1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 In re: ) Case No. 21-23169-B-11 ) 4 CALIFORNIA INDEPENDENT ) DC No. SK-8 PETROLEUM ASSOCIATION, ) 5 ) ) 6 Debtor(s). ) ________________________________) 7 8 MEMORANDUM DECISION GRANTING DEBTOR’S MOTION FOR AUTHORITY TO RETAIN AND COMPENSATE CONSULTANTS UNDER 11 U.S.C. § 363 9 Before the court is the Debtor’s Motion for Authority to 10 Retain and Compensate Consultants Utilized in the Ordinary Course 11 of Business filed by chapter 11 debtor and debtor in possession 12 California Independent Petroleum Association (“Debtor”). The 13 motion is supported by the declaration and supplemental 14 declaration of the Debtor’s Chief Executive Officer, declarations 15 of the entities that the Debtor moves to retain as consultants, a 16 reply, and supplemental points and authorities. 17 Creditors Youth for Environmental Justice, South Central 18 Youth Leadership Coalition, and Center for Biological Diversity 19 (collectively, “NPC”) filed an initial opposition and a 20 supplemental response. Other than references to the docket, 21 NPC’s initial opposition and the supplemental response are not 22 supported by other evidence. Notably, NPC submitted no evidence 23 that contradicts or otherwise refutes the Debtor’s written 24 evidence. 25 The United States trustee also filed a limited objection to 26 the motion. The limited objection references the docket and 27 includes no additional supporting evidence. 28 The motion was filed, set, and served under Local Bankr. R. 1 9014-1(f)(2). It was initially before the court on November 23, 2 2021, at which time the court ordered a briefing schedule 3 pursuant to Local Bankr. R. 9014-1(f)(2)(C) at NPC’s request. 4 The court has reviewed all relevant documents, declarations, 5 and exhibits. The court has also reviewed and takes judicial 6 notice of the docket. See Fed. R. Evid. 201(c)(1). 7 The motion is appropriate for disposition without oral 8 argument which will not assist in the decision-making process. 9 See Local Bankr. R. 1001-1(f), 9014-1(h). The continued hearing 10 on January 25, 2022, will be vacated. Findings of fact and 11 conclusions of law are set forth below. See Fed. R. Civ. P. 12 52(a); Fed. R. Bankr. P. 7052, 9014(c). 13 14 Prefatory Comment 15 The Debtor moves for authorization under 11 U.S.C. § 363 to 16 retain and collectively compensate at $50,000.00 per month 17 several entities that provided the Debtor with policy and 18 legislative-related advice, advocacy, guidance, communication, 19 monitoring, research, consulting, and lobbying services in the 20 years and months before this bankruptcy case was filed. The 21 court will refer to the entities as “Consultants” because, as 22 discussed below, that is what the evidence overwhelmingly 23 establishes the entities are. 24 NPC’s initial opposition questions whether the Debtor may 25 retain and compensate the Consultants under § 363. The initial 26 opposition strongly suggests that the Consultants are 27 “professional persons” who must be employed under 11 U.S.C. § 28 327(a) and compensated under 11 U.S.C. § 330. It also requests - 2 - 1 that the court “either deny the Motion in its entirety or set a 2 briefing schedule[.]” Docket 106 at 4:16-17. And it essentially 3 requests injunctive relief insofar as it asks the court to “order 4 the Debtor to stop paying the consultants who are the subject of 5 the Motion pending the Court’s ruling on the Motion[.]” Id. at 6 4:13-14. 7 NPC has apparently decided to retreat from its initial 8 opposition. Although NPC asks the court to reduce the 9 Consultants’ collective monthly compensation by $10,000.00, as 10 does the United States trustee, it now states in its supplemental 11 response that it will defer to the court and the United States 12 trustee on the issue of whether the Consultants are “professional 13 persons” under § 327(a) of the Bankruptcy Code.1 NPC also states 14 that it reserves the right to revisit the Consultants’ 15 compensation, which it characterizes as discretionary spending, 16 in the context of plan confirmation. 17 18 Background 19 NPC consists of “three nonprofit environmental and social 20 justice organizations[.]” Youth for Environmental Justice v. 21 City of Los Angeles, 2019 WL 642452 at *1 (Cal. App. 2d Div., 22 Feb. 15, 2019). NPC’s mission and its message differ 23 dramatically from the Debtor’s core mission and message. NPC and 24 the Debtor are also litigation adversaries. 25 The Debtor is a California corporation incorporated pursuant 26 to Internal Revenue Code § 501(c)(6). The Debtor filed this 27 28 1The United States trustee takes no position on the issue. - 3 - 1 subchapter v chapter 11 case on September 5, 2021. The Debtor 2 continues to operate and manage its affairs as a debtor in 3 possession under 11 U.S.C. § 1184. 