US Attorneys >
Title 4 >
Civil Resource Manual|
prev | next
The Bankruptcy "Players" -- Outline
January 17, 1996|
B. The Debtor
Rule 9001(5), Fed. R. Bankr. P.1. The Bankruptcy Code allows persons, corporations, partnerships, and municipalities to file petitions:(a) "debtor" means person or municipality concerning which a case under this title has been commenced, 11 U.S.C. § 101(13);(b) "municipality" means political subdivision or public agency or instrumentality of a State, 11 U.S.C. § 101(40);(c) "person" includes individual, partnership, and corporation, but does not include governmental unit that acquires an asset from a person as a result of operation of a loan guarantee agreement, or as receiver of liquidating agent of a person, 11 U.S.C. § 101(41);(d) "corporation" includes (a) associations having a power or privilege that a private corporation, but not an individual or a partnership, possesses; (b) partnership associations organized under a law that makes only the capital subscribed responsible for the debts of such association; (c) joint stock companies; (d) unincorporated companies or associations; or (e) business trusts; but does not include limited partnerships, 11 U.S.C. § 101(9).2. When the Federal Rules of Bankruptcy Procedure require an act to be performed by a "debtor" or when it is necessary to compel attendance of a "debtor" for examination and the debtor is not a natural person:(a) if the debtor is a corporation, "debtor" includes, if designated by the court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control;(b) if the debtor is a partnership, "debtor" includes any or all of its general partners or, if designated by the court, any other person in control.
3. In chapter 13 cases, the debtor has, with some exceptions, the powers of a trustee, 11 U.S.C. § 1303, including the power to operate the business if he or she is self-employed, 11 U.S.C. § 1304.C. Debtor-In-Possession
1. "Debtor-in-possession" ("DIP") means the debtor except when a trustee has been appointed. 11 U.S. C. § 1101(1). With limited exceptions, the DIP has all the rights, powers and performs all the functions of a trustee. 11 U.S.C. § 1107.
2. Before bankruptcy, the debtor's management is a fiduciary to the corporation and the shareholders. After filing the petition, the management serving as the DIP is a fiduciary to the estate and its creditors as well. Commodities Futures Trading Commission v. Weintraub, 471 U.S. 343, 355 (1985); In re Bowman, 181 B.R. 836, 842-46 (Bankr. D. Md. 1995) (comprehensive discussion of the fiduciary duty of a debtor-in-possession); In re Johns Manville Corp., 52 B.R. 879, 885 (Bankr. S.D.N.Y. 1985) (the DIP is "required to take good faith actions in the best interests of the estate, not the best interests of the shareholders of the corporation"). The DIP owes the duties of care, loyalty, and impartiality among beneficiaries to the estate and its creditors. In re Bellevue Place Assocs., 171 B.R. 615, 623-24 (Bankr. N.D. Ill. 1994) (debtor-in-possession must avoid self dealing); Bogart, Liability of Directors of Debtors in Possession: "Don't look back - Something may be Gaining on You", 68 Am. Bankr. L. J. 155 (1994) (comprehensive discussion of liability of management and directors of a DIP).D. Case Trustee
1. Chapter 7. There is always a trustee in chapter 7 cases. 11 U.S.C. §§ 701 (appointment of interim trustee by United States Trustee), 702 (election of permanent trustee by creditors), 703 (successor trustee); 28 U.S.C. § 586(b) (US Trustee appoints standing trustees subject to approval of Attorney General). Once appointed, the chapter 7 trustee (1) becomes the sole representative of the debtor's estate, (2) pursues all pre-petition causes of action belonging to the debtors, and (3) pursues trustee's own causes of action to recover money or property under the trustee's avoiding powers. In re Pearson Indus., Inc., 178 B.R. 753, 761 (Bankr. C.D. Ill. 1995); In re Lansberry, 177 B.R. 49, 55-56 (Bankr. W.D. Pa. 1995). The chapter 7 trustee represents the interests of the unsecured creditors, and is a fiduciary of the secured creditors with the duty to exercise reasonable care as custodian of the properties which serve as collateral for the secured claims. Matter of Esco Mfg., Co., 33 F.3d 509, 514 (5th Cir. 1994) (chapter 7 trustee has a fiduciary obligation "to preserve the estate's assets in order to maintain the most advantageous liquidation of the estate for the interest of its creditors"); Pearson Indus., 178 B.R. at 761; In re Arnold, 176 B.R. 13, 15 (Bankr. E.D. Tex. 1995) (chapter 7 trustee has a duty to attempt to achieve desired end result of chapter 7: distribution to creditors). This is generally accomplished by collecting and reducing to money the nonexempt property of the estate that is not subject to liens. Therefore, the chapter 7 trustee must close the estate as expeditiously as is possible. Esco Mfg., 33 F.3d at 514.
