Court: United States Bankruptcy Court, D. Delaware; October 1, 2018; Us Bankruptcy; United States Bankruptcy Court
Brendan Linehan Shannon, a United States Bankruptcy Judge, addressed the Motion for Interim and Final Orders Authorizing Brookstone to Assume a Closing Store Agreement with Hilco for going-out-of-business sales. The United States Trustee (UST) does not generally oppose the motion but contends that assuming the Agreement is procedurally improper, arguing that Hilco should be classified as a "professional" under Bankruptcy Code section 327(a). The Court determined that Hilco does not meet the definition of a "professional," as its services, while valuable, are not central to the Debtor's reorganization process. The analysis referenced a legal precedent from the First Merchants decision, which defines a "professional" as someone who controls, purchases, or sells significant assets for reorganization or negotiates reorganization plans with discretionary judgment. The Court confirmed that the typical practice involves disclosing services and compensation, followed by a hearing to ensure compliance with Bankruptcy Code sections 365 and 363, which addresses the UST's transparency concerns without the stricter requirements of section 327(a).
Brookstone Holdings Corporation and its affiliates operate a manufacturing and retail business focused on Brookstone-branded products through traditional retail channels, including 137 stores (102 in malls and 35 in airports) as of August 2, 2018. In fiscal year 2017, mall store sales constituted 52% of net sales, while airport store sales contributed 14%, with the remainder coming from e-commerce and wholesale operations. The company sought Chapter 11 relief due to declining profitability in mall stores, which have suffered losses annually since emerging from a prior Chapter 11 in 2014. Conversely, airport stores have generally been profitable. Brookstone aims to restructure operations, focusing on its intellectual property and expanding e-commerce. The pre-petition restructuring plan includes closing mall stores and liquidating significant inventory, for which it engaged Hilco to assist in the process. A Store Closing Agreement was executed on August 1, 2018, prior to the Chapter 11 petition filed the following day. The U.S. Trustee (UST) filed a limited objection to the assumption of the Store Closing Agreement, asserting that Hilco qualifies as a professional under 11 U.S.C. § 327(a). An interim order was granted allowing the liquidation sales to proceed while the court deliberates on Hilco's professional status. A Joint Stipulation of Facts has been submitted by Hilco and the UST, confirming the decision to close 102 stores and liquidate inventory over an eight-week period post-petition.
Hilco's responsibilities include recommending discounts for the sale of Merchant's goods, providing supervision for the sale, ensuring communication between Hilco and Merchant's Store Operations, establishing accounting functions for the sale, suggesting loss prevention strategies, coordinating store operations, and recommending staffing levels and incentive programs for store employees. The fee structure in the Store Closing Agreement involves a sliding Incentive Fee from 0% to 1.50%, based on merchandise sales and the Aggregate Recovery Percentage, along with reimbursement for controlled expenses (up to $520,871) and a 15% commission on non-retained furnishings, fixtures, and equipment. The Agreement anticipates the possibility of additional transactions beyond the planned GOB Sales, allowing for a potential "Alternative Transaction" which could terminate the Store Closing Agreement. Hilco and the Debtor also considered the possibility of Hilco making offers to purchase unrelated assets, with a previous offer having expired but additional offers still possible.
Hilco has submitted detailed disclosures under penalty of perjury regarding its connections relevant to the case, despite not being required to do so for the assumption motion per section 365. This practice aims to enhance transparency and address concerns raised by the UST. Hilco was contracted prior to the Petition Date to assist the Debtor with GOB Sales, with compensation aligned to industry standards, while also allowing for potential additional roles in the case, such as purchasing estate assets or serving as a lender.
The Court has jurisdiction under 28 U.S.C. §§ 1334 and 157, with venue established as proper under 28 U.S.C. §§ 1408 and 1409, qualifying this matter as a "core proceeding."
The UST argues that Hilco must be retained under section 327(a) of the Bankruptcy Code as an auctioneer or "other professional." In response, the Debtor notes that Hilco has historically provided similar services without formal retention in many retail bankruptcies. Brookstone contends that Hilco is not conducting auctions and argues against Hilco being classified as an "other professional" under section 327(a) using a six-factor test. Furthermore, Brookstone warns that requiring formal retention of Hilco as a professional could negatively impact not only this case but also the operations of many retail Chapter 11 cases.
The critical question is whether Hilco's role under the Store Closing Agreement necessitates retention as a professional under section 327(a), which stipulates that the trustee may employ disinterested professionals with court approval if they do not hold an adverse interest. If Hilco is deemed a professional, its retention must comply with section 327(a) and Federal Rule of Bankruptcy Procedure 2014.
Provisions require the Debtor and Hilco to disclose connections and potential conflicts of interest to the Court, which must confirm that any professional involved is "disinterested" and does not have an adverse interest. If Hilco is retained as a professional, it would be barred from further transactions with the Debtor outside the defined GOB Sales. The UST contends that Hilco must be formally retained under section 327(a) as it qualifies as an "auctioneer" or "other professional." The Court evaluates these claims, determining that Hilco does not fit the definition of an auctioneer under section 327(a) because the sales conducted are retail transactions rather than auctions. The definitions of "auctioneer" and "auction" imply a bidding process that does not occur in Hilco's sales, where customers purchase pre-priced merchandise without competition or negotiation. Furthermore, Hilco is contracted to sell furniture, fixtures, and equipment (FF&E), but this also does not involve auction processes. Testimony confirms that FF&E is sold at marked prices without competitive bidding. The Court concludes that Hilco has not been engaged as an "auctioneer" for the purposes of section 327(a), affirming that the sales process outlined in the Agreement does not constitute an auction.
