In the vast majority of Chapter 11 bankruptcy cases, there is no Trustee as in a Chapter 7 or Chapter 13 case. The debtor is called a “debtor in possession” because he in effect acts as his own “trustee”, to state it one way. He retains control of the assets and business operations during the course of the case. However, there are some situations (described in 11 U.S.C. 1104(a)) where a trustee can actually be appointed after a case is filed:
1. For good cause, such as seriously derelict management of assets before or during the pendency of a case, or
2. If the appointment of a trustee is in the best interests of the estate.
Of course, these situations are not often encountered. In deciding whether to appoint a trustee under the “best interests” rule, the court would have to weigh a number of factors. The final analysis would have to balance the expense of appointing a trustee against the possible savings of the assets of the estate. As a practical matter, the appointment of a trustee in a Chapter 11 bankruptcy case is only going to happen in unusual circumstances. But it does happen, and it is interesting to note the legal effect of such a development:
1. The trustee can now have an active role in running the company, if this is a corporate Chapter 11 case.
2. The debtor’s exclusive right to file a plan is now replaced by the possibility of a proposing his own plan of reorganization.
3. The trustee is vested with the authority to bring actions (adversary proceedings) against other parties on behalf of the business.
4. The debtor loses his exclusive right to convert to a Chapter 7 case (11 U.S.C. 1112(a)).
Because the incidence of a trustee being appointed in a Chapter 11 case is rare, this is not the type of issue that is commonly encountered. However, it is important to be mindful that it does exist. A party seeking such an outcome would have to make a strong showing that a trustee appointment would be to the estate’s benefit, and this is normally an uphill battle.