You represent the unsecured creditors committee in a complex Chapter 11 case, where you have reason to believe that the debtor’s officers and directors have, and continue to, engage in self-dealing and are breaching their fiduciary duties by not advancing a plan in the best interest of creditors. So, the committee asks you to seek the appointment of an examiner to investigate. The Bankruptcy Court agrees, appointing an examiner under section 1104(c) of the Bankruptcy Code, which provides for the appointment of an examiner for the purpose investigating matters related to the debtor’s estate, “including an investigation of allegations of fraud, dishonesty, incompetence, misconduct, mismanagement ….”. Using Bankruptcy Rule 2004, the examiner subpoenas and reviews over 10,000 documents, takes 10 Rule 2004 examinations and conducts 15 witness interviews. Based upon these undertakings, the examiner prepares a 200-page report finding numerous incidents of self-dealing and breaches of fiduciary duties and recommends the appointment of an independent fiduciary. The examiner’s report sends the committee over the moon, and it instructs you to file an emergency motion for the appointment of a Chapter 11 trustee under section 1104(a) of the Bankruptcy Code, suggesting that all the Bankruptcy Court need do is consider the examiner’s report and the trustee motion is a “slam dunk.” This makes sense as the Bankruptcy Court appointed the examiner, codified her duties in an order and specifically requested the preparation of a report with her findings and conclusions under section 1106 of the Bankruptcy Code. But here it comes—the report is HEARSAY. Yup, an examiner’s report is an out of court statement for which the committee seeks to use for the truth of the matter asserted therein: the factual wrongdoings of the debtor’s officers and directors. See Federal Rules of Evidence 801(c) and 802.
In 2006, the Bankruptcy Court in In re Fibermark, Inc., 339 B.R. 321 (Bankr. D. Vt. 2006), stating that it was case of first impression with respect to the admissibility of an examiner’s report, provided an informative discussion on this point. There, the court acknowledged that “[t]he benefits of an examiner’s investigative efforts flow directly to the debtor and its creditors and shareholders,” Id. at *325, “the information that an examiner provides in his or her report serves as a road map for parties in interest as they evaluate and pursue their substantive rights,” Id.,and that even “courts are aided by the conclusions of examiners and often rely on their report in contested matters,” Id. Yet the court determined that the “underlying rationale, or facts, of the Examiner” may not be admitted into evidence. Id. at *327.
Citing to Rickel Associates, Inc. v. Smith (In re Rickel Associates, Inc.), 272 B.R. 74, 87-88 (Bankr. S.D.N.Y. 2002), the Fibermark court stated that if:
the parties wish to “prove” the accuracy of the Examiner’s conclusions they must do so with competent evidence. The facts, as found by the Examiner, are not “true" just because they are in the Report. They explain and justify the Examiner's conclusions. That is all. The Examiner's rendition of the facts may not be relied upon to prove the truth of the matter asserted.
Id.
Conversely, if the party seeking the admissibility of an examiner’s report can qualify the examiner as an expert as to the matters for which she is opining under Federal Rule of Evidence 706 (Court-Appointed Expert Witnesses), then the examiner’s conclusions and opinions are admissible as an expert opinion. Id. at *323. Because the examiner in Fibermark was recognized as an expert in the field of bankruptcy and reorganization law, Rule 706 permitted “the admission of the Examiner’s conclusions,” but not his “underlying rationale, or facts.” Id.
Practice Pointers:
- Do not rely upon an examiner’s report as the evidentiary support for your case;
- Use the examiner’s report as the “road map” in developing your own evidentiary support;
- Seek to qualify the examiner as an expert on the subject matter for which she is providing conclusions and opinions as basis for their admissibility;
- A report is technically hearsay; consider the possibility of putting on the expert in your case. See In re Saraland, LLLP, No. 12-30113, 2013 WL 1403338, at *2 (S.D. Ga. Mar. 27, 2013) (admitting examiner report into evidence because “[t]he examiner was present and testified subject to cross-examination”); and
- Remember, even if you do not get in the examiner’s report into evidence, the court has reviewed it. Reference it during your case—not as evidence—but as part of the underlying facts causing you to seek the instant relief.
