11 U.S.C. Section 1107 - Rights, Powers, and Duties of Debtor in Possession

What Is Section 1107?

Section 1107 is the provision that makes the modern Chapter 11 debtor in possession (DIP) possible. Unlike Chapter 7, where a trustee takes control of the debtor's property and operations, Chapter 11 generally leaves the debtor in place with the rights, powers, and duties of a trustee. Section 1107(a) accomplishes this in a single sentence: "Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter."

The Trustee-Shoes Principle

Section 1107(a) substitutes the DIP for the trustee in virtually every provision of the Bankruptcy Code that references a "trustee." When other sections speak of trustee avoidance powers (Sections 544, 547, 548), trustee turnover demands (Section 542), trustee employment of professionals (Section 327), or trustee use of estate property (Section 363), the DIP exercises those powers in a Chapter 11 case where no trustee has been appointed. The Supreme Court in Wolf v. Weinstein, 372 U.S. 633 (1963) (interpreting a precursor to Section 1107), confirmed the fiduciary character of the DIP role: the debtor's pre-petition managers, now acting as the DIP, owe duties to creditors and the estate, not just to equity holders.

The Four Exclusions

Section 1107(a) carves out four categories from the trustee-shoes principle:

• No compensation under Section 330: A DIP does not receive a trustee's commission. The debtor's pre-petition officers and employees continue to be paid as ordinary administrative expenses, subject to court oversight if compensation is irregular or insider-related.
• No Section 1106(a)(2) investigation duty: A trustee must investigate the acts, conduct, assets, liabilities, and financial condition of the debtor; the DIP is not required to investigate itself.
• No Section 1106(a)(3) report: A trustee must file a statement of any investigation, including any fact pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity. The DIP is excused.
• No Section 1106(a)(4) transmission: A trustee must transmit such a statement to creditors, equity holders, indentured trustees, and any other entity designated by the court. The DIP is excused.

The investigation exclusions reflect a practical accommodation: requiring management to investigate itself would be either farcical or futile. If creditors believe an investigation is needed, the remedy is to seek appointment of a Chapter 11 trustee under Section 1104 or an examiner under Section 1106(b).

Fiduciary Duties of the DIP

By stepping into the trustee's shoes, the DIP assumes the trustee's fiduciary duties. These include duties of care, loyalty, and impartiality to the estate as a whole. Pre-petition managers acting as DIP must:

• Preserve and protect estate property;
• Maximize the value of the estate for the benefit of creditors and equity holders alike;
• Refrain from self-dealing and from preferential treatment of insiders;
• Disclose all material conflicts of interest;
• Maintain accurate books and records;
• Comply with all reporting requirements of the Code, the Bankruptcy Rules, and any operating order entered by the court.

Breach of these duties can lead to appointment of a Chapter 11 trustee, dismissal or conversion of the case under Section 1112, personal liability for officers, and (in extreme cases) referral for criminal investigation.

Examination of a DIP: Section 1107(b)

Section 1107(b) provides a specific carve-out from the general disqualification rule of Section 327(a): "Notwithstanding section 327(a) of this title, a person is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person's employment by or representation of the debtor before the commencement of the case." This recognizes that DIPs frequently retain their pre-petition counsel and other professionals.

The carve-out is narrow. It permits retention notwithstanding pre-petition representation, but does not relieve the professional of the broader Section 327 "disinterested person" standard or of the duty to disclose all connections under Bankruptcy Rule 2014.

Operational Authority Without a Court Order

Once an order for relief is entered, the DIP may continue to operate the debtor's business under Section 1108 unless the court orders otherwise. Routine transactions in the ordinary course are authorized by Section 363(c)(1) without a separate court order. Non-ordinary-course transactions require a 363(b) motion. Use of cash collateral requires either creditor consent or a court order under Section 363(c)(2). The interplay between Section 1107 (the DIP power), Section 1108 (continuing operations), and Section 363 (transactional authority) defines the practical scope of DIP control.

Limitations Imposed by the Court

The opening clause of Section 1107(a) - "Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes" - gives the court broad authority to constrain the DIP. Courts routinely impose operating orders that require monthly operating reports, limit insider compensation, require advance approval of significant transactions, and impose budget and reporting requirements. In some cases, the court appoints a Chief Restructuring Officer or a financial advisor with concurrent authority alongside the DIP.

Related Bankruptcy Code Sections

• Section 1101 - "Debtor in possession" defined
• Section 1108 - Authorization to operate the business
• Section 363 - Use, sale, or lease of property
• Section 327 - Employment of professional persons
• Section 1112 - Conversion or dismissal
• Section 1184 - Subchapter V analogue