Improving Governance of Chapter 11 Debtors

The concept of a debtor in possession – that incumbent directors and managers can be made into statutory fiduciaries to reorganize a business that failed under their leadership – is an inspired idea. It is a uniquely American expression of trust and confidence, and it is consistent with the principles of fresh start and renewal at the heart of Chapter 11. Notwithstanding the concept’s brilliance, we take issue with the automatic and universal application of the default presumption that all Chapter 11 debtors should remain in possession.

Despite Congress’s intention that business reorganization cases would be used “to restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders,” [1] Chapter 11 has become something quite different. Now, Chapter 11 is oftentimes a mechanism to effectuate an orderly liquidation or to correct process failures. [2] That is not “wrong” or even troubling to us; instead, we are concerned that in some such cases, allowing the debtor and its corporate management to remain in possession could inhibit the reorganization process.

Courts have tried to rein in structural imperfections of Chapter 11 in various ways, such as by dismissing bad faith filings, shortening or terminating exclusivity periods and appointing equity committees. What courts have seldom done is question, in the absence of egregious circumstances like obvious fraud or self dealing, the independence and authenticity of debtor management. It is troubling that often the dishonest or fraudulent management will at least initially remain in possession and be permitted to direct the debtor’s reorganization – oftentimes to further its own interests, and not those of the debtor and its creditors. Alternatively, in circumstances where corporate collapse or incompetence is undeniable, an outside professional may be appointed by the debtor as its “chief restructuring officer” to work around what the Bankruptcy Code would require of a debtor in possession. This fix does not address the core problem that boards of directors of many failed companies become nonfunctional or absent as distress intensifies. As a result, advisors become de facto boards and managers. With no genuine debtor governing body, there is no principal. The advisors or agents of the debtor are their own clients.

Oftentimes, these governance failures are not intentional. To paraphrase Hemingway, business failure occurs both gradually and all at once. There is an urgency when crises occur. Corporate managements and boards, to the extent they are not already dazed in the face of crisis, often freeze and become non-players. Some boards essentially disband. Others have failed because of mismanagement, and some use the bankruptcy process to enrich themselves. This condition is greatly intensified when equity value has evaporated and debt is impaired.

To protect debtor estates from abuse, the Bankruptcy Code contemplates various checks on the debtor in possession’s freedom of action, ranging from ordinary course operating parameters to required reporting and disclosure. The Bankruptcy Code also places the debtor under formal oversight of creditors committees and the United States Trustee, not to mention that of the bankruptcy court itself. And if cause is shown, bankruptcy courts are authorized to appoint a Chapter 11 trustee or independent examiner. Unfortunately, none of these limitations or measures is meaningful in practical terms, when the debtor’s decision-making is outsourced to case professionals or remains in the hands of conflicted management. This may seem like form over substance, but it is actually just the opposite. Without a genuine, independent governing body, the estate is unable to serve as a fiduciary as otherwise required by the Bankruptcy Code and corporate law. As such, the debtor’s actions may skew towards or be unduly influenced by select creditors or insiders. Although such management can have short term value, it can also provoke long term controversy and discord that exhausts estate value and resources.

Something does have to be done to achieve some rational governance construct, but that something should not include pretending that a debtor in possession exists when it does not exist. What is required, and permitted by oft-overlooked language in the Bankruptcy Code, is enhanced scrutiny of the nature of the debtor at the outset of every case. We believe that every debtor should include in its first day papers a clear description of its governance, and every bankruptcy court should hold early hearings to determine whether the debtor’s governance is sufficient to support the management’s transformation into statutory fiduciaries. If the governance is sufficiently stable, and there are no well-pled allegations of dishonesty or fraud, the debtor will readily qualify for full debtor in possession status. However, if the debtor’s governance is synthetic or otherwise suggestive of inadequacy, additional limitations should be imposed on the powers of the debtor. These limitations could range from narrowed parameters for ordinary course dealings, to modified exclusivity, to enhanced scrutiny of the debtors’ business judgment. Management would have ample opportunity to remedy its shortcomings and later qualify for full debtor in possession status. Only if after a full evidentiary hearing a debtor’s management appears to be non-existent, irreconcilably conflicted, or materially dishonest or fraudulent the bankruptcy court could consider installation of a chapter 11 trustee or examiner. Thus, no properly governed business or no business capable of proper governance should have any concern about any of these measures; such businesses would qualify for full debtor in possession status.

