Source: https://www.abi.org/abi-journal/should-an-examiner-prosecute-claims-a-response-to-proposed-changes-to-the-role-of
Timestamp: 2020-08-08 14:41:10
Document Index: 301053366

Matched Legal Cases: ['§1106', '§1104', '§1106', '§1106', '§1104', '§1106', '§1106', '§1106', '§1104', '§1104', '§1106', '§1106', '§321', '§327', '§321', '§1106', '§704', '§1107', '§1106', '§704', '§704', '§704', '§704', '§704', '§1106', '§704', '§1106', '§1109', '§1106', '§1106', '§1106', '§1106', '§321', '§45', '§321', '§321', '§1104', '§1104', '§1104', '§1', '§1104', '§1106', '§1106', '§1104', '§1104', '§1106', '§1106', '§1106', '§1106', '§1106', '§1106', '§1103', '§1104', '§1104', '§1104', '§1106', '§1103', '§1104', '§1106', '§1106', '§1103', '§1106', '§1106', '§1106', '§1106', '§1106', '§321', '§1106', '§1106', '§1106', '§1107', '§107']

Should an Examiner Prosecute Claims? A Response to Proposed Changes to the Role of Examiner Contained in the Second Report of SABRE | ABI
Home John C. Weitnauer Should an Examiner Prosecute Claims? A Response to Proposed Changes to the Role of Examiner Contained in the Second Report of SABRE Should an Examiner Prosecute Claims? A Response to Proposed Changes to the Role of Examiner Contained in the Second Report of SABRE
Should an Examiner Prosecute Claims? A Response to Proposed Changes to the Role of Examiner Contained in the Second Report of SABRE
The Select Advisory Committee on Business Reorganization (SABRE), a committee established by the American Bar Association's Section of Business Law, Business Bankruptcy Committee, recently published its Second Report.1 The Second Report contains three proposals,2 and one of them, "Proposal Three," relates to examiners in bankruptcy. Proposal Three calls for changes to the Bankruptcy Code that would, among other things, (1) expand the role of an examiner and (2) eliminate the requirement that an examiner's report be filed with the bankruptcy court. This article argues that some of these proposed changes—in particular, giving the examiner the right to prosecute claims and eliminating the requirement that the examiner's report must be filed of record—could have an adverse impact on the perceived independence and integrity of an examiner.
Summary of Proposal Three
1. Proposed Expansion of Tasks. Proposal Three enlarges the express tasks that can be assigned to an examiner. Proposal Three would expressly permit the court to order an examiner to:
(A) review, investigate, object to and make recommendations with respect to the resolution of claims;
(B) prosecute actions on behalf of the estate;
(C) negotiate, market and seek court approval of asset sales;
(D) mediate specifically identified disputes between or among parties to a bankruptcy case or proceeding; and
(E) perform any duties specified in §1106(a) and any other duties of the trustee that the court orders the debtor-in-possession (DIP) not to perform.3
2. Proposed Power to Direct Examiner to Serve as a Plan Facilitator. Proposal Three proposes a new Bankruptcy Code §1104(e) that provides, among other things, that the "court may direct that a currently serving examiner serve as plan facilitator."4 A plan facilitator is a new "player" in the bankruptcy arena proposed by SABRE.5 A plan facilitator is to mediate or facilitate negotiations over the terms of a reorganization plan, and if facilitated negotiations fail, may be authorized to propose the terms of, or file, a plan.6
3. Proposed Elimination of the Obligation to File the Examiner's Report. Proposal Three also recommends the repeal of §1106(b), which requires that an examiner shall file a statement of any investigation conducted, "including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate."7 Thus, Proposal Three eliminates the statutory requirement that an examiner's report be filed in the case.8 Proposal Three offers the following alternative approach: "Each examiner shall report to the court in the manner the court directs."9 While the court might require a written report filed on the public record, it would no longer be a statutory requirement.
4. Proposed Change in the Focus of the Examiner's Investigatory Role. Proposal Three may also change the scope of the investigatory role of an examiner. The proposed revision to the Bankruptcy Code provides that the court "may order" that an examiner:
(A) conduct such an investigation of the debtor and any specifically identified current or former agents, officers, directors, employees, contractors and professionals as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the management of the affairs of the debtor, by current or former management of the debtor, or current or former agents, employees, contractors or professionals hired by the debtor...; and
(F) perform any duties specified
in §1106(a)....10
At first, subsection (A) would appear to be broader than current Code §1104(c) (which mentions only the debtor and its current or former management) because subsection (A) explicitly adds a reference to "specifically identified" officers, professionals and other agents, and adds a reference to officers, professionals and other agents "hired by the debtor," all of whom can be investigated. In another sense, however, these additions might be read to limit what an examiner should or could investigate—in particular, could an examiner investigate the role of third parties who are not agents of, and are not hired by, the debtor, in a alleged fraudulent scheme? Proposal Three gives a court a way to avoid this potential issue, however, in that subsection (F) still permits the court to order the examiner to perform any duties of a trustee specified in §1106(a), and §1106(a)(3) provides the following duty of a trustee:
Except to the extent that the court orders otherwise, investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business and any other matter relevant to the case or to the formulation of a plan.11
Current Law on the Duties of an Examiner
As discussed below, Proposal Three is a departure from the current language and structure of the Code with respect to the powers of examiners, although some courts have bestowed the same powers to examiners in particular cases. This article will address the current statutory scheme and the decisions of the courts under the current Code, and will conclude with a critique of the practice (and the proposal in the Second Report) of granting an examiner the power to prosecute claims.
