necessary to complete discrete tasks.

In George Carlson & Assoc. v. Bankruptcy Court (In re Zamora), 2000 U.S. Dist. Lexis 11635 (D. Colo. August 11, 2000), Judge Kane reiterated his sentiments from Bueno that a bankruptcy judge's duty to review every fee application cannot be delegated by making the court's review conditioned on the filing of an objection by a party-in-interest. While a trustee is an advocate who can assist the judge in its consideration of fee applications, the trustee's role as an advocate is not the equivalent to a Code imposed judicial duty. In addition, Judge Kane held that the bankruptcy court did not abuse its discretion in disallowing fees sought by the applicant for time spent in preparing a motion to reconsider an earlier order requiring the applicant to provide an itemized statement of services rendered and a discussion of reasonableness of the fees in light of the requirements of Code '' 330(a)(3) and (4). A motion to reconsider the bankruptcy court's order requiring an applicant to provide additional information in compliance with the Code is procedurally improper because the order is not "final" as required under Fed.R.Civ.P. 59(e) and 60(b). Moreover, the bankruptcy court did not abuse its discretion in reducing the fees sought in response to the bankruptcy court's order because (1) the applicant failed to adequately explain the necessity of the many of the charges in the revised application, (2) the applicant sought approval of charges that were "overhead" items that should be built into the attorney's hourly rate, (3) none of the applicant's time incurred in the fee application process produced a benefit to the estate, and (4) the time spent in preparing the revised application and contesting the bankruptcy court's order compelling further disclosure was necessary since the initial application was vague and exceeded the limit for "short form" fee applications.

In a related context, Chief Judge Krieger has ruled that any attorney representing a debtor by preparing bankruptcy schedules must sign the bankruptcy petition even if the scope of the attorney's representation complies with the attorney's ethical duties under state law. In In re Merriam, 250 B.R. 724 (Bankr. D. Colo. July 13, 2000), the US Trustee sought disgorgement of fees paid to attorney whose representation of the debtor was limited to preparation of the debtor's schedules because the attorney failed to sign the petition and attend the Code ' 341 meeting of creditors. Because no evidence was presented that the $399 fee for preparation of the debtor's schedules was excessive, the issue addressed by the Court were limited to whether the attorney's failure to attend the credito's meeting and sign the petition rendered the fee excessive. Chief Judge Krieger first held that the attorney had a duty under Fed.R.Bankr.P. 9011(a) to sign the petition notwithstanding the limited representation. While state ethics rules permit the "unbundling" of legal services, Rule 9011 clearly requires the attorney to sign the petition because the debtor "was not by any definition a 'party who is not represented by an attorney.'" To correct this technical deficiency, the attorney was directed to file an amended petition bearing his signature and an amended Rule 2016 disclosure to reflect the limited scope of the attorney's representation. In addition, the determination of whether an attorney is required to appear on behalf of a debtor at the meeting of creditors is dependent on the nature and circumstances attendant to each case in light of the needs of the client, the agreed services to be provided, and the standard practice in the community. Here, no showing was made that the attorney's failure to attend the Code ' 341 meeting violated the attorney's duty to his client, fell below the minimum professional standards of the community or caused injury to the debtor or the estate. Accordingly, the Court declined to require any disgorgement of fees by the attorney.