Nine West Holdings, Inc.

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
)
In re: 	) 	Chapter 11
)
NINE WEST HOLDINGS, INC., et al.,1 	) 	Case No. 18-10947 (SCC)
)
Debtors. 	) 	(Jointly Administered)
)
)
MODIFIED BENCH DECISION ON DEBTORS’ APPLICATION PURSUANT TO
11 U.S.C. §§ 105(a) AND 363(b) TO (A) RETAIN ALVAREZ & MARSAL NORTH
AMERICA, LLC TO PROVIDE THE DEBTORS AN INTERIM CHIEF
EXECUTIVE OFFICER AND CERTAIN ADDITIONAL PERSONNEL AND
(B) DESIGNATE RALPH SCHIPANI AS INTERIM CHIEF EXECUTIVE
OFFICER FOR NINE WEST HOLDINGS, INC. AND ITS DEBTOR
AFFILIATES, NUNC PRO TUNC TO THE PETITION DATE
1 	The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax
identification number, are: Nine West Holdings, Inc. (7645); Jasper Parent LLC (4157); Nine West
Management Service LLC (4508); Kasper Group LLC (7906); Kasper U.S. Blocker LLC (2390); Nine
West Apparel Holdings LLC (3348); Nine West Development LLC (2089); Nine West Distribution LLC
(3029); Nine West Jeanswear Holding LLC (7263); One Jeanswear Group Inc. (0179); and US KIC Top
Hat LLC (3076). The location of the Debtors’ service address is: 1411 Broadway, New York, New York
10018.
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A P P E A R A N C E S:
KIRKLAND & ELLIS LLP
KIRKLAND & ELLIS INTERNATIONAL LLP
Attorneys for Debtors and Debtors in Possession
300 North LaSalle
Chicago, IL 60654
By: 	James A. Stempel, Esq.
Joseph M. Graham, Esq.
601 Lexington Avenue
New York, NY 10022
By: 	Christopher J. Marcus, P.C.
609 Main Street
Houston, TX 77002
By: 	Anna G. Rotman, P.C.
WILLIAM K. HARRINGTON
United States Trustee for Region 2
U.S. Department of Justice
Office of the United States Trustee
201 Varick Street, Room 1006
New York, NY 10014
By: 	Andrea B. Schwartz, Esq.
Susan Arbeit, Esq.
Benjamin J. Higgins, Esq.
MILBANK, TWEED, HADLEY & McCLOY LLP
Attorneys for Alvarez & Marsal North America, LLC
28 Liberty Street
New York, NY 10005
By: 	Dennis F. Dunne, Esq.
Alexander B. Lees, Esq.
International Square Building
1850 K Street, NW
Washington, DC 20006
By: 	Andrew M. Leblanc, Esq.
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AKIN, GUMP, STRAUSS, HAUER & FELD LLP
Attorneys for Official Committee of Unsecured Creditors
One Bryant Park
New York, NY 10036
By: 	Daniel H. Golden, Esq.
Arik Preis, Esq.
MORGAN LEWIS & BOCKIUS LLP
Attorneys for Wells Fargo Bank, National Association
One Federal Street
Boston, MA 02110
By: 	Julia Frost-Davies, Esq.
DAVIS POLK & WARDWELL LLP
Attorneys for the Ad Hoc Secured Lender Group
450 Lexington Avenue
New York, NY 10017
By: 	Marshall S. Huebner, Esq.
Darren S. Klein, Esq.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
Attorneys for Brigade Capital Management, LP
1177 Avenue of the Americas
New York, NY 10036
By: 	Douglas H. Mannal, Esq.
Rachael L. Ringer, Esq.
QUINN EMANUEL URQUHART &
SULLIVAN LLP
Co-Counsel for GLAS Trust Company, LLC
51 Madison Avenue, 22nd Floor
New York, NY 10010
By: 	Benjamin I. Finestone, Esq.
Kate Scherling, Esq.
SULLIVAN & WORCESTER LLP
Co-Counsel for GLAS Trust Company, LLC
One Post Office Square
Boston, MA 02109
By: 	Jeanne P. Darcey, Esq.
Amy A. Zuccarello, Esq.
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KING & SPALDING LLP
Attorneys for the Ad Hoc Group of Crossover Lenders
1185 Avenue of the Americas
New York, NY 10036
By: 	Michael C. Rupe, Esq.
Jeffrey D. Pawlitz, Esq.
444 West Lake Street, Suite 1650
Chicago, IL 60606
By: 	Bradley Thomas Giordano, Esq.
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SHELLEY C. CHAPMAN
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the application (the “Application”) of the Debtors to (a) retain
Alvarez & Marsal North America, LLC (“A&M”) to provide the Debtors an interim
Chief Executive Officer and certain additional personnel and (b) designate Mr. Ralph
Schipani as interim Chief Executive Officer for Nine West Holdings, Inc. and its debtor
affiliates nunc pro tunc to April 6, 2018 (the “Petition Date”).2 In support of the
Application, the Debtors filed the Declaration of Mr. Ralph Schipani [Dkt. No. 207] and
the Supplemental Declaration of Mr. Schipani [Dkt. No. 419] (“Schipani Suppl. Decl.”).
The sole objection to the relief sought by the Application (the “Objection”) was
filed by the Office of the United States Trustee (the “U.S. Trustee”) on June 21, 2018,
together with the Declaration of Andrea Schwartz in support of the Objection [Dkt. Nos.
408 and 409]. Six statements in support of the Application were filed by creditors and/or
creditor groups representing virtually all levels of the Debtors’ capital structure: (i) Wells
Fargo Bank, National Association, in its capacity as ABL/FILO DIP Agent and
Prepetition ABL/FILO Agent; (ii) an ad hoc group formed by certain lenders (the “Ad
Hoc Secured Lender Group”) that collectively beneficially own or manage (or are
investment advisors or managers for funds that beneficially own or manage)
approximately (a) $227.5 million in aggregate principal amount of the loans under that
certain Term Loan Credit Agreement, dated as of April 8, 2014 (as amended, restated,
2 	This decision was dictated on the record of the hearing held on June 28, 2018. It has been
modified to include full citations and defined terms, and reflects minor additional non-substantive
modifications. The findings of fact and conclusions of law herein shall constitute the Court’s findings of
fact and conclusions of law pursuant to Bankruptcy Rule 7052, made applicable to this proceeding pursuant
to Bankruptcy Rule 9014. To the extent any finding of fact later shall be determined to be a conclusion of
law, it shall be so deemed, and to the extent any conclusion of law later shall be determined to be a finding
of fact, it shall be so deemed.
