ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 33
The Estate Neutral: Background
A chapter 11 trustee is not the only alternative to the debtor in possession. An examiner with a specific directive may be appointed to investigate the affairs of the debtor.117 An examiner does not displace the debtor in possession or its management, and it is available only if no trustee has been appointed and only upon request of a party in interest or the U.S. Trustee and after notice and a hearing. In those circumstances, section 1104(c) requires the court to appoint an examiner if such appointment is in the interests of creditors, equity security holders, or the estate, or if “the debtor’s fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000.”118
Whether the appointment of an examiner is truly mandatory in any given case has met with resistance by some courts and created a split in the law.119 Professor Jonathan C. Lipson reviewed “dockets from 576 of the largest chapter 11 cases commenced between 1991 and 2007” and discovered that “examiners were requested in only 87 cases, or about 15 percent of the sample,” and that the “motions were granted in only 39 cases, less than half of cases where [an examiner was] sought, and about 6.7 percent of all cases in the sample.”120 Professor Lipson concluded that despite statements by some commentators to the contrary, examiners “are neither ‘routinely’ sought nor ‘automatically’ appointed in large cases.”121 Professor Lipson also concluded that examiners were more likely appointed in “huge,” contentious cases, and that a request for the appointment of a trustee increases the odds that an examiner will be appointed.122
Setting aside the debt threshold in section 1104(c)(2), courts have generally interpreted the “interests” test in section 1104(c)(1) to broadly encompass the interests of all parties in interest. As one court explained, “the basic job of an examiner is to examine, not to act as a protagonist in
117 For a general discussion of the role and appointment of examiners in chapter 11 cases, see Jonathan C. Lipson, Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies, 84 Am. Bankr. L.J. 1 (2010). 118 11 U.S.C. § 1104(c). 119 See, e.g., In re Wash. Mutual, Inc., 442 B.R. 314, 324 (Bankr. D. Del. 2011) (“The Court denied the Initial Examiner Motion . . . finding that there was no appropriate scope for an examiner to conduct an investigation given that issues pertinent to, and even beyond the scope of, the chapter 11 cases had been ‘investigated to death.’”); In re Spansion, Inc., 426 B.R. 114, 127 (Bankr. D. Del. 2010) (“I find no sound purpose in appointing an examiner, only to significantly limit the examiner’s role when there exists insufficient basis for an investigation. To appoint an examiner with no meaningful duties strikes me as a wasteful exercise, a result that could not have been intended by Congress.”); In re Erickson Ret. Communities, LLC, 425 B.R. 309, 312 (Bankr. N.D. Tex. 2010) (“At first blush, the issue here seems to be whether, because the $5 million unsecured debt threshold is met . . . the appointment of an examiner is mandatory. Many courts have been confronted with this issue and have held yes — an examiner is required whenever the $5 million unsecured debt threshold of Section 1104(c)(2) is met. This court agrees with such courts that, where the $5 million unsecured debt threshold is met, a bankruptcy court ordinarily has no discretion. The only judicial discretion that comes into play is in defining the scope of the examiner’s role/duties. The court can make the scope of an examiner’s duties very broad or very narrow.” (citations omitted)); In re Vision Dev. Grp. of Broward Cnty., LLC, 2008 WL 2676827, at *3 (Bankr. S.D. Fla. Jun 30, 2008) (“[A] request for, and appointment cannot be waived by request made late in case of, an examiner may be made ‘at any time before the confirmation of the plan.’”) (quoting 11 U.S.C. § 1104(c)(2)). See also Walton v. Cornerstone Ministries Invs., Inc., 398 B.R. 77, 81 (N.D. Ga. 2008) (“[E]very district court and nearly every bankruptcy court that has confronted the question has also read the provision to be mandatory on its face.”); In re Schepps Food Stores, Inc., 148 B.R. 27, 30 (S.D. Tex. 1992) (“This reasoning is both grammatically and contextually wrong. In the provision, ‘as is appropriate’ modifies ‘investigation.’ The statute allows the court to determine the scope, length, and conduct of the investigation, rather than the appointment itself.”). 120 Jonathan C. Lipson, Understanding Failure: Examiners and the Reorganization of Large Public Companies, 84 Amer. Bankr. L. J. 1 (2010). See generally supra note 66 and accompanying text (generally discussing limitations of chapter 11 empirical studies). 121 Id. at 4. Indeed, Professor Lipson includes this quote from the Honorable Robert Gerber of the U.S. Bankruptcy Court for the Southern District of New York: “[M]andatory appointment [of examiners] is terrible bankruptcy policy, and the Code should be amended . . . to give bankruptcy judges . . . the discretion to determine when an examiner is necessary and appropriate. . . .” Id.
122 Id. at 5. Professor Lipson also notes that examiners are more likely to be sought in cases pending in Delaware or the Southern District of New York (where most of the “huge” cases are filed), and that allegations of fraud do not automatically result in either
a request for, or order appointing, an examiner. Id.