Observations on the Survey of Facilitation by Subchapter V Trustees

11 U.S.C. Sec. 1183(b)(7) — Duty to facilitate

The following article is reprinted with permission from the American Bankruptcy Institute—originally published in its Mediation Committee Newsletter.  Here is a link to the original publication, dated 6/30/2021.

By: Hon. Louis H. Kornreich, David A. Mawhinney & Donald L Swanson

The Bankruptcy Code directs the trustee in “Subchapter V” small business debtor cases to “facilitate a consensual plan of reorganization.”[1] Earlier this year, the ABI Mediation and Reorganization Committees invited their members to participate in a survey to assess how this mandate has been implemented in practice. Approximately 50 ABI members responded. In this article, we share the survey results to help promote discussion of the role of facilitation in Subchapter V. As discussed below, we believe all participants in Subchapter V proceedings would benefit from further understanding of the important role of facilitation.

We begin with the questionnaire.

Question 1: How much involvement have you had in a subchapter V proceeding?

—Multiple-Choice Answers

  • 47.73% — Extensive involvement
  • 13.64% — Moderate involvement
  • 20.45% — Limited involvement
  •   8.18% — No opportunity as of yet

Question 2: In what percentage of your subchapter V cases have you experienced a subchapter V trustee helping facilitate the development of a consensual plan?

—Multiple-Choice Answers

  • 26.83% — 0-25%
  • 19.51% — 25-50%
  • 26.83% — 50-75%
  • 26.83% — 75-100%

Question 3: Indicate below what action (or actions) you have seen subchapter V trustees take to satisfy the statutory duty to “facilitate the development of a consensual plan”?

—Multiple-Choice Answers (can choose more than one)

  • 82.76% — Scheduling individual calls/meeting with key constituents
  • 41.38% — Scheduling all-hands calls/meetings with debtor and one or more key constituents
  • 62.07% — Facilitating the exchange of written information from individual parties to the trustee/other parties
  • 37.93% — Facilitating the creation of a timetable for party communication and proposed plan development

When asked to elaborate on what actions they have taken to facilitate plan confirmation, the answers reflect wide-ranging involvement in multiple aspects of the bankruptcy case.

  • Role as Quasi-Mediator. One trustee described their experience resolving a dispute between the debtor and a creditor who sought to have its unliquidated damages claim excepted from discharge. Through discussions back-and-forth, the trustee helped the parties reach an agreement on the payment of a fixed sum in satisfaction of the claim.  Another respondent reported, “I have filed four Subchapter V cases and confirmed two plans to date. In all cases, the Subchapter V Trustee communicated with contesting constituencies to solicit a consensual resolution. Both confirmed Plans were non-consensual, but the Subchapter V Trustee could not have changed that.”  Respondents highlighted the utility of Zoom for conducting formal mediations of pre-petition litigation matters, and informal “facilitation” meetings with creditor groups. By consistently and regularly contacting the parties, encouraging discussions and identifying potential risks to both sides, the trustee ultimately brought them to the table and agreement.
  • Compliance with Code Requirements. The U.S. Trustee has ensured that the pool of SBRA trustees includes nonlawyers with expertise in financial and business matters, such as accountants and turnaround professionals. Respondents reported that these trustees in particular have been very helpful filling a skills gap between the debtor and debtor’s counsel — e.g., helping the debtor to (1) understand the importance of record-keeping, (2) identify trouble areas to be addressed in a plan, and (3) communicate more effectively with creditors about plan treatment and feasibility.
  • Creativity in Plan Design. One respondent reported “great success” collaborating on the plan with the trustee. The respondent continued, “I treated him much as I would committee counsel, except that I was not so worried about things turning adversarial and could be forthcoming.” “He then helped incorporate views of other key creditors and “sell them on the reasonableness of the Plan.”  Another respondent reported that the trustee also took positions before the court on certain plan objections, which was helpful to all stakeholders and the court.
  • Investigations. Trustees have had the skills and trust to perform court-ordered investigations and to generally investigate the debtor’s schedules and statements, assisting the U.S. Trustee and creditors at the § 341 meeting.

Expressions of Concern and Suggestions for Improvement. The narrative answers also contained expressions of concern and suggestions for improvement.

  • Role Undefined: One respondent who regularly represents creditors questioned what the trustee actually did in their case. Where the creditors deal exclusively with debtor’s counsel, it might not be apparent how much or how little the trustee is engaged with the debtor behind the scenes. Other respondents articulated a concern that trustees who are bankruptcy attorneys may simply duplicate the work of debtor’s counsel and, for this reason, expressed a preference for trustees with financial and accounting backgrounds.
  • Cost: Aside from concerns that the trustee is participating too much or too little in the process, respondents questioned whether the cost of the trustee was in line with what Congress had intended and whether small business reorganizations truly would be cheaper than standard chapter 11.

Conclusion

Facilitation is working! Notwithstanding the practical concerns over the trustee’s role and cost articulated by some respondents, the data clearly show that so far, subchapter V cases are succeeding at a clip that surpasses standard chapter 11 cases. The time from filing to confirmation is also significantly shorter. Facilitation is an important component of that success.

Work should continue by all participants in the subchapter V process to refine the facilitation role. Many trustees possess an innate ability to facilitate. Facilitation is generally understood to mean “to ease” or “to promote.” Many trustees are facilitators by nature and/or experience. Yet there are aspects of facilitation that may not come naturally to trustees or have been required in any role prior to the duty now required. Some of those aspects are likely more akin to skills that mediators have developed by training and practice. We believe that opportunity exists to offer training sessions to trustees and other participants in subchapter V proceedings focused specifically on the role of facilitation. At this point, we envision a one-hour basic course and a three-hour advanced session offered at the national level through ABI webinars and conferences and at ABI regional meetings. In the meantime, the Mediation Committee continues to welcome ABI members to share their experiences with us on this topic.

[1] See 11 U.S.C. § 1183(b)(7).

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