Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies

Abstract:     
This paper presents hand-collected docket-level and interview data on the use of examiners in large chapter 11 reorganizations. “Examiners” are private individuals appointed by the Unites States Trustee at the direction of a Bankruptcy Court to investigate and report on the causes of a company’s failure.

Chapter 11 of the Bankruptcy Code provides that examiners “shall” be appointed if requested in any case involving, among other things, more than $5 million in certain types of unsecured debt. In creating this position, Congress apparently expected examiners to be ubiquitous in the reorganization of large, public companies.

In fact, they are rarely sought, and even less frequently appointed. Analysis of 576 of the largest chapter 11 reorganizations from 1991 to 2007 shows they were requested in only 15% of cases. Despite the seemingly mandatory language of the Bankruptcy Code, they were appointed in fewer than half of the cases where sought, or less than 7% of the sample.

The infrequent use of examiners raises larger questions about the role of information-forcing and governance mechanisms in the reorganization system. This paper explores these questions and their implications. It also proposes changes to chapter 11 to address issues involving examiners.

Number of Pages in PDF File: 79

Keywords: Bankruptcy, Chapter 11, Examiners, Public Investors, Reorganization, Debtors, Creditors, Creditors committee, Equity committee, Debtor in possession, Information-forcing, Securities fraud, Legislative history, Docket-level data,

JEL Classification: K20, K22

Accepted Paper Series