How is the Trustee Selected in a Chapter 11 Bankruptcy Case?

When a business files for Chapter 11 bankruptcy, one of the first steps in the process is the decision as to whether to assign a new trustee. Under Chapter 11, this is a choice driven by discretion: in many cases, the court will determine that bringing in a new person to run an already-existing business makes no sense, even if the debtor has gotten the organization into its current financial difficulty. Though creditors and other interested parties certainly have the right to file a motion before the court for this to happen, there are also circumstances under which the court takes matters into its own hands. Generally speaking, there are two reasons why a trustee would be appointed.

The first justification for appointing a trustee would be “for cause,” with cause including gross mismanagement, dishonesty, fraud or incompetence, whether before or after the bankruptcy procedure has been initiated. It is widely understood that this option is loosely understood: were there not a certain level of mismanagement, it is unlikely that a bankruptcy filing would be required. Therefore, the appointment of a trustee is generally only pursued when the situation is acute and the need for someone else to step in is apparent. Without that need, it is understood that, even with a level of incompetence, the people who are most familiar with the business are best suited to continue overseeing its operations.

The second justification for appointing a trustee is when it is considered to be better for “creditors, any equity security holders, and other interests of the estate.” The measure of what is in the better interest of the creditors can be a challenge to prove: they need to show that having a trustee in place would be better and cost less than leaving the debtor in place.

The process of appointing a trustee entails having the U.S. Trustee’s Office meet with all involved parties and then selecting an individual or corporation determined to be unbiased and disinterested to serve in the position. That person needs to be approved by the court and is usually a member of the Chapter 7 Trustee Panel, though this is not required.

If you are a business owner who is facing a bankruptcy proceeding, we can help. Contact our office today to set up an appointment.