This article explains the contours of the debtor in possession provisions of the Bankruptcy Code and the basis for modifying the default presumption. In Section I, the history and purpose of the debtor in possession provisions are described. This section illustrates that the legislative intent behind the debtor in possession construct is somewhat anachronistic and, for the debtors with which we are most concerned, not necessarily applicable. In Section II, the Bankruptcy Code’s existing constraints on debtor in possession status are identified. It will be demonstrated that bankruptcy courts do have the authority to impose limitations on the debtor in possession, if not completely disavow itself of the construct’s application. In Section III, we analyze relatively ignored statutory language that could provide the basis for more rigorous review by the bankruptcy court of the debtor’s governance. After all this necessary background, Section IV describes our proposal for a more rigorous review of debtor governance. Section V is a conclusion.

I – The Purpose of the “Debtor in Possession” Provisions

Under the Chandler Act, upon the filing of a petition for Chapter X bankruptcy reorganization, the debtor would be required to entrust its reorganization and day-to-day operations to a bankruptcy trustee. That was because “[f]requently, businesses needed reorganization because of the fraud of [sic] dishonesty of management . . . ” [3] However, on the eve of the passage of the Bankruptcy Code, “the need for reorganization result[ed] from business cycles or honest mismanagement of the company” and not fraud or dishonesty. [4] Congress further opined that

the need for reorganization of a public company today often results from simple business reverses, not from any fraud, dishonesty, or gross mismanagement on the part of the debtor’s management. Even if the cause is fraud or dishonesty, very frequently the fraudulent management has been ousted shortly before the filing of the reorganization case. [5]

Because it believed that companies were no longer filing for bankruptcy because of fraud or dishonest mismanagement and that a fully-functioning governance structure would remain in place, Congress crafted the Bankruptcy Code and merged Chapters X and XI so that a “management, very capable of running business, should not be ousted by a trustee . . . ” [6]

When read together, Sections 1107 and 1108 of the Bankruptcy Code grant the debtor in possession “the rights and powers of a trustee and is empowered by the Code to continue operating its business and managing the property of the estate.” [7] Section 1107(a) of the Bankruptcy Code provides that

[s]ubject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106 (a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter. [8]

Accordingly, with certain limited exceptions, [9] a debtor in possession “both enjoys the rights and must fulfill the duties of a trustee.” [10] Among these rights is that, “[u]nless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor’s business.” [11]

Congress articulated several reasons for the establishment of the debtor in possession construct. First, as already alluded to, because (Congress believed) most bankruptcies were not caused by the fraud or dishonest mismanagement of the debtor, “[t]he public and the creditors w[ould] not necessarily be harmed if the debtor is continued in possession in a reorganization case.” [12] Second, in addition to causing no harm, a debtor in possession could result in a more efficient bankruptcy case. Creditors would benefit “both because the expense of a trustee will not be required, and the debtor, who is familiar with his business, will be better able to operate it during the reorganization case.” [13] By contrast, a trustee can drain the estate of precious assets, if not destroy going concern value. A trustee responsible for the day-to-day operations of the debtor must often spend substantial time familiarizing “himself with the business before the reorganization can get under way.” [14] Because a debtor in possession need not expend resources in such a manner, Congress believed that “a debtor in possession may lead to a greater likelihood of success in the reorganization.” [15] Third, the elimination of the trustee by default is intended to encourage distressed companies to seek refuge in bankruptcy courts. If debtors knew that their management would be ousted in a bankruptcy case, then they would be less likely to file for bankruptcy and reorganizations would be less common. [16]

II – What If a Debtor Should Not Be in Possession?

The debtor in possession construct exists largely because Congress believed that debtors were no longer filing for bankruptcy as a result of fraud or dishonest management; however, during this Great Recession, that belief has been disproven. Some of the largest bankruptcies of this downturn (including Lehman Brothers, Washington Mutual, and Tribune) and of all time (Worldcom and Enron) were caused, at least in part, by the failings of management. Often, by the time such debtors file for bankruptcy, they had become empty shell debtors, or at least their managements have become highly conflicted.

