Appointment of Special Counsel • Interlocutory Review • Discretionary Jurisdiction

Segal v. Holber, PICS Case No. 14-0458 (E.D. Pa. March 20, 2014) Sanchez, J. (18 pages).

Debtor appealed from an order of the U.S. Bankruptcy Court for the Eastern District of Pennsylvania granting the application of the trustee of the debtor’s bankruptcy estate to employ a law firm as special litigation counsel to the trustee in the underlying bankruptcy proceeding. The court concluded that the order was interlocutory and declined to exercise its discretionary jurisdiction to hear an interlocutory appeal. Appeal dismissed for lack of jurisdiction.

Debtor filed a voluntary Chapter 7 bankruptcy petition. Debtor listed a consulting agreement among his assets, although he characterized the possibility of collecting monies under the agreement as “doubtful” and listed its value as “unknown.” The consulting agreement arose out of the sale of a long-term care facility by a company in which the debtor was a principal shareholder. The agreement promised to pay the debtor $1.9 million over 10 years for his consulting services associated with management of the facility. The debtor filed his bankruptcy petition shortly after Reliant Healthcare Management obtained a jury verdict against him which resulted in a judgment of $1,829,260. Reliant filed a motion for an examination of the debtor and during the examination debtor testified that he believed the only money he would realize from the sale of the facility was through the consulting agreement, that he believed the consulting agreement had been terminated and that he did not intend to pursue litigation to recover any monies owed under the agreement because he did not have the money to fund a lawsuit. The trustee issued a report of no distribution stating that there was no property available for distribution based on the representations made by the debtor about the value of the consulting agreement and his lack of intention to pursue claims under the consulting agreement. The bankruptcy court discharged the debtor and closed the Chapter 7 case on June 26, 2012. Three days later, the debtor commenced an action for breach of contract for failure to make payments owed under the consulting agreement.

In October 2012, the district court transferred the contract action to the bankruptcy court and the bankruptcy court reopened the debtor’s Chapter 7 case. A trustee was appointed and he sought to employ a law firm as special counsel to assist in determining whether the consulting agreement fees should be considered property of the bankruptcy estate. The debtor argued that the fees under the consulting agreement were wages that were not yet earned or owed to the debtor at the time he filed his bankruptcy petition. The bankruptcy court approved the application to employ the law firm and the debtor appealed.

The trustee argued that the order was insufficiently final to confer appellate jurisdiction upon the court under §158(a)(1) and that the court should decline to exercise its discretion to hear the appeal under §158(a)(3). The trustee asserted that the traditional finality standard should apply because there were no countervailing bankruptcy considerations to justify a departure from the stricter standard. Third Circuit case law suggests the relaxed standard should apply when assessing the finality of orders relating to the appointment or disqualification of counsel. However, the order in this case did not arise in the adversary context and the court did not appoint counsel solely for the purpose of pursuing an adversary action. The order’s express language does not suggest appointment of counsel was limited to prosecution of an adversary action or any narrowly drawn issue disconnected from the bankruptcy proceedings. The court concluded that the order involves considerations “unique to bankruptcy” and thus, applied the relaxed standard to determine finality and found that the order was not final.

The order would not affect the assets of the estate and did not implicate any issues central to the progress of the proceedings. While the debtor argued that the primary role of the special litigation counsel was to determine whether the payments owed under the consulting agreement were a part of the bankruptcy estate, neither the debtor’s nor the estate’s assets were at issue because the bankruptcy court had not yet addressed the central issues that would potentially affect those assets. The debtor was, in fact, asking the court to make the underlying merits determination and rule that the consulting agreement payments were exempt post-petition wages. The order appointed counsel to investigate this issue, the order did not decide it. The lack of a merit determination as to the central substantive issues behind the reopened Chapter 7 proceedings demonstrates that the order is not sufficiently final to take an appeal as of right. Additionally, the investigation of the issue will proceed whether the law firm is involved or not.

The court additionally declined to hear an interlocutory appeal because immediate appeal from the order will not materially advance the ultimate termination of the litigation. The issues presented in this appeal could be mooted by later decision of the bankruptcy court and the debtor did not establish the existence of any exceptional circumstances that would warrant discretionary review.