What a Trustee Does in Chapter 11

In Chapter 11 bankruptcy cases, the role of a trustee is distinct and typically involves specific circumstances where the court determines that the debtor in possession cannot effectively manage the reorganization process. Here are the key responsibilities and scenarios where a Chapter 11 trustee is appointed:

Appointment and Role

• A Chapter 11 trustee is appointed by the court, usually upon a motion by creditors or other parties in interest, and with the consultation of the U.S. Trustee's Office. 34
• The trustee essentially becomes the CEO of the debtor, exercising day-to-day control over the business as deemed appropriate. 3

Circumstances for Appointment

• The appointment of a Chapter 11 trustee is typically made for "cause," which includes fraud, dishonesty, incompetence, or gross mismanagement by the debtor either before or after the bankruptcy filing. 3
• The court may also appoint a trustee if it is in the best interest of creditors, equity security holders, and other interests of the estate. 3

Duties

• The trustee investigates the acts, conduct, assets, liabilities, and financial condition of the debtor, as well as the operation of the debtor's business. 7
• The trustee manages the affairs of the debtor, makes decisions about the property of the estate, and can propose a plan of reorganization. 6
• The trustee is responsible for ensuring that the debtor complies with the Bankruptcy Code and the reorganization plan, and may take legal action to enforce these requirements. 4

Operational Control

• Unlike in Chapter 7, where the trustee's primary role is to liquidate assets, a Chapter 11 trustee focuses on reorganizing the debtor's business while it continues to operate. 26
• The trustee has the authority to employ professionals, such as attorneys and accountants, to assist in the reorganization process. 2

U.S. Trustee Oversight

• The U.S. Trustee monitors the debtor in possession's operation of the business and the submission of operating reports and fees, even when a Chapter 11 trustee is not appointed. 21
• The U.S. Trustee also reviews disclosure statements and applications for the retention of professionals, and takes action to prevent undue delay in the reorganization process. 14

In summary, a Chapter 11 trustee is appointed in extraordinary circumstances to manage the debtor's business and ensure compliance with the Bankruptcy Code and the reorganization plan. The trustee's role is critical in cases where the debtor in possession cannot effectively manage the reorganization process.