Case Doc 103 Filed 01/20/14 Entered 01/20/14 15:33:26 Desc Main Document Page 1 of 7

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1 Document Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION In re: COLOR STAR GROWERS OF COLORADO, INC., VAST, INC., and COLOR STAR, LLC, Debtors. Chapter 11 Case No (Jointly Administered) LIMITED OBJECTION OF REGIONS BANK TO DEBTORS' APPLICATION TO (A) AUTHORIZE EMPLOYMENT OF SCOULER & COMPANY TO PROVIDE MANAGEMENT AND RESTRUCTURING SERVICES AND (B) DESIGNATING A CHIEF RESTRUCTURING OFFICER TO THE DEBTORS PURSUANT TO 11 U.S.C. 363 EFFECTIVE AS OF THE PETITION DATE [REFERS TO DOCKET NO. 49] Comes now Regions Bank ("Regions"), as Administrative Agent on behalf of Regions and Comerica Bank ( Comerica, each a "Lender" and together the Lenders ), and files this limited objection (the Objection ) to the Debtors' Application to (A) Authorize Employment of Scouler & Company to Provide Management and Restructuring Services and (B) Designating a Chief Restructuring Officer to the Debtors Pursuant to 11 U.S.C. 363 Effective as of the Petition Date [Doc. No. 49] (the "Scouler Application"), and in support thereof respectfully shows the Court as follows: BACKGROUND 1. On or about September 18, 2013, the Debtors executed an engagement agreement hiring Scouler & Company ( Scouler ) to act as Chief Restructuring Officer and financial advisor (the "Engagement Agreement"). Scouler Application, Ex. A. In such capacity, Scouler agreed to provide the Debtors with, among other things: (i) means of implementing profit Page 1 of 7

2 Document Page 2 of 7 improvement; (ii) means of implementing cash flow improvements or cash enhancements opportunities; (iii) an assessment of restructuring options; (iv) assistance with the sale of the Debtors Colorado operations; (v) assistance with the Debtors restructuring, reorganization, or dissolution of remaining business operations and assets; (vi) oversight of the investment banking process; and (vii) an assessment of the Debtors strategic alternatives. Id. 2. In order to implement those tasks, Scouler placed Brad Walker ( Walker ) in the role of principal contact and CRO of the Debtors. Id. at Schedule I. Schedule I of the Scouler Application, titled Professional Fees and Payment, expressly notes that the following Scouler professionals will be assisting in this matter: Dan Souler, Michael Riordan and Rachel Simcox. Id. (emphasis added). 3. Pursuant to the Engagement Agreement, Scouler sought, and the Debtors agreed to pay Scouler a blended billing rate of $345 per hour, with an additional $100,000 success fee upon the sale of the business or [reorganization of] the business. 1 Id. In regards to its hourly fee, the Scouler Application notes that our statements for professional services will be substantially based upon the amount of time spent by our professionals who perform services on your behalf and their respective hourly rates as then in effect. Id. (emphasis added). 4. On December 15, 2013 (the "Petition Date"), each of the Debtors filed their respective voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), thereby initiating their Bankruptcy Cases and creating their respective bankruptcy estates (the "Estates"). 1 Note that the Scouler Application erroneously states "Scouler shall be entitled to a fee of $100,000 when the Debtors sell substantially all of their assets." Scouler Application, 13. The sale of substantially all of the Debtors' assets is not a specifically enumerated event giving rise to the $100,000 success fee. Compare 13 and Ex. A, Schedule I, a-e. Page 2 of 7

3 Document Page 3 of 7 5. On December 27, 2013, the Debtors filed the Scouler Application in an effort to employ Scouler nunc pro tunc from and after the Petition Date. The Scouler Application alleges that Scouler has assisted the Debtors in compiling information necessary to prepare for filing the Debtors voluntary petitions and has negotiated with creditors on the Debtors behalf. Id. at 6. Scouler proposes to continue providing the services allegedly provided prior to the Petition Date, and listed above. Id. at In support of its qualifications, Scouler notes that it has extensive experience in providing restructuring advisory and restructuring management services in reorganization proceedings. Id. at Despite numerous admissions that the Scouler representatives working on the matter are indeed professionals, the Debtors seek to employ Scouler in the ordinary course of business pursuant to section 363 of the Bankruptcy Code, because Debtors do not believe that the services being provided by Scouler are services of a professional under Bankruptcy Code section 327. Id. at 11. LIMITED OBJECTION A. SCOULER IS A PROFESSIONAL UNDER SECTION 327(a) OF THE BANKRUPTCY CODE 8. This Court should deny the Scouler Application because it seeks to employ Scouler, an entity of professionals, pursuant to section 363 of the Bankruptcy Code. If the Debtors are to retain Scouler, this Court should allow Scouler s retention only pursuant to section 327(a) of the Bankruptcy Code, and should require Scouler to prove it's eligibility for retention under the standards enumerated therein. 9. Section 327(a) states, in pertinent part, that a debtor in possession with the court s approval, may employ one or more professional persons, that do not hold or represent Page 3 of 7

