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The Insider’s Scoop: May Investment Bankers be Retained by Debtors as Independent Contractors? “No” Says the Delaware Bankruptcy Court

In re MacKeyser Holdings, LLC, No. 14-11550 (CSS) (Bankr. D. Del. Aug. 7, 2014) [Transcript Ruling]

In the recently filed chapter 11 proceedings of MacKeyser Holdings, LLC and its affiliated debtors (“Debtors”), the Debtors sought to retain Hammond Hanlon Camp (“H2C”) as their exclusive investment banker under sections 327 and 328 of the Bankruptcy Code.  H2C’s proposed engagement agreement included a provision disclaiming its role as a fiduciary to the Debtors.  More specifically, it provided that “H2C shall act as an independent contractor under this Agreement and not in any other capacity including any fiduciary capacity.”

H2C’s carve-out yielded an objection by the United States Trustee, who argued that all professionals retained by debtors are fiduciaries.  The Debtors made a few points in support:  (1) the language at issue is standard in H2C’s engagement letters, both in and outside of bankruptcy cases; (2) similar language for investment banker retentions has been approved in the past by Delaware Bankruptcy Courts, see In re Ritz Camera & Image, L.L.C. No. 12-11868 (KG) and In re iGPS Company, LLC, No. 13-11459 (KG); (3) while certain estate professionals serve as fiduciaries, such as counsel for a debtor or an official committee of unsecured creditors, there is no requirement in the Bankruptcy Code that an investment banker retainer under section 327 serve as a fiduciary; and (4) H2C would not seek exculpation through a future plan submitted in the proceedings.

At the August 7, 2014 hearing on the retention application, the Honorable Christopher S. Sontchi summarily dispensed with the Debtors’ arguments and sustained the Trustee’s objection.  The Court found the Ritz Camera and iGPS cases to have “limited utility” given their uncontested nature.  More importantly, however, the Court simply found that there is no reason to treat an investment banker retained by a debtor any different from any other professional.  “[T]he law . . . deals with how professional persons retained by Debtors are to operate and under what standard they’re [sic] actions will be determined. . . . I am not going to approve [H2C] and pay [H2C] under 327 or 328 as an independent contractor; I’m just not going to do it.”  See Hr’g Tr. at 15: 20-22.  Ultimately, H2C agreed to move forward with the engagement without its requested carve-out, and an order was submitted and approved to that effect.