Chapter 11 Examiner The Basics and Successfully Fulfilling the Position Part II

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Apr 2005

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An examiner's roles will vary from case to
case. Therefore, there are no hard, fast rules that he can follow to
make his evaluation of a particular case a definite success. However,
every examiner would do well to keep in mind several factors in order to
further his goal of making his examination a success.

First is the "qualification" factor. An examiner should become
familiar with what his position entails. A newly appointed examiner
should study prior examiner's reports so that he can "get the feeling of
and understanding about" the process he is going to engage in, "its
duties and procedures and the kind of report in which his activities
will culminate."<a href="#1" name="1a">1</a>
Furthermore, he should speak with and draw from the experience of the
office of the U.S. Trustee, as this office can be of great help in
connection with fulfilling the examiner's duties.<a href="#2" name="2a">2</a> It may also be able to provide
the examiner with some helpful background on the case. If the appointed
examiner has previously acted as an examiner, he may already be familiar
with and understand the process. However, it can do no harm for the
experienced examiner to "brush up" on what the examination process
requires.

Second is the "needs" factor. The court that appointed the examiner
did so to meet particular needs. An examiner should always keep in mind
the reasons that led to the appointment. Generally, the court appoints
the examiner because the court and the debtor's creditors want an
investigation into factually supported allegations or to retrieve
necessary information, but there is not enough evidence to support the
appointment of a trustee, and the costs of the examiner have been
determined not to be disproportionately high.<a href="#3" name="3a">3</a> Thus, an examiner needs to be effective
but cost-efficient at the same time. He does not want to act in such a
way that will unnecessarily run up costs for the estate, but he does
want to adequately perform his duties in a complete and timely
manner.<a href="#4" name="4a">4</a>

Third is the "focus" factor. Throughout the examination, unless
otherwise ordered by the court, the examiner does not get involved in
the control of the day-to-day operations of the debtor's
business.<a href="#5" name="5a">5</a> The
debtor remains in possession and continues to run his business, and the
examiner should not interfere with that. Thus, an examiner does not want
to become over-involved in the debtor's business and run the risk of
being viewed as intrusive.<a href="#6" name="6a">6</a> He "should not be a roving critic or
unrestrained ombudsman."<a href="#7" name="7a">7</a> Acting as such or becoming over-involved
with the debtor's business can lead to problems with the examiner's
impartiality and disinterestedness and can lead to friction between the
parties and the examiner, causing the examination to be hindered.

Fourth is the "tools" factor. An examiner needs to know and
understand the duties given to him by the court's order prior to
beginning his examination.<a href="#8" name="8a">8</a> If he does not know what he has been
charged with doing, he will never be able to effectively fulfill his
position. He should carefully read the order and determine what he needs
to do to fulfill the duties given to him.<a href="#9" name="9a">9</a> Each examiner is unique because the duties
given him are particularized to his case.<a href="#10" name="10a">10</a> Therefore, it is up to each examiner to
determine what must be done and, in the event of confusion, it is his
duty to ask the court for clarification prior to
proceeding.<a href="#11" name="11a">11</a> He
must also stay within the scope of the duties given to him and within
the scope of his position as examiner.<a href="#12" name="12a">12</a> He must remember that unless the court
orders otherwise, he is not charged with, or "permitted to be concerned
with, undertaking an evaluation of the feasibility or fairness of the
reorganization plan."<a href="#13" name="13a">13</a> He is usually "primarily charged with
making inquiries that are designed to lead to an increase in
distributions from the debtor's estate by bringing in assets that have
been diverted or by recommending litigation that might result in a
decrease in claims or an increase in the debtor's assets."<a href="#14" name="14a">14</a>

Fifth is the "ethics and compensation" factor. In connection with the
above, the examiner must be sure he is familiar with the duties required
of him that may possibly be outside of the court's order. These are the
duties required of him by the Code, the Federal Rules of Bankruptcy
Procedure and the common law and may not be found expressly written in
the court's order. The examiner must inform the court at any time when a
problem may or has arisen with his disinterestedness or
impartiality.<a href="#15" name="15a">15</a>
He must also inform the court of any fee agreements that he has or may
have entered into.<a href="#16" name="16a">16</a> He must also remember that he owes
fiduciary duties, including the duty of loyalty to the shareholders and
the creditors.<a href="#17" name="17a">17</a>

