The U.S. Bankruptcy Code provides for the appointment of a bankruptcy examiner to investigate the debtor with respect to allegations of fraud, dishonesty, incompetence, misconduct or mismanagement. The right examiner, with a clearly defined mission, will have a major influence on the bankruptcy process. The difference between a successful financial restructuring or liquidation-resulting in substantial recoveries for the key constituencies-and a time-consuming (and asset-consuming) meltdown, can depend on the approach of the examiner and the examiner's support team.
Typically, in Chapter 11 cases in which a bankruptcy trustee has not been appointed, the court will order the appointment of an examiner upon the request of any affected party in the case and upon a determination that such appointment is in the best interests of the creditors or the estate. Furthermore, the Bankruptcy Code provides for the appointment of an examiner if "the debtor's...unsecured debts...exceed $5,000,000." When the court finds that the case warrants appointment of a bankruptcy examiner, the court will direct the U.S. trustee (an official of the U.S. Department of Justice) to make the appointment. The trustee will usually canvass major creditors in the case for suggestions as to who should fill the role as the examiner.
In contrast to a Chapter 7 case-in which a trustee is appointed automatically, thereby divesting the bankrupt company's management of control-a court presiding over a complex Chapter 11 case may be hesitant to appoint a bankruptcy trustee and is often inclined to allow the debtor's management to remain in control of its business operations and financial affairs. Appointment of a bankruptcy examiner, whose powers are more limited than those of a trustee, enables the court to strike an appropriate balance between allowing an independent investigation of the debtor's affairs in cases in which wrongdoing or mismanagement is suspected and retaining the debtor's prepetition management unless or until it is shown to be in the creditors' best interests to remove prepetition management. In addition, courts often view the appointment of an examiner for a discrete purpose as more economical than the appointment of a trustee. Thus, even in cases in which a court may be hesitant to appoint a trustee, creditors might succeed in securing the appointment of an examiner.
Bankruptcy examiners traditionally have been employed to pursue investigations into the financial affairs of the debtor. The scope of an examiner's duties is defined by the court order authorizing the examiner's appointment and varies depending on the particular circumstances of each case. Recent Chapter 11 cases have seen the role of bankruptcy examiners expand to include a diverse array of investigative functions. For example, the examiner appointed by the Southern District of New York bankruptcy court in the Enron Corp. case was tasked with investigating and reporting on the company's use of special-purpose entities and the role of Enron's officers and directors with respect to these entities.
As part of his investigation, the examiner was directed to identify potential claims against any of these parties that could be asserted by the debtor on behalf of the bankruptcy estate. In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y. April 8, 2002) (order directing appointment of examiner).
In April 2010, the U.S. Bankruptcy Court for the District of Delaware entered an order in the Tribune Co. bankruptcy directing the U.S. trustee to appoint an examiner to investigate whether the debtors' estates could pursue any causes of action in connection with the leveraged buyout of the media conglomerate in 2007. In re Tribune Co., No. 08-13141 (Bankr. D. Del. April 20, 2010) (order directing the appointment of an examiner). Similarly, an examiner was appointed in the Lehman Brothers Holdings Inc. bankruptcy-the largest bankruptcy in U.S. history-to investigate the events that led to the financial institution's downfall, and the circumstances surrounding certain intercompany transfers and whether there existed potential claims against Lehman Brothers and the officers and directors of various debtors. In re Lehman Bros. Holdings, Inc., No. 08-13555 (Bankr. S.D.N.Y. Jan. 16, 2009) (order directing appointment of an examiner).
An effective examiner's investigation can provide significant benefits to the estate and result in increased returns to the creditors. For example, in the Enron case, the investigation conducted by the examiner identified more than $10 billion in potential claims (based both on state law and federal bankruptcy code provisions) that might be asserted on behalf of the bankruptcy estate. To date, the Enron bankruptcy court has approved settlements totaling more than $500 million as a result of the claims asserted pursuant to the examiner's report. Richard Acello, "Enron Lawyers in the Hot Seat," ABA J., June 1, 2004.
From a creditor's perspective, it is important to remember that the costs of an examiner are paid from funds of the bankruptcy estate. Thus, the benefits that can result from appointment of an examiner often come at very little cost to individual creditors. In cases in which wrongdoing on the part of the debtor is suspected, creditors should consider requesting the appointment of an examiner. An effective bankruptcy examiner can streamline the bankruptcy process, identify claims that may be pursued for the benefit of interested parties and enhance the expected return to creditors.