Adopting a “liberal construction” of Section 1107(b), Chief Bankruptcy Judge Dale L. Somers of Topeka, Kan., allowed a chapter 11 debtor’s former vice president and treasurer to be retained as the debtor in possession’s chief restructuring officer, or CRO.

The individual tapped to be the CRO had served as the debtor’s treasurer and vice president for more than three years before the filing. One month before the filing, the individual had resigned as vice president and treasurer.

The official creditors’ committee supported retaining the proposed CRO. The U.S. Trustee lodged the only objection, contending that the CRO was disqualified under Section 327(a) because he was not disinterested. The subsection allows a trustee or a chapter 11 debtor in possession to retain a “professional person” who does “not hold or represent an interest adverse to the estate, and that [is a] disinterested person[].”

In turn, a “disinterested person” is defined in Section 101(14) as someone who “(A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse . . . .”

The proposed CRO was a “professional person,” meaning that the CRO must pass muster under Section 327(a), Judge Somers ruled.

Judge Somers decided that the proposed CRO was not disinterested because he had been an officer within two years of bankruptcy, but the rules are different in chapter 11. “Notwithstanding section 327(a),” Section 1107(b) says that “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.”

The U.S. Trustee took the position that the CRO was disqualified even under Section 1107(b) because the CRO had been a corporate officer within two years of bankruptcy. In response, the debtor argued that Section 1107(b) immunized the CRO because he had been employed by the debtor.

For Judge Somers, the question was this: Does employment by the debtor make a former officer eligible for retention?

The U.S. Trustee wanted Judge Somers to adopt a “narrow construction” of Section 1107(b), “under which an applicant’s prior employment is the only disqualifying factor.” In other words, the U.S. Trustee took the position that the proposed CRO should be disqualified for having been an officer because Section 1107(b) only allows retention of someone who was employed but had not been an officer.

The U.S. Trustee wanted Judge Somers to adopt the “narrow construction” of Section 1107(b) described in an opinion by Delaware Bankruptcy Judge Mary F. Walrath. In In re Essential Therapeutics, Inc., 295 B.R. 203, 207-08 (Bankr. D. Del. 2003), Judge Walrath disqualified a former officer. She “conclude[d] that section 1107(b) must be narrowly construed and is not meant to eliminate all the specific tests for disqualification enumerated in section 101(14) except the mere fact of prior employment or retention.”

Judge Somers was persuaded to examine the “totality of the circumstances” and follow decisions with a more liberal construction of Section 1107(b), such as an opinion by Bankruptcy Judge D. Michael Lynn of Fort Worth, Texas, in In re Talsma, 436 B.R. 908 (Bankr. N.D. Tex. 2010).

Judge Somers said that the proposed CRO’s service as an officer made him “knowledgeable” about the debtor’s business, finances, operation, and books and records. Without him, he said that the “efficiency of Debtor’s Chapter 11 case would be seriously impaired.”

Rejecting a narrow construction of Section 1107(b), Judge Somers approved retention of the CRO, despite his having been an officer within two years of filing.