Treffer: Examining Success.

Chapter 11 of the Bankruptcy Code presumes that managers will remain in possession and control of a corporate debtor. This presents an obvious agency problem: these same managers may have gotten the company into trouble in the first place. The Bankruptcy Code thus includes checks and balances in the reorganization process, one of which is supposed to be an "examiner," a private individual appointed to investigate and report on the debtor's collapse. We study their use in practice. Extending prior research, we find that examiners are exceedingly rare, despite the fact that they should be "mandatory" in large cases ($5 million+ in debt), and are recommended in any case if "in the interests of creditors." Using a hand-collected dataset (n=l225) of chapter 11 bankruptcies from 1991-2010, we find that they are sought in less than 9% of cases (104), and appointed in fewer than half of those (48, or 3.9% of the sample). We ma\e three observations about the use of examiners. First, regression modeling shows that the factors that predict when an examiner will he appointed appear to have little to do with the agency problems that concerned Congress, such as fraud or mismanagement. Rather, the timing of an examiner request and case venue appear to be the most important factors in the rare cases where they appear. Delaware's bankruptcy court, the nation's busiest, appears especially resistant to examiners. Our findings may support concerns that its bench has been captured by distress professionals. Second, governance in reorganization has changed significantly since Congress enacted chapter 11, yet agency problems persist. The reorganization of large companies is increasingly influenced by sophisticated investors (e.g., private equity funds), who often use pre-ban\ruptcy turnaround managers to manage the process. Examiners could tell us whether this change has net social costs or benefits--if they were used. Third, we offer preliminary evidence that examiners should be used more frequently, because a case with one is lively to be more "successful'' in a variety of ways than a case without one. Our findings inform looming fights about amending the Bankruptcy Code to alter or eliminate the examiner's position, and larger debates about how to define and achieve success in chapter 11 reorganizations. We borrow from literature on "experimentalism" in regulatory design to propose that bankruptcy courts use mini-examinations" in order to learn more about examiners' effects on the reorganization process. Sensitive to concerns about cost, we propose that some or all of these mini-examinations be funded out of bankruptcy court filing fees, which according to a recent estimate averaged about $375 million per year between fiscal years 2010-2014. [ABSTRACT FROM AUTHOR]

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