Appointment of examiners under the US Bankruptcy Code in the United States: Ambiguity in the Code

For example, in the LTL Management case (which is a subsidiary of Johnson & Johnson) the Office of the United States Trustee sought the appointment of an examiner to investigate the use of the “Texas Two Step”, a relatively untested method of separating a company's assets from large liabilities. In this case there were mass tort claims arising from Talc claims faced by LTL flowing from claims against Johnson & Johnson.

A similar request was made by the United States Trustee for an examiner in the case of Grupo Aeromexico, S.A.B. de C.V. to consider alleged conflicts of interest and transparency concerns related to the treatment of insiders under a proposed plan of reorganisation. The question that arises when considering the appointment of an examiner is under what circumstances must a court grant a request, and how much discretion does the court have in considering a request. Section 1104(c) states that the Court “shall order” the appointment “if the appointment” is in the best interest of the creditors…” and sets forth certain additional requirements.

Some courts have held that “shall” means that it’s a mandatory appointment, while others consider that budgetary concerns may curtail the authority. Questions also arise regarding the scope of an examiner's authority and who should bear the costs of the appointments. In some cases, the potential for the issuance of an examiner's report may facilitate negotiations between warring parties. In complex cases, an expert and objective view on an issue may provide the court, or even the creditor body, with useful insights and perhaps even instil confidence and integrity to the process. However, at times it may be simply an expense that duplicates the efforts of other professionals unnecessarily and burdens the bottom line. Unfortunately, it is easy to look back in hindsight and evaluate the appointment. Regardless, it is clear that courts are using this section more frequently, especially as counsel become more creative in complex and uniquely structured transactions.

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Photo: Yulia Denisyuk - stock.adobe.com