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supplemented, waived, or otherwise modified from time to time prior to the Petition Date,
the “Prepetition Secured Term Loan Credit Agreement”), (b) $17.5 million in aggregate
principal amount of the loans under that certain Secured Superpriority Debtor-in-
Possession Term Loan Credit Agreement, dated as of April 11, 2018 (as amended,
restated, supplemented, waived, or otherwise modified from time to time, the “DIP Term
Loan Credit Agreement”), and (c) $17.5 million in commitments for future fundings
under the DIP Term Loan Credit Agreement; (iii) the so-called Ad Hoc Group of
Crossover Lenders, a group of holders of loans under the Prepetition Secured Term Loan
Credit Agreement and loans under that certain Unsecured Term Loan Credit Agreement,
dated as of April 8, 2014 (the “Prepetition Unsecured Term Loan Credit Agreement”);
(iv) GLAS Trust Company, LLC, in its capacity as Administrative Agent under the
Prepetition Unsecured Term Loan Credit Agreement; (v) Brigade Capital Management,
LP, one of the Debtors’ largest economic stakeholders, serving as (a) a lender under the
DIP Term Loan Credit Agreement, (b) a holder of loans under the Prepetition Secured
Term Loan Credit Agreement, (c) a holder of loans under the Prepetition Unsecured
Term Loan Credit Agreement, and (d) a holder of 8.25% Senior Notes Due 2019; and (vi)
the Official Committee of Unsecured Creditors. Replies to the Objection were filed by
the Debtors [Dkt. No. 420] (“Debtors’ Reply”) and by A&M [Dkt. No. 426] (“A&M
Reply”).
The legal issue presented is a narrow, technical one: should the Debtors be
permitted to retain A&M under section 363(b) of title 11 of the United States Code (the
“Bankruptcy Code”), as requested by the Application, or must the retention of A&M be
considered solely under section 327(a) of the Code, as the U.S. Trustee asserts? The U.S.
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Trustee argues that A&M and Mr. Schipani are professional persons within the meaning
of section 327 of the Code and that employment of professional persons must be
accomplished solely and exclusively under section 327; the U.S. Trustee submits that a
debtor cannot use section 363(b) to employ a professional person. Taking its argument a
step further, the U.S. Trustee posits that A&M cannot meet the disinterestedness
requirement of section 327(a) and that, therefore, the Application must be denied.
The Debtors and A&M vehemently disagree with the arguments of the U.S.
Trustee, pointing out that retention of distressed management consultants has been
authorized pursuant to section 363(b) in dozens of other bankruptcy cases where the
engagement satisfies the business judgment standard, and that the Objection directly
contradicts the U.S. Trustee’s national policy over the last 14 years of explicitly assenting
to retention applications for management consultants pursuant to section 363(b) in similar
circumstances, some involving A&M and others involving other turnaround consulting
firms and personnel. Moreover, the Debtors and A&M argue that, in the context of these
cases, A&M is not functioning as a “professional person” as such term is used in section
327(a), and that section 363(b) provides the appropriate basis for granting the
Application.
A hearing on the Application was held today, June 28, 2018 (the “Hearing”). At
the Hearing, the Court heard live testimony from Mr. Ralph Schipani.
The Court assumes familiarity with the general background facts of the Debtors’
cases; its findings in this Bench Decision pertain solely to the facts surrounding the role
of A&M and Mr. Schipani in these cases. The facts described herein are contained in the
record and shall constitute the Court’s findings of fact.
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Background
For over four years, A&M has been providing vital management services to the
Debtors and their non-debtor affiliates. Pursuant to A&M’s prepetition engagement
letter, which is attached to the Debtors’ Reply as Exhibit A (“A&M 2014 Engagement
Letter”), A&M was hired in April 2014 to assist two separate companies – Jones
Holdings LLC and Nine West Holdings Inc. – in achieving strategic and operational
goals, namely an internal restructuring of operational functions across the companies’
business units following their acquisition by Sycamore Partners, L.P. (Schipani Supp.
Decl. ¶ 3; Ex. A to Debtors’ Reply (A&M 2014 Engagement Letter)). Following the
acquisition, the new board of directors sought the assistance of A&M to implement the
new business plan, which focused on organizing and developing the company’s various
brands and lines as separate business units. (Schipani Suppl. Decl. ¶ 2).
A&M’s Role
Since April 2014, A&M has provided vital management services to the Debtors
and their non-debtor affiliates and has overseen virtually all aspects of their day-to-day
operations. The duties of A&M personnel and Mr. Schipani have included, among
other things, (a) supervising and assisting in operations, finance, accounting, and
treasury functions; (b) assisting in the identification of cost reductions and other
operational improvements; and (c) assisting in the evaluation and development of
budgets and business plans. (Ex. A to Debtors’ Reply (A&M 2014 Engagement Letter)
¶ 1(b)). A&M was engaged to manage the day-to-day operations of the business and
supplement traditional in-house functions.
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As stated by Mr. Schipani in his Supplemental Declaration, A&M was not hired
to restructure the obligations of the company, and nothing in A&M’s prepetition
engagement related to bankruptcy planning; rather, it was not until approximately three
years after the engagement began, during the summer of 2017, that the company, in
consultation with advisors and independent of A&M’s activities and responsibilities,
began considering the possibility of a bankruptcy filing. (Schipani Suppl. Decl. ¶ 6).