2. Chapter 12/13. There is always a trustee in chapter 12 and 13 cases. 11 U.S.C. § 1202 (appointment of trustee by United States Trustee); 11 U.S.C. § 1302 (same); 28 U.S.C. § 586(b) (US Trustee appoints standing trustees subject to approval of Attorney General). Chapter 12 and 13 trustees do not take possession of property of the estate. 11 U.S.C. §§ 1202, 1302. Instead, the trustee receives the regular payments of the debtor and distributes the funds to creditors according to the terms of the plan.
3. Chapter 11. A trustee is rarely appointed in chapter 11 cases. In re Bellevue Place Assocs., 171 B.R. 615, 623 (Bankr. N.D. Ill. 1994) ("appointment of a trustee is an extraordinary remedy that requires proof by clear and convincing evidence"). However, the court may appoint a trustee in a chapter 11 case (a) for cause, including fraud, dishonesty, incompetence or gross mismanagement of the debtor either before or after the filing, or (b) if appointment of a trustee is in the best interests of creditors, equity security holders, or other interests of the estate. 11 U.S.C. § 1104; Petit v. New England Mortgage Servs., Inc., 182 B.R. 64, 69-71 (D. Me. 1995) (court may appoint a bankruptcy trustee in a chapter 11 case where the debtor-in-possession "cannot be properly entrusted with the [required] fiduciary duties" or where there is a "deep-seeded conflict and animosity between a debtor and its creditors."); Bellevue Place Assocs., 171 B.R. at 622-25. The court may appoint a trustee sua sponte. In re Bibo, Inc., 76 F.3d 256 (9th Cir. 1996).
4. Generally, the case trustee owes the duties of care, loyalty, and impartiality among beneficiaries to the estate and its creditors. The specific duties of a trustee differs under different chapters. Compare 11 U.S.C. §§ 704; 1106; 1202(b); 1302(b). For example, under chapter 11, the trustee has the power to operate the debtor's business, 11 U.S.C. § 1108, a power and duty not within the scope of a chapter 7 trustee, unless specifically authorized, 11 U.S.C. § 721. Additionally, a chapter 7 trustee's powers extend only over property of the estate. 11 U.C. § 704. In all cases, the enumerated statutory duties of a bankruptcy trustee are not exclusive. See 11 U.S.C. §§ 704, 1106; Holywell Corp. v. Smith (In re Holywell Corp.), 112 S. Ct. 1021, 1027 (1992) (trustee obligated to file tax returns); Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494 (1986) (chapter 7 trustee must conform with various health and safety regulations in administering estate property); Matter of Esco Mfg., Co., 33 F.3d 509 (5th Cir. 1994) (trustee must take control of and terminate a debtor's pension plan); Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154-62 (3d Cir. 1989) (bankruptcy trustee must comply with statutorily imposed obligation to arbitrate); In re Petit, 172 B.R. 706 (Bankr. D. Me. 1994) (individual chapter 11 trustee may convene § 341 meeting).
5. Individual trustees are obliged to report any criminal activities and assist in any subsequent prosecutions. 18 U.S.C. § 3057; 28 U.S.C. § 586(a)(3)(F). The trustee must also (a) investigate the debtor's financial affairs, 11 U.S.C. §§ 704(4), 1106(a)(3), 1202(b)(2) (only if ordered), 1302(b)(1); (b) oppose discharge where appropriate, 11 U.S.C. §§ 704(6), 1202(b)(1), 1302(b)(1); and (c) furnish information concerning the estate as requested by party in interest, 11 U.S.C. § 704(7).
6. A case trustee may be removed for cause by the court after notice and a hearing. The US Trustee can also remove a standing trustee. 11 U.S.C. § 324; Richman v. Straley, 48 F.3d 1139 (10th Cir. 1995) (chapter 12/13 trustee removed by UST); In re Drinkwater, 178 B.R. 590 (Bankr. D. Mass. 1995) (chapter 13 trustee); In re Reed, 178 B.R. 817, 821-22 (Bankr. D. Ariz. 1995) (chapter 7 trustee).E. Committees
1. Official committees of creditors and equity security holders are accorded substantial roles in bankruptcy cases, 11 U.S.C. §§ 705, 1102, including consultation with the debtor-in-possession or trustee, participating in formulation of the plan, objecting to the claims of other general unsecured creditors, and some litigation, 11 U.S.C. §§ 705, 1103(c); In re EBP, Inc., 171 B.R. 601, 603 (Bankr. N.D. Ohio 1994). The use of a committee to represent similarly situated creditors reduces the aggregate cost to creditors of representation. In addition to being more efficient, this process allows creditors whose claims would have been relatively too costly for them to pursue individually to be represented effectively as part of the class of creditors to which they belong.
