Opinion ID: 512405
Heading Depth: 2
Heading Rank: 2

Heading: Duties of the Debtor-in-Possession

Text: 53 Until a corporation which is in Chapter 11 can be reorganized or liquidated pursuant to a plan under 11 U.S.C. Secs. 1121-29, a trustee or the debtor-in-possession is authorized to manage the property of the estate. See 11 U.S.C. Sec. 1108. Here, LWE was continued as the debtor-in-possession. See 11 U.S.C. Sec. 1101. With certain exceptions not relevant here, a debtor-in-possession performs the same functions as a trustee in a reorganization. See 11 U.S.C. Sec. 1107(a); Whiting Pools, 462 U.S. at 200 n. 3, 103 S.Ct. at 2311 n. 3; In re Hughes, 704 F.2d 820, 822 (5th Cir.1983). The debtor-in-possession, therefore, both enjoys the rights and must fulfill the duties of a trustee. In re Hughes, 704 F.2d at 822; see also Georgia Pacific Corp. v. Sigma Service Corp., 712 F.2d 962, 966 (5th Cir.1983). As one of its duties, a trustee is not only entitled to but must collect the property of the estate. 11 U.S.C. Sec. 704(1). 12 Moreover, as the Supreme Court has held, the trustee is 'accountable for all property received,' [11 U.S.C.] Secs. 704(2), 1106(a)(1), and has the duty to maximize the value of the estate, see [11 U.S.C.] Sec. 704(1). Commodity Futures Trading Comm'n. v. Weintraub, 471 U.S. 343, 352, 105 S.Ct. 1986, 1992, 85 L.Ed.2d 372 (1985) (emphasis added). Since LWE's cause of action was property of the estate, the debtor-in-possession was duty bound to assert it if doing so would maximize the value of the estate. 54 It is clear that a trustee--and, therefore, a debtor-in-possession--has the authority to bring an action for damages on behalf of a debtor corporation against corporate principals for gross negligence, mismanagement or breach of fiduciary duty where such an action could have been asserted by the debtor corporation, or by its stockholders in a derivative action, prior to bankruptcy. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 428-29, 92 S.Ct. 1678, 1685-86, 32 L.Ed.2d 195 (1972); Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (interpreting section 70(a)(6) of the old Bankruptcy Act, a predecessor of sections 541(a)(1) and 704(1) of the Code) (While normally that fiduciary obligation is enforceable directly by the corporation, or through a stockholder's derivative action, it is, in the event of bankruptcy of the corporation, enforceable by the trustee.) (footnotes omitted); Dallas Cabana, Inc. v. Hyatt Corp., 441 F.2d 865, 868 (5th Cir.1971) (it is the trustee's right to prosecute all causes of action which could have been prosecuted by the bankrupt or debtor had bankruptcy not intervened); Hooper v. Mountain States Sec. Corp., 282 F.2d 195, 206-07 (5th Cir.1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961); In re Ozark, 816 F.2d at 1225; Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523, 527 (9th Cir.1976) (reorganization trustee had standing to assert securities law claims on behalf of debtor corporation against corporation's officers and directors); Gochenour v. Cleveland Terminals Bldg. Co., 118 F.2d 89, 93 (6th Cir.1941) (corporation's right of action to recover damages because of corporate officer's misconduct and neglect of duty passes to trustee in bankruptcy); 4 Collier, Collier on Bankruptcy p 541.10 (15th ed. 1986) (The estate created pursuant to Sec. 541 succeeds to any right of action the debtor corporation may have to recover damages for misconduct, mismanagement, or neglect of duty by a corporate officer or director.). 55 In the instant case, once LWE filed a petition for Chapter 11 relief, its cause of action against the appellees--which was property of the estate--passed to the debtor-in-possession as representative of the estate. Since the cause of action belonged to LWE, the debtor-in-possession had the authority to pursue it in bankruptcy proceedings. See In re Ozark, 816 F.2d at 1225. Moreover, under section 704(1) of the Code, the debtor-in-possession was required to pursue the cause of action if it would be beneficial to the estate to do so. Due to a conflict of interest on the part of its officers and directors, however, the debtor-in-possession, in effect, refused to assert the cause of action. As a result, the Committee sought to bring the action on the corporation's behalf. Our discussion must now turn, therefore, to whether the Committee has the authority to pursue the matter on the debtor-in-possession's behalf.