Opinion
Case No. 95-11924 (Jointly Administered)
August 3, 1995
Kevin O'Donnell, Esquire, McKinley, Schmidtlein, O'Donnell Bornmann, P.L.C., Alexandria, VA, for debtors
Thomas P. Gorman, Esquire, Tyler, Bartl, Burke Albert, Alexandria, VA, for debtors
MEMORANDUM OPINION AND ORDER
This matter, having been previously continued, was heard in open court on July 25, 1995, on the motion of Joel T. Broyhill and JTB Enterprises, L.L.C (collectively, "Broyhill") filed June 21, 1995 to compel D B Countryside L.L.C. and D B Venture, L.C., two of the debtors in these jointly-administered cases, to file an application to retain professionals. In effect, the motion seeks to prohibit any payments to American Property Services, Inc. ("APS") and to J B Builders ("J B") unless their employment as "professionals" is approved by this court.
Both APS and J B are unquestionably insiders of the debtors, inasmuch as APS is wholly-owned by Robert and Marilyn DeLuca, J B is a sole proprietorship owned by Robert DeLuca, and Robert and Marilyn DeLuca own, or claim to own, more than 20 percent of D B Countryside, L.L.C and D B Venture, L.C. APS performs both traditional property management services for the debtors and also services of the type traditionally performed by real estate brokers. J B acts as a general contractor or construction manager. Considerable concern over the role of APS and J B has been voiced by creditors in these jointly administered cases. A number of creditors, including Broyhill, have complained that APS and J B have been used to skim funds from the debtor partnerships and limited liability companies for the benefit of Robert and Marilyn DeLuca personally.
The question of who, apart from the "attorneys, accountants, appraisers, [and] auctioneers" mentioned in § 327(a) of the Bankruptcy Code and the "attorneys, accountants, appraisers, auctioneers [and] agents" mentioned in F.R.Bankr.P. 2014(a) should be considered a "professional person" who may be employed only with prior court approval, is a vexing one. Compare, e.g., Century Investment Fund VII, L.P., 96 B.R. 884 (Bankr.E.D.Wis. 1989) (manager of debtor's apartment complex not "professional" required to be approved by the court) and In re Neidig Corp., 117 B.R. 625 (Bankr.D.Colo. 1990) (manager of debtor's radio station was "professional").
Broyhill suggests that anyone whose line of work requires a professional license is a professional within the meaning of § 327(a). The case law in this District, however is not so broad. In re Sieling Associates L.P., 128 B.R. 721 (Bankr.E.D.Va. 1991) (Bostetter, C.J.) (environmental toxicology consultant hired to monitor property for oil contamination was not "professional" and could be employed by debtor in possession in ordinary course of business even though he held a claim against the debtor). In Sieling Associates, the court adopted the reasoning of a line of cases defining "professional persons" as "persons in those occupations which play a central role in the administration of the debtor proceeding" and as "only those who deal with the actual reorganization of the debtor (rather than the ongoing business of the debtor)" or "who play an intimate role in the reorganization of a debtor's estate." Id., at 723. The approach adopted in Sieling Associates was to distinguish between "professionals who actually administer the estate and those who serve mechanical functions necessary for a debtor's operations." Id. To do so, the court is required to examine the actual duties involved. If those have only a tangential relationship to the administration of the debtor's estate, they are not professional in nature. "On the other hand, if the duties involved are central to the administration of the estate such duties are professional in nature. Such duties would seem to include assisting in the negotiation of the debtor's plan, assisting in the adjustment of the debtor/creditor relationship, disposing of assets of the estate and acquiring assets on behalf of the estate." Id.
Applying these principles to the activities of APS and J B, I conclude that APS, to the extent it performs traditional property management services (i.e., collects rents, performs or arranges for maintenance and repairs, pays vendors and suppliers, etc.) is not a professional within the meaning of § 327(a) of the Bankruptcy Code. To the extent that it performs the services traditionally associated with a real estate broker (i.e., procurement of leases and sales contracts for real estate), it is "assisting in . . . disposing of assets of the estate" and is a professional whose employment must be approved by the court. J B, to the extent that it provides services as a general contractor or construction manager in connection with the construction of tenant improvements and buildouts, is not a professional.
In a chapter 11 reorganization case, a debtor in possession may continue operation of its business without necessity of specific court orders. Sieling Associates, supra, at 722. This necessarily includes the right, in the exercise of prudent business judgment, to employ persons necessary to the operation of the business. Where, however, the person or entity so employed is an insider, payments for such person's or entity's services are subject to heightened scrutiny. If improper or excessive payments are made, the court has the power to remove the debtor from possession and appoint a trustee, who would have standing under § 549 of the Bankruptcy Code to recover any payments to the extent such payments were improper or excessive. Even without appointing a trustee, this court could authorize a creditor or the creditor's committee to bring an action on behalf of the estate to recover such payments if a debtor in possession failed to do so after demand. Finally, as noted in Century Investment Fund VII, supra, at 894-895, a bankruptcy court may, under § 1107(a), Bankruptcy Code, prescribe limitations on the debtor in possession's operation of its business, including a requirement that certain payments even to nonprofessionals be subject to prior court approval after notice to creditors. In the two cases with respect to which Broyhill's motion is made, a chapter 11 trustee has been appointed, and so long as such appointment continues there appears to be no need to impose any special restrictions on operation of the debtors' businesses; but if the appointment of the trustee is terminated, the court will consider whether prior court approval should be required for payments to APS and JB even in their non-professional capacity.
It is, accordingly, ORDERED:
1. American Property Services, Inc., to the extent it provides traditional property management services, including, but not necessarily limited to, collection of rents, payment of taxes and other direct operating expenses, and performance of maintenance and repairs, is not a professional in the sense of § 327 of the Bankruptcy Code, and prior court approval of its employment and compensation is not required.
2. American Property Services, Inc., to the extent it provides services of the type traditionally supplied by real estate brokers, including, but not necessarily limited to, procurement of leases and real estate sales contracts, is a professional in the sense of § 327 of the Bankruptcy Code and may not be compensated for such services absent court approval both of its employment and compensation.
3. J B Builders, to the extent it provides construction or construction supervision services of the type traditionally provided by general contractors and construction managers, is not a professional in the sense of § 327 of the Bankruptcy Code, and prior court approval of its employment and compensation is not required.
4. The Clerk will mail copies of this order to counsel for the debtors, counsel for Broyhill, the chapter 11 Trustee, and the United States Trustee.