On March 28, 2014, the U.S. Bankruptcy Court for the Northern District of California denied the debtor’s motion in In re BR Festivals LLC[1] to employ a chief restructuring officer (CRO) as part of the chapter 11 liquidation of the debtor’s estate. The court provided an additional wrinkle in attempting to retain a CRO.
In BR Festivals, the debtor was a California limited liability company (LLC) that sought to run an annual five-day concert festival in Napa, Calif., known as “Bottlerock.”[2] The debtor produced the event in May 2013 but suffered approximately $8 million in losses due to various factors, including the rush to have the event in May.[3] In the following summer and the fall of 2013, the debtor sought a buyer of its assets in order to salvage the festival’s future and pay its 2013 creditors.[4] A group of local investors eventually purchased the debtor’s assets at a discount.[5] In the interim, a financially savvy member of the debtor left in an attempt to start a competing festival.[6] After the debtor filed its bankruptcy petition on Feb. 5, 2014, the debtor’s remaining member — who lacked financial and legal expertise — authorized the filing of a motion to employ a CRO.[7]
The Office of the U.S. Trustee objected to the motion, arguing, among other things, that employing the CRO was not consistent with the Bankruptcy Code and not necessary in the debtor’s chapter 11 liquidation.[8] The U.S. Trustee argued that the only purpose of the CRO in this case was to “supplant” the management of the debtor. In this situation, the Code only authorizes the appointment of a chapter 11 trustee under 11 U.S.C. § 1104, which the debtor did not seek. The U.S. Trustee concluded that the court’s approval of any estate fiduciary outside of a § 1104 trustee would be an improper expansion of the court’s equitable power under 11 U.S.C. § 105.
The debtor argued that § 105 of the Bankruptcy Code is inapplicable since the CRO would be employed under § 327(a).[9] Further, the debtor cited a number of decisions authorizing the employment CROs and other similar professionals. The debtor equated the U.S. Trustee’s objection to In re Blue Stone Real Estate, Construction & Development Corp.,[10] wherein the court chided the U.S. Trustee for objecting to the debtor’s retention of a CRO, stating that the U.S. Trustee seemed more interested in protecting its “turf” instead of doing what was best for the debtor.[11]
The court agreed with the U.S. Trustee’s view that the CRO’s retention was actually a “disguised trustee.” The court characterized the debtor’s proposal to have the CRO “oversee and manage the Debtor’s compliance with its obligations as a [d]ebtor-in-possession, oversee and manage the litigation of avoidance actions undertaken by the Debtor, assist in the preparation and promulgation of a Chapter 11 Plan, and act as a disbursing agent for funds of the Chapter 11 Estate” as a chapter 11 trustee’s role. Further, the court had “some reservations about following the decision of those courts [that] have approved the employment of CROs.” The court viewed the appointment of a CRO here as a “trustee equivalent” that sought an “end run” around the U.S. Trustee’s statutory role in appointing a chapter 11 trustee. Ultimately, the court concluded that since “the ‘CRO’ as proposed in this case is too much like a Chapter 11 trustee, the court will not grant the debtor’s motion.”
The court based its rejection of the CRO acting as a “trustee equivalent” on the In re Adelphia Communications Corp.[12] decision from the U.S. Bankruptcy Court for the Southern District of New York. In Adelphia, a group of noteholders sought the appointment of a chapter 11 trustee or a nonstatutory fiduciary to take over management of the debtor entities subject to the noteholder group’s notes. The court rejected both of the noteholders’ requested relief.[13] The Adelphia court found it difficult to appoint a nonstatutory fiduciary (or trustee equivalent) under §§ 105 and 1107 because (1) there was sparse case law under § 1107, (2) reliance on § 105 was not warranted since § 1104 already authorized the appointment of a chapter 11 trustee, and (3) appointment of a nonstatutory fiduciary would not benefit the debtors’ estates.[14] The Adelphia court was troubled by the noteholders’ proposal to have the nonstatutory fiduciary displace the board and all decision-making on the debtors because that would simply create “a back door means of circumventing the statutory requirements” to appoint a chapter 11 trustee.[15]
The comparison of the debtor’s motion to employ a CRO in BR Festivals to the nonstatutory fiduciary in Adelphia is odd. First, the debtor in BR Festivals makes it clear that it is seeking to employ a CRO for itself under § 327, while the noteholders in Adelphia sought to appoint someone of their choosing under §§ 1104, 1107 and 105. In addition, the BR Festivals court’s only attempt at addressing prior decisions appointing CROs under § 327 or 363[16] was to express “reservations” on those decisions without further elaboration. Second, the Adelphia court also noted that its decision was based on case-specific facts. In fact, the noteholders in Adelphia admitted that their motions were “the ‘nuclear war button’” in their “scorched-earth litigation strategy.”[17] As noted, the debtor in BR Festivals simply sought to employ its own CRO to liquidate its estate. Third, the Adelphia court believed that noteholders’ relief would imperil the proposed sale of the debtors’ assets[18] while the CRO in BR Festivals would have likely helped the debtor by winding down its affairs more efficiently.[19] Thus, rather than focusing its analysis on the propriety of appointing the CRO under § 327, the BR Festivals court latched onto the “trustee-equivalent” from Adelphia, which is not easily comparable.
