In my prior post, I described some data we’ve generated on the somewhat surprisingly infrequent use of examiners in large Chapter 11 cases. I said that in this post, I would offer some thoughts on what is going on here.

Before revealing our theories, I should note that our data are preliminary. Although we have reviewed 650 dockets and hundreds if not thousands of pleadings, we have not yet found strong predictive trends in these data. We have also interviewed nearly 30 lawyers, judges, former examiners and other participants in the bankruptcy system. While these interviews are often illuminating, they are inherently subject to bias. In short: This is all preliminary and subject to change without notice.

First, why are they so rarely sought, even in cases where they should be mandatory? It’s difficult, if not impossible, to prove a negative. We don’t really know why people don’t do things. It’s hard to know what you’re observing when you see that something is not happening, even though you (or Congress) might expect it to.

The best theory we’ve heard so far—and we have some indirect quantitative support for this—is that the supposed beneficiaries of an examiner—the “investing public”—don’t want one because they will end up competing with him (or her). How? It’s complicated, but basically comes down to two things: discovery and dollars. Lawyers and judges we spoke to said they believed that the most likely movants—securities fraud plaintiffs (or their class counsel)–never ask for an examiner because they would then compete with the examiner to gather evidence from the debtor (e.g., depositions of officers and directors) and compete with the estate’s creditors (who will usually be senior in priority) for any recovery. In short, the investing public may not want an examiner because it won’t get them what they really want—money damages for securities fraud.

This explanation is subject to a number of objections and amplications that I won’t belabor here. But even if it is true, it doesn’t answer what are perhaps more important questions: When will they be sought and appointed, and what will they do?

Here, as in so many contexts, we find evidence to support both economic and non-economic theories. Economic explanations appear to take one or both of two paths. First, there seems to be a correlation between debtor size (as measured by assets and liabilities) and the presence of an examiner: The bigger the debtor, the more likely you’ll be to have an examiner. Second, there may be some relationship between the probability of estate recoveries and examiner appointments. In other words, courts may appoint examiners when they think the examiner will produce a roadmap to a litigation or settlement that will more than cover his or her estimated costs.

No surprises there.

There are also at least two non-economic explanations for what may be going on here. The first involves case complexity. There is some evidence that examiners will be sought and/or appointed in cases that are unusually complex, as evidenced by the number of entities in a debtor group, the complexity of the debtor’s business, and so on. The second non-economic theory involves contentiousness. Here, there is some evidence that examiners may be sought or appointed if there is a perceived power vacuum in the case, or a breakdown in the “normal” negotiations that are expected to occur.

I hasten to add that these are theories based only on preliminary evidence. We have not finished collecting and analyzing the data. We may abandon or modify these theories, or find that the evidence supports others. Nevertheless, these are the patterns we see so far.

This leaves at least one question: So what? In other words, does any of this matter?

We think that it does, for at least two reasons.

First, there is a sense among practitioners that requests for examiners in large cases will become more frequent. Certainly the U.S. Trustee’s office has gone on record as indicating its support for examiner appointments, at least as a general matter.

Second, and whether or not they are more frequently sought, these theories—if supported by the data—might help guide courts struggling with examiner requests, especially ones a court may consider of questionable merit. There is some evidence that examiners are often sought for what, for lack of a better term, might be called “strategic” reasons. For example, the shareholder of a large debtor, unhappy with the way plan negotiations are developing, may move for an examiner on the eve of the confirmation hearing, arguing that the appointment is mandatory. Judges have told us they find these requests frustrating: They do not want to be told they must do something they believe is purely for the strategic advantage of one party, with no obvious benefit to the larger estate. These data may help courts and parties understand how to handle these, or similar, requests by identifying the “real” (or at least more realistic) grounds for (and against) examiner appointment.

If you have participated in a case that involved a request for, or appointment of, an examiner, I’d like to hear from you. You can reach me at lipson@temple.edu.