Business Bankruptcy--Debtor-in-Possession Fiduciary Duties


Business Bankruptcy - Simplified Operating Guidelines

A "How-To" Manual

For Non-Bankruptcy Professionals
Page 7
Robert S. Apfelberg, Karrie L. Bercik, Esq.

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Chapter 5. Debtor-in-Possession Fiduciary Duties

The debtor has the same responsibilities and powers as a chapter 11 trustee. Therefore, the debtor, by its management, has a fiduciary duty to the creditors, employees, shareholders, company and court. This fiduciary duty extends to all of the debtor's controlling management, shareholders, officers and directors. Although a difficult concept to implement practically, the debtor has a legal responsibility to act in the best interests of its creditors, and not in its own best interest.

The debtor is obligated to: (i) maximize the value of the estate for the benefit of all creditors, (ii) protect and conserve its property, (iii) appropriately pay expenses of operations and the costs of maintenance, (iv) be cooperative and honest in its disclosure of the company's condition, (v) properly maintain books and records of all transactions, (vi) investigate prior acts, conduct and the financial condition of the debtor, (vii) investigate the desirability of continuing operations, (viii) refrain from performing acts which could damage the estate or hinder a successful reorganization, (ix) institute suits to recover "avoidable preferences" (where one creditor has received an advantage over other similar creditors, generally within 90 days of the bankruptcy filing unless it is an "insider preference" which period extends for one year prior to the bankruptcy filing.), (x) disclose potential adversary proceedings or claims against creditors before asking them to vote on a plan of reorganization, (xi) negotiate in good faith and cooperate with creditors who may vote to accept or reject a plan of reorganization, and (xii) propose a plan of reorganization that satisfies all bankruptcy requirements.

In many respects, the post-petition debtor becomes a new company and is obligated to pursue any claims created by the pre-petition company and its management. This may create the odd circumstance that the debtor's administrative period management must sue pre-petition management or shareholders. Separate counsel must be utilized to represent the debtor when suing pre-petition management or shareholders.

The debtor's bankruptcy counsel represents only the company, acting by its management, but not the individual managers or shareholders. Often the primary shareholder is also the debtor's chairperson and chief executive officer. It is advisable for the primary shareholder and senior management to engage their own bankruptcy counsel to defend their personal interests.

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