The Code affirmatively states the duties of an examiner at §1106(b), as follows:
An examiner appointed under §1104(d) of this title shall perform the duties specified in paragraphs (3) and (4) of subsection (a) of this section and, except to the extent that the court orders otherwise, any other duties of the trustee that the court orders the DIP not to perform.
The first clause is clear and consistent with the reason for the appointment of an examiner given in §1104(c):12 The examiner investigates (§1106(a)(3))13 and files and transmits a report containing the findings of the investigation (§1106(a)(4)).14 The second clause (hereinafter referred to as the "Other Duties" clause) is what most courts rely on when they expand the powers of an examiner. However, there are several other sections of the Code that may be relevant to any expansion of an examiner's powers: the various sections that enumerate the "duties" or "powers" of a trustee; §321, which provides that a "person that has served as an examiner in the case may not serve as trustee in the case;" and §327(f), which provides that the "trustee may not employ a person that has served as an examiner in the case." As will be seen below, there is some difference of opinion regarding how much "expansion" of an examiner's powers is appropriate.
Interpretations of the Current Statutory Framework by the Courts
There are a number of cases that have expanded the power of an examiner in various ways, but there are only a few that have permitted an examiner to prosecute causes of action on behalf of the estate. At the same time, there are other cases that have concluded that an examiner cannot, or should not, be given the power to prosecute claims. This expanded power is discussed here because it illuminates a concern about an examiner's independence raised by Proposal Three.15
Some reported decisions merely reflect the fact that the court gave an examiner the power to prosecute claims, but do not inquire into, or explain, the basis for such an order.16 A few cases base their decision to grant an examiner the power to prosecute claims on the Other Duties clause,17 and one court found that such an expansion was also consistent with prior practice in chapter X cases under the Bankruptcy Act.18 At least one court has rejected the argument that Code §§321(b) or 327(f) prevent giving an examiner the power to prosecute claims on behalf of the estate, but primarily on the basis that the expansion of the examiner's powers occurred after the examiner's report was filed.19
In contrast, at least one court has held that an examiner cannot be given all of the powers of a trustee,20 and several other courts have reasoned that the Other Duties clause cannot be used to expand an examiner's powers beyond tasks directly related to the investigation.21
Analysis of the Other Duties Clause
"Duties" vs. "Powers." While the Other Duties clause may not be a model of clarity, it is clear that it does not say that an examiner "shall perform any other duties that the court orders the examiner to perform and shall have any other powers that may by granted by the court."22 Instead, it says that an examiner shall perform "any other duties of the trustee that the court orders the DIP not to perform."23 The Code is quite specific when it comes to the "duties" of a trustee: Section 1106 is titled, "Duties of trustee and examiner," and §1106(a) lists seven specific duties, including a cross-reference to the "duties of a trustee specified in portions of §704, which is titled "Duties of trustee." According to §1107(a), a DIP "shall perform all the functions and duties, except the duties specified in §§1106(a)(2), (3) and (4) of this title, of a trustee...." Perhaps significantly, this same section confers on the DIP, subject to certain limitations, "all the rights...and powers...of the trustee."24 Reading these together, the duties of a DIP are as follows:
1106(a)(1): to perform the duties of a trustee specified in:
§704(2) (be accountable for all property received);
§704 (5) (examine proofs of claim and object to improper claims);
§704(7) (furnish information regarding the estate and its administration as is requested by a party in interest);
§704(8) (file periodic operating reports); and
§704(9) (make a final report and file a final account).
1106(a)(5): As soon as practicable, file a plan, file a report explaining why the DIP will not file a plan, or recommend conversion or dismissal of the case;
1106(a)(6): For any year a tax return was not filed, furnish certain information to the relevant governmental unit;
1106(a)(7): After confirmation of a plan, file such reports as are necessary or as the court orders.
Ordering an examiner to prosecute a lawsuit does not fit neatly, if at all, into this list of duties.25 The court in Weld v. Robert A. Sweeney Agency Inc. (In re Patton's Busy Bee Disposal Service Inc.),26 struggled with the distinction between duties and powers.27 The court acknowledged that the Code "contains no clear authorization for the examiner's commencement of an adversary proceeding,"28 but justified it by reference to one of these specific duties in this fashion:
Pursuant to §1106(a)(1), these other duties may include the obligation specified in 11 U.S.C. §704(2) to "be accountable for all property received."