Since the Petition Date, A&M has continued in its role of managing the daily
operations of the Debtors’ business; any services it has performed relating to the Debtors’
chapter 11 process have been services that could have been performed by existing
company personnel, rather than A&M personnel, had the necessary resources been
available within the company. (Schipani Suppl. Decl. ¶ 7). For example, A&M
personnel assisted in the company’s preparation of bankruptcy schedules and disclosures,
which bolstered the function of the finance department and was, as Mr. Schipani states,
“a necessary extension and continuation of the A&M team’s existing role in managing
operations.” (Id.). A&M has continued to provide the type of services it has provided to
the company for years, and such work supports the professionals hired by the Debtors
specifically for bankruptcy purposes, in Mr. Schipani’s words, “in the same way that in-
house employees and officers of any company going through a restructuring typically
would in my experience.” (Schipani Suppl. Decl. ¶ 8). Significantly, Mr. Schipani and
his team played an instrumental role in achieving significant success in the recent sale of
certain of the Debtors’ assets for a winning bid well over 50% higher than the stalking
horse bid, which secured over $140 million of additional value for the Debtors’ estates.
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Mr. Schipani’s Role as Officer
At the outset of the A&M engagement in 2014, Mr. Schipani served initially as
Interim Vice President of Operations; his principal focus then was assisting the company
with an internal restructuring of operational functions across various business units.
(Schipani Suppl. Decl. ¶ 3). Subsequently, during A&M’s prepetition engagement, Mr.
Schipani also served in each of the following roles: (i) commencing after the acquisition,
as Interim President of Shared Services, where he was tasked with determining which
shared services would be distributed to each of the business units, assigning employees to
the different units, and managing the team that ran the non-redistributed services
functions; (ii) commencing in May 2015, as Interim President of Nine West Holdings,
Inc., where Mr. Schipani was responsible for public financial reporting, conducting
earnings calls, and overseeing cash flow management, overall capital management, and
the creation of annual business plans; and (iii) commencing in June 2016, as Interim CEO
of Nine West Holdings, Inc., where he “assumed responsibility for all aspects of the
Company, including ensuring that the business plans of the individual business unit heads
were coordinated and executed in a consistent manner” and where he became involved
with the sale of the Easy Spirit brand and the acquisition of Kasper Topco Limited in
January 2017. (Schipani Suppl. Decl. ¶¶ 3-5, 11).
Mr. Schipani’s Role as Member of Subsidiary Boards
At the time of A&M’s engagement, Mr. Schipani served as an officer but not as a
director of certain of the Debtors. When the Interim Chief Operating Officer, Mr.
Andrew Hede (another A&M Managing Director who had been appointed in connection
with A&M’s engagement) ceased working on the A&M engagement, Mr. Hede resigned
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from his positions on the boards of certain of the Debtors’ subsidiaries or affiliates.
(Schipani Suppl. Decl. ¶¶ 10-11). At that time, in May 2015, Mr. Schipani was appointed
to replace Mr. Hede on the boards of Dongguan Jones Commerce and Trading Co. Ltd.
and Kasper Global Limited. In September 2015, when Mr. Christopher Cade, Chief
Financial Officer, resigned from his positions on certain subsidiary boards, Mr. Schipani
was appointed to replace Mr. Cade on the subsidiary boards from which he was
departing. Around this time, Mr. Schipani was appointed to the boards of two other
subsidiaries (Nine West Group International Limited and GRI Group Ltd.) to replace a
company employee who had resigned from her positions. Mr. Schipani was also
appointed to the board of Kasper Topco Limited when the company acquired the entity in
January 2017.
All of Mr. Schipani’s board appointments were made pursuant to the request of
and under the supervision of the Debtors’ parent level boards, on which he did not serve.
(Schipani Suppl. Decl. ¶ 12).
The only legal entity that is a Debtor in these cases on whose board Mr. Schipani
has served within the past two years is One Jeanswear Group Inc. Mr. Schipani and Mr.
Joseph Donnalley (another officer of the company) served as the two members of this
entity’s board following Mr. Cade’s resignation in September 2015. After Mr. Donnalley
left the company in October 2016, Mr. Schipani served as the sole board member of One
Jeanswear Group Inc. from October 2016 until August 2017, when Mr. Alan Miller and
Mr. Harvey Tepner were appointed as additional board members. (Schipani Suppl. Decl.
¶ 13). Mr. Schipani resigned from each of his board positions on November 22, 2017.
(Schipani Suppl. Decl. ¶ 14).
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Mr. Schipani’s role on each subsidiary board on which he served was “strictly
administrative and did not entail substantive decision making as a director.” (Schipani
Suppl. Decl. ¶ 15). The boards on which he sat did not hold any meetings. His actions as
a director were limited to signing written consents to enact decisions that were directed
by the parent board, and he did so fewer than twenty times over the two-year period
during which he served on the boards. (Id.). Prior to approving a transaction as a
director, Mr. Schipani had already conducted a “substantive review and deliberation” in
his capacity as an officer, and it was incidental that he would sign a written consent in his
role as a director in order to formalize the approval. (Schipani Suppl. Decl. ¶¶ 15-16).
At the Hearing, Mr. Schipani provided an example of this by referring to his vetting of
the amendment of the ABL Credit Agreement in his role as an officer, after which he
signed a written consent to the amendment in his role as a director. At no time did Mr.
Schipani serve on the board of either (i) Debtor parent Jasper Parent LLC or (ii) lead
Debtor Nine West Holdings Inc.; these two boards made all decisions with respect to the
prepetition and postpetition retention and compensation of officers of the company and of
professional firms such as A&M. (Schipani Suppl. Decl. ¶ 18).
As set forth in his Supplemental Declaration, of the approximately 9,857 hours
Mr. Schipani billed between April 2014 and the Petition Date in connection with A&M’s
engagement by the company, he estimates that he spent less than one half of one hour, in
total, on all matters relating to his service on the subsidiary boards. (Schipani Suppl.
Decl. ¶ 17).
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Discussion
I. 	Section 363(b) of the Bankruptcy Code
Pursuant to section 363(b) of the Bankruptcy Code, after notice and hearing, a
debtor has broad discretion to “use, sell, or lease, other than in the ordinary course of
business, property of the estate,” so long as such use is supported by a good business
reason. 11 U.S.C. § 363(b)(1); see, e.g., Comm. of Equity Sec. Holders v. Lionel Corp.
(In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983) (“The rule we adopt requires
that a judge determining a §363(b) application expressly find from the evidence presented
before him [or her] at the hearing a good business reason to grant such an application.”).
