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For those who work with troubled companies, in and out of the federal bankruptcy courts, “turnaround” or “crisis” managers can play a critical role in achieving a successful reorganization (including the sale or liquidation in Chapter 11) of large, complex organizations. The benefits provided by qualified crisis managers far outweigh the detriments, and the Bankruptcy Code, with the supervision of the court, is often flexible enough to be stretched to serve the interests of key parties in a case. Turnaround managers differ from other professionals hired by a troubled company, such as lawyers, accountants, investment bankers and the like, due to their expertise in hands-on operations and management. The use of turnaround or crisis managers has greatly increased over the past two decades as bankruptcy has become an increasingly flexible tool for the restructuring or orderly liquidation of large business enterprises, where capable management is key. For example, APS Holding Corp., Harnischfeger Industries, Wheeling Pittsburgh Steel Corp.and LTV Steel Companyare all cases in which turnaround professionals have been retained. As Bettina M. Whyte and Camille S. Ellis have noted, existing management in a troubled company may be impeded in identifying and addressing their company’s problems by a variety of factors, most notably “fear [which] often creates a state of denial that results in paralysis. This paralysis usually occurs at the very time when executives must deal with the facts, quickly assess their options and make immediate decisions that affect whether the enterprise survives or fails.” Bettina M. Whyte & Camille S. Ellis, “Fear and Other Obstacles to Successful Turnarounds,” Am. Bankr. Inst. J., June 1995, at 28. Usually, shareholders, board members or creditors who are closely following the company’s condition can assess whether management has the skills and vitality to address its troubles, or requires outside help. Frequently, supplementing or replacing existing management with turnaround specialists is a pre-condition to continued support by a company’s lenders or suppliers, or to the infusion of new capital by investors. Thus, these specialists often play a critical role in the successful reorganization of a company. The rise in importance of turnaround and crisis managers has brought to the forefront issues relating to their retention in bankruptcy cases. In this context, there has been both imprecision and variety in the mechanisms by which principals and staff of turnaround firms have been employed over the years. Often, prior to a bankruptcy filing, a company or its primary shareholder will retain one or more individual executive-level operators who then become reorganization officers and/or retained professionals post-bankruptcy. These principals may be appointed by the board of directors as “chief restructuring officers,” “responsible officers” or as a chief executive officer. They, in turn, may often seek retention of their turnaround firms post-filing. Many courts have entered orders approving turnaround management retentions without specifying precisely the statutory basis for the retention. In fact, because the Bankruptcy Code’s provisions do not delineate the proper vehicle for employing this hybrid type of professional, there has been some confusion, which has recently led to retention objections by the Office of the U.S. Trustee, particularly in Delaware. Turnaround firms and their principals have been retained as professionals, officers, trustees and combinations of all three. See, e.g., In re Cardinal Indus. Inc., 151 B.R. 843 (Bankr. S.D. Ohio 1993) (Chapter 11 trustee); In re Madison Mgmt. Group Inc., 137 B.R. 275 (Bankr. N.D. Ill. 1992) (professional); In re Phoenix Steel Corp., 110 B.R. 141 (Bankr. D. Del. 1989) (officer). In the bankruptcy context, court approval is required for the appointment of a trustee or the retention of professionals, but not for the employment of officers. See11 U.S.C. �� 327 (professionals), 1104 (trustees). Frequently, creditors and shareholders prefer the appointment of the turnaround professional as an officer to the appointment of a Chapter 11 or Chapter 7 trustee, for the reason that, in the former case, the debtor will be perceived as having retained qualified, hands-on managers and will avoid the “taint” of a trustee, who is often presumed to have inadequate industry expertise, and whose appointment, rightly or wrongly, is often viewed as a prelude to a “distress” sale of assets that will not maximize values for creditors. RETENTION OF TURNAROUND PROFESSIONALS When determining the status of a turnaround or crisis manager for purposes of employment in a bankruptcy case, courts will usually evaluate the