Picking Your Chapter 11 Teammates

9420983815_4857d1981b_zProfessionals in Chapter 11 have to be “disinterested“;  make sure they are also capable.

In two recent cases, the estate has employed professionals connected to the debtor in his pre filing past. It’s often the case that accountants and tax preparers come with familiarity with the debtor that seems useful.

You think that it’s economic to exploit that back story.

However, in the cases I’m recalling, the very history that made them appealing to the DIP has made it hard for the estate’s counsel to demand better performance than they have initially proffered.

Chapter 11 not for the newbie

I don’t talk much here about Chapter 11 issues.  Chapter 11 isn’t a big part of my practice and Bankruptcy Mastery is really for the less experienced bankruptcy practitioners.

I’m sure I’ve said it in print as well as in person:  a Chapter 11 is not an overgrown Chapter 13.

So if you are new to bankruptcy practice, stash today’s piece away til you are really ready to mastermind a Chapter 11.

No job for friends

When you represent the debtor in a Chapter 11, your client is actually the bankruptcy estate; the debtor in possession owes his loyalty to the creditors as a whole.

The DIP ends up in an uncomfortable spot if professionals of the estate were selected because of friendship,  perceived obligation, or the desire to do a good turn for a business buddy.

It developed for me, in a case I subbed into, that the professional, whose engagement had already been approved by the court, was delivering performance that was suspect.

The DIP sensed it, but was unwilling to call his friend on the issue.

In Chapter 11, a lot of the usual rules of business have changed.  Decisions outside of the ordinary are subject to notice to creditors;  dual loyalties that might pass outside of bankruptcy are unacceptable for professionals of the estate.  The professional with preexisting ties to the DIP may not get it, and the DIP may not have the gumption to call his buddy on it.

Competence first

It happens most often with accountants, in my experience:  the existing tax preparer knows the debtor, the way the books have been kept, the issues the debtor has faced.

It seems easier to employ someone who doesn’t have to start from scratch to do tax returns, tax planning and MOR’s.

Before the estate employs the existing accountant, I’ve got two questions.

First,  to what extent is the accountant complicit in whatever got the debtor into financial trouble?  If you are representing the DIP, you need to assess whether this professional was part of the problem, and whether the job, done properly going forward, will uncover things the accountant would rather not have exposed.

Second question:  is the existing professional up to the issues present in bankruptcy?  Bankruptcy adds complexity to every professional’s job.  My experience is confined largely to Chapter 11’s for individuals, and I remain bowled over by the bankruptcy tax issues that even capable tax professionals have never encountered.

My knowledge is confined to seeing the tax question.  It’s no fun when your fellow estate professional can’t see the question, much less help you find the answer.

Moral of the story:  it’s not sufficient to be “disinterested” within the meaning of the Code.  Estate professionals also have to be the right person for the job.

Image courtesy of  Simplificamos Su Trabajo