The Debtors and A&M submit that, pursuant to section 363(b), the Court may
authorize the Debtors’ retention of A&M and of Mr. Schipani as Interim CEO. They cite
to numerous decisions and orders from this District and other districts in which courts
have relied on section 363(b) to authorize debtors to retain management consultancy
firms, including where a firm’s personnel were expected to fill key officer roles and
manage the debtor’s day-to-day business. See e.g., In re Enron Corp., No. 01-16034,
2006 WL 1030421, at *2 (Bankr. S.D.N.Y. Apr. 12, 2006) (noting that court authorized
the debtors, under section 363(b), to retain a management consulting firm to provide a
chief executive and chief restructuring officer and additional individuals to serve as
additional personnel during the chapter 11 cases); In re Ajubeo LLC, No. 17-17924, 2017
WL 5466655, at *4 (Bankr. D. Col. Sept. 27, 2017) (approving retention of management
consulting firm to provide a chief restructuring officer under section 363(b)); In re
Copenhaver, Inc., 506 B.R. 757, 764-65 (Bankr. C.D. Ill. 2014) (holding that the
retention of a current director as consultant and chief restructuring officer under section
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363(b) would be appropriate given the “unique and compelling circumstances” of the
case, subject to modification of the court’s oversight of the officers’ fees); In re Toisa
Limited, No. 17-10184 (Bankr. S.D.N.Y. Jan. 22, 2018) [Dkt. No. 458] (approving
employment of a chief restructuring officer pursuant to section 363(b)); see also Debtors’
Reply n.5 (citing orders entered by this Court authorizing retention pursuant to section
363(b) in sixteen cases); A&M Reply ¶ 22 (citing additional orders entered by this
Court). In addition, with respect to A&M specifically, Exhibit A to the A&M Reply lists
thirty-seven bankruptcy cases in which A&M itself has been retained as a management
consultant pursuant to section 363 of the Bankruptcy Code. Notably, except in the case
of In re Toisa Limited, the U.S. Trustee did not object in any of the cited cases to the
debtor(s)’ request to employ the advisors, consultants, and/or chief restructuring officers
pursuant to section 363(b) of the Code nor press the position taken here today that such
retentions could only proceed under section 327.
Seemingly ignoring this mountain of precedent, the U.S. Trustee argues that there
is “a limited body of case law under which courts have approved the retention of
restructuring professionals under section 363 and section 105(a).” (Objection, 22). With
respect to cases referenced in which A&M was retained pursuant to section 363(b), the
U.S. Trustee attempts to distinguish this case from those, asserting that “[n]one involved
the retention of A&M to provide an interim CEO and certain additional personnel, and
nearly all involved the retention of A&M to provide a Chief Restructuring Officer and
other additional personnel or financial advisory services.” (Objection, 5).
The Court is not persuaded by any of the U.S. Trustee’s arguments with respect to
section 363(b) and the Debtors’ alleged inability to utilize this section of the Code to
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provide the basis for retention of A&M and Mr. Schipani in this case. First, with respect
to the plethora of cases cited in which section 363(b) has been relied on for the retention
of A&M (without objection by the U.S. Trustee), the Court observes that the U.S.
Trustee’s narrow, factual distinction between the retention of Mr. Schipani as CEO here
and the retention of an A&M professional as CRO in the previous engagements is
nonsensical. Is the U.S. Trustee’s position that retention of a CRO can be authorized
under section 363 but retention of a CEO cannot? While it is true that the Debtors seek to
retain Mr. Schipani as CEO and not as CRO, the U.S. Trustee’s position here is that
A&M and Mr. Schipani cannot be retained under section 363 and must be retained under
section 327 because they are playing an intimate, significant, and central role in the
Debtors’ reorganization and are thus “professional persons” as such term is used in
section 327(a) of the Code. (Objection, 18). Had the Debtors sought to retain Mr.
Schipani as CRO, however, it appears likely that the U.S. Trustee’s position with respect
to section 327 would remain unchanged; he would argue that the principal duties of a
CRO are to provide support in a bankruptcy case and thus retention under section 327 is
required.
The distinction that that U.S. Trustee attempts to make in his Objection is simply
illogical. Moreover, a close examination of the thirty-seven cases listed on Exhibit A to
the A&M Reply reveals that A&M was not in fact retained to provide solely a CRO and
other additional personnel to the debtors in each and every one of such cases. Instead,
here, as in many of the cited cases, A&M employees were retained pursuant to section
363(b) to serve as additional officers of the debtors, including in roles such as Interim
Chief Executive Officer, Interim Chief Financial Officer, Interim Chief Operating
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Officer, and Interim Vice President of Finance, and to provide additional A&M personnel
to assist such officers. See, e.g., In re Angelica Corp., et al., No. 17-10870 (Bankr.
S.D.N.Y. May 4, 2017) [Dkt. No. 149]; In re Ignite Restaurant Group, Inc., et al., No.
17-33550 (Bankr. S.D. Tex. Jun. 28, 2017) [Dkt. No. 255]; In re Local Insight Media
Holdings, Inc., et al., No. 10-13677 (Bankr. D. Del. Dec. 17, 2010; Feb. 11, 2011) [Dkt.
Nos. 162, 333].
a. 	The Jay Alix Protocol
The U.S. Trustee’s position that section 363(b) cannot provide the basis for
retention of distressed management consultants such as A&M here lacks intellectual
honesty and consistency, particularly when considered in light of the so-called Jay Alix
Protocol adopted by the U.S. Trustee fourteen years ago. The full text of the Jay Alix
Protocol (the “Protocol”) can be found on the website of the U.S. Trustee.3 The
Protocol is not a provision of the Bankruptcy Code. It is not law, and it is not binding
on this Court or any other court. As Joe Guzinski, then acting general counsel for the
Executive Office for U.S. Trustee, stated on November 13, 2001,
We have seen any number of situations where turnaround or other advisory
services seek to be retained as professionals under Section 327 and also
have a role in management . . . . In our view, that renders them an insider
and, therefore, not disinterested. This protocol makes clear how advisory
firms will work with the debtor in the future, at least in a way that’s
acceptable to the UST. We have some cases pending against certain firms
at this point - there are some agreements pending that we’re trying to bring
in under the protocol. 	The protocol right now only applies to cases in
Region 3. But we anticipate making it a policy nationwide after discussion
with the USTs.
