By: Donald L Swanson
“(b) Duties.—The [Subchapter V] trustee shall— . . . (7)facilitate the development of a consensual plan of reorganization.”
- From 11 U.S.C § 1183(b)(7)(emphasis added).
Facilitation is, by statute, a duty of every Subchapter V trustee—something a Subchapter V trustee must do. But the nature and boundaries of the facilitation role have always been fuzzy and, therefore, misunderstood.
My purpose in this multi-part series is to provide observations on the facilitation role.
This first-part article focuses on neutrality. By “neutrality,” I mean this: not taking sides between disputing parties.
Neutrality Observation
Here’s my observation on a Subchapter V trustee’s facilitation neutrality:
- trying to maintain neutrality (i.e., not take sides) between disputing parties whenever possible and for as long as possible is a good thing; but
- maintaining neutrality throughout the entire Subchapter V case is not possible because of statutory duties.
Neutrality Practicalities
When a Subchapter V case is filed, the Subchapter trustee begins in a neutral posture. That’s because the trustee has no information and has no basis for taking any position on anything.
But from that time forward, the trustee gathers information—i.e., details about:
- debtor assets and values;
- creditor claims and amounts;
- lien validities and priorities;
- debtor’s pre- and post-petition conduct;
- terms of a proposed plan; and
- etc.
Such information leads the Subchapter V trustee to an inevitable reality: the trustee must take sides on a variety of disputed issues.
But there is no need for hastening to take sides. Allowing the disputing parties to work through their disputes and reach their own resolution, and assisting such efforts from a neutral posture, is a good approach—maybe even the best approach—for the Subchapter V trustee.
Yet, the time will come in every disputed Subchapter V case when the neutral posture cannot continue.
That’s because of statutory duties.
Neutrality and Statutory Duties
One Subchapter V trustee duty, in and of itself, prevents Subchapter V trustees from being neutral. It’s the duty in § 1183(b)(3) to “appear and be heard” at “any hearing that concerns”:
- value of property subject to a lien;
- confirmation of a Subchapter V plan; and
- sale of property of the estate.
–Rhetorical Question;
How can a Subchapter V trustee “appear and be heard” on a lien dispute, or a disputed plan confirmation or a contested sale, in a meaningful manner and also remain neutral—i.e., not take sides?
–Rhetorical Answer:
The Subchapter V trustee can’t. It’s not possible.
It might be possible for a Subchapter V trustee to remain neutral by punting on the “appear and be heard” duty, with statements like:
- “I hope you make a good decision, Judge, on this value dispute, because it’s very important to the reorganization effort”; or
- “The confirmation question could go either way, Judge—it’s a tough call”; or
- “I’m not sure whether the proposed sale would be good for the estate or not, Judge.”
But each of these responses:
- is less than helpful to the Subchapter V process; and
- fails to satisfy the “appear and be heard” duty—which requires a meaningful participation on the merits of the disputes.
More Duties
And there’s more. Other statutory duties also impair neutrality. Consider these:
- if a purpose is served, “examine proofs of claims and object to the allowance of any claim that is improper”;
- “if advisable, oppose the discharge of the debtor”;
- if the court so orders, investigate the debtor, its business operation and the desirability of continuance, any other relevant matter—and provide a report; and
- if debtor is removed from possession, operate debtor’s business and exercise other expanded powers.
An entirely neutral trustee cannot perform any of these additional duties. Even deciding whether to oppose a debtor’s discharge, under the “if advisable” standard, is taking sides. Consider, for example, these facts:
- debtor fails to schedule a valuable asset;
- when creditors discover the asset, debtor (i) explains, “Oops, I forgot,” and (ii) promptly discloses such asset in amended schedules”; and
- Subchapter V trustee evaluates the facts to decides whether to pursue a § 727(a)(3) objection to discharge:
- a decision to oppose the discharge favors creditors; and
- an opposite decision favors debtor.
Facilitation by Taking Sides
Moreover, taking sides on a dispute is one way of facilitating a consensual plan.
When disputing parties cannot resolve a dispute, the Subchapter V trustee can help by taking an informed and reasoned position on the merits of that dispute.
Such taking-of-sides is an act of facilitation:
- the party on the short-end of the trustee’s position will not like it—and will express that dissatisfaction in a variety of ways; but
- The trustee’s informed and reasoned position will have weight—and will push the parties toward resolution (i.e., is an exercise of the facilitation function).
Exception?
Some Subchapter V cases have no disputes: the case is filed, no creditor raises any issue, a plan is filed, the plan is confirmed without opposition, and there is no basis for opposing discharge or objecting to any claim.
In such a case, the Subchapter V trustee maintains a neutral posture. But that’s only because there is no dispute for taking sides—i.e., there is nothing to facilitate.
Conclusion
To fulfill statutory duties (e.g., the duty to “appear and be heard”), the Subchapter V trustee must step out of a neutral posture and take positions that favor one party over another. In other words the Subchapter V trustee cannot be neutral.
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