{"id":362,"date":"2015-06-01T16:57:02","date_gmt":"2015-06-01T20:57:02","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=362"},"modified":"2015-06-01T16:57:02","modified_gmt":"2015-06-01T20:57:02","slug":"bankruptcy-examiners-and-governance-in-chapter-11","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/bankruptcy-examiners-and-governance-in-chapter-11\/","title":{"rendered":"Bankruptcy Examiners and Governance in Chapter 11"},"content":{"rendered":"

Chapter 11 of the Bankruptcy Code is the principal legal system for resolving serious financial distress of U.S. businesses. Because it allows managers of troubled companies to retain control, it rests on a seeming conflict of interest: how can creditors trust the managers who may have caused the trouble in the first place?<\/p>\n

To address this, Congress designed chapter 11 to include checks and balances in the reorganization process, one of which is supposed to be an \u201cexaminer.\u201d Under section 1104 of the Bankruptcy Code, examiners are \u201cmandatory\u201d if sought in large cases ($5 million+ in debt), and are recommended in any case where an examiner would be \u201cin the interests of creditors.\u201d If appointed, they are expected to investigate and report on the debtor\u2019s collapse.<\/p>\n

In a recent paper<\/a>, my co-authors and I study their use in a sample of 1225 chapter cases from 1991-2010. We find that, despite the Code\u2019s \u201cmandatory\u201d language, examiners are exceedingly rare, being sought in about 9% of cases and appointed in 4%. About half were very large cases, with far more than $5 million in debt, so most requests should have been automatically granted\u2014but they weren\u2019t.<\/p>\n

We explain why examiners are so rare. Examiners perform a \u201cpublic\u201d function because their reports are usually available to the public. While this may enhance the integrity of the process, which was one of Congress\u2019 goals, the \u201cpublic\u201d does not pay for examiners: private creditors do, because examiners\u2019 fees are paid by the bankruptcy estate. And creditors rarely want an education–they just want to be paid.<\/p>\n

And, yet, bankruptcy examiners may add more value than many think. We find preliminary evidence that cases with an examiner are more \u201csuccessful\u201d in terms of post-bankruptcy headcounts, earnings, and bond-price movements than cases without. Because the sample is small\u2014remember, no one wants examiners\u2014we view these findings as suggesting that common resistance to examiners may be premature and shortsighted.<\/p>\n

To address creditors\u2019 concerns about cost, we propose that courts experiment with \u201cmini-examinations,\u201d in which they appoint examiners in a larger, but still limited, number of cases to explore the causes of the debtor\u2019s collapse quickly. If, in fact, such quick-looks result in a larger pattern of success associated with examiners, perhaps creditors (and courts) will be less hostile to them. To defray the costs of these mini-examinations (and to account for their \u201cpublic\u201d function), we suggest that some or all of the cost be subsidized by bankruptcy filing fees, which we estimate will be about $150 million in 2015.<\/p>\n

We find preliminary evidence that cases with an examiner are more \u201csuccessful\u201d in terms of post-bankruptcy headcounts, earnings, and bond-price movements than cases without.<\/p><\/blockquote>\n

Understanding the use of examiners is important for two reasons. First, the bankruptcy system has significantly changed since Congress created it in 1978. Rather than a \u201csalvage operation,\u201d it is increasingly becoming a venue in which sophisticated distress investors (e.g., Carl Icahn) gain control of a company before or during bankruptcy, and use the process to turn a profit. Bankruptcy examinations might tell us whether this change is good, bad or a bit of both.<\/p>\n

Second, there is growing pressure to amend the Bankruptcy Code to eliminate examiners. Proposed changes would instead use \u201cneutrals\u201d to perform various functions, including (in rare cases) examinations. Our findings suggest that, if we care about \u201csuccess\u201d in bankruptcy, it may be too early to excise examiners.<\/p>\n

Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University Beasley School of Law. He teaches Contracts, Bankruptcy, Commercial Law, and various other business law subjects. He writes about corporate bankruptcy and other forms of failure. You can learn more about him here<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Chapter 11 of the Bankruptcy Code is the principal legal system for resolving serious financial distress of U.S. businesses. Because it allows managers of troubled companies to retain control, it rests on a seeming conflict of interest: how can creditors trust the managers who may have caused the trouble in the first place? To address<\/p>\n","protected":false},"author":60,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[47,8],"tags":[],"coauthors":[44],"class_list":["post-362","post","type-post","status-publish","format-standard","hentry","category-bankruptcy","category-faculty-authored","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\nBankruptcy Examiners and Governance in Chapter 11 - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/bankruptcy-examiners-and-governance-in-chapter-11\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bankruptcy Examiners and Governance in Chapter 11 - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"Chapter 11 of the Bankruptcy Code is the principal legal system for resolving serious financial distress of U.S. businesses. 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