2. The committees ordinarily consist of persons who hold claims against the estate of the type represented by the committee. 11 U.S.C. §§ 705 (elected committee of 3-11 creditors holding allowable unsecured claims), 1102(b)(1) (appointed or self-selected committee of 7 largest creditors); 1102(b)(2) (appointed committee of 7 largest equity holders). Other committees which represent particular classes of creditors are also authorized. 11 U.S.C. § 1102(a). Whether creditors committees owe a duty to the estate and the debtor, or only to the represented creditors is subject to controversy. Compare Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438, 513-15 (S.D.N.Y. 1994) (creditors committee owes "fiduciary duty only to the class of creditors it represents, not to the Debtor, or any other party in the bankruptcy case") with In re National Liquidators, Inc., 171 B.R. 819, 826 (Bankr. S.D. Ohio 1994) ("Like debtors, they also serve as fiduciaries and are required to act in a manner to serve the best interest of the estate and its creditors."). At a minimum, creditor committees must protect the interests of the group they represent, rather than acting in a manner which serves only the best interests of the individual members. Id.
3. The court must appoint a committee of retired employees if (1) the debtor seeks to modify retiree benefits, and (2) a motion for such a committee is filed. 11 U.S.C. § 1114(c)(2), (d).
4. Only unofficial committees were recognized under the Bankruptcy Act and they continue to be recognized in chapter 11 cases.
5. Official committees enjoy a qualified immunity extending to "conduct within the scope of the committee's statutory or court-ordered authority." Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438, 514 (S.D.N.Y. 1994).F. Counsel
1. Counsel for the debtor-in-possession/trustee, unlike the debtor's counsel, has a fiduciary duty to the post bankruptcy entity and not to "the stockholder, director, officer, employee representative or other person connected with the entity." In re Bellevue Place Assocs., 171 B.R. 615, 626 (Bankr. N.D. Ill. 1994). Thus, counsel for the debtor-in-possession/trustee owes its fiduciary responsibility to the postpetition entity -- not the prepetition entity or its principals. Counsel for the debtor-in-possession/trustee must not hold or represent an interest adverse to that its client. In re Sidco, Inc., 173 B.R. 194 (E.D. Cal. 1994); In re Bellevue Place Assocs., 171 B.R. 615, 626-27 (Bankr. N.D. Ill. 1994) (comprehensive discussion of meaning of "adverse interest"); see generally 11 U.S.C. §§ 327 - 329. For example, § 327 prohibits an attorney from simultaneously representing a creditor and a trustee as a general counsel. However, counsel for a creditor may represent the trustee as special counsel for specific and limited purposes. In re Maynard, 172 B.R. 353, 355 (Bankr. M.D. Fla. 1994). Counsel for a chapter 11 debtor can only perform limited duties for the trustee if the case is converted to chapter 7. In re Pine Valley Mach., Inc., 172 B.R. 481, 486-88 (Bankr. D. Mass. 1994).
2. Committees may retain professionals, including counsel, to assist them. 11 U.S.C. § 1103. These counsel can be paid by estate assets. However, professionals hired by unofficial committees may only be compensated if they make a "substantial contribution" within the meaning of 11 U.S.C. §§ 503(b)(3)(D), (b)(4), rather than under the more lenient standard of 11 U.S.C. §§ 330, 331, applicable to professionals employed by official committees. All counsel "must be free of any personal interests or connections that are at odds with the interests of the entities they intend to represent," including free from representing parties with adverse interests. See In re National Liquidators, Inc., 171 B.R. 819, 826 (Bankr. S.D. Ohio 1994); In re EBP, Inc., 171 B.R. 601 (Bankr. N.D. Ohio 1994) (representation of individual creditor by counsel for creditor's committee does not per se create conflict of interest). Counsel for the committee must act in the best interest of the class of creditors they represent, not the individual members of the committee. National Liquidators, 171 B.R. at 826; EBP, 171 B.R. at 602 (counsel can file objection to plan even if class votes in favor of plan).
3. Counsel for interested parties (creditors, third parties, postpetition business parties) have an obligation to report felonies, 18 U.S.C. § 4 (misprision of felony), and are subject to prohibitions against using existence of felony violation for private gain, 18 U.S.C. § 873 (blackmail); 18 U.S.C. § 875(d) (extortion).
