Published Subchapter V Case Summaries

CATEGORIES OF CASES:

ELIGIBILITY

Eligibility Chapter 11 may be redesignated as Subchapter V so long as “vested rights” of party in interest are not impaired.
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.
Eligibility Debtor’s redesignation as Subchapter V debtor after SBRA effective date was permissible because the case was not sufficiently advanced to impair a party’s vested rights.
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.
Eligibility Nothing in the SBRA provided for retroactive application, and the already-passed statutory deadlines precluded the Debtor from redesignating its case as a Subchapter V case.
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.
Eligibility Debtor could redesignate as a Subchapter V case because a motion requesting the appointment of a Chapter 11 trustee, without some factual showing of prejudice, did not interfere with vested rights of a creditor.
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.
Eligibility Redesignation to Subchapter V was appropriate where case was still in its early, preconfirmation stage.
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.”
Eligibility Business debts of a now defunct business still count as “business debts” for Subchapter V eligibility purposes.
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.
Eligibility Redesignation under Subchapter V was appropriate in the case and sua sponte extended the statutory deadlines established by the subchapter.
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).
Eligibility Debtors could redesignate as Subchapter V debtors because the “business debtor” aspect of eligibility had no temporal requirements and the statutory deadlines could be justly extended.
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 re-designated 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.
Eligibility Debtor could not redesignate under Subchapter V because the statutory deadlines had already elapsed, and the Court could not extend those deadlines where the Debtor did not act to redesignate prior to the deadlines’ elapse.
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 re-designation. 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.”
Eligibility – Rejection Damages/Cap Rejection damages (because they are contingent on Court approval) and PPP loan debts (because they are contingent on spending requirements) do not count toward the Subchapter V debt limits and are thus omitted from the eligibility analysis.
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.
Eligibility Bankruptcy Court rejected the Debtor’s argument that it was eligible for Subchapter V notwithstanding the fact that a publicly traded company that owned more than 20% of the Debtor’s outstanding stock held only 6.5% of such stock eligible to vote on the bankruptcy. Because the 20% threshold was exceeded (irrespective of voting), the Debtor was not eligible.
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.
Eligibility – Affiliated Debt / Cap Because the inclusion of non-Subchapter V SARE debtor’s debts caused affiliates’ debts to exceed the statutory cap, none of the debtor affiliates were eligible for Subchapter V.
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 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.
Eligibility – “Engaged in Business” There is no meaningful difference between “engaged in” and “presently engaged in” commercial activity. Debtors were ineligible for Subchapter V where commercial activities had ceased.
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.
Eligibility – “Engaged in Business” Bankruptcy Court gave the broadest possible meaning to “engaged in commercial activity,” allowing a private wage employee was eligible for Subchapter V.
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.
Eligibility Debtor hotel was not an SARE entity because it provided significant services beyond merely managing the property, and thus was eligible as a Subchapter V debtor.
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.
Eligibility – “Engaged in Business” Bankruptcy Court distinguished between “business activities” and “business operations,” allowing a non-operating debtor to proceed under Subchapter V.
