American Bankruptcy Institute (“ABI”) 9/28/23 Article reports that in some SubV Chapter 11 cases, the SubV Trustees are NOT getting their fees paid
A relatively new bankruptcy law, frequently used by mom-and-pop businesses during the pandemic, has largely been considered a success—but not always for some of the lawyers supervising these job-saving cases.
Los Angeles bankruptcy lawyer Susan Seflin has served as trustee in more than 40 reorganization cases filed under subchapter V, otherwise known as the Small Business Reorganization Act, since it took effect. Seflin said at a recent American Bankruptcy Institute, or ABI, discussion that, in roughly a quarter of those bankruptcies, “I haven’t gotten paid and I don’t think I will get paid.”
“That’s a pretty big loss,” she said, as her fees range from $4,000 to $17,000 in most cases. “It has added up, and I’ve contemplated ‘Should I keep doing this?’”
Bankruptcy was long viewed as too expensive a process to be worth it for many small businesses. Subchapter V, which was enacted in 2019 as an amendment to the chapter 11 system and took effect the following year, has provided advantages for smaller companies when they want to restructure their finances and get a fresh start. They aren’t required, for example, to foot the legal fees for an official creditors committee, which has a big say at the negotiating table in larger cases. More than 6,000 cases have been filed under subchapter V through July, according to the Justice Department.
Subchapter V also includes the appointment of a trustee, often lawyers such as Seflin, to supervise court action and help businesses broker an exit from bankruptcy. Trustees don’t work for the companies but can take over operational duties from management under certain circumstances.
Shortly after subchapter V went into effect in 2020, Congress lowered the bar for being eligible to seek relief under the bankruptcy code, opening up the process to businesses with up to $7.5 million in liabilities, up from $2.7 million previously. At least one kink that needs to be worked out in the subchapter V law is the compensation for trustees, according to some who have gone through the process.
Seflin said she wants to continue taking subchapter V assignments but “it seems inherently unfair that often [company] counsel has a large retainer, and they’re at least guaranteed some payment, but if the case goes sideways, I’m not guaranteed any payment.”
In one case, Seflin said she asked the company’s lawyer, who was expected to get about half of the $80,000 he was due, if he would agree to give her a $2,000 cut. He refused.
“I was a little surprised,” she said.
Bankruptcy judges acknowledge that subchapter V trustees have a legitimate beef.
“I wouldn’t be telling the truth if I said there isn’t a problem,” Andrew Altenburg, a judge in the U.S. Bankruptcy Court in Camden, N.J., said at an ABI discussion earlier this month. Although most subchapter V trustees are paid, he said, New Jersey courts are considering some type of compensation structure that improves their chances.
Bankruptcy lawyer Susan Seflin and two other subchapter V trustees have asked California’s central district court, which includes Los Angeles, pictured, Riverside and Santa Ana, to change the local rules to require subchapter V businesses to set aside $1,000 a month for trustee services.
Judge Craig Goldblatt in Wilmington, Del., among the nation’s busiest chapter 11 venues, also has expressed concerns about trustees getting paid for their work in subchapter V cases.
Some courts have rules requiring the bankrupt business to make regular payments to the subchapter V trustee. Another alternative suggested is that the company’s lawyer set aside some cash for the trustee.
Seflin told WSJ Pro Bankruptcy that she and two other subchapter V trustees have asked California’s central district court, which includes Los Angeles, Riverside and Santa Ana, to change the local rules to require subchapter V businesses to set aside $1,000 a month for trustee services.
Seattle bankruptcy lawyer Geoff Groshong, who has also served as a subchapter V trustee, agreed that getting paid occasionally has been a problem.
He believes it is “extremely unlikely” that he will ever see $22,700 in subchapter V fees that he was approved for in two of the 40 cases that he has overseen. After getting their plans approved by the bankruptcy court, the two businesses later failed.
Groshong said at an ABI discussion that he will likely begin seeking a fee deposit at the start of certain subchapter V cases, which he said other practitioners have begun doing.
Nebraska, for example, is among the judicial districts that have adopted local rules providing for advance fee deposits, Groshong told WSJ Pro Bankruptcy. He said he doesn’t expect a similar local rule to take effect in Seattle’s court anytime soon.
“There will be some cases where there will be no money to pay the fees,” Mississippi lawyer Craig Geno, who has served as a subchapter V trustee, said in a written statement to ABI. “While unfortunate, it is a reality.”
NOTE: What this article does not tell the reader is that where NO SubV plan is confirmed (approved) by the Bankruptcy Judge the SubV case is assigned to, the Bankruptcy Code does NOT allow SubV Trustee’s to receive fees.