Sixth, an examiner should not be duplicative in his efforts.
Duplication leads to unnecessary costs for the estate.<a href="#18" name="18a">18</a> For example, he needs to
determine if there has been an organization or committee that has been
involved with the debtor that has conducted interviews, compiled data,
etc.<a href="#19" name="19a">19</a> If a
committee or organization exists, then he needs to try to retrieve the
information and documents from it instead of duplicating all of its
work.<a href="#20" name="20a">20</a> Another
type of duplication that must be avoided is the examiner's repetition of

his efforts. If an examiner has already compiled particular data
or interviewed particular witnesses, he does not need to repeat these
efforts unless he reasonably thinks that to do so will lead to new
information. At all times, his services need to be reasonably calculated
to benefit the debtor's estate at the time rendered.<a href="#21" name="21a">21</a> If the examiner's services
are deemed not to be beneficial to the estate at the time they were
rendered or if they are deemed to be redundant or excessive, then the
fees requested for the services will probably be reduced.<a href="#22" name="22a">22</a> It does not matter if in the
end the services benefited the estate because, in determining this
issue, the court does not look at whether the services will
ultimately benefit the estate, it only determines whether the
services were reasonably calculated to benefit the estate at the time
they were rendered.<a href="#23" name="23a">23</a>

Last is the "quality" factor. The interim and final reports of the
examiner should be well-written, well-organized and
well-researched.<a href="#24" name="24a">24</a> His "final report and the work necessary
to produce it" should be "sufficiently conclusive and definitive to be
deemed reasonably likely to benefit the debtor's estate."<a href="#25" name="25a">25</a> An examiner should be
familiar with how such reports are written, especially since due to the
"nature of the customary examiner's charge, being based upon inquiring
into the activities of third parties...causes an emphasis in the
examiner's report that is different from that found in any other
documents in the reorganization or corporate field."<a href="#26" name="26a">26</a> A report, well-written and
communicated, assists a court in being able to better understand and
more quickly assess issues affecting the debtor and its estate and move
the case to a faster resolution.

<h4>An Application: Enron</h4>

In his April 8, 2002, order, Judge Arthur Gonzalez ordered
that a second examiner be appointed in the Enron fiasco.<a href="#27" name="27a">27</a> In this order, the judge also
authorized the Enron examiner to perform particular tasks, including
investigate and report on transactions involving Enron and any entity
controlled by Enron, investigate Enron and their professionals, and
investigate all transactions involving specified items.<a href="#28" name="28a">28</a> Neal Batson, an
attorney with the Atlanta firm Alston & Bird, was later recommended
and approved as the examiner for Enron.

Batson met the qualification factor because he is familiar with what
the examiner position requires, the examination process and the law
regarding examiners. He has practiced as a bankruptcy attorney for more
than 30 years, has been an examiner in a previous large bankruptcy case,
and served from 1993-99 as a member of the advisory committee on the
rules of bankruptcy procedure of the judicial conference of the United
States.<a href="#29" name="29a">29</a>

Some of the particular needs of Enron were to investigate the
allegations surrounding management and to recoup the losses due to
mismanagement and questionable transactions as well as a host of other
problems. Batson seems to have done well because his investigations
complied with his orders from the court and were calculated to find out
how severe the fraud and mismanagement were. He has also proposed
several means of recovering assets for estates. However, there may be
problem areas of the business that were not thoroughly
investigated—for example, the extent to which there were
professionals involved in some of the transactions.

Batson remained focused on what his job required of him and did not
become over-involved in the debtor's business. He was informed about the
debtor's business, as can be seen in his four reports. He involved
himself in the business only as much needed for him to delve into the
prior transactions and other problems to complete his investigation as
ordered by the court.<a href="#30" name="30a">30</a>

In his investigation of Enron, Batson employed the tools of his
position in an effective, ethical manner. He understood his duties,
including those not expressly written in the court's order, and carried
them out effectively. We know that he read the order, as he reproduces
part of it in the first of his reports.<a href="#31" name="31a">31</a> He stayed within the scope of his
duties, which was not hard because Judge Gonzalez gave him wide latitude
in the investigation.<a href="#32" name="32a">32</a> His investigation lasted for 18 months
and produced four in-depth reports totaling more than 4,500 pages,
"relying on 266 sworn transcripts and 40 million pages of
documents."<a href="#33" name="33a">33</a>

