Introduction

The case In re Johns-Manville Corp., et al., Debtors, 60 B.R. 612 (1986), adjudicated in the United States Bankruptcy Court for the Southern District of New York, addresses critical issues surrounding the retention of lobbyists by a debtor corporation during bankruptcy proceedings. The Committee of Asbestos-Related Litigants and/or Creditors challenged Johns-Manville Corporation's (hereinafter "Manville") decisions to retain certain lobbyists post-petition, arguing that such actions were outside the ordinary course of business and required prior court approval under the Bankruptcy Reform Act of 1978 ("Code"). This commentary delves into the background of the case, summarizes the court's judgment, analyzes the precedents cited and the legal reasoning applied, assesses the potential impact of the ruling, simplifies complex legal concepts involved, and concludes with key takeaways highlighting the significance of the decision in the broader legal landscape.

Summary of the Judgment

Faced with allegations from the Asbestos Committee, Manville sought summary judgment to affirm that retaining lobbyists post-bankruptcy filing was within the ordinary course of business and that these lobbyists did not qualify as "professional persons" under § 327(a) of the Code, thus not necessitating prior court approval. The Bankruptcy Judge, Burton R. Lifland, examined two primary issues:

1. Whether Manville's retention of lobbyists was in the ordinary course of business under § 363.
2. Whether the lobbyists qualified as professional persons under § 327(a), thereby requiring court approval for their retention.

• Manville's lobbying activities were indeed in the ordinary course of business, supported by the company's historical engagement in lobbying and comparable practices among other Fortune 500 corporations.
• The lobbyists did not fall under the definition of "professional persons" as intended by § 327(a), since their roles were peripheral to the administration of the bankruptcy estate.

Analysis

Precedents Cited

The judgment extensively references prior cases to build its legal foundation:

• In re James A. Phillips, Inc. (29 B.R. 391) - Established the principle that ordinary business transactions do not require notice or hearings unless they deviate significantly from expected operations.
• In re Seatrain Lines, Inc. (13 B.R. 980) - Provided a definition for "professional persons" within § 327(a), emphasizing that only those directly involved in the administration of the debtor's estate require court approval.
• In re Waterfront Companies, Inc. (56 B.R. 31) - Introduced the "horizontal dimension" or industry-wide test for assessing ordinary course transactions.
• Other cited cases include In re Columbia Motor Express, Inc., In re La Sherene, Inc., and In re County Line Homes, Inc., each reinforcing aspects of the ordinary course of business analysis.

Legal Reasoning

The court employed a dual-faceted approach to determine whether Manville's retention of lobbyists was ordinary:

• Vertical Dimension (Creditor's Expectation Test): This examines the debtor's historical business practices. Manville's long-standing engagement in lobbying, especially concerning asbestos legislation, established that retaining lobbyists was consistent with its business operations.
• Horizontal Dimension (Industry-Wide Test): This compares Manville's practices with other similar large corporations. The court noted that many Fortune 500 companies routinely engage lobbyists without requiring court approval, thus situating Manville's actions within standard industry practices.

Additionally, the court analyzed the definition of "professional persons" under § 327(a), concluding that lobbyists, while experts in their field, do not play a central role in the administration of the bankruptcy estate. Therefore, their retention did not necessitate prior court approval.

Impact

This judgment has significant implications for corporate behavior during bankruptcy:

• Clarification of "Ordinary Course of Business": By outlining the vertical and horizontal dimensions, the court provides a clearer framework for future cases to assess whether certain transactions fall within the ordinary course, reducing ambiguity for debtors and creditors alike.
• Definition of "Professional Persons": The distinction made between central administrative roles and peripheral professional services like lobbying helps delineate when court approval is necessary, preventing potential overreach in requiring approvals for every professional engagement.
• Encouragement of Corporate Autonomy: Affirming that debtors can continue essential business operations, such as lobbying, without constant judicial oversight supports the reorganization objective of Chapter 11, allowing companies to stabilize and restructure more effectively.

Complex Concepts Simplified

§ 363 of the Bankruptcy Reform Act

§ 363 allows a debtor to use, sell, or lease property of the estate in the ordinary course of business without needing court approval, unless the transaction is deemed extraordinary. This provision aims to facilitate the debtor's continued operations during bankruptcy.

Ordinary Course of Business

Transactions that a company routinely engages in as part of its regular operations are considered to be in the ordinary course of business. Whether an action falls into this category is determined by examining historical practices (vertical dimension) and comparing them with industry standards (horizontal dimension).

Professional Persons under § 327(a)

"Professional persons" refer to individuals who play a key role in managing and administering the bankruptcy estate, such as attorneys, accountants, and appraisers. Retaining these professionals typically requires prior court approval to ensure they are essential to the reorganization process.

Conclusion

The In re Johns-Manville Corp. decision serves as a pivotal reference in bankruptcy law, particularly concerning corporate lobbying activities during reorganization. By affirming that retention of lobbyists can be within the ordinary course of business and that such professionals do not necessitate court approval, the court has provided clarity and guidance for future bankruptcy proceedings. This ruling balances the need for corporate autonomy in managing business affairs with the oversight necessary to protect creditor interests, reinforcing the pragmatic and flexible nature of bankruptcy law aimed at fostering successful reorganizations.