PHI, Inc. – U.S. Trustee for Region 6 Objects to Retention of Prime Clerk as Efforts to Improve Filing Practices Spread from Region 3

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April 5, 2019 – The U.S. Trustee for Region 6 objected [Docket No. 178] to the Debtors’ retention of Prime Clerk ("Prime") as the Debtors' claims, noticing and solicitation agent [Docket No. 8], stating that Prime's "evergreen retainer, the monthly fee procedures without a mechanism for holdback and review, and the indemnification are improper under the facts of this case."

This is one for the books. For the last week, we have been reporting on the efforts of the U.S. Trustee for Region 3 to force Debtors and their advisors to tighten up on their filing practices. The U.S, Trustee for Region 3 kicked things off, taking issue with motions to retain professionals and motions to approve KEIPs and KERPs. In what is likely a sign that this effort is being coordinated between U.S. Trustees and across regions, the Region 6 U.S, Trustee has taken aim at the largest of the claims agents. The decision to use Prime as a poster child for reforming filing practices, speaks volumes. In addition to a continued focus on compensation related motions (always an attention getter), the U.S. Trustee is turning to one of the least political actors in the bankruptcy process and its bog-standard, boilerplate-laden first day motion that is critical to getting a bankruptcy process off to a competent start. If this sort of administrative, seemingly innocuous motion (one that will have been filed in substantially identical form 100s of times) is being held up as sub-standard, is any motion safe?

The objection states, “Prime Clerk, as the Applicant, bears the burden of establishing that its employment terms are reasonable. In re Troung, 259 B.R. 264, 268 (Bankr.D. N.J. 2001).  Prime Clerk is overseen by attorneys and financial professionals, and its services implicate legal compliance.  Here, the evergreen retainer, the monthly fee procedures without a mechanism for holdback and review, and the indemnification are improper under the facts of this case. 

The Court should disallow the evergreen retainer, which is the renewal of the $50,000 deposit each time fees are paid. Generally, bankruptcy courts generally disallow evergreen retainers, and an evergreen retainer is particularly inappropriate when the professionals receive compensation every thirty days as well as protection through carve outs

Currently, Prime Clerk contemplates that any issue with its monthly fees must be raised in court. It does not increase its holdback, and it is unclear who carries the burden to file the request for hearing. The Court should mirror the procedures for other professionals as requested in the Fee Procedures Motion and require Prime Clerk to hold back any amount subject to objection. Because Prime Clerk’s work is more tailored in nature than other professionals, the United States Trustee has agreed in other cases to a final fee application only, and the United States Trustee agrees to that procedure here.

The Court should not indemnify Prime Clerk for its actions during the bankruptcy case because this provision violates the Fifth Circuit’s holding in Bank of N.Y. Trust Co. v. Off’l Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 252 (5th Cir. 2009) (‘Pacific Lumber’).

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