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FTX: Forcing The Examiner Mandate in the Third Circuit

It is a rare occasion that one can be assured with certainty that, if they file a motion with a bankruptcy court, it will be granted. But, in the Third Circuit, that is exactly what will happen if a creditor or other party in interest moves for an examiner to be appointed under Section 1104(c) of the Bankruptcy Code. Once considered to be within the discretion of a bankruptcy court “as is appropriate,” the appointment of an examiner is now guaranteed if the statutory predicates are fulfilled according to the Third Circuit Court of Appeals. This development is a marked departure from the status quo and has the potential to change an already litigious chapter 11 landscape. 

Examiners Generally

In chapter 11 cases, examiners are appointed by bankruptcy courts to investigate and analyze the affairs of a debtor and then issue a report of their findings. Section 1104(c) of the Bankruptcy Code provides:

If the court does not order the appointment of a trustee . . . 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.[1]

Thus, in any case where (x) a debtor’s unsecured debt exceeds $5 million (other than unsecured debt generally on account of operating expenses) and (y) either the United States trustee or a party in interest requests the appointment of an examiner, Section 1104(c)(2) of the Bankruptcy Code provides for a bankruptcy court to appoint an examiner. Once appointed, an examiner acts independently from the debtor and all other parties in interest (including the party that requested its appointment) to provide a neutral assessment of the debtor’s financial circumstances, potential causes for the debtor’s bankruptcy, and any possible corporate failures or fraud by the debtor’s management and/or other stakeholders.


Notwithstanding the statue’s express directive, some bankruptcy courts—including those in Delaware and New York—have considered Section 1104(c) discretionary by virtue of the phrase “as is appropriate.”[2] These courts reasoned that the cost of appointing an examiner, which is borne by the debtor’s estate, would be overly burdensome to the estate by funding an otherwise duplicative investigation already underway by other estate fiduciaries, such as a committee of unsecured creditors.

However, the Third Circuit Court of Appeals, in In re FTX Trading Ltd., recently joined the Sixth Circuit Court of Appeals in holding that once the statutory predicates are met for the appointment of an examiner, then bankruptcy courts “shall” appoint one.[3]  

The FTX Examiner Motion

By way of background, in early November 2022, the cryptocurrency world was shaken with the overnight collapse of FTX Trading Ltd. and over one hundred of its affiliates. Even after the commencement of the bankruptcy case, the circumstances leading to FTX’s bankruptcy filing and the role of its founder, Samuel Bankman-Fried, were clouded in mystery and became the subject of multiple investigations by the United States Congress, the Securities Exchange Commission, and the Department of Justice (among others). 

FTX’s chief restructuring officer submitted testimony that the FTX enterprise endured a “complete failure of corporate controls and [ ] a complete absence of trustworthy financial information” and that “[f]rom compromised systems integrity . . . to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”[4] Citing this testimony and “reasonable grounds to suspect that Bankman-Fried and others participated in actual fraud, dishonesty, or criminal conduct in the management of [FTX],” the United States Trustee requested the bankruptcy court to appoint an examiner pursuant to Section 1104(c) of the Bankruptcy Code.[5] 

Both FTX and the Official Committee of Unsecured Creditors opposed the United States Trustee’s request, arguing that an examiner “would be highly inappropriate, given that an investigation would create an unjustifiable cost for creditors, interfere with their efforts to stabilize FTX Group, duplicate their findings of management wrongdoing, and pose a security risk to cryptocurrency codes.”[6] The Delaware bankruptcy court agreed. It found that, while Section 1104(c)’s statutory predicates were fulfilled, the phrase “as is appropriate” in the statute permitted its decision to decline appointing an examiner.[7]

The Third Circuit Court of Appeals, however, reversed the Delaware bankruptcy court. Looking to the plain language of Section 1104(c), the court reasoned that “Congress made plain its intention to mandate the appointment of an examiner by using the word ‘shall,’ as in the Bankruptcy Court ‘shall’ appoint an examiner if the terms of the statute have been met.”[8] Further, the court addressed the concern that the mandatory appointment of an examiner may be duplicative or overly costly in holding that “as is appropriate” means “the court ‘retains broad discretion to direct the examiner’s investigation,’ including its scope, degree, duration, and cost.”[9] Thus, while the bankruptcy court has no discretion as to the appointment of an examiner once Section 1104(c) is met, the bankruptcy court has discretion to appropriately limit the scope of an examiner’s appointment “as is appropriate.”

