Section 1104 and the Appointment Process1

Special Bankruptcy Code provisions exist for the appointment of or an examiner when a debtor seeks to reorganize under Chapter 11 of the Bankruptcy Code. If the bankruptcy court has not appointed a trustee, the court may, on request of a party, appoint an examiner.

Section 1104 of the Bankruptcy Code governs the appointment of an examiner in Chapter 11 proceedings and provides in pertinent part the following:

(c) 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, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as in 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.

(d) If the court orders the appointment of a trustee or examiner . . . then the United States trustee, after consultation with parties in interest shall appoint, subject to the court’s approval, one disinterested person other than the United States trustee to serve as . . . examiner . . . in the case.

11 U.S.C. §§ 1104 (c) and (d).

Any party-in-interest or the United States Trustee may request the appointment of an examiner so long as such appointment is made prior to confirmation of a plan. Although a party can request the appointment of examiner until confirmation, a party in interest may waive its right to seek the appointment of an examiner by failing to make a timely request. See In re Bradlees Stores, 209 B.R. 36, 39 (Bankr. S.D.N.Y. 1997).

Upon such request, a bankruptcy court will order the appointment of an examiner, who is selected by the United States Trustee, only if the court has not already ordered the appointment of a trustee and if (1) the appointment is in the interests of creditors, equity security holders or 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 $5,00,000. Despite the Bankruptcy Code’s apparent mandatory language in Section 1104(c), courts have reached different conclusions regarding the statute’s mandatory character.

Courts who have addressed this issue can be classified into three groups: (1) cases in which the court held “shall” as used in § 1104(c)(2) means “shall,” (2) cases in which the court held “shall” means “may,” and (3) cases in which the court applied a waiver analysis to deny the motion for appointment under § 1104(c)(2). See Leonard L. Gumport, The Bankruptcy Examiner, 20 Cal. Bankr. J. 71, 112-14 (classifying and discussing cases).

The court in Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500-01 (6th Cir. 1990), the only reported U.S. Court of Appeals decision to squarely address the issue of appointment of an examiner under Section 1104(c)(2), held that the appointment of an examiner is mandatory if the requirements of Section 1104(c)(2) have been met, whereas the court in In re Rutenberg, 158 B.R. 230, 233 (Bankr. M.D. Fla. 1993) held such appointment was discretionary. However, as will be discussed below, most of the courts have held that the scope of the examiner’s appointment is discretionary. See In re Revco, 898 F.2d at 501 (noting that the bankruptcy court “retains broad discretion to direct the examiner’s investigation, including its nature, extent, and duration”). Several courts have found that the appointment of an examiner is not mandatory under Section 1104(c)(2), even where a debtor’s debts exceeds $5 million. The Delaware bankruptcy courts historically have refused to treat Section 1104(c)(2) as mandatory. See In re 5A Telecommunications, Inc., Case Nos. 97-2395 to 97-2401 (PJW) (Bankr. D. Del. March 27, 1998). Explicitly or implicitly, these courts have embraced the basic tenet of statutory construction that “shall” can be construed as “may.”

The better view is that the appointment of an examiner pursuant to Section 1104 is a matter within the bankruptcy court’s discretion. In re Lenihan, 4. B.R. 209, 211 (Bankr. D.R.I. 1980); In re Gilman Services, Inc., 46 B.R. 322, 327 (Bankr. D. Mass. 1985) (appointing an examiner after there was an unexplained loss of assets and possible fraudulent conveyances and deficiency in the debtor’s operating reports). In exercising its discretion, the bankruptcy court must determine whether creditors and equity security holders would be best served by the appointment and whether the costs associated with such appointment are not disproportionately high. Id. The court also has the power to appoint an examiner sua sponte under Sections 1104(b) and 105(a) of the Bankruptcy Code, see In re Public Serv. Co., 99 B.R. 177, 182 (Bankr. D. N.H. 1989); In re UNR Indus., 72 B.R. 789, 795 (Bankr. N.D. Ill. 1987).

