Although Chapter 11 of the Bankruptcy Code allows existing management of a debtor to remain in control of its business, it imposes several oversight mechanisms to help ensure the integrity of the process. Two of the most common include the Office of the U.S. Trustee and an Official Committee of Unsecured Creditors. In addition, the code calls, under certain conditions, for the appointment of an independent examiner whose role can run from the very broad to extremely limited. Some courts interpret the code's examiner appointment provisions to be mandatory if the statutory requirements are met, while many others do not. The now infamous Chapter 11 bankruptcy case of FTX Trading Ltd. (FTX), once a multibillion-dollar cryptocurrency company, has reemerged in a dispute over this very important issue. On appeal, the U.S. Court of Appeals for the Third Circuit recently held that the plain text of Section 1104(c)(2) mandates the appointment of an examiner under the specified conditions set forth. See In re FTX Trading, No. 23-2297, 2024 U.S. App. LEXIS 1279 (3d Cir. Jan. 19, 2024). As a result, in the Third Circuit, and likely other jurisdictions, the FTX decision will carry significant implications for large and medium sized bankruptcy cases.

As background, Samuel Bankman-Fried (SBF) was the founder and majority owner of both FTX, a cryptocurrency exchange platform, and Alameda Research, a cryptocurrency hedge fund. Since its formation in 2019, FTX had grown to a staggering $32 billion valuation in just a few years. In early November 2022, however, questions emerged alleging a conflict of interest between the two ostensibly independent companies, and investors began cashing out at an alarming rate after discovering that Alameda Research had used funds from FTX customers to inflate its own balance sheet, among other questionable activities. On Nov. 11, 2022, following a massive liquidity crisis that saw customers collectively lose billions of dollars in investments and put the legitimacy of the entire cryptocurrency industry in question, FTX filed for bankruptcy and SBF appointed John J. Ray III as replacement CEO for FTX and its affiliates. Ray's own investigations of the company confirmed "unacceptable management practices" including "the use of software to conceal the misuse of customer funds," and ultimately "located and secured only a fraction of the digital assets."