California Bankruptcy Court Removes Subchapter V Debtor From Possession

A Chapter 11 debtor in possession must manage estate property carefully and disclose financial information fully. In a recent decision, a California bankruptcy court removed a Subchapter V debtor from possession after finding unauthorized payments, disclosure omissions, and late reporting. The court transferred control to the Subchapter V trustee while reserving whether to dismiss or convert the case. If you are interested in filing for bankruptcy, a California bankruptcy attorney can help parties understand these duties and their consequences.

Facts and Procedural History

Allegedly, the debtor filed a Chapter 11 petition under Subchapter V in May 2026 and continued managing estate property. In August, the United States Trustee moved to dismiss the case or convert it to Chapter 7 for cause. The debtor opposed the motion and argued that, if the court found cause, it should expand the Subchapter V trustee’s powers to investigate finances and assess plan feasibility.

It is alleged that two creditors supported conversion and submitted declarations asserting additional grounds for relief. Another creditor joined the motion at the September hearing, while other lenders took no position. The Subchapter V trustee did not oppose an expanded role and said he would try to help resolve the case.

Reportedly, the court reviewed the filings, declarations, and hearing arguments and found substantial problems with the debtor’s management and disclosures. The debtor had made significant payments on prepetition debts without court approval. He initially omitted a Peruvian property interest valued at approximately $2 million and disclosed it only after questioning at a creditors’ meeting. He also belatedly identified about $2.7 million in property that he claimed to hold or control for someone else.

It is reported that the debtor did not identify possible Peruvian accounts or related creditors, did not provide required reports concerning several entities in which he held substantial interests, and listed income from business activities as unknown. His statements about business ownership conflicted with his schedules, and he filed two monthly operating reports about a month late. No appeal is described in the order.

Grounds for Removal of a Subchapter V Debtor from Possession

On appeal, the court evaluated the evidentiary record under Bankruptcy Code Section 1185(a), which permits removal of a Subchapter V debtor from possession for cause. The court found incompetence, gross mismanagement after the petition date, and a lack of candor in disclosures made under penalty of perjury.

The court concluded that these failures undermined the debtor’s ability to act as a fiduciary. Removal served creditors and the estate because the Subchapter V trustee could protect assets, investigate finances, prevent unauthorized payments, address cash collateral, and pursue settlements and plan negotiations. The court withdrew an oral suggestion that the debtor had consented to removal because the evidence of cause made consent unnecessary.

The court removed the debtor from possession effective September 15, 2026, at 4:51 p.m. Pacific Time. It did not yet decide whether to dismiss or convert the case under Section 1112(b). Instead, it continued that hearing and the case status conference to October 26, allowing supplemental briefing on whether the finding of cause under Section 1185(a) also established cause under Section 1112 and, if so, whether conversion was required.

Consult with a Skilled California Bankruptcy Attorney 

Accurate disclosures and authorized use of estate funds are essential when a debtor remains in control during bankruptcy. The California bankruptcy attorneys of the Law Offices of Matthew D. Roy represent clients throughout California in bankruptcy matters. If you have questions about your duties as a debtor in possession or a dispute over control of estate property, contact the firm at (916) 361-6028 or use its online form to request a confidential consultation with a California bankruptcy attorney.