AGUIDE TO THE SMALL BUSINESS REORGANIZATION ACT OF

A GUIDE TO THE SMALL BUSINESS

REORGANIZATION ACT OF 2019

Revised June 2022

Paul W. Bonapfel

U.S. Bankruptcy Judge, N.D. Ga.

This June 2022 compilation of A Guide to the Small Business Reorganization Act of 2019 merges

the July 2021 compilation of the Guide with material in the May-June 2022 Supplement and

incorporates revisions in a May 2022 compilation. The earlier compilations and this one update

the original version published at 93 Amer. Bankr. L. J. 571 (2019).

The May-June 2022 Supplement is in two parts. The first part supplements the July 2021

compilation with revisions and new material as of May 2022. The second part adds additional

revisions and materials as of June 2022. This June 2022 compilation includes all of the revisions

in both supplements.

The reader who is not familiar with the July 2021 compilation may consult only this June 2022

compilation, because it includes all the material in both of the supplements.

The reader who is familiar with the July 2021 compilation may consult only the May-June 2022

Supplement to review new material added to the July 2021 compilation. The reader who is also

familiar with the May 2022 Supplement may consult only the June part of the May-June 2022

Supplement to review new material.

This paper is not copyrighted. Permission is granted to reproduce it in whole or in part.

Table of Contents

I. Introduction ................................................................................................................................ 1

II. Overview of Subchapter V ........................................................................................................ 7

A. Changes in Confirmation Requirements ................................................................................... 8

B. Subchapter V Trustee and the Debtor in Possession ................................................................. 9

C. Case Administration and Procedures ........................................................................................ 9

D. Discharge and Property of the Estate ...................................................................................... 10

1. Discharge – consensual plan ............................................................................................ 10

2. Discharge – cramdown plan............................................................................................. 10

3. Property of the estate ....................................................................................................... 11

III. Debtor’s Election of Subchapter V and Revised Definition of “Small Business Debtor” .... 11

A. Debtor’s Election of Subchapter V ......................................................................................... 11

B. Eligibility for Subchapter V; Revised Definitions of “Small Business Debtor” and “Small

Business Case” .............................................................................................................................. 17

1. Statutory provisions governing application of subchapter V and the debt limit .............. 17

2. Overview of eligibility for subchapter V ......................................................................... 19

3. Revisions to the definition of “small business debtor” and requirements for eligibility for

subchapter V in general ........................................................................................................ 21

C. Debtor Must Be “Engaged in Commercial or Business Activities”....................................... 24

1. Whether debtor must be engaged in commercial or business activities on the petition date

............................................................................................................................................... 25

2. What activities are sufficient to establish that the debtor is “engaged in commercial or

business activities” when the business is no longer operating .............................................. 28

D. What Debts Arise From Debtor’s Commercial or Business Activities .................................. 37

E. Whether Debts Must Arise From Current Commercial or Business Activities ...................... 44

F. What Debts Are Included in Determination of Debt Limit ..................................................... 46

G. Ineligibility of Corporation Subject to SEC Reporting Requirements and of Affiliate of Issuer

....................................................................................................................................................... 49

IV. The Subchapter V Trustee ..................................................................................................... 51

A. Appointment of Subchapter V Trustee ................................................................................... 51

B. Role and Duties of the Subchapter V Trustee ......................................................................... 53

1. Trustee’s duties to supervise and monitor the case and to facilitate confirmation of a

consensual plan ..................................................................................................................... 53

2. Other duties of the trustee ................................................................................................ 57

3. Trustee’s duties upon removal of debtor as debtor in possession .................................... 58

C. Trustee’s Disbursement of Payments to Creditors .................................................................. 59

1. Disbursement of preconfirmation payments and funds received by the trustee .............. 59

2. Disbursement of plan payments by the trustee ................................................................ 61

D. Termination of Service of the Trustee and Reappointment .................................................... 62

1. Termination of service of the trustee ............................................................................... 62

2. Reappointment of trustee ................................................................................................. 63

E. Compensation of Subchapter V Trustee .................................................................................. 64

