As part of our efforts to bring more full-length thought-leadership insights to our member subscribers, we are introducing a new Spotlight Series. Our first Spotlight Series by Marc Kirschner and Gordon Z. Novod analyzes whether the recent Eletson decision has shifted the balance of power too far toward entrenched management and out-of-the money shareholders. We provide a summary below of their thought-provoking piece and you can find the full-length feature here.

The recent Eletson decision is a case study in how Chapter 11 has tilted too far in favor of entrenched management and out-of-the money shareholders, disenfranchising creditors. Despite significant evidence of insider conflicts, questionable asset transfers, and overwhelming creditor support—including the U.S. Trustee—the court declined to appoint a Chapter 11 Trustee under Section 1104. Instead, it leaned heavily on WorldCom, a precedent born out of a massive public accounting scandal, rather than applying a more flexible standard more appropriate for a closely held, insider-driven enterprise.

The consequences were predictable: management clung to control, disputes escalated, recoveries were delayed, and litigation costs multiplied. Even after creditors won confirmation of their plan, they faced continued obstruction—requiring contempt motions, sanctions, and international enforcement actions just to effectuate what should have been a straightforward transition.

For restructuring professionals, the lesson is clear. While Chapter 11 provides creditors with tools like adequate protection, committee oversight, and plan voting rights, these measures are often insufficient when insiders operate with conflicting interests. The trustee mechanism under Section 1104 exists precisely for these situations—yet courts’ reluctance to use it undermines the Code’s core promise of fairness and timely resolution.

Creditors deserve more than theoretical remedies. Experienced independent fiduciaries are well equipped to stabilize complex businesses, safeguard value, and reduce friction. By declining to appoint trustees when warranted, courts risk perpetuating costly delays and eroding confidence in Chapter 11 as a balanced system.

Eletson should serve as a reminder: creditor protections are only as strong as the willingness of courts to enforce them. If Chapter 11 is to remain trusted, the judiciary must be prepared to use all its tools—including trustee appointments.

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