Powers and Duties of a Chapter 11 Debtor in Possession
A Chapter 11 bankruptcy allows a business facing insolvency to reorganize its debts so that it can have a chance to return to financial health. In most cases, the business continues to be operated by its owner, but under the supervision of the bankruptcy trustee. The owner becomes a debtor in possession.
The role of the debtor in possession (DIP) is critical to the success of a Chapter 11 bankruptcy. The DIP has most of the powers of a bankruptcy trustee and also has a fiduciary duty to the creditors. Among the responsibilities of a debtor in possession are these:
- Filing the reorganization plan and related documents
- Filing any informational reports required by the court
- Filing tax returns for the business
- Maintaining the business’s assets
- Objecting to questionable creditor claims
- Operating the business, which might include selling merchandise in the normal course
- Making payments required by the reorganization plan
- Taking any action required by the trustee or the court
Allowing the debtor in possession to perform these functions makes sense because a bankruptcy trustee has neither the time nor the necessary expertise to effectively operate all of the Chapter 11 debtors it supervises.
However, the DIP needs court approval to do some things, such as:
- Obtaining additional financing to fund business operations during the Chapter 11
- Selling assets it normally wouldn’t sell in the normal course of its business
- Entering into, modifying or terminating leases, mortgages, financing agreements and other contracts
- Retaining and paying attorneys, accountants and other professionals
- Expanding or closing all or part of the business
The DIP’s fiduciary duty means that it must protect the legitimate interests of the creditors, keep the court and trustee apprised of its actions and not engage in fraudulent or bad faith conduct. A creditor who believes the DIP has breached its duty can ask the court to take the business away and to appoint a special trustee.
A bankruptcy attorney with experience representing debtors in possession can ease your burden in a Chapter 11 proceeding by providing reliable advice on your rights and duties, seeking court approval when you need it, defending you against any charges of malfeasance and otherwise protecting your interests.
The Law Offices of Michael Jay Berger in Beverly Hills is one of southern California’s most experienced bankruptcy law firms. If you need our assistance in a Chapter 11 or other bankruptcy matter, contact us online or call 310-271-6223 to schedule a consultation.