responsibilities and compensation of the manager. [FOOTNOTE 1] In re Madison, 137 B.R. at 283. (“Form is not determinative. The bankruptcy court should consider the substance of the person’s employment over the form in determining whether the person is a professional.”). However, turnaround or crisis management firms are usually found to be professionals whose retention requires court approval under Code � 327, 11 U.S.C. � 101 et seq. despite the fact that it is common for their principals to serve as officers of debtors. While numerous turnaround firms have acted in various capacities in major bankruptcy proceedings in the past, recent objections have focused on the ability of principals and staff of a turnaround firm to serve as officers of and professionals for the debtor. Code Sec. 327(a), which establishes the parameters for employment of professionals, provides for employment of “attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons.” 11 U.S.C. � 327(a). Thus, professionals retained pursuant to � 327(a) must be “disinterested.” See id.Sec. 101(14) provides, in part, that a person is not “disinterested” if such person (i) is a “creditor, an equity security holder, or insider” [FOOTNOTE 2]of the debtor; or (ii) is or was, “within two years before the date of the filing of the petition a director, officer or employee of the debtor.” 11 U.S.C � 101(14)(A) and (D). The Office of the U.S. Trustee has objected from time to time to the characterization of crisis managers as “responsible officers,” on the ground that this designation does not specify how the party is employed in a manner recognized by the Code. The turnaround profession adapted to this by becoming appointed as officers of the debtor, or retained as professionals under � 327. Relying on a technical reading of the Code, the Office of the U.S. Trustee may then object to the retention applications of turnaround or crisis management firms in cases where a principal of the firm is or was, within two years of the filing date, or is appointed post-filing as an officer of the debtor. These objections assert that the turnaround or crisis management firms are not “disinterested” and should therefore not be retained. But see S.S. Retail Stores Corp. v. Ekstrom( In re S.S. Retail Stores Corp.), 2000 WL 867984 (9th Cir. 2000) (holding that the disqualification of a lawyer as a “disinterested person” was not attributable to his firm). Notwithstanding the carefully crafted rules for the avoidance of conflicts of interest that apply to the retention of professionals in bankruptcy matters as well as general prohibitions on the employment of professionals with contacts with the debtor or creditors pre-bankruptcy, there are exceptions that allow for the continued employment of professionals where beneficial to the estate and the reorganization process. These exceptions combine flexibility and pragmatism in achieving the best interests of the diverse constituencies in an insolvent or troubled estate. For example, the Code clearly contemplates that a debtor should operate its business as a debtor-in-possession, exercising most if not all the powers and duties of a trustee, and continuing to operate in the normal course of business post petition, subject to certain restrictions. See11 U.S.C. �� 1107(a), 1108; In re Madison, 137 B.R. at 281. For obvious reasons, a person is not disqualified from employment by the debtor-in-possession solely because that person was employed by the debtor prior to the commencement of the case. 11 U.S.C. �� 1107(b). Additionally, an officer of a debtor normally would not be considered a professional required to be retained under � 327, but rather an ordinary course employee; however, in some instances, officers, because of their special expertise, may be considered and treated as professionals required to be retained under � 327. Many orders have been entered without objection that retain these officers notwithstanding their prepetition role with the company. Just as a trustee is specifically authorized to retain his law firm or accounting firm to assist him in administering a case, so the turnaround managers frequently require their firms to help them carry out their duties. Thus, a technical reading on the part of the U.S. trustee can lead to administrative objections that increase costs and delay and frustrate the frequently unified interests of creditors and shareholders in supplementing management with turnaround specialists, a particularly urgent need in situations where a debtor lacks employees who are willing or able to act as senior-level officers. Even if the debtor is able to retain a substitute turnaround or crisis management firm, the delay caused by having to interview and retain such a firm and the “learning curve” that