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 warranted appointment. 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. Berkshire claimed that appointment was mandatory pursuant to section 1104(c)(2) of the Bankruptcy Code. The Official Committee of Unsecured Creditors (“the Committee”) objected to appointment, arguing that its own investigation obviated the need for an independent examiner. The court held that appointment was not mandatory because section 1104(c)’s mandatory language is qualified by the phrase “as is appropriate.” However, the court held that the Committee’s concurrent investigation, by itself, was not enough to render an independent examiner’s appointment inappropriate.
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. 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. Ultimately, the court rejected the Committee’s argument that its own investigation was sufficient to defeat Berkshire’s motion. 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. Next, the court reasoned that the litigation was still new and the appointment of an independent examiner would not unduly delay the proceedings. Finally, the court held that the Committee failed to prove that Berkshire moved with ignoble motives.
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. The only appellate court to comment on this issue, the Sixth Circuit in Morgenstern v. Revco,hasheld that appointment is mandatory and stressed the plain language of the statute. The Residential Capital court’s reasoning, including its examination of section 1104(c)(2)’s legislative history, 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. 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.