Published Subchapter V Case Summaries

In re Progressive Sols., Inc.,
No. 8:18-bk-14277-SC, 2020 Bankr. LEXIS 467 (Bankr. C.D. Cal. Feb. 21, 2020)
A small business debtor that commenced its chapter 11 almost fifteen months before the SBRA’s effective date filed a motion requesting the entry of an order for authorizing the amendment of its chapter 11 petition to permit it to proceed under Subchapter V. The court relied on the legislative history of the SBRA, the canon that states that a court should apply the law in effect at the time it renders its decision, and the court’s ability to reschedule the procedural matters and deadlines to determine there is no legal reason to restrict a pending Chapter 11 to re-designate under Subchapter V. The court, however, qualified this by pointing out that it would be impermissible for a debtor to make a belated Subchapter V election if “vested rights” of a party in interest would be impaired. The court ultimately denied the debtor’s motion, however, reasoning that under FRBP 1009, rather than re-designating by motion, the debtor must amend its petition to make the election and a dissenting party must object, thus creating a contested matter.
In re Moore Props. of Person Cty., LLC,
No. 20-80081, 2020 Bankr. LEXIS 550 (Bankr. M.D.N.C. Feb. 28, 2020)
The debtor filed its original bankruptcy case before the SBRA effective date and designated itself as a small business debtor, but the bankruptcy administrator filed an objection to that designation. After the effective date, the debtor filed an amended bankruptcy petition electing to proceed under Subchapter V, arguing that even if it did not meet the definition of “small business debtor” when it filed, the SBRA’s amendment to the definition cured the defect and, in addition, it had the right to amend its petition to proceed under Subchapter V. The court allowed the re-designation because the case was not “sufficiently advanced that the substantive alterations in the requirements for plan confirmation arise to a taking of a vested property rights [sic].” Additionally, the court found that the debtor met the SBRA amended definition of “small business debtor,” and as such the debtor could elect to proceed under Subchapter V.
In re Double H Transportation LLC,
No. 19-31830-HCM, 2020 WL 2549850 (Bankr. W.D. Tex. Mar. 5, 2020)
The debtor filed its original petition prior to the effective date, did not designate itself as a small business debtor under the old definition, and subsequently sought re-designation and to proceed under Subchapter V after the effective date. The court stated that “[n]othing in the SBRA enabling statute indicates that the SBRA was intended to have retroactive effect.” The court said allowing such retroactivity “would create a procedural quagmire,” and it denied the motion, in part because the 90-day time to submit a plan under Subchapter V and the deadlines for the Subchapter V status conference and status report had already lapsed. Unlike Progressive Sols. and those that followed it, the fact that the court had the discretionary ability to reset these timelines did not persuade the court.
In re Body Transit, Inc.,
No. 20-10014 ELF, 2020 Bankr. LEXIS 740 (Bankr. E.D. Pa. Mar. 24, 2020)
The small business debtor filed its petition before the SBRA effective date, a creditor filed a motion requesting the appointment of a Chapter 11 trustee, and the debtor subsequently sought to amend and proceed under Subchapter V. The court adopted the “vested property rights” test of In re Moore, and sought to determine whether the limited powers of the Subchapter V trustee (as opposed to the requested Chapter 11 trustee) was a significant enough change to interfere with vested rights of the creditor. The court denied making its determination as a matter of law, but instead stated that it was a fact-dependent inquiry. In this case, because the creditor depicted the debtor merely as a failing, unprofitable business with no hope of reorganizing, the court was not persuaded that the appointment of a Chapter 11 trustee would indeed be in the best interest of the estate. Because the creditor failed to show, beyond mere hypotheticals, how the diminished power of the Subchapter V trustee would affect them in this case, they failed to show the requisite prejudice (i.e., they failed to meet the burden) to forbid re-designation.
In re Bello,
No. 19-46824, 2020 Bankr. LEXIS 813 (Bankr. E.D. Mich. Mar. 27, 2020)
Debtor originally filed a Chapter 13 petition and amended to proceed under Chapter 11 before the SBRA effective date. After the SBRA effective date, the debtor sought to amend its petition and proceed under Subchapter V. Adopting the test from In re Moore Props., the court allowed the re-designation because the case was “still in the early, pre-confirmation stage as a Chapter 11 case.”
In re Ventura,
No. 8-18-77193-reg, 2020 Bankr. LEXIS 985 (Bankr. E.D.N.Y. Apr. 10, 2020)
After the SBRA effective date, debtor sought to proceed under Subchapter V. After agreeing with prior courts that re-designation is not impermissible, the court sought to determine whether doing so would interfere with any “vested rights” of parties in interest. After dismissing any constitutional takings concerns, the court addressed the creditor’s arguments that its vested rights included the prior orders issued by the court permitting the creditor to file its own plan, approving the creditor’s disclosure statement, and finding that the debtor’s proposed disclosure statement was patently unconfirmable. The court ultimately held that no property rights can be said to have vested (in either the creditor or the debtor) until a plan was confirmed, and that the modified procedures in Subchapter V would not unduly prejudice the creditor.
