Financial Advisory Firms Whose Affiliate’s Employees Served as Independent Officers or Directors of the Debtor Prepetition Should Be Retained Under Section 327(a) of the Bankruptcy Code
The retention of financial advisors by chapter 11 debtors must be approved by a bankruptcy court. Currently, debtors may file employment applications for financial advisors, whose affiliate’s employees, prepetition, served as a chief restructuring officer (“CRO”), under two different sections of title 11 of the United States Code (the “Bankruptcy Code”). Under section 327(a), financial advisors must satisfy a stringent two-part test to be approved. Alternatively, financial advisors may seek approval under section 363(b) pursuant to the J. Alix Protocol, a national settlement protocol developed by the United States Trustee Program (the “USTP”). Since its inception, the J. Alix Protocol has been cited by debtors and bankruptcy courts when seeking and granting employment application approval. However, concerns over the use of the J. Alix Protocol as “a tool to avoid transparency and create inequity” have courts reverting back to approving the retention of financial advisors under section 327(a).
The United States Bankruptcy Court for the Southern District of Texas voiced concerns when a debtor initially filed an employment application pursuant to the J. Alix Protocol. After amending its application to seek approval under section 327(a), the debtor received court approval to employ financial advisors, and the court found this second filing provided “a much-appreciated level of transparency.”
This memorandum explores whether debtors should be permitted to retain financial advisors who served in prepetition roles under section 327(a) or the J. Alix Protocol. Part I evaluates the employment application process under section 327(a). Part II similarly analyzes applications filed under the J. Alix Protocol. Part III discusses each application’s effectiveness at providing transparency and equity and concludes debtors should file financial advisor employment applications under section 327(a).