Perhaps cognizant that not all debtors should remain in possession due to fraud or gross mismanagement, [17] Congress endowed bankruptcy courts with the power to appoint chapter 11 trustees. Section 1104(a) of the Bankruptcy Code provides that

At any time after the commencement of the case but before 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 a trustee—

(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor;

(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or

(3) if grounds exist to convert or dismiss the case under section 1112, but the court determines that the appointment of a trustee or an examiner is in the best interests of creditors and the estate. [18]

This analysis is supposed to be fact-driven; [19] a trustee should be appointed “only if the protection afforded by a trustee is needed and the costs and expenses of a trustee would not be disproportionately higher than the protection afforded.” [20] Though Congress made clear that this analysis was “not intended to be a precise cost/benefit standard,” it declined to define the contours of this rule. Instead, Congress deferred to the courts which they believed would “quickly develop” case law “defining the circumstances in which a trustee should appointed.” [21]

Appointment of a trustee is highly discretionary and an extraordinary remedy. [22] If a trustee should not be appointed, but circumstances call for the examination of the debtor’s affairs, the Bankruptcy Code contemplates a less restrictive alternative – the appointment of an examiner. [23] “An examiner might be appropriate instead of a trustee, for example, where current management has recently replaced a former fraudulent management, or where continuance of management is essential to the continued operation of the business during the reorganization, even though there may be some small suspicion of wrong-doing on the part of management.” [24]

Authority to appoint an examiner is derived from Section 1104(c), which states that

[i]f the court does not order the appointment of a trustee under this section, 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, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor, if—

(1) such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or

(2) the debtor’s fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000. [25]

The statutory language seems to create a very low threshold for the appointment of an examiner. Courts have interpreted Section 1104(c)(1) to be satisfied when a complete and thoroughly independent investigation is necessary. [26] Section 1104(c)(2) is almost always satisfied in large bankruptcy cases. [27] Some courts though have suggested that neither of these standards is mandatory. [28] Sometimes looking to the legislative history, [29] these courts have concluded that an examiner should only be appointed if the benefits of an examiner outweigh the burden and expenses. [30]

III – “Subject to . . . such limitations or conditions as the court prescribes”

Although bankruptcy courts have authority to appoint trustees and examiners, rarely are such powers exercised. For example, in none of the major cases identified at the beginning of Section II was a chapter 11 trustee appointed. [31] An examiner was appointed in each of those cases, but often only after the passage of a substantial period of time and after substantial litigation surrounding the examiner’s appointment. The zealous protection of the debtor in possession presumption is not necessarily desirable. The empty shell debtor or allegations of a dishonest debtor can cause an inefficient process as looming questions regarding the discharge of fiduciary duties may result in costly delays. [32]

Fortunately, these results are not necessary as Congress crafted the Bankruptcy Code to limit the powers of a debtor in possession. Although Section 1107(a) of the Bankruptcy Code allows the debtor and its management to retain control of the debtor’s operations, the statutory language suggests that the debtor in possession presumption can be limited. Section 1107(a) provides that the rights and duties of the debtor in possession are “[s]ubject to . . . such limitations or conditions as the court prescribes.” The legislative history does not provide any elucidation as to the nature of the limitations and conditions that a court may impose. Although “case law addressing the imposition of conditions is very sparse,” [33] some courts have suggested that the “subject to . . . such limitations or conditions” language references the court’s equitable power to enter any order that is necessary. [34] As such, courts have concluded that they have, pursuant to Sections 105(a) and 1107(a), “considerable authority to interfere with the management of a debtor corporation in order to protect the creditors’ interests.” [35]

Notwithstanding the “complete power and control” of the bankruptcy court, [36] there are several guiding principles that inform a court’s decision to limit or condition the authority of a debtor in possession. The imposition of any conditions is entirely discretionary and in no way mandatory. [37] Discretion should only be exercised if the court is not satisfied that the appointment of a debtor in possession is in the best interests of the estate. [38] That is, the debtor in possession must be beneficial, and not prejudicial, to the interests of creditors and the estate. [39]

