Solyndra, the alternative energy company which took stimulus money, filed for Chapter 11 bankruptcy in early September. The office of the United States Trustee recently asked Solyndra’s bankruptcy judge to appoint an independent trustee to assume control of the company.
This request highlights several important aspects of a Chapter 11 case. First, in a Chapter 11 bankruptcy case, the debtor is also the trustee in the case. The debtor is designated “debtor in possession” to indicate that it remains in control of its assets and business. In the case of Solyndra, for example, this means that its existing management continued to control the company after it filed for Chapter 11 bankruptcy. Similarly, an individual filing for Chapter 11 bankruptcy will remain in control of his or her assets and affairs during the bankruptcy case.
Second, a debtor in possession does not have free reign, but is subject to the supervision of the office of the United States Trustee and ultimately the bankruptcy judge. Shortly after the filing of a Chapter 11 case, the United States Trustee’s office will schedule an interview with the individual or oversees Chapter 11 debtors to ensure that they understand their obligations and carry them out. As mentioned in the article, this meeting is called the “initial debtor interview.”
Third, a Chapter 11 debtor in possession is expected to disclose its financial affairs. In Solyndra’s case, its management declined to answer certain questions about its affairs in the initial debtor interview because it was under active criminal investigation by the FBI. A Chapter 11 debtor in possession is also required to disclose its financial affairs in a variety of schedules, statements, meetings, reports and hearings throughout the case.
Fourth, the United States Trustee or a creditor may request appointment of an independent trustee if the debtor in possession is not carrying out its responsibilities. However, this is generally considered a severe remedy for significant misconduct. In Solyndra’s case, the bankruptcy judge found that its management’s failure to disclose was not severe enough to require appointment of a trustee.
Fifth, a debtor in possession can often increase its credibility by hiring competent professionals. Another article on the decision reports that the hiring of a turnaround specialist influenced the judge’s decision not to appoint a trustee. The resignation of its former CEO may also have provided some assurance that Solyndra was distancing itself from its prior troubles.
In short, a Chapter 11 debtor can manage its own affairs, but is expected to play by the rules.
If you are considering requesting Chapter 11 bankruptcy protection, you should consult with an attorney familiar with Chapter 11 bankruptcies to discuss your options. For a free consultation, call (480) 719-1152.