A recent California case highlights the discomfort that many judges outside of Delaware and New York have with concept of a Chief Restructuring Officer (CRO). Although ubiquitous to the point of being accepted without much thought in the major large case venues, CRO appointments draw greater scrutiny from both the United States Trustee and judges elsewhere.

The opinion in BR Festivals LLC, No. 14-10175 (N.D. Cal., Mar. 28, 2014) (Jaroslovsky, B.J.), is a case in point. First the win – the U.S. Trustee argued that the mere fact that the debtor sought a CRO was an admission that current management was not competent and should be replaced for cause by a trustee under 11 U.S.C. § 1104(a). Rejecting that argument, the Court took the opposite position that, far from being evidence of mismanagement, seeking the appointment of a CRO was evidence of acting responsibly.

Victory was short-lived, however. Citing an East-West divide, the Court stated that CRO appointments are a rarity in the West. It then rejected the appointment on the grounds that the CRO was a “disguised trustee” and that the Court lacked authority to authorize an “end run” around the U.S. Trustee’s statutory role under 11 U.S.C. § 1104(d) in appointing Chapter 11 trustees. Nonetheless, the Court was convinced that the appointment of a trustee was not in the best interest of creditors or the estate. Faced with a dilemma, the Court suggested that the debtor and committee “find some legitimate way to employ [the CRO] which does not require court approval” or employ the CRO in a more limited role – maybe a CRO-lite? It is not clear how the CRO could be appointed without court approval since such appointments typically are made either under section 327 or a combination of sections 105(a) and 363(b)(1), with both approaches requiring court approval. Further, since the assistance the debtor needed was managing its compliance with its debtor-in-possession obligations and preparation and promulgation of a Chapter 11 plan, it is not clear how the CRO could provide those services without triggering the “disguised trustee” argument.