Debtor in Possession (DIP)
- The debtor in possession (DIP) is a debtor under Chapter 11 bankruptcy that has been given most of the duties and powers of a trustee while also allowed to continue to run the business.
- The DIP has more complete control of its bankruptcy than a debtor under other bankruptcy chapters because many Chapter 11 cases are filed by big businesses where most trustees would not have the expertise or time to run the business nor would they have the time or competence to scrutinize the many financial transactions of a large business that would be needed to perform the other duties of a trustee, such as avoiding liens, or reversing fraudulent transfers or preference payments.
- The DIP generally hires many professionals, such as attorneys, accountants, and property appraisers to carry out its duties under bankruptcy, which is why the administration of a Chapter 11 case is expensive.
- The United States Trustee oversees and manages the DIP to ensure that statutory requirements are being met and that the Chapter 11 case is progressing, and also forms the creditors' committee.
- Either a case trustee or examiner may be appointed if the DIP is dishonest or incompetent or if it would best serve the parties in interest.
- A case trustee replaces the DIP by running the business and performing the other duties of a trustee under other bankruptcy chapters.
- An examiner has a more limited role than a case trustee. The most important function of an examiner is to investigate and monitor the DIP.
The debtor in possession (DIP) has similar responsibilities, duties, and powers that a trustee serves under other bankruptcy chapters, but also remains in control of the business and its assets. The debtor in possession serves as such until the reorganization plan is confirmed, the case is dismissed or converted to another chapter, or a case trustee is appointed.
The debtor in possession has the position of a fiduciary, with the rights and powers of a chapter 11 trustee, and it requires the debtor to perform all but the investigative functions and duties of a trustee, including accounting for property, examining and objecting to claims, and filing informational reports, such as monthly operating reports, as required by the court and the U.S. Trustee.
The debtor in possession also has many of the other powers and duties of a trustee, including the right, with the court's approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to perform the many duties required to a Chapter 11 case. Other responsibilities include filing tax returns and reports which are either necessary or ordered by the court after confirmation, such as a final accounting.
Although the debtor in possession runs the business and performs many of the functions of the trustee, it is not free to do whatever it wants. Not only do the creditors make sure that their interests are protected, but the bankruptcy case proceeds under the close supervision of the U.S. Trustee, and maybe even a case trustee or an examiner.
The U.S. Trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The U.S. Trustee is responsible for monitoring the debtor in possession's operation of the business and the submission of operating reports and the payment of fees. Additionally, the U.S. Trustee monitors applications for compensation and reimbursement by the professionals hired to administer the bankruptcy case, scrutinizes plans and disclosure statements filed with the court, and oversees the creditors' committees.
The U.S. Trustee conducts a meeting of the creditors, often referred to as the section 341 meeting, in a chapter 11 case. The U.S. Trustee and creditors may question the debtor under oath at the 341 meeting concerning the debtor's acts, conduct, property, and the administration of the case.
The U.S. Trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, establishing new bank accounts, and paying current employee withholding and other taxes. By law, the debtor in possession must pay a quarterly fee to the U.S. Trustee for each quarter of a year until the case is closed, converted or dismissed. The amount of the fee, which may range from $250 to $10,000, depends on the amount of the debtor's disbursements during each quarter. Should a debtor in possession fail to comply with the reporting requirements of the U.S. Trustee or orders of the bankruptcy court, or fail to take the appropriate steps to bring the case to confirmation, the U.S. Trustee may file a motion with the court to have the debtor's chapter 11 case converted to Chapter 7 or to have the case dismissed.
Case Trustees and Examiners
A case trustee or an examiner may be appointed for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or if such an appointment is in the interest of creditors, equity security holders, and other interests of the estate. A party in interest or the U.S. Trustee can request the appointment of a case trustee or examiner at any time prior to confirmation in a chapter 11 case. The case trustee is appointed by the U.S. Trustee, after consultation with parties in interest and subject to the court's approval. In some cases, the U.S. Trustee may convene a creditors' meeting solely to elect a case trustee.
The case trustee is responsible for management of the property of the estate, operation of the debtor's business, and, if appropriate, the filing of a plan of reorganization. The trustee is required to file a plan as soon as possible, or, if not possible, to file a report explaining why a plan will not be filed or to recommend that the case be converted to Chapter 7 or be dismissed.
In some cases, an examiner rather than a trustee will be appointed. The examiner does not run the debtor's business or perform the other duties of the case trustee except to investigate and report the debtor's performance. If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform. Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken. If the court decides that a case trustee is needed, the examiner will be replaced.