Practical Considerations

The chapter 11 landscape is increasingly transforming into a proverbial battleground where competing stakeholders seek leverage in a variety of ways—including engaging in discovery and litigating otherwise routine matters in a bankruptcy case. Now, with the mandate of an examiner if Section 1104(c) is met, creditors and other parties in interest can put a debtor and other stakeholders through the paces of an additional investigation. Indeed, some courts have expressed concern that “[t]he appointment of an examiner would be inappropriate if the motion was filed for an improper purpose such as a litigation tactic to delay a case, or if there is no factual basis to conclude that an investigation needs to be conducted, or if an appropriate and thorough investigation has already been conducted (or is nearly complete) by a creditors committee or a governmental agency.”[10] While the Third Circuit contemplates that bankruptcy courts may limit the scope and costs associated with the appointment of an examiner “as is appropriate,” once Section 1104(c) is satisfied, different factions of creditors and parties in interest have the unequivocal right to have an examiner (or examiners) appointed to investigate potentially mutually exclusive topics of interest (such as a debtor’s internal business processes and management versus seemingly suspect transactions with third-parties).

This ultimately could prove to be a powerful tool for creditors within a bankruptcy case to raise red flags to the court for an examiner to investigate. Moreover, because an examiner is independent from all other parties in interest, the examiner has little incentive to short-circuit its investigation and can conduct a fulsome inquiry into specific topics highlighted by a creditor moving for its appointment. From a practical standpoint, creditors with institutional knowledge of a debtor and its management may now have another avenue to steer the trajectory of a case. And, because that examiners are mandatory at least in the Third and Sixth Circuits if Section 1104(c) is satisfied, certain investigations that would otherwise be forsaken in the interest of expediency or by lack of initiative on the part of a debtor and its management are now fair game for creditors and parties in interest. 

[1] 11 U.S.C. § 1104(c).

[2] See, e.g., In re Residential Capital, LLC, 474 B.R. 112, 121 (Bankr. S.D.N.Y 2012); In re Dewey & LeBoeuf LLP, 478 B.R. 627, 639 (Bankr. S.D.N.Y. 2012); In re Spansion, Inc., 426 B.R. 114, 127 (Bankr. D. Del. 2010).

[3] See In re FTX Trading Ltd., 91 F.4th 148 (3d Cir. 2024); see also, Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500-01 (6th Cir. 1990).

[4] See Declaration of John J. Ray in Support of Chapter 11 Petitions and First Day Pleadings, In re FTX Trading, Ltd., et al., No. 22-11068 (JTD) at Dkt. No. 24 (Bankr. D. Del. Nov. 17, 2022). 

[5] See Motion of the United States Trustee for Entry of an Order Directing the Appointment of an Examiner, In re FTX Trading Ltd., et al., No. 22-11068 (JTD) at Dkt. No. 176 (Bankr. D. Del. Dec. 1, 2022).

[6] See In re FTX Trading Ltd., 91 F.4th at 152.

[7] Id.

[8] Id. at 153.

[9] Id. at 156 (citing 5 Norton Bankr. L. & Prac. § 99:25 (3d ed. 2023)).

[10] In re Residential Capital, LLC, 474 B.R. at 121.

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Dallas G. Taylor is an attorney at Mintz who represents public and private companies, acquirers of distressed assets, lenders, equity holders, and other stakeholders in all aspects of bankruptcy proceedings, corporate restructurings, and insolvencies. His clients include companies in the financial services, health care, retail, and real estate industries.