In order to avoid the result of “shall” means “shall” courts have used a carveout of the mandatory result. The courts in In re Bradlees Stores, 209 B.R. 36, and In re Schepps Food Stores, 148 B.R. 27 (S.D. Tex. 1992), applied a waiver analysis to prevent inequitable application of § 1104(c)(2).

The Bradlees court avoided the “issue of mandatoriness” by holding that the party in interest waived the right to seek the appointment of an examiner, relying, in part, on Schepps. In re Bradlees, 209 B.R. at 39. Factually, the court was informed by: (1) the fact that the party in interest allowed a similar investigation be undertaken by the debtors’ professionals for thirteen months without seeking appointment; (2) the lateness of the party’s motion, which the court took to suggest that the request “was nothing more than a litigation/negotiation tactic”; and (3) the form of the relief requested was flawed in that it allowed the examiner to “commence lawsuits to preserve the running of the limitations period” without first investigating whether any claims actually exist. Id. at 39-40.

The Purpose and Role of an Examiner and the Scope of an Examiner’s Powers

Congress’s purpose in drafting the provisions Section 1104 was to provide the bankruptcy court with the alternative to the appointment of a trustee where it was unnecessary for the functionary to assume total control of the estate. L. King, 3 Collier on Bankruptcy, § 1104.03, at 1104-29 (15th Ed. Supp. 1983). The legislative history also makes clear that in enacting Section 1104, the drafters sought to provide extra protection to stockholders of public companies through the mechanism of an independent functionary. In re Gilman Services, 46 B.R. 322, 327 (Bankr. D. Mass. 1995). The appointment of an examiner is also a less drastic remedy than the appointment of a trustee and preserves exclusivity for plan purposes. Thus, by appointing an examiner, an investigation of a debtor’s affairs may be conducted without stripping the debtor of its status as a debtor-in-possession.

An examiner’s statutory role is to investigate “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 if the debtor.” 11 U.S.C. § 1104(b); In re Gilman, 46 B.R. at 327; In re Bradlees Stores, 209 B.R. at 39 (“[t]he main purpose of an examiner ... is primarily investigative”). The Bankruptcy Code further provides for the duties of an examiner upon appointment. In pertinent part, Section 1106 of the Bankruptcy Code provides that “[a]n examiner appointed under section 1104(d) of this title shall perform the duties specified in [11 U.S.C. § 1106(a)](3) and (4) . . . .” 11 U.S.C. § 1106(b). Pursuant to this cross-reference, Section 1106(a)(3) accordingly provides in effect that “except to the extent that the court orders otherwise, an examiner shall investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan.” 11 U.S.C. § 1106(a)(3).

While an examiner’s primary function is to investigate, several courts have extended the examiner’s role beyond that of investigation and expanded the functions of an examiner in Chapter 11 proceedings. This is sometimes referred to as the “Creeping Examiner.”

Courts have routinely held that the expansion of an examiner’s powers to investigate and prosecute actions on behalf of a debtor-in-possession does not conflict with Section 1104(b) of the Bankruptcy Code as such powers are authorized by Section 1106 of the Bankruptcy Code. See In re Carnegie Int’l Corp., 51 B.R. 252, 255 (Bankr. S.D. Ind. 1984); In re John Peterson Motors, Inc. 47 B.R. 551, 553 (Bankr. D. Minn. 1985).