The court also was asked to resolve whether the debtor could use section 1190(3) of the Bankruptcy Code to modify the mortgage the creditor held on the property on which the debtor both lived and conducted her business. The court articulated four factors to consider: (1) whether the mortgage proceeds were used primarily to further the debtor’s business interests, (2) whether the property is an integral part of the debtor’s business, (3) the degree to which the specific property is necessary to run the business, (4) whether customers need to enter the property to utilize the business, and (5) whether the business utilizes employees and other businesses in the area to run its operations). The court ultimately held there was sufficient evidence to hold a full evidentiary hearing regarding the debtor’s proposed use of section 1190(3).
In re Wright,
No. 20-01035-HB Chapter 11, 2020 Bankr. LEXIS 1240 (Bankr. D.S.C. Apr. 27, 2020)
The debtor was an individual who was involved in two previous Chapter 11 businesses in which he held a significant ownership interest and retained personal liability for business debts. Both entities had ceased to do business prior to the filing of the new case. As a result of the business debts, the debtor listed business debt of more than $395,816.29 and consumer debt of $220,882.42, thus meeting the Subchapter V requirement that more than 50% of the total debt be business or commercial. The court sought to determine whether the debtor met the “engaged in commercial or business activities” requirement. Because Subchapter V does not require debt to be “current” debt, the court held that the requirement had been met and allowed the debtor to proceed under Subchapter V.
In re Twin Pines, LLC,
No. 19-10295-j11, 2020 Bankr. LEXIS 1217 (Bankr. D.N.M. Apr. 30, 2020)
Consistent with the holding in Progressive Sols., the court allowed the debtor to re-designate and proceed under Subchapter V. Unlike the court in Double H Transportation, the court granted sua sponte extensions to the Subchapter V deadlines §§ 1188(b) and 1189(b).
In re: Penland Heating & Air Conditioning, Inc.,
No. 20-01795-5-DMW, 2020 Bankr. LEXIS 1550 (Bankr. E.D.N.C. June 11, 2020)
In the only published decision of the week re: Subchapter V (from Judge Warren in the Eastern District of North Carolina), Judge Warren noted that while “the court routinely allows Chapter 7 panel trustees and Chapter 11 trustees to hire themselves and their law firms to provide legal services” In re: Penland Heating & Air Conditioning, Inc., No. 20-01795-5- DMW, 2020 Bankr. LEXIS 1550, at *4 n.1 (Bankr. E.D.N.C. June 11, 2020), “authorizing a Subchapter V trustee to employ professionals, including oneself as counsel, routinely and without specific justification or purpose is contrary to the intent and purpose of the SBRA.” Id. at *4-5.
The case does not include much analysis. Nothing Earth shattering here, but it does illustrate a Judge’s recognition that if the debtor is doing what it needs to do (including hiring competent counsel), a Subchapter V proceeding should not be a fee-frenzy (nor unnecessarily lucrative for the trustee). This case is something important to keep in mind for retention motions filed by Subchapter V trustees.
In re Crilly,
No. 20-11637-SAH, 2020 Bankr. LEXIS 1718 (Bankr. W.D. Okla. June 30, 2020)
The debtors filed their first Chapter 11 case in 2018 and repeatedly failed to file a confirmable plan. Creditors eventually moved to dismiss the case for cause, and the debtors agreed to dismiss just before the dismissal hearing in May 2020. Hours later, the debtors filed a second case (now under Subchapter V). Because of the first case, the automatic stay did not apply to the second case, and the debtors requested the court to continue the stay. Looking at the totality of the circumstances, the court denied the motion because the debtors failed to rebut the presumption that the case was filed in bad faith. The court noted that the mere desire to take advantage of the Subchapter V in a second case was not objectionable, but it was not alone sufficient to make a showing of good faith after the debtors “masterfully manipulated the Bankruptcy Code for twenty months to serve their purpose of staying [their creditors’] collection activities.”`
In re SlideBelts, Inc.,
No. 2019-25064-A-11 BMR-31, 2020 Bankr. LEXIS 1777 (Bankr. E.D. Cal. July 6, 2020)
The debtor filed its original case under Chapter 11 and did not qualify as a small business debtor. In response to the enactment of the Paycheck Protection Program and the increased Subchapter V debt limits by the CARES Act, the debtor sought to dismiss its Chapter 11 case in order to benefit from the PPP and immediately refile its case under Subchapter V. As part of its dismissal, it sought to avoid the bankruptcy court’s imposed condition that the debtor pay committee counsel for services rendered during the case. While the Supreme Court has held that dismissal should “return [the debtor] to the prepetition financial status quo,” the bankruptcy court stated that reliance by a party in interest on the bankruptcy case and the associated prejudice incurred by nonpayment is “a textbook example” of cause to modify the prepetition status quo. The case represents the simple proposition that while courts are willing to see a previous Chapter 11 debtor be re-designated as a Subchapter V small business debtor, a debtor may not do so to the detriment of a party in interest.
