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A fairly recent flurry of appointments of “examiners” in bankruptcy cases nationwide, including in some of the largest bankruptcy cases ever filed, created a renewed interest in the role of examiners in bankruptcy cases. In well-publicized cases including Enron, WorldCom, Global Crossing, United Airlines and DVI Inc., the bankruptcy court appointed professionals to investigate and report on accounting scandals and other financial irregularities, or just to take an independent and impartial look at an important issue in the bankruptcy case. These investigations are no small matter. For example, the Enron examination, which took more than 18 months, produced four reports totaling more than 4,000 pages, relying on 266 sworn transcripts and 40 million pages of documents, and cost over $100 million. Even smaller examinations, such as the DVI examination, which produced one report of about 188 pages, cost more than $2.25 million. Although the costs were high, these reports detailed billions of dollars of potential recoveries against banks, accounting firms, law firms and other potential deep pockets. While it is too early to know exactly how much these reports assisted in the prosecution of cases against former professionals, investment bankers or banks, there have already been settlements bringing in hundreds of millions of dollars between the Enron estates and other parties detailed in the Enron reports. Thus, it may be that the money invested in these examinations is money well spent. Whether that is true or not, it seems that, for the foreseeable future, professionals in the bankruptcy bar or dealing with bankruptcy cases for a client are going to be dealing with examiners more often, in bigger cases. Knowing what they are about is a good idea for practitioners, no matter what their specialty. Section 1104 of the U.S. Bankruptcy Code, 11 U.S.C. 101-1330, the statutory basis for the appointment of an examiner, provides, among other things, that an examiner may be appointed when a trustee has not been appointed, or upon request of a party in interest (including the debtor itself) or of the U.S. Trustee (UST), a division of the U.S. Department of Justice, after notice and a hearing, to conduct an investigation of the debtor as appropriate. In practice, bankruptcy courts have also not been reluctant to appoint examiners sua sponte when the situation seemed appropriate. In many cases the party moving for the appointment of an examiner will be involved in the selection process, but the final recommendation to the bankruptcy court comes from the UST. The UST will appoint the examiner, and this appointment will then be subject to approval and order by the bankruptcy court. In some cases the examiners are accountants or attorneys; in other cases they are restructuring professionals. In high-profile cases, it is not uncommon to have a well known public figure selected. For example, in the WorldCom case, former U.S. Attorney General Richard Thornburgh was appointed as examiner. The decision whether to appoint an examiner is discretionary with the bankruptcy court if the debtor’s liabilities are less than $5 million, and mandatory if the debtor owes more than $5 million in fixed, liquidated, unsecured debts, other than to an insider. 11 U.S.C. 1104(c)(1), 1104(c)(2); see In re Gilman Services Inc., 46 B.R. 322 (Bankr. D. Mass. 1985). However, despite the latter provisions in the Bankruptcy Code, examiners are not regularly appointed in large bankruptcy cases just because a party in interest moves for the appointment. Rather, it is an exceptional remedy, reserved for cases where there appear to be issues of fraud and mismanagement that the various parties-in-interest do not believe are, or can be, addressed properly by the debtor company’s existing management. The order appointing the examiner will usually detail the subject matter of the examination, and may include allegations of fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the management of the affairs of the debtor or by current or former management of the debtor, if such appointment is in the interests of creditors or others. 11 U.S.C. 1104(c). The examiner investigates “the acts, conduct, assets, liabilities, and financial condition” and operations of the debtor, the desirability of continuing the business and matters relevant to the case or formulation of a plan. (11 U.S.C. 1106(b) states that an examiner shall perform the duties of a trustee listed in subsections (3) and (4) of subsection (a), which includes these duties.) In practice, examiners have been appointed for other purposes as well, including monitoring business operations, mediating disputes and proposing plans of reorganization. Examiners appointed to accomplish tasks outside of the express language of the statute are commonly referred to as “examiners with expanded powers.” The examiner can file interim reports, and when the investigation is complete, the examiner files a final report to the bankruptcy court. These reports are to include “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.” 11 U.S.C. 1106(a)(4). SPECIAL POWERS OF EXAMINERS Examiners are able to obtain the equivalent of discovery without many of the limits imposed on discovery in the Federal Rules of Civil Procedure, and, perhaps more importantly, parties are reluctant to get into a fight over documents or information with an examiner appointed by, and reporting directly to, the bankruptcy judge. Thus, discovery of documents and witness interviews during an examiner’s investigation are frequently much more informal then one would otherwise expect. The examiner can issue subpoenas under Bankruptcy Rule 2004, but in many smaller cases, informal requests are all that is necessary. In many cases, the examiner is able to waive the attorney-client privilege of the debtors, at least in respect to the issues being addressed in the investigation. For example, in the Enron case, the order appointing the examiner gave the examiner the power to waive, “on an issue-by-issue basis, the attorney-client privilege” for certain prepetition communications, subject to consultation with the counsel for the debtors and the creditors’ committees and with those parties having a right to object to the bankruptcy court for a final determination. See Order Pursuant