4 The Debtor’s mission, and its core business purpose, is to 5 promote greater understanding and awareness of the unique nature 6 of California’s independent oil and natural gas producers and the 7 marketplace in which they operate including the economic 8 contributions made by California independents to local, state, 9 and national economies, to otherwise foster the efficient 10 utilization of California’s petroleum resources, and to promote a 11 balanced approach to resource development and environmental 12 protection in order to improve business conditions for the 13 Debtor’s members. The Debtor generates revenue by performing its 14 core mission. As a matter of internal operations, the Debtor has 15 determined that the postpetition retention of the Consultants is 16 critical to its ability to continue to perform its core mission. 17 Retention of the Consultants also benefits creditors. In 18 the two years before the Debtor filed its chapter 11 petition it 19 reduced its workforce from eight staff members to four. This 20 resulted in a reduction in payroll costs from $1,658,000.00 for 21 fiscal year 2019 to approximately $1,052,000.00 expected in 2021. 22 The Debtor has used the Consultants to fill the gap resulting 23 from the workforce reduction. In that regard, the Consultants 24 provide services that are otherwise performed by employees 25 without the need for the Debtor to incur insurance, travel, 26 overhead, and other auxiliary costs associated with additional 27 employees. Use of the Consultants in this capacity has resulted 28 in a cost-effective alternative to hiring additional employees. - 4 - 1 The Debtor has identified eight Consultants.2 Each 2 Consultant has submitted a declaration that describes in detail 3 its pre- and postpetition services, and which further confirms 4 that the services provided are no different than services that an 5 employee of the Debtor would perform. The Consultants and their 6 respective services are as follows: 7 (1) Geosyntech Consultants, Inc. [Docket #120] 8 • Biweekly Member Meetings: Prepare for and attend biweekly meetings with the Firm, Catalyst Environmental 9 Solutions (Catalyst), and CIPA members. Preparation for biweekly meetings consists of updating graphics, 10 processing data received from data requests, and updating meeting agendas.
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1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 In re: ) Case No. 21-23169-B-11 ) 4 CALIFORNIA INDEPENDENT ) DC No. SK-8 PETROLEUM ASSOCIATION, ) 5 ) ) 6 Debtor(s). ) ________________________________) 7 8 MEMORANDUM DECISION GRANTING DEBTOR’S MOTION FOR AUTHORITY TO RETAIN AND COMPENSATE CONSULTANTS UNDER 11 U.S.C. § 363 9 Before the court is the Debtor’s Motion for Authority to 10 Retain and Compensate Consultants Utilized in the Ordinary Course 11 of Business filed by chapter 11 debtor and debtor in possession 12 California Independent Petroleum Association (“Debtor”). The 13 motion is supported by the declaration and supplemental 14 declaration of the Debtor’s Chief Executive Officer, declarations 15 of the entities that the Debtor moves to retain as consultants, a 16 reply, and supplemental points and authorities. 17 Creditors Youth for Environmental Justice, South Central 18 Youth Leadership Coalition, and Center for Biological Diversity 19 (collectively, “NPC”) filed an initial opposition and a 20 supplemental response. Other than references to the docket, 21 NPC’s initial opposition and the supplemental response are not 22 supported by other evidence. Notably, NPC submitted no evidence 23 that contradicts or otherwise refutes the Debtor’s written 24 evidence. 25 The United States trustee also filed a limited objection to 26 the motion. The limited objection references the docket and 27 includes no additional supporting evidence. 28 The motion was filed, set, and served under Local Bankr. R. 1 9014-1(f)(2). It was initially before the court on November 23, 2 2021, at which time the court ordered a briefing schedule 3 pursuant to Local Bankr. R. 9014-1(f)(2)(C) at NPC’s request. 4 The court has reviewed all relevant documents, declarations, 5 and exhibits. The court has also reviewed and takes judicial 6 notice of the docket. See Fed. R. Evid. 201(c)(1). 7 The motion is appropriate for disposition without oral 8 argument which will not assist in the decision-making process. 9 See Local Bankr. R. 1001-1(f), 9014-1(h). The continued hearing 10 on January 25, 2022, will be vacated. Findings of fact and 11 conclusions of law are set forth below. See Fed. R. Civ. P. 12 52(a); Fed. R. Bankr. P. 7052, 9014(c). 