A bankruptcy examiner is appointed by the court in a bankruptcy case pursuant to Code section 1104(c) 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." 

This simple grant of authority has led to the issuance of  reports that, when stacked together, surely validate former Fed chairman Alan Greenspan’s conclusion in 2002 — in pre-Sarbannes-Oxley testimony before the Senate — that:

  • The stock boom of the 1990’s created "an outsized increase in opportunites for avarice," in which "[a]n infectious greed seemed to grip much of our business community.  Our historical guardians of financial information were overwhelmed."
  • "It is not that humans became any more greedy than in generations past.  It is that the avenues to express greed had grown so enormously."

Historians of future generations need only look at examiner’s reports in some of the more spectacular bankruptcies of the recent past to confirm Mr. Greenspan’s conclusory observations.  (See, e.g., Enron, WorldCom-1&2 , Spiegel, Fibermark, and Gitto Global-1, 2, 3, 4).  Perhaps, though, they’ll just conclude, like King Solomon, that "there’s nothing new under the sun."

Another damning examiner’s report, this one issued by Dan Harrow, the Court-appointed examiner in the Fruehauf Trailer Corp. case, has recently been the subject of considerable controversy, as these articles from the LA Times relate.  According to today’s story:

What otherwise promised to be a low-key race for Orange County treasurer/tax collector has been anything but, with one candidate stung by allegations that he mismanaged the assets of a bankrupt trailer company, resulting in a district attorney’s investigation….

After bankruptcy was granted in 1998, Street took over a successor company formed to liquidate Fruehauf’s remaining assets as well as its pension plan. He resigned in August 2005, replaced by a new trustee, Daniel Harrow.

On March 15, five days after Street filed his candidacy papers to run for Moorlach’s seat, Harrow filed a 63-page statement with the Bankruptcy Court in Delaware accusing Street of "mismanagement, conflicts of interest and greed" while in charge of the trust.

Street said the statement was rife with falsehoods. He defended his actions, saying that creditors had recouped their money and that he had shored up the company’s ailing pension fund.

When the federal Pension Benefit Guaranty Corp. announced its takeover of the fund in 2004, its news release said that a $7-million deficit would be covered by insurance.

In April, Street filed a defamation and conspiracy lawsuit against Harrow and a union official who criticized Street before Orange County supervisors.

Street’s "shoot the messenger" defamation suit likely won’t go far given that private trustees like Harrow have, according to the 9th Circuit, quasi-judicial immunity for "actions that are functionally comparable to those of judges, (i.e., those functions that involve discretionary judgment)."  Curry v. Castillo (In re Castillo), 297 F.3d 940, 947 (9th Cir. 2002) (pdf). 

Street’s failure to obtain a protective order under Code section 107(b)(2) to "protect [him] with respect to scandalous or defamatory matter contained in a paper filed [with the Court]" may also bar him on claim preclusion grounds from attempting to raise this issue again in another related proceeding.  Cf., Gitto v. Worcester Telegram & Gazette Corp. (In re Gitto), 422 F.3d 1 (1st Cir. 2005) (pdf) (contents of examiner’s report only "defamatory" for purposes of Code section 107(b)(2) if material would cause a reasonable person to alter its opinion of the person in question and either (i) the material is untrue or (ii) the material is potentially untrue and irrelevant or included within a bankruptcy filing for an improper end).


© Steve Jakubowski 2006