Property of an estate includes any causes of action which might be asserted on behalf of the DIP. Had this court ordered the DIP not to account for such causes of action, this duty would have passed to the examiner pursuant to the provisions of 11 U.S.C. §§1106(b), 1106(a)(1) and 704(2). Instead, the order of Feb. 26, 1993, speaks only in terms of a positive grant of authority to the examiner. Nonetheless, the pleadings clearly indicate the concern that the DIP might not commence this litigation, particularly insofar as it sought recovery from insiders. This court is satisfied that the intent of the judge at that time was to preempt the debtor's administration of these causes of action and thereby to assign that responsibility to the examiner. Accordingly, the court hereby corrects the order of Feb. 26, 1993, nunc pro tunc, to reflect that intent.29
The court felt that one more step was needed, however, and invoked §1109 (a party in interest may raise and be heard on any issue in a case) and analogized to the power of a creditors' committee to bring litigation in the name of the debtor:
A duty to account for causes of action does not necessarily authorize the commencement of adversary proceedings. In this regard, the powers of an examiner are similar to those of a creditors' committee.... For examiners, a similar implication derives from §§1106 and 1109. Section 1109(b) recognizes a right to sue by any party in interest, including a trustee. In the present context, where the examiner has assumed certain duties of a trustee, that examiner is a party in interest as to the obligations that are so assumed. In assigning these responsibilities, §1106(b) recites not merely the existence of duties, but that the examiner shall "perform" them.... [T]herefore, the examiner may commence an action with the approval of this court.30
By contrast, the court in Official Committee of Asbestos Personal Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.)31 expressed doubts that a court could equate the DIP's refusal to pursue a claim (the typical reason a court would consider empowering an examiner to bring it) with an order directing the DIP not to bring it:
The cases frequently reason that a debtor's refusal to bring a fraudulent-conveyance action is the equivalent of the court ordering the debtor not to bring a fraudulent-conveyance action, thus permitting the delegation of that authority to an examiner with expanded powers. This court is not convinced....
[T]he decision to bring a [an avoidance] action is the sole prerogative of the trustee (or debtor). In the absence of a trustee, if a debtor refuses to bring an avoidance action, it is exercising its statutory prerogative, albeit in the negative. Exercising a right is the antithesis of submitting to an order from the court.... The fact is that this court has never ordered the debtor not to bring this fraudulent conveyance action. To hold that the debtor's refusal to do so is the same as an order from the court to that effect would be a leap unsupported by the language of the statute.32
A 2003 en banc decision from the Third Circuit, Official Committee of Unsecured Creditors of Cybergenics Corporation v. Chinery,33 albeit in dicta, invoked the principle of ejusdem generis to explain its misgivings about a court's ability to order an examiner to prosecute claims:
The more serious problem, however, is that it is less than obvious that §1106(b) actually does permit examiners to initiate actions on the debtor's behalf.... Although this catch-all language is expansive, it is subject to the interpretive canon ejusdem generis, which states that "where general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar to those enumerated by the preceding specific words." Sections (3) and (4) allow the examiner to "investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other [relevant] matter," and also to "file a statement of investigation." Critically, these sections permit only investigating and reporting on that investigation; they stop far short of authorizing examiners to litigate based on their findings.
Therefore, although an examiner's proper role in chapter 11 proceedings is hardly at issue in this case, we conclude that §1106(b)'s broad grant is most naturally interpreted to authorize only acts relating directly to investigation.34
The "Unique" Role of an Examiner in the Chapter 11 Process
A number of courts and commentators35 have expressed the view that an examiner has a unique role in the chapter 11 process, and to the extent they are correct, it seems clear that directing an examiner to prosecute claims may undermine the basis claimed for that unique role. For example, in a case deciding that materials reviewed by an examiner were not subject to discovery, In re Baldwin United Corp.,36 the court noted:
[W]e never contemplated, nor in our opinion does the Bankruptcy Code contemplate, that the examiner act as a conduit of information to fuel the litigation fires of third-party litigants. The prospect of an examiner being required to indiscriminately produce investigative materials obtained through promises of confidentiality and reliance upon this court's orders raises grave concerns touching both the integrity of the bankruptcy court's processes, as well as the integrity of the statutory position of the examiner.
These concerns are highlighted by the unique nature of the position itself. An examiner's legal status is unlike that of any other court-appointed officer which comes to mind. He is first and foremost disinterested and nonadversarial. The benefits of his investigative efforts flow solely to the debtor and to its creditors and shareholders, but he answers solely to the court. As was noted in In re Hamiel & Sons Inc., 20 B.R. 830, 832 (Bankr. S.D. Ohio 1982), an examiner "constitutes a court fiduciary and is amenable to no other purpose or interested party...."
