Appointment of an Examiner

Bankruptcy Oversight Options

The Bankruptcy Code outlines the traditions and practices that the bankruptcy courts have found to be practical and fair. According to the Code, after a bankruptcy petition has been filed and granted, there are generally three types of bankruptcy oversight. Those are:

• Debtor in Possession
• Trustee
• Examiner

Debtor in Possession

In the case of a Chapter 11 filing, Section 1121 provides the option of debtor management. For a period of 120 days after the order for relief is entered, the debtor has the exclusive right to propose a plan of reorganization. If the plan is acceptable to the court and the creditors, the debtor is then left to execute the terms of reorganization and satisfy his obligations.

Examiner

If creditors have some concerns about the debtor’s honesty or reliability, they have the option of requesting an examiner to conduct such investigation as is deemed appropriate to determine if there has been any fraud or other irregular behavior by management either before or after the filing of the bankruptcy petition. Unless there is substantial reason to mistrust the debtor, creditors often choose to allow for reorganization under the “debtor in possession” arrangement and avoid charges against assets incurred by use of an examiner.

The powers of an examiner are limited, as compared to those of a trustee. The examiner’s job is conducted under the aegis of the “debtor in possession” bankruptcy structure. An examiner may discover misconduct, but is not empowered to act on it. A trustee, on the other hand, acts as a replacement for existing management, assuming complete control of the enterprise that has filed for protection. Once a trustee is appointed, the exclusive right of the debtor to file a plan of reorganization is terminated and the option to file a plan is opened to the trustee and any other party of interest in the case.

Trustee

Trusteeship is the most powerful tool for abrupt change in the bankrupt entity. However there are a number of considerations that come into play regarding trusteeship. There is a statutory creditor’s committee that plays a major role in negotiating the terms of reorganization. If they oppose trusteeship, the choice may be an examiner where there is some question of mismanagement rather than opting for the trusteeship which brings increased delay and expense. It has also been found that independent trustees tend to lean toward liquidation under Chapter 11 rather than an attempt at restructuring and restoring the enterprise.

Exceptions to Every Rule

Recent case law has blurred these traditional roles. One ruling provided for an interim “equity receiver” to operate in tandem with the trustee, prior to the trustee’s resolution of the case. Another case instituted an “acting supervisor” for a going concern that was in bankruptcy, due to an ongoing dispute among the affected parties. In another, the examiner’s powers were expanded as an alternative to trusteeship; in yet another, a “responsible officer” was appointed by the court in the absence of any remaining officer or director after the corporation filed for bankruptcy. It is an open question as to whether these types of redesigned administrators not provided for in the Bankruptcy Code are rare aberrations, or a trend towards courtroom adaptation under existing statute law.