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A Code Head-Scratcher

posted by Stephen Lubben

From a retention application in Lehman,

By this Application, the Debtors seek entry of an order, pursuant to section 327(e) of the Bankruptcy Code, authorizing the employment and retention of KBT&F as special counsel to the Debtors, to perform necessary legal services pertaining to the Debtors’ chapter 11 cases . . . (emphasis added).

And section 327(e) of the Code, which provides

(e) The trustee [or debtor, in chapter 11], with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee [or debtor] in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed. (emphasis added). 


How is that a head scratcher? KBT&F is not being retained to represent Lehman in "conducting the case" as say Weil does. Their being retained specifically to investigate prepetition actions and commence litigation and prosecute, with the Debtors’ authorization, third parties who have engaged in so-called "Illegal Activity."

There's no head scratcher. If you think there is, then maybe you have a problem 327(e) special counsel role, but the Code explicitly approves it.

SInce the putative causes of action belong to the estate, and the recovery will benefit the creditors in an obvious way, it seems rather clear to me that this constitutes representing the debtor in conducting the case. Indeed, the retention application quote above seems to concede as much. Sure this happens in lots of cases, but the statute actually provides little support for it.

According to your reasoning almost everything post-petition constitutes "representing the debtor in conducting the case." Luckily, caselaw is to the contrary.

No. Only post-petition bankruptcy work. If you're bringing a cause of action that the trustee/debtor only has authority to bring (because of 546, etc.), its bankruptcy work. To my mind this firm is no different than conflicts counsel, and should have been retained under 327(a).

Isn't that the point though. KBT&F is not being retained as conflicts counsel to represent the Debtor in matters that Weil cannot. They're being retained for a specific, limited purpose within the bankruptcy case.

So you think an IP firm cannot be retained as special counsel to handle IP matters because it will involve property of the estate and estate causes of action? Isn't that the point of 327(e)?

There is probably no need for KBT&F to be retained as Weil is capable of doing the work, but that's an issue to be raised by an objection. The Code itself authorizes the retention, whether it's a good idea is another matter.

Well, that all depends on whether we have to take the retention application at face value, or whether we should dig a little deeper. I think these are causes of action that would have been brought by debtor's counsel, but for the identity of the defendants. If that's right, KBT&F is conflicts counsel in all but name.

It's clear you have an issue with Weil's drafting of the application and not the Bankruptcy Code.

Your novel theory of what consitutes 327(e) counsel--whether the matter involves estate property or causes of action--is unworkable and, more importantly, not supported by the Bankruptcy Code or caselaw. 327(e) counsel are those retained for a "specified special purpose." That is all. Kasowitz fits the bill in the Lehman case as it is being employed for a specified special purpose of investigating and filing specific types of litigation; it is not conducting the bankruptcy case.

You have invented a problem where none exists. I'd love to see any authourity for what you deem to be the test for 327(e).

While I tend to agree with my anonymous friend that this discussion has run its course, I would note that while he focuses on 327(e) as practiced, my focus is on 327(e) as drafted. There is a lot more to the provision than simply appointing an attorney for a specified special purpose, although that's the only part that seems to get acknowledged in the leading chapter 11 jurisdictions. Perhaps that should be changed, but for now we probably should actually read the Code.

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