The examiner in this case has aptly characterized his duties as comparable to that of a "civil grand jury...to ascertain legitimate areas of recovery and appropriate targets for recovery." If examiners in other cases are to perform these "civil grand jury" functions effectively, and if their non-adversarial role is to be maintained, they and the subjects of their investigation must be unhampered by the threat that any information that comes into the examiner's hands will be fair game for a plethora of anxious litigants, regardless of the limitations on disclosure which the bankruptcy court has imposed. Even absent such limitations on disclosure, we believe that the examiner, as a non-party to any proceeding and a non-adversarial officer of the court, is entitled to some immunity from the whirlwind of litigation commonly attendant to large chapter 11 cases.37
Examiners should not be authorized to prosecute claims.
In United States v. Schilling (In re Big Rivers Electric Corp.),38 the court noted how other provisions of the Code were designed to enforce this objectivity and neutrality, as follows:
While examiners and trustees perform some of the same duties and while each of them must remain disinterested, the Code distinguishes examiners from trustees in other ways. In contrast to earlier practices, the Code now prohibits an examiner from serving as a trustee or as counsel for the trustee in order to ensure that examiners may not profit from the results of their work. Compare Bankruptcy Reform Act of 1978, §§321(b) ("A person that has served as an examiner in the case may not serve as trustee in the case") and 327(f) ("The trustee may not employ a person that has served as an examiner in the case") with Bankruptcy Act of 1898, as amended, §45, reprinted in Collier on Bankruptcy, App. A, pt. 3(a) (15th ed. rev. 2003) (including no such prohibition). See 124 Cong. Rec. H11, 103 (daily ed. Sept. 28, 1978), reprinted in 1978 U.S.C.C.A.N. 6473 ("In order to ensure that the examiner's report will be expeditious and fair, the examiner is precluded from serving as a trustee in the case or from representing a trustee if a trustee is appointed"); 124 Cong. Rec. S17, 420 (daily ed. Oct. 6, 1978), reprinted in 1978 U.S.C.C.A.N. 6542.39
Potential Impact on the Role of an Examiner from Permitting the Prosecution of Claims
The Code's distinction between duties and powers, the prohibition of an examiner becoming a trustee or being employed by the trustee, and the frequent recognition by the courts and commentators of the unique, independent role of an examiner all suggest that an examiner cannot, or should not, be authorized to prosecute claims. Proposal Three would amend the existing provisions of the Code by expressly conferring the right to grant an examiner this expanded power—apparently because some courts have done so—but does not consider whether this could undermine the unique role of an examiner.
The primary concern this aspect of Proposal Three raises is its impact on an examiner's independence and integrity, or the parties' or the public's perception of an examiner's independence and integrity. The same concern exists where the courts have given examiners the power to prosecute claims. An examiner investigates one or more matters as directed by the court and files a report of the examiner's findings. The publication of that report will end the matter as far as the examiner is concerned. The examiner has, simply by virtue of his or her limited role, a certain amount of independence. While nothing can prevent a complaint that an examiner did a poor job, or spent too much money, or identified potential claims that others believe lack merit, this limited role in all cases prevents charges that an examiner was biased in favor of finding a colorable claim in the hope (or certainty) that the examiner would be hired to pursue the claims investigated and discovered.
While the Big Rivers court was not addressing the issue of whether or not an examiner could be given the expanded power to prosecute a claim, it is easy to see how the prosecution of a claim by an examiner that investigated the claim could be seen to contradict either the letter or the spirit of §§321(b) and 327(f) of the Code. The rejoinder of one court, that the independence of the examiner's investigation would not be undermined because the expanded power to bring suit occurred after the investigation was complete,40 misses the point of these statutory provisions. The very act of approving a subsequent prosecution of a claim negates their protection in the future. Once it is established that a court may, after the investigation, authorize a follow-up prosecution of a claim discovered, each examiner appointed in the future will know that. Thus, the restrictions established by §§321(b) and 327(f) are meaningless thereafter; subsequent examiners would know that they could profit from their work if given a later assignment to prosecute the claims identified.41 The possibility that an examiner's investigation would be (or would appear to the parties or the public to be) biased occurs when courts can, or do, expand the examiner's power to include the prosecution of claims.
There is another, broader reason to avoid any risk to the highest ideal of objectivity and neutrality for an examiner's investigation and report. "The Bankruptcy Code is designed to bring the debtor's affairs to light, not to hide them."42 As the Second Circuit has recognized, "[O]ne of the purposes for conferring upon the trustee in reorganization broad investigatory powers" is "the exposure of corporate abuses...."43 The same purpose is also served, perhaps to an even greater degree, by an examiner. However, anything that weakens the perceived independence and neutrality of the examiner will weaken the potential impact that the report's findings may have on policy issues in the future.