such a firm will have to overcome may cause irreparable harm to the debtor. Furthermore, this technical reading disregards the pervasive practice of companies hiring turnaround and crisis management firms and appointing their principals as officers prior to filing for bankruptcy in an effort to either stay out of bankruptcy or prepare for an orderly bankruptcy. See, e.g., In re Bidermann Indus. U.S.A. Inc., 203 B.R. 547 (Bankr. S.D.N.Y. 1997) (approving the retention of a turnaround or crisis management firm even though two of its principals were officers of the debtor and the debtor had employed the firm prior to filing for bankruptcy). Moreover, this technical reading is contrary to the “substance over form” approach adopted by bankruptcy courts with respect to the issue of whether a turnaround or crisis manager appointed as an officer thereby disqualifies the firm on which he relies for support as not being “disinterested.” SeeDaniel J. Bussel, “‘Plain-meaning’ Cases Lead to Costly and Flawed Amendments to the Bankruptcy Code,” Am. Bankr. Inst. J., Jul./Aug. 2000, at 1. [FOOTNOTE 3] Perhaps it would be easier and clearer, as one U.S. trustee staff lawyer has suggested, to merely appoint a trustee. Under Code � 1104, a Chapter 11 trustee may be authorized by the court, on request of a party in interest or the U.S. trustee, for cause, or if the appointment is in the interest of creditors, equity security holders and other interests of the estate. See11 U.S.C. � 1104. In the first instance, the U.S. trustee will appoint the trustee, but on request of a party in interest, must convene a meeting of creditors for the purpose of electing one disinterested person to serve as trustee in the case. 11 U.S.C. � 1104(b). The issue may be one of control in the sense of deciding who can select the administrator of the case. In the end, however, this selection process is the prerogative of creditors, who normally support the turnaround or crisis manager. Again, the trustee may retain his own firm under � 327 to assist him in managing the case, despite his acting as a de facto officer of the company. Of course, there is a reason that shareholders, boards and creditors have increasingly and repeatedly opted for the turnaround manager rather than a court-appointed trustee: the perception that the appointee can maximize values through reorganization or orderly liquidation in a non-distress sale environment. See In re Sharon Steel Corp., 871 F.2d 1217, 1225 (3d Cir. 1989). (“The appointment of a trustee should be the exception, rather than the rule.”); In re Madison, 137 B.R. at 281 (“Generally, courts favor allowing the debtor to continue to manage its own affairs. The appointment of a trustee, therefore, is an extraordinary remedy.”). There is no question that the bankruptcy court has the authority, under �� 105, 327, 1107, 1108 and other sections, to approve the retention of appropriate managers and professionals to operate the debtor’s business. Trustees may be appointed with full or limited powers, see 11 U.S.C. � 1104; an examiner may be appointed under � 1104(c) to conduct an appropriate investigation of the debtor’s affairs, and the courts will review and fix compensation and other terms of employment. See In re Bartley Lindsay, 137 B.R. 305, 310 (D. Minn. 1991). Retention of a turnaround manager under � 327 may be appropriate even if the manager is retained as an executive officer of the debtor to enable the manager to properly perform his duties. To disqualify the manager’s firm from retention solely because a member is an officer does not further the goals of the parties in interest in the case. See In re Bidermann, 203 B.R. at 551-52 (conflict of interest found where debtor’s CEO, also the principal of the retained turnaround firm, was involved in a transaction to purchase estate assets). In the future, principals of turnaround or crisis management firms may refuse to serve as officers of companies out of fear of disqualifying their firms. Principals may be forced to enter into reporting relationships with officers or directors of companies who may lack the ability or desire to act as decision makers. This scenario will frustrate the desires of the creditors and shareholders alike who often want to retain turnaround or crisis managers because of their decision-making abilities and industry expertise. It is precisely the operational skills of turnaround or crisis managers that make them so valuable to the process. Based on the frequency of use and central importance of the role of the turnaround firm or crisis manager in modern Chapter 11 cases, they are clearly perceived to be useful in maximizing recoveries and administering cases efficiently. There is still a role for Chapter 11 and Chapter 7 trustees, as well as for