Batson has recommended several avenues that could result in the recovery
of billions of dollars for the Enron estate.<a href="#34" name="34a">34</a> He hired many other professionals to
assist him in the investigation, which probably allowed the
investigation to go faster (and to be more costly).<a href="#35" name="35a">35</a> In fact, his efforts in the
investigation have been praised as being in-depth and providing valuable
tools that others can use to benefit the company.<a href="#36" name="36a">36</a> However, some shareholders
and employees are disgruntled by the costs and efforts of the
investigation.<a href="#37" name="37a">37</a>
This is a result of the fact that shareholders did not get anything due
to the costs<a href="#38" name="38a">38</a>
and the belief that some of the investigation was
duplicative.<a href="#39" name="39a">39</a>

Some questions have been raised regarding whether Batson's efforts
were duplicative at times. He conducted hundreds of interviews and
depositions over the course of his investigation.<a href="#40" name="40a">40</a> Some of those interviewed by
Batson have called his efforts "overdone," "overkill" and wearing on
those involved.<a href="#41" name="41a">41</a>
He has been criticized for his continuous coverage of the same topics
over and over again.<a href="#42" name="42a">42</a> Substantial creditors do not seem to
have voiced any objections, so the few who are outspoken about their
disapproval of Batson's tactics may not have any recourse.<a href="#43" name="43a">43</a> On the other hand, the
continuous coverage of topics could have been a strategic tactic used by
Batson to finally get the answers he wanted and needed to complete his
investigation properly.

Questions also arise on the topic of whether his services were
reasonably calculated to benefit the estate at the time they were
rendered and whether he was effective while being
cost-efficient.<a href="#44" name="44a">44</a>

The costs of his investigation are large. As his investigation proceeded
and his fee applications appeared, just how large became an issue on
many people's minds. At the end of the 18-month examination of Enron,
the legal tab from his law firm was $87.5 million.<a href="#45" name="45a">45</a> According to court documents,
the firm billed $496,000 for the almost 1,700 hours spent by the firm's
employees preparing the bills.<a href="#46" name="46a">46</a> The bill for Batson alone is $1.8
million.<a href="#47" name="47a">47</a>
However, the effectiveness of his investigation could also be large,
which can be seen by just a few examples from his investigation. He
"produced four [in-depth] reports totaling more than 4,500
pages."<a href="#48" name="48a">48</a> Based
on his investigations and reports, the Enron estate may be able to
recover a total of $4.6 billion from numerous companies and committees.
Actions to recover $957 million from Whitewing Associates and $84
million from Ken Lay (the former chairman) and his wife have already
commenced.<a href="#49" name="49a">49</a>
Batson also found that Enron could recover $53 million that was paid to
employees during the 30 days prior to the bankruptcy<a href="#50" name="50a">50</a> and that if Enron redefined
certain transactions, it could lead to a $500 million
recovery.<a href="#51" name="51a">51</a> These
are just some of the examples of what Batson produced.

His work has been called "overkill" by some, but it continues to be
hard to make this determination when we do not know the final outcome of
Enron.<a href="#52" name="52a">52</a> A key
question, according to Nancy Rapoport, Dean of the University of
Houston Law Center, is whether Batson's efforts will recover enough cash
and assets to justify his expenses.<a href="#53" name="53a">53</a> If Batson's efforts return billions of
dollars to the Enron estate, most people will probably say that his
expenses are justified; however, if his efforts do not return large
amounts, the expenses will probably be criticized by many as being too
much. In sum, the answer to whether Batson was effective and
cost-efficient will not be resolved until Enron is finalized.