From a different perspective, there is yet another issue that needs to be considered. After the report is filed, it is up to the parties in interest to take such action as may be appropriate based on such report. Sometimes a report will lead to a vigorous assertion of the claims documented, sometimes the report will be a catalyst to the negotiation of a consensual plan,44 and sometimes the claims will be settled for little or nothing—but these decisions will be made by parties with an economic stake in the case.45 Should a claim be prosecuted by someone who is answerable to no one but the court? What if the claim is one to recover a fraudulent transfer and it will be litigated before the court that directed the examiner to prosecute the claim? Could a consensual plan be stymied because the examiner is plowing ahead with a claim that the parties would like to settle, but the settlement is deemed unreasonably small by the examiner, who does not have the same sort of economic stake in the case as do the parties in interest?
Public Filing of the Report
Proposal Three eliminates the requirement that an examiner file a report; instead, the examiner would "report to the court in the manner the court directs." As discussed above, there is a public benefit to the bankruptcy process, particularly from the investigatory role of a trustee or an examiner: the exposure of corporate abuses.46 While it can be hoped that, even with broad discretion on how an examiner should report, courts would require a public report of all investigations, it would clearly not be mandatory, and the public benefit could be lost in many cases. Certainly the parties that are the subject of an investigation that reveals wrongdoing would prefer less scrutiny and less publicity.47
But this aspect of Proposal Three raises another issue: Could the court order that the examiner report to the court on an ex parte basis? Although not discussed in the Second Report, the broad discretion given by proposed §1104(d)(3) would appear to trump the provisions of Bankruptcy Rule 9003, which provides that, "[e]xcept as otherwise permitted by applicable law, any examiner...shall refrain from ex parte meetings and communications with the court concerning matters affecting a particular case or proceeding."48 While there are certainly examples of bankruptcy judges deciding that ex parte contacts are necessary to move a case along, they sometimes are part of the circumstances that actually result in a setback in the progress of a case.49 Considering the issue more broadly, however, the bankruptcy process, while it necessarily involves a great deal of negotiation among the parties in interest (at least some of them), is designed to find resolution after public disclosure, whether through "notice and a hearing" in the context of a sale of the business or the filing of a disclosure statement in connection with a reorganization plan. An objecting party looks to the court, but if the plan has emerged after the examiner has had extensive ex parte contacts with the judge over the plan and the claims that are being settled or being preserved, will the objecting party expect to get a fair hearing?
Examiners should not be authorized to prosecute claims. The results of their investigations should be filed on the public record for the parties in interest to consider and take action on—or not.
1 Second Report of the Select Advisory Committee on Business Reorganization, 60 Bus. Law. 277 (2004) (hereinafter the Second Report). Return to article
2 Proposal One relates to committees, and Proposal Two relates to "creditors" representatives, a new concept. Return to article
3 Proposed §1104(d)(1), Second Report at 308. Subsection (A) of proposed §1104(d)(1) relates to the conduct of certain investigations by an examiner; see §1(d) of this Article for a discussion of its provisions. Return to article
4 Proposed §1104 (e), Second Report at 310. While the concept of a plan facilitator is new, the current Code permits the court to direct an examiner to file a plan if the DIP is ordered not to. Code §1106(b) provides that an "examiner...shall perform...any other duties of the trustee that the court orders the DIP not to perform." One of these duties is to "file a plan...file a report of why the trustee will not file a plan, or recommend conversion...or dismissal of the case...." Code §1106(a)(5). Return to article
5 Proposed §1104(e). See Second Report at 309. The plan facilitator was the second proposal in SABRE's first report. Id. Examiners have been given the role of mediating among parties in interest in connection with the negotiation of a reorganization plan. See, e.g., In re Public Serv. Co., 99 B.R. 177 (Bankr. D. N.H. 1989). Return to article
6 Proposed §1104(e), Second Report at 310. Return to article
7 Code §1106(a)(4)(A). The actual workings of §1106(b) are as follows: Section 1106(b) provides that an examiner shall perform the duties specified in §1106(a)(3) and (4); §1106(a)(4) provides that a trustee shall file a report of any investigation conduced under §1106(a)(3) and transmit a copy of the report to any creditors' committee, equity committee, any indenture trustee and any other entity as the court may direct. Return to article
8 Proposal Three would also eliminate the requirement that the report be transmitted to the key parties in interest, which is required by §1106(a)(4). By contrast, an investigation made by a creditors' committee need not be filed. See §1103(c)(2). Return to article
9 Proposed §1104(d)(3), Second Report at 309. SABRE takes a similar approach in connection with SABRE's proposal that a new participant in the bankruptcy process, a "plan facilitator," be created, stating that "the order(s) appointing the plan facilitator shall define...the extent and format in which the plan facilitator shall disclose the status of negotiations and make recommendations to the court." Proposed §1104(e)(3), Second Report at 310. Return to article
