Relevant Documents:
Agenda
UCC Letter
Judge John Dorsey gave his “preliminary thoughts” on the examiner appointment process and scope of the investigation at a status conference today. The court set today’s status conference after the U.S. Court of Appeals for the Third Circuit issued a Jan. 19
decision directing the appointment of an examiner in the chapter 11 cases.
Judge Dorsey stated that the examiner should begin by reviewing all investigations conducted in the cases. Then, the court said, the examiner should issue a summary report 30 to 45 days after appointment recommending any areas for further investigation. Judge Dorsey posited that the preliminary report should identify the subject matter of the topic of investigation, the projected cost and the benefits to the estates and the court. Finally, the court would then seek comment from parties in interest and make a determination whether any future investigation is “necessary and proper in the context of the case.”
Judge Dorsey said his proposed investigation format would address the Third Circuit’s and his concerns about the costs of an examiner. In the ruling, the court of appeals concluded that the plain text of section 1104(c)(2) of the Bankruptcy Code required the bankruptcy court to grant the U.S. Trustee’s
request for an examiner given Congress’ intent to provide “‘special protection for the large cases having great public interest’” by “guaranteeing an ‘automatically appointed’ examiner in large cases.”
The ruling reversed Judge Dorsey’s February 2023
bench ruling finding that the bankruptcy court had discretion to deny the UST’s request in light of the substantial costs and duplication of parallel FTX investigations by the debtors, the official committee of unsecured creditors,
federal prosecutors,
regulators and
Congress.
In the court’s view, the investigation format would allow the examiner to also address the discrete concerns raised by the Third Circuit regarding (i)
potential conflicts of interest arising from debtor’s counsel serving as prepetition advisors to FTX, (ii) concerns that FTX Group officers or employees that were involved in fraud remain involved with the company and (iii) FTX’s use of its proprietary FTT cryptocurrency token to inflate the value of FTX and Alameda Research. Specifically, Judge Dorsey said that the examiner could review materials submitted in connection with the court’s
approval of the debtors’ retention of Sullivan & Cromwell as counsel and “make a report about any other potential conflict.”
The court’s determination was contrary to the approaches suggested by the debtors and the U.S. Trustee. James Bromley of Sullivan & Cromwell, counsel to the debtors, outlined today the debtors’ proposal, set forth in a
letter to the court, to first set the parameters for an “appropriate” examiner investigation and only then select an examiner.
Bromley underscored that the parameters for the investigation should be set quickly at minimal costs to the estates. Although the UST had prevailed, Bromley said that the Third Circuit’s decision was “very clear” that the bankruptcy court retained discretion to control the costs of the investigation and limit any disruption to the reorganization process.
Accordingly, Bromley argued that the court should take into account the “substantial work” done in the year since the UST’s appointment request and the fact that the debtors are now just months from emergence. He likened the debtors’
plan to a “freight train” delivering substantial recoveries to creditors that were only expecting “cents on the dollar” when FTX
collapsed in November 2022.
Linda Richenderfer, appearing for the UST, argued that the debtors’ proposal is contrary to the Bankruptcy Code’s provisions and standard bankruptcy practice. According to Richenderfer, the examiner must be involved in formulating the “game plan” for the investigation, and she argued that it would be premature to set the scope of the examination before the appointment is finalized.
Richenderfer also raised what she said was a critical procedural issue in that the Third Circuit had not yet issued its mandate for its decision. Although the debtors indicated they would not seek U.S. Supreme Court review of the decision, Richenderfer argued that the debtors need to take affirmative steps to ensure that the court of appeals issued its mandate before the bankruptcy court would have jurisdiction to move the examiner appointment process forward.
Kenneth Pasquale of Paul Hastings, for the UCC, confirmed that the committee would not seek rehearing before the Third Circuit or other relief that would delay the mandate.
At the close of the hearing, the parties agreed to confer regarding the selection of an examiner and cooperate to accelerate the issuance of the mandate. Procedurally, the court noted that the appointment of an examiner would proceed as a contested matter and stated that it could be an “adversarial process, if necessary.”