In re Trepetin,
No. 20-11718-MMH, 2020 Bankr. LEXIS 1770 (Bankr. D. Md. July 7, 2020)
The debtor filed his original case under Chapter 7 of the bankruptcy code in February 2020. In June, the debtor sought to convert the case to Chapter 11 to take advantage of the small business provisions of Subchapter V (after the 60-day deadline for the status conference and 90-day deadline to file a plan had elapsed). The debtor asked the court to extend the deadlines. Unlike a typical Chapter 11, the court noted that the Bankruptcy Code does not grant an automatic deadline extension to a debtor who elects to proceed under Subchapter V. Nevertheless, like other courts before it, the court looked to sections 1188 and 1189 of Subchapter V that allow extensions in “circumstances for which the debtor should not justly be held accountable” to determine the extensions were permissible in this case. In so doing, however, the court held that it needed to look to the totality of the circumstances, and the facts that the debtor complied with the Code in his Chapter 7 case, no party alleged bad faith, and conversion did not unfairly prejudice any party each weighed in favor of granting the extensions and allowing the Subchapter V case to proceed.
In re Blanchard,
No. 19-12440, 2020 Bankr. LEXIS 1909 (Bankr. E.D. La. July 16, 2020)
The debtors filed for chapter 11 bankruptcy before the enactment of the SBRA and new Subchapter V provisions. The debtors subsequently sought to have their bankruptcy redesignated to proceed under Subchapter V. A creditor contested the applicability of the subchapter because the debtors were not presently engaged in commercial or business activity, and the United States Trustee contested the applicability of the subchapter because certain procedural deadlines (including those in sections 1188 and 1189) had already passed. In line with previous courts that have taken up these issues, the court noted that the definition of “small business debtor” had no temporal qualifications, and ruled that the subchapter is available where the debtors’ debts are primarily commercial (whether present or past). Additionally, and consistent with other courts, the court used its power to extend the relevant deadlines by appealing to prior case law and the legislative history of the statute.
In re Seven Stars on the Hudson Corp.,
Nos. Chapter 11, 19-17544-SMG, 2020 Bankr. LEXIS 2106, (Bankr. S.D. Fla. Aug. 7, 2020)
The debtor filed its initial chapter 11 before the effective date of the SBRA and sought to proceed under Subchapter V after the statutory deadlines of sections 1188 and 1189 had elapsed. After reviewing possible procedural problems (and noting no such problems existed), the court turned to the issue of whether extensions to the deadlines would be appropriate. The court used the Trepetin test allowing extensions in “circumstances for which the debtor should not justly be held accountable”.
Unlike Trepetin, however, the court did not look at whether the debtor’s inability to effectively reorganize was due to circumstances for which it should not be justly accountable. Instead, the court centered the inquiry on whether its inability to meet the statutory deadlines was beyond its control. Because the deadlines passed before the debtor acted to re-designate under Subchapter V, the court did not allow the redesignation. Unlike nearly every court before it to review the issue, the court held unambiguously that “excus[ing] a debtor's compliance with these deadlines because they did not previously exist is to effectively pick and choose which provisions of Subchapter V should apply to a debtor's case. . . . if a debtor elects to proceed under Subchapter V, it must comply with all its provisions, including the statutory timelines.”
In re Parking Mgmt.,
No. 20-15026, 2020 Bankr. LEXIS 2309 (Bankr. D. Md. Aug. 28, 2020)
To be eligible for Subchapter V, under the CARES Act amendments, a debtor must have noncontingent liquidated debts as of the date of the filing of the petition that do not exceed $7.5 million. In this case, the primary issues were whether a lease rejection claim and PPP repayment claim were noncontingent liquidated debts. The court pointed out that assumption or rejection of an unexpired lease is subject to court approval, meaning it could not be done unilaterally by the debtor. Drawing on analogous Chapter 13 holdings, the court ruled that the rejection claim is contingent on a post-petition event, and accordingly rejection claims do not count toward the Subchapter V debt limit. Similarly, the court held that the PPP loan could not be considered in the limit because its repayment was wholly contingent on whether the debtor used the funds on eligible expenses and maintained the required staffing levels. Because the amount (or whether) the debtor would have to repay could not be ascertained as of the petition date, it was excluded from the debt limit.
This case is another example of pro-debtor messaging from bankruptcy courts who seek to provide “an expedited process for small business debtors to reorganize quickly, inexpensively, and efficiently,” just as Congress intended in enacting Subchapter V.
In re Vp Williams Trans,
Nos. Chapter 11, 20-10521 (MEW), 2020 Bankr. LEXIS 2587 (Bankr. S.D.N.Y. Sep. 29, 2020)
The Subchapter V debtor filed its proposed plan, under which it would retain its taxi medallion. The medallion was collateral for a secured lender and the plan divided the secured lender’s claim into two parts: a secured portion (the value of the collateral) and an unsecured portion (the deficiency). The lender filed an election under section 1111(b) (a creditorprotection mechanism whereby an undersecured creditor elects to treat its entire claim, including the deficiency, as secured).