For example, in In re Corlew Valley Assocs., Case No. 80-00876 (Bankr. D. Utah 1980), a special examiner was appointed and had authority to employ accountants, attorneys and other agents of representatives to assist the examiner in the performance of his duties. In In re White Motor Corp., Case No. B-280-3360 (Bankr. N.D. Ohio 1980), the examiner’s duties were subject to expansion if the debtor did not file a plan of reorganization within a specified time. In In re FSC Corp., 38 B.R. 346 (Bankr. W.D. Pa. 1983), the examiner was to serve as a “responsible officer” of the debtor and, as such, was required to perform the duties of a debtor-in-possession. In In re John Peterson Motors, Inc., 47 B.R. 551 (Bankr. D. Minn. 1985), an examiner was appointed with all the powers and duties of a trustee to enable the debtor to continue as a party in a district court action. In In re Carnegie Int’l, 51 B.R. 252 (Bankr. S.D. Ind. 1984), an examiner was authorized to bring suit on behalf of the debtor. In the UNR Industries case cited above, an examiner was appointed with expanded powers to mediate and aid in breaking a deadlock in plan negotiations. In In re Landscaping Servs., Inc., 39 B.R. 588 (Bankr. E.D.N.C. 1984), the bankruptcy court held it could appoint an examiner on its own to assist in determining whether or not the statutory requirements for confirmation of the debtor’s plan of reorganization had been satisfied. Finally, in In re Cleary Bros. Constr. Co., 9 B.R. 40 (Bankr. S.D. Fla. 1980), the bankruptcy court authorized the examiner to effect a sale of the debtor’s property, which was subject to certain liens.

As these cases make clear, the powers of an examiner may and should be expanded if the specific facts and circumstances of the case warrant such expansion. As the court stated in In re John Peterson Motors, Inc.:

Section 1106(b) specifies two duties of an examiner but goes on to say that the court can order an examiner to perform any other duties of a trustee to the exclusion of the debtor in possession. Thus, § 1106(b) allows me to give an examiner any or all of the duties of a trustee.

47 B.R. at 553. In In re Liberal Market, Inc., 11 B.R. 742 (Bankr. S.D. Ohio 1981) a creditor sought the appointment of an “operating trustee.” The bankruptcy court held that there was insufficient proof of “cause” for the appointment of a trustee. Instead, the court appointed an examiner and authorized him to perform an investigation, as well as additional duties which included the supervision and operative control of the debtor’s business, stating:

We direct attention to the authority in [11 U.S.C. § 1106(b)] authorizing an examiner to perform “any other duties of the trustee that the court orders the debtor-in- possession not to perform.” Hence, the court may give an examiner additional duties not specifically enumerated as circumstances . . . warrant.

Id. at 745.

Some courts, however, have interpreted the statutory grant of powers to an examiner more narrowly. In In re The Bible Speaks, 74 B.R. 511 (Bankr. D. Mass. 1987), the bankruptcy court appointed a trustee, rather than an examiner, to mediate a dispute and to determine the cost-effectiveness of an appeal. The court believed that an examiner lacked the power to undertake such tasks. Id. at 514. In In re American Bulk Transport Co., 8 B.R. 337 (Bankr. D. Kan. 1980), the court declined to appoint an examiner due to insufficient evidence that such appointment would be in the best interests of the creditors or other interests of the estate. The court also noted that the duties of an examiner are more restrictive than the duties of a trustee. Id. at 340.

The Bankruptcy Code’s lack of statutory guidance and almost nonexistent legislative history does raise many issues. See Lawrence K. Snider, The Examiner in the Reorganization Process: A Need to Modify, 45 Bus Law. 35 (1989). Particularly troubling to courts and commentators are issues pertaining to examiners with expanded powers (“the Creeping Examiner”), abuse of examiner appointment motions using the “mandatory” $5 million test, and examiners conducting an investigation concurrent with a criminal investigation. Nonetheless, the flexibility provided by the ambiguities and uncertainties can be very useful to design the role of an examiner in a particular case.

Burden of Proof

Even though Section 1104 of the Bankruptcy Code provides for the appointment of an examiner to investigate allegations of fraud, dishonesty, and gross mismanagement, mere allegations of misconduct will not suffice. There must be a factual basis supporting the need for an independent investigation. See In re Lenihan, 4 B.R. 209 (Bankr. D.R.I. 1980). In addition to the requirement of cause, the bankruptcy court must analyze the costs of appointing an examiner, to ensure that such costs are not “disproportionately high.” Notes of Committee on the Judiciary, House Report No. 95-595. The benefit to the estate and the attendant protections of an examiner’s investigation must outweigh the expenses. In re Hamiel & Sons, Inc., 20 B.R. 830, (Bankr. S.D. Ohio 1982). “The appointment of an examiner is a cautious, intermediate procedure which is more economical than the appointment of a trustee.” In re Gilman Services, 46 B.R. at 328.

