Subchapter V Trustee Employing An Attorney? (In re Penland)

By: Donald L Swanson

The Bankruptcy Court opinion is in In re Penland Heating And Air Conditioning, Inc., Case No. 20-01795 (Bankry.E.D.N.Car.)(decided June 11, 2020). 

Issue

The In re Penland issue is this: should a Subchapter V Trustee be allowed to hire an attorney, as common practice, at the beginning of a Subchapter V case?

Facts

Debtor operates a heating and air conditioning business that performs services throughout the state of North Carolina.

On May 1, 2020, Debtor files a voluntary bankruptcy petition under Subchapter V, and on May 4, 2020, a Subchapter V Trustee is appointed.

Debtor is winding down its business and intends to file a plan to liquidate its assets after its jobs in progress are completed.

Application to Employ

The Subchapter V Trustee files an application for authority to employ his own law firm to represent him, as Trustee, in the case. 

In doing so, he notes:

1. Such applications are filed as standard practice by trustees in Chapter 7 cases; and
2. Chapter 7 and Chapter 11 trustees are routinely allowed to hire to hire their own law firms as a way to create economical efficiencies in case administration;

Bankruptcy Court Ruling

The Bankruptcy Court’s opinion declares that a Subchapter V trustee “should avoid retaining professionals, except in unusual circumstances.”  The Court explains:

“authorizing a Subchapter V trustee to employ professionals, including oneself as counsel, routinely and without specific justification or purpose is contrary to the intent and purpose of the SBRA.”

The Court adds that “overzealous and ambitious Subchapter V trustees” will not be compensated for “unnecessary or duplicative services” or for “other fees incurred outside of the scope and purpose of the SBRA.”

The Bankruptcy Court is quick to emphasize, however:

• It’s ruling “absolutely does not imply that the Trustee in this case had even a remote thought of performing services outside the scope of the SBRA”; and
• It “appreciates this opportunity to provide some guidance for this new legislation.”

Rationale

Here’s the Bankruptcy Court’s rationale.

Subchapter V exists as part of the Small Business Reorganization Act of 2019 (“SBRA”).

With the SBRA, Congress intended to streamline reorganization processes for small businesses, who often struggle to reorganize under chapter 11.

Unlike in a traditional Chapter 11, a trustee is appointed in every Subchapter V case. The Subchapter V trustee’s duties are:

• To act as a fiduciary for creditors, in lieu of an appointed creditors’ committee;  
• To facilitate the subchapter V debtor’s small business reorganization; and
• To monitor the subchapter V debtor’s consummation of its plan of reorganization.

SBRA does not restrict a Subchapter V trustee from employing attorneys and other professionals, but such employments could substantially increase administrative expenses. Notably:

• The intent behind SBRA is to reduce administrative expenses; and
• A debtor will already employ professionals, who can perform many duties that a trustee might seek to perform.

The Bankruptcy Court denies the employment application but allows that, if during the case the Trustee identifies a specific need for the employment of an attorney, the court will consider a new employment request at that time.

Conclusion

Here’s a “thank you” to this Bankruptcy Court in North Carolina for providing guidance on an important issue of case administration under Subchapter V.

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