By: Michael L. Moskowitz
A Houston Bankruptcy Judge’s recent decision brings into question the need for – and efficacy of – the longstanding Jay Alix Protocol. In re McDermott Int’l Inc., 20-30336 (Bankr. S.D. Tex. May 20, 2020). Read the full opinion.
The J. Alix Protocol was originally developed to reconcile the dual nature of chief restructuring officers as both officers of the debtor – and thus insiders – and professionals providing bankruptcy restructuring services to the debtor’s estate. When the Bankruptcy Code initially was developed, the role of chief restructuring officer did not exist. As such, the Bankruptcy Code did not specifically address their retention which, on the surface, appears to fly in the face of section 327’s disinterested standard.1 As a result of this inconsistency, and settlements between restructuring firm Jay Alix and Associates and the Office of the United States Trustee regarding the firm’s retention, the Jay Alix Protocol was established and has been widely followed since. In simple terms, the Jay Alix Protocol provides that debtors should retain restructuring professionals pursuant to section 3632 of the Bankruptcy Code, while applying the relevant disclosure and conflict provisions of section 327(a).
While the Trustee’s Office has indicated they will object to retention applications not compliant with the Jay Alix Protocol, it has no force of law. Further, some find the Jay Alix Protocol bestows certain benefits on restructuring professionals, as it does not require them to comply with certain fee application requirements of section 327. Accordingly, some courts have declined to require it.
On May 20, 2020, Chief Bankruptcy Judge David R. Jones, sitting in the United States Bankruptcy Court for the Southern District of Texas, issued an opinion finding that retention of financial advisors under the Jay Alix Protocol is “completely unnecessary.” In his opinion, Judge Jones observed that section 1107(b) specifically provides that a “person is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person’s employment by or representation of the debtor before the commencement of the case.” He further criticized the retention of restructuring professionals pursuant to section 363(b) as it allows such professionals to avoid court oversight through the fee application process as well as public scrutiny. Among his complaints regarding the lack of transparency, Judge Jones noted that:
- Invoices are not publicly available;
- Certain financial advisory services are miscategorized as “back office” support services; and
- Success fees are not overtly disclosed.
In finding the restructuring firm was eligible for retention under section 327(a), Judges Jones noted the firm was not a creditor, equity holder or insider. Further, Judge Jones found the firm had not been an officer, director or employee of the debtor within two years, rejecting any per se rule imputing a single member’s disinterestedness to the member’s firm. See In re Cygnus Oil and Gas Corp., 07-32417, 2007 WL 1580111 (Bankr. S.D. Tex. May 29, 2007) (Isgur, J.); but see In re Essential Therapeutics, Inc., 295 B.R. 203 (Bankr. D. Del. 2003) (finding per se disqualification).
Thus, Judge Jones’ decision authorizing the designation of the pre-bankruptcy chief transformation officer as the chief restructuring officer for the debtor-in-possession signals his expectation that, in cases before him, debtors seeking to retain restructuring professionals should submit “a single application for employment under Section 327(a).” Judges in the Southern District of New York, however, still appear to enforce the Jay Alix Protocol. See In re Nine West Holdings, Inc., et al., 18-10947 (Bankr. S.D.N.Y. July 2, 2018) (Chapman, J.) (admonishing the Trustee’s Office for objecting to retention of a restructuring professional under the Jay Alix Protocol while observing the “mountain of precedent” providing for such retentions under section 363). These distinctions highlight the importance of retaining skilled counsel to represent debtors filing for relief under chapter 11 of the Bankruptcy Code.
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Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a co-founder, focuses his practice on business and bankruptcy litigation, shareholder and partner disputes, business divorce, commercial dispute resolution, as well as a full range of creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or mlm@weltmosk.com.
1 Section 327(a) provides, in relevant part, that a debtor in possession “with the court’s approval, may employ one or more 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, to represent or assist the trustee in carrying out the trustee’s duties under this title.” Section 101of the Bankruptcy Code specifically provides that a person is not disinterested if that person has been “a director, officer or employee of the debtor” within two years of the bankruptcy.
2 Section 363(b) governs debtors’ use of estate property outside of the ordinary course of business.