1. Compensation of standing subchapter V trustee .............................................................. 64

2. Compensation of non-standing subchapter V trustee ...................................................... 65

3. Deferral of non-standing subchapter V trustee’s compensation ...................................... 70

F. Trustee’s Employment of Attorneys and Other Professionals ................................................ 70

V. Debtor as Debtor in Possession and Duties of Debtor ............................................................ 76

A. Debtor as Debtor in Possession ............................................................................................... 76

B. Duties of Debtor in Possession................................................................................................ 77

C. Removal of Debtor in Possession............................................................................................ 81

VI. Administrative and Procedural Features of Subchapter V .................................................... 89

A. Elimination of Committee of Unsecured Creditors ................................................................ 90

B. Elimination of Requirement of Disclosure Statement ............................................................. 91

C. Required Status Conference and Debtor Report ..................................................................... 92

D. Time for Filing of Plan................................................................................................... 96

E. No U.S. Trustee Fees ............................................................................................................. 100

F. Modification of Disinterestedness Requirement for Debtor’s Professionals ........................ 100

G. Time For Secured Creditor to Make § 1111(b) Election ...................................................... 101

H. Times For Voting on Plan, Determination of Record Date for Holders of Equity Securities,

Hearing on Confirmation, Transmission of Plan, and Related Notices ...................................... 102

I. Filing of Proof of Claim; Bar Date ......................................................................................... 103

J. Extension of deadlines for status conference and debtor report and for filing of plan .......... 105

K. Debtor’s postpetition performance of obligations under lease of nonresidential real property--

§ 365(d) ....................................................................................................................................... 111

VII. Contents of Subchapter V Plan .......................................................................................... 113

A. Inapplicability of §§ 1123(a)(8) and 1123(c) ........................................................................ 113

B. Requirements of §1190 for Contents of Subchapter V Plan; Modification of Residential

Mortgage ..................................................................................................................................... 114

C. Payment of Administrative Expenses Under the Plan .......................................................... 119

VIII. Confirmation of the Plan ................................................................................................... 121

iii

A. Consensual and Cramdown Confirmation in General .......................................................... 121

1. Review of confirmation requirements in traditional chapter 11 cases and summary of

changes for subchapter V confirmation ............................................................................... 121

2. Differences in requirements for and consequences of consensual and cramdown

confirmation ........................................................................................................................ 124

3. Benefits to debtor of consensual or cramdown confirmation ......................................... 128

4. Whether balloting on plan is necessary .......................................................................... 133

5. Final decree and closing of case ..................................................................................... 135

B. Cramdown Confirmation Under §1191(b) ............................................................................ 137

1. Changes in the cramdown rules and the “fair and equitable” test ................................. 137

2. Cramdown requirements for secured claims.................................................................. 139

3. Components of the “fair and equitable” requirement in subchapter V cases; no absolute

priority rule ......................................................................................................................... 140

4. The projected disposable income (or “best efforts”) test ............................................... 141

i. Determination of projected disposable income......................................................... 143

ii. Determination of period for commitment of projected disposable income for more

than three years ............................................................................................................... 150

5. Requirements for feasibility and remedies for default ................................................... 156

6. Payment of administrative expenses under the plan ..................................................... 161

C. Postconfirmation Modification of Plan ................................................................................. 161

1. Postconfirmation modification of consensual plan confirmed under §1191(a) ............. 161

2. Postconfirmation modification of cramdown plan confirmed under §1191(b) ............. 164

D. § 1129(a) Confirmation Issues Arising in Subchapter V Cases ........................................... 165

1. Classification of claims; unfair discrimination .............................................................. 165

2. Acceptance by all classes and effect of failure to vote .................................................. 167

3. Classification and voting issues relating to priority tax claims ..................................... 168

4. Timely assumption of lease of nonresidential real estate .............................................. 169

5. The “best interests” or “liquidation” test of § 1129(a)(7) .............................................. 170

6. Voting by holder of disputed claim ............................................................................... 170

7. Individual must be current on postpetition domestic support obligations ..................... 171

8. Application of § 1129(a)(3) good faith requirement in context of consensual plan when

creditor objects because debtor is not paying enough disposable income .......................... 171

E. § 1129(b)(2)(A) Cramdown Confirmation and Related Issues Dealing With Secured Claims

Arising in Subchapter V Cases ................................................................................................... 176

