Bankruptcy Court Promotes Equity and Transparency Through Dismissal of the J. Alix Protocol

By: Lauren Jusas

St. John’s University School of Law

American Bankruptcy Law Review Staff


Section 327(a) of title 11 of the United States Code (the “Bankruptcy Code”) provides that a debtor may employ professionals, including financial advisors.[1] An application under section 327 requires that those employed professionals be “disinterested persons” who “do not hold or represent an interest adverse to the estate.”[2] Under certain circumstances, courts have approved retention of professionals under the J. Alix Protocol, pursuant to which a debtor may employ a professional under section 363(b) of the Bankruptcy Code, without demonstrating that the professional is disinterested.[3] In In re McDermott International, Inc., the United States Bankruptcy Court for the Southern District of Texas approved applications under 11 U.S.C. § 327(a) for the employment of financial services rendered prior to the filing, finding that this allowed for greater equity and transparency when compared to the use of the J. Alix Protocol.[4]

On October 22, 2019, McDermott International, Inc. (“McDermott”) entered into an agreement with AP Services, LLC (“AP Services”) to assist McDermott’s financial restructuring.[5]  Under the agreement, AP Services would fill McDermott’s chief transformation officer role with John Castello and provide other temporary personnel for hourly fees, plus a five-million-dollar success fee.[6] AlixPartners, LLP (“AlixPartners”), an affiliate of AP Services, actually acted as the “vendor” in providing the temporary personnel.[7] Thereafter, McDermott filed for bankruptcy under chapter 11 of the Bankruptcy Code and filed an application to employ AP Services pursuant to the October agreement under 11 U.S.C. §§ 105 and 363.[8] After the bankruptcy court expressed concerns regarding the application, McDermott filed an application to employ AlixPartners and AP Services under 11 U.S.C. § 327(a).[9] The bankruptcy court approved this second filing, noting McDermott’s recent success was attributable to the services already performed by Castellano and the other professionals provided by AP Services.[10] Neither party filed a formal objection to either of McDermott’s applications, but on April 8, 2020, the U.S. Trustee filed a statement, arguing for the implementation of the J. Alix Protocol, a national settlement protocol developed by the U.S. Trustee Program to resolve objections regarding applications to employ officers and their firms when they were brought on prior to the debtor’s bankruptcy filing.[11] Under this protocol, Castello’s alleged lack of disinterestedness would be per se imputed to AP Services and AlixPartners, making them ineligible to be employed under 11 U.S.C. § 327(a).[12] Thus, McDermott’s applications could only be granted under 11 U.S.C. § 363(b) because this section contains no such disinterestedness restriction.[13]

A “disinterested” person is one “that (i) is not a creditor, an equity security holder, or an insider; (ii) is not and was not, within two years prior to the petition date, a director, officer or employee of the debtor; and (iii) does not hold a material adverse interest to the bankruptcy estate.”[14] However, a person is not disqualified for employment under 11 U.S.C. § 327(a) solely because prior to filing, the person was employed by the debtor.[15] Castellano qualified as a disinterested person because he was never employed by McDermott.[16] The court further acknowledged that even if Castellano was considered not disinterested, this status would not be automatically imputed to AP Services and AlixPartners.[17] As there was no evidence presented to suggest that AP Services or AlixPartners were not disinterested persons, the court found them to be disinterested persons.[18] Thus, the court approved McDermott’s applications for employment under 11 U.S.C. § 327(a).[19]

This bankruptcy court concluded that in the interest of equity and transparency, the J. Alix Protocol should not be employed.[20] In a majority of cases where the J. Alix Protocol is used, “applicants selectively comply with the protocol’s requirements,” and the “protocol’s suggestion that separate entities be utilized as artificial barriers creates confusion.”[21] This is due to the protocol’s use of 11 U.S.C. § 363(b) to authorize employment despite a lack of any statutory language addressing “the conditions under which a professional person may be employed.”[22] In contrast, the court found that McDermott’s amended application under 11 U.S.C. § 327(a) provided “a much-appreciated level of transparency to the process” that stemmed from the “unbundling of the triangular relationship between the parties.”[23]

[1] See In re McDermott Int’l, Corp., 614 B.R. 244, 255 (Bank. S.D. Tex. May 20, 2020).

[2] 11 U.S.C. § 327(a) (2018).

[3] See 11 U.S.C. § 363(b)(1) (2018) (“The trustee after notice and a hearing, may use, sell, or lease, other than in the ordinary course of the business, property of the estate.”). This statute does not specifically address the employment of professional persons, but generally “provides authorization for the use of estate property outside the ordinary course of business.” In re McDermott, 614 B.R. at 249.

[4] See In re McDermott, 614 B.R. at 255; see also id. at 249.

[5] See id. at 247.

[6] See id.

[7] See id.

[8] See id.

[9] See id.

[10] See In re McDermott, 614 B.R. at 248.

[11] See id. at 248–9.

[12] See id. at 250.

[13] See id.

[14] 11 U.S.C. § 101(14) (2018).

[15] See 11 U.S.C. § 1107(b) (2018) (“Notwithstanding section 327(a) of this title, a person is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person’s employment by or representation of the debtor before the commencement of the case.”).

[16] See In re McDermott, 614 B.R. at 254.

[17] See id.

[18] See id. at 255.

[19] See id.

[20] See id. at 255.

[21] Id. at 252-3.

[22] In re McDermott, 614 B.R. at 249.

[23] Id. at 253.