By: Donald L Swanson
On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.
This article is the eighth in a series summarizing and condensing the Task Force’s Final Report into “a nutshell.” The subject of this article is:
- whether the Subchapter V trustee or other party in interest should be allowed to file a plan after debtor’s removal from possession.[Fn. 1]
Recommendation
Provisions for removal of the debtor in possession in § 1189 should not be changed to permit anyone but the debtor to file a plan.
Analysis
Sec. 1189(a) says, “Only the debtor may file a plan under this subchapter.”
Upon removal of debtor from possession, the Subchapter V trustee has, by statute, enhanced authority to:
- operate debtor’s business; and
- exercise other trustee powers, rights, functions and duties.
But the Subchapter V trustee cannot file a plan, even after debtor’s removal from possession, without debtor’s cooperation.
Some professionals argue for a contrary rule; that the Subchapter V should have the authority, after debtor’s removal from possession, to file a plan—especially when debtor’s business remains viable.
The Task Force finds that a removed debtor’s Subchapter V case can be concluded without the trustee filing a plan:
- the facilitation duty authorizes a Subchapter V trustee to work with the removed debtor toward preparing a plan for debtor to file;
- if the removed debtor can’t or won’t file a plan, the court can still conclude the case by conversion to Chapter 7 or by a structured dismissal;
- if the case is converted, the Subchapter V trustee might also be appointed as the Chapter 7 trustee (§ 701(a)(1) authorizes appointment of a trustee “that is serving as trustee in the case immediately before the order for relief under this chapter”);
- practical considerations often require continuation of the Subchapter V case for a while so the trustee can realize the highest possible value from sale of debtor’s business; and
- fact-specific determinations on whether to convert or dismiss are left to the discretion of the court.
Practical reasons for retaining debtor’s plan exclusivity, even after removal from possession, include:
- if the debtor won’t work with the trustee to prepare a feasible and confirmable plan, prospects for reorganization are not good;
- a trustee plan would be contrary to the Subchapter V policy of debtor being in charge of the case’s outcome;
- many Subchapter V businesses are of little value without the entrepreneur’s involvement;
- reserving plan exclusivity to the debtor encourages use of the subchapter while discouraging its abuse;
- some businesses might be deterred from filing Subchapter V, without plan exclusivity; and
- if debtor is not cooperative, a trustee’s 363 sale may be the most viable path to maximizing value.
Conclusion
The Task Force opposes any change to debtor’s plan exclusivity.
————————–
Footnote 1. Discussion of this subject is on pages 43 to 47 of the Final Report.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Feed Original Url