Facilitating a Consensual Plan: The Role of the Subchapter V Trustee

11 U.S.C. § 1183(b)(7) tells us that “[t]he trustee shall ... facilitate the development of a consensual plan of reorganization.” The Small Business Reorganization Act of 2019 (Public Law 116-54) established for the first time in chapter 11 a mandatory, but nonpossessory trustee — the “subchapter V trustee” — to keep an eye on small business reorganizations under the new subchapter V of chapter 11 of the Bankruptcy Code. The subchapter V trustee’s duties, while enumerated with some specificity in § 1183(b)(1)-(6),[2] include a vaguely defined final directive to “facilitate” a consensual plan of reorganization.

How does the subchapter V trustee “facilitate” a consensual plan when the debtor stays in possession and the subchapter V trustee has no economic levers to convince any party to come to the table?

A number of authorities suggest that the trustee act as “mediator” to bring the parties together.[3] But the subchapter V trustee cannot, in the traditional sense, be a mediator. Mediators, by longstanding practice, have no involvement in the underlying case. Mediators usually sign confidentiality agreements and are therefore able to keep the parties’ confidences. Once the mediation is concluded, mediators depart the scene; they do not show up in court in a later hearing.

In contrast, subchapter V trustees are involved in the underlying case. They have knowledge of the parties, the judge and the lawyers involved. They may have been involved in contested matters or adversary proceedings with these very parties. Subchapter V trustees cannot promise to refrain from using information learned in a discussion with the parties against one of them later. In my practice as a subchapter V trustee, I have had to “Mirandize” the parties to let them know that anything they say can and will be used against them in a court of law, specifically the bankruptcy court. After all, the subchapter V trustee is authorized (and sometimes required) to investigate the affairs of the debtor and file a report of the findings (§ 1183(b)(2)), object to claims (including a claim of one of the parties to the dispute (§ 1183(b)(1))), oppose the debtor’s discharge (§ 1183(b)(1)), and take a position on asset sales and confirmation of a plan (§ 1183(b)(3)). These duties may be inconsistent with keeping parties’ confidences.

How, then, can a subchapter V trustee “facilitate” a consensual plan of reorganization? The answer lies in the subchapter V trustee’s essential qualifications and role in the case: A subchapter V trustee is both a “disinterested person” within the meaning of § 101(14) and a “party in interest,” at least with respect to the issues for which Congress has expressly given the subchapter V trustee standing to be heard.

The Subchapter V Trustee Is Disinterested

To be appointed, a subchapter V trustee must be a “disinterested person” within the meaning of § 101(14). Therefore, the subchapter V trustee cannot be a creditor, equityholder, officer, employee or other stakeholder in the debtor. Thus, the subchapter V trustee has no pecuniary interest in the outcome of the case. The subchapter V trustee, therefore, can be an honest broker between the warring parties precisely because the resolution will not increase or decrease the balance in the subchapter V trustee’s bank account. In this respect, the subchapter V trustee is like a mediator. But that is where the neutrality stops.

The Subchapter V Trustee Is a Party in Interest

Despite being “disinterested” from a pecuniary standpoint, the subchapter V trustee is not a neutral. In fact, the subchapter V trustee can be quite partisan. Congress gave the subchapter V trustee express authority to appear and be heard on confirmation, asset sales and other important issues in the bankruptcy case. The subchapter V trustee can object to claims and support or object to discharge. The subchapter V trustee also can appear and file motions adverse to a creditor by objecting to a claim or security interest, or by supporting a nonconsensual confirmation over a creditor’s objection under § 1191(b). Likewise, the subchapter V trustee can oppose confirmation of the debtor’s plan, investigate and file a report that could lead to the debtor being put out of possession, and object to the debtor’s discharge.

The Subchapter V Trustee Can Use Its Disinterestedness and Position as a Party in Interest to Facilitate a Consensual Plan

The key strength of the subchapter V trustee in a negotiation is, without a doubt, the subchapter V trustee’s ability to let an inflexible party know that the next time they meet, the subchapter V trustee might take a position against them. This is not dissimilar to parties using sister judges or retired judges to mediate difficult cases, because the mediator-judge can look a party in the eye and state, with authority, that the parties’ position will not hold up in court.

Similarly, subchapter V trustees, while not judges, can tell the parties whether their positions on confirmation, claims objections and discharge will have weight with the bankruptcy court. Why? In a twist of irony, subchapter V trustees’ credibility with the bankruptcy court derives from their disinterestedness. Aside from chapter 12 trustees, no other player in the bankruptcy court is simultaneously disinterested and yet empowered and required to be so materially involved in the case. Even statutory creditors’ committees and chapter 7 and 11 trustees have constituencies, and the U.S. Trustee, while similarly disinterested, is not empowered to facilitate settlements, conduct investigations and proactively object to claims.

The subchapter V trustee’s position is subtly powerful provided that the subchapter V trustee maintains both disinterestedness and gives attention to the duties in § 1183.

Takeaway: Using the Subchapter V Trustee’s Dual Role to Bring the Parties to Resolution

In my position as the appointed subchapter V trustee in a recent case, I was called upon to “facilitate” (I cannot use the word mediate) between two parties that had been stuck and unable to resolve their differences for months. I had frank discussions with the debtor about the problems with its plan and treatment of the secured creditor and other issues that would cause me to take a position against the debtor with respect to confirmation. I had equally frank discussions with the secured creditor about the weaknesses in the secured creditor’s security interest, valuation and, most concerning for the secured creditor, the debtor’s ability to cram down the plan, which would result in the secured creditor being paid over a very long period of time. Both sides appreciated the possibility of undesirable results. They both recognized that I had no stake in the outcome because I was disinterested. They both recognized that, despite that disinterestedness, I might, in accordance with my statutory powers under § 1183, take positions that might result in an undesirable outcome for them. And they both recognized that there was a very good chance the bankruptcy court would give weight to the position I took. Because of my disinterestedness and my potential to be partisan, both parties moved significantly from their prior ossified positions. The case was then able to move forward with a consensual plan facilitated by the subchapter V trustee.

Bankruptcy practitioners in subchapter V would do well to use the subchapter V trustee’s position as a disinterested person and party in interest to get the parties to “yes.”

[2] All references to sections herein refer to sections of the Bankruptcy Code.

[3] See, e.g., Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act, 28 Amer. Bankr. Inst. L. Rev. 251, 261 (2020) (“Trustees seem likely to play the role of mediator.”).