Grounds for Appointment of an Examiner

Grounds for the appointment of an examiner in a Chapter 11 proceeding are not limited to investigation of fraud and other irregularities. An examiner may be appointed: (a) to mediate and aid in breaking a deadlock in plan negotiations, see In re Public Serv. Co., 99 B.R. 177, 182 (Bankr. N.H. 1989); In re UNR Indus., 72 B.R. 789, 795-96 (Bankr. N.D. Ill. 1987); (b) where the debtor failed to file accurate financial statements during pendency of the case, see In re Gilman Services, 46 B.R. at 327; or (c) where creditors feel that the debtor-in-possession is not capable of proper management, see In re UNR Indus., 30 B.R. 609, 612 (Bankr. N.D. Ill. 1983).

Qualifications of an Examiner

In In re Tarkowski, 104 B.R. 828 (Bankr. E.D. Mich. 1989), the Bankruptcy Court noted that partners, individuals, and corporations are all eligible for appointment as examiners. The court also indicated that the likely candidates would be law firms and accounting firms, “[because] the Code does not provide any authority for retention by the examiner for professional persons to assist in the investigation.” Id. at 830 (citations omitted). The court also stated that if the examiner must act as a self-sufficient unit, it would seem likely that the United States Trustee should consider the appointment of a law firm as examiner if an in-depth investigation is required. Id.

Engagement of Professionals by an Examiner

An examiner may also employ professionals to assist the examiner in carrying out its duties under certain facts and circumstances. As set forth above, although the Bankruptcy Code does not expressly authorize an examiner to employ professionals, the size and complexity of the examiner’s investigation may warrant the examiner employing such professionals. See Southmark Corp. v. Southmark Personal Storage, Inc., 113 B.R. 280 (Bankr. N.D. Tex. 1990).

The Southmark court noted that a committee of creditors or equity security holders could conduct an investigation pursuant to Section 1103(c)(2). However, because of the risk that the investigation could involve the activities of the creditors or equity holders, the court concluded a disinterested examiner would serve as a better investigator. 113 B.R. at 282. The court also noted that the appointment of an examiner would be appropriate where cause did not exist to replace a debtor’s post petition management with a trustee and where the best interests of the estate would not be served by such an appointment. Id.

While the court approved the appointment of both counsel and accountants for the examiner, it cautioned that its holding should not be construed as permitting examiners to employ professional persons as a matter of course. The court stated that bankruptcy courts should not authorize examiners to employ professional persons unless such authorization is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Whether such authorization is necessary or appropriate should be determined after weighing a number of factors, including the depth of the investigation ordered and the advisability of replacing the examiner with another more capable examiner or with a trustee. The key factor in this determination “should be whether, when viewed prospectively, authorizing the examiner to employ professional persons at the expense of the estate is in the best interests of the estate.” In re Tighe Mercantile, Inc., 62 B.R. 995, 1001 (Bankr. S.D. Cal. 1986).

Compensation

An examiner and any professionals employed by the examiner are entitled to reasonable compensation for their services. Such requests for compensation will be reviewed by the bankruptcy court, as requests for attorney compensation are similarly reviewed, upon consideration of what is known as the “12 Johnson factors” enunciated by the Fifth Circuit in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974), which are:

(1) the time and labor required;

(2) the novelty and difficulty of the questions;

(3) the skill requisite to perform the legal service properly;

(4) the preclusion of employment by the [examiner] due to acceptance of the case;

(5) the customary fee;

(6) whether the fee is fixed or contingent;

(7) time limitations imposed by the client or the circumstances;

(8) the amount involved and the result obtained;

(9) the experience, reputation, and ability of the [examiner];

(10) the “undesireability” of the case;

(11) the nature and length of the professional relationship with the client; and

(12) awards in similar cases.

