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Appointment of Trustee or Examiner in Chapter 11 Bankruptcy

15. What is appointment of a trustee or examiner?

In certain circumstances, the bankruptcy court will appoint a bankruptcy trustee to supervise the actions or conduct of the debtor in possession (DIP). Generally, however, there is a strong presumption against appointment of a trustee. To overcome this presumption, creditors must show “cause” why the appointment is necessary. Cause includes situations involving fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case. The bankruptcy court will look at the “totality of the circumstances” to determine the need for a trustee. An alternative to appointing a trustee is the appointment of a “corporate examiner”. The examiner serves a role similar to special counsel to the DIP. This action allows management to continue running the business while having activities monitored by the examiner.

•    Discussion: How do you feel about the DIP remaining in control of the business? Do you think appointment of a trustee should require a showing of “cause”? Why or why not? Do you think the appointment of a corporate examiner is sufficient protection to substitute for appointment of a trustee? Why?

•    Practice Question: ABC Corp files for Chapter 11 Bankruptcy. The DIP continues business operations. Many creditors become concerned about their interest based upon the DIP’s decision making and apparent incompetence. What are the options available to the creditors in this situation?

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