Chapter 7 Trustee and Your Business: 6 Things They Take Over on Day One

The company stops belonging to its owner at the moment the petition is filed, which is earlier than the trustee arrives. Section 301 of the Bankruptcy Code makes the filing of a voluntary petition the order for relief. Section 541 creates the estate at that same instant, gathering in "all legal or equitable interests of the debtor in property" as they stood when the petition was filed. The trustee comes afterward: Section 701 directs the United States Trustee to appoint an interim trustee from the private panel "promptly after the order for relief," and the statute names no hour.

So the phrase "day one" deserves a small correction before it can be used honestly. The property changes hands on the day of filing. The person who exercises control over it follows, and from that point six things that used to answer to the owner answer to someone else.

1. The Operating Account Becomes the Estate's Account

Cash in the company's bank account on the petition date is property of the estate, and so is the deposit relationship itself. Section 521(a)(4) obliges the debtor to "surrender to the trustee all property of the estate," which for a business means the balances, the account, and the authority to move money that the owner exercised the week before without a second thought.

The consequence arrives through a narrow door. A payment the owner sends after filing, to a supplier or a landlord or an employee the owner feels loyal to, is a transfer of estate property that nobody approved, and Section 549(a) permits the trustee to avoid a postpetition transfer "that is not authorized under this title or by the court." The signature card still sits in the bank's file. It no longer means what it meant.

A company debit card in the owner's wallet after the petition resembles the key to a lake cottage that was sold at a county tax auction: it still turns in the lock, and turning it is the problem.

2. Customers Now Owe Their Invoices to the Trustee

Receivables are the asset owners most often forget to count, perhaps because they arrive as someone else's promise. Section 542(b) is direct: an entity that owes a matured debt that is property of the estate "shall pay such debt to, or on the order of, the trustee," subject to setoff. The customer who mails a check to the old address has done nothing wrong (Section 542(c) protects a good-faith payment by someone without notice of the case), but the owner who deposits that check into a new account has.

For a company financed by a merchant cash advance, ownership of those receivables was often contested before anyone filed, since the funder's contract may describe the deal as a purchase of future receipts. The trustee inherits that dispute along with the invoices. The contract, the UCC filing, and in the end the court decide it, not the funder's collection letter.

3. The Books, the Passwords, and the Privilege Behind Them

Section 521(a)(4) does not stop at property. It requires the debtor to surrender "any recorded information, including books, documents, records, and papers, relating to property of the estate," and it adds a phrase that tells the owner how seriously Congress meant it: "whether or not immunity is granted under section 344."

The statute speaks of papers. The trustee, in a modern company, means logins. When the general ledger lives in cloud accounting software, the payment history sits in a processor's dashboard, and the correspondence with the funder sits in a company email account, the duty to surrender recorded information has no practical meaning unless the credentials go with it. Section 704(a)(4) then directs the trustee to "investigate the financial affairs of the debtor," and those credentials are where the investigation begins.

Most owners treat the company's email account as a private diary. The trustee treats it as a file.

The more consequential transfer is invisible. In Commodity Futures Trading Commission v. Weintraub, decided in April 1985, the Supreme Court held that "the trustee of a corporation in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to prebankruptcy communications." The reasoning was structural: outside bankruptcy, management controls the corporation's privilege, and in bankruptcy that power "passes to the trustee because the trustee's functions are more closely analogous to those of management" than the functions of the old directors. The Court drew a line for individuals, who can act for themselves. It drew no line to protect the officer who wrote the letters.

The company's lawyer was always the company's lawyer. Bankruptcy changes only who answers for the company when someone asks what was said.

An owner who wrote to company counsel in the months before filing about which creditor to pay first, or about moving equipment to a relative's new venture, wrote to a privilege that the trustee may now decide to waive. Whether owners who wrote with that kind of candor understood whose confidence they were placing it in is a question the opinion does not pause over. Weintraub concerned a corporation, and how the rule applies to a limited liability company is a point for counsel to confirm, though the logic of the opinion does not obviously stop at the word "corporation."

4. Every Claim the Company Could Have Brought

Section 323 makes the trustee "the representative of the estate" and gives the trustee "capacity to sue and be sued." Taken together with the breadth of Section 541, that means a lawsuit the company had against a customer who never paid, a vendor who delivered defective goods, or a former partner is now the trustee's lawsuit to bring, settle, or abandon.

The same is true of claims against the company's creditors (and a claim against a funder for an allegedly usurious or mischaracterized advance, which an owner may have spent a year preparing with litigation counsel, is no exception, since the right to bring it belonged to the company and the company now speaks through someone else). The trustee also holds the avoidance powers that no owner ever held, including the power under Section 547 to reach payments made to insiders within a year before the filing.

5. The Equipment Leases, on a Sixty-Day Clock

Under Section 365(d)(1), in a chapter 7 case an executory contract or an unexpired lease of personal property that the trustee does not assume or reject within the first 60 days of the case is deemed rejected, unless the court extends the time within that period. The lease on the company's premises runs on a separate schedule under Section 365(d)(4): 120 days, extendable once by 90 days on motion, and any further extension needs the landlord's written consent.

The lease on the forklift is decided by someone who has never seen the forklift.

6. Whether the Doors Open Tomorrow

A chapter 7 trustee does not run the business by default. Section 721 allows the court to "authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate," and a trustee who operates must file periodic reports of receipts and disbursements under Section 704(a)(8). Absent that authorization, the business closes, or, to be more exact, it stops operating, since the company as a legal entity persists until state law ends it.

The owner keeps one role. Bankruptcy Rule 2003 requires the United States Trustee to call a meeting of creditors between the 21st and the 40th day following the order for relief, and the meeting includes an examination of the debtor under oath, which for a company means its officers. The owner arrives at that meeting as a witness to a business that someone else now holds.

What Stays Behind With the Owner

Two things never pass to the trustee: the owner's personal guaranties and the owner's own judgment about what to do next. The company receives no discharge in chapter 7, because Section 727(a)(1) grants none to an entity debtor, and the company's filing does not stop a funder from pursuing an owner on a personal guaranty.

For a company that has stopped operating, holds assets that need orderly sale, or carries transactions that deserve an independent investigation, bankruptcy counsel is the right call, and a settlement company cannot do that work. An owner still deciding whether the company must close, and whose pressure comes mostly from advances and personal guaranties, can have the settlement alternative reviewed first. Delancey Street handles that kind of negotiation, and Delancey Street, which is not a law firm, neither files cases nor advises on the law; independently licensed attorneys take the legal questions, and the initial review costs nothing and stays confidential.

What the filing transfers, in the end, is a set of permissions the owner had stopped noticing: to sign, to deposit, to call the lawyer, to decide about the forklift. Most people learn what they held only by watching it handed to someone they have not met.