Subchapter V Trustee Fees Protected as Administrative Expenses Outside the Ordinary Course of Business

Since its inception, Subchapter V of chapter 11 of the United States Bankruptcy Code has raised novel questions for practitioners to consider and, ultimately, for courts or legislators to address. One of these issues – the payment of the fees and expenses of a Subchapter V trustee – was recently addressed by the U.S. Bankruptcy Court for the District of Oregon in In re Roe, No. 23-32077-THP11, 2024 WL 206678 (Bankr. D. Or. Jan. 18, 2024).

Subchapter V Trustees Generally

Before discussing the court’s decision regarding Subchapter V trustee fees, it is important to understand what a Subchapter V trustee is and the pivotal role they play in a Subchapter V case.

Subchapter V chapter 11 cases are a relatively new form of chapter 11, intended to provide a streamlined path through chapter 11, without many of the costs associated with “traditional,” chapter 11 cases. A chapter 11 debtor with less than $7.5 million in total noncontingent, liquidated business debts (both secured and unsecured) may elect to proceed under Subchapter V. Subchapter V provides a handful of key benefits to small chapter 11 debtors, most notably the elimination of the “absolute priority rule,” which does not apply in Subchapter V cases, elimination of a mandatory appointment of unsecured creditors’ committees, and the inapplicability of United States Trustee fees.

When Congress enacted Subchapter V, it endeavored to create a system for potentially less‑sophisticated small businesses with little or no knowledge of the chapter 11 process. Congress did so by requiring the appointment of a Subchapter V trustee in each Subchapter V case.

Subchapter V trustees have specific statutory duties that generally charge the trustee with a monitoring and oversight function. Subchapter V trustees are also granted standing to be heard on specific issues and to act as disbursing agent if a Subchapter V chapter 11 plan is confirmed through a cramdown. As the prevalence of Subchapter V cases increases, the role of a Subchapter V trustee has matured, with many assuming a mediator role to facilitate the formulation and confirmation of reorganization plans on a consensual basis.

Uncertainty Regarding Subchapter V Trustee Compensation

Unfortunately, Congress did not provide for Subchapter V Trustee compensation other than to note that such fees should be paid as administrative expenses of a debtor’s bankruptcy estate. Typically, administrative expenses are addressed through a plan of reorganization. In many cases, Subchapter V trustees may, therefore, be putting their time and fees at risk if a case is unsuccessful or may encounter significant delays before receiving compensation for their services. So, what can be done to ensure that Subchapter V trustees are fairly compensated and incentivized to vigorously perform their statutory duties?

One notable case addressing this issue is In re Roe. In that case, the debtor filed chapter 11 and elected to proceed under Subchapter V. After filing a proposed plan of reorganization, the debtor and several other key parties in the case engaged in mediation regarding the plan, which was initially unsuccessful. The plan proposed to pay administrative expenses (including the Subchapter V trustee’s fees and expenses) on the later of the effective date of the plan or a date agreed to by such party.

Rather than wait for a plan to be confirmed and become effective, the Subchapter V trustee proactively filed a motion seeking an order requiring the debtor to post a retainer for the trustee’s fees and expenses. The bankruptcy court granted the request (subject to the trustee providing notice of his motion to all creditors in the case), holding 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 [of the Bankruptcy Code].” Thus, a Subchapter V trustee has the ability to use property of a debtors’ estate outside the ordinary course of business to perform its statutory duties, analogous to a chapter 11 debtor’s ability to do the same to fulfill its duties as a debtor in possession.

The Roe decision indicates the practical need for Subchapter V trustees to have assurances regarding their compensation and not be asked to perform their statutory duties at risk of nonpayment. As such, where appropriate, we expect more Subchapter V trustees to use the Roe decision to safeguard their financial interests when appointed to Subchapter V cases.