Hilco is determined not to qualify as an "other professional" under section 327(a) of the Bankruptcy Code, which permits debtors-in-possession to retain certain professionals in addition to attorneys, accountants, appraisers, and auctioneers. The term "professional" is not defined in the Code, leading to ambiguity in judicial interpretation. The court refers to the First Merchants case, which established a "list of factors" to evaluate whether an individual qualifies as a professional requiring formal retention. The case involved a debtor seeking to employ Ugly Duckling Corporation for significant services related to its receivables, prompting the U.S. Trustee's objection based on the scope of services provided.
The court articulated six factors to assess if an employee is a professional: 1) Control over significant assets related to the debtor's reorganization; 2) Involvement in negotiating a Plan of Reorganization; 3) Direct relevance of employment to the debtor's operations; 4) Discretion in exercising professional judgment; 5) Extent of involvement in administering the debtor's estate; and 6) Possession of special knowledge or skills. The court emphasizes that no single factor is decisive; rather, all factors must be weighed collectively, with particular attention to the independence and discretion afforded to the employee and their relationship to the debtor's reorganization efforts.
Hilco is not classified as an "other professional" under the Store Closing Agreement based on the analysis of several factors. The first factor examines whether Hilco manages significant assets relevant to the debtor's reorganization. Although Hilco is hired to assist in closing 102 stores that accounted for over 50% of Brookstone's sales in FY 2017, evidence shows that Brookstone retains complete control over the sales process, including management, pricing, and duration of sales. Therefore, this factor favors Hilco and Brookstone.
The second factor considers whether Hilco is involved in negotiating the terms of a plan of reorganization. It is agreed that Hilco is not involved in such negotiations, which also supports Hilco's position.
The third factor evaluates the nature of Hilco's employment concerning the debtor's routine operations. The closure of a significant portion of Brookstone's retail business is deemed non-routine and integral to its restructuring. The debtor expected the store closures and liquidations to play a critical role in its Chapter 11 proceedings, which are facilitated by protections under the Bankruptcy Code that allow for efficient liquidation and store closings. Consequently, this factor supports the view that Hilco's services pertain to the debtor's restructuring activities rather than routine operations. Overall, the analysis confirms that Hilco's role aligns with the debtor's restructuring efforts.
The fourth factor from First Merchants examines whether an employee possesses discretion or autonomy in managing a debtor's estate. The UST contends that Hilco has significant autonomy in overseeing GOB Sales. However, the case record and Joint Stipulation indicate that Hilco's discretion is limited and not exercised in the administration of the debtor's estate. Key considerations for GOB Sales include pricing strategy and sales timeline, where Hilco can advise but not dictate actions. The Debtor rejected Hilco's advice on the duration of sales, demonstrating limited influence.
In contrast to Ugly Duckling from the First Merchants case, which had extensive control over the debtor's assets and operational decisions, Hilco's role is more constrained. Hilco did not decide on store closures or the specifics of the Store Closing Sale; the Debtor maintained final authority over all aspects, including signage and pricing strategy. Unlike the consultant in First Merchants, Hilco's discretion does not involve tasks within the fiduciary duties of a debtor-in-possession, as its role is limited to advising on inventory reduction and liquidation strategies, lacking the expansive mandate seen in First Merchants.
The fifth First Merchants factor examines the extent of an employee's involvement in administering the debtor's estate. The analysis parallels the fourth factor, focusing on Hilco's role in the debtor's estate management. Although the closure of 102 stores indicates substantial restructuring activity, Hilco's involvement is limited to inventory disposition, lacking meaningful participation in developing a reorganization plan that garners stakeholder support. The Court concludes that Hilco's contributions do not meet the criteria for "administration of the debtor's estate" as defined in section 327(a), thus favoring Hilco and the Debtor.
The sixth factor assesses whether the employee's services require special knowledge or skill, qualifying them as a "professional." The Court finds this factor unhelpful, noting that all service providers, including Hilco, possess specialized knowledge. Consequently, this factor does not significantly influence the decision. Evaluating all relevant factors collectively, the Court determines that Hilco is not acting as an "other professional" in its service to the Debtor.
The Court overrules the UST's Limited Objection and grants the Store Closing Motion. The involved parties are instructed to submit a consistent order to the Court within seven days. This Opinion serves as the Court's findings of fact and conclusions of law, complying with the Federal Rules of Bankruptcy Procedure. Although section 327 pertains to trustees, a debtor-in-possession in a Chapter 11 case holds the same rights and powers. Section 327(a) allows for the retention of professionals, including auctioneers, with court approval. A "disinterested person" is defined under 11 U.S.C. § 101(14) and cannot have conflicting interests with the debtor's estate. Initially, Ugly Duckling’s agreement with First Merchants granted it broad hiring discretion, but this was later revised to require court or UST approval for hiring outside personnel.
