American Bankruptcy Institute
24 IV. Proposed Recommendations: Commencing the Case
administrator. Moreover, the trustee, receiver, or administrator could terminate the employment of the debtor’s management altogether.
The Commissioners debated the potential utility of a third-party manager to the bankruptcy estate. The Commission determined that these third-party alternatives could add the most value to cases involving fraudulent or incompetent management. The Commissioners acknowledged, as discussed further below, that section 1104 of the Bankruptcy Code currently mandates the appointment of a trustee in such cases.88 The Commission also considered that in recent years many countries have adopted some form of the debtor in possession model either in lieu of or as an alternative (at the company’s election) to a receiver or administrator.89 This trend suggests broad recognition of the potential benefits of allowing the honest-but-unfortunate company debtor to lead its own restructuring efforts. Thus, on balance, the Commission concluded that the potential value of a mandatory trustee-like actor was significantly outweighed by the potential disruption, costs, and inefficiencies associated with the displacement of the debtor’s management. Accordingly, the Commission recommended retention of the debtor in possession model.
As part of that decision, the Commission also agreed that directors, officers, and similar managing persons who operate a business in chapter 11 should remain subject to their state law fiduciary duties.90 The Commissioners analyzed whether creating a new fiduciary standard under federal bankruptcy law would better serve the purposes of the Bankruptcy Code. Any federal standard would incorporate the traditional duties of care and loyalty, as well as good faith either as a subset of the duty of loyalty or an independent duty.91 As the Commissioners discussed this possibility, they recognized significant value in aligning the fiduciary duties of the debtor in possession’s management with state law fiduciary duties. This approach lends consistency to the process and is informed by the wealth of case law discussing state law fiduciary duties.
88 11 U.S.C. § 1104(a) (providing that, upon the request of a party in interest or the U.S. Trustee, the court shall appoint a trustee “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause”) (emphasis added). In addition, section 1104(e) provides: “The United States trustee shall move for the appointment of a trustee under subsection (a) if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtor’s chief executive or chief financial officer, or members of the governing body who selected the debtor’s chief executive or chief financial officer, participated in actual fraud, dishonesty, or criminal conduct in the management of the debtor or the debtor’s public financial reporting.” 11 U.S.C. § 1104(e). 89 See, e.g., Business Continuity Act of 31 Jan. 2009 (Belgium: debtor remains in control during moratorium period with limited control by the court); Companies’ Creditors Arrangement Act (Canada: debtor remains in control and is assisted by a court-appointed monitor frequently selected by the debtor); Insolvenzordnung, German Insolvency Act §§ 80, 270 (Germany: provides for “self-administration” in which the debtor works to reorganize under the surveillance of a supervisor; debtor may elect self-administration provided that there are “no facts known which give reason to expect that the order will lead to disadvantages to the creditors”); Civil Rehabilitation Act (Japan: debtor remains in control and is monitored by a supervisor). 90 This Report refers to “applicable state entity governance law” to capture not only state corporate law, but also applicable state law governing unincorporated entities (e.g., partnerships, limited liability companies, etc.). In addition, references to “board of directors” and “directors, officers, and similar managing persons” are intended to refer to the individuals or entities acting on behalf of unincorporated entities in capacities similar to those of the board, directors, and officers in the corporate context. 91 See, e.g., Lange v. Schropp (In re Brook Valley VII, Joint Venture), 496 F.3d 892, 900 (8th Cir. 2007) (explaining that, in the bankruptcy context, “[t]he fiduciary obligation consists of two duties: the duty of care and the duty of loyalty”); Ad Hoc Comm. of Equity Holders of Tectonic Network, Inc. v. Wolford, 554 F. Supp. 2d 538, 558 n.135 (D. Del. 2008) (duty of good faith is a subset of the duty of loyalty in the bankruptcy context); Unif. P’ship Act § 404 (1997) (fiduciary duties of partners in partnership). See also Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (“In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors. We now explicitly so hold.”) (citation omitted); Stone v. Ritter, 911 A.2d 362, 369–70 (Del. 2006) (“The failure to act in good faith may result in liability because the requirement to act in good faith ‘is a subsidiary element[,]’ i.e., a condition, ‘of the fundamental duty of loyalty.’”) (quoting Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003)); Lyman P.Q. Johnson & Mark A. Sides, The Sarbanes-Oxley Act and Fiduciary Duties, 30 Wm. Mitchell. L. Rev. 1149, 1205–06 (2004) (“Although often overlooked, corporate officers, including senior officers such as the Chief Executive Officer, the Chief Financial Officer, Chief Technology Officer, General Counsel, Executive Vice Presidents, the Treasurer, the Secretary, and others are ‘agents’ of the corporation. Agency is a fiduciary relationship. Even though senior officers of corporations typically have employment agreements, they still occupy a fiduciary status in relation to the corporate principal.”) (citations omitted).