Further Precedent Supporting the Retention of CROs

The Debtor presumably filed the Retention Application under sections 105(a) and 363(b) of the Bankruptcy Code because, as a former of employee of the Debtor, Mr. Moravec was not disinterested and would not be eligible for retention under section 327(a) of the Bankruptcy Code. The Debtor proposed to pay Mr. Moravec $225 per hour for his services, to be rendered as needed. Mr. Moravec submitted a declaration in support of the Retention Application, stating his “compensation is not subject to court oversight,” but that he would maintain time records and file “fee statements” which would be subject to objection by the United States Trustee.

The Retention Application

On Feb. 11, 2014, the bankruptcy court held a hearing to consider the Retention Application. An attorney for the Office of the United States Trustee appeared at the hearing and stated that although he supported the retention of Mr. Moravec, he questioned whether section 363(b) of the Bankruptcy Code provided authority for his employment. Nevertheless, at the hearing Judge Gorman stated that she would approve the Retention Application if: 1) Mr. Moravec would submit an amended declaration stating that he was required to apply to the bankruptcy court for compensation; and 2) He would file a final fee application subject to bankruptcy court approval when his work was completed.

On Feb. 14, 2014, the Debtor filed a brief in support of the Retention Application, arguing that Mr. Moravec's retention should be approved and he should not be required to submit his fees to the bankruptcy court for approval. The Debtor contended that Rule 2016 of the Federal Rules of Bankruptcy Procedure and the official comments thereto limit application of the rule, which requires a Debtor to file fee applications, to a debtor's professionals who are paid pursuant to section 330 of the Bankruptcy Code. In support, the Debtor cited unpublished orders from other bankruptcy courts authorizing the retention of CROs under sections 105(a) and 363(b) of the Bankruptcy Code ' which did not require the CRO retained by the debtors in those cases to file a full fee application pursuant to section 330 of the Bankruptcy Code.

The Ruling

On March 11, 2014, Judge Gorman denied the Retention Application without prejudice because the Debtor and Mr. Moravec refused to submit Mr. Moravec's fees to the bankruptcy court for approval. However, Judge Gorman stated that the court would grant an amended application under sections 105(a) and 363(b) if the Debtor and Mr. Moravec agreed to submit Mr. Moravec's fees to the bankruptcy court for approval.

In her opinion, Judge Gorman reviewed the recent trend of opinions and orders, primarily from the United States Bankruptcy Court for the Southern District of New York and the United States Bankruptcy Court for the District of Delaware, in which CROs were retained pursuant to sections 105(a) and 363(b) of the Bankruptcy Code using the “Jay Alix Protocols.” These protocols were developed as part of a settlement between the Office of the United States Trustee and Jay Alix & Associates, a firm that sought to have one of its principals serve as a CRO in two bankruptcy cases pursuant to section 363(b) of the Bankruptcy Code. In re Harnishfeger Indus., Inc., Chapter 11 case no. 99-2171, United States Bankruptcy Court for the District of Delaware; In re Safety-Kleen Corp., Chapter 11 case no. 00-02303, United States Bankruptcy Court for the District of Delaware.

Despite the fact that they are not binding law, or even reported in a published decision, these protocols have become part of the standard for CRO retention pursuant to section 363(b) in many jurisdictions, including the Southern District of New York and Delaware. The key elements of the “Jay Alix Protocols” are as follows: 1) professionals can only serve in one capacity (i.e., as a CRO, financial adviser or claims agent); 2) the professional may not be a member of a board of the debtor or have served on the board in two years; 3) the professional's relationships with interested parties are disclosed; 4) compensation is subjected to a review for reasonableness, often by the filing of quarterly fee statements which are much less onerous to prepare than fee applications submitted pursuant to section 330(a) of the Bankruptcy Code; and 5) all success fees are approved at the end of the case. Id.

Judge Gorman also relied on a recent article published in the American Bankruptcy Institute Journal, “Emerging Tends and Lingering Criticisms: A CRO Retention Update,” co-authored by myself and Timothy W. Brink (available at http://bit.ly/1q2akaq). In that article, we summarized the increasing prevalence of CROs being retained under sections 105(a) and 363(b) of the Bankruptcy Code, and noted that while CROs retained under these sections were not required to file fee applications, their fees should still be reviewed under a reasonableness standard.

Judge Gorman concluded that although the constraints of sections 330 and 331 of the Bankruptcy Code do not apply to CROs retained under sections 105(a) and 363(b) of the Bankruptcy Code, those professionals must still submit their fees to the court. However, the method for doing so “may be made in different forms, at different times, and with different procedures for review ' When employment is sought on a flat or fixed gee basis or under terms which require only an objective calculation, fees may be approved at the same time as employment is approved. Interim methods for allowing payments may be structured to meet the circumstances of a particular employee or business. The amount of detail required, even in a final application, may be tailored to what is reasonable under the specific circumstances.”

