By: Donald L Swanson
A Subchapter V Trustee “shall . . . facilitate the development of a consensual plan of reorganization.” [Fn. 1]
This is a mediator-ish role: a “third party” who “participates to assist in the resolution of issues in controversy.” [Fn. 2]
Subchapter V Trustee is Not Neutral
However, a Subchapter V trustee can never be a true “mediator” because he/she is not, and cannot be, a “neutral third party” [Fn. 3]. That’s because the Subchapter V trustee has additional statutory duties that put him/her at odds, in many circumstances, with both the debtor and creditors. Such additional duties include, in appropriate circumstances, investigating the debtor’s conduct, objecting to creditors’ proofs of claims, and objecting to debtor’s discharge. [Fn. 4]
This lack of neutrality creates a confidentiality dilemma for the Subchapter V trustee’s duty to “facilitate the development of a consensual plan.” That’s because: whatever debtors or creditors says to a Subchapter V trustee can and will (in appropriate circumstance) be used against them.
Confidentiality Expectations
Confidentiality is the heart of mediation and other alternative dispute resolution (“ADR”) processes. That’s why every U.S. district court has an ADR plan that includes confidentiality requirements. [Fn. 5]
However, there can be no expectation of confidentiality when a debtor or creditor communicates with the Subchapter V trustee. That’s because of the trustee’s various statutory duties that render the trustee not-neutral.
The only confidentiality expectation a debtor or creditor can have, in communications with the Subchapter V trustee, comes from the usual confidentiality Rule that governs negotiations between interested parties—i.e., Fed.R.Evid. 408, which is titled “Compromise Offers and Negotiations.” [Fn. 6]
In relying on Rule 408, however, everyone needs to recognize that Rule 408 limits only the admission of evidence. It does not limit discovery of information. Neither does it limit informal disclosures of information.
Confidentiality Agreements
It is entirely possible for a Subchapter V trustee to enter into confidentiality agreements with the debtor and creditors, in fulfilling the “facilitate” duty.
Such agreements can be formal written events. Or they can be informal, verbal assurances, like this Q&A between Debtor’s Counsel (“Can I tell you something in confidence?”) and the Subchapter V Trustee (“of course.”).
But there is a tension:
- A Subchapter V trustee must not impair the ability to fulfill other statutory duties; and
- Debtors and creditors must be mindful of those other duties.
Practicalities for a Mediation-Like Session
One way for a Subchapter V trustee to fulfill the “facilitate” duty is to conduct a mediation-like session for disputing parties.
Practical effects of the Subchapter V trustee’s not-neutral status, in conducting a mediation-like session, include:
- communications during a facilitation session are governed, exclusively, by Fed.R.Evid. 408, unless the parties agree otherwise;
- the trustee should be reluctant to agree to any confidentiality provision that would limit the exercise of other statutory duties;
- using a joint session format (i.e., with everyone meeting together and everyone talking to each other) minimizes confidentiality expectations; and
- using a caucus format (i.e., the trustee bounces back and forth between caucused parties conveying information and offers) is a viable option—but it creates heightened expectations of confidentiality.
Conclusion
The Subchapter V trustee’s duty to “facilitate the development of a consensual plan” creates a confidentiality dilemma because the trustee cannot be entirely neutral.
As the Subchapter V trustee works with debtors and creditors to fulfill the “facilitate” duty, everyone needs to be cognizant of the trustee’s confidentiality dilemma and proceed with a full recognition of that dilemma.
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Footnote 1. Quoted language is from the list of Subchapter V trustee duties in 11 U.S.C. § 1183(b)(7)).
Footnote 2. Quoted language is from the definition of “alternative dispute resolution” in 11 U.S.C. § 651(a), which statute is part of the Alternative Dispute Resolution Act of 1998.
Footnote 3. Id.
Footnote 4. A list of the Subchapter V trustee’s statutory duties is provided in 11 U.S.C. § 1183(b).
Footnote 5. The Alternative Dispute Resolution Act of 1998 requires (in 28 U.S.C. § 652(d)) that “each district court shall, by local rule . . . , provide for the confidentiality of the alternative dispute resolution processes.”
Footnote 6. Fed.R.Evid. 408 provides: “(a) Prohibited Uses. Evidence of the following is not admissible — on behalf of any party — either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction: (1) furnishing, promising, or offering — or accepting, promising to accept, or offering to accept — a valuable consideration in compromising or attempting to compromise the claim; and (2) conduct or a statement made during compromise negotiations about the claim — except when offered in a criminal case and when the negotiations related to a claim by a public office in the exercise of its regulatory, investigative, or enforcement authority. (b) Exceptions. The court may admit this evidence for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.”
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