ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 49
Professionals and Compensation Issues: Background
Nonbankruptcy Professionals
A debtor in possession182 generally must seek court approval to retain professionals to assist it with the chapter 11 case. Specifically, section 327(a) of the Bankruptcy Code provides: “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.”183 The fees and expenses of professionals retained under section 327 are subject to court approval under section 330 of the Bankruptcy Code.184
The Bankruptcy Code does not define “professional persons” or specifically address the debtor in possession’s ability to hire and pay professionals to assist with nonbankruptcy matters that arise in the operation of the debtor’s business. The one exception to this statement involves lawyers retained for a special purpose. Section 327(e) provides: “The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interests of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.”185 In general, courts tend to define “professional” in one of two ways, focusing on whether the entity either (i) plays a central role in the administration of the estate, or (ii) is allowed to exercise judgment and autonomy in matters concerning the administration of the estate.186 Accordingly, debtors in possession frequently seek clarification from the court concerning the scope of “professionals” retained by the debtor in possession and its ability to pay these professionals in the ordinary course of business.187
The disinterestedness standard generally requires that the professional not be a creditor or, within the two years before the petition date, a director, officer, or employee of the debtor. It also mandates that the professional not hold “an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor.”188 Some courts interpret disinterestedness strictly, disqualifying any professional holding actual or potential conflicts of interest with the debtor.189 Other courts take
182 As previously noted, references to the trustee are intended to include the debtor in possession as applicable under section 1107 of the Bankruptcy Code, and implications for debtors in possession also apply to any chapter 11 trustee appointed in the case. See supra note 76 and accompanying text. See generally Section IV.A.1, The Debtor in Possession Model. 183 11 U.S.C. § 327(a). 184 Id. § 330. In addition, the U.S. Trustee has formulated guidelines for reviewing professionals’ fees and expenses in the chapter 11 context. See Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses, 28 C.F.R. Part 58, Appendices A & B. 185 11 U.S.C. § 327(e). 186 See, e.g., In re Am. Tissue, Inc., 331 B.R. 169, 173 (Bankr. D. Del. 2005) (using six-factor test to evaluate role of entity in case, including those above); In re Fretheim, 102 B.R. 298, 299 (D. Conn. 1989) (focusing on autonomy and judgment factors); In re Seatrain Lines, Inc., 13 B.R. 980, 981 (Bankr. S.D.N.Y. 1981) (focusing on role of entity in administration of estate). But see In re Metro. Hosp., 119 B.R. 910, 916 (Bankr. E.D. Pa. 1990) (defining professional as “someone with special knowledge and skill usually achieved through study and educational attainments whether licensed or not”). See also In re New Orleans Auction Galleries, Inc., 2013 WL 1196680 (Bankr. E.D. La. Mar. 25, 2013). 187 A debtor in possession also may seek authority to pay service providers who are not characterized as professionals and who are retained outside the ordinary course of business under section 363(b) of the Bankruptcy Code. 11 U.S.C. § 327(a). 188 Id. § 101(14)(E). 189 See, e.g., Dye v. Brown (In re AFI Holding, Inc.), 530 F.3d 832, 838 (9th Cir. 2008) (“[B]ankruptcy court did not abuse its discretion in concluding removal was proper due to the Trustee’s past affiliations with insiders that created a potential for a materially adverse effect on the estate and an appearance of impropriety resulting in ongoing disharmony in the estate’s administration.”); In re Marvel Entm’t Grp., Inc.,140 F.3d 463, 476 (3d Cir. 1998) (“(1) Section 327(a), as well as § 327(c),