When it comes to the retention of a financial advisory firm whose personnel had served as officers of the debtor before bankruptcy, Bankruptcy Judge David R. Jones of Houston has decided that the so-called Jay Alix Protocol “is completely unnecessary.”
In his May 20 opinion, Judge Jones concluded that the “transparent process of Section 327(a)” is best suited for the continued retention of financial advisors who had assisted a company before bankruptcy.
To avoid a perceived “disinterestedness” problem, the Jay Alix Protocol was promulgated to permit retention of financial professionals under Section 363(b), which deals with use of estate property outside of the ordinary course of business. Judge Jones rejected reliance on Section 363(b), saying it does not deal with “the conditions under which a professional person may be employed.”
The Genesis of the Protocol
Judge Jones described the history of the Jay Alix Protocol, which was designed by the U.S. Trustee Program so that chapter 11 debtors could continue using financial professionals who began work before filing. Typically, a professional from a financial firm would have served before bankruptcy as a company executive, perhaps as chief restructuring officer. Pre-filing service as an officer was seen by some as rendering the officer and the firm not disinterested and thus ineligible for continued retention after filing.
The protocol appears on the website of the U.S. Trustee Program. To read the protocol, click here.
Judge Jones explained the statutory maze that gave rise to the protocol. Section 327(a) allows the retention of “professional persons” who are “disinterested” and do not “represent an adverse interest.” In Section 101(14), someone is not disinterested if that person has been “a director, officer, or employee of the debtor” within two years of bankruptcy.
It was therefore widely believed that a pre-bankruptcy financial professional who served as an officer would not be disinterested and thus not eligible for retention under Section 327(a). The protocol therefore utilized Section 363(b), which by its terms contains no provisions regarding the retention of financial professionals.
Judge Jones pointed out how Section 1107(b) states 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.”
Judge Jones cited decisions where the protocol has been both endorsed and criticized. Although the protocol was “innovative at its inception,” he said it had “become a tool to avoid transparency and create inequity.”
Problems with the Protocol
Judge Jones recited shortcomings in the protocol and its implementation:
- “Applicants routinely push more and more services under the auspices of § 363(b) to avoid court oversight through the fee application process and the accompanying public transparency.
- “Invoices are provided to limited parties in lumped fashion and kept from public scrutiny.
- “Financial advisory services are inappropriately categorized as ‘back office’ support services;” and
- “Success fees are mentioned only in a back-page disclosure.”
Judge Jones said, “These examples are but a sampling and tarnish the sanctity of a process that demands complete transparency. Moreover, the protocol is completely unnecessary.”
Imputed Lack of Disinterestedness
Judge Jones believes the protocol to be unnecessary because he concurred with his Houston colleague, Bankruptcy Judge Marvin Isgur, who found no per se rule imputing a single member’s disinterestedness to the member’s firm. See In re Cygnus Oil and Gas Corp., 07-32417, 2007 WL 1580111 (Bankr. S.D. Tex. May 29, 2007). Judge Jones said that a “majority” of courts agree with Cygnus.
In siding with Judge Isgur, Judge Jones noted that a bankruptcy court in Delaware saw a per se disqualification. See In re Essential Therapeutics, Inc., 295 B.R. 203 (Bankr. D. Del. 2003).
In deciding that the financial professionals were eligible for retention under Section 327(a), Judges Jones noted that the firm was not a creditor, equity holder or insider. Likewise, the firm had not been an officer, director or employee of the debtor within two years. Critically, he found “no evidence to suggest” that the “alleged [lack of] disinterestedness” by the pre-bankruptcy restructuring officer “should be imputed” to the firm.
In the future, Judge Jones said he “expects to see a single application for employment [of financial professionals] under Section 327(a).” He authorized the designation of the pre-bankruptcy chief transformation officer as the chief restructuring officer for the debtor in possession.
When it comes to the retention of a financial advisory firm whose personnel had served as officers of the debtor before bankruptcy, Bankruptcy Judge David R. Jones of Houston has decided that the so-called Jay Alix Protocol “is completely unnecessary.”
In his May 20 opinion, Judge Jones concluded that the “transparent process of Section 327(a)” is best suited for the continued retention of financial advisors who had assisted a company before bankruptcy.
To avoid a perceived “disinterestedness” problem, the Jay Alix Protocol was promulgated to permit retention of financial professionals under Section 363(b), which deals with use of estate property outside of the ordinary course of business. Judge Jones rejected reliance on Section 363(b), saying it does not deal with “the conditions under which a professional person may be employed.”
The Genesis of the Protocol
Judge Jones described the history of the Jay Alix Protocol, which was designed by the U.S. Trustee Program so that chapter 11 debtors could continue using financial professionals who began work before filing. Typically, a professional from a financial firm would have served before bankruptcy as a company executive, perhaps as chief restructuring officer. Pre-filing service as an officer was seen by some as rendering the officer and the firm not disinterested and thus ineligible for continued retention after filing.
The protocol appears on the website of the U.S. Trustee Program. To read the protocol, click here.
Judge Jones explained the statutory maze that gave rise to the protocol. Section 327(a) allows the retention of “professional persons” who are “disinterested” and do not “represent an adverse interest.” In Section 101(14), someone is not disinterested if that person has been “a director, officer, or employee of the debtor” within two years of bankruptcy.
It was therefore widely believed that a pre-bankruptcy financial professional who served as an officer would not be disinterested and thus not eligible for retention under Section 327(a). The protocol therefore utilized Section 363(b), which by its terms contains no provisions regarding the retention of financial professionals.