Can a Bankrupt Landlord Be Their Own Trustee in a Bankruptcy?

Duties

• Upon the filing of a Chapter 11 bankruptcy case, the debtor is automatically also appointed as the debtor-in-possession. The debtor-in-possession acts as a fiduciary to the assets of the bankruptcy estate and to the creditors of the estate. This means that the debtor-in-possession must act in the best interest of creditors and the estate, not the debtor landlord. Thus, if it would be in the best interest of creditors to sell certain of the property of the landlord, the debtor-in-possession landlord must do so.
  
  

Powers

• A debtor-in-possession has the vast majority of powers that belong to a bankruptcy trustee. The most significant powers that a debtor-in-possession has include the avoidance of transfers. The landlord may initiate lawsuits against creditors and other entities to seek the avoidance of fraudulent and preferential transfers. A fraudulent transfer is a transfer of property meant to hide assets from creditors. A preferential transfer is generally a payment made to a creditor within 90 days prior to the bankruptcy filing. In addition to the ability to undo certain transfers, the debtor-in-possession may also accept or reject certain uncompleted or executory contracts.
  
  

Removal

• Although a debtor-in-possession is the equivalent of a bankruptcy trustee, unlike a trustee, the court and creditors will closely monitor his behavior. A creditor may file a motion with the court seeking appointment of a Chapter 11 bankruptcy trustee to oversee the case. A creditor may seek such an appointment if the debtor-in-possession is not acting in the best interest of creditors and the estate, or is not following other requirements of the bankruptcy code. If the court grants the request, it will appoint a bankruptcy trustee and remove the debtor landlord from its position as debtor-in-possession.
  
  

Distinction

• Unlike a bankruptcy trustee, a debtor-in-possession is not required to investigate the financial condition of the debtor and provide a written report to the court. This is because the debtor-in-possession is also the debtor, so it makes little sense for a debtor to investigate himself. Furthermore, the law precludes a debtor-in-possession from seeking compensation for any services it performs that benefit the bankruptcy estate. A bankruptcy trustee, on the other hand, may seek compensation for services performed.