Previously, I posted about Lenny Dykstra and why someone like him would file for Chapter 11, which is more typically used for business bankruptcies, rather than Chapter 7 or Chapter 13 which are for individual bankruptcies.
Regardless of whether it was the right path strategically speaking, things don’t seem to be going so well for him at the moment. The bankruptcy judge recently decided to appoint a trustee to oversee the case because Dykstra could no longer administer his finances.
While not a great development for Dykstra, it does provide a good opportunity here to highlight some of the different roles of a trustee in Chapter 7, 11 and 13 bankruptcies.
So why was a trustee appointed? Shouldn’t there already be a trustee in a Chapter 11 bankruptcy case? Years ago the answer would be yes. A trustee was automatically appointed in Chapter 11 cases to oversee the case. However, since the 1978 bankruptcy law went in to effect, in most cases the debtor actually continues to administer its own finances.
What? You mean the same debtor that got itself into trouble in the first place? Yep. It’s called “Debtor-in-Possession” or “DIP” for short. The idea is that, despite all the problems leading to the bankruptcy, the debtor is still likely the best positioned to know how to run the the debtor’s business. The ability to keep control of the case also served as an incentive to get companies to file for Chapter 11 to enable a reorganization so that both debtor and creditors could move forward with their lives and businesses rather than get tangled up for a long time.
For a counterexample, look at Japan during the 1990s when it was completely stagnant. The lack of “attractive” bankruptcy laws, from a debtor’s perspective, led companies to stand pat and avoid reorganization. As a result, valuable assets stayed locked up in non-productive uses for a long period.
Getting back to American soil, while typically a debtor in a Chapter 11 stays in control of the case as a Debtor-in-Possession, in some cases a bankruptcy judge will appoint a trustee to administer the debtor’s finances instead. This generally happens when the judge believes that the debtor is doing such a poor job, perhaps as a result of incompetence or fraud, that the debtor’s estate and creditors would fare better with an independent trustee at the helm.
In Dykstra’s case, it sounds like he didn’t have much of a plan for moving forward, according to Stephen Grocer of the Wall Street Journal’s Deal Journal (“Lenny Dykstra Wiffs in Bankruptcy Case“). The judge recognized that and appropriately appointed a trustee.
Go to Chapter 11 Bankruptcy Attorney Brooklyn NY to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.
