American Bankruptcy Institute
28 IV. Proposed Recommendations: Commencing the Case
consult with parties in interest during this process, and the selection is subject to court approval.105 Although section 1104(d) is silent on the scope of court review, the court generally will review only whether the U.S. Trustee consulted with parties as required by the Bankruptcy Code and whether the candidate is disinterested and is formally qualified to serve as trustee. A party in interest may also request that the U.S. Trustee hold an election for the trustee in accordance with section 702 of the Bankruptcy Code.106
Once identified and approved, the chapter 11 trustee assumes all of the powers of the debtor’s management, is vested with certain other powers, and is subject to certain duties under section 1106 of the Bankruptcy Code. The trustee can, among other things, operate the debtor’s business, manage and administer the bankruptcy estate, file and implement a chapter 11 plan, and investigate the debtor’s affairs and prepetition activities.107 The trustee must also ensure that certain materials and reports are filed with the court on a timely basis.
The Chapter 11 Trustee: Recommendations and Findings
The debtor in possession model should not be the sole structure for a chapter 11 case. The Bankruptcy Code needs an effective mechanism for appointing a chapter 11 trustee to displace management in appropriate cases. The Commissioners discussed the kinds of cases that warrant chapter 11 trustees, including instances of fraud or illegal conduct by management. They also acknowledged the value of appointing a trustee to increase accountability in chapter 11 cases, to protect against “bankruptcy rings” and collusive conduct, and to create dynamic tension by introducing an outsider to the negotiation process.108 As referenced in the previous section, however, the Commissioners also evaluated the potential disadvantages of appointing a trustee, such as the potential collateral impact of the appointment, additional costs, delays, and inefficiencies in the case. In light of the foregoing, the Commission determined to retain the grounds for the appointment of a chapter 11 trustee set forth in section 1104(a) because they are warranted and strike an appropriate balance between the benefits and drawbacks of such appointment.
The Commission also considered the relatively low percentage of trustee appointments in chapter 11 cases. It was not able to determine if the relatively small number of trustee appointments suggested a flaw in the current system or reflected the judgment of stakeholders that grounds either did not exist to support an appointment or were remedied through prepetition changes
muster necessary bankruptcy, financial and business expertise.”). Bankruptcy cases in Alabama and North Carolina are not under the jurisdiction of the U.S. Trustee, but rather are administrated by Bankruptcy Administrators in those jurisdictions. 105 11 U.S.C. § 1104(a). See also Chapter 11 Trustee Handbook 7 (May 2004) (explaining that the U.S. Trustee consults, either by telephone or in person, with parties in interest to identify candidates and then interviews potential candidates to determine if they are qualified for the particular case and disinterested); White & Theus, supra note 104 (“Once the court enters the order, the U.S. Trustee expeditiously consults with major creditors, the creditors’ committee, the debtor and other interested parties. This consultation might be in person, by telephone or by email. U.S. Trustees take seriously and place a high value on the input provided by parties in interest.”). 106 11 U.S.C. § 1104(b) (providing that motion requesting an election must be filed within 30 days of the entry of the order appointing a chapter 11 trustee). 107 Id. § 1106(a). 108 For a historical overview of the purpose of the U.S. Trustee in response to so-called “bankruptcy rings,” see 6 Collier On Bankruptcy ¶ 6.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“[I]n many parts of the country, the Bankruptcy Act principle of creditor control of cases had degenerated into a system of attorney control. That fostered the development of ‘bankruptcy rings,’ closed bankruptcy practices heavily favoring the appointment of insiders, who were obliged to one another, to trustee positions. Cases were too often administered solely for the benefit of the members of the bankruptcy rings, with creditors receiving nothing.”).