Rudolph J. DiMassa Jr.,left, and George W. Fitting, right, of Duane Morris. Courtesy photos

Introduction

Section 327(a) of the Bankruptcy Code allows debtors to employ estate professionals. The section requires these professionals to be "disinterested persons" who "do not hold or represent an interest adverse to the bankruptcy estate." While well-intentioned, Section 327(a) can have an unduly limiting effect on debtors seeking to retain professionals who have performed prepetition services for the debtor and who have gained beneficial institutional knowledge of the debtor's operations. As an example, professionals often provide services to a business that ultimately files for bankruptcy protection. If these prepetition services remain unpaid as of the bankruptcy petition date, the professionals will become creditors of the debtor, and Section 327(a) renders them ineligible to be retained. Additionally, because prepetition directors and officers are excluded from the definition of "disinterested person" as insiders under Section 101(14), a prepetition chief restructuring officer may be unable to continue providing services to the debtor after the petition date.

To facilitate a debtor's post-petition operations, many courts have resorted to Bankruptcy Code Sections 105(a) and 363(b) to approve the employment of professionals who may not otherwise satisfy the restrictive "disinterestedness" requirements of Section 327(a). Section 105(a) bestows upon the court broad equitable powers to "carry out the provisions of" the Bankruptcy Code, while Section 363(b) allows a debtor (after notice and hearing) to "use, sell or lease, other than in the ordinary course of business, property of the estate." While Section 363(b) does not address employment on its face, courts have reasoned that this section affords the debtor significant discretion to use property of the estate (in this case, cash to hire professionals) as long as the debtor uses reasonable business judgment.

In In re Express Grain Terminals, Case No. 21-11832 (Bankr. N.D. Miss. Jan. 31, 2022), the U.S. Bankruptcy Court for the Northern District of Mississippi took things a small step further: in approving the debtor's employment of a turnaround management firm to provide a chief restructuring officer, the court relied on Sections 105(a) and 363(b) rather than on Section 327(a), even though the debtor had employed neither the firm nor its chief restructuring officer before filing for bankruptcy protection. The court determined that it would avoid relying on Section 327(a) because some of the debtor's creditors continued to allege certain improprieties in the turnaround management firm's selection and hiring process, thereby potentially precluding a finding that the firm was "disinterested."