he Third Circuit reversed a bankruptcy court order denying a motion by the UST to appoint an examiner in a cryptocurrency chapter 11 case to investigate allegations of pre-bankruptcy manager misconduct even though the debtor's unsecured debt far exceeded the $5 million threshold. In so ruling, the Third Circuit joined the Sixth Circuit in concluding that the appointment of an examiner is such cases is mandatory when requested by the UST or a party-in-interest, and that the bankruptcy court's discretion is limited to defining the scope of the examiner's investigation. Appointment of a Trustee or Examiner in Chapter 11Ordinarily, a chapter 11 debtor's pre-bankruptcy management continues to direct the debtor's affairs and control its assets as a debtor-in-possession ("DIP"). However, if management's misconduct or incompetence indicates that it should no longer be entrusted with that role, the Bankruptcy Code provides that the DIP can be supplanted with a chapter 11 trustee. Specifically, section 1104(a) of the Bankruptcy Code provides that during the pendency of a chapter 11 case prior to confirmation of a plan, the court, upon the request of a party in interest or the UST, and after notice and a hearing, "shall" order the appointment of a trustee either "for cause" or "if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate" (but excluding the number of the debtor's security holders or the amount of its assets or liabilities). "Cause" is defined non-exclusively to include "fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management," either before or after the bankruptcy petition date. 11 U.S.C. §1104(a)(1).The Bankruptcy Code also contemplates a less drastic alternative—the appointment of an examiner—in cases where "cause" to appoint a trustee is absent, but where the input of an independent third party is deemed necessary to investigate the debtor's financial affairs or management's conduct. Secti

It is a rare occasion that one can be assured with certainty that, if they file a motion with a bankruptcy court, it will be granted. But, in the Third Circuit, that is exactly what will happen if a creditor or other party in interest moves for an examiner to be appointed under Section 1104(c) of the Bankruptcy Code. Once considered to be within the discretion of a bankruptcy court “as is appropriate,” the appointment of an examiner is now guaranteed if the statutory predicates are fulfilled according to the Third Circuit Court of Appeals. This development is a marked departure from the status quo and has the potential to change an already litigious chapter 11 landscape. Examiners GenerallyIn chapter 11 cases, examiners are appointed by bankruptcy courts to investigate and analyze the affairs of a debtor and then issue a report of their findings. Section 1104(c) of the Bankruptcy Code provides:If the court does not order the appointment of a trustee . . . then at any time before the confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence,

er the past 50 years, the Bankruptcy Code’s mandatory appointment of examiners in large cases seems increasingly “archaic,” particularly to bankruptcy judges on the front lines who have stretched to interpret section 1104(c) in a manner that provides for flexibility in appointment of examiners. Ultimately, it has become evident, most recently in the FTX bankruptcy, that the most effective tool available to bankruptcy judges is their discretionary authority to dictate the scope, duration and cost of any examination, as a means to appropriately balance the interests of “public security holders” with those of “public needs,” including the ability to facilitate a quicker and less expensive reorganization that better preserves a company and the jobs it provides to its employees.Paul SilversteinHunton Andrews KurthMandatory Appointment of Examiner: 3rd Circuit in FTX makes clear that “Shall” means “Shall”That a bankruptcy court could find, in the context of a mandatory examiner motion under section 1104(c)(2) of the Bankruptcy Code, that the words “shall order” do not mandate an examiner appointment illuminates that bankruptcy courts are fundamentally in the business of facilitating the prompt emergence from Chapter 11 of large complex debtors. The Bankruptcy Code is, and was intended as, a debtor statute; but there must be limits and respect for clear statutory mandates. The 3rd Circuit’s recent FTX decision, a very straightforward and simple decision, makes clear that the word “shall” means “must” and a motion for appointment of a mandatory examiner must be granted when the requisite dollar amount of unsecured debt exists.Notwithstanding existing Delaware bankruptcy court precedent for the proposition that “shall” does not mean “shall”, it was nonetheless surprising that the Bankruptcy Court declined to appoint a mandatory examiner in FTX on the United States Trustee’s motion. FTX is a significant and novel case allegedly involving massive fraud and management improprieties. Indeed, as the 3rd Circuit remarked