The court addressed the argument that the election was inappropriate because the secured lender’s interest in the collateral was “inconsequential”. After discussing the general rules for an inconsequential determination, the court rejected the debtor’s argument that the policy considerations in Subchapter V cases demand deviation from the general rules. The debtor (relying on In re Body Transit) argued that Congress’ purpose of fostering small business reorganizations in Subchapter V should allow for a more lenient definition of “inconsequential’. The court determined that 1111(b) applies in equal force to Subchapter V cases, and nothing in the new subchapter indicates congressional intent to weaken the protections of 1111(b).
The court also addressed the timing of such elections. Ordinarily, an 1111(b) election must be made prior to the conclusion of the hearing on the disclosure statement. As no disclosure statement is required in Subchapter V cases, the debtor argued the date of the filing of the plan should be the deadline. The court rejected this argument, stating that the election necessarily must be made after the plan is proposed. Looking to the rules governing the election, the court determined that the deadline in Subchapter V cases is “the date fixed by the Court”. As no such date was fixed in this case, the election was timely.
In re Ellingsworth Residential Cmty. Ass'n,
No. 6:20-bk-01346-KSJ, 2020 Bankr. LEXIS 2897 (Bankr. M.D. Fla. Oct. 16, 2020)
The Subchapter V debtor sought nonconsensual confirmation of its plan over the objections from a creditor that the plan was not “fair and equitable” under the provisions of Subchapter V and that the debtor had failed to provide adequate financial information for confirmation. The court held firmly that the plan was fair and equitable as to the unsecured creditor because it called for paying more than the debtor’s disposable income to creditors, payments were likely, and the plan provided creditors a remedy for nonpayment in the form of court action after a ten-day cure period. Unlike other chapter 11 cases, the court noted that a formal disclosure statement was not required, and that the debtors needed only to provide a brief history of the debtor’s operations, a liquidation analysis, projections with respect to payments under the plan, and submission of the future earnings or income to the trustee to ensure execution of the plan. Because the court was able to conclude there was a “reasonable likelihood” the debtor would make all plan payments and the plan was not likely to be followed by liquidation or further reorganization, the plan could be confirmed over the creditors objections.
Hall L.A. WTS, LLC v. Serendipity Labs, Inc. (In re Serendipity Labs, Inc.),
Nos. Chapter 11 (Subchapter V), 20-68124- sms, 2020 Bankr. LEXIS 3164 (Bankr. N.D. Ga. Oct. 19, 2020)
The debtor filed its chapter 11 case and elected to proceed under Subchapter V. The debtor’s disputed secured lender objected to the election because, among other things, the debtor was ineligible to proceed under Subchapter V due to a publicly traded company owning more than 20% of the voting shares of the debtor. The Court, as a preliminary matter, dismissed out of hand the lender’s arguments that the election was “gaming the Subchapter V process” to protect the equity of its directors and officers. Similarly, the Court rejected the debtor’s arguments that disallowing the election would make the case more complicated and administratively burdensome (to the detriment of the stakeholders). The Court held that Congress’ eligibility requirements were all it could consider, and the history and motivations of the debtor are irrelevant. In accordance with this view, the Court rejected the argument by the debtor that it was eligible for Subchapter V because the publicly traded company controlled only 6.5% of the stock eligible to vote on the bankruptcy. The Court held that the Bankruptcy Code was clear in defining 20% of the debtor’s outstanding voting securities and it disallowed the election, furthering the Court’s view that Congress’ enumerated eligibility standards are the only standards for eligibility.
In re 305 Petroleum, Inc.,
Nos. 20-11593-JDW, 20-11594-JDW, 20- 11595-JDW, 2020 Bankr. LEXIS 3008 (Bankr. N.D. Miss. Oct. 27, 2020)
In another case dealing with Subchapter V eligibility, four affiliate debtors filed chapter 11 petitions. One of the affiliates, as a single asset real estate debtor, was not eligible for Subchapter V election and proceeded as a non-Subchapter V debtor. The remaining three took the election. To be eligible for Subchapter V, a debtor’s total debt plus the debt of all affiliates In another case dealing with Subchapter V eligibility, four affiliate debtors filed chapter 11 petitions. One of the affiliates, as a single asset real estate debtor, was not eligible for Subchapter V election and proceeded as a non-Subchapter V debtor. The remaining three took the election. To be eligible for Subchapter V, a debtor’s total debt plus the debt of all affiliates cannot exceed $7.5 million. The three Subchapter V debtors collectively met this requirement, but inclusion of the non-Subchapter V single asset debtor raised the total debt above the ceiling. The debtors argued that the single asset debtor was otherwise ineligible for Subchapter V treatment, so its debt should not be included in the total. The Court rejected this argument by looking to the plan language of the statute and holding it “means what it means”. Because the total debt of all four affiliates exceeded the ceiling, none were eligible to elect Subchapter V, furthering the growing consensus among courts that Congress’ eligibility requirements should be strictly construed.
