Creditor Committees Concurrent Investigation Did Not Vitiate Need for Independent Examiner

By: Brendan A. Bertoli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Southern District of New York held that courts have discretion to appoint an independent examiner in cases where the debtor’s fixed debts exceed five million dollars, but the facts of In re Residential Capital, LLC[1] warranted appointment.[2] Berkshire Hathaway (“Berkshire”), joined by the Trustee, sought the appointment of an independent examiner to investigate certain pre-petition transactions between the debtor, GMAC, Ally and Cerebus Capital.[3] Berkshire claimed that appointment was mandatory pursuant to section 1104(c)(2) of the Bankruptcy Code.[4] The Official Committee of Unsecured Creditors (“the Committee”) objected to appointment, arguing that its own investigation obviated the need for an independent examiner.[5] The court held that appointment was not mandatory because section 1104(c)’s mandatory language is qualified by the phrase “as is appropriate.”[6] However, the court held that the Committee’s concurrent investigation, by itself, was not enough to render an independent examiner’s appointment inappropriate.[7]

Section 1104(c)(2), provides that an examiner “shall” be appointed if: 1) no trustee has been appointed, 2) no plan has been confirmed, 3) fixed debts exceed five million dollars, and 4) investigation would be appropriate.[8] To determine whether appointment was appropriate, the court considered whether an investigation had already been conducted, whether appointment would be too costly or would cause delay, and the timing and underlying motives of the application for an independent examiner.[9] Ultimately, the court rejected the Committee’s argument that its own investigation was sufficient to defeat Berkshire’s motion.[10] First, the court found that although the Committee was conducting an investigation, it was incomplete and did not bar the appointment of an independent examiner.[11] Next, the court reasoned that the litigation was still new and the appointment of an independent examiner would not unduly delay the proceedings.[12] Finally, the court held that the Committee failed to prove that Berkshire moved with ignoble motives.[13]

Residential Capital is significant for two reasons. First, it joins the minority of courts that have held that the appointment of an examiner is not mandatory even when fixed debts exceed $5 million.[14] The only appellate court to comment on this issue, the Sixth Circuit in Morgenstern v. Revco,[15]hasheld that appointment is mandatory and stressed the plain language of the statute.[16] The Residential Capital court’s reasoning, including its examination of section 1104(c)(2)’s legislative history,[17] adds credence to the minority of courts holding that the appointment of an examiner is not mandatory. Second, Residential Capital stands for the proposition that an ongoing investigation by another party-in-interest does not make the appointment of an examiner per se inappropriate.[18] Refining the “as is appropriate” standard in this regard provides further guidance to the minority of courts that believe an examiner is not mandatory. For these reasons, Residential Capital is significant for courts and litigants wrestling with the issue of whether an examiner should be appointed.

 

 

 

 

 

 


[1] 474 B.R. 112 (Bankr. S.D.N.Y. 2012).
[2] See In re Residential Capital,474 B.R. 112, 121 (Bankr. S.D.N.Y. 2012).
[3] See Id. at 115, n.3 (detailing the debtors pre-petition dealings with Ally and Ally’s corporate parent, Cerberus). 
[4] See Id. at 116 (Berkshire and the UST argued that the statute plainly and unambiguously mandates that the court “shall” order appointment).  See also 11 U.S.C. 1104(c)(2) (2006) (“The court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate, …if… (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.”).
[5] See In re Residential Capital, 474 B.R. at 114 (“No party really disputes that an investigation and report should be done in this case; the only issue is whether the Creditors Committee should perform the investigation, or whether an examiner must be appointed to conduct the investigation pursuant to section 1104(c) of the Bankruptcy Code.”).
[6] See Id. at 116-17 (“…the phrase ‘such an investigation as is appropriate’ provides a limitation on the requirement for appointment of an examiner under either subsections (1) or (2)”).
[7] See Id. at 121 (“[W]hile the Creditors Committee has started an investigation, it is far from complete….”).
[8] See Id. (parsing statute to four necessary requirements for an examiner to be appointed). 
[9] See Id. at 121 (“The appointment of an examiner would be inappropriate if the motion was filed for improper purpose such as a litigation tactic to delay a case, or if there is no factual basis to conclude that an investigation needs to be conducted, or if an appropriate and thorough investigation has already been conducted (or is nearly complete) by a creditors committee or a governmental agency.”). See also Id. at 119-20 (citing In re Washington Mutual Inc., Hearing Transcript, No. 08-12229(MFW) (Bankr.D.Del. May 5, 2010), ECF No. 3699).
[10] See Id. at 121 (appointment necessary because all circumstances present).
[11] See supra note 7.
[12] See In re Residential Capital, 474 B.R. at 121.(“The motion was filed early in these cases….”).
[13] See Id. (“There is no evidence that the Examiner motion was filed in bad faith or as a litigation tactic….”).
[14] See, e.g. Hearing Transcript at 170:16-20, In re Visteon Corp., No. 09-11786(CSS) (Bankr.D.Del May 12, 2010), ECF No. 3145 (holding that interpreting section 1104(c)(2) as mandatory leads to “absurd” results).
[15] 898 F. 2d 498 (6th Cir. 1990).
[16] See Morgenstern v. Revco (In re Revco) 898 F. 2d 498, 500-01 (6th Cir. 1990) (reasoning that 1104(b)(2) (the precursor to 1104(c)(2)) plainly mandates appointment of examiner when debts exceed $5 million).
[17] See In re Residential Capital, 474 B.R. at 120-21 (“The legislative history points to the purpose of section 1104(c). An examiner shall be appointed to conduct an investigation ‘as appropriate under the particular circumstances of the case,’ but ‘the protection must be needed….’”) (citations omitted). 
[18] See Id. at 121 (“Notwithstanding the ability of any other party to effectively and expeditiously investigate the Debtors, section 1104(c)(2) of the Bankruptcy Code requires that an examiner should be appointed if no trustee has been appointed, a plan has not been confirmed, the debtors' fixed debts exceed $5 million and an investigation is appropriate. All of those circumstances are present here.”).