Role of Auditors |
Bankruptcy |
Soft Dollars |
Mutual Funds
House Passed Amendment to the Bankruptcy Code
As It Relates to the Retention of Investment Bankers
Answers to Questions About the
Investment Bankers Proposal to Section 101(14) of the Code
- Question: How long have underwriters/investment bankers been singled out in the definition of disinterestedness?
1.A.Answer: Underwriters were first treated separately in the definition of disinterestedness in the amendments to the bankruptcy laws embodied in the Chandler Act of 1938. The existing language regarding investment bankers was introduced along with many other amendments to the bankruptcy laws in the Bankruptcy Code that was adopted in 1978.
- Question: Have there been instances in which the debtor and the Bankruptcy Court have wanted a given investment bank to represent a debtor, but the investment bank was ultimately disqualified because of the arbitrary existing language in the Code?
Answer: Yes. Significant instances exist in which the desire of a debtor and the decision of a Bankruptcy Court judge to hire an investment bank have been overturned as a result of the existing language in the Bankruptcy Code.
A. Two examples follow:
- 2.A.1. Eagle Picher. In re Eagle Picher Industries, 999 F.2d 969 (6th Cir. 1993) the Bankruptcy Court determined that although Goldman, Sachs was "technically" not disinterested under Section 101(14) because it had underwritten some of the debtor's securities prior to the filing, it did not have an actual conflict, and, therefore, should be allowed to be retained as the debtor's financial advisor. The U.S. Trustee objected to the retention and the matter was submitted to the Circuit Court, which reversed the lower court's decision as follows:
The language of section 327 (a), when read in conjunction with the definitions set out in section 101(14), does not leave room for debate: Goldman, Sachs is and was an investment banker for outstanding securities of the debtors, and as such, is not a disinterested person within the meaning to the statute…
It is, moreover, clear from both the statute and from Middleton Arms that a person can be not "disinterested," yet without any adverse interest. Although it may make little sense to the bankruptcy court and the debtors – or, for that matter, to this court – that Goldman, Sachs is not permitted to serve as financial advisor, the statute requires that result. This court is bound to apply the plain meaning of the statute even when the application apparently results in an apparent anomaly…
- 2.A.2. Federated Department Stores. In re Federated Department Stores, 44 F.3d 1310 (6th Cir. 1995) the Court of Appeals reversed a decision by the Bankruptcy Court authorizing the retention of Lehman Brothers as financial advisor to the debtor.
- Question: Have Courts always felt the need to interpret the existing language on disinterestedness so narrowly when applying it to the retention of investment banks?
3.A. Answer: Prior to the Eagle Picher decision, Bankruptcy Courts were often more lenient in approving the retention of investment banks, notwithstanding the language in Section 101(14). For example, prior to the Federated Department Stores decision, Smith Barney was retained as financial advisor to Continental Airlines in its Chapter 11 case, notwithstanding its prior role as lead manager on several underwritings. Continental selected Smith Barney due to the combination of company knowledge, industry expertise, and restructuring experience.
- Question: What was the position of the National Bankruptcy Review Commission on the subject of disinterestedness?
4.A. Answer: The Commission recognized the need for reform, considered eliminating the concept of disinterestedness entirely ultimately decided against that, but then did not make any specific recommendations regarding Section 101(14).
- Question: Are all the professionals who were involved in a prior underwriting of debt of equity of a company that later files bankruptcy treated the same under existing law?
5.A. Answer: No. The company's auditors and the law firm that advised the company in connection with such underwriting are treated like other professionals under current law. They must demonstrate and the court must find that they are disinterested in the same manner as other professionals. The concept of "material adverse interest" is central to this standard of disinterestedness. Investment banks would be held to this same standard pursuant to the proposed amendment.
- Question: Would the proposed amendment preclude a judge from finding, based on specific facts, that a prior underwriting role by an investment bank rendered it not disinterested in an issuer's subsequent bankruptcy?
6.A. Answer: No. A judge would retain full discretion to disqualify an investment banker as a financial advisor to a debtor for whom it previously underwrote securities based on the specific facts of the case.
- Question: Does the current law ever impose an unnecessary burden on a debtor as it seeks to reorganize?
7.A. Answer: Yes, in two ways. First, if a judge were to otherwise find that an investment bank is disinterested and therefore eligible to represent a debtor as it seeks to reorganize, the debtor might be denied access to the services of the firm whose skills and resources are best suited to its needs. Second, in such a case, there would be less competition among potential financial advisors to the debtor for the engagement. The fees that the debtor might have to pay could be significantly higher, thereby increasing the cost of its reorganization.
