Getting Subchapter V Trustees Paid: § 1191(e)

For love or money? (photo by Marilyn Swanson)

Subchapter V of the Bankruptcy Code’s Chapter 11 is relatively new: it took effect as a new law on February 19, 2020. Accordingly, new questions continue to arise on how its terms and provisions should be applied.

A Trustee Fees Question

One Subchapter V question is this:

When does a Subchapter V trustee’s administrative claim for fees and costs get paid?

A Regular Chapter 11 Answer

The answer in regular Chapter 11 has always been this:

Such claims must be paid in cash and in full shortly after confirmation of a Chapter 11 plan, unless the claimant agrees to something different.

That’s because 11 U.S.C. § 1129(a)(9)(A) says:

“Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that—(A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim.”[Fn. 1]

A Different Answer in Subchapter V

Subchapter V, however, changes the regular Chapter 11 answer of prompt payment in full.

Subchapter V provides that the trustee’s fee can be paid “through” debtor’s Subchapter V plan. Specifically, § 1191(e) says (emphasis added):

“(e) Special Rule.—Notwithstanding section 1129(a)(9)(A) of this title, a plan that provides for the payment through the plan of a claim of a kind specified in paragraph (2) or (3) of section 507(a) of this title may be confirmed under subsection (b) of this section.”

So . . . what does that “payment through the plan” phrase mean in § 1191(e)?

Must—or may—fee payments to the Subchapter V trustee be spread over the entire three to five years of the plan’s term?; or
Can Subchapter V trustee fees be paid in full in the early stages of the plan, e.g., before payments to general unsecured creditors begin?

I submit that the “payment through the plan” phrase means this: Subchapter V trustee fees can be paid “through” the plan but should still be made, (i) as quickly as possible, and (ii) before payments to general unsecured claims begin.

Here’s why.

–Statutory Language

§ 1191(e) quoted above authorizes payments “through the plan,” it does not require payments “throughout the term of the plan”; and
the “notwithstanding § 1129(a)(9)(A)” language in § 1191(e) merely eliminates the “on the effective date” requirement—it does not reduce administrative claim priorities to a general unsecured status.

–Practicalities

Here are some practical observations, based on comments I’ve read and heard from other Subchapter V trustees:

It’s common for Subchapter V plans to provide for payment of administrative claims first and in full before payments begin on general unsecured claims;
Such an approach is not controversial with debtor’s counsel, because debtor’s counsel will also have an administrative claim that needs to be paid through the plan too—so, both types of administrative claims get paid first-and-together; but
When administrative claims are large, in proportion to the amounts that general unsecured claims will receive, the payments stream on administrative claims can still take a long time.

Conclusion

Subchapter V trustees want to get paid. Surprise! Surprise!

And they want to get paid as quickly as possible.

§ 1191(e) provides a means for making that happen.

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Footnote 1. 11 U.S.C. § 507(a)(2) refers to “administrative expenses allowed under section 503(b) of this title,” and 11 U.S.C. § 503(b) says, “there shall be allowed administrative expenses . . . , including—(1)(A)the actual, necessary costs and expenses of preserving the estate.”

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