Third Circuit Mandates Appointment Of Examiner In FTX Bankruptcy

• Published date: 30 January 2024
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Schulte Roth & Zabel LLP
• Author: Mr Douglas S. Mintz, Robert D. Brown and Reuben E. Dizengoff

The Third Circuit reversed the Bankruptcy Court explicitly, holding that the Bankruptcy Code "mandates the appointment of an examiner to investigate FTX's management." The Court of Appeals rejected the Bankruptcy Court's ruling that the Bankruptcy Code, by permitting the Court to appoint an examiner "as is appropriate," gives the Court the flexibility to appoint no examiner in this case, holding that the Code mandates that the Court "shall" appoint an examiner provided the case at hand meets certain minimal conditions. We expect the Bankruptcy Court to appoint an examiner consistent with the United States Trustee's request for an examiner to review the Debtors' prepetition management. In re FTX Trading Ltd., et al. v. Andrew R. Vara, ECF No. 66 (3d Cir. Jan. 19, 2024) (Case No. 23-2297).

Background

FTX Trading Ltd. and its affiliates filed for bankruptcy in late 2022 after a precipitous crash in the value of various crypto assets and in the company. Shortly after the bankruptcy filing, the United States Trustee filed a motion seeking appointment of an examiner to investigate FTX's collapse and the role of pre-bankruptcy management in that collapse. The US Trustee sought appointment of an examiner under section 1104(c) of the Bankruptcy Code, which states:

If the court does not order the appointment of a trustee under this section, then at any time before the confirmation of a plan, on request of a party in interest or the United States trustee . . . 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 '

• such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or
• the debtor's fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000. (emphasis added)

The US Trustee argued that the Bankruptcy Code mandates the appointment of an examiner here because FTX's debts exceed $5 million and the US Trustee made the motion, which under the plain terms of the statute state that the court shall appoint an examiner in these circumstances.

The Debtors, the UCC and others opposed the motion. They argued that the phrase "as is appropriate" (italicized above...