In 2020, the United States Supreme Court issued a decision in Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696 (2020) strictly limiting the ability of federal courts to enter orders nunc pro tunc[GF1] [1].

Since Acevedo, some bankruptcy courts have questioned the propriety of entering nunc pro tunc orders approving applications to employ professionals under section 327 of the Bankruptcy Code.  Nevertheless, a consensus has emerged among the lower courts that Acevedo does not, in fact, bar such orders.  Before getting to these decisions, a brief recap of Acevedo is in order.

The Facts in Acevedo

The nunc pro tunc order at issue in Acevedo arose from the following facts:

The defendant, the Archdiocese, removed the case from a Puerto Rico court to the federal district court.  Thereafter, while the federal district court still had jurisdiction over the case, the Puerto Rico court entered certain payment and seizure orders against the Archdiocese. Then, the case was remanded to the Puerto Rico court—the remand order was enterd nunc pro tunc, stating that remand was effective as of a date that was three days before entry of the first payment and seizure order entered by the Puerto Rico court.  The Supreme Court was faced with the question of whether entry of the nunc pro tunc order under these facts represented a valid and enforceable order.

The Supreme Court’s Holding in Acevedo

In a per curiam opinion, the Court ruled that a state court altogether lacks jurisdiction in a removed action until the case has been formally remanded. Merely terminating the basis for federal jurisdiction does not restore the state court’s jurisdiction and power to act.  Invoking one of its prior decisions, the Court said that a nunc pro tunc order must “‘reflect[] the reality’” of what has occurred. A nunc pro tunc order, the Court said, “presupposes” that a court has made a decree that was not entered on account of “inadvertence.” Id. at 700-01.   Stated another way, nunc pro tunc orders are appropriate only if the court makes a ruling but fails to enter an order at the time.

Invoking the plain meaning of language, the Supreme Court in Acevedo explained what nunc pro tunc means, and it does not mean “retroactive.” Thus, the Court’s ruling was not a prohibition on making orders retroactive. Rather, Acevedo holds that a court cannot make an order effective as of an earlier date at which time the court had no subject matter jurisdiction.

Importantly from a bankruptcy perspective, the Supreme Court essentially banned the oft-used term “nunc pro tunc” from the bankruptcy lexicon.

Decisions Following Acevedo

Acevedo Doesn’t Bar Compensation for Services Before Entry of a Retention Order

Following the Acevedo decision, bankruptcy courts began the process of dealing with its implications in a number of different ways, not the least of which was how bankruptcy professionals are employed and compensated.  Initially, a number of courts held that employment of a professional retroactive to the date prior to entry of the employment order was prohibited by Acevedo, but nevertheless held that compensation for services rendered prior to that date were nonetheless compensable. See, e.g., In re Miller, 620 B.R. 637 (Bankr. E.D. Cal. 2020) (holding that while bankruptcy courts may not approve a professional’s employment nunc pro tunc, effective on a date before the employment was actually approved, this does not mean that the courts cannot exercise their equitable discretion to compensate professionals for their pre-employment services); In re Roberts, 618 B.R. 213, 217 (Bankr. S.D. Ohio 2020) (holding that although bankruptcy court must sanction employment of a professional before professional may be awarded compensation for any services rendered, this does not mean that services rendered prior to entry of an order authorizing the employment will be uncompensated); In re Benitez, No. 8-19-70230-REG, 2020 WL 1272258, at *2 (Bankr. E.D.N.Y. Mar. 13, 2020) (“It is this Court’s determination, however, that retroactive approval of the retention of an estate professional, whether it be nunc pro tunc, post-facto or any similar nomenclature, is not mandated under the Code or Rules. The Court finds that neither the Code nor the Rules preclude an award of “reasonable compensation” or reimbursement for “actual, necessary expenses” pursuant to section 330 for services rendered prior to an order approving retention of the professional. The only temporal requirement in the Code and Rules is that a professional must have been retained pursuant to section 327 to successfully obtain a court award of compensation. Simply stated, a professional must be retained as required by the statute, but once having been retained, the bankruptcy court is free to compensate him for services rendered to the estate at any time, pre and post-court approval, in accordance with section 330 of the Code.”).

Acevedo Doesn’t Bar Employment of a Professional to a Date “Retroactive” to Entry of the Retention Order

A June 2021 decision from the United States Bankruptcy Court for the Central District of California provides a good example of the more recent trend in  the law on this issue. In . In re Hunanyan, 631 B.R. 904, 907 (Bankr. C.D. Cal. 2021), the United States Trustee objected to the Chapter 7 Trustee employing an accounting firm nunc pro tunc, asserting that the effective date of the employment should be the hearing date or the date the court signs the order, if there is no hearing. The bankruptcy court disagreed, holding that Acevedo does not bar a professional from being compensated for services performed before the professional’s retention was approved by court order.

In so doing, the court opined:

The objection is overruled because Acevedo does not change the existing authority of the court to approve employment that has commenced before the motion was brought. Acevedo reiterates a long-established principle ‘that jurisdiction in the federal courts must emanate from the United States Constitution or a statute and cannot be created by the actions of a court.’ As the Ninth Circuit BAP explained with respect to § 362(d) of the Bankruptcy Code, a specific statute conferring authority on the court does not exceed the court’s jurisdiction in the way the language of the removal statute prohibited the court from exercising jurisdiction in Acevedo. The court has explicit authority under 11 U.S.C.§ 327 to approve this employment application without resorting to equitable principles or issuing nunc pro tunc orders.

