Chapter 11 and the Debtor in Possession -

      When the Chapter 11 petition is filed, the debtor automatically becomes what is known as a "debtor in possession" or "DIP". This means that the debtor in effect acts as his own trustee in the case. The debtor will remain as DIP up until the earlier to occur of: confirmation of a Chapter 11 plan, at which time the debtor becomes a "Reorganized Debtor"; dismissal of the case or conversion to Chapter 7; or appointment of a Chapter 11 trustee.

Court-Appointed Trustee

      A trustee in a Chapter 11 case can only be appointed by the court, and only for good cause shown. In the majority of cases, the debtor acts as debtor in possession throughout the case. Section 1104(a) of the Bankruptcy Code states that the court shall appoint a trustee: (1) for cause including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the petition was filed; (2) if the appointment would be in the best interests of creditors and the estate; or (3) if grounds exist under Bankruptcy Code Section 1112 for dismissal of the case or conversion to Chapter 7.

Powers of a Trustee and "DIP"

      Under Bankruptcy Code Section 1107(a), with certain minor exceptions, a debtor in possession has all of the rights and powers of a trustee, and is required to carry out the duties of a trustee. That means he can operate the business and take all of the actions which are available to a trustee under the Bankruptcy Code. It also means that he has a fiduciary duty to the creditors, and in effect has assumed a dual role.

      The powers of a trustee and the DIP include the right to investigate and object to claims; sue third parties to set aside preferential transfers or fraudulent conveyances; seek turnover of assets; file actions to determine validity, priority, nature and extent of liens or other interests in property; enter into contracts; assume or reject leases and executory contracts of the debtor; and borrow money to fund the Chapter 11, on an unsecured, secured, or priority basis.

      Any of these actions which require court approval for a trustee, also require court approval for the debtor in possession. Generally, under Bankruptcy Code Section 363, the use, sale or lease of property of the estate in the "ordinary course of business" does not require court approval; actions outside the ordinary course of business require such approval.

Duties of a DIP

      The duties of a DIP are complex and require an intimate familiarity with the provisions of the Bankruptcy Code and Rules, as well as the Local Rules for each Bankruptcy Court. While may DIP's may have extensive business and professional backgrounds, it is common for a DIP to hire professionals to assist him in carrying out his duties. These include a bankruptcy attorney, real estate broker, appraiser, auctioneer, and accountant. Employment of such professionals is subject to the approval of the bankruptcy court, and their fees become administrative expenses under Section 503(b) of the Bankruptcy Code. The award of fees is also subject to court approval as to reasonableness, and after notice and a hearing.

Reporting & Filing Requirements

      There are substantial reporting and filing requirements for Chapter 11. The DIP (or trustee) is required to file monthly operating reports with the court, containing detailed financial information about the post-petition operations. These reports are generally due on the 20th day of the month, for the preceding month's activities. They are generally on forms prescribed by the Office of the U.S. Trustee, and are commonly in formats such as Excel or Quatro, and often require that copies of redacted bank statements be attached. The DIP is also required to file all required post-petition tax returns.

Written by Henry Rendler