13 14 Prefatory Comment 15 The Debtor moves for authorization under 11 U.S.C. § 363 to 16 retain and collectively compensate at $50,000.00 per month 17 several entities that provided the Debtor with policy and 18 legislative-related advice, advocacy, guidance, communication, 19 monitoring, research, consulting, and lobbying services in the 20 years and months before this bankruptcy case was filed. The 21 court will refer to the entities as “Consultants” because, as 22 discussed below, that is what the evidence overwhelmingly 23 establishes the entities are. 24 NPC’s initial opposition questions whether the Debtor may 25 retain and compensate the Consultants under § 363. The initial 26 opposition strongly suggests that the Consultants are 27 “professional persons” who must be employed under 11 U.S.C. § 28 327(a) and compensated under 11 U.S.C. § 330. It also requests - 2 - 1 that the court “either deny the Motion in its entirety or set a 2 briefing schedule[.]” Docket 106 at 4:16-17. And it essentially 3 requests injunctive relief insofar as it asks the court to “order 4 the Debtor to stop paying the consultants who are the subject of 5 the Motion pending the Court’s ruling on the Motion[.]” Id. at 6 4:13-14. 7 NPC has apparently decided to retreat from its initial 8 opposition. Although NPC asks the court to reduce the 9 Consultants’ collective monthly compensation by $10,000.00, as 10 does the United States trustee, it now states in its supplemental 11 response that it will defer to the court and the United States 12 trustee on the issue of whether the Consultants are “professional 13 persons” under § 327(a) of the Bankruptcy Code.1 NPC also states 14 that it reserves the right to revisit the Consultants’ 15 compensation, which it characterizes as discretionary spending, 16 in the context of plan confirmation. 17 18 Background 19 NPC consists of “three nonprofit environmental and social 20 justice organizations[.]” Youth for Environmental Justice v. 21 City of Los Angeles, 2019 WL 642452 at *1 (Cal. App. 2d Div., 22 Feb. 15, 2019). NPC’s mission and its message differ 23 dramatically from the Debtor’s core mission and message. NPC and 24 the Debtor are also litigation adversaries. 25 The Debtor is a California corporation incorporated pursuant 26 to Internal Revenue Code § 501(c)(6). The Debtor filed this 27 28 1The United States trustee takes no position on the issue. - 3 - 1 subchapter v chapter 11 case on September 5, 2021. The Debtor 2 continues to operate and manage its affairs as a debtor in 3 possession under 11 U.S.C. § 1184. 4 The Debtor’s mission, and its core business purpose, is to 5 promote greater understanding and awareness of the unique nature 6 of California’s independent oil and natural gas producers and the 7 marketplace in which they operate including the economic 8 contributions made by California independents to local, state, 9 and national economies, to otherwise foster the efficient 10 utilization of California’s petroleum resources, and to promote a 11 balanced approach to resource development and environmental 12 protection in order to improve business conditions for the 13 Debtor’s members. The Debtor generates revenue by performing its 14 core mission. As a matter of internal operations, the Debtor has 15 determined that the postpetition retention of the Consultants is 16 critical to its ability to continue to perform its core mission. 17 Retention of the Consultants also benefits creditors. In 18 the two years before the Debtor filed its chapter 11 petition it 19 reduced its workforce from eight staff members to four. This 20 resulted in a reduction in payroll costs from $1,658,000.00 for 21 fiscal year 2019 to approximately $1,052,000.00 expected in 2021. 22 The Debtor has used the Consultants to fill the gap resulting 23 from the workforce reduction. In that regard, the Consultants 24 provide services that are otherwise performed by employees 25 without the need for the Debtor to incur insurance, travel, 26 overhead, and other auxiliary costs associated with additional 27 employees. Use of the Consultants in this capacity has resulted 28 in a cost-effective alternative to hiring additional employees. - 4 - 1 The Debtor has identified eight Consultants.2 Each 2 Consultant has submitted a declaration that describes in detail 3 its pre- and postpetition services, and which further confirms 4 that the services provided are no different than services that an 5 employee of the Debtor would perform. The Consultants and their 6 respective services are as follows: 7 (1) Geosyntech Consultants, Inc. [Docket #120] 8 • Biweekly Member Meetings: Prepare for and attend biweekly meetings with the Firm, Catalyst Environmental 9 Solutions (Catalyst), and CIPA members. Preparation for biweekly meetings consists of updating graphics, 10 processing data received from data requests, and updating meeting agendas. Meetings have generally been 11 15 to 30 minutes in duration. Post-meeting activities typically have consisted of reviewing and editing 12 meeting minutes and addressing CIPA members’ questions and comments and responding to members’ emails. 