ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 37
compromise. As further explained below, the Commission determined that the concept of an estate neutral should replace examiners under the Bankruptcy Code.
The Commissioners found little correlation between the standards for a mandatory appointment and the utility of the appointee in any given case, based on experiences with examiners under section 1104(c) of the Bankruptcy Code. Accordingly, the Commission voted to eliminate the mandatory nature of the appointment process and to permit the court to order the appointment of an estate neutral, upon request of a party in interest or the U.S. Trustee and after notice and a hearing, if such appointment would be in the best interests of the estate. The Commission specifically considered the existing case law, and it rejected a standard that required all interests to be served by the appointment. It found that, given the role contemplated for estate neutrals under these principles, the appointment standard should be flexible and tailored by the court to the particular case. Courts should determine if, on balance, the best interests of the estate would be served by the appointment.
The Commissioners further discussed the proper role of estate neutrals in the reorganization process. Absent the appointment of a trustee, all parties in the chapter 11 case have potentially diverging interests and may be motivated purely by self-interest. For example, the debtor in possession acts as a fiduciary for the estate, but the estate itself likely has different constituencies. The debtor in possession is also working to reorganize its business and preserve relationships with employees, vendors, and other constituents that ultimately serve the interests of the estate. Likewise, a statutory unsecured creditors’ committee owes its duties to general unsecured creditors, but those creditors are not the only stakeholders in the case. The Commissioners observed that an estate neutral-like appointee is the only party uniquely situated to provide an independent and neutral perspective in the case. The Commission also considered other potential rationales for expanding the role of the new estate neutral from that of a traditional examiner in chapter 11 cases, such as facilitating dispute resolution and reducing information asymmetries.
The Commissioners recognized the costs associated with the appointment of an examiner under the current law, as well as the additional costs that might accompany the new estate neutral, which could be used more frequently and for a wider array of tasks. Not only would the estate compensate the estate neutral, but the estate also would compensate any professionals that the court authorizes the estate neutral to retain. The Commissioners explored ways to contain these costs, including through court-approved budgets and restrictions on the efforts by the debtor in possession and the unsecured creditors’ committee that may be duplicative of those assigned to the estate neutral. The Commissioners believed that this kind of oversight by the court and other stakeholders could mitigate the potential increases in costs. The Commissioners did not believe, however, that such restrictions should be statutorily mandated, but rather left to the court and parties in interest to determine in any given case.
The Commission also considered the potential cost savings that an estate neutral may generate in cases when the parties are at an impasse in negotiations or need an independent investigation to facilitate resolution of particular matters. The Commissioners discussed how courts should balance the costs associated with an estate neutral with the potential efficiencies created by the appointment. The Commissioners also observed that, even under this cost-benefit analysis, the circumstances of the case could warrant the appointment of more than one estate neutral to perform different functions