What Are Your Responsibilities as a Chapter 11 Debtor in Possession?

A Chapter 11 debtor in possession (DIP) holds a unique and multifaceted role. As a DIP, you are not only seeking financial reorganization but also acting as a fiduciary, entrusted with managing the business and assets for the benefit of all stakeholders. This dual nature encompasses a wide range of duties and carries a considerable weight of responsibility.

Initially, the DIP, with the assistance of legal and financial professionals, formulates a plan for financial reorganization that will be presented to creditors for approval. This plan must satisfy a long list of conditions specified in the Bankruptcy Code, including that it be feasible and realistic in its assumptions about the company’s ability to emerge solvent from the Chapter 11.

Once the plan is confirmed by the court, the DIP shoulders a range of operational responsibilities. These include:

• Running the business — While the business is in Chapter 11, the DIP maintains staffing, fulfills existing contracts and manages day-to-day operations. Major decisions, such as sale of substantial assets or taking on large debt, may require the U.S. Trustee’s approval.
• Obtaining financing — Securing adequate financing is necessary to keep the business afloat during the reorganization. Lenders may be willing to provide DIP financing because it gives them high priority claims against available collateral.
• Appointing professionals — The DIP has the authority to appoint key professionals, such as attorneys, accountants, and appraisers, to assist with the bankruptcy process.

The DIP also carries wide fiduciary duties that can be summarized as follows:

• Accountability — The DIP must maintain detailed records of all financial transactions, assets, and liabilities. This includes preparing regular financial reports for the court, the U.S. Trustee and creditors and other interested parties.
• Maximizing business value — The DIP is tasked with operating the business in a way that preserves and ideally increases its value. This involves making sound business decisions, exploring potential revenue streams and taking measures to minimize losses.
• Fair dealing with creditors — The DIP must act in good faith towards all creditors, secured and unsecured alike. This includes providing accurate and timely information, negotiating a fair reorganization plan and assuring secured creditors adequate protection for their collateral.
• Compliance with orders and laws — The DIP must adhere to all bankruptcy court orders as well as abide by federal and state laws and regulations concerning the business..

A DIP is under constant vigilance by the U.S. Trustee and by the creditors’ committee. If either of them doubts you are acting in compliance with your duties, they can ask the court to appoint a special trustee to take control of the business. An experienced Chapter 11 attorney can advise you and guide you in carrying out your responsibilities as a DIP.

The Law Offices of Michael Jay Berger in Beverly Hills has wide experience representing debtors in possession in Chapter 11 bankruptcies throughout California. Call our firm at 310-271-6223 or contact us online to schedule a free initial consultation.