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"Vested Mediator" is Subchapter V Trustee's Most Valuable Role

by Nancy King

The Small Business Reorganization Act went into effect in February of 2020 just as the COVID-19 pandemic was about to hit. The law created Subchapter V, a streamlined version of Chapter 11 available only to small businesses. On its face Subchapter V is in every respect a quicker, smoother, less expensive debt restructuring vehicle than traditional Chapter 11. In practice, many consider it a magic bullet for small businesses needing to deleverage.


Part of what makes it so effective is the Subchapter V Trustee, a unique kind of bankruptcy trustee who is statutorily mandated to help facilitate a successful case.[i] In every Subchapter V case our law firm has filed, the Sub V Trustee has played an important role in the successful outcome. But it's the more contentious cases, where the Trustee has played the role of "vested mediator," that maximum positive impact has been realized.


What is Subchapter V?

The Chapter 11 process has traditionally been too complex, lengthy, and expensive to provide meaningful relief for small businesses. Subchapter V is a streamlined Chapter 11 process for small businesses. It makes reorganizing or winding down more efficient in several important ways:


Less Cost: (1) no U.S. Trustee Quarterly fees; (2) no creditor’s committee (as a general rule); (3) no separate Disclosure Statement required; (4) the ability to pay administrative expenses over the life of a non-consensual plan; and (5) less time between filing of the case and confirming a plan.[ii]


Moves Very Quickly: Some of the changes that have increased the speed include: (1) only the debtor can file a Plan; (2) the time limits are shortened; (3) no separate Disclosure Statement is required; (4) a Subchapter V Trustee is appointed to “facilitate the development of a consensual plan of reorganization;” and (5) the debtor may confirm a cramdown plan without the acceptance of any class of creditors.


Advantages for Businesses and Owners: (1) elimination of the absolute priority rule[iii]; (2) certain modifications to home mortgages; (3) allowance of post-confirmation modifications in some instances; (4) allowance of a discharge; and (5) other more specific benefits.[iv]


What is the Role of the Subchapter V Trustee?

In a recent case, the Bankruptcy Court explained that the role of the Subchapter V Trustee is to “help facilitate negotiations among the parties who will be voting on the plan of reorganization in order to build consensus” calling the trustees “honest brokers.”[v]


Unlike trustees under other chapters of the Bankruptcy Code, the Subchapter V Trustee does not take control of a debtor’s assets—instead owners or managers stay in control and continue to run their own business affairs. Particularly with small business owners who often have more personal relationships with customers and suppliers, staying in control of their affairs and maintaining those valuable business connections is an essential part of reorganization. So, what does the Subchapter V Trustee do?


The Trustee’s basic role is defined by statute and requires the trustee to: (1) review the pleadings, (2) attend the initial debtor interview, (3) attend mandatory status conferences, and (4) attend any important hearings including the confirmation hearing.[vi] Under section 1183 of the Bankruptcy Code, the Sub V Trustee’s principal duty is to facilitate the development of a consensual plan of reorganization.[vii] This means that the trustee’s role is closer to that of a mediator or consultant.


Most Debtors see a clear value in having a trustee to facilitate a consensual plan, but in order to reach a consensus, the Trustee must consider the creditors’ positions as well. Therefore, the Trustee is not a true neutral party like a mediator, because the Trustee has other statutory powers (such as objecting to claims) and the Trustee’s duties can be expanded in appropriate circumstances. The Trustee’s position has teeth when needed.


Section 1183(b)(2) allows for more traditional chapter 11 trustee powers but only upon the request of a party in interest and for “cause.” These powers include investigation of “the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan.”[viii]


Furthermore, the Bankruptcy Code allows for the removal of a debtor in possession “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the date of the commencement of the case.” Further, if the debtor is removed as the debtor in possession, Section 1185(b)(5) provides for the Subchapter V trustee’s duties to be expanded to operating the business.[ix]


In Subchapter V cases involving contentious litigation, the Trustee can be a crucial mediator to help the parties resolve their disputes and thereby preserve resources for the reorganization. In cases where the goal is a straightforward restructuring of debt, the Trustee can help both the debtor and creditors understand the benefits of reaching a consensual plan, especially since Subchapter V allows a debtor to confirm a plan that is fair and equitable even over a creditor’s objection. The involvement of a vested mediator is a valuable resource in situations where the parties have reached a standstill or stalemate.