In re Space, 2021 Bankr. LEXIS 1077 (Bankr. D. Utah Apr. 22, 2021) In another case regarding the “engaged in commercial or business activities” requirement of Subchapter V, a largely non-operational debtor entity sought to proceed under the subchapter. The U.S. Trustee objected, stating that the debtor had no employees, was no longer conducting business in the manner it previously conducted business, had no intention to reorganize its business, and intended to merely liquidate. The debtor responded that the Trustee was conflating “activities” with “operations”. The court, agreeing with the majority of other courts to address the issue, first determined that the relevant inquiry was whether the debtor was currently (as opposed to previously) engaged in the covered activities, whatever they may be. Similar to In re Ikalowych and its “totality of the circumstances” approach from just a week prior, the court determined that the debtor could proceed under Subchapter V. The court held that the debtor was engaged in the following commercial or business activities: (1) having active bank accounts; (2) having accounts receivable; (3) analyzing and exploring counterclaims in a lawsuit; (4) managing certain publicly tradeable stock; and (5) winding down its business and taking reasonable steps to pay its creditors and realize value for its assets. This case, and In re Ikalowych before it, seem to indicate the high-water mark for “engaged in commercial or business activities” and demonstrate a growing willingness to allow debtors to proceed under Subchapter V.
Eligibility – “Engaged in Business” Debtor could proceed as a Subchapter V debtor engaged in commercial activities, as a debtor who worked both as a W-2 employee and an independent contractor.
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.
Eligibility – “Engaged in Business” Bankruptcy Court determined that a liquidating debtor could still proceed under Subchapter V, provided that it could meet the requirement of being engaged in commercial activities as of the petition date.
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.
Eligibility – What is commercial debt? The “primary purpose” test of debt only seeks to determine whether debt is commercial or not. Whether the debt arose from commercial activities of the Debtor had little bearing on eligibility as long as the debt was commercial.
Lyons v. Family Friendly Contracting LLC (In re Family Friendly Contracting LLC), No. 21-14213-TJC, 2021 Bankr. LEXIS 2945 (Bankr. D. Md. Oct. 26, 2021) The Debtor was a Maryland limited liability company that provided certain home and commercial real estate improvement and management services. The debtor elected to proceed under Subchapter V. The debtor’s former owner objected to the election, alleging that it did not qualify because a majority of its debts did not arise from commercial or business activities “of the debtor.” Specifically, the former owner contended that certain blanket loans were incurred by the debtor and its new owners as part of the larger transaction by which the company was sold to the new owners. Because this debt was incurred primarily for the benefit of the new owners, the former owner contended that the debt, however business or commercial it may be, did not arise from the commercial activities of the debtor. The Court disagreed. In so doing, the Court first held that the “primary purpose” test previously set out in In re Ventura only determines the binary of whether a debt is commercial or not. Because commercial activities can benefit more than one party. Because the loans at issue were part of a fully integrated business transaction that resulted in direct and indirect benefit to the debtor, the loans contributed toward the debtor’s eligibility.
Eligibility – “Engaged in Business” Bankruptcy Court determined that “a garden variety employee-employer relationship” is generally insufficient commercial activities to be eligible as a Subchapter V debtor.
Nat'l Loan Inv'rs, L.P. v. Rickerson (In re Rickerson), Nos. 21-10315-TPA, 28, 37, 2021 Bankr. LEXIS 3403 (Bankr. W.D. Pa. Dec. 14, 2021) The debtor was a physician who previously operated her practice through a number of entities. At the time she filed her bankruptcy petition, these entities were no longer functioning, and she was engaged in “a garden variety employee-employer relationship.” Coming into conflict with In re Ikalowych, which suggested that virtually all private sector wage earners are engaged in commercial or business activities, the Court here determined that the ordinary meaning of the phrase did not include employer-employee relationships where the employee has no ownership or other special interest in the employer. As an independent ground to deny Subchapter V status, the Court also analyzed whether the debtor’s tax obligations could be construed as business debts. Without ultimately resolving the issue of whether personal income tax debt can be considered business debt, the Court determined that an insufficient amount of the tax obligations arose from her commercial or business activities to entertain the possibility that 50% of her total debt was business debt.
Eligibility – “Engaged in Business” Subchapter V required debtors to be presently engaged in commercial activity. Moreover, a wife was not an affiliate of her husband, and thus would not be an eligible Subchapter V debtor irrespective of the husband’s commercial engagement.
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.

