Chapter 11
Proposal #16 Elimination of Mandatory Appointment of Examiners When
Unsecured Debts Exceed $5,000,000
Under section 1104(c) of the Bankruptcy Code, the court must order the appointment of an
examiner if an independent investigation would be in the interests of parties in the bankruptcy
case, especially in a situation that potentially involves fraud, dishonesty, incompetence, or
misconduct in the debtor’s management of the estate’s affairs. However, under
section 1104(c)(2), the court also is required to order the appointment of an examiner on the
request of a party in interest if the debtor’s fixed, liquidated, unsecured debts to
non-insiders exceed $5,000,000, regardless of whether there is any indication of mismanagement
or wrongdoing or whether an investigation would further the interests of creditors and other
parties. This mandatory provision triggered only by debt is arbitrary and unnecessary because it
duplicates the substantive triggers already in place. Rather than helping to protect the estate, it
more likely serves as a strategic tool to cause delay and to increase costs.
The Recommendation
Congress should eliminate section 1104(c)(2), which requires the court to order
appointment of an examiner upon the request of a party in interest if the
debtor’s fixed, liquidated, unsecured debts, other than debts for goods,
services, or taxes or owing to an insider, exceed $5,000,000.
Reasons for the Change
At best, this provision is superfluous of the requirement to order appointment of an examiner
in the interest of the estate and the estate’s creditors, particularly when an investigation of
potential fraud or mismanagement is necessary. At worst, however, this provision permits parties
to seek the appointment of an examiner in the absence of any need for an examiner to make an
investigation. Such requests can be used as leverage and delay tactics by a few creditors seeking
to serve their own interests rather than furthering the interests of the estate and the creditor body
overall. A creditor who can threaten to demand an examiner and know that its demand will be
granted without any showing of a legitimate purpose can enhance its own treatment in
exchange for withdrawing its demand. For this reason, some courts observing misuse of this
provision have denied relief based on waiver or laches when a request is made very late in the case
without a legitimate reason for the delay and when there is no evidence that a third-party
investigation is warranted. [ FN: See, e.g.In
re Bradlees Stores Inc. 95 B 42777, Slip Op. (Bankr. S.D.N.Y. June 4, 1997) (creditors
waived right to seek appointment of examiner by waiting until conclusion of thirteen month
investigation by debtor ’s professionals); see alsoIn re Schepps Food Stores Inc.,
148 B.R. 27, 30 (S.D. Tex. 1992) (party in interest may waive right to seek appointment of
examiner);In re Shelter Resources Corp., 35 B.R. 304 (Bankr. N.D.Ohio 1983) (refusing
to appoint examiner under this provision after court approved settlement of action at
issue).] However, a literal reading of section 1104(c)(2) does not leave
roomfor discretion when the debt floor is satisfied. [
FN: SeeIn re Revco D.S. Inc., 898 F.2d 498 (6 th Cir. 1990) (because provision
is mandatory and automatic, reversing lower court decision denying motion for appointment of
examiner under this provision as duplicative of other investigative efforts), rev ’g 93 B.R.
119 (Bankr. N.D. Ohio 1988).] Particularly in large chapter 11 cases,
creditors’ committees and their professionals provide a check on management and serve
routine investigative functions until a particular situation is suspected that would justify the
appointment of an independent examiner.
The participants in the June plenary session unanimously agreed that section 1104(c)(2) is
neither helpful nor necessary to preserve the authority of the court to order the appointment of an
examiner in instances when the appointment would serve the interests of parties in the case.
Competing Considerations
This proposal appears to enjoy overwhelming support, and no competing considerations are
immediately apparent.
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