Not Required, But Still Appropriate - Judge Glenn Appoints Examiner ...


The chapter 11 case of mortgage lender and servicer Residential Capital, LLC (“ResCap”) is fascinating on a number of levels. Its parent company, Ally Financial, Inc. (“AFI”), hopes to use ResCap’s bankruptcy to extricate itself from potential liabilities arising from the collapse of the residential housing market at the end of the last decade. To that end, AFI has welcomed a thorough investigation in the chapter 11 case of its relationship with ResCap and transactions between the two entities, in the hope that a showing of no impropriety can form the basis for a global settlement that can be approved by the bankruptcy court. 

One question that has arisen in the early stages of the case is whether the investigation should be undertaken by ResCap’s official committee of unsecured creditors (the “Committee”), or by an independent examiner appointed by the bankruptcy court. A motion filed by Berkshire Hathaway, Inc. (“Berkshire”), a major ResCap creditor, asserted that the appointment of an examiner is mandatory in this case under the plain language of Section 1104(c) of the Bankruptcy Code. ResCap and the Committee responded that, notwithstanding the evident requirement, the bankruptcy court had discretion not to appoint an examiner, particularly in view of the investigation by the Committee that is already underway. Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York ruled this week that the Bankruptcy Code does not mandate the appointment of an examiner, but nonetheless determined that the circumstances of this case warrant such an appointment. 

(Kelley Drye & Warren LLP represents a significant party in interest in the ResCap chapter 11 case, but has taken no part in the matters discussed in this post.) 

The language of Section 1104(c) states in relevant part:

[O]n request of a party in interest . . . the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate . . . 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 . . . exceed $5,000,000.      

The issue of whether an examiner is mandatory upon request in cases where the fixed debts exceed $5,000,000 has sharply divided courts and flummoxed practitioners. Judge Glenn noted that several courts, including the only circuit court to consider Section 1104(c), have held that the word “shall” eliminates judicial discretion and requires the appointment of an examiner upon request in any case where “fixed, liquidated, unsecured debts . . . exceed $5,000,000.” Conversely, other courts have concluded that the qualifying words “as is appropriate” clearly give a court the authority to determine whether such an appointment is in fact “appropriate”, and thus the power to deny such an appointment in circumstances where it would be not be. 

After considering the cases on both sides, Judge Glenn determined that the “as is appropriate” qualification conveys discretion on the bankruptcy court as to whether to appoint an examiner. He then concluded that because there were no facts or circumstances regarding ResCap’s chapter 11 case that would make the appointment of an examiner “inappropriate”, Berkshire’s motion should be granted.           

ResCap and the Committee had largely focused in their objections on the investigation already commenced by the Committee, and that the appointment of an examiner would be duplicative. While Judge Glenn intimated that a completed investigation might warrant a different conclusion, he noted that in this case the Committee’s investigation is still in its early stages. “Notwithstanding the ability of any other party to effectively and expeditiously investigate the Debtors . . . [a]ll of [the] circumstances [requiring the appointment of an examiner] are present here.”

The scope, timing and budget for the examiner’s investigation remain to be determined. Judge Glenn indicated in remarks from the bench before he rendered the opinion that he was highly sensitive to concerns regarding delay and unnecessary expense, and that he fully expected coordination and cooperation among the parties. The manner in which the Committee’s and the to-be-appointed examiner’s investigations ultimately proceed and co-exist will be closely watched and could serve as a model in other large cases where this issue arises.