Some courts have suggested that Section 1107(a) grants the courts the authority to scrutinize for fairness the transactions between insiders and a debtor in possession. [40] Reviewable transactions include the salaries paid to a debtor in possession’s officers. [41] For example, in In re Lyon & Reboli, Inc., the court noted that, although it did not intend to question the efficacy of a business decisions, where there may be excessive and detrimental action in favor of insiders to the detriment of creditors, such action need be scrutinized when asked by a party in interest to do so, particularly where the insider transactions were subject to little, if any, internal review. [42]

More relevant to our proposal, other courts have suggested that the language gives bankruptcy courts a continuing supervisory role over the rights and powers of a debtor, [43] including that of the debtor’s self-governance. In In re Real Estate Partners, Inc., when describing the effect of Section 1107(a), the bankruptcy court noted that the “such limitations or conditions as the court prescribes” language places “not only the assets of the estate but its governance as well . . . in custodia legis.” [44] The scope of this custodianship is illustrated in In re Lifeguard Indus., Inc. [45] There, one of the debtor’s only actively involved shareholders and directors proposed a plan of reorganization in which he and certain executives would receive the reorganized debtor’s new common stock but his family members and co-shareholders in the debtor would receive nothing under the plan. [46] These co-shareholders launched a hotly contested battle for control to appoint a new board of directors. [47] Ultimately, the co-shareholders gained control of the board and ousted from control their relative. [48] The new directors sought to change the management structure by installing a new president, secretary and treasurer. [49] The court concluded that such a change in the management structure, during the pendency of a chapter 11 case, was subject to the court’s review under Section 1107(a) and that “[i]t is this Court’s responsibility to protect creditors’ interests from the actions of inexperienced, incapable, or foolhardy management, whether old or new.” [50] Notwithstanding the election of new directors, the court denied the application to approve new management and explained that new

management team might ultimately usher in a new era of unprecedented prosperity at Lifeguard. But no concrete means or plan have been suggested for achieving this promised result. Indeed, the new management slate has demonstrated no real understanding of the immediate problems facing the business, or for that matter, the business itself. If they fail in their efforts, only the creditors lose. We do not believe that such unwilling gamblers should be required to take that risk. [51]

Other courts have similarly concluded that they have authority to oversee and overrule proposed changes in a debtor’s governance structure. [52] Accordingly, it appears as though bankruptcy courts have considerable, generally untapped, discretion to monitor the debtor in possession’s governance.

IV – Our Proposal

As noted, the “subject to . . . such limitations or conditions” language allows bankruptcy courts to exercise the authority to monitor and review the debtor in possession’s governance, without otherwise appointing a trustee or examiner. However, courts will oftentimes only exercise this authority upon the request of a party in interest. [53] We believe that waiting for a party in interest’s request is unnecessary and not contemplated by the language of the Bankruptcy Code. Likewise, it is unrealistic to assume that a party in interest will promptly raise the issue with a debtor in possession; the parties with the resources to raise issue with the debtor’s governance and debtor in possession status may already be, or may prefer to attempt, exerting influence on the debtor’s management. Additionally, the parties that wish to bring a request to the court risk that the debtor may be punitive towards them as the debtor develops a plan of reorganization. In order to ensure that debtors who are entitled to be in possession are the beneficiaries of Section 1107 and 1108, we suggest that it become a preliminary requirement, perhaps codified in local bankruptcy rules or in chambers procedures, that debtors be required to make a minimal showing at the outset of a bankruptcy case to demonstrate that there is in fact a debtor worthy of being in possession.

A debtor’s failing or absent management, advisors, and professionals can exact substantial harm to creditors at the onset of their case without such actions being subject to the court’s scrutiny. Requiring at least some review of the merits of the debtor remaining in possession at the beginning of a case would enhance efficiency and expedience of bankruptcy cases and ensure the fairness of the case. Among the factors that would warrant consideration are: (1) whether the debtor’s board is engaged; (2) whether the directors or management are parties to any alleged conflicts of interest with the debtor; (3) whether insider transactions are a central issue in the case; (4) whether the debtor’s board is to survive the reorganization process and remain with the reorganized debtor; (5) whether any insider-concerned transactions were subject to internal review; and (6) whether creditors have been exerting inappropriate control or influence over the debtor. The presence of several of these factors may indicate that either the debtor’s management has acted dishonestly or that the debtor has transformed to an empty shell. Such debtors should not be permitted to remain in full possession, but, because the appointment of a trustee or examiner can have a chilling effect upon bankruptcy filings, courts should advise debtors to remedy their failings or otherwise impose temporary restrictions upon the debtor’s management and operations. Only if full debtor in possession status is not at some subsequent hearing shown to be warranted would the bankruptcy court then impose lasting limitations or otherwise appoint an independent fiduciary.

