FTX: Forcing The Examiner Mandate In The Third Circuit

• Published date: 29 February 2024
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Mintz
• Author: Dallas G. Taylor

It is a rare occasion that one can be assured with certainty that, if they file a motion with a bankruptcy court, it will be granted. But, in the Third Circuit, that is exactly what will happen if a creditor or other party in interest moves for an examiner to be appointed under Section 1104(c) of the Bankruptcy Code. Once considered to be within the discretion of a bankruptcy court 'as is appropriate,' the appointment of an examiner is now guaranteed if the statutory predicates are fulfilled according to the Third Circuit Court of Appeals. This development is a marked departure from the status quo and has the potential to change an already litigious chapter 11 landscape.

Examiners Generally

In chapter 11 cases, examiners are appointed by bankruptcy courts to investigate and analyze the affairs of a debtor and then issue a report of their findings. Section 1104(c) of the Bankruptcy Code provides:

If the court does not order the appointment of a trustee . . . then at any time before the confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor, if -

(1) such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or

(2) the debtor's fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000.¹

Thus, in any case where (x) a debtor's unsecured debt exceeds $5 million (other than unsecured debt generally on account of operating expenses) and (y) either the United States trustee or a party in interest requests the appointment of an examiner, Section 1104(c)(2) of the Bankruptcy Code provides for a bankruptcy court to appoint an examiner. Once appointed, an examiner acts independently from the debtor and all other parties in interest (including the party that requested its appointment) to provide a neutral assessment of the debtor's financial circumstances, potential causes for the debtor's bankruptcy, and any possible corporate failures or fraud by the debtor's management and/or other stakeholders.

Notwithstanding the statue's express...