Revisiting Knudsen – Getting Paid in Chapter 11 Cases

I have been putting together some materials for our office on Chapter 11 cases.  Section 2 of the materials will be about Employment Applications.  So I have been re-reading In re Knudsen, 84 B.R. 668 (9th Cir BAP 1988).  The Debtor’s attorneys, Stutman, Treister & Glatt, asked for permission to be paid every month without filing a fee application.  They would give notice and an opportunity to object before being paid.  Judge Barry Russell approved it over the UST objection.  The UST argued that it was never appropriate to permit payment without a fee application.  Shortly after the ruling in favor of Debtor’s counsel, counsel for the committee and the debtor’s accounting firm requested and got similar orders, now known as Knudsen Orders.

The facts seem to make it obvious that it was appropriate and that it is almost never appropriate otherwise.  In Knudsen, the fees were estimated to be in the range of $250,000 per month.  It was a liquidating case, for the benefit essentially of the secured creditor.  The secured creditor was essentially paying the fees since it was allowing payment out of its collateral.  The secured creditor authorized the fees.  There was a creditor’s committee who could watch over the fees and object if necessary.  The firm getting the fees had the ability to repay if it came to that.

Judge Deborah Saltzman commented the other day in a case before her that she has only authorized a Knudsen Order once in her tenure on the bench.

The BAP summarized its approval of Knudsen by saying:

In general, professionals must file applications for compensation which are subject to a noticed hearing prior to allowance or payment of fees. However, in the rare case where the court can make the following findings, a fee retainer procedure like the one here may be authorized:

1. The case is an unusually large one in which an exceptionally large amount of fees accrue each month;
2. The court is convinced that waiting an extended period for payment would place an undue hardship on counsel;
3. The court is satisfied that counsel can respond to any reassessment in one or more of the ways listed above; and
4. The fee retainer procedure is, itself, the subject of a noticed hearing prior to any payment thereunder.

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