This prospective assessment of debtor corporate governance will ensure that a qualified fiduciary is in place to protect the interests of the estate and that the bankruptcy case is being pursued to advance the best interests of creditors. Although there may be some concern that our proposal will chill bankruptcy petitions, we believe that few debtors would need to be concerned by our proposal. We do not propose imposing any greater limitations or restrictions than what are available under existing bankruptcy law; we only suggest that consideration of such restrictions be expedited. Indeed, speedier review of the debtor’s governance accords with recent jurisprudence that requires litigants to make minimal showings of proof before benefitting from court protection. [54]

V – Conclusion

There is something of a reaction going on in the courts due to the problem of ambiguous debtor governance. Some judges are essentially retrofitting a fiduciary management by authorizing chief restructuring officers, appointing examiners after substantial delays, and occasionally appointing trustees. This is problematic because significant decisions such as settlements, proposed plan treatments and structures and other extraordinary actions by debtors have been defaulted into the hands of case professionals or conflicted management. As a consequence the principals are all on the creditors’ side, while the debtor is essentially a synthetic construct. In exceptional cases such as Texaco, PG&E, Dow Corning, United Airlines, where massive businesses with well established corporate governance reorganized as going concerns, there was little basis for doubt about the authenticity and independence of the debtor in possession. However, in the more typical Chapter 11 case, when equity value has been obliterated and the enterprise must be componentized, sold or otherwise transformed to achieve value, debtor boards tend to be disengaged and decision making shifts to managements, which are often self-interested in an outcome, or to debtor professionals, who, despite good intentions, may be inclined toward mere expediency. This is not what Congress intended. As such, courts must prospectively assess whether the debtor should remain in possession. This check upon the dishonest or empty shell debtor is necessary to ensure the smooth and proper functioning of each and every bankruptcy case and can be implemented so as not to chill the filing of bankruptcy petitions.

