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Losing Control in a Chapter 11 Case

Published April 23, 2014 by Sasser Law Firm

When an individual files a chapter 7 or chapter 13 case, they are referred to throughout the case as “the Debtor.” When a corporation or LLC files a chapter 7 case, the company, likewise, is called, “the Debtor.” But in chapter 11 cases, the filing company or individual receives a different kind of title: “Debtor-in-Possession.” The title means that it is the filing entity, themselves, that retains control of the bankruptcy estate, not a trustee. The Debtor-in-Possession retains this control throughout the case unless a party in interest (a creditor, the Bankruptcy Administrator, a committee of creditors, etc.) moves the Court to appoint a Chapter 11 Trustee under 11 U.S.C. section 1104. Common allegations made by a parting moving to have a trustee appointed are that the Debtor-In-Possession was dishonest, incompetent, or grossly mismanaged the financial affairs in the case.

Even though case law states that “the appointment of a trustee in a chapter 11 case is an extraordinary remedy,” Judge Doub recently ruled in In re Dew (13-02284-8-RDD) that a trustee was appropriate in situation where there had been gross mismanagement. What is gross mismanagement? Judge Doub tells us. “Gross mismanagement is manifest when creditors may reasonably lose all confidence in the ability of management to direct the reorganization effort.” When that happens, the court puts a trustee in the driver’s seat.

Some debtors file chapter 11 cases because of events outside of their control. For those who file because of some past missteps in management, In re Dew is a cautionary tale that the court and the creditors must be assured throughout the case that the Debtor-in-Possession is both competent and honest.

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