See In re Big Rivers Elec. Corp., 233 B.R. 754, 763 (Bankr. W.D. Ky. 1999), aff’d in part and rev’d on other grounds, 252 B.R. 676 (Bankr. W.D. Ky. 2000).

Given the Uncertainty of a Creditors’ Committee’s Ability to Pursue Claims and Causes of Action on Behalf of a Debtor’s Estate After Cybergenics, the Appointment of a Trustee or Examiner May Be the Only Means by Which Unsecured Creditors Can Remain Protected

On September 20, 2002, the Third Circuit issued its opinion in The Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 304 F.3d 316 (3d Cir. 2002). In Cybergenics, the Third Circuit affirmed the District Court’s dismissal of claims brought by a creditors’ committee on behalf of a debtor’s bankruptcy estate pursuant to Section 544(b) of the Bankruptcy Code seeking to challenge certain transactions as fraudulent transfers. The panel’s opinion in Cybergenics framed the question that was before the court as “whether a creditor’s committee may assert fraudulent transfer claims under § 544 of the Bankruptcy Code (“Code”), or whether only the trustee or debtor in possession may bring such actions.” In re Cybergenics, 304 F.3d at 318. In affirming the District Court’s order dismissing the creditors’ committee’s claims against the defendants, the Third Circuit held:

In light of the plain meaning of § 544(b) and the reasoning of Hartford Underwriters, we hold that a creditor or creditors’ committee may not initiate a fraudulent transfer action under § 544. Neither may a bankruptcy court authorize such an arrangement.

In re Cybergenics, 304 F.3d at 332. On November 18, 2002, however, the entire Third Circuit vacated the panel’s decision to uphold the District Court and voted to rehear Cybergenics en banc. See Order of November 18, 2002, Adv. Pro. 01-3805.

Given these conflicting rulings and attendant uncertainty, it is clear that the issue as to whether a creditors’ committee may file claims on behalf of a bankruptcy estate remains open, at least in the Third Circuit. Given the possibility that a debtor’s estate may lose valuable avoidance actions and other claims unless a trustee or examiner is appointed, the appointment of an examiner empowered to prosecute avoidance actions and other claims and causes of action to ensure that these claims will not be lost may be both appropriate and necessary.

The “Creeping Examiner” -
The Appointment of an Examiner in Chapter 22 Case
Results in Significant Distributions to Unsecured Creditors

In the second Chapter 11 case of Planet Hollywood International, Inc., in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division, Case Nos. 01-10428-6B1 through 01-10443-6B1, the official committee of unsecured creditors appointed in the cases (the “Committee”) filed an application with the bankruptcy court seeking the appointment of an examiner after it began to have serious concerns with respect to the clear conflict of interest between the debtors, the debtors’ insiders and management and unsecured creditors, as well as the debtors’ inaction and failure to provide basic and critical information and documents necessary for the Committee to fully understand the debtors’ financial structure, operations and business affairs.2 These concerns, coupled with evidence of related party and insider transactions and breaches of fiduciary duties to the detriment of unsecured creditors, left the Committee with no choice but to seek the appointment of an independent third-party to investigate and report on the actions of the debtors’ board of directors and the debtors’ transactions and business dealings with insiders and related third parties.

The Committee’s application sought the appointment of an examiner pursuant to Sections 105 and 1104(c) of the Bankruptcy Code to investigate and report on, among other things, (a) the actions of the debtors’ board of directors, (b) the transactions and business dealings of the debtors with insiders and related parties, (c) the debtors’ franchise and license network, and (d) possible claims and causes of action against the debtors’ board of directors, insiders and related third parties.3 As a result of the Committee’s diligent efforts, the bankruptcy court granted the Committee’s application to appoint an examiner.

Upon the appointment of the examiner, the Committee and its professionals spent a significant amount of time and effort in assisting the examiner by reviewing, selecting, preparing and making available all records, files, documents and information necessary for his investigation and conducting meetings, discussions and conferences with the examiner in an effort to assist the examiner with his investigation.

