Federally Appointed Trustees: Helping or Hindering?

Tensions between failing companies and federally appointed Trustees in Bankruptcy have created challenges for federal bankruptcy courts across the nation. While companies that file for Chapter 11 bankruptcy tend to choose a venue that will be more favorable to their restructuring objectives, federally appointed Trustees are increasingly resistant to grant such accommodations.

The most common form of bankruptcy is Chapter 7, which serves to provide immediate relief of outstanding debts to creditors by halting company operations and liquidating existing assets in their entirety. Chapter 7 bankruptcies are supervised by federally appointed Trustees who are responsible for gathering debtors’ non-exempt assets, managing the sale of those assets, and distributing the proceeds to outstanding creditors. In contrast, Chapter 11 governs the process of reorganization of a debtor in bankruptcy proceedings. Chapter 11 enables businesses to undergo a financial reorganization, also supervised by a court appointed Trustee in Bankruptcy. Chapter 11 typically empowers the Trustee with the ability to operate the debtor’s business, and affords the debtor various mechanisms to restructure its business with the goal of eventually emerging from debt. Recent notable Chapter 11 bankruptcies include both Lehman Brothers Holdings Inc. and Washington Mutual during the heart of the financial crisis of 2008.

Failing businesses argue that the U.S. Trustees’ lack of leniency regarding choice of venue will leave them with potentially no way out of bankruptcy. The Trustees counter that their responsibility is “to preserve the integrity of the bankruptcy system, [and that sometimes] in doing so, it will not be in the best interest of a particular company.” As the debate continues, it will be interesting to see whether a trend begins to develop in favor or against the U.S. Trustees’ devotion to uphold stringent standards for American companies filing Chapter 11.

For more information on this issue see:

Wall Street JournalTesting Chapter 11’s Limits – U.S. Watchdogs Square Off With Companies over Venue, Executive Bonuses. By: Rachel Feintzeig and Jacqueline Palank

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