The Quirks of Mediation in Sub V

• Published in: American Bankruptcy Institute journal 2024-04, Vol.43 (4), p.26-66
• Main Authors: Benedek, Marla S, Felger, Mark E, Berkoff, Leslie A
• Format: Article
• Language: English
• Subjects: Balance of power; Bankruptcy; Bankruptcy laws; Bankruptcy reorganization; Confidentiality; Cost control; Debt; Jurisdiction; Mediation; Mediators; Participation; Small business
• ISSN: 1931-7522

Under the SBRA's original text, in order to file a subchapter V case, the debtor had to be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with combined total secured and unsecured debts of $2,725,625 or less as of the petition date, not less than 50 percent of which arose from the commercial or business activities of the debtor.1 The debt cap for qualifying as a subchapter V debtor was increased to $7.5 million by the Coronavirus Aid, Relief and Economic Security Act of 2020 and, through an extension via the Bankruptcy Threshold Adjustment and Technical Corrections Act of 2022, will continue at that level through June 21,2024. [...]permitting the debtor to confirm a plan without any consenting creditors fixes a longstanding problem of small business reorganizations failing simply due to lack of creditor involvement. In ruling on a final fee application of a subchapter V trustee, one bankruptcy court detailed the uniqueness of the trustee's role, emphasizing that trustees in chapter 7,11 or 13 cases tend to be adversarial to the debtor - in that they have a duty to protect the estate and its creditors.18 In contrast, subchapter V trustees only take possession of estate property if the debtor is removed and the subchapter V trustee's powers are expanded, and are only required to investigate the debtor's financial affairs if the court orders them to do so for cause and upon a party's request.19 The court concluded that the subchapter V trustee's role was intentionally designed to be less adversarial, and he/she in fact "acts more like a mediator than an adversary. When a subchapter V trustee is serving as a defacto mediator, it would likely be more akin to a typical negotiation process facilitated by the trustee than a formal mediation. [...]to protect individual interests, parties wishing to treat the trustee as a mediator should enter into an explicit confidentiality agreement that defines the contours of the understanding among the parties and is signed by all mediating parties and the subchapter V trustee.