Every now and then, (i) something is blatantly obvious, but (ii) those in charge insist that what seems obvious is actually false. Such a disconnect breeds distrust.

That’s precisely what exists in our bankruptcy system. The U.S. Constitution requires that bankruptcy laws be “uniform . . . throughout the United States”:

The opinion is from In re The Diocese of Buffalo, N.Y., Case No. 20-10322, Western New York Bankruptcy Court (entered December 27, 2021, Doc. 1487).

The Diocese of Buffalo asks the Bankruptcy Court to refer its Chapter 11 case and related adversary proceedings to mandatory global mediation–it does so twice. Its first request is denied. It’s second is granted . . . but with limitations.

“Engaged in” eligibility for Chapter 12 (farming operations) and Subchapter V (commercial or business activities) are similar-but-separate things.

An opinion by the Kansas Bankruptcy Court shows the difficulty in addressing the “engaged in” eligibility standards in Chapter 12—even when Subchapter V opinions are consulted as analogous.

“We can’t see what the Subchapter V trustees are doing, so we don’t have an opinion on their effectiveness.”

–This is the response of a couple bankruptcy judges, when asked about the effectiveness of Subchapter V trustees in performing the statutory “facilitate a consensual plan” duty.

Startled!

Startled! That’s my initial reaction, upon hearing the judges’ response.

But the response actually makes sense:

On January 3, 2022, Reuters reports, under the heading “Judge orders mediation for Purdue, Sacklers over opioid settlement,” as follows:

Johnson & Johnson (“J&J”) has, for a very long time, produced and sold a baby powder product containing talc—a mineral milled into fine powder that includes traces of asbestos.

In recent years, that baby powder product has spawned a torrent of lawsuits alleging that it causes ovarian cancer and mesothelioma.

Currently, over 38,000 ovarian cancer actions and over 400 mesothelioma actions are pending against J&J. Expectations are for thousands more to be filed in decades to come.

An assignment for benefit of creditor (“ABC”) is, historically, a nonjudicial process for administering the affairs of a failed business. ABC laws are rooted in English common law and predate enactment of federal bankruptcy laws in the U.S.[Fn. 1]

An ABC is made by a formal, voluntary transfer of most-or-all of a business’s assets to an assignee, in trust, to apply the property or its proceeds to the payment of debts and to return any surplus to the debtor.

On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.

This article is the first in a series that summarizes and condenses the Task Force’s Final Report into “a nutshell.” This article:

• provides background information and data on Subchapter V.[Fn. 1]

Overall

Debtor’s Chapter 11 counsel cannot be compensated for services performed after a trustee is appointed and the debtor removed from possession.

• That’s the rule of law in the Fifth Circuit and in a not-for-publication decision of the Ninth Circuit’s Bankruptcy Appellate Panel, based on a U.S. Supreme Court ruling.

So . . . the question is, what about Subchapter V? Does that same no-compensation rule apply in Subchapter V when the debtor is removed from possession?

Ninth Circuit BAP Opinion

Bankruptcies with large tort claims are common:

• some involve a limited number of claimants (e.g., a drunk driver hits a bus or a restaurant serves bad food one evening); and
• others have large numbers of claimants, some of whom won’t even be known for at least another decade (e.g., asbestos cases).

Often in tort bankruptcies, the total amount of claims overwhelms the debtor’s ability to pay: i.e., existing assets, insurance coverages and projected future income streams are, simply, insufficient.