Early Termination of Subchapter V Trustee In Both Consensual & Non-Consensual Plan Confirmations? (§ 1183(c))

 

Sec. 1183(c)

By: Donald L Swanson

There is no doubt about this: after the consensual confirmation of a Subchapter V plan:

  • the trustee’s role terminates upon “substantial consummation” (see § 1183(c)); and
  • “substantial consummation” often occurs shortly after confirmation (see § 1101(2)).

The early trustee termination is not merely a possibility, it’s mandatory upon substantial consummation for a plan confirmed consensually: “the services of the trustee in the case shall terminate” (§ 1183(c)(1), emphasis added).

The Question

But what about early trustee termination under a non-consensual plan? 

  • Is that possible . . . or is it entirely prohibited?

To the best of my knowledge, no court has addressed this non-consensual question.

I’ll try to walk through, in what follows, the consensual rules . . . and then address non-consensual possibilities

Statutory Provisions For Consensual Plan

–§ 1183(c)(1)

§ 1183(c)(1) provides:

  • “If the plan . . . is confirmed under section 1191(a) of this title” [i.e., a consensual confirmation];
  • “the service of the trustee in the case shall terminate when the plan has been substantially consummated”;
  • “except that the United States trustee may reappoint a trustee as needed.” 

–§ 1101(2)

“Substantial consummation” occurs upon (according to § 1101(2)):

  • “transfer of all or substantially all of the property proposed by the plan to be transferred”;
  • “assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan”; and
  • “commencement of distribution under the plan.”

–Result

Typically, such transfers and assumptions happen, under a Subchapter V plan, shortly after confirmation.  The same is true of the “commencement” of plan payments. 

So, termination of the Subchapter V trustee’s role, in a consensual confirmation, typically occurs shortly after confirmation.

What About Non-Consensual Plan?

Notably, § 1183(c) applies specifically and by its express terms to a plan that’s confirmed consensually (under § 1191(a)).

But what about a non-consensual confirmation (under § 1191(b))?  No statutory provision specifically addresses this question.

–Statutory Language

Do either of the following prohibit an early trustee termination under a non-consensual confirmation:

  • The failure to mention § 1191(b) in § 1183(c); or
  • The absence of a corresponding provision elsewhere for non-consensual plans?

–Plan Language

What if the plan itself, or the confirmation order, specifies:

  • The debtor will be its own disbursing agent throughout the term of the plan; and
  • The trustee’s role will terminate upon substantial consummation, with reappointment authorized when needed?

Would such specifications be inappropriate, wrongful or unacceptable?  Would their existence in a plan prevent, as a matter of law, a non-consensual confirmation?

Subchapter V Trustee’s Handbook

The Handbook for Small Business Chapter 11 Subchapter V Trustees provides:

  • “If the plan is confirmed on a nonconsensual basis pursuant to section 1191(b), . . . the trustee will remain in place for the life of the plan” (at 3-15 – 3-16).

While such provision is descriptive of what happens in a non-consensual confirmation, it does not specifically address whether a plan or a confirmation order could provide otherwise.

Statutory Purpose

One purpose of Subchapter V is to eliminate unnecessary burdens and costs. 

Three to five years is a long time to keep a Subchapter V trustee in place.  And the incurring of costs, during such long time, will necessarily be significant—even if the trustee acts with great efficiency.

In light of such purpose, why should a Subchapter V debtor be prevented from forestalling post-confirmation trustee costs by providing, in the plan, for early trustee termination under either a consensual or non-consensual plan? 

Such purpose is especially applicable in various courts where the only difference between a consensual confirmation and a non-consensual confirmation can be a single creditor who:

  • must be classified separately; and
  • fails or refuses to cast a ballot.

Policy Considerations

Here are a couple policy considerations to factor in.

First, the post-confirmation duties of a Subchapter V trustee are limited to:

  • assuring that debtor “commences” payments under the plan;
  • appearing at a hearing on modification of the plan “after confirmation”;
  • providing information requested by a party in interest;
  • filing reports “as are necessary or as the court orders”; and
  • filing a final report.

Such duties are hardly the type of things that demand a term-long trustee.

Second, early-termination of a trustee can always be undone, when needed.  § 1183(c)(1) specifically so provides: “the United States trustee may reappoint a trustee as needed for performance of duties.”   

Conclusion

The Bankruptcy Code expressly provides for, (i) early termination of a Subchapter V trustee upon substantial consummation, and (ii) reappointment of the trustee thereafter, if needed.

But those express provisions are only for a plan that’s confirmed consensually (under § 1191(a)).

A question remaining unanswered by the courts, however, is this:

  • Can a plan or its confirmation order provide for early-termination of the trustee role (upon substantial consummation), even when the plan is confirmed non-consensually?

** 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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