The U.S. Bankruptcy Court for the District of Delaware recently discussed a question of first impression in Delaware—when a subchapter V debtor is unwilling or unable to serve as a fiduciary to the bankruptcy estate, does the bankruptcy court have the authority to “de-designate” a subchapter V case to a “regular” Chapter 11 case, so that the court can then appoint a Chapter 11 trustee? Although the Delaware bankruptcy court ultimately left the question undecided, it stated that even if the court did have the authority to order such a remedy, it should only do so as a measure of last resort.

One of the defining features of Chapter 11 of the Bankruptcy Code is that it leaves the debtor itself—as opposed to a third-party trustee—in possession of the bankruptcy estate to serve as a fiduciary to the estate while it reorganizes or liquidates its assets. If a Chapter 11 debtor violates this trust, then the recourse available includes the ability to request that the bankruptcy court dispossess the debtor and appoint a third-party trustee to administer the bankruptcy estate— i.e., a “Chapter 11 trustee.” Section 1104 of the Bankruptcy Code provides this remedy, stating that the court shall order the appointment of a Chapter 11 trustee “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management.”

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