In re Tri-State Roofing,
No. 20-40188-JMM, 2020 Bankr. LEXIS 3405 (Bankr. D. Idaho Dec. 7, 2020)
The debtor’s Subchapter V chapter 11 case was dismissed after the Subchapter V trustee filed a motion to dismiss that was supported by the U.S. Trustee and, eventually, the debtor. Accordingly, no plan was confirmed. Because there was no standing trustee, the U.S. Trustee appointed a disinterested person to serve as Subchapter V trustee. Where a plan is not confirmed, the Subchapter V trustee may deduct certain claims (including their unpaid compensation) before returning the held funds to the debtor. Section 330(a)(1) of the Code allows the Court to award Subchapter V trustees compensation, provided such compensation is reasonable and complies with sections 326, 328, and 329. Section 329 prohibits compensation for Subchapter V, chapter 12, and chapter 13 standing trustees, but allows reasonable compensation to appointed trustees, provided that chapter 12 and chapter 13 appointed trustees’ compensation is capped at five percent of all payments under the wouldbe plan. While the Court noted that it is likely Congress also intended this statute to impose the cap on appointed Subchapter V trustees, the Court held that the statute, as written, fails to do so. Because enforcing the statute as written would not result in an absurd result, the Court ultimately held that there is no statutory cap on appointed Subchapter V trustee compensation beyond the requirement that such compensation be reasonable.
In re Thurmon,
No. 20-41400-can11, 2020 Bankr. LEXIS 3422 (Bankr. W.D. Mo. Dec. 8, 2020)
The individual debtors in this case elected to proceed under Subchapter V of chapter 11. Their debts did not exceed the statutory limit and they complied with the other Subchapter V requirements, so the only issue with respect to their eligibility was whether they could proceed as small business debtors despite the fact that they had ceased operating their business, sold their assets, and retired several months before filing for relief. Analogizing to similar language in chapter 12, the Court ruled that there is no meaningful difference between being “engaged in” commercial activity and being “presently engaged in” commercial activity. Accordingly, and in opposition to the prior two cases to rule on this issue, the Court held that Subchapter V is only available to those debtors who are currently engaged in commercial activity, not merely any debtors whose debts are primarily commercial and meet the other statutory requirements. This case represents a new lack of consensus among districts as to who may proceed under Subchapter V
In re Baker,
No. 20-33465, 2020 Bankr. LEXIS 3548 (Bankr. S.D. Tex. Dec. 21, 2020)
The Subchapter V debtor sought an extension for the deadline to file the plan of reorganization. Section 1189 of the Bankruptcy Code provides that a debtor “shall file a plan not later than 90 days after the order for relief under this chapter, except that the court may extend the period if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” After determining that this ninety-day period is not jurisdictional, the Court turned to the applicability of the section 1189 standard in Subchapter V cases. This is a fact-dependent inquiry, and the Court relied on various factors articulated by other Courts to analyze the extension. In addition to these factors, however, the Court also appealed to the overarching policy of Subchapter V, namely to “streamline the bankruptcy process”. This Case follows a growing trend in Subchapter V jurisprudence that demonstrates the willingness of courts to work with debtors and other parties in interest in Subchapter V cases to better facilitate this streamlined process.
In re Online King LLC,
No. 1-20-42591-las, 2021 Bankr. LEXIS 198 (Bankr. E.D.N.Y. Jan. 19, 2021)
In a case under Subchapter V, the debtor is the only party who may file a plan and the debtor is required to do so within 90 days from the entry of the order for relief, unless the court extends the time period upon the debtor demonstrating the extension is required due to circumstances for which the debtor should not justly be held accountable. In this case, the debtor failed to file a plan within the 90-day time limit and did not seek an extension prior to the expiration of the 90-day time limit. After the deadline, the debtor moved for an extension and the court was left to determine (1) whether a debtor may move for an extension after the deadline has passed and, if so, (2) whether the debtor was entitled to an extension. Addressing the first issue, the court held that nothing in the statute on its face requires a motion to extend to be brought, heard, or granted prior to the expiration of the 90 days. Accordingly, the court held that it had the authority to retroactively grant an extension, provided an extension is warranted. The court held, relying on the stated goal of Subchapter V to serve as a fast-track chapter 11, that the burden of receiving an extension is a stringent one. Because the debtor knew the deadline was fast approaching, did not seek relief, and demonstrated no inherent issues it or counsel faced by the pandemic preventing the debtor from timely filing its plan, the court ultimately denied the extension.
In re Johnson,
No. 19-42063-ELM, 2021 Bankr. LEXIS 471 (Bankr. N.D. Tex. Mar. 1, 2021)
In the first case to deal squarely with the issue of married couples’ treatment under Subchapter V, a married couple filed a joint petition under chapter 7 and sought to have their case converted to chapter 11 and designate themselves “small business debtors”. Subchapter V requires, among other things, that the debtor be “engaged in commercial or business activities” or be an affiliate of such a debtor. The husband had previously operated several defunct businesses and held debts related to such operations. After extensive statutory exegesis, the court ultimately held that a debtor must be presently engaged in commercial activity to proceed under Subchapter V, furthering a divide among the bankruptcy courts on whether Subchapter V is retroactively available to debtors after they cease operation. In determining whether the wife was eligible as an “affiliate,” the court ultimately held that she was not because the spouses held no ownership interest in one another and had no lease or operating agreement with one another for the purposes of operating each other’s business. Accordingly, because the wife could not proceed under Subchapter V, the court held that there were independent grounds to deny conversion of the joint case.
