Bankruptcy

Professional Retention & Compensation under the Code

By Stephen Lubben

More fun with the Code, or "Bankruptcy Nerdcore," {my attempt at nerdy humor -- "nerdcord" -- apparently lost on one and all} as one recent commentator has described it.

It is the reality of current academia that we don't do much in the way of "close readings" of the Bankruptcy Code anymore, at least in our published scholarship. But today was the day to teach professional retention in my Bankruptcy class. Normally I've done an introductory lecture before working on the problems, but I find that the relevant Code provisions are so many and scattered that students have trouble following the lecture. So this morning I trashed the lecture notes and quickly made this slide, which formed the basis for our discussion.

And in the process of putting together the slide, I came to a few conclusions:

1.  While courts sometimes talk about "retention under §328(a)," there really is no such thing. Rather, retention must be under §327 or §1103, as the plain language of 328(a) itself suggests. The implication:  cases like Circle K are misguided, because 328 simply provides authority to retain a professional under 327 or 1103 under something other than a traditional hourly rate structure. As I read it, 328(a) simply provides that the compensation structure is to be set ex ante, and not revisited unless the final sentence of 328(a) applies. In short, no fair using 20/20 hindsight to change the terms of retention -- the amount of compensation is a different story, although I'll agree that it is hard to untangle the two if you are dealing with something other than an hourly rate.

2.  Retention under §363(b) should not be permitted, despite the practice in the SDNY, Delaware, and perhaps other jurisdictions. While the Code clearly does not work well with turnaround firms that take over management of the debtor before bankruptcy, I don't see how using the generic provision (363) can be justified in the face of the rather elaborate system outlined in my slide. And §330 by its terms seems to suggest that the only avenues for retention are 327 and 1103.

I know many Credit Slips readers are "in the trenches," working with these provisions on a daily basis. I'd appreciate your thoughts on my two conclusions (or the slide, particularly if I've missed some key provision).

My general thought is that these issues suggest yet another way in which chapter 11 could benefit from an update, inasmuch as the retention provisions of 1978 have been strained to their limits by current practice. I suggest that considering how the Code should adapt is a more productive avenue than debating whether or not these efforts to stretch the Code are "illegal."

Full post as published by Credit Slips on November 23, 2009 (boomark / email).