Chapter 11

Proposal #17: The Use of Professionals and Investigative Tools by Examiners

Examiners perform critical investigatory functions in cases that warrant an independent and impartial inquiry into certain situations. The ability of examiners to fulfill this responsibility would be enhanced by several narrow and modest changes to the Bankruptcy Code and the Bankruptcy Rules. Currently, the Bankruptcy Code does not provide specific authorization for an examiner to retain professionals to assist in the performance of the examiner’s duties. Likewise, an examiner is not specifically empowered to request an examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure, which can be central to the fulfillment of an examiner’s responsibilities.

The Recommendation

Congress should amend section 327 to provide for the retention of professionals by examiners for cause under the same standards that govern the retention of other professionals.

The Commission should submit to the Advisory Committee on Bankruptcy Rules of the Judicial Conference a recommendation that Federal Rule of Bankruptcy Procedure 2004(a) be amended to provide that "On motion of any party in interest or of an examiner appointed under section 1104 of title 11, the court may order the examination of any entity."

Reasons for the Change

The primary role of an examiner is as an investigator. Certain situations will require examiners to have additional tools at their disposal to carry out their investigative responsibilities fully and competently. Some courts have permitted examiners to retain professionals under section 105(a), [ FN: See, e.g.,In re Tighe Mercantile Inc., 82 B.R. 995, 1000-1002 (Bankr. S.D. Cal. 1986) (court can use section 105 to authorize examiner ’s appointment of professionals where no examiner could carry out duties without professional assistance);In re Southmark Corp., 113 B.R. 280 (Bankr. N.D. Tex. 1990).] but some judges and practitioners are uncomfortable with this indirect source of authority. Under this recommendation, courts would be authorized specifically, but not required, to permit the appointment of professionals for examiners when cause exists to do so. The retention would be governed by the same standards that govern the retention of professionals generally. Of course, the need for additional professionals will depend on the duties of the examiner and the circumstances of the case. If an accountant is appointed as an examiner solely to review a debtor’s books and records, for example, it may not be necessary to authorize the retention of a professional. However, in situations involving complex financial matters, examiners may need to retain professionals with certain financial expertise. In addition, if an examiner is not an attorney, the examiner may need to retain legal counsel, especially in situations involving fraudulent conveyance or preference actions or when parties in interest make allegations against the examiner. By eliminating the mandatory appointment requirement that is triggered by the$5,000,000 debt floor, there is less concern that professional costs will be incurred unnecessarily.

Currently, parties in interest can request a Rule 2004 examination, but an examiner may not be a party in interest. [ FN: See, e.g.,In re Baldwin United Corp., 46 B.R. 314, 316 (Bankr. S.D. Ohio 1985) (stating in dicta that an examiner is not a party in interest).] The ability to acquire information under Rule 2004 and to use other discovery tools can be integral to investigating fraud and other misconduct or mismanagement, which are precisely the responsibilities of an examiner. No reported decision has been found denying use of Rule 2004 to an examiner, [ FN: See Memorandum from Lawrence K. Snider to Professor Elizabeth Warren, Re: "Chapter 11 Working Group - Role and Duties of the Examiner, p. 9 (June 5, 1997).] but it is important to eliminate any question that this discovery tool is available to examiners in pursuing their investigatory functions.

Competing Consideration

Some people might argue that a chapter 11 case already involves too many professionals and that the power to retain professionals should not be expanded. However, once appointed, the examiner serves an important function of helping to protect assets of the estate and to investigate problems. The examiner should have the proper tools and professionals to fulfill this responsibility.