Conclusion

Judge Gorman's decision in Copenhaver is good news for debtors attempting to retain CROs under sections 105(a) and 363(b) of the Bankruptcy Code because it provides further precedent that retention under these sections is appropriate. The decision is particularly valuable because it comes from a court outside of New York and Delaware, where the retention of CROs under these sections is common.

Further, Judge Gorman's insistence that Mr. Moravec submit his fees to the bankruptcy court for approval is consistent with prior orders of other courts, which permitted debtors to retain CROs pursuant to sections 105(a) and 363(b) so long as the CROs filed staffing reports or otherwise submitted their fees to the court for review. The decision is also a reminder against overreaching. Judge Gorman's opinion suggests that she would have quickly granted the fee application, and possibly endorsed a more flexible approach regarding the CRO's fees, had the Debtor not initially refused to submit the CRO's fees to the court at all.

On March 13, 2014, the Debtor filed an amended application to retain Mr. Moravec as CRO pursuant to sections 105(a) and 363(b) of the Bankruptcy Code, in which it provided that Mr. Moravec would file a final fee application pursuant to the applicable provisions of the Bankruptcy Code, Bankruptcy Rules and the guidelines established by the office of the United States Trustee. On March 25, 2014, Judge Gorman entered an order granting the amended application.

James R. Irving is of counsel in the Louisville, KY, office of Bingham Greenebaum Doll LLP. Mr. Irving concentrates his practice in restructuring, bankruptcy and commercial litigation. He can be reached at [email protected].

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A recent decision by Judge Mary P. Gorman of the United States Bankruptcy Court for the Central District of Illinois in In re Copenhaver, Inc., Chapter 11 case no. 13-72052, is part of a growing trend of opinions and orders around the country allowing a debtor to retain a chief restructuring officer (CRO) under sections 105(a) and 363(b) of the Bankruptcy Code, rather than section 327(a) of the Bankruptcy Code. The Copenhaver decision clarifies that although a CRO retained pursuant to sections 105(a) and 363(b) of the Bankruptcy Code may not be required to file fee applications pursuant to sections 330 and 331 of the Bankruptcy Code, a CRO must still submit its fees to the bankruptcy court for approval.

Background

In the Copenhaver case, the Debtor filed its voluntary bankruptcy petition on Oct. 28, 2013. On Dec. 17, 2013, the bankruptcy court entered an order authorizing the sale of the Debtor's “core assets.” On Jan. 27, 2014, the Debtor filed an application to retain (the Retention Application) Dave Moravec as its CRO and consultant under sections 105(a) and 363(b) of the Bankruptcy Code. Mr. Moravec, a former employee of the Debtor, was instrumental to the Debtor's asset sale, and left the Debtor to work full-time for the company that purchased the Debtor's assets. In the Retention Application, the Debtor contended that Mr. Moravec was the only person with sufficient knowledge of the Debtor's business who could be of meaningful assistance with the liquidation of the Debtor's remaining assets.

The Debtor presumably filed the Retention Application under sections 105(a) and 363(b) of the Bankruptcy Code because, as a former of employee of the Debtor, Mr. Moravec was not disinterested and would not be eligible for retention under section 327(a) of the Bankruptcy Code. The Debtor proposed to pay Mr. Moravec $225 per hour for his services, to be rendered as needed. Mr. Moravec submitted a declaration in support of the Retention Application, stating his “compensation is not subject to court oversight,” but that he would maintain time records and file “fee statements” which would be subject to objection by the United States Trustee.

The Retention Application

On Feb. 11, 2014, the bankruptcy court held a hearing to consider the Retention Application. An attorney for the Office of the United States Trustee appeared at the hearing and stated that although he supported the retention of Mr. Moravec, he questioned whether section 363(b) of the Bankruptcy Code provided authority for his employment. Nevertheless, at the hearing Judge Gorman stated that she would approve the Retention Application if: 1) Mr. Moravec would submit an amended declaration stating that he was required to apply to the bankruptcy court for compensation; and 2) He would file a final fee application subject to bankruptcy court approval when his work was completed.

On Feb. 14, 2014, the Debtor filed a brief in support of the Retention Application, arguing that Mr. Moravec's retention should be approved and he should not be required to submit his fees to the bankruptcy court for approval. The Debtor contended that Rule 2016 of the Federal Rules of Bankruptcy Procedure and the official comments thereto limit application of the rule, which requires a Debtor to file fee applications, to a debtor's professionals who are paid pursuant to section 330 of the Bankruptcy Code. In support, the Debtor cited unpublished orders from other bankruptcy courts authorizing the retention of CROs under sections 105(a) and 363(b) of the Bankruptcy Code ' which did not require the CRO retained by the debtors in those cases to file a full fee application pursuant to section 330 of the Bankruptcy Code.