AUTOMATIC STAY / ELIGIBILITY

Automatic Stay Merely refiling a previously dismissed case to take advantage of the new provisions of Subchapter V was insufficient to make a showing of good faith after prior bad faith actions in the original case.
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.”`

CASE DEADLINES

Deadlines Bankruptcy Court allowed extension of Subchapter V deadlines after case converted from Chapter 7 because Debtor could not justly be held accountable for missing such deadlines and Debtor complied with all Chapter 7 deadlines pre-conversion.
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.
Deadlines The 90-day plan deadline is not jurisdictional and held that extensions to the deadline should be reviewed in light of the totality of the circumstances with due consideration to Congress’ intent that Subchapter V streamline the bankruptcy process.
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.
Deadlines Bankruptcy Court held that retroactive extension of plan deadline can be granted, but the standard is a stringent one and debtors should seek extension prior to the deadline passing.
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.
Deadlines Bankruptcy Court allowed extension of Subchapter V deadlines after Debtor was forced to convert from Chapter 13 after IRS filed an amended proof of claim rendering the Debtor ineligible for Chapter 13.
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.
Deadlines Bankruptcy Court determined that retroactive extensions of Subchapter V deadlines are within the discretion of the Court, but such extensions should not be granted where Debtor failed to provide justification for such extensions.
In re Excellence 2000, No. 21-33136, 2022 Bankr. LEXIS 112 (Bankr. S.D. Tex. Jan. 18, 2022) The debtor was ordered to file a plan of reorganization no later than December 27, 2021. Instead of filing a plan, however, the debtor filed an emergency motion to extend the deadline to file on December 28, 2021 (one day after the 90-day deadline). Thus, the Court was faced with two issues: (1) whether retroactive relief could be granted, and (2) if so, whether it was warranted. Dealing first with the retroactivity question, the Court noted that section 1121 (applicable in non-Subchapter V Chapter 11 cases) of the Bankruptcy Code provides that a court may grant an extension of the deadline to file the plan only if “the order extending time is signed before the existing deadline has expired.” Section 1189 (which governs Subchapter V), however, contains no time limit on the order’s entry, however, and the Court determined that retroactive extensions are within the discretion of the court. Turning to the issue of whether the Court should exercise its discretion, it noted that the standard is whether “the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” Because the debtor did not put forward any plan drafts and only cited an ongoing real property dispute as the reason for the delay, the Court denied the extension.
Deadlines Bankruptcy Court determined that retroactive extension of deadlines is within the Court’s discretion but denied extension where the delay was due to the Debtor’s counsel’s calendaring error.
In re Majestic Gardens Condo. C Ass'n, No. 21-18653-PDR, 2022 Bankr. LEXIS 667 (Bankr. S.D. Fla. Mar. 14, 2022) Due to a calendaring error on the part of the debtor’s counsel, the debtor failed to file its Subchapter V plan within the 90-day deadline imposed by section 1189. Section 1189(b) provides that the court may extend the deadline for “circumstances for which the debtor should not justly be held accountable”. The debtor sought a retroactive extension of the deadline pursuant to FRBP 9006 for “excusable neglect”. The Court determined that the narrow issues before it were the following: (1) whether the Court could grant the extension retroactively, and (2) whether the excusable neglect of the clerical error qualified as circumstances for which the debtor should not justly be held accountable. Joining the Court in In re Online King LLC, the Court determined that retroactive extension was within its power. However, because FRBP is a rule and section 1189 is a statute, the Court determined that the rule could not apply to extend the deadline. Because the Supreme Court has held unambiguously that clients are “accountable for the acts and omissions of their chosen counsel,” the Court determined that holding the debtor accountable for the counsel’s calendaring error would be just, and it accordingly denied the extension. While the Court acknowledged that the ordinary conclusion in such circumstances would be dismissal, the Court allowed the debtor to amend its petition to remove the Subchapter V designation.
Deadlines Bankruptcy Court granted retroactive extension of plan filing deadline and determined that cause existed to grant extension because the Debtor’s need to wait for affiliate tax returns to be prepared were circumstances for which Debtor could not justly be held accountable.
In re Castillo, No. 8:20-bk-06411-RCT Chapter 11, 2022 Bankr. LEXIS 1417 (Bankr. M.D. Fla. May 9, 2022) The debtor commenced his case as a chapter 13 case. After a creditor moved to dismiss on the grounds that the debtor was ineligible for chapter 13, the debtor timely converted the case to subchapter v and the Court entered an order setting procedures and deadlines for the converted case (including the deadline to file a plan). The debtor timely filed a motion to “extend the exclusivity period” to file a plan, despite debtor exclusivity being statutorily integrated into subchapter v. The Court accordingly denied the motion. One month after the deadline to file a plan had passed (without a plan being filed), the U.S. Trustee moved to dismiss the case. In response, the debtor requested that the court reconsider the “exclusivity motion,” and conceded that it was inartfully drafted and should have instead sought an extension of time to file the plan. In support of a retroactive extension of time, the debtor explained that he could not propose a plan until the tax returns were prepared for his four business entities, and accordingly the need for extension was “circumstances beyond his control,” as required by the statute. The Court joined the growing majority in holding that a retroactive extension of the plan filing deadline was within the Court’s power. In granting such relief, the Court determined that the debtor’s stated reason for delay (the needed tax returns) were circumstances beyond his control for which he should not justly be held accountable. In reaching this conclusion, the Court noted that the errors of counsel in the exclusivity motion (to the extent they were errors) for which the debtor would normally be held accountable were not the sole cause of the delay, and thus an extension of time to file the plan was granted.

