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Debtor v. UST: The Battleground Over Retention of a Chief Restructuring Officer
Nearly two decades ago, a dispute between J. Alix & Associates and the Executive Office of the United States Trustee (EOUST) over J. Alix's proposed role in two turn-of-the-century restructuring cases (Harnischfeger Industries, Inc. and Safety-Kleen Corp.) led to détente, and a procedure that has generally governed the employment of chief restructuring officers (CRO) in bankruptcy cases since that time.
The "J. Alix Protocol," as it is known, does not have the force of law; rather, it is a set of guidelines by which the UST will not object to retention of a CRO under 11 U.S.C. §363(b), which allows the debtor to enter into transactions "outside the ordinary course of business" with court approval. The compromise struck in the Protocol is the incorporation of certain of the Bankruptcy Code's conflicts of interest, disclosure, and compensation guidelines applicable to case professionals (e.g., attorneys and financial advisors). See, 11 U.S.C. §Section 327(a).
Under the J. Alix Protocol:
- The CRO cannot have served on the debtor's board within two years of the bankruptcy case or invested in the debtor during that same period.
- The CRO and firm can serve in only one capacity (e.g., cannot serve as both CRO and financial advisor, also known as the "one hat rule").
- The CRO must disclose its connections with case parties and professionals.
- The CRO must report to an independent board of directors.
- The CRO must file monthly compensation reports subject to court review.
The EOUST takes the position that certain elements, such as the restriction on board service and the existence of an independent board, fix bright-line rules. Courts, however, often take a more practical or nuanced view.
The UST's Bright Line Approach, Increasingly Battle-Scarred
Recently, the local UST earned the ire of the judge overseeing the Nine West bankruptcy case in the Southern District of New York (the Hon. Shelley C. Chapman). In Nine West, lead debtor Nine West Holdings, Inc. sought to retain Alvarez & Marsal NA, LLC (A&M) to provide it with an interim CEO and certain other personnel. The proposed interim CEO had served in a similar capacity for four years prepetition, and had also served on the board of one or more of the subsidiary debtors for a period of time, in what was described as a "ministerial capacity." The proposed CEO never served on the parent holding company's board. The UST lodged the sole objection, arguing that the proposed officer's prepetition role as a director for any subsidiary debtor, no matter how minimal, disqualified A&M from retention under 11 U.S.C. §363(b).
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