ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 21
than in the past 75 years.75 Moreover, there is no meaningful way to discern how many distressed companies that could have used chapter 11 simply closed their doors instead of pursuing alternatives through the reorganization process.
The Commission was very mindful of these considerations in reviewing issues relating to the filing, financing, and initial steps of a chapter 11 case. The principles in this section strive to address several of these issues.
A. oversight of the case
1. the debtor in possession model
Recommended Principles:
• The ability of the debtor to act as a debtor in possession and assume the duties and powers of a trustee in bankruptcy is a central feature of chapter 11 of the Bankruptcy Code. It allows the debtor to continue its operations with minimal disruptions while still serving the interests of the debtor’s creditors and, in many cases, its equity security holders as well. Accordingly, the debtor in possession
model should continue as the default rule under chapter 11.
• Applicable state law fiduciary duties should continue to govern the conduct of the debtor in possession’s board of directors, officers, or similar managing persons.
• For a discussion of directors’, officers’, and similar managing persons’ fiduciary duties in the plan context, see Section VI.A.2, Role of Debtor in Plan Process.
The Debtor in Possession: Background
A fundamental feature of chapter 11 of the Bankruptcy Code is the “debtor in possession” concept. This feature allows the financially distressed company to remain in control of its assets and to continue to operate its business after commencing the chapter 11 case. Accordingly, on the petition date, the company assumes the new legal capacity of a “debtor in possession.”76
In a typical chapter 11 case, the debtor in possession’s prepetition board of directors and officers will continue to manage the debtor’s affairs and make decisions regarding both the debtor’s business and its reorganization efforts in the chapter 11 case. The debtor in possession model was expanded by
75 Oral Testimony of Dan Dooley: ASM Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11, at 36–39 (Apr. 19, 2013) (ASM Transcript) (discussing increased use of state law alternatives to chapter 11 such as local and state receiverships and assignments for the benefit of creditors (ABCs)), available at Commission website, supra note 55. For a further discussion of the use of receiverships, see Section VII.B, General Application of SME Principles. 76 This Report refers only to the trustee in certain principles, and those references are intended to include the debtor in possession as applicable under section 1107 of the Bankruptcy Code. In addition, the Report discusses the implications of certain principles for debtors in possession, which likewise apply to any chapter 11 trustee appointed in the case.