A trustee for a small business debtor under subchapter V of chapter 11 may not routinely retain counsel, according to Bankruptcy Judge David M. Warren of Raleigh, N.C.

Developing the notion that subchapter V was intended to make chapter 11 economically feasible for small businesses, Judge Warren warned trustees at the end of his June 11 opinion that “unnecessary or duplicative services may not be compensated.”

The corporate debtor filed a chapter 11 petition in early May and designated itself as a small business debtor intending to wind down the business and culminate in a liquidating plan under subchapter V. The new small business provisions of chapter 11 had become effective on February 19 under the Small Business Reorganization Act, or SBRA. Subchapter V provisions are codified principally at 11 U.S.C. §§ 1181 – 1195.

The so-called CARES Act, adopted on March 27 in response to the coronavirus pandemic, raised the debt limit in subchapter V to $7.5 million, although “not less than 50 percent of [the debt must have arisen] from the commercial or business activities of the debtor.” See Section 101(51D).

The debtor had retained counsel. Mimicking the usual procedure in chapter 7 cases, the trustee filed an application to retain counsel “as a matter of course.” Judge Warren said the trustee “did not have any current need for legal representation in the Debtor’s case.”

To resolve the application, Judge Warren cited the Ventura decision, where Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., observed that the SBRA was intended to streamline reorganization for small business debtors. See In re Ventura, 18-77193, 2020 BL 134496, 2020 WL 1867898 (Bankr. E.D.N.Y. April 10, 2020). To read ABI’s report on Ventura, click here.

Judge Warren listed the trustee’s duties in Section 1183(b), which include acting as a fiduciary in lieu of a creditor’s committee, “facilitating” the reorganization and “monitoring” the debtor’s consummation of the plan. He quoted Bankruptcy Judge Paul Bonapfel, who said in his handbook that employment of professionals may “substantially increase administrative expenses.”

Judge Bonapfel went on to say that “courts may be reluctant to permit a sub V trustee to retain attorneys or other professionals except in unusual circumstances.” Paul W. Bonapfel, A Guide to the Small Business Reorganization Act of 2019, 93 Am. Bankr. L.J. 571, 591 (2019).

Judge Warren also referred to the Justice Department’s Handbook for Small Business Chapter 11 Subchapter V Trustees 3-17-18 (2020), which says that a subchapter V trustee should “carefully consider[] whether employment of the professional is warranted under the specific circumstances of each case.”

Judge Warren held that “authorizing a Subchapter V trustee to employ professionals, including oneself as counsel, routinely and without specific justification or purpose is contrary to the intent and purpose of the SBRA.” Significantly, he added that “the Trustee does not need legal assistance to fulfill his basic duties to monitor and facilitate the Debtor’s reorganization.”

Adding teeth to his interpretation of the limited duties of a subchapter V trustee, Judge Warren inserted a footnote cautioning “overzealous and ambitious Subchapter V trustees that unnecessary or duplicative services may not be compensated, and other fees incurred outside of the scope and purpose of the SBRA may not be approved.”

In other words, subchapter V trustees should lend their expertise to assist the debtor and facilitate  confirmation of a plan. They are not the equivalent of chapter 13 trustees, and certainly are not akin to trustees in chapter 11 or chapter 7.

To this writer, it appears that the statute silently imposes a greater oversight role on the bankruptcy judge, given the absence of a creditors’ committee and the lack of a trustee whose virtual duty is to serve as the debtor’s unflagging adversary.