Endnotes

[*] Messrs. Gover and Silverbrand or their colleagues have represented parties in some of the bankruptcy cases discussed in this article. The views expressed herein are those of the authors alone.
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[1] H.R. Rep. No. 95-595, at 220 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6179.
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[2] Some have suggested that these changes have transformed bankruptcy “from at least the semblance of a rehabilitative approach to a casino approach of ‘how do I make more money?” See Mike Spector & Tom McGinty, Debt Traders Draw Fire from Bankruptcy Judges, Wall St. J., at A1, Sept. 7, 2010 (quoting Harvey Miller of Weil, Gotshal & Manges LLP).
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[3] Id. at 232.
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[4] Id. at 233.
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[5] Id.
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[6] Id.
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[7] Comm. of Asbestos-Related Litigants and/or Creditors v. Johns Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 616 (Bankr. S.D.N.Y. 1986) (citing 11 U.S.C. §§ 1107, 1108).
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[8] 11 U.S.C. § 1107(a).
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[9] The exceptions relate to the setting of a trustee’ compensation (which is inapplicable to a debtor that remains in possession), filing lists and schedules when a debtor has not done so (which is inapplicable where the debtor is in possession and is otherwise required to file lists and schedules), and investigating fraud and mismanagement (which, at least in theory, is unnecessary for the honest debtor in possession and would otherwise discourage the filing of chapter 11 cases).
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[10] Louisiana World Exposition v. Fed. Ins. Co., Inc., 858 F.2d 233 (5th Cir. 1988) (quoting In re Hughes, 704 F.2d 820, 822 (5th Cir. 1983)).
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[11] 11 U.S.C. § 1108.
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[12] H.R. Rep. No. 95-595, at 233.
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[13] Id.
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[14] Id.
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[15] Id.
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[16] Id. (“The other goal, facilitation of the reorganization to the benefit of the debtor and the creditors, militates against the appointment of a trustee.).
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[17] H.R. Rep. No. 95-595, at 233.
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[18] 11 U.S.C. § 1104(a).
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[19] H.R. Rep. No. 95-595, at 233 (“The policy that has been followed . . . has been flexibility . . . and determination of the needs of each case on the facts of the case.”).
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[20] Id. at 234.
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[21] Id.
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[22] See In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3d Cir. 1989) (“section 1104(a) decisions must be made on a case-by-case basis”); Collier on Bankruptcy ¶ 1104.02 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.).
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[23] Id. (“The court may also adopt the less restrictive alternative of ordering the appointment of an examiner to investigate the affairs of the debtor.”).
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[24] Id.
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[25] 11 U.S.C. § 1104(c).
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[26] See, e.g., In re New Century TRS Holdings, Inc., No 07-10416 (KJC) (Bankr. D. Del. June 1, 2007) (appointing an examiner was in the best interest of the estate to investigate accounting and financial irregularities which led to the debtor’s need to restate its financial statements); Keene Corp. v. Coleman (In re Keene Corp.), 164 B.R. 844, 856 (Bankr. S.D.N.Y. 1994) (appointing examiner in best interest of creditors where allegations existed that estate property was being diverted in fraud of creditors); In re First Am. Health Care of Ga., Inc., 208 B.R. 992, 994-95 (Bankr. S.D. Ga. 1996) (appointing examiner where allegations of fraud existed).
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[27] See, e.g., In re Loral Space & Commc’n, Ltd., No. 04-8645, 2004 WL 2979785 (S.D.N.Y. Dec. 23, 2004); In re Revco D.S., Inc., 898 F.2d 498, 500-01 (6th Cir. 1990); In re UAL Corp., 307 B.R. 80, 86 (Bankr. N.D. Ill. 2004); In re Mechem Fin. of Ohio, Inc., 92 B.R. 760, 761 (Bankr. N.D. Ohio 1988); In re The Bible Speaks, 74 B.R. 511, 514 (Bankr. D. Mass. 1987); In re 1243 20th St., Inc., 6 B.R. 683, 685, n.3 (Bankr. D.D.C. 1980); In re Lenihan, 4 B.R. 209, 211 (Bankr. D.R.I. 1980).
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[28] See, e.g., g., In re SA Telecommunications, Inc., Case No. 97-02395 (Bankr. D. Del. Mar. 27, 1998) (J. Walsh), (“My view is that [1104](c)(2) is not mandatory”); See also In re Bradlees Store, Inc., 209 B.R. 36, 39 (Bankr. S.D.N.Y. 1997); In re Rutenberg,158 B.R. 230, 233 (Bankr. M.D. Fla. 1993).
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[29] Congress does not appear to have intended examiners to be regularly appointed. In the House Report, it was written that the “standards for determining whether to order the appointment of an examiner are the same as those for appointment of a trustee: the protection must be needed and the cost not disproportionately high.” H.R. Rep. No. 95-595, at 234.