Gaske v. Satellite Rests. Inc. (In re Satellite Rests. Inc.),
Nos. 20-19282-MCR (Chapter 11), 21- 00012-MCR, 2021 Bankr. LEXIS 652, (Bankr. D. Md. Mar. 19, 2021)
In the case of a debtor restaurant, the court was faced with determining whether the debtor’s debts were non-dischargeable under section 523(a)(2)(A) and section 523(a)(6) of the Bankruptcy Code. Section 523 generally provides that certain debts are non-dischargeable if they arise from false pretenses, false representations, or actual fraud. The court held that, in light of the fact that before the creation of Subchapter V, and it was well-settled that this exception to discharge did not apply to non-individual debtors, the statute’s meaning should not change absent a clear intention from Congress. The court held that the reference to Subchapter V cramdown added to section 523(a) by the SBRA must be given meaning, and the only reasonable meaning was that Congress intended to continue to limit application of the section 523(a) exceptions in a Subchapter V case to individuals. Court held that the plain language of section 523(a) is unequivocal and confirmed that the exceptions to a debtor's discharge, including a discharge under section 1192, apply only to an individual.
In re Young,
No. 20-11844-t11, 2021 Bankr. LEXIS 765 (Bankr. D.N.M. Mar. 26, 2021)
A Subchapter V debtor put forward a plan of reorganization. The debtor’s secured creditor objected to confirmation and moved to convert the case to a chapter 7. Apart from failing the so-called “best interest of the creditors test” (that creditors would be better under the plan than in a chapter 7 liquidation), the court ultimately held that the plan could not be confirmed because it was not fair and equitable, as defined by the bankruptcy code. The plan did not have projected payments to unsecured creditors. A Subchapter V plan must provide that all of the projected disposable income of the debtor be paid over the course of the plan. The debtor argued that its plan was fair and equitable because it did not have any disposable income and the debtor intended to retire (and cease operating). The court ultimately held that a plan under Subchapter V must involve payments of disposable income. If there is no projected disposable income, or if a debtor is going to retire such that there will not be disposable income, a debtor should not be able to proceed under Subchapter V and avoid a chapter liquidation.
In re Ikalowych,
No. 20-17547 TBM, 2021 Bankr. LEXIS 997 (Bankr. D. Colo. Apr. 15, 2021)
In one of the most significant cases to date dealing with the “engaged in commercial or business activities” requirement of Subchapter V, the court needed to determine an individual debtor’s eligibility for Subchapter V. At the time of filing his petition, the debtor was the sole member of a largely pass-through LLC which, in turn, owned a 30% membership interest in a separate entity that was winding down, at which the debtor previously worked. At the time of the petition, however, the debtor worked as a private, salaried employee, selling commercial insurance for a company in which he held no ownership interest. After determining that the relevant temporal consideration was whether the debtor was engaged in the commercial or business activities at the time of the petition, the court dove into some of the most detailed statutory exegesis in the whole of Subchapter V jurisprudence. The court ultimately determined that the debtor’s work for the LLC he owned constituted commercial engagement because it had a business consulting contract and that his work in assisting the winding down of his previous employer also qualified. Most shockingly, however, the court ruled that his role as a salaried employee for an entity in which he held no ownership interest also qualified. In the court’s own words, it held that it “realizes that its legal conclusion regarding the Debtor's work for [the private employer] suggests that virtually all private sector wage earners may be considered as ‘engaged in commercial or business activities.’ So be it. In a very real sense, even employees flipping burgers at fast food restaurants are ‘engaged in commercial or business activities’ as a part of our grand American economy in that they are helping produce and sell a product. There is no reason that ‘commercial or business activities’ are somehow reserved only for business titans, company owners, or management. Every non-governmental worker has their role to play in private sector commerce and business.” This holding, if followed by other bankruptcy courts, would virtually erase the “engaged in commercial or business activities” requirement for all employed debtors, meaning that their largest remaining hurdle would be to establish that their debts are primarily commercial or business.
In re Keffer,
No. 2:20-bk-20334, 2021 Bankr. LEXIS 1020 (Bankr. S.D. W. Va. Apr. 16, 2021)
A chapter 13 debtor learned he was ineligible to proceed under chapter 13 after the IRS filed an amended proof of claim, evidencing his debts exceeded the debt limits proscribed in chapter 13. The debtor moved to convert his case to chapter 11 and elect to proceed under Subchapter V, but certain time limits under Subchapter V (those under sections 1188 and 1189) counting from the initial petition date had already passed, given the time the debtor spent in chapter 13. This court held, consistent with the majority of courts to deal with the issue to date, that an extension was appropriate. Here, the court determined that the debtor certainly knew that he would owe tax to the IRS, but was not certain of the amount or extent of such tax. Because the amended proof of claim and disqualification from chapter 13 were circumstances for which the debtor should not justly be held accountable, the court allowed the debtor to proceed under Subchapter V with extended deadlines.
