Chapter 11 Debtor-in-Possession

In February 2011, crain’s new york business.com reported that the founder of New York’s H&H Bagels, filed bankruptcy. The founder was sentenced to 50 weekends in jail in 2010 for failing to pay over $500,000 in payroll taxes. H&H Bagels started in 1972 with its first store at Broadway and West 80th Street on Manhattan’s Upper West Side. The business went into financial troubles from litigation, the loss of rental income from a tenant who declared bankruptcy, and construction costs. The business filed under Chapter 11

In some Chapter 11 cases, a trustee may be appointed. The trustee reviews the debtor’s schedules and represents the interests of the creditors in the bankruptcy case. The trustee manages the bankruptcy estate assets. Though the bankruptcy estate pays the trustee’s fees, the trustee does not use the bankruptcy estate assets for him/herself or the debtor. The trustee works for the benefit of the creditors.

In most Chapter 11 cases, the debtor stays in control and possession of the bankruptcy estate as a debtor-in-possession. To the external world, the debtor may look the same, continuing to make decisions on its assets, but the debtor-in-possession no longer owns the property for personal benefits. The debtor-in-possession assumes the duties of a trustee. The debtor-in-possession is a fiduciary for the creditors, and owes the creditors a duty of care and loyalty.

In a duty of care, the debtor-in-possession must comply with the prudent investor rule to exercise the degree of care, skill and prudence exercised by a reasonably prudent person in managing a business. The duty of loyalty requires the debtor-in-possession to avoid conflicts and self dealings.

The debtor-in-possession, with the court’s approval, may engage attorneys, accountants, appraisers, or other professionals to assist the debtor in bankruptcy proceedings. The fees for professionals come from the bankruptcy estate after application to the US trustee.

The US trustee imposes reporting requirements on the debtor-in-possession. The debtor-in-possession needs to compile financial statements into reports on monthly income and operating expenses, used by secured creditors to study cash flow and by the US trustee to calculate quarterly fees. The US trustee fee ranges from $250 to $10,000 each quarter. Should a debtor-in-possession fail to comply with the reporting requirements, the US trustee may file a motion with the court to dismiss the debtor’s case.

When a court dismisses a case, the debtor returns to the place held prior to filing bankruptcy, with the automatic stay lifted. The debtor goes back to owning the property outright, with creditors able to go after the debtor to collect.

When in debt, engage an experienced New York bankruptcy attorney for support in carrying out debtor-in-possession responsibilities.