Nevertheless, the BR Festivals court has expressed concern over the scope of a CRO’s role in bankruptcy. The court voiced its concern over displacing the role of management without following the strictures of the Bankruptcy Code — namely, the appointment of a trustee. While it remains to be seen whether BR Festivals carries any weight, the decision shows some courts’ hesitance to “employ” professionals who will essentially replace the debtor’s management.
[1] Mem. on Mot. to Appoint Ch. 11 Trustee and Mot. to Employ Chief Restructuring Officer, In re BR Festivals LLC, No. 14-10175, Docket No. 61 (Bankr. N.D. Cal. March 28, 2014).
[2] Mot. for Authority to Employ Chief Restructuring Officer; Decl. of Randy Sugarman, In re BR Festivals LLC, No. 14-10175, Docket No. 21 at ¶ 2 (Bankr. N.D. Cal. Feb. 18, 2014).
[3] Omnibus Decl. of Gabriel Z. Meyers, In re BR Festivals LLC, No. 14-10175, Docket No. 55 at ¶¶ 5-6 (Bankr. N.D. Cal. Feb. 18, 2014).
[4] Id. at ¶¶ 7-10.
[5] Id. at ¶¶ 11-16.
[6] Id. at ¶ 9.
[7] Mot. for Authority to Employ Chief Restructuring Officer; Decl. of Randy Sugarman, In re BR Festivals LLC, No. 14-10175, Docket No. 21 at ¶ 2 (Bankr. N.D. Cal. Feb. 18, 2014).
[8] U.S. Trustees’ Obj. to Debtor’s Mot. for Authority to Employ Chief Restructuring Officer and Reservation of Rights, In re BR Festivals LLC, No. 14-10175, Docket No. 40 at 1-3 (Bankr. N.D. Cal. March 13, 2014). The U.S. Trustee also moved for the appointment of a chapter 11 trustee. See U.S. Trustee’s Mot. to Appoint Ch. 11 Trustee under 11 U.S.C. § 1104(a) or in the Alternative, Appointment of an Examiner under 11 U.S.C. § 1104(c) or Mot. to Convert Case to Ch. 7 under 11 U.S.C. § 1112(b), In re BR Festivals LLC, No. 14-10175, Docket No. 41 (Bankr. N.D. Cal. Feb. 18, 2014).
[9] Reply Mem. of Points and Authorities in Support of Debtor’s Mot. for Authority to Employ Chief Restructuring Officer, In re BR Festivals LLC, No. 14-10175, Docket No. 51 (Bankr. N.D. Cal. March 21, 2014).
[10] 329 B.R. 897 (Bankr. M.D. Fla. 2008).
[11] Id. at 906.
[12] 336 B.R. 610 (Bankr. S.D.N.Y. 2006).
[13] See id. at 656-69.
[14] Id. at 664-69.
[15] Id. at 669.
[16] See . Mem. on Mot. to Appoint Ch. 11 Trustee and Mot. to Employ Chief Restructuring Officer, In re BR Festivals LLC, No. 14-10175, Docket No. 61 at 1 (citing Timothy W. bring and James R. Irving, “Emerging Trends & Lingering Criticisms: A CRO Retention Update,” 32 Am. Bankr. Inst. J. 18 (September 2013) (stating that § 363 is proper statutory provision to employ CROs).
[17] Id. at 619-19.
[18] The Adelphia court characterized the portion of the noteholders’ motions relevant here as “wholly without merit,” id. at 678, upon which the relief requested “would bring intolerable consequences for [the] estate.” Id.
[19] The BR Festivals court noted that the debtor could reapply to have the CRO perform a much limited role. Mem. on Mot. to Appoint Ch. 11 Trustee and Mot. to Employ Chief Restructuring Officer, In re BR Festivals LLC, No. 14-10175, Docket No. 61 at 3 (“The court also has no problem authorizing his employment under § 327 … in a more limited role than proposed in the motion.”). Thus, the debtor reapplied. See Mot. for Authority to Employ Accountant and Financial Advisor; Decl. of Randy Sugarman, In re BR Festivals LLC, No. 14-10175, Docket No. 68 (Bankr. N.D. Cal. April 2, 2014).