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[30] See, e.g., In re Adelphia Comm’cns, Corp., Case No. 02-41729 (Bankr. S.D.N.Y. Feb. 6, 2006) (J. Gerber) (declining to appoint an examiner because, among other reasons, the same result could be achieved in a more efficient and economic manner through an investigation conducted by the committees); In re Bradlees Store, Inc., 209 B.R. 36, 39 (Bankr. S.D.N.Y. 1997) (declining to appoint examiner where such would be “duplicative, needless and wasteful”); In re Schepps Food Stores,Inc., 148 B.R. 27, 30 (S.D. Tex. 1992) (“a creditor cannot use the provision [for appointment of an examiner] to disrupt the proceedings”); In re Calpine Corp., Case No. 05-60200 (Bankr. S.D.N.Y. Oct. 24, 2007) (J. Lifland) (refusing to appoint examiner in part because the requesting party’s “ill-timed motion smacks . . . of litigation leverage . . . ”).
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[31] In several of the cases, the debtor was permitted to remain in possession because the dishonest management had been displaced by either new management or an independent fiduciary like a chief restructuring officer. However, this did not occur in all cases.
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[32] For example, it was clear from the outset of Tribune Company’s bankruptcy case that there were substantial questions regarding the debtor’s management in connection with the debtor’s leveraged buyout. Nevertheless, the debtor remained in possession. About nine months into the case, a motion to appoint an examiner was filed, and, nearly ten months later, a similar motion brought by a different party was granted. All the while, progress towards the development of a plan of reorganization was slow to come because of the questions regarding the LBO and the debtor’s management’s involvement therein. When the examiner’s report was released, it became clear that the debtor’s efforts to settle claims through a plan of reorganization would fail and a new plan of reorganization would need to be proposed. The outcome of the examiner’s review essentially eviscerated more than a year’s worth of reorganization efforts. All the while, the bankruptcy case was running professional fees and expenses chargeable to the debtor at about eight to ten million dollars per month. (Feb. 18, 2010 Hr’g Tr. 38:15-24) (David Kurtz, Tribune’s financial advisor, testifying).
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[33] In re Adelphia Comm’cns Corp., 336 B.R. 610, 665 (Bankr. S.D.N.Y. 2006).
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[34] In re Gaslight Club, Inc., 782 F.2d 767, 770-71 (7th Cir. 1986).
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[35] Id. at 771.
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[36] See Rushton v. Am. Pacific Wood Prods. Inc. (In re Americana Expresways, Inc.), 192 B.R. 763, n.5 (D. Utah 1997).
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[37] See In re Blue Stone Real Estate, Construction & Development Corp., 392 B.R. 897, 902 (Bankr. M.D. Fla. 2008); In re Adelphia Comm’cns Corp., 336 B.R. at 665.
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[38] See In re Adelphia Comm’cns Corp., 336 B.R. at 667.
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[39] See, e.g., id. at 669 (“Without deciding the outer limits on a court’s power to prescribe conditions on the rights and powers of a debtor in possession under section 1107(a), it appears obvious to the Court that it should use its discretion in this regard only when the conditions would be in the interests of creditors, and not prejudicial to them.”)
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[40] In re Regensteiner Printing Co., 122 B.R. 323 (N.D. Ill. 1990).
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[41] In re Zerodec Mega Corp., 39 B.R. 932, 934-35 (Bankr. E.D. Pa. 1984).
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[42] In re Lyon & Reboli, Inc., 24 B.R. at 154.
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[43] See, e.g., In re Stone Ridge Assocs., Ltd. P’ship, 142 B.R. 967, 974 (Bankr. D. Kan. 1992); In re Curlew Valley Assocs., 14 B.R. 506, 510 (Bankr. D. Utah 1981) (the language “permits judicial oversight where the debtor in possession acts as a trustee. . . . Such particularized draftsmanship suggests a desire to monitor debtors in possession but to allow fuller rein for trustees in the management of the estate.”); In re Lyon & Reboli, Inc., 24 B.R. 152, 154-55 (Bankr. E.D.N.Y. 1982); cf. In re Airlift Int’l, Inc., 18 B.R. 787, 789 (Bankr. S.D. Fla. 1982).
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[44] No. SA 07-13239 TA, 2007 WL 7025114, at *5 (Bankr. C.D. Cal. Nov. 20, 2007)
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[45] 37 B.R. 3 (Bankr. S.D. Ohio 1983).
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[46] Id. at 5.
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[47] Id. at 10-11.
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[48] Id. at 13.
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[49] Id.
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[50] Id. at 17 (emphasis removed).
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[51] Id.
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[52] See also In re Potter Instrument Co., Inc., 593 F.2d 470, 475 (2d Cir. 1979) (Chandler Act case) (noting that bankruptcy courts have equitable powers that justify denying a petition for a special meeting to elect new directors when the “election might result in unsatisfactory management” that would jeopardize the rehabilitation and the rights of creditors and stockholders).
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[53] See, e.g., In re Lifeguard Indus., Inc., 37 B.R. at 17 (“Thus, the Court has an obligation to scrutinize the actions of the corporation when asked by a party in interest to do so.”).
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[54] See, e.g., Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009).
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