By: Alexandra Hastings
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Finding that a public relations firm did not qualify as a bankruptcy “professional” within the meaning of section 327(a) of the Bankruptcy Code, the United States Bankruptcy Court for the Western District of Kentucky, in In re Seven Counties Services, Inc.,[i] authorized a debtor to retain the firm under section 1108 to assist with the general operation of its post-petition business. In Seven Counties Services, the debtor sought to retain a public relations firm, which had been working with the debtor prior to the bankruptcy case, to participate in “lobbying, third party advocacy and support of [the d]ebtor’s efforts in restructuring its retirement plans and media relations.”[ii] The court found that although the firm’s representatives were “professional persons” within the context of section 327(a), the firm was “not performing any tasks of the [d]ebtor enumerated in 11 U.S.C. § 1107,” nor was it “involved in formulating the [d]ebtor’s plan of reorganization or the administration of the estate.”[iii] Moreover, the firm’s work for the debtor did not “involve any part in negotiating the plan, adjusting debtor/creditor relationships, disposing or acquiring assets or performing any duty required of the [d]ebtor under the Code.”[iv] Thus, the firm did not qualify as a bankruptcy “professional” for purposes of section 327.[v]
Section 327(a) authorizes a debtor-in-possession, subject to court approval, to employ one or more “professional persons,” such as attorneys and accountants, to represent or perform services for the debtor’s estate.[vi] Further, section 327(a) provides that the debtor-in-possession may only employ professionals that are “disinterested” persons, who do not hold or represent an adverse interest to the estate.[vii] As such, section 327 explicitly governs the employment of “professional persons” by a debtor.[viii] In a chapter 11 case, however, a debtor-in-possession may employ persons, including professional firms such as law firms, who are not “professional persons” in the ordinary course of business.[ix] These firms may be hired if such persons are not providing bankruptcy-related advice to the debtor-in-possession, because a debtor-in-possession is authorized to operate pursuant to section 1107(a).[x]
As Seven Counties Services demonstrates, in a chapter 11 case, a debtor-in-possession may, as an exercise of its business judgment, employ a professional firm that is not disinterested to assist with the general operation of the debtor’s post-petition business.[xi] This ordinary course retention is permitted because a “professional person” may not always qualify as a bankruptcy “professional” within the meaning of section 327. Accordingly, a debtor-in-possession may retain, in the ordinary course of business, a professional firm, which had a pre-petition relationship with the debtor, to assist the debtor with its non-bankruptcy activities, even if the firm has a pre-petition claim against the debtor that the firm refuses to waive or is otherwise not disinterested. This ability is significant, because it allows a debtor-in-possession to maintain relationships with so-called “ordinary-course professionals” that are familiar with the debtor’s operations, which eliminates the delays and costs that would likely arise from a new firm familiarizing itself with the debtor’s business operations.
[i] 13-31442(1)(11), 2013 WL 3756486, at *3 (Bankr. W.D. Ky. July 15, 2013).
[ii] Id. at *2.
[iii] Id. at *3.
[iv] Id. at *2.
[v] Id. at *3.
[vi] 11 U.S.C. § 327(a) (2006) (stating that “the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons”).
[vii] Id. (reading that professionals may be employed “that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.”).
[viii] Id. (“Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.”).
[ix] In re Johns–Manville Corp., 60 B.R. 612 (S.D.N.Y. 1986) (holding “debtor's employment of nonattorney lobbyists was not activity outside of ordinary course of its business, so that debtor was not on that basis required to obtain prior court approval, and nonattorney lobbyists, who did not play intimate role in reorganization of debtor's estate, were not ‘professional persons’ whose employment court had to approve.”).
[x] 11 U.S.C. § 1107(a) (2006) (“Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.”). Courts will consider several factors when determining whether a person is a professional that must be retained under section 327. For example, in In re First Merchants Acceptance Corp., 1997 WL 873551 (Bankr. D.Del. 1997), the court considered the following factors: “(1) whether the employee controls, manages, administers, invests, purchases or sell assets that are significant to the debtor’s reorganization; (2) whether the employee is involved in negotiating the terms of a plan of reorganization; (3) whether the employment directly relates to the type of work carried out by the debtor or to the routine maintenance of the debtor’s business operations; (4) whether the employee is given discretion or autonomy to exercise his or her own professional judgment in some part of the administration of the debtor’s estate; (5) the extent of the employee’s services involvement in the administration of the debtor’s estate; and (6) whether the employee’s services involve some degree of special knowledge or skill, so that the employee can be considered a ‘professional’ within the ordinary meaning of the term.” The courts have held that “no one factor is to be considered in toto” and the real inquiry for deciding whether an individual whom debtor seeks to employ qualifies as a “professional,” “focuses on the type of duties performed and whether any special skills or training are necessary to carry out these duties.” In re Seven Counties Services, Inc., 2013 WL 3756486, at *2, citing In re Triplett, 2008 WL 2123743 (Bankr. E.D. Tenn. 2008).
[xi] In re Seven Counties Services, Inc., 2013 WL 3756486, at *4.
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