to 11 U.S.C. 1104(c) and 1106(b) Directing Appointment of Enron Corp. Examiner, at 3, No. 01-16034 (Bankr. S.D.N.Y., entered April 8, 2002). Once appointed, the examiner will, in the vast majority of cases, retain both counsel and accounting support. These retentions are subject to the approval of the bankruptcy court and, if approved, all the fees incurred in the examination become an expense of the administration of the estate, paid for from the estate’s assets. Like all professionals paid for by the estate, these professionals will have to file detailed fee applications in support of their bills, which are subject to review and objection by interested parties. At the conclusion of the investigation, the examiner will almost certainly have to deal with issues such as requests for production of documents and requests to serve as an expert witness. In the Enron case, for example, the examiner received documents from congressional committees, and the Securities and Exchange Commission provided documents to the examiner, subject to confidentiality agreements. As a general matter, examiners are not subject to civil discovery during the course of the examination. Moreover, except for the actual reports filed with the court, the documents compiled by the examiner are not judicial records and there is no right to public access for those documents. As a quasi-judicial officer, an examiner has immunity during the investigation. In the Enron case, the examiner asked for exculpation of him and his professionals at the conclusion of the case, to continue that immunity post-confirmation of the Enron plan of reorganization. See Motion of Neal Batson, the Enron Corp. Examiner, with Respect to Certain Procedural Issues in Connection with the Termination of the Enron Corp. Examination, �� 28-29, at 19-20, No. 01-16034 (Bankr. S.D.N.Y., filed Nov. 4, 2003). Thus, much like a trustee or special master, an examiner cannot be sued for matters involved in his investigation. THE ‘BIG RIVERS’ CASE One of the most interesting recent examiner cases in the bankruptcy community involves the examiner in the Big Rivers Electric Corp. bankruptcy case, which came out of Kentucky in the mid-1990s. (The appellate decision discussed here however, was not entered until Jan. 8, 2004.) At the time of filing, it was the largest case ever filed in Kentucky and one of the largest in the nation. The Big Rivers examiner was appointed, among other things, to “work with” the debtors and creditors “to resolv[e] various disputes … and … attempt to negotiate a global settlement of the disputes in this case and the development of a consensual plan of reorganization.” In re Big Rivers Elec. Corp., 355 F.3d 415, 422 (6th Cir. 2004). Because the examiner had concluded that he was performing duties analogous to a bankruptcy trustee, apparently he also concluded he should be paid more like a trustee. He then decided to ask for, in addition to his hourly fees, a 3 percent fee on the additional benefits he brought to the estate. In the end, he filed a request for payment of $4.41 million. However, in the course of his fee application being reviewed, it was discovered that he had also negotiated separately and secretly with three large creditors to be paid directly by them for any additional recoveries they received as a result of his efforts as examiner in the case. When this was discovered, several parties in interest objected to his fees. The bankruptcy court awarded all his hourly fees and an amount equal to four times those fees as an enhancement. On appeal, the district court affirmed the award of the base fees, but reversed the enhancement and remanded the matter to the bankruptcy court to decide a request by the objecting parties that the examiner be required to disgorge his already-awarded fees as a result of his misconduct. Eventually, procedural machinations resulted in the case being back before the district court, at which point a district court judge from Michigan was assigned to hear the matter because all the district court judges in the Western District of Kentucky recused themselves. The Michigan judge not only denied the fee request, he ordered the examiner to disgorge more than $1 million in fees already paid. On appeal, the 6th U.S. Circuit Court of Appeals affirmed, holding that by entering into the side agreements with creditors, the examiner had violated his obligations regarding loyalty and disinterestedness. This disloyalty, the 6th Circuit concluded, warranted the “steep sanction” imposed. There is continuing debate in the bankruptcy law community over whether these expensive examinations are worthwhile. On the one hand, counsel for the debtors and creditors’ committees often argue that they can, and will, conduct the same type of investigation on behalf of the estate and its creditors. Thus, they argue that the examination is duplicative and unnecessary. On the other hand, the proponents of the examination argue that an investigation by the debtors or committees is unlikely to be as efficient as by an examiner who is an officer of the court, and can conduct informal discovery. In most cases, however, the deciding factor is whether the creditors (and in the end, the court) have lost confidence in the management and counsel for the debtors or committees to fairly investigate the issues raised in the motion to appoint an examiner. The appointment of examiners, in bankruptcy cases large and small, happens with increasing frequency. The appearance of an examiner can change the dynamics of a bankruptcy case in many ways. As a quasi-judicial officer of the court, the examiner will be held to high standards of loyalty, to be treated as a unique nonadversarial party with rights that few others possess. Practitioners of all areas of the law can expect to encounter them with increasing frequency and are well served to understand their role and responsibilities. Samuel R. Maizel is a shareholder in the Los Angeles office of Pachulski, Stang, Ziehl, Young, Jones & Weintraub (www.pszyj.com). His practice includes bankruptcy matters and financial restructuring in and out of court nationwide. He currently is serving as the examiner in the bankruptcy case of Metropolitan Mortgage & Securities in Spokane, Wash. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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