More fun with the Code, or "Bankruptcy Nerdcore," {my attempt at nerdy humor — "nerdcord" — apparently lost on one and all} as one recent commentator has described it.
It is the reality of current academia that we don't do much in the way of "close readings" of the Bankruptcy Code anymore, at least in our published scholarship. But today was the day to teach professional retention in my Bankruptcy class. Normally I've done an introductory lecture before working on the problems, but I find that the relevant Code provisions are so many and scattered that students have trouble following the lecture. So this morning I trashed the lecture notes and quickly made this slide, which formed the basis for our discussion.
And in the process of putting together the slide, I came to a few conclusions:
1. While courts sometimes talk about "retention under §328(a)," there really is no such thing. Rather, retention must be under §327 or §1103, as the plain language of 328(a) itself suggests. The implication: cases like Circle K are misguided, because 328 simply provides authority to retain a professional under 327 or 1103 under something other than a traditional hourly rate structure. As I read it, 328(a) simply provides that the compensation structure is to be set ex ante, and not revisited unless the final sentence of 328(a) applies. In short, no fair using 20/20 hindsight to change the terms of retention — the amount of compensation is a different story, although I'll agree that it is hard to untangle the two if you are dealing with something other than an hourly rate.
2. Retention under §363(b) should not be permitted, despite the practice in the SDNY, Delaware, and perhaps other jurisdictions. While the Code clearly does not work well with turnaround firms that take over management of the debtor before bankruptcy, I don't see how using the generic provision (363) can be justified in the face of the rather elaborate system outlined in my slide. And §330 by its terms seems to suggest that the only avenues for retention are 327 and 1103.
I know many Credit Slips readers are "in the trenches," working with these provisions on a daily basis. I'd appreciate your thoughts on my two conclusions (or the slide, particularly if I've missed some key provision).
My general thought is that these issues suggest yet another way in which chapter 11 could benefit from an update, inasmuch as the retention provisions of 1978 have been strained to their limits by current practice. I suggest that considering how the Code should adapt is a more productive avenue than debating whether or not these efforts to stretch the Code are "illegal."
Comments
6 responses to “Professional Retention & Compensation under the Code”
“Retention” only applies to “professional persons” which is unfortunately undefined. 363 is perfectly appropriate for employment of a person as an employee of the company or as an independent contractor, which are how it is most often used. Many independent contractors perform services for “the business” that are not necessarily part of “the case” even though “the business” is in “the case”. I suggest a bright line definition of “professional person” along those lines would be most helpful.
I am not aware of any cases in Delaware where retention of a professional was approved under section 363. I see your point re 328. Although 328 uses the word “employ” it immediately qualifies it with “under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis.” It is really an alternative to section 330 re compensation. Interesting (although I don’t think it matters practically speaking).
I agree with the 327 vs.328 analysis and often clarify at the hearingds that the employment is allowed pursuant to 327 and fee applications will reviewed accord with 330 so as to avoid the issues found in cases such as Circle K.
Looks like we got a Bench-Bar Conference going on here! On 363, I am pretty sure that Steve is referring to the arrangement seen in many DE and SDNY cases under which turnaround firms can be engaged pursuant to 363 to provide certain services including furnishing persons to serve as officers of the debtor. While that technically does not involve approving “retention of a professional . . . under Section 363,” that is because we have defined it not to be so. Prior to the development of that protocol some years ago, debtors did seek to engage such firms as professionals under 327/328, and those applications drew disinterestedness objections where principals of the firm had served as officers of the debtor prepetition.
I believe Steve is suggesting 363 is an imperfect fit for that situation and we ought to find another solution. I would be interested to hear concretely what that alternative might look like.
On the 328 vs. 327 question, I think that arose from a belief that was prevalent for a while in DE and maybe elsewhere that 328(a) had to be invoked talismanically in the retention order for non-hourly rate terms to be “protected.” While that persists because it has gotten into everyone’s form files, the better view should be that 328 applies when it applies and it is not dependent on the utterance of magic words in the order — no more than the other compensation standards under 330 are.
I want to thank everyone for a really intelligent discussion on this issue.
I was indeed talking about turnaround firms when I mentioned 363. I think by any reasonable definition the turnaround firm itself, often paid either hourly or monthly for its services (and maybe a bonus too), must be a professional retained “to represent or assist the trustee [DIP] in carrying out the trustee’s duties under this title.”
I think the better approach to dealing with this would be to amend the definition of “disinterested” to acknowledge that a person who becomes an officer/director as part of the turnaround is different from somebody who has been an officer/director during the period of the debtor’s decline. I also agree with the person who suggested a need to more precisely define what professionals we care about for bankruptcy purposes — unlike Professor LoPucki, I don’t think we really want the “slip and fall” attorney from Anamosa filing a retention and fee application in GM’s bankruptcy case. That strikes me as a terrible use of bankruptcy court resources.
Dealaware [not sic] notoriously does not abide by the Code; except when it suits “courting” purposes.
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Case in point is the Region 3 Trustee’s office Objected to Irell & Manella being eToys 01-706 (DE Bankr (2001)) counsel; due to a relatively minor (purported) former representation of an eToys issue pre petition.
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Then local counsel MNAT was approved as eToys Debtor’s counsel who failed to disclose the fact that it represented Bain (the purchaser of eToys assets), or Mattel/Learning Co merger (where Mattel was THE largest unsecured vendor) and Goldman Sachs – the IPO agent of eToys (the Code goes Way to the max to halt insider dealings of Investment Banks)
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The Professors of the Law are the Keepers of our gate – yet they invariably bury their heads in the sand and refuse to address obvious, flagrant abuses of the Code/Rules.
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Such cowardice makes their teachings hypocriscy of the highest order!