Subchapter V Trustee Should Not Be A Debtor’s Disbursing Agent

By: Donald L Swanson

Question: 

Should a Subchapter V trustee be receiving and disbursing the debtor’s payments to creditors?

Answer: 

No—absent highly unusual circumstances.

Rationale

Here are the reasons for the negative answer.

–First

A Subchapter V trustee’s compensation is based on hourly services rendered—not on a percentage of money the trustee handles.  See this linked article

A Chapter 12 trustee and a Chapter 13 trustee, by contrast, are compensated by a percentage of funds they handle—and so, they receive and disburse a debtor’s plan payments as standard practice.  See, e.g., Handbook for Chapter 13 Standing Trustees, at 2-2 to 2-4, and Handbook for Chapter 12 Standing Trustees, at 2-2 to 2-4.  One effect is that disputes will arise between debtors and Chapter 12 trustees, because Chapter 12 debtors often try to make large payments directly to creditors for the sole purpose of avoiding the trustee’s percentage fee.  See, e.g., Bankruptcy Court opinion of In re Spindler, Case No. 20-11642, Western District of Wisconsin (Doc. 44, issued 12/28/2020).     

–Second

Business debtors should be capable of sending their own payments directly to creditors.

–Third

Disbursing debtor’s payments through an account managed by the Subchapter V trustee will add unnecessary hourly costs to the bankruptcy case.  Whereas, one of the purposes of Subchapter V is to reduce such costs: Subchapter V “represents an innovative effort to expedite and reduce the cost of bankruptcy for small business debtors” (from Department of Justice statement dated 2/19/2021). 

–Fourth

There is no statutory provision in Subchapter V requiring that funds be paid through the trustee.  Here are some statutory provisions on the subject, within Subchapter V:

  • 11 U.S.C. § 1190 provides for “submission” of future earnings and income “to the supervision and control of the trustee,” but this provision is qualified by the non-mandatory words “as is necessary for the execution of the plan”—accordingly, absent highly unusual circumstances, there is no necessity to make payments through the Subchapter V trustee;
  • 11 U.S.C. §  1194(a) describes what a Subchapter V trustee is to do with funds received—but it contains no requirement that the trustee actually receive any funds;
  • 11 U.S.C. § 1194(b) talks about the trustee making payments to creditors under the plan but adds, “except as otherwise provided in the plan or in the order confirming the plan”—this is a non-mandatory provision; and
  • 11 U.S.C. § 1194(c) says, “the court . . . may authorize the trustee to make payments” to a secured creditor for adequate protection—but this is also a non-mandatory provision.

–Fifth

A Subchapter V trustee’s statutory duties do not include receiving or disbursing funds.  A Subchapter V trustee’s “Duties” are specified in § 1183(b).  There is no reference of any sort to a payments duty in Subchapter V’s § 1183(b), other than:

  • being “accountable for all property received” (§ 1183(b)(1) and § 704(a)(2)), and
  • ensuring that debtor “commences making timely payments” under a confirmed plan (§ 1183(b)(4)).

–Sixth

The Handbook for Small Business Chapter 11 Subchapter V Trustee does not require payments through the trustee.  Instead, it acknowledges that payments through the trustee will generate additional costs for the estate.  Here are provisions on the subject from such Handbook (emphases are added):

  • The subchapter V trustee may be required to act as a disbursing agent for the debtor’s payments to creditors under the confirmed plan of plan reorganization (at 1-1);
  • In a consensual plan, the debtor generally makes payments under the plan directly (at 3-10);
  • In a plan confirmed nonconsensually, the trustee will collect and distribute plan payments, “unless otherwise provided in the plan or confirmation order” (at 3-15 & -16);
  • The trustee will remain in place for the life of the plan, “regardless of whether the trustee or debtor make the plan payments” (at 3-16);
  • “The trustee may have additional post-confirmation reporting requirements in cases, particularly if the trustee will be collecting and distributing plan payments” (at 3-16);
  • If the confirmed plan is non-consensual and the trustee is responsible for making the plan payments to creditors, the case ordinarily will remain open after substantial consummation until all payments have been made by the trustee, the trustee has filed his final report . . . “ (at 3-16 & -17);
  • For a plan confirmed nonconsensually, “the trustee will remain in place throughout the life of the plan, and the trustee may collect compensation as the trustee disburses payments received from the debtor, except as provided in the plan or ordered in the confirmation order” (at 3-21);
  • “Section 1194 permits, but does not require, a debtor to make adequate protection payments through the trustee” (at 3-21);
  • Under a plan confirmed non-consensually where “the debtor made the plan payments, and the trustee did not handle estate funds,” the trustee is to “file the NDR after completion of the plan payments under the nonconsensual plan and the conclusion of the trustee’s administration of the case” (at 8-3); and
  • “In cases in which the trustee is required to disburse the plan payments, the court may require the trustee to file with the court periodic post-confirmation reports” (at 8-3).

Conclusion

Disbursing a Subchapter V debtor’s payments to creditors through the Subchapter V trustee is inadvisable.  That’s because such disbursing efforts will create hourly, and unnecessary, trustee fees for the bankruptcy estate. 

Highly unusual circumstances may require otherwise.  However, it is difficult to imagine what circumstances might qualify as highly unusual.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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