Bankruptcy

District Court: Bankruptcy Court Must Appoint Examiner If Requirements Of §1104(c)(2) Are Established

By Scott Riddle

The District Court held that the language of 11 U.S.C. §1102 requires the appointment of an Examiner if certain facts are established. The Bankruptcy Court's Order denying the US Trustee's Motion to Appoint an Examiner was reversed. 

Donald Walton, US Trustee v. Cornerstone Ministries Investments, Inc., 2008 WL 5169523 (N.D. Ga. Dec. 5, 2008) (click here for .pdf of order) (click here for discussion of Cornerstone Chapter 11 case).

Th US Trustee sought the appointment of an examiner pursuant to 11 U.S.C. 1104(c) ...  

to conduct an investigation into and provide a public, transparent and objective report on: (1) the events and circumstances leading to [d]ebtor's shift in late 2004 from making loans only to churches and other non-profit organizations to making loans to for-profit developers, including related entities and/or entities with which it had other business relationships and/or shared common officers or directors; (2) the extent, if any, to which this shift in [d]ebtor's business plan was motivated or influenced by self-dealing on the part of its officers, directors, or professional advisers; and (3) whether and to what extent purchasers of the [i]nvestor [b]onds were notified of this shift in [d]ebtor's business plan and whether and to what extent they may have claims against broker-dealers or others arising from their purchase and/or retention of the [i]nvestor [b]onds.

The Bankruptcy Court denied the motion primarily on the grounds that the Official Committee of Unsecured Creditors was investigating many of the issues and the appointment of an Examiner would be duplicative.  Click here for Bankruptcy Court Order. The US Trustee appealed.

The District Court reversed and ordered the appointment of an Examiner.

Section 1102 of the Bankruptcy Code provides as follows:

If 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. 

The parties disputed whether § 1104(c)(2) is mandatory or discretionary. The US Trustee argued that the use of “shall” is mandatory, while Cornerstone argued that the statute permitted the bankruptcy judge to exercise discretion when a US Trustee requested an Examiner.  The Court agreed with the US Trustee:

On its face, the statute appears to require the appointment of an examiner if certain requirements are met. The only appellate court to consider the question reached the same conclusion as this court, explaining that “[t]he provision plainly means that the bankruptcy court ‘shall’ order the appointment of an examiner when the total fixed, liquidated, unsecured debt exceeds $5 million, if the U.S. trustee requests one.”  Morgenstern v. Revco D. S., Inc. (In re Revco, D. S., Inc.), 898 F.2d 498, 500-01 (6th Cir.1990). Furthermore, every district court and nearly every bankruptcy court that has confronted the question has also read the provision to be mandatory on its face...

Because “the meaning of statutory language, plain or not, depends on context,” the court must consider the text of § 1104(c) (2) in light of § 1104 as a whole... Such a contextual analysis only strengthens the court's conviction; the mandatory nature of § 1104(c)(2) is particularly clear when compared with the discretionary nature of § 1104(c)(1). Whereas § 1104(c)(1) predicates the appointment of an examiner on the court's determination that it is in the “interests of creditors, any equity security holders, and other interests of the estate,” § 1104(c)(2) only requires the debtor's fixed, liquidated, unsecured debts to exceed $5,000,000. “A provision for discretionary appointment, where the court is to consider the interests of parties in making its own determination whether an examiner is necessary, followed by a provision that only considers whether a dollar criterion has been satisfied, is conclusive that the second provision is compelling on the court.”...

Appellees insist that it is unnecessary to look beyond the plain meaning of the text to find discretion, as they argue that the phrase “as is appropriate”  endows bankruptcy judges with complete discretion over the scope-and, by extension, the existence-of the examiner's investigation. As one court confronting an identical argument explained, however, “[t]his reasoning is both grammatically and contextually wrong. In the provision, ‘as is appropriate’ modifies ‘investigation.’ The statute allows the court to determine the scope, length, and conduct of the investigation, rather than the appointment itself.”...

Conclusion -  On its face, the plain language of the statute requires a bankruptcy judge to appoint an examiner in certain situations. This case presents such a situation: the bankruptcy court has not appointed a trustee; a plan has not yet been confirmed; the United States trustee has requested the appointment of an examiner; and debtor's fixed, liquidated, unsecured debts equal roughly $143,000,000, far exceeding the $5,000,000 threshold. The court shares the bankruptcy court's and appellees' concerns for efficiency and preserving the bankruptcy estate. Nonetheless, the statute is clear, and, “[w]hile Congress may not have foreseen the problems that arise when discretion over an appointment of an examiner is missing, that is not sufficient grounds for refusing to give effect to the plain meaning of the statute.” For the foregoing reasons, the judgment of the bankruptcy court [1-3] is hereby REVERSED and the case is hereby REMANDED to the bankruptcy court with instructions to order the appointment of an examiner under 11 U.S.C. § 1104(c)(2)

Full post as published by Georgia Bankruptcy Blog on December 12, 2008 (boomark / email).