Bankruptcy Examiners in Chapter 11

By Jonathan C. Lipson, Temple University—Beasley School of Law, and Christopher Fiore Marotta, KPMG

Lipson MarottaBankruptcy examiners have long been a controversial feature of chapter 11—and remain so in recent cases such as Caesars Entertainment. Section 1104 of the Bankruptcy Code requires one if sought in large cases ($5 million+ in debt) or if “in the interests of creditors.” Congress created the position as a check on the reorganization process, since neither the SEC nor trustees typically provide oversight. Yet, system participants grouse about their costs and potential to disrupt negotiations. The ABI’s reform proposal would eliminate them.

In a recent paper, we study their use in a sample of 1225 chapter 11 cases from 1991-2010. We find that, despite the Code’s “mandatory” language, examiners are exceedingly rare, being sought in about 9% and appointed in 4% of cases. About half were very large cases, with far more than $5 million in debt, so most requests should have been granted—but they weren’t. The factors that Congress thought should matter most—such as fraud or incompetence—don’t.

What predicts whether an examiner will be appointed? Timing and location: an early request in a case outside Delaware is nearly twice as likely to be granted than otherwise. Yet, contrary to conventional wisdom, we also find that examiners correlate to better outcomes, including in post-bankruptcy earnings and headcounts.

We explain why examiners are so rare, and suggest a way to use them more frequently and economically.

For the full article see here.