In re ENKOGS1, LLC,
No. 6:21-bk-00276-KSJ, 2021 Bankr. LEXIS 1043 (Bankr. M.D. Fla. Apr. 20, 2021)
The court in this case was faced with determining whether the debtor hotel could proceed under Subchapter V, given the prohibition against single asset real estate (“SARE”) cases under the subchapter. The court looked first to the definition of “single asset real estate” under the code, which includes a single parcel of property (other than one consisting solely of four or fewer residential units) that generates substantially all of the debtor’s income and “on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.” Looking to the statutory text, case law, and common-sense logical reasoning, the court determined that this hotel does not (and indeed, virtually all hotels do not) qualify as single asset real estate. Because the debtor it provided room cleaning services, laundry services, internet/wi-fi services, phone services, bus and trailer parking, business services, complimentary breakfast, and a fully maintained swimming pool and fitness center, the debtor was conducting substantial business other than operating the real property.
In re Space,
2021 Bankr. LEXIS 1077 (Bankr. D. Utah Apr. 22, 2021)
The debtor in this Subchapter V case lost $4,000 through gambling after the petition date. The United States Trustee sought dismissal of debtor's case, for cause, alleging gross mismanagement of the debtor’s estate. The Court ultimately held for the debtor and denied dismissal on two grounds. First, the Court determined that the gambling losses did not constitute gross mismanagement under the circumstances. The debtor gambled post-petition income from his salary and did so prior to confirmation. The Court held that, because the salary was not property of the estate, such gambling and losses should not result in dismissal. Alternatively, the Court held that even if the debtor's post-petition gambling somehow constituted gross mismanagement, dismissal was not in the best interests of creditors because dismissal could negatively impact the successful completion of the plans of reorganization in the related bankruptcy cases of his partner and the reorganization of their business. Because the Court did not see the benefit in dismissing the case, even if there were mismanagement, it determined that dismissal would not be the appropriate mechanism to remedy such mismanagement.
In re U.S.A. Parts Supply,
No. 3:20-bk-00241, 2021 Bankr. LEXIS 1131 (Bankr. N.D.W. Va. Apr. 28, 2021)
Prior to filing its petition, the debtor was engaged in a protracted state court litigation. At the conclusion of the litigation, judgment was entered against the debtor and a receiver was appointed to liquidate the debtor’s assets. The debtor filed its Subchapter V petition, effectively halting the liquidation process. The debtor put forward a plan of reorganization, and the United States Trustee opposed confirmation of such plan and moved for dismissal for cause. The Court held a hearing at which it determined that there was ample cause to dismiss the debtor's case seeking confirmation. The debtor suffered continuing losses in the absence of a reasonable likelihood of rehabilitation. The debtor repeatedly failed to comply with the duties imposed by the Bankruptcy Code by, for example, choosing to operate behind a cloak of misinformation and obfuscation, pay pre-petition unsecured creditors post-petition without seeking approval, failing to file necessary tax returns and maintain current on the debtor’s obligations, and obtaining a loan from an insider without approval. The Court ultimately determined the debtor's plan was not feasible because the debtor failed to show that the plan was not likely to be followed by liquidation or further reorganization. Accordingly, confirmation was denied and the case was dismissed.
In re Wildwood Vill., LLC,
No. 3:20-bk-02569-RCT, 2021 Bankr. LEXIS 1188 (Bankr. M.D. Fla. May 4, 2021)
In this Subchapter V proceeding, class plaintiffs sought to have a class proof of claim pursuant to Rule 7023 of the Federal Rules of Bankruptcy Procedure. While the Court noted such class proofs of claim are not forbidden in Subchapter V, the Court held that instead of allowing a class claim, a simplified claims procedure was the best way to proceed. The Court determined that in this case, where class plaintiffs had filed their claim as a secured claim based on asserted equitable liens and constructive trust arguments, it was clear that the class plaintiffs did not have an equitable lien or a constructive trust for anything impacting debtor’s real property. Because any claims of interests in property and/or the nature and extent of any claimed lien would have to be addressed in an adversary proceeding anyway, introducing the complications of a class proof of claim mechanism was unnecessary where other alternatives, when combined with a simplified claims process, would secure a workable result.
In re Blue,
No. 21-80059, 2021 Bankr. LEXIS 1378 (Bankr. M.D.N.C. May 7, 2021)
In another case dealing with the eligibility for Subchapter V, the debtor previously owned an IT consulting firm which provided various technology services. The debtor’s firm ceased operations and at the time of the petition the debtor worked as both a salaried W-2 employee and an independent contractor. Joining with the majority of other courts to address the issue, the Court determined that the debtor was able to proceed under Subchapter V because (1) she was “engaged in commercial or business activities” (based on the plain meaning of those words) due to her consulting services, (2) her debts were qualified business debts because Subchapter V has no requirements that the business debts be for the currently engaged business, and (3) at least 50% of the debtor’s debts were such qualified business debts. While certainly not a paradigm shift, this case nevertheless represents another voice in the chorus of growing consensus regarding Subchapter V eligibility.