PLAN CONFIRMATION ISSUES

Plan Provisions and Confirmation Five-factor test for analyzing whether a Subchapter V debtor may use section 1190(3) to modify the rights of the holder of the mortgage on the Debtor’s principal residence and business location.
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).
Plan Provisions and Confirmation Nothing in the SBRA indicated Subchapter V debtors should receive preferential treatment when analyzing 1111(b) elections. Moreover, the deadline for 1111(b) elections in Subchapter V cases is whatever deat the court fixes, provided that such deadline should be after the plan is filed.
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 creditor-protection 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.
Plan Provisions and Confirmation Subchapter V debtors must merely show there is a “reasonable likelihood” that plan payments will be made and the plan is not likely to be followed by liquidation or further reorganization to meet confirmation requirements.
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.
Plan Provisions and Confirmation Bankruptcy Court determined that a Subchapter V plan must provide for projected disposable income payments to unsecured creditors and if there is no projected disposable income due to lack of operations or the debtor’s intent to retire, the debtor cannot proceed under Subchapter V.
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.
Plan Provisions and Confirmation Bankruptcy Court held that confirmation was not appropriate because Debtor failed to show the plan was not likely to be followed by liquidation or further reorganization after consistently failing to comply with the Bankruptcy Code and obfuscating relevant facts.
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.
Plan Provisions and Confirmation Bankruptcy Court determined that plan could not be confirmed because injunction provisions were inappropriate and the vague allusions without concrete projections rendered the plan wholly not feasible.
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.
Plan Provisions and Confirmation Because resolution of a motion for summary judgment would effect disposition of the Debtor’s plan, the Bankruptcy Court granted a limited extension of the deadline to file a plan until after the hearing on such motion.
In re HBL SNF, LLC, 635 B.R. 725 (Bankr. S.D.N.Y. 2022) The debtor was a 160-bedroom nursing and rehabilitation facility that opened in late 2019. In 2015, the debtor had entered onto certain agreements with its future landlord regarding the construction and financing of the debtor’s facility. In part due to problems stemming from the pandemic, the landlord eventually filed litigation against the debtor asserting that the debtor’s lease had already been terminated. After filing for bankruptcy, the landlord litigation was removed to the bankruptcy court where discovery was completed and a motion for summary judgment was scheduled to be heard after the 90-day deadline for the debtor to file its reorganization plan. The debtor sought a 90-day extension to the deadline and the landlord objected. In granting the extension, the bankruptcy court took a measured approach. After identifying the relevant standards for extension, the Court noted that all parties agreed that the status of the lease with the landlord was the threshold issue that must be resolved before any reorganization could occur. The Court held that such a central, non-prejudicial issue merited an extension of time to file a Subchapter V plan. Equally, the Court determined that a 90-day extension was greater than necessary to accomplish these goals, and instead granted the extension for only 60 days.
Plan Provisions and Confirmation Distributions to creditors, no matter how de minimus, rendered a confirmed subchapter v plan substantially consummated and therefore prohibited the debtor’s attempts to modify the confirmed plan.
In re Nat'l Tractor Parts, Inc., No. 20 B 20833, 2022 Bankr. LEXIS 1591 (Bankr. N.D. Ill. June 6, 2022) The Bankruptcy Court confirmed the debtor’s plan consensually and entered a confirmation order in the subchapter v case. The Plan contained six classes of creditors and equity interests, including classes for priority claims, three separate secured creditors, general unsecured creditors and equity interests. Class 5, the general unsecured creditors, includes treatment of a claim filed by the Small Business Administration ("SBA"). After making approximately $900 in payments to Class 1 and $600 in payments to Class 4, but before making the contemplated $50,000 payments to Class 2 or any quarterly payments to Class 5, the debtor sought to amend the confirmed plan. Specifically, the debtor proposed to change the plan's treatment of SBA's unsecured claim (based on a prepetition loan made under the COVID-19 EIDL program) because after confirmation, it learned that it may be eligible for an increase in the EIDL Loan. To benefit from this increase, the debtor proposed a new Class 7 for the EIDL Loan that would allow it to be paid on its original terms if increased and paid as a Class 5 claim if not. Because the section 1101 definition of substantial contribution controlled in a subchapter v case, the debtor could not modify the plan after payments to creditors had commenced, irrespective of whether any creditors objected to modification or indicated they would change their votes.

