A Subchapter V trustee is entitled to have the court create a trust account for the pro rata payment of the trustee’s fees and other administrative expenses, according to Bankruptcy Judge Teresa H. Pearson of Portland, Ore.
Evidently, the Subchapter V case had problems. The confirmation hearing had been adjourned because mediation failed to deliver an agreement between the debtor and her secured lender. The Sub V trustee had already run up almost $7,000 in fees that were, of course, unpaid.
The debtor was paying administrative expenses arising in the ordinary course of business. Unpaid administrative expenses, including the fees of the Sub V trustee, were to be paid when the plan became effective. To be applied toward postpetition services, the debtor’s counsel was holding about $6,000 in a prepetition retainer.
The Sub V trustee filed a motion asking the court to require the debtor to post a $7,500 retainer for application to the Sub V trustee’s fees and expenses. The debtor opposed, but Judge Pearson granted the motion in a January 18 opinion, with important qualifications.
The Sub V Trustee’s Powers
Establishing a retainer for the Sub V trustee would entail the use of estate property not in the ordinary course of business. Judge Pearson therefore addressed the question of whether a Sub V trustee could use the powers in Section 363(b). After “notice and a hearing,” the subsection provides that the “trustee may use, sell, or lease, other than in the ordinary course of business, property of the estate.”
As Judge Pearson said, the trustee’s motion raised the “question [of] whether section 1184 divests a Sub V trustee from the power to use Section 363(b).” Section 1184 provides:
Subject to such limitations or conditions as the court may prescribe, a debtor in possession shall have all the rights . . . and powers, and shall perform all functions and duties . . . of a trustee serving in a case under this chapter, including operating the business of the debtor.
Judge Pearson noted that “section 1184 does not say that the debtor in possession has exclusive access to the rights and powers under the Bankruptcy Code.” [Emphasis in original.] She also said “it would be absurd to believe that Congress meant to impose duties on subchapter V trustees without giving subchapter V trustees the means to fulfill those duties.”
Judge Pearson held “that a subchapter V trustee may use the trustee’s rights and powers under the Bankruptcy Code to the extent it is necessary for a subchapter V trustee to fulfill the statutory duties given to subchapter V trustees in section 1183.”
Cause to Use Estate Property Outside of the Ordinary Course?
Judge Pearson said that the Sub V trustee had shown “a valid business justification” for the motion, because “there is a basic level of expenses that a subchapter V trustee will incur in every case.” In “more difficult cases,” she said, “subchapter V trustees will incur higher expenses.”
Because “a debtor in subchapter V must be able to account for the reasonable anticipated fees of a subchapter V trustee from the outset of the subchapter V process,” Judge Pearson held that the use of “a debtor’s funds outside the ordinary course of business is an appropriate way of accounting for those fees.”
A Retainer, or Something Else?
Judge Pearson considered whether the creation of a retainer for the Sub V trustee would align with the Bankruptcy Code.
The Sub V trustee is entitled to an administrative claim, but Judge Pearson noted that “claims of equal priority must be treated the same.” If estate property were to be set aside, she said it “should be set aside for the pro rata benefit of all administrative claimants, and not just for the Subchapter V Trustee.”
Furthermore, Judge Pearson said that the funds “should be placed in a trust account to be used to pay administrative expenses, and not in the form of a retainer in which only the Subchapter V trustee would have a property interest.” Finally, she ruled that the “[f]unds may not be paid from the trust account unless and until payment to the Subchapter V Trustee and any other administrative expenses is authorized by the Bankruptcy Code and approved by the court.”
The Sub V trustee had served the motion only on the debtor, secured creditors and the U.S. Trustee. Judge Pearson directed the Sub V trustee to serve the motion on all creditors. If no objections were filed, she directed the Sub V trustee to submit an order.
A Subchapter V trustee is entitled to have the court create a trust account for the pro rata payment of the trustee’s fees and other administrative expenses, according to Bankruptcy Judge Teresa H. Pearson of Portland, Ore.
Evidently, the Subchapter V case had problems. The confirmation hearing had been adjourned because mediation failed to deliver an agreement between the debtor and her secured lender. The Sub V trustee had already run up almost $7,000 in fees that were, of course, unpaid.
The debtor was paying administrative expenses arising in the ordinary course of business. Unpaid administrative expenses, including the fees of the Sub V trustee, were to be paid when the plan became effective. To be applied toward postpetition services, the debtor’s counsel was holding about $6,000 in a prepetition retainer.
The Sub V trustee filed a motion asking the court to require the debtor to post a $7,500 retainer for application to the Sub V trustee’s fees and expenses. The debtor opposed, but Judge Pearson granted the motion in a January 18 opinion, with important qualifications.