Upon his appointment, the examiner began investigating the debtors’ business, operations, financial structure, transactions and course of dealings. Subsequent to the completion of his investigation, the examiner filed a report setting forth his findings and recommendations with the bankruptcy court. Among the significant findings set forth in the examiner’s report were:

(a) The debtors’ insiders and board members directly or indirectly controlled or had ownership in most of the debtors’ affiliates and franchises.

(b) The inter-relation of the debtors’ companies and senior management was “intricate and convoluted which leads to potential insider conflicts.”

(c) The debtors’ management demonstrated a history of creating receivables from various units owned and/or controlled by insiders or related third parties for franchise fees, memorabilia lease payments and other services and then compromising these assets with write-offs. The debtors were owed collectively over $3 million in outstanding franchise fees, including royalties and memorabilia lease fees owed by entities controlled and/or owned by insiders or related parties, which, according to the examiner, would most likely never be collected by current management.

(d) The debtors were owed in excess of $5 million from celebrities resulting from loans which the celebrities obtained individually which the debtors chose to repay, or loans made directly to the celebrities or their agents obtained by the debtors. These receivables pre-dated the debtors’ first Chapter 11 bankruptcy filing in Delaware. The examiner concluded that it appeared that the debtors orchestrated a structured compromise to write off these receivables and that there was “little persuasive evidence that these receivables were not recoverable.” The examiner also concluded that it appeared that one of these celebrity loans was partially forgiven after the filing of these bankruptcy cases without proper approval by the bankruptcy court and without proper reporting to the Internal Revenue Service. The examiner concluded that the failure of debtors’ current management to attempt to collect these receivables suggested management was more concerned with preserving its personal relationships at the expense of the debtors’ business, creditors and shareholders.

(e) The examiner concluded that there was no persuasive evidence that the debtors conducted a due diligence investigation of any possible claims against past and present directors, officers and shareholders of the debtors or against any celebrities and recognized that such investigation by existing management had inherent conflicts.

(f) The debtors indirectly transferred ownership of certain assets to various trusts of insiders whose children served as beneficiaries of such trusts. The examiner also concluded that the debtors offered no convincing evidence of a diligent effort to evaluate alternative business strategies for disposing of the debtors’ “loss bleeders” prior to accepting the fairness of the trusts’ continuing investment in such loss-making units.

(g) The debtors’ board approval of the transfer of up to six (6) operating units to insiders and related parties was given in the face of clear conflicts, ignored the initial prerequisite to obtain a fairness opinion and evinced signs of self-dealing. The examiner concluded that there was no evidence demonstrating that the debtors attempted to market these units to maximize the benefit to creditors.

(h) The debtors’ history indicated that the debtors’ management had little regard for creditors where the debtors’ repeated bankruptcies were aimed to privatize a public company at the expense of its creditors and shareholders.

(i) The debtors’ close proximity to their exit from their first Chapter 11 case, ongoing cash problems and chronically declining revenues raised serious questions as to the financial diligence of senior management and the debtors’ projections.

(j) The debtors’ schedules and statement of financial affairs were severely deficient and the debtors did not comply with the terms of their cash collateral agreement by failing to provide periodic financial information.

(k) Given the debtors’ downsized corporate structure and the reality that de minimus revenue was received from the debtors’ franchisees for the memorabilia, the examiner concluded that the memorabilia, which was the debtors’ most significant tangible asset, needed be liquidated sooner rather than later in order to achieve the highest return.

Based on the foregoing findings, the examiner concluded in his report that a legal due diligence of possible management misconduct was justified and that any such liability exposure should remain an asset for unsecured creditors. The examiner also made a number of recommendations in his report, including:

(a) A legal analysis should be undertaken with respect to the outstanding celebrity receivables to determine the ability to pursue these loans and related write-offs under applicable fraudulent transfer laws.

