Subchapter V Trustee As “De Facto Mediator” (In re 218 Jackson)

De facto end of the harbor? (photo by Marilyn Swanson)

By: Donald L Swanson

A Subchapter V trustee “acts more like a mediator than an adversary”; and

A “substantial part of the Subchapter V trustee’s pre-confirmation role” is to “serve as a de facto mediator between the debtor and its creditors.” 

–From In re 218 Jackson LLC, Case No. 21-00983, Middle Florida Bankruptcy Court (issued August 17, 2021, Doc. 157). 

The 218 Jackson opinion deals with the requirement, in § 1183(a), that a Subchapter V trustee be a “disinterested person,” as defined in § 101(14)(C). What follows is taken from the 218 Jackson opinion.

Unique Role

The 218 Jackson opinion describes the “unique role” of a Subchapter V trustee: a role that is mediator-ish.

Subchapter V provides a new avenue for small business debtors to reorganize—efficiently. While many Subchapter V provisions are found elsewhere in the Bankruptcy Code, Subchapter V is also unique in many ways.

Differences from other Bankruptcy Code provisions include:

  • Subchapter V encourages the confirmation of a consensual plan, but allows the debtor to confirm a plan without the approval of any creditors; and
  • Subchapter V introduces a new player—the subchapter V trustee—who plays a different role from other trustees, even though many trustee duties are the same or similar [fn. 1].

Facilitate Role

The Subchapter V trustee is unique, as the only bankruptcy trustee directed to “facilitate the development of a consensual plan of reorganization.” § 1183(b)(7) (emphasis added). This facilitation duty is assigned to no other trustee in bankruptcy.

Moreover, this duty to “facilitate” is a principal duty of a Subchapter V trustee.  Such duty is significant:

  • Traditionally, trustees tend to be adversarial to the debtor as a result of their duties in protecting the estate and creditors;
  • Chapter 7 trustees take possession of the estate’s property and dispose of or administer those assets in order to pay creditors—such a role typically puts a trustee in conflict with the debtor and sometimes creditors;
  • A chapter 11 trustee, if one is appointed, similarly takes possession of estate assets for the purpose of liquidation, sale, or less frequently, a reorganization;
  • A chapter 13 trustee also gathers assets—but in the form of plan payments in order to distribute to creditors; and
  • A chapter 12 trustee is most similar, but even a chapter 12 trustee is not charged with facilitation of a consensual plan.

Not Adversarial

The Subchapter V trustee’s role is intentionally designed to be less adversarial than trustees under other chapters of the Bankruptcy Code.  For example:

  • Facilitation of a consensual plan requires the Subchapter V trustee to work with the creditors and debtor toward agreement—the definition of facilitate is to “make the occurrence of (something) easier; to render less difficult”; and
  • A subchapter V trustee is not required to investigate the financial affairs of the debtor, unless the court orders an investigation for cause and upon request of a party.

Instead of taking an adversarial posture, the U.S. Trustee’s “Handbook” declares that Subchapter V Trustees should, “as soon as possible”:

  • “begin discussions with the debtor and principal creditors about the plan the debtor will propose”;
  • “encourage communication between all parties in interest as the plan is developed”;
  • be proactive in “communicating with the debtor and debtor’s counsel and with creditors”; and
  • be proactive in “promoting and facilitating plan negotiations.”

De Facto Mediator

In sum, as noted above, the Subchapter V trustee is to be a de facto mediator between the debtor and creditors.

A Subchapter V trustee, of course, is not (and cannot be) an actual mediator, because of other statutory duties, limitations on confidentiality, etc. But the duties of a Subchapter V facilitator (as established by Congress) are mediator-ish and involve the same types of skills and abilities. That’s what “de facto mediator” means.

Action Item—Mediation Training

In light of the “de facto mediator” nature of a Subchapter V trustee’s role, mediator training for all Subchapter V trustees (including yours truly) is advisable—if not essential.

————————

Footnote 1. Similarities between duties of a Subchapter V trustee and other bankruptcy trustees include the following: (i) Trustees in chapters 7, 11, 12, 13 and subchapter V all have duties of accounting for property received, examining proofs of claim (if a purpose would be served), furnishing information about the estate if requested by a party in interest, and making a final report and a final accounting on the administration of the estate, (ii) Subchapter V, Chapter 12 and Chapter 13 trustees are further required to appear and be heard at any hearing concerning the value of property subject to a lien, confirmation of a plan, and modification of a plan, and (iii) Chapter 12 and Subchapter V trustees must also appear and be heard at any hearing that concerns the sale of property of the estate. 

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