13 • Communication with Stakeholders: Provide support 14 through communication as needed to CIPA, its members, and stakeholders. Although the Firm provides general 15 communications, the Firm also will engage in meetings with individual CIPA members to discuss data needs 16 (separate from biweekly meetings and data request memoranda). The Firm also will participate in internal 17 meetings regarding California Environmental Quality Act on behalf of CIPA members, as well as engage in ongoing 18 communication with Catalyst. 19 • Data Processing and Graphics: Review, processing and verify data received from CIPA members to fill gaps and 20 to refine the current geodatabase such that a strong case for a BPA in the area of interest will be 21 presented. Update the geodatabase and update graphics as data is processed. 22 • Basin Plan Amendment Work Plan: Prepare a BPAW. A 23 draft BPAW will be submitted for review to CIPA 24 2The Debtor originally included Alcantar Law Group. 25 Alcantar did not submit a declaration and it is not one of the 26 entities the Debtor seeks to retain under § 363. In fact, the Debtor acknowledges that Alcantar may be a “professional person” 27 under § 327, Docket 83 at 4:7-10, and agreed to file a retention application for that entity, Docket 109 at 3:21-23, which it did 28 on December 23, 2021. Dockets 149, 154, 159, & 161. - 5 - 1 members. The Firm will incorporate comments and suggestions from CIPA members into the final BPAW prior 2 to submittal to CV-SALTS and the RWQCB. 3 • Regulatory Meetings: Participate in approximately four regulatory meetings: two regulatory meetings with 4 CV-SALTS and two regulatory meetings with the RWQCB. 5 (2) Tradesman Advisors, Inc. [Docket #121] 6 • Engage agency staff, management and/or other policymakers on an ongoing basis; 7 • Work on the outstanding issues associated with: (i) 8 ARB’s Cap and Trade Rulemaking, (ii) ARB’s Oil/Gas Methane Rule, (iii) ARB’s Short-Lived Climate 9 Pollutants Plan, and (iv) ARB' s 2030 Target Scoping Plan; 10 • Coordinate agency meetings as needed; 11 • Attend necessary public workshops on behalf of CIPA; 12 • Prepare/edit formal comment letters for CIPA’s review 13 and submission; 14 • Assist CIPA in creating and providing technical support materials; 15 • Identify and engage key state elected officials and 16 staff, as appropriate; 17 • Work With other trade groups and associations as directed to solve problems in the most efficient 18 manner; and 19 • Engage lead agencies during regulatory adoption proceedings. 20 (3) Catalyst Environmental Solutions Corporation. 21 [Docket #122] 22 • Monitoring and consulting on permitting at California Geologic Energy Management Division (“CalGEM”) and the 23 State Water Resource Board. 24 • Providing objective analysis on proposed regulations and other agency rule changes. 25 • Coordinate industry input on water quality 26 regulations. 27 • Conduct research and studies on industry related issues. 28 - 6 - 1 (4) Gualco Group, Inc. [Docket #123] 2 • Provide CIPA with advocacy, intelligence gathering, analyses, advice and counsel relative to the escalating 3 plethora of oil extraction and wastewater disposal issues pending before the State Water Resources Control 4 Board, the Department of Conservation, specifically, the Division of Oil, Gas & Geothermal Resources 5 (“DOGGR”) and key regional water quality control boards. 6 • Attention will be paid to the implementation of SB 4 7 (Pavley, Ch. 313, Statutes of 2013) with specific focus on groundwater protection and related issues such as 8 aquifer exemptions. 9 • Assist in the identification of funding opportunities available as a result of the passage of Proposition 1, 10 commonly referred to as the water bond. 11 • Keep CIPA alerted to significant developments, including items identified in the Legislature, the 12 Executive Branch and agencies that could either help or hinder our mutual efforts at the SWRCB, DOGGR, the 13 regional water boards, DWR, and other relevant agencies. 14 • Analyze the current status and impact of CV-SALTS. 15 • Researching recent relevant State Water Board 16 documents. 17 • Monitoring a Central Valley Water Board meeting on Thursday and conduct a virtual briefing for CIPA 18 members. 