10 Proposed §1104(d)(1)(A) and (F) (emphasis added). Return to article
11 §1106(a)(3). An identical power to investigate is given to the creditors' committee. §1103(c)(2). However, there is no requirement that a report of any findings of the creditors' committee must be filed with the court. Return to article
12 §1104(c) provides that if "the court does not order the appointment of a trustee...then...the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate...if (1) such appointment is in the interests of creditors...or (2) the debtor's...debts...exceed $5 million." Return to article
13 §1106(a)(3) provides that a trustee shall, "except to the extent that the court orders otherwise, investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan." Return to article
14 §1106(a)(4) provides that a trustee shall
(A) file a statement of any investigation conducted under paragraph (3) of this subsection, including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate; and
(B) transmit a copy or a summary of any such statement to any creditors' committee or equity security-holders' committee to any indenture trustee and to such other entity as the court designates. Return to article
15 Unlike the proposal to authorize an examiner to prosecute claims, some of the other "expanded" powers recommended by Proposal Three—for example, the power to "mediate" disputes—can be seen as consistent with the conception of an examiner as a neutral party. Return to article
16 In re Boileau, 736 F.2d 503, 506 (9th Cir. 1984) ("In the case at bar, however, an examiner with expanded powers was appointed by stipulation of the parties to avoid designation of a trustee." Boileau held that the examiner in that case could waive the attorney/client privilege in connection with a complaint to avoid a fraudulent transfer.); Smith v. Lynco-Electric Co. (In re El Paso Refinery L.P.), 165 B.R. 826, 827 (W.D. Tex. 1994) ("Among the powers granted to the examiner is the right to pursue preference actions." The issue on appeal was the power of the bankruptcy court to conduct a jury trial). Return to article
17 Liberal Mkt. Inc. v. Malone & Hyde Inc. (In re Liberal Mkt. Inc.), 14 B.R. 685, 688 (Bankr. S.D. Ohio 1981) ("the court further ordered 'that pursuant to Bankruptcy Code §§1103(c)(5) and 1106(b) respectively, the official creditors' committee and the U.S. examiner shall be authorized to jointly commence and prosecute, in the name of and on behalf of the debtor or DIP, any action that the debtor or DIP would be authorized to...prosecute...including...actions to recover preferential transfers, fraudulent transfers....'"); Franklin-Lee Homes Inc. v. First Union Nat'l. Bank (In re Franklin-Lee Homes Inc.), 102 B.R. 477, 479 (E.D.N.C. 1989) ("The...bankruptcy court...conclude[ed] that the expansion of the examiner's duties to include filing adversary proceedings to recover money or property for the estate is specifically authorized by 11 U.S.C. §1106(b)...."); Williamson v. Roppollo, 114 B.R. 127, 129 (W.D. La. 1990) (court relied on §1106(b) and legislative history that states: "The court is authorized to give the examiner additional duties as the circumstances warrant."); Weld v. Robert A. Sweeney Agency Inc. (In re Patton's Busy Bee Disposal Serv. Inc.), 182 B.R. 681 (Bankr. W.D.N.Y. 1995) (a qualified right to initiate suit with the approval of the bankruptcy court "derives" from §§1106(b) and 1109(b); court likens an examiner to a creditors' committee in this regard); NBD Park Ridge Bank v. SRJ Enters. Inc. (In re SRJ Enters. Inc.), 151 B.R. 198 (Bankr. N.D. Ill. 1993) (dicta). Return to article
18 In re Carnegie Int'l. Corp., 51 B.R. 252, 255 (Bankr. S.D. Ind. 1984) (§1106(b) derived from former Rule 10-108(b)); but, see Snider, L., "The Examiner in the Reorganization Process: A Need to Modify," 45 Bus. Law. 35 (1989) ("The court's reliance on...chapter X is inappropriate. Under former Rule 10-208, an examiner was granted far greater powers than under §1106"). Return to article
19 In re Carnegie Int'l. Corp., 51 B.R. at 254-55 (the examiner "did not actively seek to have his duties expanded—he merely submitted an extensive report.... Because the decision to expand the examiner's powers was made after the filing of his report, there can be no basis for suspecting the contents of that report"); see, also, In re Franklin-Lee Homes Inc., 102 B.R. 477 (Code §§321 and 327(f) raised in opposition to expansion of examiner's powers; court did not address this argument except to say that §1106(b) and prior reported cases had authorized expanded powers for an examiner). Return to article
20 In re Int'l. Distrib. Ctrs. Inc., 74 B.R. 221 (S.D.N.Y. 1987) (bankruptcy court order expanding examiner's powers "to encompass all powers" of a trustee reversed). See, also, In re The Bible Speaks, 74 B.R. 511, 514 (Bankr. D. Mass. 1987) ("[T]his case cries out for the services of a trustee. An examiner would lack the powers to accomplish what must be done"). Return to article
21 Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 578 (3rd Cir. 2003) ("although an examiner's proper role in chapter 11 proceedings is hardly at issue in this case, we conclude that §1106(b)'s broad grant is most naturally interpreted to authorize only acts relating directly to investigation"); Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 285 B.R. 148, 156 (Bankr. D. Del. 2002) ("the court has misgivings whether the concept of an examiner acting as the prosecutor of a fraudulent conveyance proceeding is consistent with the more general concept of the examiner under the Code"). Return to article
