When Is a Trustee Appointed in Place of a Debtor in Possession?
During a Chapter 11 bankruptcy proceeding, company leaders usually can expect to remain in control as debtors in possession, which allows them to oversee the restructuring process and continue business operations. Appointing a Chapter 11 trustee is an exception to the usual practice and typically arises when there are serious concerns about the debtor in possession.
The most common justifications for appointing a trustee to manage a company in Chapter 11 include:
- Concerns about fraud (even without definitive proof)
- Evidence of dishonesty by the filer
- Concerns about executive incompetence
- Gross mismanagement of business resources
Additionally, the court can appoint a trustee when it determines that doing so is in the best interests of the creditors or the estate of the filing organization.
The appointed trustee assumes authority similar to that of a CEO. Their principal responsibilities are to:
- Operate and manage the debtor’s business — This includes running day‑to‑day business operations, managing employees and making financial and strategic decisions.
- Protect and manage estate assets — The trustee must securing and maintain property and determine which assets to keep, sell, or restructure.
- Investigate the debtor’s financial affairs — This review includes examining the conduct of prior leadership to determine whether fraud, mismanagement or other actions contributed to the company’s financial distress.
- Review claims and object if appropriate— The trustee evaluates creditor claims and objects to improper or inflated claims when doing so benefits the estate.
- Develop and implement a reorganization plan — The trustee evaluates whether reorganization is feasible and, if so, develops and a proposed plan and implements it once approved. This may involve reducing expenses, closing unprofitable locations or restructuring business operations. If a viable Chapter 11 plan is not possible, the trustee may seek to convert the case to a Chapter 7.
- Provide financial reporting and transparency — The trustee must file periodic reports to keep creditors and the court informed, including statements of receipts and disbursements, business performance summaries and any information required by the U.S. Trustee or the court.
- Ensure compliance with legal requirements — This means making sure that the debtor’s operations and the estate’s administration comply with the Bankruptcy Code, court orders and reporting and fiduciary obligations.
At the end of the case, the trustee files an accounting and report detailing administration of the estate.
Although the appointment of a trustee removes control of the business from existing leadership, it can benefit both creditors and the estate. An experienced Chapter 11 bankruptcy attorney can provide crucial advice in helping restructure the company and put it on a path to solvency.
The Law Offices of Michael Jay Berger assist California businesses in Beverly Hills and the surrounding areas with Chapter 11 bankruptcy, including cases involving trustee appointment. Schedule a free initial consultation by calling 310-271-6223 or contacting us online.