4 Document Page 4 of 7 an interest adverse to the estate, and that are disinterested persons. 11 U.S.C. 327(a). Section 363 of the Bankruptcy Code is inapplicable to the employment of professional persons identified in section 327(a). In re Bicoastal Corp., 149 B.R. 216, 218 (Bankr. M.D. Fla. 1993) (rejecting employment under section 363 and noting that investment advisors, business and financial consultants, and asset managers are professionals subject to section 327(a)); and In re Blue Stone Real Estate, Const. & Dev. Corp., 392 B.R. 897, (Bankr. M.D. Fla. 2008) (disregarding request for employment of turnaround advisor under section 363 and noting advisor was clearly a professional within the meaning of section 327(a). ). Accordingly, this Court must determine whether Scouler is a professional within the meaning of section 327(a). 10. Generally, financial advisors, workout specialists and consultants are, for the purpose of Section 327 of the Bankruptcy Code, professionals. In re Madison Mgmt. Group, Inc., 137 B.R. 275, 283 (Bankr. N.D. Ill. 1992) (ruling that CEO and financial advisor hired to assist with liquidation of debtor s assets was a professional despite pre-petition employment); see In re Carolina Sales Corp., 45 B.R. 750, (Bankr. E.D.N.C. 1985) (identifying professional management consultants, consultants, appraisers, business advisors, and others who offer professional services and expertise to beleaguered chapter 11 debtors as professionals under section 327(a)). Further, a party whose occupation plays an integral role in the administration of a debtor s bankruptcy case will typically be deemed a professional for the purposes of section 327(a). Madison, 137 B.R. at 283 (citing In re United Color Press, Inc., 129 B.R. 143, 145 (Bankr. S.D. Ohio 1991) for proposition that a professional is a person who plays an intimate role in the reorganization of the debtor. ). 11. Courts may consider a series of factors in order to determine whether the party is indeed a professional. Madison, 137 B.R. at 283; In re Bartley Lindsay Co., 120 B.R. 507, 512- Page 4 of 7

5 Document Page 5 of 7 13 (Bankr. D. Minn. 1990) aff'd, 137 B.R. 305 (D. Minn. 1991); and In re First Merchants Acceptance Corp., JJF, 1997 WL (D. Del. Dec. 15, 1997). 2 Those factors include: (i) the duties the applicant is performing, and whether the duties are executive or consulting in nature; (ii) whether former management is still employed by the company; (iii) whether the applicant is making executive decisions; (iv) whether the applicant s primary employment is as a consultant or work out specialist, as opposed to a trained executive; (v) whether compensation is paid directly to the applicant or the entity employing the applicant; (vi) whether the applicant receives fringe benefits from the debtor; (vii) whether income taxes and withholding taxes are withheld from the applicant s salary; (viii) whether the applicant s compensation is consistent with compensation paid to predecessor officers; (ix) whether the applicant has been employed to solve the debtor's financial problems, as opposed to permanent employment; (x) whether the applicant was employed contemporaneous with the filing of the bankruptcy case, or significantly in advance; (xi) whether the applicant is a full time employee of the debtor or contractually able to work on other deals; and (xii) whether the applicant is paid a retainer. Madison, 137 B.R. at In this case, as in Madison, Bartley Lindsay, and First Merchants, the factors strongly support a finding that the applicants are professionals subject to section 327(a). See Madison, 137 B.R. at 283; Bartley Lindsay, 120 B.R. at ; First Merchants, 1997 WL 2 Analyzing a slightly different set of factors: (1) whether the employee controls, manages, administers, invests, purchases or sells assets that are significant to the debtor's reorganization, (2) whether the employee is involved in negotiating the terms of a Plan of Reorganization, (3) whether the employment is directly related to the type of work carried out by the debtor or to the routine maintenance of the debtor's business operations, (4) whether the employee is given discretion or autonomy to exercise his or her own professional judgment in some part of the administration of the debtor's estate, i.e. the qualitative approach, (5) the extent of the employee's involvement in the administration of the debtor's estate, i.e. the quantitative approach, and (6) whether the employee's services involve some degree of special knowledge or skill, such that the employee can be considered a professional within the ordinary meaning of the term. First Merchants, 1997 WL at *3. The court in First Merchants ruled that consulting firm s expertise, wide discretion, and involvement in administration of the debtor s receivables was sufficient to meet the definition of a professional under section 327(a), and expressly rejected employment under section 363. Page 5 of 7

6 Document Page 6 of at *3-5. Scouler, Walker, and Scouler s team of professionals performed consulting duties, allowed the Verbeeks continued involvement in decision making, are primarily employed as a consulting and advisory firm, receive payments made to Scouler without tax withholdings, do not receive fringe benefits from the Debtors, are paid inconsistently with prior management on account of the proposed success fee and blended hourly wage structure, were employed to solve the Debtors financial problems, were employed within months of the Petition Date and with a sale or reorganization in mind, were paid a retainer, and remain contractually entitled to work on other deals with other clients as time permits. In summary, nearly every single factor strongly supports a finding that Scouler, Walker, and its team are professionals subject to section 327(a). The Court should therefore deny the Scouler Application under section 363. WHEREFORE, Regions requests the Court deny the relief requested in the Scouler Application. Regions further requests such further relief to which it shows itself to be entitled. Dated: January 20, 2014 Respectfully submitted, KANE RUSSELL COLEMAN & LOGAN PC By: /s/ John J. Kane George H. Barber State Bar No John J. Kane State Bar No Thanksgiving Tower 1601 Elm Street Dallas, Texas Telephone - (214) Telecopier - (214) ecf@krcl.com ATTORNEYS FOR REGIONS BANK Page 6 of 7

7 Document Page 7 of 7 CERTIFICATE OF SERVICE I hereby certify that on January 20, 2014 a true and correct copy of the foregoing Objection was served on all parties receiving ECF Notification at the date and time filed. /s/ John J. Kane John J. Kane Page 7 of 7