Finally, there is little doubt that Batson's reports were
well-written, well-organized and well-researched. His reports provided
an in-depth evaluation of the issues raised and provided valuable tools
for the court and others to begin the recovery of money for the
estate.<a href="#54" name="54a">54</a> His
reports were so well done that he has received praise for
them.<a href="#55" name="55a">55</a>

<h4>Conclusion</h4>

A chapter 11 examiner is a unique figure in bankruptcy that will,
over time, become as well known in bankruptcy law as the trustee is
today. For now, the case law, rules and opinions regarding examiners
will continue to evolve and develop as each new examiner is appointed.
An examiner should be able to have greater success in fulfilling his
role to the estate and assisting the estate if he adheres to the points
outlined in this article. Overall, keeping in mind that his purpose is
to benefit the estate, he must use his best judgment in deciding what to
do, how to do it and when to do it. He should view his appointment as an
honor bestowed upon him by a court that believes he is the best person
for this case, and he should strive to live up to that honor.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Kaplan, supra note
31 at 442 (see Part I). <a href="#1a">Return to article</a>

<a name="2">2</a> Id. <a href="#2a">Return to article</a>

<a name="3">3</a> In re Gilman Servs.
Inc., 46 B.R. 322, 322 (Bankr. D. Mass. 1985). <a href="#3a">Return
to article</a>

<a name="4">4</a> Ch. 11 Reorg. 2d Ed.
§7.9. <a href="#4a">Return to article</a>

<a name="5">5</a> Zaretsky, supra
note 2 at 908 (see Part I). <a href="#5a">Return to article</a>

<a name="6">6</a> See Kaplan,

supra note 31 at 440 (discussing an examiner who dominated
proceedings and acted as a type of glorified party to the case)
(see Part I). <a href="#6a">Return to article</a>

<a name="7">7</a> Id. at 447. <a href="#7a">Return to article</a>

<a name="8">8</a> In re Big Rivers Elec.
Corp., 213 B.R. 962 (Bankr. W.D. Ky. 1997). <a href="#8a">Return to
article</a>

<a name="9">9</a> See Kaplan,
supra note 31 at 441 (see Part I). <a href="#9a">Return to
article</a>

<a name="10">10</a> Id. <a href="#10a">Return to article</a>

<a name="11">11</a> See Id. <a href="#11a">Return to article</a>

<a name="12">12</a> Big Rivers, 213
B.R. 962. <a href="#12a">Return to article</a>

<a name="13">13</a> Kaplan, supra
note 31 at 444 (see Part I). <a href="#13a">Return to article</a>

<a name="14">14</a> Id. <a href="#14a">Return to article</a>

<a name="15">15</a> See Big Rivers,
355 F.3d 415. <a href="#15a">Return to article</a>

<a name="16">16</a> See Id. <a href="#16a">Return to article</a>

<a name="17">17</a> Id. <a href="#17a">Return to article</a>

<a name="18">18</a> Id. at 442-43.
<a href="#18a">Return to article</a>

<a name="19">19</a> Id. <a href="#19a">Return to article</a>

<a name="20">20</a> Id. (discussing
that the SEC had done an investigation prior to his appointment, and
that to repeat the SEC's efforts would be duplicative and incur
unnecessary expenses for the estate). <a href="#20a">Return to
article</a>

<a name="21">21</a> See Kovalesky v.
Carpenter, 1997 WL 666299 (Bankr. S.D.N.Y 1997). <a href="#21a">Return to article</a>

<a name="22">22</a> See, e.g., Id.; see,
also, 11 U.S.C. §330 (compensation of officers). <a href="#22a">Return to article</a>

<a name="23">23</a> Kovalesky, 1997
WL 666299. <a href="#23a">Return to article</a>

<a name="24">24</a> Id. (discussing
the examiner's report being beyond dispute under §330). <a href="#24a">Return to article</a>

<a name="25">25</a> Id. <a href="#25a">Return to article</a>

<a name="26">26</a> Kaplan, supra
note 31 at 444 (see Part I). <a href="#26a">Return to article</a>

<a name="27">27</a> Order Pursuant to 11
U.S.C. §§1104(c) and 1106(b), Directing Appointment of Enron
Corp. Examiner, In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y.
2002), available at <a href="http://www.elaw4enron.com">http://www.elaw4enron.com</a>, docket
entry no. 2836 [hereinafter Appointment Order]. <a href="#27a">Return to
article</a>

<a name="28">28</a> See Id. In part,
the order authorized and directed the examiner to inquire into, inter
alia, all transactions...(i) involving special-purpose vehicles or
entities created or structured by the debtors or at the behest of the
debtors (SPEs) that are (ii) not reflected on the Enron Corp. balance
sheets, or that (iii) involve hedging using the Enron Corp. stock, or
(iv) as to which the Enron examiner has the reasonable belief are
reflected, reported or omitted in the relevant entity's financial
statements not in accordance with generally accepted accounting
principles, or that (v) involve potential avoidance actions against any
pre-petition insider or professional of the debtors. Id. <a href="#28a">Return to article</a>

