Restructuring

Contributed by Rich Mullen
Our highly sophisticated, bankruptcy literate computer has been hard at work uncovering some of the more hidden treasures of the Bankruptcy Code, and, for this second edition of Breaking the Code, has selected section 1104(d).  For those of us not familiar with this morsel of procedure, section 1104(d) of the Bankruptcy Code provides as follows:

If the court orders the appointment of a trustee or an examiner, if a trustee or an examiner dies or resigns during the case or is removed under section 324 of this title, or if a trustee fails to qualify under section 322 of this title, then the United States trustee, after consultation with parties in interest, shall appoint, subject to the court’s approval, one disinterested person other than the United States trustee to serve as trustee or examiner, as the case may be, in the case.

Interestingly, Congress drafted section 1104(d) primarily to address its concern regarding “bankruptcy rings” in which judges would appoint practitioners with whom they were close, set their compensation, and then decide disputes between their hand-picked trustees and the parties in the bankruptcy case.  Putting the power to appoint trustees in the hands of the U.S. Trustee was meant to avoid such conflicts of interest and also free bankruptcy judges from the rather burdensome task of interviewing and selecting trustees.  After a successful pilot program, the procedural appointment process became a part of the Bankruptcy Code with the enactment of the Bankruptcy Judges, United States Trustee, and Family Farmer Bankruptcy Act of 1986.
So, section 1104(d) of the Bankruptcy Code basically provides the procedural framework from which the U.S. Trustee is to appoint a trustee or examiner.  Pursuant to section 1104(b) of the Bankruptcy Code, however, the U.S. Trustee may only exercise its power to appoint if no party in interest chooses to request a meeting of creditors for the purpose of electing a trustee within 30 days after the court orders the appointment of a trustee.
Getting down to the nitty-gritty, section 1104(d) has two crucial aspects.  First, in exercising its power to appoint trustees or examiners, the U.S. Trustee must consult with the various parties in interest.  Second, the U.S. Trustee’s selection must be a disinterested person.
“Disinterested person” is defined by section 101(14) of the Bankruptcy Code, which requires that the person not be a creditor, equity holder or insider; is not and has not, within two years of the filing of the petition, been a director, officer or employee of the debtor; and does not have any interest materially adverse to the interests of the estate, any class of creditors, or equity holders.
When considering whether to approve the U.S. Trustee’s selection, courts have strictly enforced the consultation requirement.  In In re Capital Services Investments, Inc., the Bankruptcy Court for the Central District of Illinois stated that section 1104(d) (then section 1104(c)) required the U.S. Trustee to “make a good faith attempt to get input from the parties in interest.”  There, the U.S. Trustee never disclosed the names of candidates, ignored candidates submitted by certain parties in interest, and even threatened to bring charges before the attorney discipline commission against anyone who dared to try to influence his decision as to the appointment.  Not surprisingly, the court admonished the U.S. Trustee in its written opinion for wasting the court’s and the parties’ time, causing unnecessary expenses to the estate and the parties in interest, and generally being uncooperative.  In In re Cardinal Industries, Inc., the Bankruptcy Court for the Southern District of Ohio concluded that the U.S. Trustee did not consult “in good faith” because the individual selected, although “impressive and commendable in the legal and government community,” did not “include specialized experience” in the relevant private sector.  The Bankruptcy Court for the Western District of New York, in In re Successor Borrower Services, LLC, has required the U.S. Trustee to answer specific questions in its application to approve its appointee.  The U.S. Trustee must indicate, among other things, which parties in interest were consulted (and specifically whether the principal of the debtor was consulted), the nature of any consultations, and which qualifications the parties in interest were seeking.  Ultimately, the court found that the U.S. Trustee’s application of merely six sentences was “woefully insufficient.”
It should also be noted that, aside from the court approval process, parties in interest have the ability to challenge the U.S. Trustee’s actions, including those related to the appointment of a trustee or examiner, in a contested matter pursuant to Bankruptcy Rule 2020.  As a result, the party in interest could obtain a court order mandating performance of the U.S. Trustee’s statutorily imposed duties.
There you have it, another more obscure section of the Bankruptcy Code polished up for our readers.  As one last tidbit, keep in mind that the appointment of a trustee is an “extraordinary remedy” that will not be granted often – certainly less often than publications of Breaking the Code.