In February 2023, the Bankruptcy Court for the District of Delaware ruled that the appointment of an examiner under Section 1104(c)(2) of the Bankruptcy Code is discretionary, and the bankruptcy court denied such an appointment. The United States Trustee appealed that ruling and moved to certify the order for direct appeal to the Third Circuit.
On January 19, 2024, the Third Circuit Court reversed the bankruptcy court’s decision, holding section 1104(c)(2) mandates the bankruptcy court grant a United States Trustee’s Motion to Appoint an Examiner, where:
- the unsecured debt minimum of $5 million has been met and
- no trustee has been appointed.
Moreover, the Third Circuit found that the preservation of creditor interest requires independent investigation of debtors’ conduct, where there was such pervasive fraud, which is further protected by requiring an examiner’s findings be made public.
The Third Circuit remanded the case to the bankruptcy court to oversee the appointment of an examiner.
On remand at a hearing on January 24, 2023, the bankruptcy court stated that the appointment of an examiner at this time is premature pursuant to the appointment procedures outlined in section 1104(d). After the Third Circuit issues requisite mandate pursuant to the Bankruptcy Code, the United States Trustee will thoroughly review the prospective examiners and submit a motion to the bankruptcy court to appoint the named individual as examiner. The United States Trustee agreed to confer with the debtors and the committee of unsecured creditors on the same.
Once appointed, the examiner will review any past and active investigations of the parties regarding the proceedings, recommend any necessary supplemental investigations, and provide a report summarizing the examiner’s findings. Specifically, the bankruptcy court stated that the examiner should investigate three main issues:
- allegations of a conflict of interest existing between the debtors and Sullivan & Cromwell LLP (S&C),
- the alleged continued employment of individuals involved in fraudulent activity by FTX, and
- the Debtors’ use of FTT (FTX’s cryptocurrency) to artificially inflate the value of FTX prepetition.
The bankruptcy court anticipates that the examiner can provide a full summary of the investigation within 30-45 days of the examiner’s appointment, and that total costs associated with the examiner’s duties should be in the “seven figure range.”
Generally speaking, examiners conduct an independent investigation of claims and issues in a bankruptcy case. Here, the bankruptcy court seemingly narrowed the examiner’s scope of work, but that narrowing may nevertheless impact FTX’s bankruptcy case. The examiner will—at a minimum—be scrutinizing S&C’s decisions and will provide a report to the bankruptcy court on his or her conclusions about them. This process may also impact your case depending on the examiner’s findings. As the scope of the examiner investigation is further clarified, we will update you on the progression of it.
If you have questions or would like more information, please contact Tara Pakrouh (tpakrouh@morrisjames.com; 302.888.6836) or Eric Monzo (emonzo@morrisjames.com; 302.888.5848) or another member of our bankruptcy and restructuring practice.
