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URNAROUNDMANAGERS
andinvestment bankers are often engagedby companies for the purpose of find-ing a business partner that will infusecapital as part of a reorganization or,failing that, finding an entity to purchase thecompany’s assets as a going concern. During therecent high-tech meltdown and overall negativeeconomic climate, boards of directors have turnedto these professionals as a means of gracefullyexiting a sinking ship. As third parties,turnaround managers and investment bankersare typically not entirely familiar with a client’sfinancial condition or the extent of its problemsat the outset of their engagement.In many situations, a Chapter 11 filing will benecessary to facilitate a reorganization or, morecommonly in recent years,a sale transaction.While turnaround managers and investmentbankers tend to be familiar with the principalprovisions of the Bankruptcy Code thathelp corporate debtors reach their businessobjectives, they are typically less familiarwith some of the more technical statutoryprovisions relating to the administration of abankruptcy estate. These provisions may havea significant impact on how much, or evenwhether, suchprofessionals may be paid by acompany in bankruptcy, despitethe terms of aretention agreement entered into beforethebankruptcy filing.
Bankruptcy filing canaffect a professional’scontract
The last thing a professional wants, afterbeing retained and performing most, if not all,of the contractual services, is a dispute over thepayment of fees. In order to avoid suchdisputes, it is necessary for turnaroundmanagers and investment bankers to avoid anynegative consequences that a bankruptcy couldhave on their right to contractual compensa-tion. Here are some suggestions:
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Retain separate counsel
. Becausea bankruptcy filingis not completelyunforeseeable, a professional needs toanticipate a potential filing and planaccordingly. Professionals will often be temptedto rely on the company’s insolvency counsel inan attempt to avoid paying legal fees, but sucha decision is risky. Although the professionalmay well be on the same “team” as companycounsel, counsel may have a conflict of interestwith the professional’s personal interests andmay be constrained in the advice its provides.Thus, fees paid for advice from separate counselonstructuring the retention agreement will bewell spent, as such advice will often prevent orlimit compensation disputes at the conclusionof the project.
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Plan for a bankruptcy filing at the outset
.Advice on the structuring of a professional’scompensation should be obtained at the outsetof the engagement, even if a bankruptcy filingseems remote. The reason for this precaution isthat any subsequent modification could beattacked in a later bankruptcy case. Thestrong-arm powers set forth in the BankruptcyCode, including the right to avoid and recoverpreferences, fraudulent transfers and othertransactions, can be applied to the restructur-ing of a professional-services contract, especial-ly when the restructuring was done to avoid thenegative consequences of the bankruptcy filingon the professional.
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Promptly obtain court approval of employ-ment
. In all bankruptcy cases, a professionalneeds to obtain approval from the court inorder to be compensated by the company’sbankruptcy estate. See 11 U.S.C. 327. While aturnaround manager hired as an employee willgenerally not be considered a profes- sionalwhose retention needs to be approved, theprofessional should seek approval of any specialcompensation provisions, such as a bonus orsuccess fee. A professional needs to submit anapplication early in the case for two reasons.First, a professional will probably have the mostleverage early onbecause of the knowledge of the client’s business he or she has gained overtime and the disruption that the loss of suchknowledge would have on reorganization efforts.Second, any delay in seeking such approval canbe a basis for denying compensation.
BANKRUPTCY LAW
Retention Agreements
Craig M. Rankin
is a partner at the Los Angeles-based bankruptcy boutique Levene, Neale, Bender,Rankin and Brill.Christopher Alliotts is of counselto the Menlo Park, Calif., office of Los Angeles-based Sulmeyer Kupetz. They can be reached atcmr@lnbrb.com and calliotts@sulmeyerlaw.com
By Craig M. Rankinand Christopher Alliotts
Craig M. RankinChristopher Alliotts
© ALM PROPERTIES INC.WWW.NLJ.COMMONDAY, MAY 17, 2004
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