Id. at 908 (internal citations omitted).

“Unlike many sections of the Bankruptcy Code,” the court said, “neither [Section 327 nor 330] has a temporal requirement for when the application should be filed.” Id. at 909. In addition, Bankruptcy Rule 2014(a) “also has no deadline for filing the employment application.”  Id.

According to the court, there is no statutory prohibition on retroactive retention orders, because Section 327(a) requires the “court’s approval,” not the “court’s prior approval.” Id. at 911.  Furthermore, there are circumstances where “professional assistance is needed before the noticed hearing [on a retention application] can be held.”  Id.

Similarly, in City of Rockford v. Mallinkrodt PLC (In re Mallinkrodt PLC), No. 21-268, 2022 WL 906462 (D. Del. March 28, 2022), the court rejected the idea that Acevedo “has suddenly declared that bankruptcy courts have no authority to retroactively approve retention of professionals.”  Id. at *8. There, the employment application in question, and the order approving it, used the term “nunc pro tunc.” It seems that the use of this phrase invited an objection to entry of the employment order.

In rejecting the arguments advanced by the parties opposing entry of the employment order, the District Court consistently used the word “retroactive” in place of “nunc pro tunc” when explaining its ruling that Acevedo did not prohibit entry of the order in question.

Practice Pointers

Employment Applications Should use the Word Retroactive Rather than the Phrase “Nunc Pro Tunc”

Words matter. The Supreme Court in Acevedo made this clear. Contrary to common understanding, the Latin phrase nunc pro tunc does not mean “retroactive,” although it has often been used (incorrectly) as its synonym.

Acevedo told us what nunc pro tunc actually means and when it may be used properly: The term is correctly used when a court took an action but failed to enter an order at that time. Beyond definitional clarification, Acevedo stood for the unremarkable proposition that a court may not enter an order effective as of a date when the court had no jurisdiction.

As discussed above, this does not mean, however, that a bankruptcy court cannot approve employment of a professional “retroactive” to a date prior to actual entry of the employment order. 

But despite the Supreme Court’s decision in Acevedo, lawyers have continued submitting orders using the words nunc pro tunc when the orders more properly should sstate that they would be effective as of an earlier date (i.e., “retroactive”). It was this nomenclature that led to the principal issue on the appeal in Mallinkrodt PLC. 

As a result, lawyers should avoid using the phrase “nunc pro tunc” in their employment applications in order to avoid inviting an appeal of the employment order.

Do Not Delay in Filing an Employment Application

            Although the decisions from the courts discussed above permitted entry of orders approving employment of a professional retroactive to a date prior to entry of the employment order, many of those decisions made clear that this is not an invitation to unduly delay in filing the employment application.

            For example, in Hunanyan, the court explained that the ability to make retention retroactive “is not license to wait indefinitely for court approval.” When there has been a delay, the court said that “caselaw adequately addresses this situation.” The court then set out the “body of law [to determine] when a delay is too long to warrant the payment of fees or denial of employment.”  In so doing, the court explained:

These delayed application cases are better understood as exercising the court’s control of compensation as a tool to have timely oversight of the use of estate assets. The employment application must be reviewed for conflicts, but it is also a preview of whether the estate should be compensating certain professional services. Where that is unreasonably delayed, explanations and greater scrutiny are in order.

Hunanyan, 631 B.R. at 913.

            Similarly, the court in Benitez issued the following caution to professionals:

Although a professional does not violate the Code or Rules by commencing services prior to court approval, late applicants should understand the consequences of their delay.

***

The longer an estate professional waits to seek court approval of its retention, the more the “particular facts and circumstances surrounding [the] case” develop, which means the Court may broaden its analysis to include hindsight consideration of the services already rendered and the professionals who rendered those services. Seeking court approval after-the-fact subjects the professional to the possibility that approval of retention may be denied considering the lack of benefit to the estate thus precluding any possibility of compensation under section 330. Where services rendered ultimately provide little or no benefit to the estate, court approval obtained prior to the rendering of the services would at least allow the professional to seek compensation and prove the compensation was reasonable and necessary in light of the facts and circumstances of the case.

2020 WL 1272258, at *5–6 (internal citations omitted).

Conclusion—Retroactive Orders Still Alive and Well

            Put simply, the Supreme Court in Acevedo did not bar the practice of seeking retroactive orders in appropriate situations; it merely clarified the appropriateness of the term nunc pro tunc and the effect of orders granted nunc pro tunc.Practitioners should avoid using the term nunc pro tunc when, in reality, the relief they seek is retroactive application. Moreover, when retroactive application is needed in the context of professional retention, the earlier the order is sought, the better it is for both the Court and the professionals.  Promptness will limit the concerns that arise with retroactivity and ensure that professionals are appropriately compensated for the services they render. 

Nelson Mullins attorneys are experienced in handling bankruptcy matters of all sizes and are well equipped to advise debtors, trustees, purchasers, professionals, and other stakeholders on both the legal and practical aspects of any number of issues that arise in a bankruptcy case, including the retention and compensation of professionals in bankruptcy.

[1] Nunc pro tunc is a phrase used in an order or judgment when the court wants the order or judgment to be effective as of a date in the past rather than on the date the judgment or order is entered into the court record.