19 (5) Kester/Pahos [Docket #124] 20 • Monitoring: Review all proposed legislation, amendments and identify language of potential interest 21 to CIPA. Send copies of proposed legislation and amendment language to CIPA. Provide a description of 22 legislative proposals and amendments and advise CIPA. Maintain a database legislative tracking system, and 23 prepare reports on a regular basis or as requested by CIPA. 24 • Advocacy: Perform all necessary advocacy services, 25 including legislative advocacy, agency advocacy, negotiations with all relevant parties, testimony in 26 all necessary legislative proceedings, and general advocacy for CIPA's interests (CMTA, WSPA, CCC, etc.). 27 Prepare suggested legislative language for submission to Legislative Counsel and draft proposed amendments 28 for distribution to other parties for purposes of - 7 - 1 conducting negotiations. 2 • Communication: Regularly communicate with CIPA staff, or other individuals requested by CIPA. Mr. Pahos will 3 be available and willing to communicate with CIPA Staff on a regular basis and provide written reports as 4 requested. Mr. Pahos will be reasonably available to attend meetings held by the CIPA Government Affairs 5 Committees and special functions as requested, including, but not limited to, PAC drives, APA events, 6 CIPA's annual meeting, workshops and board meetings. Mr. Pahos will make reasonable appearances before the 7 CIPA membership to communicate relevant issues and help the Academy bring aboard new members. 8 • Ancillary Services: Provide a professional 9 environment in Sacramento to conduct meetings on behalf of CIPA. Ensure that CIPA is in compliance with all 10 Fair Political Practice Act disclosures. 11 (6) Rosencoco Holdings [Docket #125] 12 • Kern County EIR/Oil & Gas Permitting - represent CIPA on committee(s) to ensure that its members’ interests 13 and concerns are addressed. Provide written reports to keep CIPA staff and members abreast of issues that have 14 potential operational and/or fiscal impact on members. 15 • USGS Water Quality Studies - stay abreast of reporting that is put forth by the USGS in their 16 ongoing groundwater sampling program and convey status of program to CIPA members. Establish a working 17 relationship with key USGS personnel, determine USGS calendar and plans for the USGS next steps. Establish 18 uniform policy for CIPA members on presenting a consistent response to USGS requests. 19 • Regulatory Relief with CalGEM - During these unusual 20 times of a worldwide pandemic work with CalGEM management to ensure that CIPA members are able to stay 21 in CalGEM compliance without undo health and safety risk to their employees and contractors. During times 22 of economic downturn work with CalGEM to establish protocol that will minimize economic hardship on CIPA 23 members while maintaining environmental and safety compliance per CalGEM regulations. 24 • OSPR-work with CIPA [] in developing cost-effective 25 training programs that will comply with statutory changes resulting from AB 1197, CDFW OSPR regulations. 26 Training will result in certification of spill management teams, uniform drill training/scenarios and 27 establishment of OSRO resources for members. 28 • As requested by CIPA, attend public meetings and - 8 - 1 provide public comments on issues as directed by CIPA management and staff; public comments to be delivered 2 will be prepared in advance of meetings and approved by CIPA prior to presentation. 3 • Prepare position papers and/or comments on specific 4 issues for release by CIPA when requested to do so. 5 • Prepare status reports as directed and present to CIPA membership (at Board meetings) as requested. 6 (7) Cornerstone Engineering, Inc. [Docket #126] 7 • Provide a dedicated lead person to track the 8 government actions on the items listed below, convene CIPA members interested in the topic, and help coalesce 9 an association position. Deliverables to CIPA in this role are comment letters, meeting notes, and sometimes 10 meetings or public comments before governmental agencies or decision-making bodies. 11 • Issues of special concern to CIPA members that 12 Cornerstone will track and assist include, without limitation: 13 (1) LA County Sustainability Plan-CIPA’s January 2021 14 comment letter faced head-on the County’s stated goals of fossil fuel elimination, fence-line monitoring, and 15 setbacks. Cornerstone will pick up tracking and engaging in the process to ensure that the adopted plan 16 doesn’t unduly disadvantage our industry nor the County’s citizens. 17 (2) Non-Conformity/Amortization-CIPA members face a 18 relatively new tactic from local jurisdictions of shutting in oil production in the name of 19 nonconformity/amortization. Culver City, City of Los Angeles, and County of Los Angeles are using these 20 tools to shut down production. Cornerstone will coordinate members to engage and respond to maneuvers 21 by local agencies associated with “takings-by-amortization”. 