A Third Way: Examiners As Inquisitors

By Daniel J. Bussel, UCLA School of Law

BusselThere is a buzz concerning bankruptcy examiners. Recently in such cases as ResCap, Dynegy and Tribune, and perhaps now in Caesars, examiners have played a decisive role in resolving major Chapter 11 cases involving avoiding power claims.

“Litigate or settle” is the dispute resolution choice generally available in US bankruptcy courts. But there is another way: An inquisitorial model of justice in which an active and informed neutral investigates the facts and then assesses and applies the law to resolve a legal dispute. Chapter 11 examiners are peculiarly suited to introduce this inquisitorial process into a Chapter 11 case. In particular, Ken Klee, serving as examiner in the Tribune case, and a series of post-Tribune investigations show that inquisitorial methods make sense in certain large bankruptcy cases involving complex legal disputes (rather than financial or operational problems). Indeed Tribune and its progeny suggest that the inquisitorial experiment has already begun.

A Third Way: Examiners As Inquisitors looks at examiner methodologies in Tribune and the few post-Tribune examiner cases. It assesses the method’s comparative advantages (fact-finding accuracy, nonpartisan experts, freedom from artificial evidentiary constraints, transparency and legitimacy) and disadvantages (lack of finality, expense, delay, risks to reorganization efforts, risk of overzealousness, due process concerns) and suggests that in the absence of a countervailing business exigency demanding exclusive focus on reorganization, the Tribune model may offer a superior alternative for resolving contested avoidance claims. Indeed, large Chapter 11 cases may be an ideal proving ground for inquisitorial methods more broadly.

For more see A Third Way: Examiners As Inquisitors, 90 Am. Bankr. L. J. __ (forthcoming 2016), available here.

The Problem With Preferences

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By Daniel J. Bussel, UCLA School of Law

BusselBrook Gotberg in Conflicting Preferences does a great service in lucidly identifying the problem with preference law as currently configured. But she errs in diagnosing the cause and prescribing the treatment. As to cause, preference law is not and should not be a single-minded pursuit of equality of distribution without consideration of complementary, and even countervailing policies. To the contrary, the recent arc of preference law is strongly driven by refocusing on culpable opt-out behavior, and the goal of ratable distribution has been sharply subordinated to other objectives.

Repealing preference law in Chapter 11 would be counterproductive. Blanket repeal of preference law in Chapter 11, while simultaneously enhancing preference recovery in Chapter 7, insulates, indeed rewards, affirmative pre-bankruptcy opt-out behavior by insiders and creditors with superior knowledge or leverage, while undermining the reorganization objectives of Chapter 11. It will encourage, and in some instances require, liquidations that would not otherwise be necessary or desirable. Raising (not abandoning) the floor on preference recovery, bolstering (not eliminating) trade creditors’ ordinary course and new value defenses, and limiting or eliminating the safe harbors for financial contracts, all without discriminating between Code chapters, would reduce arbitrariness and unfairness in preference law. These more modest reforms would enable preference law to continue to police the most extreme forms of opt-out behavior, while fostering reorganizations where such reorganizations remain viable and desirable notwithstanding eve-of-bankruptcy opt-out actions by creditors and insiders.

For the full article see The Problem With Preferences, 100 Iowa L. Rev. Bull. 11, available here.