1. The § 1111(b)(2) election .............................................................................................. 177

2. Realization of the “indubitable equivalent” of a secured claim -- § 1129(b)(2)(A)(iii) 187

IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation ............................. 190

A. Debtor Makes Plan Payments and Trustee’s Service Is Terminated Upon Substantial

Consummation When Confirmation of Consensual Plan Occurs Under §1191(a) .................... 190

B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of Plan Confirmed

Under Cramdown Provisions of §1191(b) .................................................................................. 191

C. Unclaimed Funds................................................................................................................... 195

X. Discharge .............................................................................................................................. 197

A. Discharge Upon Confirmation of Consensual Plan Under §1191(a) .................................... 197

B. Discharge Upon Confirmation of a Cramdown Plan Under § 1191(b) ................................. 199

C. Exceptions to Discharge in Subchapter V Cases .................................................................. 200

1 Exceptions to discharge after consensual confirmation ................................................. 201

2. Exceptions to discharge after cramdown confirmation ................................................ 202

3. Procedure for determination of exceptions to discharge under § 523(a)(2), (4), or (6) 203

D. Whether § 523(a) Exceptions Apply to Cramdown Discharge of Entity ............................. 203

1. Statutory language and background .............................................................................. 203

2. Judicial debate over application of § 523(a) exceptions to cramdown discharge of an

entity .................................................................................................................................. 207

XI. Changes to Property of the Estate in Subchapter V Cases .................................................. 239

A. Property Acquired Postpetition and Earnings from Services Performed Postpetition as

Property of the Estate in Traditional Chapter 11 Cases .............................................................. 239

B. Postpetition Property and Earnings in Subchapter V Cases .................................................. 241

1. Property of the estate in subchapter V cases of an entity .............................................. 242

2. Property of the estate in subchapter V cases of an individual ....................................... 244

XII. Default and Remedies After Confirmation ........................................................................ 247

A. Remedies for Default in the Confirmed Plan ........................................................................ 247

B. Removal of Debtor in Possession for Default Under Confirmed Plan ................................. 249

C. Postconfirmation Dismissal or Conversion to Chapter 7 ...................................................... 251

1. Postconfirmation dismissal ............................................................................................ 251

2. Postconfirmation conversion ......................................................................................... 255

XIII. Effective Dates and Retroactive Application of Subchapter V ......................................... 257

APPENDIX A Lists of Sections of Bankruptcy Code and Title 28 Affected or

Amended By The Small Business Reorganization Act of 2019

(as amended by the Coronavirus, Aid, Relief, and Economic

Security Act)

APPENDIX B Summary of SBRA Interim Amendments to The Federal

Rules of Bankruptcy Procedure To Implement SBRA

APPENDIX C Summary Comparison of U.S. Bankruptcy Code Chapters

11, 12, & 13 (Prepared by Bankruptcy Judge Mary Jo Heston’s

Chambers)

APPENDIX D Key Events in the Timeline of Subchapter V Cases

(Prepared by Bankruptcy Judge Benjamin A. Kahn and

Law Clerk Samantha M. Ruben)

APPENDIX E Comparison of Subchapter V With Chapter 13 and Chapter 11

A Guide to the Small Business

Reorganization Act of 2019

Paul W. Bonapfel

U.S. Bankruptcy Judge, N.D. Ga.

I. Introduction

The Small Business Reorganization Act of 2019 (the “SBRA”)

enacted a new

subchapter V of chapter 11 of the Bankruptcy Code, codified as new 11 U.S.C. §§ 1181 – 1195,

and made conforming amendments to several sections of the Bankruptcy Code and statutes

dealing with appointment and compensation of trustees in title 28.

SBRA also revised the

definitions of “small business case” and “small business debtor” in § 101(51C) and § 101(51D),

respectively.

It took effect on February 19, 2020, 180 days after its enactment on August 23,

2019.

Subchapter V applies in cases in which a qualifying debtor elects its application. As

originally enacted, SBRA provided that a “small business debtor,” as defined in revised

§ 101(51D), could make the election. In the absence of the election, a small business debtor

would be in a “small business case,” which revised § 101(51C) defines as the case of a small

business debtor that does not elect subchapter V. SBRA did not change the pre-SBRA

Small Business Reorganization Act (SBRA) of 2019, Pub. L. No. 116-54, 133 Stat. 1079 (codified in 11 U.S.C.