VENUE

Venue Bankruptcy Court determined venue was more appropriate in New York when Debtor was a New York corporation with all of its creditors in New York and filing in Florida appeared to be a delay tactic to stymie New York litigation.
In re Bensalz Prods., No. 21-21018-MAM, 2022 Bankr. LEXIS 1428 (Bankr. S.D. Fla. May 19, 2022) In this case, the debtor was a defunct media production company whose sole assets were approximately $1,000 in cash and certain royalties from the defunct media operations with an “unknown” value. The debtor had been involved in protracted litigation with an individual and her business entities, stemming from breaches of contract with such business entities and the alleged sexual assault of the individual by one of the debtor’s three members. The debtor was a New York entity, the litigation was in New York, and the debtor’s sole creditors were the New York litigants and the New York law firm the debtor had hired in such litigation. Nevertheless, the debtor filed its bankruptcy case (originally under chapter 7) in Florida because one of its other members was a resident of Florida. The individual creditor and her business entities moved to dismiss the case or, in the alternative, transfer venue to the Southern District of New York. In determining that the case should be transferred, the Court noted that “[t]he facts and equities point toward dismissal.” Nevertheless, the Court determined that a hearing on dismissal may be necessary to establish a sufficient record, and such a hearing would more appropriately be held before a court in New York. In reviewing the standards for transfer of venue, the Court determined that each factor either favored New York or was irrelevant to the inquiry. The Court ultimately determined, “[e]ven after giving great weight to [the debtor’s] selection of venue and straining to accept the tenuous business justifications offered, the Court cannot condone the end run to justice that tinges every aspect of [the debtor’s] filing its bankruptcy case in [Florida].”

DISMISSAL / DISCHARGE

Dismissal/Discharge Debtor could not voluntarily dismiss its Chapter 11 case and shortly thereafter re-file as a Subchapter V debtor merely to take advantage of PPP funds and avoid payment to committee counsel.
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.
Dismissal/Discharge Bankruptcy Court held that Congress intended to continue to limit application of section 523(a) exceptions in a Subchapter V case to individuals.
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.
Dismissal/Discharge Bankruptcy Court held that the Debtor’s postpetition gambling losses did not justify dismissal because the gambling of postpetition assets postpetition did not constitute gross mismanagement of estate assets.
In re Robinson, No. 20-11471, 2021 Bankr. LEXIS 1078 (Bankr. D. Kan. 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.
Dismissal/Discharge Bankruptcy Court determined debtors’ case was not SARE because rents from real property were not property of the debtors’ estate (because such rents were assigned to the mortgage-holder bank), but nevertheless dismissed the Subchapter V case because the proposed plan was still an attempt to reorganize SARE property.
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).
Dismissal/Discharge The Bankruptcy 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 Subchapter V debtors. NOTE: Subsequently overturned by the 4th Circuit (see below).
Cantwell-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.
Dismissal/Discharge The Bankruptcy Court determined that the plan meaning of section 523(a) should govern, and that its exception to discharge applies only to individual debtors (even in the context of a Subchapter V).
In re Rtech Fabrications, LLC, Nos. 21-20048-NGH, 21-07002-NGH, 2021 Bankr. LEXIS 2529 (Bankr. D. Idaho Sep. 15, 2021) The debtor was a limited liability company that specialized in custom vehicle builds and modifications. The debtor contracted to build certain custom vehicles from 2016 through 2020. The debtor and its counterparty ultimately had a falling out, and the counterparty initiated an adversary proceeding seeking, inter alia, to except the debtor from discharge under section 523(a) due to fraud, breach of contract, and violation of the Idaho Consumer Protection Act. Under section 1192(2) of the Bankruptcy Code, a debtor is granted a discharge "except any debt . . . of the kind specified in section 523(a) of this title." However, section 523(a) by its terms in isolation only excepts discharge as to individual debtors. Joining the two Maryland bankruptcy court decisions to previously take up the issue, the court determined that the plan meaning of the statute should govern, and that the section 523(a) exception to discharge applies only to individual debtors (even in the context of a Subchapter V).
Dismissal/Discharge Bankruptcy Court determined Debtors had no intention of effectively reorganizing and dismissed case due to bad faith (and potential eligibility issues due to the Debtors’ wage-earner status).
In re Patel, No. 20-30455, 2022 Bankr. LEXIS 1215 (Bankr. W.D.N.C. May 4, 2022) The debtors originally filed for chapter 11 in April 2020, and after the SBA filed a proof of claim for $1.8 million stemming from personal guarantees of a loan some twenty years earlier, the debtors redesignated their case to a subchapter v case. The debtors were high-wage earners who maintained a luxurious lifestyle. The debtors’ proposed plan included only the SBA as an impaired creditor and throughout the case the debtors provided inconsistent rationale for seeking to strike the SBA claim in toto. The United States, on behalf of the SBA objected to the plan and sought dismissal of the case. In reviewing the record of the case, the Court ultimately determined that the debtor’s only reason for filing the bankruptcy case was to eliminate the SBA claim. Moreover, it determined that in so doing the debtors’ goals were primarily to frustrate the rights of the SBA, not reach a resolution. Because the Court determined the debtors’ bad faith in filing and prosecuting their bankruptcy case, it ruled that the proposed plan could not be confirmed, and the case must be dismissed—“the Debtors have no proper purpose for remaining in this Chapter 11 case and have no honest intent to effectuate a plan of reorganization.” As an additional note, while the Court did not squarely address the issue of subchapter v eligibility, it did take the time to highlight the wage-earner status of the debtors (in connection with their lifestyle) in assessing the bad faith inquiry. This approach may be instructive for practitioners who seek dismissal or redesignation of a subchapter v case where the debtors are wage earners but the district’s law is nevertheless in favor of subchapter v status.
Dismissal/Discharge The 4th Circuit determined that the Bankruptcy Court erred when it held that the exception to discharge under section 1192(2) of debts “of the kind specified in section 523(a)” is limited only to individual Subchapter V debtors.
Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), No. 21-1981, 2022 U.S. App. LEXIS 15627 (4th Cir. June 7, 2022) Ruling that the lower bankruptcy court erred and breaking from the Bankruptcy Court for the District of Idaho which had previously agreed with the lower bankruptcy court, the Fourth Circuit determined that corporate subchapter v debtors do not benefit from the exception to discharge identified in section 523(a). While the Circuit Court agreed that there is ““a certain lack of clarity in the relationship between § 1192(2) and § 523(a),” it ultimately determined that a strict textual reading combined with the underlying policy implications demanded that the bankruptcy court’s prior interpretation fall. The Court ultimately held that section 1192 discharged classes of debtors (i.e, individual and corporate) and excepts those debtors from discharging kinds of debts identified in section 523(a). Whether such section would normally apply to corporate debtors or not is immaterial, as section 1192’s language applies the section 523 exception to all subchapter v corporate debtors, both corporate and individual.

