A liquidator conducting store-closing sales for a retailer is not a “professional” whose employment is governed by Section 327, according to Bankruptcy Judge Brendan Linehan Shannon of Delaware.

In the reorganization of Brookstone Holdings Corp., the debtor signed a contract one day before the chapter 11 filing for a liquidator to conduct going-out-of-business sales, or GOB sales, at the company’s 102 mall-based stores. The debtor intends to reorganize around its 35 airport locations and its internet business.

Immediately after filing, the debtor filed a motion to authorize the GOB sales and assume the prepetition contract with the liquidator.

In his October 1 opinion, Judge Shannon said there had been a “well-developed practice in this and other courts” to authorize the retention of liquidators to conduct GOB sales by the assumption of prepetition contracts. Recently, however, he said the U.S. Trustee had begun objecting and contending that liquidators are “professionals” who must be retained under Section 327.

Disclosure of potential conflicts of interest was not the issue, however, because the liquidator in the Brookstone case had filed an extensive list of connections with the debtor and other parties. Applying Section 327 was significant because being a “professional” might later preclude the liquidator from providing other necessary functions for the debtor, such as purchasing assets or making loans.

Subjecting liquidators to the structures of Section 327, Judge Shannon said, “would have a significant and detrimental impact . . . in most retail chapter 11 cases by severely limiting the type of work and service [liquidators] could perform.”

Section 327(a), entitled “Employment of professional persons,” requires court approval to engage “attorneys, accountants, appraisers, auctioneers, or other professional persons.”

Judge Shannon said the liquidator was not an “auctioneer” because the firm was selling inventory and fixtures in an ordinary retail setting at fixed prices, not at auction.

Next, the U.S. Trustee argued that the liquidator fell within the rubric of “other professional persons.”

Judge Shannon was not writing on a clean slate. In Delaware, he had guidance from In re First Merchants Acceptance Corp., 1997 WL 873551 (D. Del. Dec. 15, 1997), where the district court developed a six-factor test focusing on the amount of independence exercised by the service provider and the nexus between those services and the reorganization.

The first factor focuses on whether the liquidator sells assets “significant” to the reorganization. “At first blush,” Judge Shannon said the asset sales were significant. On further analysis, he noted that the debtor retains control of all aspects of the GOB sales, including pricing strategy and duration of the sales. Consequently, the liquidator neither controls nor manages the GOB process, he said.

The liquidator is not involved in the formulation of a reorganization plan and is not exercising discretion in the administration of the estate, two factors that also weigh against the application of Section 327.

However, the scales did tip toward Section 327 because the GOB sales were not routine business operations. Instead, the sales related to the debtor’s restructuring.

The sixth factor, the firm’s special or knowledge or skill, is “entirely unhelpful,” Judge Shannon said. “[L]iterally all business and service activities require ‘specialized knowledge or skill,’ . . . but so do all of the other entities providing services to the debtor, from IT support to waste management.”

All factors considered, Judge Shannon concluded that the liquidator was not in the category of “other professionals” and was thus not subject to retention under Section 327.

In similar or analogous circumstances, a court might consider whether the alleged “professional” must have obtained specialized education and licensing, like accountants, lawyers, or appraisers. However, a mortician must be specially educated and licensed, but his or her engagement by a bankrupt funeral home would not seem to invoke Section 327.