In re McGrath,
No. 3:20-bk-3689-RCT, 2021 Bankr. LEXIS 1491 (Bankr. M.D. Fla. June 2, 2021)
Individual debtors owned three pieces of real property: (1) a single-family residence in Florida (the debtors’ home), (2) a single-family residence in Pennsylvania (the debtors’ former home), and (3) a commercial property in Pennsylvania (a warehouse leased to commercial tenants). Pursuant to the mortgage on the commercial property, the “rents” on the property were assigned to mortgage-holder bank. When the bank objected to the debtors’ election to proceed under Subchapter V on the grounds the case was a SARE case, the court determined that the case was not SARE because “substantially all of the gross income” of the debtors did not come from managing the real estate, as such rents were not property of the estate. Indeed, the debtors’ only income was from monthly social security payments. Despite this determination, when the debtors filed their plan of reorganization, the bank moved to dismiss the case, alleging that the plan essentially reorganized a SARE case and was not proposed in good faith. The plan did not seek to reorganize the mortgage on the Florida home (it would ride through), did not seek to reorganize the mortgage on the Pennsylvania home (it would be sold and surrendered), and did not seek to reorganize the debtors’ car debt (it too would be sold and surrendered). Because the only debt actually to be restructured in the plan was the mortgage on the single piece of commercial real property, the court held that the debtors’ proposed plan was an attempt to “spin about” and use Subchapter V in a SARE case. The Court held this was an improper use of bankruptcy jurisdiction and dismissed the case for cause (with leave to convert to a Chapter 7 case).
Cantell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC),
Nos. 21-10765-MMH, 21-00056-MMH, 2021 Bankr. LEXIS 1738 (Bankr. D. Md. June 29, 2021)
Plaintiff, a creditor of the debtor, filed an adversary proceeding for a determination that its debt against debtor was excepted from discharge under 11 U.S.C. § 523(a). The introductory language of section 523 says unambiguously: “A discharge under . . . this title does not discharge an individual debtor from any debt . . .” before enumerating certain classes of debt excepted from discharge. Section 1192(2) of the Bankruptcy Code (which provides for a discharge in Subchapter V cases) excepts from discharge any debt “of the kind specified in section 523(a) of [the Bankruptcy Code].” Accordingly, before the court was the narrow question of whether debts “of the kind specified in section 523(a)” incorporated an exception for the classes of debts enumerated therein as to all debtors, or also incorporated the limiting language of “an individual debtor.” Relying on the statutory interpretation of the court in Gaske v. Satellite Rests. Inc. and on the historical context of Subchapter V in favor consistent corporate discharge (even for small business debtors), the court held that the exception to discharge under section 1192(2) of debts “of the kind specified in section 523(a)” is limited to individual debtors proceeding in Subchapter V.
In re Port Arthur Steam Energy, L.P.,
No. 21-60034, 2021 Bankr. LEXIS 1793, (Bankr. S.D. Tex. July 1, 2021)
The debtor filed a bankruptcy case and elected to proceed under Subchapter V of chapter 11. The Office of the United States Trustee and a litigation counterparty objected to the Subchapter V designation. Among the objectors’ key arguments were that the debtor was not operational, and its plan was (essentially) a liquidation. The sole issue before the court, as with many cases before this one, was whether the debtor was engaged in commercial or business activities. The court ultimately held that the debtor was, in fact, engaged in commercial and business activities because it was “actively pursuing litigation against a third party, seeking to collect on outstanding accounts receivable, selling an asset, preserving asset value and having managers oversee the company while an independent contractor maintained the [debtor’s] facility.” The court was similarly not moved by arguments that the legislative history of the Subchapter demonstrated a desire by Congress to promote reorganizations. The court held that the texts of the relevant statutes were not ambiguous, obviating the need for legislative history, and that a Subchapter V debtor may propose a plan that includes the selling of assets to pay creditors.
In re Lupton Consulting LLC,
No. 20-27482-beh, 2021 Bankr. LEXIS 2371 (Bankr. E.D. Wis. Aug. 31, 2021)
The debtors sought confirmation of their combined chapter 11 plan. The U.S. Trustee and a major lender filed objections to the proposed plan, citing concerns over certain release and injunction provisions, feasibility, and bad faith. With respect to the injunction provisions, the proposed plan contained both plan-term injunctions and permanent injunctions for certain debtor insider “(and soon-to-be outsider[])” guarantors. In ruling that the injunction provisions were not appropriate, the Court noted that the debtors failed to meet the basic requirements for injunctive relief, and throughout their defense of the injunctions the debtors failed to differentiate between the plan-term and permanent injunctions. Moreover, the Court noted that the plan left several key terms undefined and it was unpersuaded by the debtors’ arguments that all of the guarantors (an undefined term) should be released due to the efforts of a single guarantor. In the end, the Court held that debtors failed to meet their burden of establishing the “very rare and unique circumstances” required for such injunctions to be appropriate under Seventh Circuit law. With respect to feasibility and good faith, the Court determined that the debtors’ “hopes and vague allusions of making up a deficit in some unidentified manner” did not meet the burden of establishing credible feasibility. While mere lack of confirmability or supporting documentation does not, alone, render a plan proposed in bad faith, this patent lack of feasibility, lack of financial records, and overall excessive benefits to insiders supported a finding that the plan in these cases was not proposed in good faith.
Pack Law - Subchapter V Case Log
Friday, September 10, 2021