A “Nuclear Option” in Chapter 11. One way the Bankruptcy Code seeks to encourage companies to seek the protection of chapter 11, when doing so is the prudent thing to do, is its default rule that the owner stays in charge upon filing a chapter 11 petition. However, not every restructuring/insolvency regime on Earth follows suit.
Under certain circumstances, however, a bankruptcy court may appoint a chapter 11 trustee to assume responsibility for day-to-day operational control of the debtor as well as the reorganization. The utterance of the words “motion to appoint a chapter 11 trustee” are usually considered cause for a fight from a Debtor’s perspective. And even those seeking the appointment of a chapter 11 trustee are usually hesitant to do so.
Why? Two reasons. First, there can be drastic consequences of a change in management to a debtor and its operations. Second, the standard to persuade a court to grant a motion to appoint a chapter 11 trustee is stringent.
Creditors and other stakeholders, therefore, should understand the potential benefits and pitfalls of displacing management and the likelihood of success of appointing a chapter 11 trustee. In the first half of their article, The Good, the Bad, and the Ugly of Replacing a Debtor’s Management with a Chapter 11 Trustee, Lawrence V. Gelber (of Schulte Roth & Zabel) and Aaron Wernick (of MetLife Investment Management), discuss the strategic considerations parties should take into account before seeking a chapter 11 trustee. In the second half, they discuss the statutory requirements for such a motion to succeed, ousting the debtor in possession (DIP) and getting a chapter 11 trustee appointed.