Can Ombudsmen Retain Professionals? BY BRUCE BUECHLER, ESQ., - - PDF document

Journal of Corporate Renewal

8

Nov/Dec 2012

Can Ombudsmen Retain Professionals?

BY BRUCE BUECHLER, ESQ., MEMBER, LOWENSTEIN SANDLER

Journal of Corporate Renewal

8

Nov/Dec 2012

Journal of Corporate Renewal

9

Nov/Dec 2012

T

he Bankruptcy Code authorizes U.S. Bankruptcy Courts to direct the U.S. Trustee to appoint either a consumer privacy ombudsman (CPO) or a patient care ombudsman (PCO) in certain circumstances, pursuant to Bankruptcy Code §§ 332 and 333, respectively. When a debtor seeks to sell personally identifjable information in a manner inconsistent with its prepetition privacy policy, §363(b)(1)(B) of the code nevertheless permits the Bankruptcy Court to authorize the sale after appointing a CPO and conducting a

• hearing. Under Bankruptcy Code §332(b),

the CPO is appointed “to appear and to be heard at such hearing and [to] provide the court information to assist the court in the consideration of the facts, circumstances and conditions

• f the proposed sale or lease of

personally identifjable information.…” When a Chapter 7, 9, or 11 debtor is a health care business, Bankruptcy Code §333(a) provides that a PCO shall be appointed within 30 days after the petition date “to monitor the quality

• f patient care and to represent the

interest of the patients of the health care business” unless the court fjnds that a PCO is not needed. Left unresolved by Bankruptcy Code §§ 332 and 333 is whether ombudsmen have authority to retain attorneys or other professionals to assist them in performing their duties. Sections 332 and 333, enacted in 2005, authorize the appointment

• f ombudsmen, but contain no

provisions authorizing them to retain professionals, including attorneys. Simultaneously with the enactment

• f §§332 and 333, Congress amended

§330(a)(1) of the Bankruptcy Code to permit Bankruptcy Courts to award an ombudsman “reasonable compensation for actual, necessary services rendered by the . . . ombudsman . . . and by any paraprofessional person employed by such person . . . .” While §330 as amended permits

• mbudsmen to seek compensation

for paraprofessionals they employ, the statute is silent with respect to attorneys or other professionals they

• retain. Under the plain language of

these provisions, ombudsmen are not expressly authorized to seek compensation for professionals they retain. See In re Renaissance Hospital-Grand Prairie, Inc., 399 B.R. 442, 445-46 (Bankr. N.D. Tex. 2008). An ombudsman’s ability to retain professionals recently came to the forefront in the Chapter 11 cases of In re Borders Group, Inc., et al., Case No. 11- 10614 (Bankr. S.D.N.Y.), in which a CPO was appointed in connection with the sale of certain of the debtors’ customer

• data. The CPO sought compensation

totaling in excess of $350,000 for services rendered by the CPO and various attorneys and paralegals in the law fjrm

• f which the CPO was a member.

The offjcial committee of unsecured creditors objected to the CPO’s fjnal fee application, arguing that (i) code §332 does not authorize a CPO to retain professionals, (ii) the CPO could not seek to retain counsel nunc pro tunc, (iii) code §330 does not authorize attorneys employed by a CPO to be paid out of the estate, and (iv) even if the court allowed reimbursement of fees for the CPO’s professionals, certain of those fees were unreasonable and should be denied. The committee and the CPO ultimately reached a settlement in the dispute. Although the Bankruptcy Court did not render a decision, the case highlighted a serious issue that persons appointed as ombudsmen should address immediately upon appointment: whether they need to retain professionals and, if so, how to minimize the risk of disallowance of such professionals’ compensation. As already noted, §330(a) only authorizes reasonable compensation for services rendered by an ombudsman and any paraprofessional he or she employs. In the Chapter 11 case In re Synergy Hematology-Oncology Medical Associates, Inc., 433 B.R. 316 (Bankr. C.D. Cal. 2010), the Bankruptcy Court addressed the issue of whether a PCO could retain counsel. The Synergy court found that Congress did not expressly authorize the retention of legal counsel by either a PCO or a CPO. Id. at 318. The court then held, however, that when appropriate under the facts of a particular case, Bankruptcy Courts, pursuant to their equitable power under §105 of the Bankruptcy Code, may authorize a PCO to retain counsel and did so in Synergy. Id. at 319-20. While §330(a) does not authorize

• mbudsmen to seek compensation

for the work of attorneys and other professionals they seek to retain, one can analogize the appointment of an

• mbudsman to that of an examiner

appointed under Bankruptcy Code §1104. Courts have authorized examiners in certain instances to employ professionals, such as attorneys, pursuant to code §105, notwithstanding the absence of any express authorization in the Bankruptcy Code for such

• employment. See, e.g., In re Southmark

Corp., 113 B.R. 280, 283 (Bankr. N.D.

• Tex. 1990); In re Tarkowski, 104 B.R.

828, 829 (Bankr. E.D. Mich. 1989); In re Tighe Mercantile, Inc., 62 B.R. 995, 990-1000 (Bankr. S.D. Cal. 1986). The crucial fact for ombudsmen, like examiners, is that they must seek authority from the Bankruptcy Court before retaining attorneys or other

• professionals. Only once the attorney
• r other professional is properly

retained, with Bankruptcy Court approval, may an ombudsman seek payment from the estate for services rendered by that professional. By way of example, in In re Steve and Barry’s Manhattan LLC, et al., Case No. 08-12579 (ALG) (Bankr. S.D.N.Y. 2008), the individual who was appointed as CPO promptly fjled an application for authority to employ a law fjrm pursuant to §§105 and 332 of the Bankruptcy Code, citing her need to rely upon the fjrm’s “considerable experience in privacy issues, as well as matters

• f bankruptcy law and procedures.”