22 (3) Zoning Memo 133-In September 2016, Los Angeles City 23 Zoning Administrator issued “Memo 133” essentially inserting themselves into oil well permitting through 24 the “Plan Approval” process and re-writing CEQA to take otherwise legal avenues for determination off the table 25 for oil & gas. City representatives are evidently open to CIPA member input on what activities trigger the 26 zoning memo and how it is implemented. Cornerstone will provide structure to members’ dialogue in this 27 regard and keep conversations open with the City. 28 (4) LA Fire Idle Well Regs-The City of Los Angeles - 9 - 1 attempts to trump CalGEM’s definition of “idle wells” and in doing so, has overly-burdensome idle well 2 regulations that conflict with the state’s regulations. Cornerstone will organize members to work with the City 3 to avoid preemption while responding to the spirit of the City’s idle well expectations. 4 (5) Cyclic Steam—It has been a year since CalGEM issued 5 NTO 2020-02 placing a moratorium on approval of new cyclic steam operations. Cornerstone will engage with 6 the state on where things stand, open issues of concern, and organize member producers to address 7 issues with the aim of releasing the cyclic steam moratorium. 8 (8) Independent Oil Producers’ Alliance [Docket #127] 9 Services include, but are not limited to, monitoring 10 regulations and activities pertaining to the oil and gas industry by the Central Valley Air Pollution 11 Control Board and the Central Valley Regional Water Board. 12 None of the Consultants are prepetition creditors or an 13 insider of the Debtor. And none of the Consultants hold any 14 position on the Debtor’s board or executive committee. 15 16 Discussion 17 The Consultants are not “Professional Persons” Under § 327(a). 18 The Consultants are not “professional persons” under § 19 327(a).3 Although there is limited Ninth Circuit authority on 20 the issue, In re East Coast Foods, Inc., 2019 WL 6893015 at *6 21 22 23 3Section 327(a) states as follows: (a) Except as otherwise provided in this section, the 24 trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, 25 or other professional persons, that do not hold or 26 represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the 27 trustee in carrying out the trustee’s duties under this title. 28 11 U.S.C. § 327(a). - 10 - 1 (C.D. Cal. Dec. 8, 2019), the Ninth Circuit Bankruptcy Appellate 2 Panel has opined that: 3 Not every person employed by a trustee is a ‘professional person’ within the meaning of § 4 327. A ‘professional person’ is one who takes a central role in the administration of 5 the bankruptcy estate and in the bankruptcy proceedings. Individuals or entities that 6 perform mechanical, nondiscretionary tasks are not ‘professional persons’ within the 7 meaning of § 327. 8 Blair v. Stratton (In re Blair), 329 B.R. 358, 2005 WL 2009303 at 9 *4 (9th Cir. BAP June 20, 2005) (internal quotations and 10 citations omitted). Other courts consider a number of factors 11 when determining whether an entity or an individual is a 12 “professional person” under § 327(a). 13 In In re Nine West Holdings, Inc., 588 B.R. 678 (Bankr. 14 S.D.N.Y. 2018), the bankruptcy court authorized the debtor’s 15 postpetition retention and compensation of prepetition 16 consultants under § 363 and in so doing rejected the United 17 States trustee’s argument that the consultants were professionals 18 under § 327(a). In reaching its decision, the court noted that 19 the debtor retained the consultants years before it filed 20 bankruptcy. It also noted that the consultants’ services did not 21 involve substantive decision-making, were largely administrative, 22 were limited to day-to-day operations that supplanted in-house 23 functions, and were required without regard to the debtor’s 24 bankruptcy filing. 25 The court in In re Heritage Home Group LLC, et al., 2018 WL 26 4684802 (Bankr. D. Del. Sept. 27, 2018), reached a similar result 27 holding that the debtor’s liquidation consultant was not a 28 “professional person” under § 327(a). Central to the decision - 11 - 1 was that the consultant’s role was advisory. The consultant also 2 was not intimately involved in the bankruptcy case, had no role 3 in the preparation or negotiation of a reorganization plan, had 4 no discretion with regard to the debtor’s business decisions, and 5 its role was limited to making recommendations to the debtor. 