In re Spansion, Inc, 426 BR 114 (Bankr Del April 1, 2010)
At the confirmation hearing regarding a chapter 11 debtor’s plan of reorganization, the Bankruptcy Court considered an ad hoc committee of convertible noteholders’ motion to vacate the order approving the debtors’ disclosure statement. The motion was based on allegations that the debtors had engaged in misconduct and misrepresentation. In its motion, the ad hoc committee also moved for the appointment of an examiner under section 1104(c)(2) of the Bankruptcy Code, which provides for the appointment of an examiner when a debtor’s debts exceed $5 million. Despite the express language of 1104(c)(2), the Bankruptcy Court denied the ad hoc committee’s motion, finding that the statutory language does not require the appointment of an examiner in every instance when the debt threshold is exceeded.
Spansion, Inc. designed and manufactured semiconductor devices. When the economy took a severe downturn in 2008, demand for Spansion’s products did as well. Spansion (and several subsidiaries) filed chapter 11 bankruptcy petitions in March 2009. Over the course of several months, Spansion negotiated with different creditors and interest holders, including the unsecured creditors committee, senior secured noteholders, junior noteholders, and unsecured and equity holders, attempting to finalize its reorganization plan. It was undisputed that Spansion’s debt exceeded $5 million.
Over various objections, Spansion’s disclosure statement was approved by the Bankruptcy Court, and its plan of reorganization was scheduled for a confirmation hearing. Spansion’s reorganization plan included various distribution options for creditors, as well as various sources for the funding of the plan. Spansion intended to make a rights offering of new common stock to several classes of creditors, and a “backstop” rights offering to a specific investor.
Prior to submission of the plan to the Bankruptcy Court, the ad hoc committee of convertible noteholders made an alternative equity financing proposal to Spansion, which Spansion rejected, and which was not incorporated into its plan. Days prior to the scheduled confirmation hearing, the ad hoc committee filed a motion seeking to vacate the order approving the disclosure statement and seeking the appointment of an examiner or trustee under section 1104(c)(2) of the Bankruptcy Code.
The ad hoc committee alleged that the disclosure statement contained intentionally misleading information, and that Spansion had engaged in fraud or other misconduct. Primarily, the ad hoc committee argued that Spansion had misrepresented its financial forecasts, utilizing unreasonably conservative projections, thereby under-valuing the company and unfairly impacting unsecured creditors. The ad hoc committee argued that an examiner should be appointed under section 1104(c)(2) to investigate these alleged misrepresentations.
Appointment of an Examiner
Section 1104(c)(2) of the Bankruptcy Code provides that, after notice and a hearing, “the court shall order the appointment of an examiner to conduct an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud … if … the debtor’s fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes … exceed $5,000,000.”
Because Spansion’s debts exceeded $5 million, the ad hoc committee argued that the statute required the Bankruptcy Court to appoint an examiner. The Bankruptcy Court disagreed, however, based upon its interpretation of the language of the provision and its review of decisions reached by other courts.
The Bankruptcy Court noted that some courts found that the language of 1104(c)(2) mandates an examiner be appointed when the debt threshold is met, regardless of whether the examiner was needed to perform any tasks or functions. In fact, some courts had gone so far as to appoint an examiner without assigning any duties to the examiner. Those courts reasoned that the statute required appointment, but that the phrase, “as is appropriate,” gave the court discretion to assign – or not assign - duties to the examiner as it deemed fit. Other courts, however, decided that since bankruptcy courts have considerable discretion in dealing with examiner issues, and since the provision contains the phrase, “as is appropriate,” a court could decide not to appoint an examiner in appropriate circumstances.
Appointment Neither Mandatory Nor Warranted
Here, the Bankruptcy Court focused its analysis on the phrase “as is appropriate,” and reviewed other decisions in which the courts found that the appointment of an examiner was not mandatory. In particular, the Bankruptcy Court cited In re Winston Indus., Inc., 35 B.R. 304 (Bankr. N.D. Ohio 1983), which found that appointment of an examiner was not required in instances where such an appointment is “needless, costly and non-productive and would impose a grave injustice on all parties herein.”
Ultimately, the Bankruptcy Court found that the record before it did not contain sufficient evidence of “conduct that would make an investigation of the Debtors appropriate, but rather reveals deep heated differences of opinion about the value of the Debtors’ companies.” All parties had been vigorously represented and had conducted extensive discovery, and the court found no fraud or misconduct in the valuation methodologies. Based on these findings, the Bankruptcy Court found that no investigation was appropriate, and denied the motion to appoint an examiner, on the basis that an examiner in this case would not have substantive duties and would be wasteful. The ad hoc committee’s allegation that Spansion’s rejection of its alternative equity financing constituted misconduct was merely a “classic confirmation dispute,” rather than grounds for the appointment of an examiner. As such, the court denied the ad hoc committee’s motion.
The court in Spansion found that 1104(c)(2) does not require a court to appoint an examiner if the debtor has assets in excess of $5 million, unless there is evidence that there is an appropriate and sufficient basis to warrant an investigation by an examiner. In contrast, other courts view 1104(c)(2) as requiring the appointment of an examiner, regardless of the circumstances of the case. While there is no definitive standard, the Delaware Bankruptcy Court in Spansion indicated that it was appropriate for courts to perform an analysis of the facts of each case when considering the appointment of an examiner under 1104(c)(2). Furthermore, where the parties have already conducted extensive discovery, and there has not been a clear showing of fraud, a court may well conclude that appointment of an examiner would serve no useful purpose, and refuse to appoint an examiner under section 1104(c)(2).