t outlining certain noteworthy progress of the FTX Trading Ltd. (“FTX”) Chapter 11 proceeding. Items or events described below are compiled as of the date of this writing.Issues concerning appointment of independent examinerThe U.S. Trustee, FTX’s lawyers and the company’s unsecured creditors’ committee has been heatedly discussing and litigating with respect to the necessity of appointing an independent examiner as proposed by the Department of Justice. The court held a hearing on February 6, 2023 to hear the parties’ arguments and, after requesting the parties to work on a “consensual resolution,” ultimately ruled against the U.S. Trustee’s motion on February 15, 2023. Despite the court’s ultimate rejection, some noteworthy takeaways could still be drawn from the submissions and oral arguments that either support or oppose the proposed appointment.1. Whether it is mandatory to appoint an independent examinerThe major argument advanced by the U.S. Trustee is that the conditions under Section 1104(c) of the Bankruptcy Code were met, so the appointment of an independent examiner is mandatory. The concerned conditions are (i) appointment is in the interests of creditors, any equity security holders, and other interests of the estate, and (ii) the debtor’s fixed, liquidated, unsecured debts … exceed $5 million dollars. FTX and the unsecured creditors’ committee opposed such interpretation of Section 1104(c) on the ground that the court should have the discretion to approve or deny a motion to appoint an examiner pursuant to the express language of the provision and the phrase “as is appropriate” contained therein. As argued by the opponents, to construct Section 1104(c) as imposing a mandatory obligation on the court could result in the slippery slope effect that all courts hearing a bankruptcy case in the future will be required to appoint an independent examiner as long as the described two conditions stated are satisfied.The court appears to have sided with FTX and the unsecured creditors’ committee wit

Appointment of an examiner is not routine and generally occurs when allegations exist concerning fraud, incompetence or mismanagement of a debtor. 11 U.S.C. 1104(a)(1),(c). An examiner's investigatory powers usually focus on impropriety involving a debtor's management, but can be expanded "as is appropriate" to probe other aspects of the debtor's business.

You represent the unsecured creditors committee in a complex Chapter 11 case, where you have reason to believe that the debtor’s officers and directors have, and continue to, engage in self-dealing and are breaching their fiduciary duties by not advancing a plan in the best interest of creditors. So, the committee asks you to seek the appointment of an examiner to investigate. The Bankruptcy Court agrees, appointing an examiner under section 1104(c) of the Bankruptcy Code, which provides for the appointment of an examiner for the purpose investigating matters related to the debtor’s estate, “including an investigation of allegations of fraud, dishonesty, incompetence, misconduct, mismanagement ….”. Using Bankruptcy Rule 2004, the examiner subpoenas and reviews over 10,000 documents, takes 10 Rule 2004 examinations and conducts 15 witness interviews. Based upon these undertakings, the examiner prepares a 200-page report finding numerous incidents of self-dealing and breaches of fiduciary duties and recommends the appointment of an independent fiduciary. The examiner’s report sends the committee over the moon, and it instructs you to file an emergency motion for the appointment of a Chapter 11 trustee under section 1104(a) of the Bankruptcy Code, suggesting that all the Bankruptcy Court need do is consider the examiner’s report and the trustee motion is a “slam dunk.” This makes sense as the Bankruptcy Court appointed the examiner, codified her duties in

CR standard requires more than disinterestedness." According to Judge Krause, "[a]n FCR must be able to act in accordance with a duty of independence from the debtor and other parties in interest in the bankruptcy, a duty of undivided loyalty to the future claimants, and an ability to be an effective advocate for the best interests of the future claimants." Id. (footnote omitted).The Third Circuit reached this conclusion after considering the text of the Bankruptcy Code and its legislative history, the standards traditionally applied to creditors' committees—which, the court explained, serve an analogous role in bankruptcy cases—and "the administrability of the fiduciary standard … in the bankruptcy context." Id.First, the Third Circuit reasoned, Congress specifically chose to use the "disinterested person" standard in 11 other provisions of the Bankruptcy Code, yet omitted it from section 524(g). Id. at 375 (citing 11 U.S.C. §§ 327(a), 328(c), 332(a), 333(a)(2)(A), 701(a)(1), 703(c), 1104(b)(1), 1104(d), 1163, 1183(a), 1202(a) and 1302(a)). This is not surprising, Judge Krause wrote, because the provisions containing the "disinterested person" standard "relate to professionals whose duties run to the entire estate or to the court, requiring that they remain impartial" and do not represent any adverse interest, whereas the FCR is the "'legal representative' for just such an adverse interest, having been appointed specifically 'for the purpose of protecting the rights of' future asbestos claimants." Id. (quoting 11 U.S.C. § 524(g)(4)(B)(i)). The Third Circuit accordingly concluded that this statutory omission "counsels against" adopting the disinterested person standard for the purpose of FCR appointments.Next, the Third Circuit reasoned that lawmakers' usage of the term "legal representative"—a term of art referring to someone owing fiduciary duties to absent constituents—in section 524(g) indicates they anticipated an FCR should "be able to fulfill the heightened duties owed

A bankruptcy court can appoint a trustee after “notice and a hearing.” 11 U.S.C. § 1104. And that means, “after such notice as is appropriate in the particular circumstances and such opportunity for a hearing as is appropriate in the particular circumstances.”

[13] Under certain circumstances, a trustee may be appointed in Chapter 11 cases. See 11 U.S.C. § 1104.[14]See 11 U.S.C. § 704, which delineates the duties of a Chapter 7 trustee and notes that his or her first duty is to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704(a)(1).