CLAIMS ISSUES

Claims Bankruptcy Court determined that a simplified claims process was preferable over a class claims process, in light of Subchapter V’s streamlined procedures and policy.
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 or 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.
Claims Bankruptcy Court denied motion to declare Subchapter V could not apply to claims that accrued prior to the effective date of the SBRA and declare that the SBRA violated the takings principals of the Fifth Amendment due to multiple procedural defects in the motion.
In re Chee Wei Fong, No. 20-16813-JGR, 2021 Bankr. LEXIS 3577 (Bankr. D. Colo. Nov. 23, 2021) In a short opinion from the United States Bankruptcy Court for the District of Colorado, the Court was faced with a motion that sought a declaration that section 1191(b) of the Bankruptcy Code (which governs confirmation of Subchapter V plans) "may not be retrospectively applied to any creditor's claim which accrued prior to August 23, 2019." The motion contained numerous defects. For one, because the motion functionally would set out the amount and priority of distributions under the plan (as well as a declaratory judgment) it must have been brought as an adversary proceeding under 28 U.S.C. § 2201(a) and Fed. R. Bankr. P. 7001. Furthermore, the creditor’s motion contended that the “retrospective” application would offend taking principals rooted in the Fifth Amendment. Because motions that draw into question the constitutionality of a federal statute must be served on the Attorney General, the creditor failed to take the correct procedural steps in bringing their motion.