<a name="29">29</a> "Batson Recommended as
Enron Examiner," BCD News & Comment (June 6, 2002). <a href="#29a">Return to article</a>

<a name="30">30</a> See First Interim
Report of Neal Batson, In re Enron Corp., No. 01-16034 (Bankr.
S.D.N.Y. 2002), Second Interim Report of Neal Batson, In re Enron
Corp., No. 01-16034 (Bankr. S.D.N.Y. 2003); Third Interim Report
of Neal Batson, In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y.
2003), and Final Report of Neal Batson, In re Enron Corp., No.
01-16034 (Bankr. S.D.N.Y. 2003). <a href="#30a">Return to article</a>

<a name="31">31</a> First Interim Report
of Neal Batson, In re Enron Corp., No. 01-16034 (Bankr. S.D.N.Y.
2002). <a href="#31a">Return to article</a>

<a name="32">32</a> Id. <a href="#32a">Return to article</a>

<a name="33">33</a> Maizel, Samuel R.,
"Examiners on the Rise; Courts Increasingly Appoint Professionals in Big
Cases to Report on Irregularities," Nat'l. Law J., Vol. 26, No. 59 (Nov.
22, 2004) at 18. <a href="#33a">Return to article</a>

<a name="34">34</a> Id. <a href="#34a">Return to article</a>

<a name="35">35</a> Lin, Anthony, "Enron
Examiner Billed Estate for $100 Million; Batson Seeks End of Appointment
for Inquiry," N.Y.L.J. (Dec. 5, 2003) at 1. <a href="#35a">Return to
article</a>

<a name="36">36</a> See Rankin,

supra note 32. <a href="#36a">Return to article</a>

<a name="37">37</a> See Id.; see
Berger, supra note 39. <a href="#37a">Return to article</a>

<a name="38">38</a> See Rankin,
supra note 32. <a href="#38a">Return to article</a>

<a name="39">39</a> See Berger,
supra note 39. <a href="#39a">Return to article</a>

<a name="40">40</a> Id. <a href="#40a">Return to article</a>

<a name="41">41</a> Id. <a href="#41a">Return to article</a>

<a name="42">42</a> Id. <a href="#42a">Return to article</a>

<a name="43">43</a> See Id. <a href="#43a">Return to article</a>

<a name="44">44</a> See, e.g., "The
Man Investigating Enron Knows How to Bill," Consumer Bankr. News
Vol. 12, No. 15 (Apr. 18, 2003). <a href="#44a">Return to article</a>

<a name="45">45</a> Rankin, Bill, "Enron's
Legal Tab Close to $1 Billion; Atlanta Firm Among Top Recipients,"
The Atlanta Journal-Constitution (Nov. 14, 2004) at 1A. <a href="#45a">Return to article</a>

<a name="46">46</a> Id. <a href="#46a">Return to article</a>

<a name="47">47</a> Id. This is an
average amount of $586 an hour. <a href="#47a">Return to article</a>

<a name="48">48</a> Id. <a href="#48a">Return to article</a>

<a name="49">49</a> Id. <a href="#49a">Return to article</a>

<a name="50">50</a> BCD News &
Comment, Vol. 7, No. 2 (Mar. 28, 2003). <a href="#50a">Return to
article</a>

<a name="51">51</a> "Enron First Examiner's
Report Questions Financial Dealings, Banks," BCD News &
Comment, Vol. 40, No. 4 (Oct. 11, 2002). <a href="#51a">Return to
article</a>

<a name="52">52</a> Berger, Eric, "Lawyer's
Inquiry Is Called 'Overkill,'" Houston Chronicle (May 21, 2003),
available at <a href="http://www.chron.com/cs/CDA/story.hts/special/enron/1897436">http://www…;.
<a href="#52a">Return to article</a>

<a name="53">53</a> Id. <a href="#53a">Return to article</a>

<a name="54">54</a> See Rankin,
supra note 32. <a href="#54a">Return to article</a>

<a name="55">55</a> Id. <a href="#55a">Return to article</a>

Journal Authors

Krista Renee Fuller

Journal Date

Friday, April 1, 2005 - 12:00

Bankruptcy Rule

2005

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