Examiner Who Failed to Disclose Fee Arrangement Forced to Disgorge Compensation

Bankruptcies are often zero-sum games in which every dollar recovered by one creditor amounts to a dollar lost by another creditor. In view of this reality, the Bankruptcy Code contains many safeguards that were designed to ensure that the process is not unfairly tilted in favor of one creditor (or group of creditors) over another. Two such safeguards are the disinterestedness and disclosure requirements governing the engagement and compensation of professionals and others acting as fiduciaries in the case. In In re Big Rivers Electric Corp., the Sixth Circuit Court of Appeals addressed the effect of a court appointed examiner's undisclosed agreement to link his compensation to a specific creditor's recovery. At issue in the case were the examiner's related duties of disinterest and disclosure. The court ruled that the examiner would have to disgorge all fees awarded to him during the case because he violated both his duty to remain "disinterested" and his disclosure obligations by entering into prohibited fee arrangements and failing to make appropriate disclosures.

Bankruptcy Examiners

Typically, a chapter 11 debtor remains in possession, operates the business and manages the reorganization effort. In some instances, however, such as when the debtor's management is guilty of fraud, incompetence or gross mismanagement, a bankruptcy court may order the appointment of a trustee to operate (or liquidate) the debtor's business and devise a reorganization strategy. Less severe cases may lead the court to conclude that although circumstances do not warrant the outright removal of existing management, some kind of independent functionary an examiner should be appointed to conduct a thorough investigation of the debtor's affairs. The Bankruptcy Code provides that in cases where the court does not order the appointment of a trustee, it may (and in some cases must), on the request of any party-in-interest, appoint an examiner if such relief best serves the interests of the estate, creditors and shareholders, or if the debtor's unsecured non-trade, tax and insider obligations exceed $5 million.

Examiners have two express responsibilities. First, they are required to investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuation of the business, and any other matter relevant to the bankruptcy case or the formulation of a chapter 11 plan. Second, each examiner must file a report, which identifies and memorializes the examiner's findings with...