Effectiveness of the Subchapter V Trustee So Far?

The unique role of a facilitator trustee seems be working. In a study done by the American Bankruptcy Institute, an analysis of Subchapter V cases filed in 2020 through the end of June 2021, showed that 50% of the cases had confirmed plans, 19% percent were dismissed; and the rest were pending as of the study. Of the confirmed plans, approximately 59% were consensual confirmations and usually confirmed within six-months of filing.[x]


Our experience representing businesses and their owners in Subchapter V cases has been even more compelling. To date, every Subchapter V case our law firm has filed has resulted in a confirmed Plan. In some, the Trustee has played an important role, and in others the Trustee's involvement has been nothing short of crucial to the ultimate success of the reorganization.


Conclusion

Small businesses, which are the foundation of the American economy needed help when COVID hit. Accordingly, Congress temporarily raised the debt limits to a $7.5 million debt ceiling, but that higher debt limit is only effective until June 21, 2024.[xi] With rising interest rates, continuing supply chain issues, and inflation, any small business that is struggling under the weight of too much debt should act soon to take advantage of this small-business friendly law.

 

[i] 11 U.S.C. § 1183(b)(7) [ii] One important note is that the Subchapter V Trustee is paid by the debtor. Trustees charge for their involvement on an hourly basis, so there will necessarily be some expense involved for a debtor. However, there are no quarterly fees owed in a Subchapter V (like a traditional chapter 11), so the expense of the trustee is typically less than having to pay quarterly fees. One major issue left unresolved by Congress, was HOW the subchapter V trustee is to be paid which is beyond the scope of this article. It is worth noting that in the Middle District of Tennessee, it has become somewhat routine to establish an escrow account to which the debtor contributes monthly prior to confirmation in order to “bank” some money for the trustee’s fees when the trustee files a motion for compensation pursuant to 11 U.S.C. § 330. [iii] This is a HUGE advantage to small businesses and can be more fully explained by an experienced bankruptcy attorney. [iv] See https://www.emerge.law/post/small-business-reorganization-act-streamlined-chapter-11-relief-for-businesses-and-individuals [v] In re Corinthian Commc’ ns, Inc., 642 B.R. 224 (Bankr. S.D.N.Y. 2022) [vi] 11 U.S.C. § 1183. [vii] The Subchapter V trustee's primary duty is to “facilitate the development of a consensual plan of reorganization.” 11 U.S.C. § 1183(b)(7); In re Ozcelebi, 2022 WL 990283, at *7 (Bankr. S.D. Tex. Apr. 1, 2022); UST Program Policy and Practices Manual, § 3-17.1.1, p. 189 (“A trustee is appointed in every [Subchapter V] case tasked primarily with facilitating a consensual plan.”). It is a significant distinction shared by no other trustee in bankruptcy. 218 Jackson, 631 B.R. at 947. And it makes the Subchapter V trustee's role more like that of a mediator than other trustees who have traditionally taken on a more adversarial role. See also, In re Louis, No., 2022 WL 2055290, at *16 (Bankr. C.D. Ill. June 7, 2022) (emphasis added). See also In re 218 Jackson LLC, 631 B.R. 937, 947 (Bankr. M.D. Fla. 2021) (“It is not a stretch then to conclude that the subchapter V trustee's role was intentionally designed to be less adversarial. Facilitation of a consensual plan requires the subchapter V trustee to work with the parties—the creditors and debtor—to agree on a plan. The definition of facilitate is to “make the occurrence of (something) easier; to render less difficult.” BLACK'S LAW DICTIONARY 734 (11th Ed. 2019). As a result, the subchapter V trustee acts more like a mediator than an adversary.”). [viii] 11 U.S.C. § 1183(b) and 11 U.S.C. § 1106(3).. [ix] 11 U.S.C. § 1185. [x]Subchapter V Cases by the Numbers,” Michelle M. Harner, Emily Lamasa, and Kimberly Goodwin-Maigetter ABI Journal (October, 2021). [xi] That amount will revert to just over $3,000,000 in 2024.


 

Nancy King is a partner with EmergeLaw, PLLC in the firm's Nashville, Tennessee office. She guides companies and their owners through Chapter 11 reorganizations. She also represents committees, creditors, asset buyers, trustees, and other parties in business bankruptcy cases.

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