Marathon Asset Management recently requested the appointment of an examiner in the American Airlines bankruptcy case. Ostensibly, the hedge fund creditor was requesting an investigation of $2.26 billion in debt that AMR Corp., the parent corporation of American Airlines, assumed from its regional airline subsidiary American Eagle prior to the bankruptcy filings. Nonetheless, there was agreement from academia and bankruptcy professionals alike that Marathon’s request was merely a ploy to delay and frustrate the bankruptcy and the debtors, who have generally excluded Marathon from settlement discussions. And indeed, Marathon dropped its request when the debtors agreed to preserve their claims.
In Chapter 11, examiners investigate alleged wrongdoing which occurred prior to the bankruptcy. Examiners have been appointed in many major bankruptcies, including Enron, Worldcom, and Lehman, and their investigations have occasionally led to major lawsuits.
To be sure, the function of examiners is intuitively appealing. Certainly in many cases there may be serious allegations of illegal activity (Enron in particular comes to mind) and it may be beneficial to have an independent professional dedicated solely to investigation of such issues for the benefit of the public.
The language of the Bankruptcy Code appears to require the appointment of an examiner if certain criteria are met – if there are allegations of fraud and the like, or if an appointment would be in the interests of creditors or equityholders. 11 U.S.C. § 1104(a). Moreover, the legislative history suggests, and some circuit courts agree, that examiners should be appointed in every large bankruptcy case.
Nonetheless, courts appear reluctant to appoint examiners for a host of concerns and problems which may arise, including the scope of an examiner’s investigatory powers, what responsibilities examiners may possess, and how examiners are to be compensated. As noted by some commentators, the courts have routinely defined and limited the scope of examiners’ responsibilities, which contravenes the statute’s clear language and its broad grant of power. See Elizabeth Warren, Examining the Examiner, 24-May Am. Bankr. Inst. J. 34; see also Jonathan C. Lipson, Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies, 84 Am. Bankr. L.J. 1 (providing a thorough analysis of when examiners have been appointed in cases).
Because the issues are unresolved, and because examiners can potentially wield immense power over a case (and thus command immense fees), confusion naturally breeds abuse. Judges and academics have suggested various solutions. Recently, Judge Gerber commented on the issue in Lyondell:
“I and the other bankruptcy judges around the country have seen the ways in which the mandatory appointment language has been abused. And it’s obvious, to anyone with any large case experience, that mandatory appointment is terrible bankruptcy policy, and the Code should be amended, forthwith, to delete section 1104(c)(2), and to give bankruptcy judges (subject to appellate review, of course) the discretion to determine when an examiner is necessary and appropriate, and whether a request for an examiner is merely a litigation or negotiating ploy.”
Transcript of Hearing at 55, In re Lyondell Chem. Co., (Oct. 26, 2009) (No. 09-10023).
Other commentators, such as former professor (and current Massachusetts Senator) Elizabeth Warren (D-MA), suggest that the answer may instead be to appoint special counsel for specific matters and limit appointment of examiners to those bankruptcies that truly require examiners’ broad powers. See Warren, at 75. This does not solve the problem that the statute provides few barriers for appointment of examiners, however, returning the issue again to courts.
Perhaps the current ways are fine – bankruptcy judges seem capable of determining when an examiner is truly necessary (supplemented and advised by powerful counter-interests, such as creditors’ committees and U.S. Trustees) and when requests for appointment are merely a litigation tactic. And of course, parties which truly desire an examiner are always free to appeal bankruptcy court denials.
Then again, as we’ve just seen, the leverage that comes with the threat of appointment of an examiner from creditors with little to lose may be enough to draw concessions from debtors.