22 Not all courts bother to note this distinction. See, e.g., In re John Peterson Motors Inc., 47 B.R. 551, 553 (Bankr. D. Minn. 1985) ("I can accomplish my intention by ordering the appointment of an examiner who will have all the powers and duties of a trustee other than the right to prosecute the district court litigation, and that is what I intend to do. Thus, for all intents and purposes, we will have a trustee albeit with the title of examiner"). Return to article
23 §1106(b). Return to article
24 §1107(a) (emphasis added). Return to article
25 By contrast, even if the reference to "other duties of the trustee" in the Other Duties clause is strictly construed, a court could order a DIP not to examine or object to proofs of claim, or not to file a plan, and order an examiner to do so. Whether that is a good idea if the same examiner has previously investigated potential claims against a claimant, or a potential basis for the equitable subordination of a major creditor, is a different question and is discussed below. Return to article
26 182 B.R. 681 (Bankr. W.D.N.Y. 1995). Return to article
27 Id. at 685-86 ("the parties fail to distinguish the concepts of duty and responsibility from the concepts of power and authority"). Return to article
28 Id. at 686. Return to article
31 285 B.R. 148 (Bankr. D. Del. 2002). Return to article
32 Id. at 156. Return to article
33 330 F.3d 548 (3rd Cir. 2003). Return to article
34 Id. at 578 (citations omitted). Return to article
35 See, e.g., In re Southmark Corp., 113 B.R. 280, 282, 284 (Bankr. N.D. Tex. 1990) ("While the court could direct that the appointed examiner use the services of the committee's court-approved accountant, that might defeat the objective of a disinterested examiner not associated with or serving creditors or equity security-holders.... [T]he court affirms the prior finding that the best interests of this estate compel the appointment of a disinterested, non-adversarial person with no connections to Southmark's creditors or equity security holders to investigate Southmark's pre-petition acts and conduct"); In re 1243 20th St. Inc., 6 B.R. 683, 686 (Bankr. D.C. 1980) ("The role of an examiner requires that he be disinterested. Accordingly, the objective statement rendered may be of immeasurable importance in determining those matters relating to vital aspects of the reorganization case"); See, also, Zaretsky, Barry L., "Symposium on Bankruptcy: Chapter 11 Issues: Trustees and Examiners in Chapter 11," 44 S.C. L. Rev. 907, 937, 946-48, 952-53 (1993) ("In a bankruptcy proceeding, there is value to maintaining the credibility of the process in the eyes of the various constituencies. The availability of an objective investigation of the debtor's conduct or operations may have considerable value even if it is not intended to lead to any recovery of property or reduction of claims.... An independent third party is often particularly well suited to investigate issues of concern to the parties and to provide an impartial report that has greater credibility that a report from an interested party.... [A]n impartial examiner's report will not be subject to the suspicion of bias that might taint a committee's report.... In addition, parties may be more willing to cooperate with an impartial, independent examiner, who will not be pursuing litigation against them.... [A]n absolute rule that an examiner can never pursue litigation on behalf of an estate would be unfortunate.... However, because of the examiner's own 'appearance of conflict' issues, an examiner's ability to pursue litigation on behalf of the estate should be limited to matters that were not investigated by the examiner and on which the examiner did not report"); Snider, Lawrence K., "The Examiner in the Reorganization Process: A Need to Modify," 45 Bus. Law. 35, 46 (1989) ("The Baldwin decision correctly recognized the unique status of the examiner in the performance of his primary investigatory function. This unique status has not been controversial"). Return to article
36 46 B.R. 314 (Bankr. S.D. Ohio 1985). Return to article
37 Id. at 316-17 (emphasis added) (citations omitted). See, also, Kovalesky v. Carpenter, No. 95 Civ. 3700 (SAS) 1997 WL 630144, at *3 (S.D.N.Y. Oct. 9, 1997) ("Examiners...play a chiefly information-seeking role and, like the court itself, must remain a neutral party in the bankruptcy process." The issue before the court was whether an examiner should have immunity from a lawsuit alleging negligence in connection with the investigation and report); In re Interco Inc., 127 B.R. 633, 638 (Bankr. E.D. Mo. 1991) ("[T]he examiner's role is by its nature disinterested and non-adversarial. There is no doubt that the examiner is a neutral party in a bankruptcy case." The issue before the court was whether a minor representation of a creditor by the examiner's law firm on unrelated matters resulted in a failure to be disinterested.). Return to article
38 355 F.3d 415 (6th Cir. 2004). Return to article
39 Id. at 430. Return to article
40 In re Carnegie Int'l. Corp., 51 B.R. 252. Return to article
41 One commentator has suggested that, even without the prospect of a future engagement to prosecute claims, examiners will strain to find any potential claim. Kaplan, Stanley A., "The Role of the Examiner: Some Observations," 4 Bankr. Dev. J. 429 (1987):
The nature of the customary examiner's charge, being based upon inquiring into the activities of third parties, including management persons, with the objective of recovering monies improperly diverted or owed by virtue of breaches of fiduciary duty, causes an emphasis in the examiner's report that is different from that found in any other documents in the reorganization or corporate field.
