US Trustee in a Chapter 11 Bankruptcy

In November 2010, crain’s new york reported that Ambac Financial Group Inc., a holding company for the bond insurer being restructured by state regulators in Wisconsin, filed for bankruptcy protection to reschedule payments on more than $1 billion in bonds. The case was In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The petition for Chapter 11 protection listed assets of $394.5 million and liabilities of $1.68 billion. According to crain’s new york, The Vanguard Group Inc. was listed as the largest shareholder, with 5.46% of the company’s stock.

In a Chapter 11, the US trustee, part of the Department of Justice, monitors the progress of a Chapter 11 bankruptcy. The US trustee, with offices close to the bankruptcy court, often makes appearances at Chapter 11 status conferences. The US trustee monitors plans and disclosure statements filed with the court, and creditors’ committees.

The US trustee monitors professional fees and reimbursement applications. The Bankruptcy Code allows applications to be made by certain professionals during the case. A trustee, a debtor’s attorney, trustee’s attorney, accountant, or any professional person appointed by the court may apply to the court at intervals of 120 days for interim fees and reimbursement payments. The fees come from the bankruptcy estate though the professionals may not be working for the benefit of the debtor. Although professional fees may be paid if authorized by the court, the debtor cannot make payments to professional creditors arising before the filing of the bankruptcy petition.

In a Chapter 11, the US trustee conducts a meeting of the creditors, referred to as the “section 341 meeting”. At a 341 meeting, the US trustee and creditors question the debtor under oath concerning the debtor’s acts, conduct, property, and case administration. If a debtor does not show up for a 341 meeting, the debtor’s plan does not go to confirmation. The case may be dismissed if the 341 meeting needs to be continued too many times. Any confirmation hearing scheduled would be delayed to after the debtor appears for the 341 meeting.

When there is no trustee appointed a bankruptcy case, the debtor is a debtor-in-possession. To the outside world, it may look as if nothing has changed in that the debtor still has possession and control of its assets, but the assets no longer belong to the debtor for the debtor to do whatever the debtor wants. The debtor-in-possession acts as a trustee in managing bankruptcy estate assets. The US trustee imposes requirements on the debtor-in-possession concerning reports on monthly income and operating expenses, opening new bank accounts, and paying employee withholding and other taxes.

A debtor in New York should engage an experienced bankruptcy attorney to understand the roles of different parties in interest in a bankruptcy case.