Delaware Bankruptcy Court Holds Retention of Liquidation Consultant Not Subject to 11 U.S.C § 327(a)
In a recent decision, Heritage Home Group LLC, et al., Case No. 18-11736-KG, 2018 WL 4684802 (Bankr. D. Del. Sept. 27, 2018), Judge Kevin Gross, U.S. Bankruptcy Judge for the District of Delaware, held that a consultant tasked with liquidating the debtors’ assets under a store closing and asset disposition agreement (“Disposition Agreement”) is not a professional, and consequently, not required to be retained under Section 327(a) of the Bankruptcy Code.
The Debtors, Heritage Home Group LLC, et al. (“Debtors”), sought to retain SB360 Capital Partners, LLC (“SB360” or “Consultant”), pursuant to the Disposition Agreement, as their consultant to sell the Debtors’ “Non-Luxury Group” assets. Heritage Home Group, 2018 WL 4684802 at *1. In exchange, Debtors agreed to pay SB360 commissions from the sales of assets and furniture, fixtures and equipment. Id. at *2. Bankruptcy court approval of the retention was sought under Sections 105(a) and 363 of the Bankruptcy Code, pursuant to a motion for authority to, inter alia, enter into the Disposition Agreement and conduct store closing or similar themed sales. Id. at *1; see also Case No. 18-11736-KG, Docket No. 219.
The U.S. (“Trustee”) objected to SB360’s retention on the bases that the engagement was subject to Section 327(a) of the Bankruptcy Code, not Section 363. More specifically, the Trustee argued that the Consultant was a “professional like an auctioneer” and should be required to file a declaration of disinterestedness and have its fees reviewed under applicable professional compensation standards, in compliance with Section 327(a) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2014. Id. at *2; see also Case No. 18-11736-KG, Docket No. 265.
The Debtors disputed that the engagement required approval under Section 327(a), arguing that Section 363 was the proper standard and the engagement was a valid exercise of the Debtors’ business judgment. See Case No. 18-11736-KG, Docket No. 305 at 2-3. SB360 argued it was not a “professional” as defined in Section 327(a), and the services provided under the Disposition Agreement did not require Section 327 retention because the services did not assist the Debtors in administering the chapter 11 cases. See Case No. 18-11736-KG, Docket No. 300 at 2.
Following an evidentiary hearing and argument, the Delaware Bankruptcy Court rejected the notion that SB360 was an auctioneer. Heritage Home Group, 2018 WL 4684802 at *3. Noting the term “auctioneer” is not defined in case law or the Bankruptcy Code; the Court reviewed the Black’s Law Dictionary definition of an auctioneer and determined that SB360 was not an auctioneer because it was not in charge of selling at an auction and there was no public auction. Id.
The Court, citing In re First Merchants Acceptance Corp., 1997 WL 873551 (D. Del. Dec. 15, 1997), observed that “a ‘professional’ is limited to those occupations which control, purchase or sell assets that are important to reorganization, is negotiating the terms of a plan of reorganization, has discretion to exercise his or her own personal judgment, and whether he or she contributes ‘some degree of special knowledge or skill.’” Id. at *3. The Court noted that SB360 was not at the center of Debtors’ reorganization and the terms of the Disposition Agreement nullified SB360’s control. Id.
The Court then looked to the bankruptcy court decisions in In re Nine West Holdings, Inc., 2018 WL 3238695 (Bankr. S.D.N.Y. July 2, 2018), and In re hhgregg, Inc., Case No. 17-01302-RLM-1 (Bankr. S.D. Ind. May 8, 2017). Id. at *4. In Nine West Holdings, the Bankruptcy Court for the Southern District of New York rejected the argument that Alvarez and Marsal and its employee serving as Nine West’s CEO should be retained under Section 327(a), as opposed to Section 363(b). That court reiterated that “a ‘professional’ for purposes of Section 327(a) is intimately involved in the reorganization process.” Id. Judge Gross noted that SB360 was not so involved. Id. Similarly, in hhgregg, the Bankruptcy Court for the Southern District of Indiana did not require Section 327(a) retention because the consultant at issue “(1) carried out debtor’s judgment, (2) did not play a central role in the reorganization, (3) did not have broad discretion and (4) had no control over sale prices.” Id.
Considering the language of the Disposition Agreement which required SB360 to, among other things, “‘recommend appropriate discounting,’ ‘provide qualified supervision,’ ‘maintain focused and constant communication,’ …,” the Court concluded that the Consultants’ responsibilities were “clearly advisory” and did not “constitute an intimate role in the Debtors’ plans.” Id.
In overruling the Trustee’s objection, the Court observed that the Bankruptcy Code provides clearly that certain professionals must be retained formally pursuant to Section 327(a) but that retention of the Consultant did not require such treatment. Id.
The ruling in Heritage Home Group provides certainty to practitioners, as well as consultants seeking to be retained by a debtor to liquidate assets, that such consultants are not “professionals” requiring retention under Section 327(a) in the Delaware bankruptcy court.
Subsequent to Judge Gross’ decision in Heritage Home Corp., Judge Brendan Linehan Shannon, U.S. Bankruptcy Judge for the District of Delaware, held, in Brookstone Holdings Corp., Case No. 18-11780-BLS, 2018 WL 4801890 (Bankr. D. Del. Oct. 1, 2018), that Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC (collectively, “Hilco”), performing services related to debtor’s going-out-of-business (“GOB”) sales (and acting in a role similar to SB360 in Heritage Home Corp.), was not a “professional” within the meaning of Section 327(a). Judge Shannon looked to the common usage of the term “auctioneer” and concluded that the sale process was not an auction and Hilco was not hired to conduct an auction. As such, Hilco was not engaged as an “auctioneer” for purposes of Section 327(a). Brookstone Holdings Corp., 2018 WL 4801890 at *6. The Court also considered whether Hilco was an “other professional” as the term is used in Section 327(a) and decided it was not. Id. at *10. The Court reviewed the factors developed in First Merchants for determining whether an employee is a “professional” within the meaning of Section 327(a), and concluded Hilco’s services were “not sufficiently central to the development and implementation of the Debtor’s reorganization.” Id. at *1. Based on the record, the debtor remained in “complete control of all aspects of the GOB sales” and Hilco did not control or manage the sale process, was not involved in negotiating the terms of a plan, did not exercise discretion “in the administration of the debtor’s estate” and it’s role in store closures did not “constitute meaningful participation in the ‘administration of debtors’ estate.’” Id. at *7-9.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.
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