Debtor-in-Possession (DIP)

The Debtor-in-Possession (DIP) is the debtor in a Chapter 11 case who remains in possession and management of assets and operations rather than having a trustee appointed. Section 1107 grants the DIP the rights, powers, and duties of a trustee, operating the business as fiduciary for creditors. DIP status is the Chapter 11 default. A trustee is appointed only for cause or where appointment serves the interests of creditors, equity holders and the estate (§ 1104(a)). The term also commonly refers to DIP financing, post-petition lending authorized under § 364, often with super-priority or lien protection, allowing distressed companies to obtain working capital during reorganization.

DIP rights and duties, § 1107

The DIP exercises trustee powers under § 1107 with limited exceptions: (1) operate the business, under § 1108; (2) use, sell, or lease property, ordinary course without court approval; non-ordinary requires § 363 motion; (3) obtain credit, under § 364; (4) assume or reject executory contracts, under § 365; (5) avoid preferential and fraudulent transfers, under §§ 547, 548, 549; (6) fiduciary duties to estate and creditors, including duty of loyalty, duty of care. The DIP typically has same management as pre-petition (with possible new CRO, Chief Restructuring Officer).

When trustee replaces DIP

Section 1104 permits trustee appointment for cause: (1) fraud, dishonesty, incompetence, or gross mismanagement by current management; (2) cause generally; (3) interests of creditors, equity security holders and the estate (§ 1104(a)(2)). A party in interest or the US Trustee may request appointment, and § 1104(e) requires the US Trustee to move for a trustee where there are reasonable grounds to suspect fraud, dishonesty or criminal conduct by senior management or the governing body. Most Chapter 11 cases proceed without a trustee. An examiner under § 1104(c) investigates the debtor without taking over management. On request, the court must appoint one where that serves creditors and the estate, or where the debtor's fixed, liquidated, unsecured debts (other than for goods, services, taxes or insider debts) exceed $5,000,000.

DIP financing, § 364

Section 364 permits post-petition financing with various priority levels: (1) § 364(a), ordinary course unsecured credit; administrative expense priority; (2) § 364(b), non-ordinary course unsecured; administrative expense priority with court approval; (3) § 364(c)(1), super-priority administrative expense; (4) § 364(c)(2), secured by unencumbered property; (5) § 364(c)(3), junior lien on encumbered property; (6) § 364(d), priming senior liens (most aggressive). Credit under § 364(c) requires a showing that unsecured credit allowable as an administrative expense is unavailable. A priming lien under § 364(d) also requires adequate protection for the existing lienholder, and the debtor bears the burden on that issue. DIP financing is typically negotiated heavily with senior secured creditors.

Cash collateral use

Cash collateral (cash subject to secured creditor liens) requires special treatment under § 363(c)(2): (1) creditor consent; OR (2) court order after notice and hearing. Cash collateral disputes are among first issues in Chapter 11, debtor needs cash to operate; secured creditor wants protection. Standard resolution: budget-based use with adequate protection (cash payments, replacement liens, equity cushion). Cash collateral order is typically the first major Chapter 11 order.

DIP fiduciary duties

The DIP owes fiduciary duties to all creditors and the estate: (1) duty of loyalty, undivided loyalty to creditors and estate; conflicts of interest must be disclosed; (2) duty of care, reasonable diligence in business operation; (3) duty to maximize estate value; (4) duty to disclose, reporting to court, US Trustee, creditors. Mismanagement or dishonesty by current management can support appointment of a trustee under § 1104(a)(1).