On March 17, 2026, the United States Bankruptcy Court for the District of Connecticut issued a decision in Old CP, Inc. v. Novo Advisors, LLC (Adv. Pro. 23-02020) that provides important guidance on the fiduciary obligations of restructuring professionals. The decision is particularly notable for treating chief restructuring officers (“CROs”) and financial advisors as fiduciaries subject to the same stringent duties of loyalty, disclosure, and conflict-of-interest avoidance as corporate officers and directors.
On March 30, 2026, Novo Advisors, LLC (“Advisor”) appealed the bankruptcy court’s decision to the United States District Court for the District of Connecticut.
Background
Before the Advisor was engaged by Old CP, Inc. (“CPI”), it had been engaged by CPI’s senior secured lender (“Lender”) to perform a financial assessment of CPI, including its ongoing viability. The Advisor had worked with the Lender on several unrelated prior engagements and maintained an ongoing relationship with the Lender. The engagement regarding CPI imposed a continuing confidentiality covenant on the Advisor. The Advisor generated a detailed report that included a liquidation analysis indicating that, under any liquidation scenario, the Lender would stand to lose millions of dollars (“Lender Report”). The Lender Report did not include any reorganization strategy.
CPI later engaged the Advisor as its prepetition financial advisor and CRO to improve business performance and explore restructuring strategies. The engagement agreement included a conflicts waiver, including “all previous conflicts related to the prior [L]ender engagement between the Advisor and the [L]ender.” The Advisor did not disclose the Lender Report to CPI. After CPI filed for chapter 11 protection, the Advisor terminated its engagement over concerns that its inability to share the Lender Report with CPI created a conflict of interest that would impede its appointment as financial advisor and CRO in CPI’s bankruptcy. The Advisor received $1.2 million in connection with its prepetition services as financial advisor and CRO for CPI.
CPI subsequently sued the Advisor, alleging that the Advisor breached fiduciary duties owed to CPI by operating under undisclosed or inadequately managed conflicts of interest.
The Bankruptcy Court’s Ruling
In a 97-page opinion, Judge Tancredi emphasized that where a CRO or financial advisor assumes decision-making authority or exercises substantial influence over a debtor’s operations, the restructuring professional will be held to the same standard as a corporate officer or director—requiring undivided loyalty and full and complete disclosure of any potential or actual conflicts of interest. The court held that the Advisor breached these duties to CPI.
The court found that the Advisor’s prior engagement with the Lender should have prevented the Advisor’s engagement by CPI. The court focused on the Advisor’s inability to disclose to CPI any of the information learned during its engagement by the Lender, the diverging economic interests of CPI and the Lender, and the Advisor’s continuing relationship with the Lender, all of which, the court said, created “a clear and unmistakable conflict of interest.”
The court also found that the conflicts waiver contained in the Advisor’s engagement agreement “was bereft of any of the material disclosures that a genuine fiduciary should make to assure the due performance of its duties and to secure a knowing and intelligent waiver of conflicts.” The court went even further, finding that, under the facts and circumstances of this case, the Advisor’s conflicts were unwaivable.
For substantially the same reasons, the court found that the Advisor had also breached its implied covenant of good faith and fair dealing and violated the Connecticut Unfair Trade Practices Act.
The court required the Advisor to disgorge the $1.2 million in fees it received in connection with its CPI engagement, pay CPI an additional $275,000 in punitive damages (representing the fees the Advisor received in connection with its engagement with the Lender), as well as attorneys’ fees and pre-judgment interest.
Key Takeaways from the Decision
- Substance of the Role Determines Fiduciary Status: While restructuring professionals may argue that they are merely advisors, courts will analyze the substance of their role to determine their fiduciary status.
- Heightened Standard: Restructuring professionals who step beyond a traditional advisory role and operate in a management-like capacity should expect to be held to the same stringent fiduciary standards as corporate officers and directors.
- Warning Against Dual-Role Engagements: The decision is a cautionary tale for advisors who do prepetition work for lenders and seek to serve as a borrower’s CRO, as such conflicts may be unwaivable.
- Full Disclosure: Conflict waivers and releases must be explicit and carefully drafted to have a preclusive effect. However, even with adequate disclosure, certain conflicts (as presented here) may be unwaivable.
The decision highlights bankruptcy courts’ willingness to hold restructuring professionals to heightened fiduciary standards, particularly when they serve as insiders or exercise managerial authority. A copy of the Court’s decision is available HERE.