The Ruling

On March 11, 2014, Judge Gorman denied the Retention Application without prejudice because the Debtor and Mr. Moravec refused to submit Mr. Moravec's fees to the bankruptcy court for approval. However, Judge Gorman stated that the court would grant an amended application under sections 105(a) and 363(b) if the Debtor and Mr. Moravec agreed to submit Mr. Moravec's fees to the bankruptcy court for approval.

In her opinion, Judge Gorman reviewed the recent trend of opinions and orders, primarily from the United States Bankruptcy Court for the Southern District of New York and the United States Bankruptcy Court for the District of Delaware, in which CROs were retained pursuant to sections 105(a) and 363(b) of the Bankruptcy Code using the “Jay Alix Protocols.” These protocols were developed as part of a settlement between the Office of the United States Trustee and Jay Alix & Associates, a firm that sought to have one of its principals serve as a CRO in two bankruptcy cases pursuant to section 363(b) of the Bankruptcy Code. In re Harnishfeger Indus., Inc., Chapter 11 case no. 99-2171, United States Bankruptcy Court for the District of Delaware; In re Safety-Kleen Corp., Chapter 11 case no. 00-02303, United States Bankruptcy Court for the District of Delaware.

Despite the fact that they are not binding law, or even reported in a published decision, these protocols have become part of the standard for CRO retention pursuant to section 363(b) in many jurisdictions, including the Southern District of New York and Delaware. The key elements of the “Jay Alix Protocols” are as follows: 1) professionals can only serve in one capacity (i.e., as a CRO, financial adviser or claims agent); 2) the professional may not be a member of a board of the debtor or have served on the board in two years; 3) the professional's relationships with interested parties are disclosed; 4) compensation is subjected to a review for reasonableness, often by the filing of quarterly fee statements which are much less onerous to prepare than fee applications submitted pursuant to section 330(a) of the Bankruptcy Code; and 5) all success fees are approved at the end of the case. Id.

Judge Gorman also relied on a recent article published in the American Bankruptcy Institute Journal, “Emerging Tends and Lingering Criticisms: A CRO Retention Update,” co-authored by myself and Timothy W. Brink (available at http://bit.ly/1q2akaq). In that article, we summarized the increasing prevalence of CROs being retained under sections 105(a) and 363(b) of the Bankruptcy Code, and noted that while CROs retained under these sections were not required to file fee applications, their fees should still be reviewed under a reasonableness standard.

Judge Gorman concluded that although the constraints of sections 330 and 331 of the Bankruptcy Code do not apply to CROs retained under sections 105(a) and 363(b) of the Bankruptcy Code, those professionals must still submit their fees to the court. However, the method for doing so “may be made in different forms, at different times, and with different procedures for review ' When employment is sought on a flat or fixed gee basis or under terms which require only an objective calculation, fees may be approved at the same time as employment is approved. Interim methods for allowing payments may be structured to meet the circumstances of a particular employee or business. The amount of detail required, even in a final application, may be tailored to what is reasonable under the specific circumstances.”

Conclusion

Judge Gorman's decision in Copenhaver is good news for debtors attempting to retain CROs under sections 105(a) and 363(b) of the Bankruptcy Code because it provides further precedent that retention under these sections is appropriate. The decision is particularly valuable because it comes from a court outside of New York and Delaware, where the retention of CROs under these sections is common.

Further, Judge Gorman's insistence that Mr. Moravec submit his fees to the bankruptcy court for approval is consistent with prior orders of other courts, which permitted debtors to retain CROs pursuant to sections 105(a) and 363(b) so long as the CROs filed staffing reports or otherwise submitted their fees to the court for review. The decision is also a reminder against overreaching. Judge Gorman's opinion suggests that she would have quickly granted the fee application, and possibly endorsed a more flexible approach regarding the CRO's fees, had the Debtor not initially refused to submit the CRO's fees to the court at all.

On March 13, 2014, the Debtor filed an amended application to retain Mr. Moravec as CRO pursuant to sections 105(a) and 363(b) of the Bankruptcy Code, in which it provided that Mr. Moravec would file a final fee application pursuant to the applicable provisions of the Bankruptcy Code, Bankruptcy Rules and the guidelines established by the office of the United States Trustee. On March 25, 2014, Judge Gorman entered an order granting the amended application.

James R. Irving is of counsel in the Louisville, KY, office of Bingham Greenebaum Doll LLP. Mr. Irving concentrates his practice in restructuring, bankruptcy and commercial litigation. He can be reached at [email protected].

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