6 Several days later, a different bankruptcy judge in the same 7 district reached the same conclusion in a different case. In re 8 Brookstone Holdings Corp., 592 B.R. 27 (Bankr. D. Del. 2018), the 9 court held that the debtor’s prepetition consultant was not a 10 “professional person” and therefore could be retained under § 363 11 without regard to § 327(a). The court again noted that the 12 consultant’s role was advisory, the debtor remained in complete 13 control over all aspects of the business, and the consultant was 14 not involved in negotiating the terms of a reorganization plan. 15 In reaching their respective decisions, the courts in 16 Heritage Home and Brookstone relied on a number of non-exclusive 17 factors. These factors (paraphrased) are as follows: 18 1. whether the entity or individual controls, manages, administers, invests, purchases, or sells 19 assets that are significant to the debtor’s reorganization; 20 2. whether the entity or individual is involved in 21 negotiating the terms of a plan of reorganization; 22 3. whether the entity or individual is directly related to the type of work carried out by the debtor 23 or to the routine maintenance of the debtor’s business operations; 24 4. whether the entity or individual is given 25 discretion or autonomy to exercise professional judgment in some part of the administration of the 26 debtor’s estate; 27 5. the extent of the entity’s or individual’s involvement in the administration of the debtor’s estate; and 28 - 12 - 1 6. whether the entity’s or individual’s services involve some degree of special knowledge or skill, such 2 that the employee can be considered a ‘professional’ within the ordinary meaning. 3 Brookstone, 592 B.R. at 34-35. 4 These factors are persuasive and instructive. The court 5 will therefore rely on them here. 6 The Consultants do not-and are not retained to-administer, 7 invest, purchase, or sell the Debtor’s assets. In fact, there is 8 no evidence that the Consultants have anything to do with the 9 Debtor’s assets. 10 There is no evidence that the Consultants are or will be 11 involved in the negotiation of plan terms. 12 Inasmuch as the Consultants’ services are critical to the 13 Debtor’s ability to perform its core mission and they correlate 14 with internal tasks that an employee would otherwise perform but 15 for the Debtor’s workforce reduction, the Consultants’ services 16 relate directly to the type of work carried out by the Debtor. 17 Moreover, that the Consultants were retained to provide these 18 services well before this bankruptcy case was filed further 19 demonstrates that the Debtor did not retain the Consultants for 20 the purpose of administering this chapter 11 case and that the 21 Consultants were retained instead for fundamental business 22 purposes unrelated to this case. 23 The Consultants lack discretion and autonomy to exercise 24 professional judgment in the administration of the estate and the 25 Debtor’s affairs. As an initial matter, there is no evidence 26 that the Consultants are or will be involved in any aspect of 27 this bankruptcy case or estate administration. Inasmuch as the 28 - 13 - 1} Consultants interact only with the Debtor, to the extent they are involved in this case their involvement is tangential and not central.’ See In re That’s Entm’t Mktg. Grp., Inc., 168 B.R. 230 (N.D. Cal. 1994). The Consultants also lack discretion and autonomy to 6 || exercise their professional judgment with regard to the Debtor’s affairs. They serve in an advisory capacity. They also monitor events, collect and research information, meet with the Debtor its members, and make recommendations to the Debtor and its 10 || members based on the foregoing. To the extent any of the 11] consultants lobby for the Debtor or have contact with boards or 12 |} elected officials on the Debtor’s behalf, they do so subject to 13 the Debtor’s direction and control. In other words, the Debtor retains control of any message the Consultants convey to the 15 |} outside world for or on the Debtor’s behalf. 16 The only factor that possibly weighs in favor of 17 || characterizing the Consultants as § 327(a) “professional persons” 18 is the sixth factor. But even that is weak, and the factor is not controlling in the overall analysis. Moreover, the court in 20 || Brookstone found this factor “entirely unhelpful” because 21 “literally all business and service activities require 22 — 23 ‘The court notes that the Consultants’ interaction with the Debtor in this case is significantly less than the interaction between the consultants and the respective debtors in Nine West 25 and Brookstone. The consultants in the former served as the debtor’s CEO and in the latter the consultant served as the sole entity that disposed of and monetized the debtor’s inventory. The point here is that in Nine West and Brookstone interaction 27 || between the consultants and the debtors was constant and ongoing whereas in this case interaction between the Consultants and the 28 | Debtor is sporadic and “as-needed.” - 14 -
