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; trustee appointment occurs only for cause. The term also commonly refers to DIP financing, post-petition lending with super-priority status under § 364, 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 and equity; (4) upon request of US Trustee. Trustee appointment is rare in modern Chapter 11; most cases proceed with DIP throughout. Examiner appointment (§ 1104(c)) is more common, investigates specific allegations without taking management role. Recent cases (Enron, FTX) have featured trustee appointments.

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). Each level requires increasingly strong showing of necessity. 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. Breach of fiduciary duty exposes management to personal liability and can support trustee appointment. Sophisticated DIPs maintain proper governance, conflicts policies, and documented decision-making.