Understanding the Purpose of the Subchapter V Trustee

By Jim White

The Small Business Reorganization Act (“SBRA”), which added Subchapter V to Chapter 11 of the bankruptcy code, has been in effect for about 20 months. Small business debtors – principally defined as debtors with less than $2,725,625 in noncontingent liquidated debts under the Act (although Congress has raised that limit to $7.5 million through March 2022 as part of COVID-19 relief legislation) – may elect to have their cases administered under this new subchapter. A principal goal of the Act was to make Chapter 11 more accessible and affordable for small businesses. The Act does this in several ways, among them: allowing only the debtor to file a plan, generally requiring no disclosure statement, providing for the use of a form plan, eliminating creditors’ committees, eliminating the absolute priority rule, and permitting the court to cram down a plan of reorganization even if all classes of creditors oppose it. The most prominent change, though, is the creation of the Subchapter V trustee.

A Subchapter V trustee is unlike any other trustee appointed in the bankruptcy process. Under section 1183 of the Bankuptcy Code, this trustee’s principal duty is to facilitate the development of a consensual plan of reorganization. While the trustee has the potential to assume other duties, most of those powers are contingent. For example, the trustee may, “if a purpose would be served,” examine and object to proofs of claim, or “if advisable” oppose the debtor’s discharge. 11 U.S.C. §§ 704(5) & 705(6).  The trustee is not required to investigate the financial affairs of the debtor unless the court orders it. 11 U.S.C. §§ 1183 & 1106(a)(3). And, if the circumstances warrant, the court can expand the Subchapter V trustee’s duties to many of those of a traditional Chapter 11 trustee under section 1106.

A common concern of debtors’ attorneys is that the addition of this new party adds unnecessary administrative costs to the bankruptcy of a business that by definition does not have substantial funds to pay them. A Subchapter V trustee’s fees are incurred whether or not the trustee is ever needed to play a meaningful role in the bankruptcy. The trustee is required to review the pleadings, attend the initial debtor interview, attend mandatory status conferences and the confirmation hearing, as well as attend any other key hearings in the case. They are paid by the hour by the debtor’s estate, so several thousand dollars of costs for the trustees’ fees are unavoidable.

I have been involved in several Subchapter V cases, both as debtor’s attorney and trustee, and my experience has been that the Subchapter V trustee can help make Subchapter V cases more affordable than traditional bankruptcies for small businesses. Subchapter V eliminates quarterly fees, increasing the availability of additional funds help offset the cost of the trustee. There are no creditors’ committees, so the debtor does not bear the risk of paying the fees of committee counsel. But, some of the biggest savings come from the presence of a trustee focused on moving creditors and debtors towards a consensual plan and away from contentious litigation and plan objections.

In most cases, the Subchapter V trustee’s role is closer to that of a mediator or consultant than that of a traditional Chapter 11 trustee. For example, in one case in which I served as trustee, there were substantial disagreements between secured creditors about the priorities of their claims. As a result, the possibility of a heavily contested plan confirmation, or even multiple adversary proceedings, loomed. To avoid this, I held a day-long settlement conference, working with each party, and got them to agree on a consensual plan. In another case, I worked hard on facilitating negotiations between the largest creditor and the debtor. Without the intervention of the Subchapter V trustee, these negotiations may not have occurred – or may only have occurred after the filing of a complaint or the initiation of a contested matter.

Unlike a mediator, the trustee is not strictly a neutral party. Rather, the trustee is a facilitator who also has the authority to object to a proof of claim or oppose a plan if the parties cannot reach agreement. Having a facilitator overseeing the bankruptcy from the beginning almost necessarily eliminates some of the procedural maneuvering engaged in in traditional 11s. Some creditors’ attorneys have expressed concerns that Subchapter V tilts the playing field toward the debtor, since there is no committee funded by the estate, no ability for a creditor to file a competing plan, and the possibility of confirmation of a plan that is opposed by every class of creditors. The trustee/facilitator serves as a check on this outcome – they are tasked with getting not merely a confirmed plan, but a consensual plan. To do this, the trustee needs to keep the interests of all parties in mind.

Another concern that has been raised is that the Subchapter V trustee’s role is not well-defined, and the effectiveness of a trustee’s “facilitation” depends upon the skills and choices of that trustee. But, early data has shown that Subchapter V’s facilitated plan confirmation process seems to be working. In a recent article in the October 2021 ABI Journal, entitled “Subchapter V Cases by the Numbers,” Michelle M. Harner, Emily Lamasa, and Kimberly Goodwin-Maigetter conducted an analysis of Subchapter V cases filed in 2020, with data compiled through the end of June 2021. In fifty percent of the cases, a plan had been confirmed. Only nineteen percent of the cases had been dismissed; the rest were still in process. Of the confirmed plans, approximately fifty-nine percent were confirmed under §1191(a) – in other words, consensually. Generally,  Subchapter V debtors appear able to reach a confirmed plan within six months of filing.

The creation of Subchapter V nearly coincided with the onset of the global pandemic. It offers a path for businesses that may not have been successful in traditional Chapter 11, and as Judge Harner and her colleagues noted, “[s]mall businesses appear now to have a restructuring tool that is both affordable and effective for addressing their financial needs.” Certainly the procedural efficiencies of Subchapter V form some basis for reduced costs, but a core function of the Subchapter V trustee – proactive facilitation of conflict resolution – provides small business debtors with substantial, demonstrable benefits in terms of time and money.