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.
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