pre-bankruptcy management supported by retained professionals with which management has no employment history and no economic ties. Notwithstanding the lack of statutory premise in the Code for the employment of a crisis manager as the decision-making officer (and the subsequent retention of his firm to assist in the turnaround effort), it is well within the scope of recognized structures under the Code. The retention, supervision and compensation provisions by which such entities are bound in a Chapter 11 case more than adequately ensure that conflicts of interest, if any, will be addressed and abuses of power curtailed. Robin E. Keller is an insolvency partner at Stroock & Stroock & Lavanin New York. This article was prepared with the assistance of Edward O. Sassower and Anna M. Taruschio, insolvency associates at the firm. ::::FOOTNOTES:::: FN1The following factors have been considered by courts when determining whether or not an individual is a professional: (1) What duties are being performed by the individual officer? Is the officer performing traditional executive functions of the office held or is the officer performing services in the way of advice and consulting services for the debtor which is beyond the traditional function of the office held or both?; (2) Is former management still employed by the company or have one or more executives left, leaving a gap in management?; (3) Is the officer, in fact, making those executive decisions traditional of the office held and directing others or are others actually making the decisions based on the advice from the officer?; (4) Is the officer’s primary employment the provision of consulting workout or other insolvency services to distressed businesses or is the officer a corporate executive by training and profession?; (5) Is compensation for the officer’s services paid directly to the officer or is it paid to another legal entity by which the officer is also employed?; (6) Does the officer receive fringe benefits and other perquisites of the office held consistent with the treatment of other similarly situated and former officers and employees?; (7) Are income and employment taxes withheld from the officer’s compensation or is the amount of gross compensation paid to the officer or to some other entity?; (8) Is the compensation of the officer consistent with compensation paid to predecessors and with others employed by the debtor? In other words, is the compensation so large and out of proportion to other compensation being paid by the debtor that such payment would be considered to be outside the ordinary course of the debtor’s business?; (9) Has the officer been employed specifically to work through and try and solve the debtor’s financial problems or is the employment permanent or intended as indefinite?; (10) Does the officer’s employment antedate the commencement of the bankruptcy case or is it contemporaneous with or follow commencement of the bankruptcy case?; (11) Is the officer working full time for the debtor or is the officer allowed to perform services for other business as well?; (12) Is the officer or the officer’s firm paid a retainer? In re Bartley Lindsay Co., 120 B.R. 507, 512 (Bankr. D. Minn. 1990). FN2Bankruptcy Code � 101(31) defines an “insider” of a corporation as (i) a director, officer, affiliate, managing agent or person in control of the corporation, (ii) a partnership in which the corporation is a general partner, (iii) a general partner of the corporation or (iv) a relative of a general partner, director, officer or person in control of the corporation. 11 U.S.C. � 101(31)(B), (E) and (F). FN3Mr. Bussel’s article describes the dangers and problems associated with using a technical approach when interpreting the Bankruptcy Code, especially given the difficulties of amending “glitches” in the statute that impede practical application of the principles of reorganization: Overruling by amending the Code is clearly a time-consuming business. Moreover, amending the Code is an uncertain and faulty business. The overrulings [in a recent survey of cases] generated substantial further litigation or serious unintended consequences, or were botched, in 36 instances…. This appears to be equally true of amendments overruling textualist or primarily textualist decisions as it is of more pragmatic judicial decisions. Relying on legislation to correct judicial misinterpretation is like relying on surgery to correct ills caused by misprescribed drugs. It is costly, risky, and rarely as efficacious as administering the correct medicine in the first place. Daniel J. Bussel, “‘Plain-meaning’ Cases Lead to Costly and Flawed Amendments to the Bankruptcy Code,” Am. Bankr. Inst. J., Jul./Aug. 2000, at 41.

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