(See “EOUST SAYS JAY ALIX PROTOCOL WILL BE NATIONAL POLICY,”
3 	See
https://www.justice.gov/sites/default/files/ust/legacy/2014/08/11/J_Alix_Protocol_Engagement.pdf.
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Bankruptcy Court Decisions Weekly News & Comments, 38 No. 14 Bankr. Ct. Dec.
News 1 (November 13, 2001)).
The Protocol began as a settlement agreement executed in 2004 between the
U.S. Trustee and Jay Alix & Associates, a management consultancy firm, in a
bankruptcy case unrelated to this one; it has developed into a national policy adopted by
the U.S. Trustee whereby the U.S. Trustee assents to – indeed, directs – the retention of
distressed management consultants by a debtor pursuant to section 363 of the Code as
long as the firm complies with certain requirements contained in the Protocol. (See
Protocol §§ I.A-C (defining crisis management engagements to include any engagement
where the firm “furnishes interim executive officers” either prepetition or postpetition
and stating that crisis management firm “shall seek retention under section 363 of the
Bankruptcy Code”)).
As correctly summarized by the Debtors in their Reply, the core requirements of
the Protocol include the following:
(a) the firm sought to be retained must serve in only one capacity (i.e., as
either a financial advisor, crisis manager, claims agent, or investor);
(b) the firm’s retention application must be filed under section 363 of the
Bankruptcy Code and the application must disclose the firm’s relationships
with interested parties and make other disclosures showing the firm is
otherwise disinterested;
(c) the firm must file monthly staffing reports, which must be subject to
Court review; and
(d) retention of persons furnished by the firm must be approved by and act
under the direction of an independent board of directors.
Requiring parties to comply with the Protocol has served as a way to avoid
conflicts of interest. More specifically, the Protocol’s “one hat” rule (which requires that
the firm sought to be retained serve the debtor in only one capacity) is designed to avoid
the “inherent conflict” between an advisor’s duty to a debtor and its own business
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interests where the advisory firm serves both as a financial advisor retained pursuant to
section 327 of the Bankruptcy Code and as a crisis manager with firm staff serving as
officers of the debtor corporation. See In re Saint Vincent’s Catholic Med. Centers of
New York, No. 05-14945, 2007 WL 2492787, at *3 n.3 (Bankr. S.D.N.Y. Aug. 29, 2007).
Put simply, the Protocol was designed to prevent a party from using its position in one
capacity to benefit itself in another capacity. Footnote three to the Protocol states that a
financial advisor “shall not seek to be retained in any capacity in a bankruptcy proceeding
for an entity where any principal, employee or independent contractor of [the advisor]
serves or has served as a director of the entity or an affiliate thereof within two years
prior to the petition date.” (Protocol, n.3). Compliance with the Protocol prevents a
director of a debtor who is also an employee of the advisory firm sought to be retained
from wielding undue influence over the hiring and compensation of such director’s firm.
The U.S. Trustee has not objected to the section 363 retention of distressed management
consultants in scores, if not hundreds, of cases over the past fourteen years where such
consultants have purportedly followed the Protocol.4
Significantly, here, the U.S. Trustee’s Objection fails to mention the Protocol at
all, let alone A&M’s compliance in all material respects with each of its requirements.
4 	Notably, courts in this District and others have approved the retention of restructuring advisors
pursuant to section 363(b) well before the U.S. Trustee first implemented the Protocol. See, e.g., In re
Adelphia Commc’ns. Corp., No. 02-41729 (Bankr. S.D.N.Y. July 31, 2002) [Dkt. 253] (authorizing the
retention of a restructuring advisory firm to provide personnel, including a CRO, pursuant to section
363(b)); In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y. Apr. 4, 2002) [Dkt. 2725] (authorizing the
debtors to enter into an agreement with a consulting firm which then provided an individual as Acting CEO
and CRO, and certain additional personnel pursuant to section 363(b)); In re Iridium Operating, LLC, No.
99-45005 (Bankr. S.D.N.Y. Oct. 12, 1999) [Dkt. 86] (authorizing and approving the terms of retention for
restructuring officers pursuant to sections 105(a) and 363(b)); In re Bill’s Dollar Stores, Inc., No. 01-0435
(Bankr. D. Del. Mar. 14, 2001) [Dkt. 141] (authorizing the continued retention of an advisory firm to
provide the debtors with interim management through their Interim CEO and CRO pursuant to section
363(b)).
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Instead, the Objection on its face ignores the U.S. Trustee’s prior position with respect to
section 363 retentions and argues that retention of A&M can only be authorized pursuant
to section 327(a) of the Code, implying that there was clear error in every case in which a
bankruptcy court has in the past approved an A&M retention pursuant to section 363(b).
Both the Debtors and A&M speculate in their respective Replies (and counsel for the
U.S. Trustee confirmed at the Hearing) that the true origin of the Objection is A&M’s
alleged non-compliance with footnote three of the Protocol, given Mr. Schipani’s service
as a director of a lone Debtor entity within two years prior to the Petition Date.
Returning to first principles, the Court finds that the purpose of the Protocol –
preventing a consultant from using its position in one capacity to benefit itself in another
capacity – has not been violated by A&M here. As emphasized by the Debtors in their
Reply, while Mr. Schipani did in fact serve as a director on a single subsidiary board
within two years of the Petition Date, neither he nor any other A&M employee has ever
served on the parent boards responsible for approving the prepetition or postpetition
retention or compensation of A&M. (Debtors’ Reply ¶ 20; Schipani Supp. Decl. ¶ 18).
Nor did Mr. Schipani’s service on certain subsidiary boards overlap with the timing of
the consideration of either A&M’s 2014 or 2018 engagement letters. Moreover, as the
Court has found, Mr. Schipani’s service on certain subsidiary boards was done at the
discretion and under the direction of the parent boards and primarily involved what can
fairly be characterized as ministerial duties and approvals of transactions he had
previously vetted in his role as an officer. Accordingly, the circumstances surrounding
the concerns which led to the development of the Protocol – avoiding undue influence by
a director in the hiring of professionals – are simply not present here, and the Court finds
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that A&M has complied with the core requirements of the Protocol in all material
respects.