EXPANSION OF POWERS

Expansion of Powers Bankruptcy Court determined listed causes to remove Subchapter V debtor were not exhaustive and that requisite cause existed where serial bankruptcy filer deliberately refused to comply with Court orders.
In re Pittner, No. 21-11009-FJB, 2022 Bankr. LEXIS 292, (Bankr. D. Mass. Feb. 4, 2022) The debtor was a serial bankruptcy filer who had filed five bankruptcy cases and had been in bankruptcy for more than ten years. The debtor sought confirmation of his plan of reorganization which contemplated the sale of certain real property. The U.S. Trustee argued that the Subchapter V trustee should be the operating trustee. The Court denied confirmation and instead ordered the debtor to either apply to retain a real estate professional or file a motion to sell the real property. The debtor failed to do so and at a subsequent show cause hearing disputed the wisdom of the Court’s order and explained that he thought a sale outside of the Court’s order would be more effective. The U.S. Trustee the suggested that cause existed to remove the debtor from possession. The Court, after noting that the causes enumerated in section 1185 is non-exhaustive, ultimately held that the debtor’s deliberate refusal to obey the Court’s order was requisite cause to remove the debtor from possession and the Subchapter V trustee’s powers were accordingly expanded.
Expansion of Powers Bankruptcy Court determined debtor had lied on numerous occasions and had fraudulent intent at hearing to consider sua sponte motion to remove Debtor from possession. Court ultimately determined conversion was in bets interest of creditors.
In re Ozcelebi, No. 20-70295, 2022 Bankr. LEXIS 854, (Bankr. S.D. Tex. Apr. 1, 2022) The debtor was a gastroenterologist who practiced in Texas through a variety of complicated, semi-overlapping entities over which he and his family maintained ownership and control. Before filing the petition, the debtor and his former colleague had been engaged in some two-decade-long dispute that resulted in the colleague’s $2 million judgment against the debtor (the largest non-insider creditor). The colleague creditor filed a motion to dismiss or convert the case, or alternatively, for authority to pursue chapter 5 causes of actions against insiders. The United States Trustee also filed a motion to convert, and the Court sua sponte ordered notice that it would consider whether the debtor should remain as debtor in possession. The Court began its analysis by reviewing the credibility of the debtor and determined that he was not credible and consistently “feigned ignorance” of his conduct and financial affairs. The Court additionally chastised the colleague creditor, the Subchapter V Trustee, and the UST for failing to file a motion to remove the debtor from possession and expand the powers of the Subchapter V Trustee. Ultimately, the Court determined the case should be converted due to the debtor’s numerous lies, failure to make candid representations to the Court, fraudulent intent, and bad faith (both in filing the case and carrying out his postpetition duties). While the “right answer” eventually was reached in this case, the larger lesson here is that parties should act expeditiously to seek removal of debtors from possession in conjunction with dismissal or conversion of a subchapter v case. The Court put it plainly: “Parties should always use the tools provided by the Code to mitigate waste of judicial resources. That was not done here.”

PROFESSIONAL FEES

Professional Fees Bankruptcy Court acknowledged that it is common for Chapter 7 and Chapter 11 trustees to hire themselves or their law firms to provide legal services but cautioned practitioners that the purpose of the SBRA demand avoiding a fee frenzy and prohibits doing so routinely or without specific purpose.
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.
Professional Fees Bankruptcy Court determined that the SBRA, as-drafted, imposed no cap on appointed Subchapter V trustee fees under section 329, and accordingly no such cap exists irrespective of possible congressional intent to the contrary.
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 would-be 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.
Professional Fees Bankruptcy Court, appealing to the Subchapter V policy of keeping fees low, reduced Debtor’s counsel’s fee application due to excessive or unnecessary work, work that could have been done at a lower rate, and duplicative work.
In re Rockland Indus., No. 21-02590-dd, 2022 Bankr. LEXIS 380 (Bankr. D.S.C. Feb. 14, 2022) The debtor’s general counsel sought fees in the amount of $66,970.50, split between two fee applications filed eight days apart. Because a local rule required fee applications to be submitted at least thirty days apart, counsel sought an exception to the rule. The attorneys' hourly rates ranged between $525.00 to $395.00, and paralegal time was charged at $175.00 per hour. The United States Trustee objected to the fee applications, stating that the case was a simple liquidation with only $3.4 million of liabilities and opining that the fee applications appeared inconsistent with the cost-saving goals of Subchapter V. The Court reviewed several bases to reduce the fees, including whether time spent was excessive or unnecessary, whether tasks could have been completed at a lower hourly rate, and whether efforts were duplicated. The Court ultimately reduced the fees by $6,023.75, appealing in particular to the policy of Subchapter V and its stated goal to keep costs low. Of particular note, the Court appealed to the existence of a form Subchapter V plan in reducing plan fees by $841.75. While practitioners should be wary in all bankruptcy cases to closely monitor their fee requests, it appears the policy of Subchapter V, in connection with the plan forms, should encourage counsel to be extra vigilant in small business cases.
Pack Law - Subchapter V Case Log
May 31, 2022