In re We Work Inc. ¹⁰

We Work, “the global leader in flexible workspace,” invested “billions of dollars in creating one of the most expansive private commercial real estate portfolios in the world.” ¹¹ A failed IPO and management changes shifted We Work's business model from rapid growth to operational efficiency, ultimately resulting in a chapter 11 filing underwritten by its lead secured creditor and majority owner, SoftBank.

*17 A group of junior noteholders filed a motion of the ad hoc group of noteholders requesting (1) the appointment of an examiner pursuant to § 1104(c); and (2) derivative standing to prosecute estate causes of action (the ““ad hoc motion”) ¹² three weeks after the Third Circuit issued its FTX decision. The argument for the mandatory appointment of an examiner consumed two paragraphs of a 40-page brief. The remainder of the ad hoc motion set forth the factual and legal basis for the discretionary appointment of an examiner under § 1104(c)(1), arguing that irregularities in the prebankruptcy restructuring transactions presented grounds for the re-characterization or equitable subordination of the SoftBank debt.

These cases illustrate the complexities inherent in chapter 11 proceedings, particularly when motions for examiner appointments intersect with strategic considerations. The interplay of tactical maneuvers and genuine concerns about transparency and governance underscores the need for nuanced reforms. Brown and Williams argued that legislative changes are necessary to ensure that such motions do not devolve into procedural tools weaponized to achieve ulterior motives rather than legitimate oversight. The ad hoc motion also outlined purported claims for fraudulent and preferential transfer, breach of fiduciary duty, and aiding and abetting against SoftBank, asking the bankruptcy court to grant the ad hoc committee derivative standing to pursue those claims after an examiner's investigation.

Two months later, the debtors announced a $7.5 million cash settlement with the unsecured noteholders, a condition of which was withdrawal of the ad hoc motion. ¹³ In addition to the cash distribution to unsecured noteholders, the debtors agreed to pay $1 million of the ad hoc group's professional fees. The court confirmed the reorganization plan incorporating the settlement on May 30, 2024.

In re Big Lots Inc. ¹⁴

“Big Lots is a one-stop-shop home discount retailer,” citing post-COVID-19 inflation and macroeconomic pressures as reasons for its decreased sales and need for restructuring. ¹⁵ The goal of the chapter 11 case was to sell substantially all assets to a stalking-horse bidder that would continue the enterprise as a going concern.

After initially consenting to tight milestones and super-priority debtor-in-possession financing with a 100 percent rollup of pre- petition debt, Big Lots' largest unsecured creditor filed Blue Owl Capital LLC's emergency motion to extend the challenge period and remove the blanket “professional eyes only” designation from the productions or, alternatively, *58 appoint an examiner, ¹⁶ asking the court to extend the time for the official committee of unsecured creditors to investigate potential claims against the secured lenders. While Blue Owl “believe [d that] the investigation will be most efficiently performed by the [unsecured creditors' committee] or Blue Owl itself,” it proposed the appointment of an examiner as an alternative.

The debtors and unsecured creditors' committee both opposed the examiner appointment, but the request was mooted when the bankruptcy court granted Blue Owl's motion to extend the debtor-in-possession financing order's challenge period. The anticipated going-concern sale to the stalking-horse bidder ultimately fell through, with a new bidder acquiring a smaller group of retail locations. The court extended Big Lots' exclusivity period through July 6, 2025.

Readers will draw their own conclusions about whether the examiner motions in these three recent cases were driven purely or primarily by tactical considerations. In the We Work case, the examiner's motion appears to have extracted significant value for previously out-of-the-money creditors. ““Correlation is not causation,” of course, and none of the bankruptcy courts stated that they had considered § 1104(c)(2) or the FTX decision.

This question remains: Would the textual revisions that Brown and Williams proposed have changed the parties' strategies in the three cases discussed here, or other cases? The answer is “perhaps.”

*59 Increase in the Debt Threshold

Increasing the debt threshold for mandatory appointment of an examiner from $5 million to $25 million would have precluded a mandatory examiner appointment motion in the Belmont Trading case, but it would not have precluded the movant's preferred relief: the discretionary appointment of a trustee. The We Work and Big Lots cases would have met an even more significantly increased debt threshold, so, as Brown and Williams correctly noted, “simply increasing the debt threshold in § 1104(c)(2) is not enough to resolve the problem.” ¹⁷

Replacing “As Is Appropriate” with “If Appropriate,” and Replacing “Shall” with “May”

As the structure of the Bankruptcy Code provision seems to contemplate, examiner requests are often appended to motions to appoint a trustee. Section 1104(c) begins with the phrase, “If the court does not order the appointment of a trustee under this section.” Section 1104(c)(1) already gives the bankruptcy court discretion to appoint an examiner for cause. In the three cases discussed in this article, little argument was devoted to § 1102(c)(2)'s mandatory nature. Rather, all three movants identified real or perceived concerns about “irregularity in the management of the affairs of the debtor.” If proven, allegations of this sort would likely justify the discretionary appointment of a trustee or examiner under § 1104(a) or (c)(1).

Whether an examiner appointment is mandatory or discretionary, the bankruptcy court “‘retains broad discretion to direct the examiner's investigation,’ including its scope, degree, duration, and cost.” ¹⁸ As the FTX court noted, “[i]f we ignore the plain text of the two subsections, then subsection (c)(2) becomes discretionary and indistinguishable from subsection(c)(1).” ¹⁹ “If possible, every word and every provision is to be given effect (verba cum effectu sunt accipienda). None should be ignored. None should needlessly be given an interpretation that causes it to duplicate another provision or to have no consequence.” ²⁰

Conclusion

If, as Brown and Williams contend, the Third Circuit's interpretation of § 1104(c)(2) presents a problem, their proposed statutory revisions may well create a different problem: textual redundancy. To ensure that bankruptcy courts retain complete discretion, a more straightforward solution might be to excise subsection (2) from § 1104(c) altogether, making the size of a debtor's creditor pool but one of many factors a bankruptcy court may consider in its exercise of discretion.
 

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Footnotes

^a1 Katherine Stadler is a shareholder with Godfrey & Kahn, SC in Madison, Wis.

¹ Kimberly A. Brown & George A. Williams, “Reevaluating § 1104(c)(2): The Need for Modernization and Discretion,” XLIV ABI Journal 7, 34-35, 60-61, July 2025, abi.org/abi-journal/reevaluating-Bx-1104c2-the-need-for-modernization- and-discretion.

² 91 F.4th 148 (3d Cir. 2024).