For fourteen years, the crisis and interim management industry has relied on the
implicit consent of the U.S. Trustee that such firms can be retained in a bankruptcy case
pursuant to section 363 rather than section 327 if they meet the requirements of the
Protocol, and the industry has developed its business model based on the understanding
that the U.S. Trustee would enforce this policy consistently and fairly. To permit the
U.S. Trustee to now reverse course in this case would be, in the words of A&M, “starkly
inequitable.” (A&M Reply ¶ 29). The only explanation the U.S. Trustee has provided
for this stunning reversal of policy is that “all bets are off” because of Mr. Schipani’s de
minimis board service; the economic disruption that his departure would cause is of no
concern to the U.S. Trustee. The U.S. Trustee has chosen to take a position that would
unquestionably visit damage on this case, this company, and its creditors; he chooses
compliance with a footnote over the interests of every creditor in this case.
Courts are tasked with ensuring compliance with the Code and ensuring that the
Code is applied with common sense and in a predictable manner. The U.S. Trustee cites
to the Supreme Court’s decision in Jevic for the proposition that deviating from strict
interpretation of the Bankruptcy Code and creating a “rare case” exception to retain
professionals pursuant to section 363 who might be ineligible under section 327 should
not be permitted, as it may “threaten[ ] to turn a ‘rare case’ exception into a more general
rule.” (See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 986 (2017)). But the U.S.
Trustee ignores the Supreme Court’s additional statements regarding judicially-created
exceptions not specifically found in the Code but which advance significant Code-related
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objectives. Jevic strictly interpreted the absolute priority rule; however, with respect to
other instances “in which a court has approved interim distributions that violate ordinary
priority rules,” including “‘first-day’ wage orders that allow payment of employees’
prepetition wages, ‘critical vendor’ orders that allow payment of essential suppliers’
prepetition invoices, and ‘roll-ups’ that allow lenders who continue financing the debtor
to be paid first on their prepetition claims,” the Supreme Court stated that “one can
generally find significant Code-related objectives that the priority-violating distributions
serve.” Id. at 985. So too here.
At the Hearing, counsel for the U.S. Trustee characterized the Application’s use
of section 363 as a “backdoor” way to avoid the limitations of section 327(a) of the Code,
including the disinterestedness requirement. When questioned by the Court, counsel for
the U.S. Trustee indicated that, if a turnaround consulting firm complies with the Jay Alix
Protocol, however, the U.S. Trustee would “exercise his prosecutorial discretion” and not
object to the debtor’s seeking retention of the firm under section 363(b) instead of under
section 327(a). Counsel’s explanation in this regard appears to indicate the U.S.
Trustee’s belief that only the U.S. Trustee, and not the Court, has discretion to create an
“exception” to the Code’s requirement that professional persons be retained pursuant to
section 327 rather than pursuant to section 363; i.e., that it is only permissible for the
Court to approve a section 363 retention if the U.S. Trustee approves. This cannot be. If
the U.S. Trustee believes he can, through the Protocol, green-light an “exception” to
section 327(a) – which the Protocol clearly does – then he cannot arbitrarily revoke such
protocol without notice and inflict substantial harm on professionals and debtors who
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have acted in reliance on over fourteen years of precedent with respect to A&M and other
similar advisory firms.
As described by counsel to A&M at the Hearing, companies approaching
financial distress have been able to meet their needs for operational resources by
engaging management consultancy firms to run the day-to-day management of such
companies and, at times, to serve as their interim officers. Engagement of management
consultancy firms prior to a bankruptcy filing and their continuing retention postpetition
has enabled companies to achieve business continuity during their darkest hour. As aptly
pointed out by the Debtors, if, however, section 327 is the only path available for a
chapter 11 debtor to retain a restructuring advisory firm and officers supplied by such
firm, firms that previously provided firm personnel to fill necessary management roles at
the company must be jettisoned when the company files for chapter 11 by virtue of the
fact that, having served as officers of the debtor, the firm and its personnel are arguably
not disinterested within the meaning of section 101(14) and thus cannot be retained under
section 327(a).
This practice would disrupt company management at the precise time when
management services are most needed – an absurd result, to say the least. The U.S.
Trustee’s position in this regard appears to be that the more vital a role an advisory firm
played at a company prepetition, the more likely it is that such firm and its personnel will
be unable to serve as retained professionals in the company’s bankruptcy case pursuant to
section 327(a) of the Code. And to what end? Notably and inexplicably, the U.S.
Trustee makes the unequivocable statement in its Objection that “[a] debtor cannot use
section 363(b) to employ a professional person.” (Objection, 21 (citing In re Bicoastal
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Corp., 149 B.R. 216, 218 (Bankr. M.D. Fla. 1993)). It is quite difficult for this Court to
reconcile this statement with the statement in the Protocol that the professional “shall
seek retention under section 363 of the Bankruptcy Code.” (See Protocol § I.C.
(emphasis added)).
The Court declines to elevate form over substance in the manner sought by the
U.S. Trustee, Instead, it concludes that rehabilitating a debtor and preserving the value of
the debtor’s business – significant Code-related objectives – can be best accomplished
here by permitting the Debtors to utilize their estate assets under section 363 of the Code
to hire the advisory services firm and its personnel who played key management roles at
the company prepetition, thus ensuring the continuity of such services. The Court agrees
with the observation made by counsel to the Ad Hoc Secured Lender Group at the
Hearing that section 363 is “not a backdoor but, rather, an equally appropriate door” on
which the Court can consider the retention of A&M and Mr. Schipani.
Even assuming that the U.S. Trustee was not estopped from arguing that the
retention cannot be considered under section 363, an argument on which the Court
declines to rule at this time, after considering the extensive case law and precedent cited
by the parties providing authority for the retention of A&M and Mr. Schipani pursuant to
section 363(b) and the Code-related objectives of rehabilitating a debtor and preserving
its economic value for stakeholders, the Court finds that the U.S. Trustee’s section 363
argument is without merit. For these reasons, the Court finds that nothing precludes the
Debtors from relying on section 363(b) to seek authorization for the retention of A&M
and Mr. Schipani.
