Liquidation Consultants Are Not “Professionals” Requiring Retention Under § 327(a) of the Bankruptcy Code

In re Heritage Home Group LLC, No. 18-11736 (KG), 2018 WL 4684802 (Bankr. D. Del. Sept. 27, 2018) and In re Brookstone Holdings Corp., No. 18-11780 (BLS), 2018 WL 4801890 (Bankr. D. Del. Oct. 1, 2018)

Recently, in the chapter 11 cases of Heritage Home and Brookstone, the United States Trustee (“UST”) objected to the engagement of Gordon Brothers Retail Partners, LLC, Hilco Merchant Resources, LLC (together with Gordon Brothers Retail Partners, LLC, “Hilco”), and SB360 Capital Partners, LLC (“SB360” and together with Hilco, the “Consultants”) to assist the debtors with store closing sales by way of sections 105(a), 363(b), and/or 365(a) of the Bankruptcy Code, arguing that the Consultants are “professionals” that must be retained under section 327(a) of the Bankruptcy Code.  The statutory scheme is important because section 327(a) and related Bankruptcy Rule 2014 impose additional requirements and restrictions on retained professionals, including more robust disclosures, Court approval of fees and expenses, and the statutory requirement that the professional be disinterested and not hold or represent an interest adverse to the estate.  Retention under section 327(a) may also limit the professional’s ability to purchase assets from a liquidating debtor’s estate – a common practice of professional liquidators such as the Consultants.  Notably, the UST’s position is a significant departure from the well-developed practice in the District of Delaware permitting the engagement of the Consultants and others similarly situated by way of sections 365(a) and 363(b) with voluntary disclosures and limited review of fees and expenses.

To render their decisions, Judge Gross in Heritage Home and Judge Shannon in Brookstone focused on the nature of the going out of business sales as well as the support services to be provided by the Consultants given that, of particular relevance to the pending disputes, section 327(a) applies only to auctioneers and “other professional persons.”  As to the first possible category, both courts easily found that the Consultants were not “auctioneers” as the debtors’ going out of business sales involved no auctions.  Indeed, the sales involved no bidding or negotiation.

In determining whether the Consultants fell within “other professional persons”, both courts looked to the non-exclusive list of factors articulated in In re First Merchants Acceptance Corp., No. 95-1500, 1997 WL 873551, at *3 (D. Del. Dec. 15, 1997):

1. whether the employee controls, manages, administers, invests, purchases, or sells assets that are significant to the debtor’s reorganization;
2. whether the employee is involved in negotiating the terms of a plan of reorganization;
3. whether the employee is directly related to the type of work carried out by the debtor or to the routine maintenance of the debtor’s business operations;
4. whether the employee is given discretion or autonomy to exercise his own professional judgment in some part of the administration of the debtor’s estate;
5. the extent of the employee’s involvement in the administration of the debtor’s estate; and
6. whether the employee’s services involve some degree of special knowledge or skill, such that the employee can be considered a “professional” within the ordinary meaning.

In Heritage Home, Judge Gross succinctly summarized the standard as follows:  “What is clear in First Merchants is 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, [and] has discretion to exercise his or her own personal judgment.” Heritage Home, at *6.

In both cases, the Consultants’ responsibilities included recommending appropriate discounting, providing qualified supervision, maintaining focused and constant communication, establishing and monitoring accounting functions, recommending loss prevention strategies, coordinating with the debtors, recommending appropriate staffing, and assisting the debtors.  Both Judge Gross and Judge Shannon largely dismissed the last First Merchants factor, noting that nearly all business and service activities require specialized skill and knowledge on the part of the provider.  In evaluating the remaining factors, in Heritage Home, Judge Gross found that SB360’s responsibilities “are clearly advisory and do not constitute an intimate role in the Debtors’ plans.”  Id. at *8.  Indeed, SB360 had no discretion over business decisions and was limited to making recommendations to the debtors.  Similarly, in Brookstone, Judge Shannon found that while Hilco may offer advice on pricing strategy and timeline, the debtors remained in complete control of all aspects of the sales and retained final authority over the sales.  Judge Shannon also found that Hilco was not involved in negotiating the terms of a plan, Hilco’s services related to the Debtors’ restructuring activity, not their routine business operations, and Hilco’s role in the store closures (which will conclude before the filing of a plan or the closing of other transactions that form the core of the restructuring strategy) did not constitute meaningful participation in the administration of the debtors’ estates.  Accordingly, both courts concluded that the Consultants were not “other professional persons” for the purposes of section 327(a) of the Bankruptcy Code.