1 ‘specialized knowledge or skill’ on the part of the service 2 provider.” Brookstone, 592 B.R. at 37. This court agrees. 3 Additionally, the court must consider this factor in the context 4 of the BAP’s statement in Blair that a professional plays a 5 “central” role in the administration of the bankruptcy estate and 6 proceedings. And as noted above, the other factors 7 overwhelmingly establish this is not the case here. 8 Based on the foregoing, the court concludes that the 9 Consultants are not “professional persons” which means that the 10 Debtor may retain and compensate the Consultants in the ordinary 11 course of its business under § 363(c) and without regard to §§ 12 327(a) and 330. Alternatively, to the extent that authorization 13 to retain and compensate the Consultants is necessary under § 14 363(b), the court grants such authorization. 15 The Debtor is also authorized to collectively compensate the 16 Consultants no more than $50,000.00 monthly. Any unused portion 17 in a particular one-month period may be rolled over to the 18 following month for future compensation. But in no event shall 19 the Consultants’ collective compensation for a particular one- 20 month period exceed $50,000.00. Because the evidence before the 21 court supports the conclusion that the Debtor uses the 22 Consultants to perform its core mission and that the Debtor 23 generates revenue by performing its core mission, the court views 24 the Consultants’ compensation as critical to the reorganization 25 process and not discretionary spending as NPC suggests. 26 In the interests of transparency and disclosure, the 27 following protocols will also apply to any future consultant the 28 Debtor may elect to retain and compensate: (1) any newly- - 15 - 1 retained consultant shall file a verified statement or 2 declaration similar to the declarations the Consultants filed in 3 support of the Debtor’s motion; (2) parties in interest will have 4 an opportunity to object to a future proposed consultant’s 5 retention within fourteen (14) days after a verified statement or 6 declaration is filed; and (3) the Debtor shall itemize payments 7 to each Consultant on its monthly operating reports. 8 Retention and Compensation of the Consultants is a Valid Business Judgment and in the Best Interest of Creditors. 9 Retention and compensation of the Consultants under § 363 is 10 a valid exercise by the Debtor of its business judgment and in 11 the best interest of creditors for at least two reasons. First, 12 the Consultants are critical to the Debtor’s ability to perform 13 its core mission which is critical to the Debtor’s ability to 14 generate the revenue it will need to fund a chapter 11 plan and 15 pay creditors. Second, the Debtor’s use of the Consultants in 16 the capacity of as-needed employees reduces operational costs 17 which increases funds available to the Debtor to pay creditors 18 under a chapter 11 plan. The Debtor’s business judgment on these 19 matters is entitled to substantial deference. Simantob v. Claims 20 Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 289 (9th Cir. BAP 21 2005). 22 One final note. It is entirely inappropriate for NPC - as 23 unsecured creditors and apparently the Debtor’s philosophical, 24 political, and litigation nemeses - to use these bankruptcy 25 proceedings to undermine the Debtor’s business judgment on 26 matters that pertain to the Debtor’s internal operations. In 27 that regard, NPC’s decision to retreat from its initial 28 - 16 - 1 opposition is a wise one. Recall that at the inception of this 2 case NPC vehemently asserted that it expects full payment of its 3 state court judgment against the Debtor. See Docket 37 at 3:4-6, 4 6:1-2. Having made that assertion it would be bad faith and an 5 improper use of these bankruptcy proceedings for NPC to then take 6 a position that effectively deprives the Debtor of critical 7 resources the Debtor needs to perform its core mission, generate 8 revenue, and pay the judgment that NPC asserts the Debtor must 9 pay in full. However, given NPC’s supplemental response, the 10 court need not reach this issue. 11 12 Conclusion 13 For the foregoing reasons, and other good cause appearing, 14 the motion will be granted to the extent stated hereinabove and 15 the continued hearing on January 25, 2022, at 9:30 a.m. will be 16 vacated. 17 A separate order will issue. 18 19 20 21 22 23 24 25 26 27 28 - 17 - 1 INSTRUCTIONS TO CLERK OF COURT SERVICE LIST 2 The Clerk of Court is instructed to send the attached 3 document, via the BNC, to the following parties: 4 Ian S. Landsberg 1880 Century Park East Suite 300 5 Los Angeles CA 90067 6 Carl L. Grumer 11355 W Olympic Blvd 7 Los Angeles CA 90064 8 Lisa A. Holder 3710 Earnhardt Dr 9 Bakersfield CA 93306 10 Paul J. Pascuzzi 500 Capitol Mall, Suite 2250 11 Sacramento CA 95814 12 Adam B. Wolf 4 Embarcadero Center, Suite 1400 13 San Francisco CA 94111 14 Jason M. Blumberg 501 I St #7-500 15 Sacramento CA 95814 16 17 18 19 20 21 22 23 24 25 26 27 28 - 18 -