(b) The debtors should be directed to amend their schedules and statement of financial affairs to include certain disclosures with respect to the debtors’ interests in certain assets and the undisclosed payments to insiders and creditors during the one-year and 90-day period preceding the debtors’ bankruptcy filing.

(c) A significant portion, if not all, of the proceeds from certain transactions should be allocated to the debtors.

(d) Certain outstanding receivables should be collected immediately.

Based upon the findings and recommendations contained in the examiner’s report, as well as its own investigation, the Committee determined that the debtors’ estates possessed numerous meritorious causes of action against certain officers, directors, insiders and other related third parties which, if prosecuted, could significantly maximize the value of the debtors’ estates. The Committee therefore believed that it was imperative that either the Committee or the examiner, as an independent third party who was knowledgeable and thoroughly familiar with the facts that supported these causes of action, be authorized to commence and prosecute these actions on behalf of the debtors’ estates.

Given the clear evidence of the debtors’ continuous failures to satisfy their fiduciary duties and obligations, the lack of independence on the part of the debtors’ board of directors and management and the plethora of insider and related party transactions, the Committee had lost confidence in the debtors and their ability to operate and satisfy their obligations in a manner that was free from self dealing and believed that the scope of the examiner’s powers should be expanded to permit the examiner to serve as fiscal agent or chief restructuring officer for the purpose of supervising and controlling the debtors’ business affairs, finances, operations, transactions and cash management decisions, ensuring that the debtors complied with all reporting requirements and to otherwise consider and explore strategic alternatives.

Accordingly, the Committee filed with the bankruptcy court a motion for an order (a) authorizing the Committee , or in the alternative, the examiner, to commence litigation on behalf of the debtors and the debtors’ estates; and (b) expanding the scope of the examiner’s duties and powers and permitting the examiner to serve as fiscal agent or chief restructuring officer pursuant to Sections 1106(b) and 105 of the Bankruptcy Code.4 The Committee relied upon the authority set forth above for the proposition that the examiner’s powers may be expanded to commence adversary proceedings on behalf of the debtors’ estates and to serve as fiscal agent or chief restructuring officer.

The results of the examiner’s investigation and report and the Committee’s use of these results to support both its motion practice as well as its negotiating position were critical in extracting concessions from the debtors with respect to the terms of their plan of reorganization and disclosure statement, which ultimately resulted in a global settlement among the debtors and the Committee. More importantly, as a result of the independent report, the debtors and Committee were successful in obtaining payment from the debtors’ officers and directors insurance policy without additional litigation. In particular, unsecured creditors would receive a significant and meaningful distribution and other benefits under the debtors’ plan of reorganization which otherwise would not have been possible or achieved, where, at the outset of these cases, all parties believed that there was no possibility that unsecured creditors would receive any distribution.

Conclusion

As set forth above, the appointment of an examiner in a Chapter 11 proceeding when the facts and circumstances warrant such appointment can help achieve a number ends for the various constituents and parties to such bankruptcy proceeding. The powers of an examiner powers can be limited or expanded to fit the particular facts and circumstances of the case. The examiner can assist in investigating any aspect of the bankruptcy case both on a pre-petition and post-petition basis, including the debtor’s underlying business operations, past, present and potential future operational conduct of the debtor and its management, as well as potential causes of action against management and third parties which could result in bringing further value to the debtor’s estate. The examiner can diffuse tension among the various constituents and parties and assist in making reorganizational decisions, including whether to liquidate assets or to rehabilitate and reorganize operations. As one can see, the benefits of an examiner include enhancing value for the debtors’ estates as well as enhancing the credibility of the bankruptcy process.

1Mr. Silfen is a member of the Financial Restructuring and Bankruptcy Group in the New York Office of Arent Fox. Leah Eisenberg is an associate in the Financial Restructuring and Bankruptcy Group of Arent Fox based in New York.

2Mr. Silfen and Ms. Eisenberg represented the Official Committee of Unsecured Creditors in the Planet Hollywood cases.

3A copy of this application is attached at the end of these materials for your review.

4A copy of this motion is attached at the end of these materials for your review.