Unlike most other types of bankruptcy cases, Chapter 11 cases feature a significant amount of direct involvement from the U.S. trustee’s office. Organizations that are contemplating filing for Chapter 11 bankruptcy protection can expect a great deal of interaction with the U.S. trustee throughout the bankruptcy process.
What is the difference between a case trustee and a U.S. trustee?
In other types of bankruptcy cases, the case trustee is responsible for overseeing, and sometimes helping to execute, all matters related to the bankruptcy process. But in the majority of Chapter 11 cases, these duties are fulfilled by the debtor in possession (the corporation or individual who has filed for Chapter 11 protection, but remains in control of the property), and therefore case trustees are not usually appointed. However, the appointment of a case trustee can be specially requested by either the U.S. trustee or a party in interest, usually for a specific cause, such as dishonesty, gross mismanagement, or fraud on the part of the debtor or parties in control of the debtor. Case trustees can also be elected rather than appointed in certain circumstances.
A component of the Department of Justice, the United States Trustee Program oversees bankruptcy case administration and litigating in order to enforce bankruptcy laws and protect the integrity and efficacy of the national bankruptcy system. (More information on the mission of the U.S. Trustee Program can be found here.) The Executive Office for U.S. Trustees is located in Washington, D.C. The program also has 21 regional offices and 95 field offices across the country.
What duties does the U.S. trustee perform in a Chapter 11 bankruptcy case?
First day orders
Early in a Chapter 11 case, the U.S. trustee will review requests from the debtor for emergency orders and will ensure that any requested relief, such as approval to obtain emergency financing, pay certain suppliers, or retain professionals is appropriate to the circumstances. It is important that such requests are carefully reviewed, as they may have an impact on certain creditors’ rights, and potentially alter their ability later in the case to participate in negotiations for the terms of the debtor’s reorganization.
Chapter 11 cases feature numerous official committees representing the different creditor groups involved in the case, such as bond holders, equity security holders, or unsecured creditors. The U.S. trustee determines what official committees are necessary, appoints committee members, and oversees committee actions. The U.S. trustee also supervises any professionals employed by the committee, such as attorneys and accountants.
Plans and statements
A debtor must submit reorganization plans and disclosure statements, documents which outline the debtor’s financial circumstances and detail the strategy for satisfying creditors and getting out of bankruptcy, within the first 120 days of filing for Chapter 11 protection. The U.S. trustee reviews all filed plans and statements to ensure that the information that the debtor provides is both adequate and accurate.
As the debtor in possession in a Chapter 11 case is responsible for many of the duties of a trustee, ensuring the debtor’s compliance with the case’s reporting requirements is a critical aspect of the U.S. trustee’s responsibilities. The U.S. trustee ensures that all required fees, schedules, and reports are filed in a timely manner. Required documents typically include the debtor’s monthly operating reports, schedules of income and expenses, tax returns, proof of insurance, and any other documents which allow parties in the case to monitor the progress of the debtor’s reorganization plan. The U.S. trustee also ensures that the debtor’s management of money and assets is consistent with the Bankruptcy Code.
In order to help achieve the U.S. Trustee Program’s goal of promoting the efficiency of the bankruptcy system, the U.S. trustee has the ability and the duty to take action to prevent undue delay in the proceedings of a Chapter 11 case. Steps that the U.S. trustee can take to streamline the process include appointing a case trustee, converting the case from a Chapter 11 to a Chapter 7 liquidation, or filing a motion to have the case dismissed.
Many different professionals may serve in a Chapter 11 case and receive their payment from the bankruptcy estate. These professionals might include investment advisors, accountants, attorneys, auctioneers, and real estate brokers. The U.S. trustee reviews applications made by such professionals – either for employment in the case or, for those already employed, for payment of compensation or expense reimbursement – and identifies objections where appropriate. For example, the U.S. trustee might object to employing a particular law firm given that its work for other clients creates a conflict of interest with the case.
As a representative of the U.S. Department of Justice, the U.S. trustee investigates fraudulent, abusive, or criminal conduct for possible criminal or civil prosecution. Where applicable, the U.S. trustee is responsible for pursuing civil, or non-criminal, penalties. In situations where criminal fraud may have taken place, the U.S. trustee refers the case to the U.S. Attorney for further investigation and criminal prosecution.