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b. 	The Debtors’ Business Decision to Retain A&M and Mr. Schipani is a
Sound Exercise of Their Business Judgment
When considering whether to approve a debtor’s use of estate property outside the
ordinary course of business pursuant to section 363(b), courts review the business
judgment of the debtor. The business judgment standard applied by courts presumes that
the court will not second guess the business judgment of a debtor’s board in making a
business decision, provided that the directors of a corporation acted on an informed basis,
in good faith, and in the honest belief that the action taken was in the best interests of the
company. See In re Lionel Corp., 722 F.2d at 1071; Off. Comm. of Subordinated
Bondholders v. Integrated Resources Inc. (In re Integrated Resources Inc.), 147 B.R.
650, 656 (Bankr. S.D.N.Y. 1992); In re Global Crossing Ltd., 295 B.R. 726, 742-43
(Bankr. S.D.N.Y. 2003).
As is evident from the plethora of case law cited by the Debtors and A&M, courts
in this District and elsewhere have entered orders permitting management consultant
firms to be retained under section 363(b) based upon a finding that the engagement
satisfies the business-judgment standard, without requiring applicants to meet a separate
burden of proof under section 327(a).
Mr. Schipani’s testimony at the Hearing demonstrated that retention of A&M and
of Mr. Schipani as Interim CEO are necessary to preserve and maximize the value of the
Debtors’ businesses and are of critical importance in these cases. During the four years
preceding the Petition Date and continuing postpetition, A&M personnel have occupied
key management positions and supported existing in-house functions, helping to oversee
day-to-day operations, find and pursue corporate opportunities, create and carry out
business plans, and otherwise manage the Company at the direction of the board of
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directors of parent Nine West Holdings, Inc. Mr. Schipani and his team have overseen
all aspects of the company’s affairs and have developed strong relationships with the
Debtors’ customers, vendors, and employees, particularly since Mr. Schipani has served
as Interim CEO since June 2016. At the Hearing, Mr. Schipani testified in a measured,
detailed, and passionate way concerning his responsibilities and role as CEO and
acknowledged that he is viewed as the “face of the stability” of the company by creditors,
vendors, and the company’s 1350 employees, all of whom are counting on him.
As evidenced by the statements in support of the Application filed by six distinct
creditor groups representing virtually all major stakeholders across the Debtors’ capital
structure, the Debtors’ creditors believe that the retention of A&M and Mr. Schipani is
critical to the Debtors’ success. Mr. Schipani recently played a key role in obtaining
dramatically increased value for the Debtors in an auction of certain of their businesses
(see Dkt. No. 404), and he is expected to be a key participant in discussions regarding
chapter 11 resolutions and to play a crucial role in further refining the Debtors’ go-
forward business plan. (See Debtors’ Reply ¶¶ 24-25). In fact, were the Debtors not to
seek to retain the continuing services of Mr. Schipani and A&M, it would be a manifestly
unreasonable exercise of their business judgment.
Abruptly removing Mr. Schipani and A&M from their management roles at this
time, more than four years into A&M’s engagement and just as the Debtors are entering
the most critical phase in their history as they seek to restructure their obligations in
bankruptcy, could, as the Debtors assert, put the success of the entire reorganization at
risk. As counsel for the Debtor emphasized at the Hearing, were Mr. Schipani and A&M
to be ousted from the roles at this time, there would likely be insurmountable disruption
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to the Debtors’ business. Their experience in managing the company would be
impossible to replicate, and any new executive and supporting personnel would have a
significant learning curve that the Debtors cannot afford at this time. In addition, as
pointed out in a footnote to the Debtors’ Reply, the importance of the continued retention
of Mr. Schipani and A&M was recently made even more stark due to the resignation of
the Debtors’ chief financial officer. (See Debtors’ Reply ¶ 24, n. 8).
The Debtors have demonstrated that retention of A&M and Mr. Schipani is
clearly in the best interests of the Debtors, their estates, and their creditors, and, for all of
these reasons, the Court declines to second-guess the business judgment of the parent
board with respect to this decision.
II. 	Section 327 of the Bankruptcy Code
Section 327(a) of the Bankruptcy Code provides that a trustee or debtor in
possession “with the court’s approval, may employ one or more attorneys, accountants,
appraisers, auctioneers, or other professional persons, that do not hold or represent an
interest adverse to the estate, and that are disinterested persons, to represent or assist the
trustee in carrying out the trustee’s duties under this title.” 11 U.S.C. § 327(a).
“[A] professional person is one who plays an intimate or central role in the
administration of the debtor’s bankruptcy proceeding.” (Objection, 19 (citing Comm. Of
Asbestos-Related Litigants v. Johns-Manville Corp., et al (In re Johns-Manville Corp.),
60 B.R. 612, 619 (Bankr. S.D.N.Y. 1986) (stating that a professional within the meaning
of section 327 is one intimately involved in the administration of the reorganization
process, for example, one who played a part in negotiating a plan, who is involved with
disposing of or acquiring assets, or who interacts with creditors))). In this Circuit,
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“professional persons” are defined to include firms or individuals who have been “hired
for the purpose of reorganizing the corporation or otherwise assisting it through the
Chapter 11 bankruptcy process.” In re SageCrest II, LLC, Nos. 3:10CV978, 3:10CV979,
2011 WL 134893, at *7 (D. Conn. Jan. 14, 2011).
In SageCrest II, the Court explained that “[o]fficers responsible for the day-to-day
business of the debtor . . . stand in contrast to professionals hired for the sole purpose of
reorganizing the debtor organization.” Id. (emphasis added); see also In re Phoenix Steel
Corp., 110 B.R. 141, 142 (Bankr. D. Del. 1989) (finding that workout managers hired as
officers to evaluate company’s financial condition and oversee day-to-day operations
were not “professional persons” within the meaning of section 327(a)); In re Dairy
Dozen-Milnor, LLP, 441 B.R. 918, 920 (Bankr. D.N.D. 2010) (stating that a
“professional person” under section 327(a) is one who “takes a central role in the
administration of the debtor’s bankruptcy estate and bankruptcy proceedings as opposed
to one who provides services to the debtor that are necessary regardless of whether a
bankruptcy petition was filed”); In re Seatrain Lines, Inc., 13 B.R. 980, 981 (Bankr.
