Contributed by Jessica Diab
Today, debtors rely on a myriad of professionals to navigate them through and out of a bankruptcy filing. Behind many successful chapter 11 cases is a team consisting of not only restructuring attorneys and financial advisors, but also business consultants, PR firms, and litigation and corporate counsel, just to name a few. Unfortunately, as we previously discussed here, determining the process by which a debtor can hire such professionals postpetition is no easy task. “Professionals,” as the term is used in section 327(a) of the Bankruptcy Code, must be formally retained by the debtor, subjecting the bankruptcy professional to various requirements under the Bankruptcy Code, including stringent disclosure requirements and requiring that the debtor obtain court approval before providing the bankruptcy professional with any postpetition payment for its services. An added obstacle to retention under section 327(a) is the requirement that the bankruptcy professional be “disinterested,” a term that is defined in section 101(14) of the Bankruptcy Code. A bankruptcy professional is not disinterested if it has a claim against the debtor’s estate and, therefore, a debtor cannot hire a prepetition professional as a bankruptcy professional unless it kept current on its fees prepetition. A professional that falls outside the ambit of section 327(a) may be able to be retained pursuant to section 1108 of the Bankruptcy Code which, as we have previously discussed, affords the debtor broad powers to continue to run its business postpetition. It will come as no surprise then that the million-dollar question is who constitutes a “professional” for the purposes of the Bankruptcy Code? The Bankruptcy Code does not define the term “professional.” Instead, section 327(a) provides several examples of “professionals” including attorneys, accountants, and appraisers, and then provides a catch-all phrase subjecting all “other professionals” to section 327(a). The definition is then left to the courts, which often apply a fact-driven analysis, to determine which professionals fall within this catch-all phrase. Recently, a decision of the United States Bankruptcy Court for the Western District of Kentucky Louisville Division considered whether a PR firm was considered a professional for the purposes of section 327(a).
The debtor, Seven Counties Services, Inc., was a not-for-profit corporation which, prepetition, had hired Peritus Public Relations, LLC to provide it with “public relations and public affairs support in Kentucky on all issues relating to the ongoing effort to affect changes in [the Debtor’s] involvement in the Kentucky Retirement System.” The work included lobbying, third-party advocacy and supporting the debtor’s efforts in restructuring its retirement plans and media relations. In addition, leading up to the bankruptcy, Peritus issued payment to third-party vendors on behalf of the debtor.
After filing for chapter 11 protection, the debtor filed a motion for nunc pro tunc authority (i.e., requesting that the court grant the motion and permit the holding to apply retroactively) to (1) employ and compensate Peritus pursuant to section 1108 of the Bankruptcy Code and (2) issue payment to Peritus for the reimbursable expenses it incurred prepetition on the debtor’s behalf. Objections were filed by two pension funds which argued that Peritus’s employment by the debtor should be governed by section 327(a) and should be disallowed because Peritus was a creditor of the debtor and therefore, not a “disinterested person” as is required for retention under section 327(a). In response, the debtor contended that because Peritus would not be assisting the debtor with any of the enumerated duties of a debtor-in-possession as set forth in section 1107 of the Bankruptcy Code, it need not formally retain Peritus under section 327(a).
Acknowledging that courts have addressed, in a variety of ways, the issue of whether a professional falls within the scope of section 327(a), the court chose to apply the test set forth by the District of Delaware in In re First Merchants Acceptance Corp. The test, the court noted, combined both qualitative and quantitative factors including: (1) whether the employee controls, manages, administers, invests, purchases or sells 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’ 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 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. Notably, the court stated that no single factor was dispositive and that the “real inquiry focuses on the type of duties performed and whether any special skills or training are necessary to carry out these duties.”
After outlining the test, the court went on to conclude that Peritus was not a professional within the meaning of section 327(a). Although Peritus’s services involved a degree of special knowledge and skills, it was not performing any of the tasks enumerated in section 1107, nor was it involved in formulating the debtor’s plan of reorganization or administering the estate and thus, none of the factors, with the exception of the last factor, weighed in favor of classifying Peritus as a “professional” under section 327(a). Having concluded that Peritus was not a professional within the meaning of section 327(a), the court found that it need not consider the issue of “disinterestedness.” The court went on to conclude that the debtor could employ Peritus in conformity with the debtor’s broad powers under section 1108 to operate its business according to its business judgment.
The takeaway: outside of the types of professionals listed in section 327 of the Bankruptcy Code, there is no bright line test that can determine whether a professional is a “professional” under section 327. Thus, at present, the determination depends almost exclusively on the nature of the tasks and whether the professional’s work involves negotiating the plan, adjusting debtor/creditor relationships, disposing or acquiring assets, or performing any other duty required by the debtor under the Bankruptcy Code.
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