This kind of charge to the examiner has the inherent effect of causing examiners to concentrate on the viability of litigation to recover additional assets. The inclination of any person so charged is to expand the horizon for such potential litigation. Consequently, it would not be at all surprising if the scrutiny of examiners into the circumstances that resulted in the financial difficulties and debacles, which led to the particular reorganization in question, would result in a pressure toward litigation that might have a significant long-range effect upon the state of corporate law. The examiner will certainly call attention to all kinds of potential litigation that occur to him, including much that is novel or even remote, lest he be charged with overlooking or disregarding a possible recoupment. New theories of liability are going to be tested, and old ones are going to be explored for expansion, and the consideration of these matters by the court against the background of the reorganization proceedings and the circumstances of financial debacle are all likely to lead to the growth of potential liability and the expansion of obligations. This combination of circumstances would, in itself and without any countervailing tendencies, have the potential of modifying applicable corporate law and of leading to the expansion of duties and liabilities.
This result would almost inevitably occur were it not for the countervailing tendency of the pressure from current management of the debtor to effect settlements in order to be relieved of the jurisdiction of the bankruptcy judge and out of court as soon as possible. This countervailing tendency is, however, very strong; there have been several examiners' reports recommending extensive litigation, except where the debtors have, as a matter of business judgment, waived or released all of the actions recommended by the examiner in order to effect a settlement with prior management, so that the debtor could be relieved from the burden of bankruptcy jurisdiction as promptly as possible. This strange minuet of strong recommendations for extensive litigation by various examiners followed by waivers of all claims against the recommended defendants by direction of the debtor's management has had the result of nullifying the various sets of recommendations by examiners. Return to article
42 In re PRS Ins. Group Inc., 274 B.R. 381, 385 (Bankr. D. Del. 2001) (citations omitted) (denying debtor's motion to place the report of an internal investigation under seal). Return to article
43 Austrian v. Williams, 198 F.2d 697, 702 (2d Cir. 1952). See, also, Weissman v. Hassett, 47 B.R. 462, 467 (S.D.N.Y. 1985) (citing Austrian and noting that "[t]he courts recognize that dissemination of a judicial opinion or report may serve an important public purpose"); cf. 11 U.S.C. §107 (providing for public access to papers filed in bankruptcy proceedings). Return to article
44 See, e.g., In re Apex Oil Co., 111 B.R. 235, 243 (Bankr. E.D. Mo. 1990), rev'd. sub nom, Apex Oil Co. v. Palans, 132 B.R. 613 (E.D. Mo. 1991), rev'd. in part and aff'd. in part sub nom, Novelly v. Palans (In re Apex Oil Co.), 960 F.2d 728 (8th Cir. 1992). The issue in Apex Oil was whether or not the examiner was entitled to a fee enhancement. Return to article
45 It is tempting to propose a small modification to Proposal Three to avoid the problem of compromising an examiner's independence: Since Proposal Three also contemplates that more than one examiner could be appointed in a case, why not prohibit the "investigating" examiner from serving as the "prosecuting" examiner? See comments of Prof. Zaretsky, supra note 35. That could solve the independence problem, but does not solve the problem discussed in this paragraph. Return to article
46 See, e.g., Friedman, Lawrence, Executive Office for U.S. Trustees testimony before the House Judiciary Committee (March 9, 2004): "The WorldCom examiner revealed gross corporate mismanagement, including alleged inappropriate conduct by some senior officials who remained employed by the company after the bankruptcy filing...[and] tax-avoidance schemes deemed improper and which continued long after the bankruptcy filing." Return to article
47 See comments of Prof. Kaplan, supra note 41. Return to article
48 Bankruptcy Rule 9003(a). Return to article
49 See, e.g., In re Kensington Int'l. Ltd., 368 F.3d 289 (3rd Cir. 2004) (requiring recusal of judge that had presided over five complex asbestos-related bankruptcy cases for over two year due to, among other things, ex parte communications). Return to article