4. Federal agencies are represented in bankruptcy proceedings by a host of attorneys. The Corporate/Financial Debt Recovery Section of DOJ's Commercial Litigation Branch personally represents the government in many large, multi-agency proceedings and provides assistance generally on bankruptcy issues. DOJ's Tax Division focuses on issues involving the IRS, while issues involving the EPA are represented by DOJ's Environment and Natural Resources Division. The United States Attorney's Office will have Assistant United States Attorneys who regularly practice in the local bankruptcy court. Agencies which are regularly involved in litigation may have Special Assistant United States Attorneys who also appear in bankruptcy court. Finally, every agency has agency counsel who assist, in varying degrees, in the litigation of bankruptcy proceedings.G. An Examiner
H. United States Trustee
1. The United States Trustee ("UST") program was designed to relieve the bankruptcy judges of certain administrative matters. The UST has broad statutory standing in chapter 11 including the right to raise any issue and to be heard on any issue raised by others, 11 U.S.C. § 307, and also have a variety of powers under other provisions of the Code, as well as extensive duties imposed by 28 U.S.C. § 586(a)(3), including appellate standing. In re Columbia Gas Systems Inc., 33 F.3d 294, 296-99 (3d Cir. 1994). Courts have recognized that the UST "serve[s] as the vanguard, especially on those issues that impact upon the integrity of the [bankruptcy] process." In re National Liquidators, Inc., 171 B.R. 819, 825 (Bankr. S.D. Ohio 1994).
2. USTs are appointed under 28 U.S.C. § 581. They are obligated to report any criminal offenses and assist in any subsequent prosecutions. 18 U.S.C. § 3057; 28 U.S.C. § 586(a)(3)(F). The duties of the UST include (1) monitoring applications for compensation and reimbursement; (2) monitoring plans and disclosure statements in chapter 11 cases; (3) making sure that all reports, schedules, and fees required to be filed by the debtors are in fact filed; (4) monitoring the functioning of creditor's committees; (5) notifying the U.S. Attorney of possible crimes uncovered and cooperating with the U.S. Attorney in subsequent prosecutions; (6) monitoring the progress of bankruptcies and keeping cases moving; and (7) monitoring the employment of professional persons in bankruptcy cases. In re Columbia Gas Systems Inc., 33 F.3d 294, 296 (3d Cir. 1994).I. Interested parties
J. The Securities and Exchange Commission
K. Individual Creditors
1. One purpose of bankruptcy is -- at least in theory -- creditor protection. The idea: once the petition is filed, creditors shouldn't be able to improve their positions but -- on the other hand -- their positions shouldn't be diminished. The Code protects creditors as well as the debtors by proscribing a creditor's gaining an advantage by making a quick grab for assets.
2. The Code, at least in theory, intends that a creditor's property interests be maintained. Thus, for example, a creditor may demand adequate protection if the trustee wants to use its property, 11 U.S.C. § 363, set off mutual debts with court permission, 11 U.S.C. § 553, or ask the court to compel the assumption or rejection of an executory contract, 11 U.S.C. § 365.
3. In addition, creditors having similar claims generally are treated similarly. A class of creditors having superior claims are provided priority treatment -- thus, e.g., unsecured creditors should be paid in full before equity holders are paid.L. Federal Creditor Agencies
M. Individual Shareholders
N. The Bankruptcy Court
1. Bankruptcy Judges are appointed by the Circuit Courts of Appeals and serve fourteen year terms of office. 28 U.S.C. § 152. The bankruptcy court is an "adjunct" of the district court and has the authority to hear and decide cases arising under the Bankruptcy Code under the supervision of the district court. Cases are "referred" to the bankruptcy court by the district court through standing orders of referral. They are not Article III courts and have limited grants of jurisdiction. However, they also have considerable equitable powers. 11 U.S.C. § 105. Naturally, they have an obligation to report bankruptcy crimes. 18 U.S.C. § 3057.
2. The bankruptcy court has its own clerk and clerk's office staff. They can be a valuable source of documents and information.O. The District Court
1. The district court has original and exclusive jurisdiction over all bankruptcy "cases," 28 U.S.C. § 1334(a), and over all property of the debtor and estate, 28 U.S.C. § 1334 (d). The district court has original but not exclusive jurisdiction over all "civil proceedings" arising under the Code, or arising in or related to a bankruptcy case. 28 U.S.C. § 1334(b). Proceedings arising under the Code are proceedings seeking relief affordable only under a substantive Bankruptcy Code provision; proceedings arising in a case under the Code are those involving the administration and structuring of the estate that would have no existence but for the bankruptcy case. The scope of "related to" cases is subject to controversy but is fairly broad.
2. As noted above while federal district courts have original jurisdiction, they rarely actually handle bankruptcy cases. Instead, by standing orders, they refer them to bankruptcy judges for handling. Thereafter, the district court's role is generally limited to hearing appeals from bankruptcy court orders although occasionally when important issues involving non-bankruptcy issues arise, the district court can "withdraw its reference" and hear a matter in the first instance.P. Federal Investigatory Agencies