What is a "Motion to Confirm the Appointment of a Trustee?"

The appointment of a trustee in a Chapter 11 bankruptcy filing plays a major role in monitoring the progress of the case. The trustee is primarily tasked with overseeing the operation of the business to ensure that it is accurately reporting all monthly income and operating expenses along with paying employee withholding taxes.

What is Chapter 11 Bankruptcy?

Most publicly held companies choose to file under Chapter 11 because they can still run their business while retaining control of the bankruptcy process. Chapter 11 bankruptcy is used when sole proprietors, corporations and partnerships wish to reorganize their debts. Unlike Chapter 13, there are no limits on the amount of debt. The debtor filing for bankruptcy protection (referred to as a “Debtor-In-Possession”) usually remains in possession of their assets, but operates the business under the supervision of the court. If the court finds that the management is ineffective or fraudulent, a trustee will be appointed. The debtor must submit a plan of reorganization outlining how the debts will be restructured. Repayment of loans should be secured by real estate to be paid over an extended length of time. Term loans are usually paid over a five or ten-year period while unsecured creditors are paid less than the amount of their claims.

The Role of the Trustee

Once a Chapter 11 bankruptcy case begins, upon the request of any interested party, the court must order the appointment of a trustee if the following conditions exist:

• Evidence of fraud, dishonesty, incompetence or gross mismanagement of the business affairs by the debtor or current management
• If appointing a trustee is in the best interest of the creditors or any asset holders
• If there are grounds to convert or dismiss the case
• The debtor’s fixed or unsecured debts exceed $5,000,000

The U.S. Trustee will establish a creditors committee from the 20 largest unsecured creditors. This committee represents all of the creditors to provide oversight of the business owner’s operations. A Chapter 11 plan can only be confirmed by an affirmative vote of the majority of the creditors. The creditors are placed into similar classes, such as unsecured debts. If one class votes against the plan, the court may still approve the plan if it is deemed fair and equitable without unfairly discriminating against a certain class of creditors. Before the confirmation of a plan, the court must confirm the appointment of the trustee.

How a Bankruptcy Attorney Can Help

If your business needs to restructure their debts, filing for Chapter 11 can provide you the time needed to repay your creditors. The appointment of a trustee can have many disadvantages. Most trustees are likely to shut down the business and convert the case to a liquidation. Before deciding which type of bankruptcy you should file under, consulting with an attorney who specializes in this area of law would be a wise decision.