ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 27
The Chapter 11 Trustee: Background
A trustee is appointed in a chapter 11 case only upon a motion of a party in interest or the U.S. Trustee and the entry of an order of the court granting such motion. Section 1104 of the Bankruptcy Code provides that the court shall order the appointment of a trustee “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management” or “if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate.”95 In addition, section 1104(e) requires the U.S. Trustee to file a motion requesting a trustee “if there are reasonable grounds to suspect that current [management] . . . participated in actual fraud, dishonesty, or criminal conduct in the management of the debtor or the debtor’s public financial reporting.”96
Notwithstanding this statutory authority, anecdotal evidence suggests that chapter 11 trustees are the rare exception rather than the rule.97 The paucity of cases in which chapter 11 trustees serve may suggest that the overall system is working and that stakeholders either have confidence in the debtor’s management or have replaced troublesome managers prior to or shortly after the petition date.98 Parties in interest may also be using the possibility of seeking the appointment of a trustee in negotiations with the debtor in a way that fosters meaningful results and eliminates the need for a trustee.99 A case warranting a chapter 7 trustee may convert to a case under chapter 7 of the Bankruptcy Code, thereby eliminating the need for a chapter 11 trustee.100 Some contend that a systemic antipathy to reorganization trustees, arising from pre-Bankruptcy Code practice, found its way into early decisions that construed the language of the Bankruptcy Code.101 For example, courts may be discouraging parties from filing motions requesting the appointment of a chapter 11 trustee by applying the clear and convincing standard to the determination.102 Parties in interest also may fear retribution by the debtor or other stakeholders if the court denies the motion, or may prefer having individuals with whom they are familiar (even if they do not like or necessarily trust them) rather than an individual they do not know. Moreover, some parties may raise concerns regarding the costs associated with chapter 11 trustees, which may be driven by a perception that chapter 11 trustees are inclined toward litigation to ensure that they fulfill their fiduciary duties to the estate.103
If the court enters an order appointing a chapter 11 trustee, the U.S. Trustee identifies a disinterested and qualified individual to serve as the trustee.104 Section 1104(d) requires the U.S. Trustee to
95 11 U.S.C. § 1104(a)(1), (2). 96 Id. § 1104(e). 97 See, e.g., Dickerson, supra note 19, at 888–900 (explaining that “[t]hough the Code provides that managers can be replaced or supervised by a public trustee, trustee appointments are, and always have been, rare”); Kelli A. Alces, Enforcing Corporate Fiduciary Duties in Bankruptcy, 56 U. Kan. L. Rev. 83, 84–85 (2007) (noting rarity of chapter 11 trustees). 98 See, e.g., John D. Ayer, et al., Bad Words to a Debtor’s Ear, Am. Bankr. Inst. J., Mar. 2005, at 20 (“Creditors force out the old management before the chapter 11 begins, and so the nominal ‘DIP’ is someone in whom creditors have faith, sent in to clean up the mess that others left behind.”). 99 See, e.g., Stuart C. Gilson & Michael R. Vetsuypens, Creditor Control in Financially Distressed Firms: Empirical Evidence, 72 Wash. U. L.Q. 1005, 1012 (1994) (discussing creditors’ threats to petition the court to appoint a trustee if managers do not resign). 100 See, e.g., Ayer et al., supra note 98. 101 Clifford J. White III & Walter W. Theus, Jr., Chapter 11 Trustees and Examiners after BAPCPA, 80 Am. Bankr. L. J. 289, 314–15 (2006). 102 See, e.g., In re G-I Holdings, Inc., 385 F.3d 313 (3d Cir. 2004) (applying clear and convincing standard). But see Tradex Corp. v. Morse, 339 B.R. 823 (D. Mass. 2006) (applying preponderance of the evidence standard). 103 In addition, the increasing use of chief restructuring officers, at least in larger chapter 11 cases, may suggest that parties are working around the concerns often associated with chapter 11 trustees. 104 See Clifford J. White III & Walter W. Theus, Jr., Taking the Mystery Out of the Chapter 11 Trustee Appointment Process, Am. Bankr. Inst. J, May 2014 (“Beyond independence, the U.S. Trustee will consider a candidate’s experience, qualifications and ability to