American Bankruptcy Institute
52 IV. Proposed Recommendations: Commencing the Case
Professionals and Compensation Issues: Recommendations and Findings
Nonbankruptcy Professionals
Many professionals employed by a debtor in possession during the course of a chapter 11 case do not consult or work on bankruptcy-related issues. Rather, these professionals perform services that the debtor would have required outside the bankruptcy context and even if the chapter 11 case had not been filed. For example, the debtor may employ lawyers, forensic accountants, tax accountants, and other service providers to help with ordinary course business matters such as patent applications, regulatory compliance, or litigation relating to employee claims or disputes that are not material to the chapter 11 case. The Commission referred to these types of professionals as “nonbankruptcy professionals.”
The Commissioners debated the utility of subjecting nonbankruptcy professionals to the retention standards in section 327(a) and the disclosure and reasonableness standards for professionals’ fees and expenses in section 330 of the Bankruptcy Code. The Commissioners discussed the purpose underlying the retention standards of section 327(a). In the case of professionals working on bankruptcy matters that directly impact the estate, the relationships between the professionals and the debtor, creditors, and other stakeholders in the case are material and speak to potential conflicts that could bias the advice and actions of the professionals. Conversely, nonbankruptcy professionals generally do not work on matters that affect the rights of creditors and other stakeholders in the debtor’s estate and do not address the claims of these parties or the allocation of the estate’s assets. The debtor also would have likely retained these nonbankruptcy professionals even if it had not filed the chapter 11 case; the retention would have been governed by state law, including state ethical codes for lawyers that address conflicts of interest and fee arrangements. Consequently, the Commission agreed that nonbankruptcy state laws governing many professions are sufficient to protect the interests of the estate with respect to nonbankruptcy professionals.
The Commissioners, however, recognized that the work of nonbankruptcy professionals can impact the value of an asset of the estate or the debtor. The advice of nonbankruptcy professionals concerning a certain product or their assessment or management of a particular piece of litigation could underlie a substantial gain or loss by the debtor. The Commissioners discussed examples of nonbankruptcy litigation that could have a material effect on the chapter 11 case. They weighed the costs and benefits of setting a materiality threshold or compensation cap, and whether either such limitation would capture the significant matters with which they were concerned. On balance, the Commission agreed that requiring disclosure of the name of each nonbankruptcy professional and the nature of the services provided by such professional would provide the court, the U.S. Trustee, and parties in interest with sufficient information (and perhaps more meaningful information than that provided by a compensation cap) to determine if the professional should be reclassified as a chapter 11 professional subject to the requirements of sections 327, 328, and 330, even though the professional is not rendering bankruptcy-related services. In addition, the Commission determined that, with respect to professional firms, this classification should be made based on the firm as a whole, not based on the individual professionals in such firm (i.e., if a law firm or financial firm
a credit bid by a secured creditor is not moneys for purposes of section 326(a). See, e.g., In re Lan Assocs. XI, L.P., 192 F.3d 109, 116 (3d Cir. 1999); U.S. Trustee v. Tamm (In re Hokulani Square, Inc.), 460 B.R. 763, 777–78 (B.A.P. 9th Cir. 2011).