S.D.N.Y. 1981) (concluding that maritime engineers hired by the debtor were not
“professional persons” because they did not play a central role in the administration of
the bankruptcy case and the need for their employment did not arise from the bankruptcy
itself).
The U.S. Trustee argues that A&M and Mr. Schipani, are “professional persons”
within the scope of section 327, as they “specialize in financial and operational
restructuring” and, “[d]espite the label of Interim CEO, they are intimately involved in
the restructuring of the Debtors’ businesses and are central to the reorganization.”
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(Objection, 18). In support of his assertion, the U.S. Trustee points to the fact that Mr.
Schipani and A&M personnel, among other things, have prepared each of the Debtors’
schedules and SOFAs; have assisted in claims work and in reviewing various contracts
for the Debtors to determine which contracts to assume or reject; are preparing the
Debtors’ 13-week cash flow forecast; have been assisting with the debtor-in-possession
financing; and were intimately involved in the postpetition sale of a substantial portion of
the Debtors’ business where they evaluated bids, qualified certain bids, and participated
in the auction which ultimately led to a very significant sale for the Debtors. (See
Objection, 18-19).
After listing these tasks (and others) in the Objection, the U.S. Trustee concludes
that Mr. Schipani and A&M have been assisting the Debtors on “nearly every major
element” of a large chapter 11 case and, thus, unquestionably are professional persons
within the meaning of section 327(a) who must be retained under such Code section.
(Objection, 18-19).
In contrast, A&M contends that Mr. Schipani and A&M, who were engaged over
four years ago to manage the day-to-day operations of the company’s businesses and not
for the express purpose of administering the then-nonexistent bankruptcy estates, are not
“professional persons” within the meaning of section 327(a). The Court agrees. Here,
there can be no doubt that the SageCrest “hired for the purpose of reorganizing”
formulation is inapplicable to A&M.
A&M was hired four years before the Petition Date, and, since that time, Mr.
Schipani and other A&M personnel have managed the company, providing services that
would be needed independent of any bankruptcy filing. The evidence supports this
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conclusion. As stated by Mr. Schipani in his Supplemental Declaration and at the
Hearing, A&M was not hired to restructure the obligations of the company, and nothing
in A&M’s 2014 engagement related to bankruptcy planning; rather, it was not until
approximately three years after the engagement began, during the summer of 2017, that
the company, in consultation with advisors and independent of A&M’s activities and
responsibilities, began considering the possibility of a bankruptcy filing. (Schipani
Suppl. Decl. ¶ 6).
Since the Petition Date, A&M has continued in its role of managing the daily
operations of the Debtors’ businesses; any services it has performed relating to the
Debtors’ chapter 11 processes have been services that could have been performed by
existing company personnel, rather than A&M personnel, had the necessary resources
been available within the company. (See Schipani Suppl. Decl. ¶ 7). During the chapter
11 cases, A&M has continued to provide the types of services it has provided to the
company for years, and such work supports the professionals hired by the Debtors
specifically for bankruptcy purposes, in Mr. Schipani’s words, “in the same way that in-
house employees and officers of any company going through a restructuring typically
would in my experience.” (Schipani Suppl. Decl. ¶ 8). As A&M correctly asserts,
“because the firm is not tasked with actually administering the bankruptcy estate,” it does
not fall within the definition of a “professional person” under section 327(a). (A&M
Reply ¶ 6).
At the Hearing, counsel for A&M elicited testimony from Mr. Schipani which
illustrated that the services he provides to the company postpetition have remained
largely unchanged, albeit augmented by certain bankruptcy-related responsibilities such
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as attending section 341 meetings and preparing monthly operating reports. He
compared his prepetition and postpetition responsibilities as CEO, testifying that, during
both periods, he has been responsible for, among other things, monthly reporting;
managing cash flows; controlling inventory; sales of assets; and negotiating the
company’s financing. For instance, Mr. Schipani testified that, in 2016, he coordinated
the sale of the Easy Spirit brand and, during the chapter 11 cases, he worked on the sale
of the Nine West brand; he was also responsible for negotiating amendments to the
prepetition credit agreement much as he did in connection with the DIP credit
agreement. Mr. Schipani’s testimony was supported by a comparison of the scope of
services set forth in the A&M 2014 Engagement Letter and in A&M’s 2018 postpetition
engagement letter. Mr. Schipani likened his role as Interim CEO to the role of other
CEOs at distressed companies such as that of the CEO of Chemtura, with whom he
worked closely.
The Court declines to find here that Mr. Schipani and A&M are “professional
persons” as such term is utilized in section 327(a) of the Code. Their roles – both
prepetition and postpetition – are focused on running the business. As Mr. Schipani’s
testimony made clear, the services that they have provided to support the Debtors’
bankruptcy-specific professionals are largely work that the officers and managers of
any bankrupt entity would have to do in the ordinary course. It would be an absurd
result if their work in such roles was sufficient to render them “professional persons;”
if this were the case, virtually every senior executive of every chapter 11 debtor would
have to be retained under section 327(a). This simply cannot be.
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As the Court has determined that section 327(a) does not apply to the retention of
A&M and Mr. Schipani in these cases, it need not reach the U.S. Trustee’s additional
argument that they are not “disinterested” under section 101(14) of the Code and thus fail
to meet the requirements of section 327(a).
For all of the foregoing reasons, the Objection is overruled, the Application is
granted, and the Debtors are authorized to retain A&M to provide the Debtors with an
interim CEO and certain additional personnel and to designate Mr. Schipani as Interim
CEO pursuant to section 363(b) of the Bankruptcy Code. The Debtors are directed to
submit an order consistent with this Bench Decision.
Dated: July 2, 2018
New York, New York
/s/ Shelley C. Chapman_________________
UNITED STATES BANKRUPTCY JUDGE
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