Id., Docket No. 938 at ¶¶ 8-9. No

• bjections to the retention application

were fjled, and the Bankruptcy continued on page 10

RESTRUCTURING SOFT ASSET COMPANIES

The crucial fact for ombudsmen, like examiners, is that they must seek authority from the Bankruptcy Court before retaining attorneys or other professionals.

Journal of Corporate Renewal

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Nov/Dec 2012

Court entered an order authorizing the CPO to employ the law fjrm. At the hearing, the Bankruptcy Court stated that it would monitor the fees

• f the law fjrm “very, very closely”

to ensure “that all of the work that counsel does in this assignment is necessary and appropriate under the circumstances” even though, by agreement of the parties, the fees of the CPO’s counsel would be paid by the purchaser and not by the debtor’s

• estate. Id., Docket No. 1925 at ¶¶ 10-
• 11. Thus, there is legal precedent that

authorizes an ombudsman to retain counsel (and therefore, presumably,

• ther necessary professionals)

pursuant to Bankruptcy Code §105 if warranted by the facts of the case. One interesting argument raised by the Borders CPO dealt with the express language of §332(a), which states that the court can order the U.S. Trustee to appoint “1 disinterested person” to serve as a CPO. The “1 disinterested person” limitation also applies to appointment

• f a PCO pursuant to §333(a)(2).

The Borders CPO argued that the U.S. Trustee could have appointed the CPO’s law fjrm as the CPO and that the court should consider retroactively modifying the appointment order to do so. One potential problem with this argument is that the statute, by using the number “1” to modify the term “person,” arguably requires the CPO to be an individual and not a “person” as that term is defjned in §101(41) of the Bankruptcy Code. Section 101(41) defjnes a “person” as an individual, corporation,

• r partnership, which could include a

professional fjrm, such as a law fjrm. The court in Renaissance Hospital reached the opposite conclusion and held that a corporation or partnership, not just a natural person, could be a

• PCO. 399 B.R. at 448. The committee in

Borders argued that while the Bankruptcy Court directs the appointment of a CPO, it is the U.S. Trustee that is responsible for the actual appointment under the

• statute. Thus, the committee argued, the

court could not direct the U.S. Trustee to change the notice of appointment to substitute the CPO’s law fjrm for the individual CPO after the fact. In light of Congress’s use of the number “1” in Bankruptcy Code §§332(a) and 333(a), any corporation or partnership appointed as an ombudsman should be concerned about whether it qualifjes and can be compensated from the debtor’s estate for services rendered. Ombudsmen serve difgerent constituencies than professionals retained by trustees, debtors in possession, or creditors’ committees, each of which is charged with serving a constituency with a specifjc economic interest in the bankruptcy

• estate. Conversely, an ombudsman is

“concerned with a constituency whose interests do not necessarily coincide with the economic interests of other case participants. The ombudsman therefore is not concerned with economics of the case.” Renaissance Hospital, 399 B.R. at 446. The Renaissance Hospital court determined that it could not rely on code §330 or the cases discussed analogizing ombudsmen to examiners. The court said that §330 does not provide for compensation of ombudsmen’s professionals and that an analogy to an examiner under §105 was inapposite, because examiners owe fjduciary duties to the estate, which ombudsmen do not. Nonetheless, citing §105(a) to authorize the PCO to retain professionals, the court read the phrase “1 disinterested person” as authorizing a partnership

• r corporation to be appointed. If a

partnership or corporation were engaged as PCO, that entity could only act in court through counsel. Since part of an

• mbudsman’s responsibility is to advise

the court on issues concerning a sale

• f consumers’ personally identifjable

information or on issues with regard to patient care, ombudsmen other than natural persons would be unable to fulfjll their statutory obligations without

• counsel. However, the Renaissance

Hospital court made clear that the PCO’s retention of attorneys and other professionals was strictly limited to the purposes for which the PCO was being appointed and that the ombudsman must demonstrate a clear need for the retention of professionals. Id. at 448-449. While the few courts that have directly dealt with the issue of an ombudsman’s retention of professionals difger

• n the legal basis upon which an
• mbudsman can retain an attorney
• r other professional, the result is

consistent: ombudsmen can retain professionals, but they must do so immediately upon appointment and must demonstrate the specifjc facts that necessitate their retention

• f counsel or other professionals,

with appropriate limitations. The key issue in the Borders case was that the CPO never fjled an application to retain his law fjrm, and thus the court never authorized the retention. While ultimately the dispute in Borders was settled with the CPO’s law fjrm agreeing to a reduction in fees, the lesson for individuals appointed as ombudsmen in future bankruptcy cases is clear: if they determine that they need the assistance

• f counsel or other professionals, they

must promptly fjle with the Bankruptcy Court an appropriate application to retain such professionals and explain in detail the facts that warrant and justify their retention of such professionals. Failure to do so could cause an

• mbudsman’s attorneys or other

professionals to be precluded from compensation and reimbursement of expenses for their services rendered. Turnaround specialists frequently are called upon to act as CPOs and PCOs. A turnaround specialist selected to serve in such a capacity must quickly determine if the facts and circumstances of a particular case warrant the employment

• f attorneys or other professionals.

If so, they must promptly apply for Bankruptcy Court approval of the retention, setting forth the factual basis for why the retention is necessary, to minimize the risk that the retained professionals end up working for free. J Bruce Buechler is a member of Lowenstein Sandler’s Bankruptcy, Financial Reorganization & Creditors’ Rights Group. He represented the creditors’ committee in the Borders Chapter 11 bankruptcy case discussed in this article and, therefore, the views expressed in this article are his personal views and do not reflect the views of his firm or any of its clients. Buechler can be reached at bbuechler@lowenstein.com. continued from page 9