§§ 1181-1195 and scattered sections of 11 U.S.C. and 28 U.S.C.).

Unless otherwise noted, references to sections are to sections of the Bankruptcy Code, title 11 of the United States

Code.

Section 3 of SBRA also enacts changes relating to prosecution of preference actions under 11 U.S.C. § 547

and to venue for certain proceedings brought by a trustee. These amendments apply in all bankruptcy cases.

SBRA § 3(a) amends § 547(b) to require that a trustee seeking to avoid a preferential transfer must exercise

“reasonable due diligence in the circumstances of the case” and must take into account a party’s “known or

reasonably knowable” affirmative defenses under § 547(c). SBRA § 3(a).

SBRA § 3(b) amends 28 U.S.C. § 1409(b) to provide that a trustee may sue to recover a debt of less than

$ 25,000 only in the district where the defendant resides. Prior to the amendment, the amount (as adjusted under 11

U.S.C. § 104 as of April 1, 2019) was $ 13,650. As of April 1, 2022, the adjusted amount under § 104 is $ 27,750.

SBRA § 4(1)(A)-(B).

provisions of chapter 11 that govern a small business case with one exception. SBRA amended

§ 1102(a)(3) to provide that no committee of unsecured creditors is appointed in a small business

case unless the court orders otherwise.

A debtor is a small business debtor under § 101(51D) only if, among other things, its

debts (with some exceptions) are within a specified debt limit. The debt limit at the time of

SBRA’s enactment was $ 2,725,625; on April 1, 2022, the debt limit was increased pursuant to

§ 104 to $ 3,024,725.

As Section III(B) discusses in detail, later legislation expanded the availability of

subchapter V on a temporary basis to debtors whose debts do not exceed $ 7.5 million if they

otherwise qualify as a small business debtor.

Under this legislation, § 1182(1) defines

eligibility for subchapter V, with the same language that defines a “small business debtor” in

§ 101(51D), except for the debt limit. On June 21, 2024, the provisions expire, and § 101(51D)

will again govern eligibility for subchapter V.

Appendix A is a chart that lists sections of the Bankruptcy Code that SBRA affected and

summarizes the changes, as affected by the later legislation.

The purpose of SBRA is “to streamline the process by which small business debtors

reorganize and rehabilitate their financial affairs.”

A sponsor of the legislation stated that it

SBRA, § 4(a)(11), 133 Stat. 1079, 1086.

Between March 27, 2022 and June 20, 2022, a debtor had to be a small business debtor as defined in § 101(51D),

and the debt limit was, therefore, $3,024,725. The change on June 21, 2022, was retroactive. See Section 3(B)(1);

Part XIII.

H.R. REP. NO. 116-171, at 1 (2019), available at https://www.govinfo.gov/content/pkg/CRPT-

116hrpt171/pdf/CRPT-116hrpt171.pdf.

For a summary of small business reorganizations under the Bankruptcy Code, see Ralph Brubaker, The

Small Business Reorganization Act of 2019, 39 B

ANKRUPTCY LAW LETTER, no. 10, Oct. 2019, at 1-4.

Amendments to the Bankruptcy Code in 1994 permitted a qualifying small business debtor to elect small

business treatment. As amended, § 1121(e) provided that, in a small business case, only the debtor could file a plan

for 100 days after the order for relief and that all plans had to be filed within 160 days. In addition, amended

§ 1125(f) permitted parties to solicit acceptances or rejections of a plan based on a conditionally approved disclosure

allows small business debtors “to file bankruptcy in a timely, cost-effective manner, and

hopefully allows them to remain in business,” which “not only benefits the owners, but

employees, suppliers, customers, and others who rely on that business.”

Courts have taken the

legislative purpose of SBRA into account in their application of the new law.

SBRA has had a significant impact. A preliminary estimate was that approximately 40

percent of chapter 11 debtors in chapter 11 cases filed after October 1, 2007, would have

qualified as a subchapter V debtor and that about 25 percent of individuals in chapter 11 cases

statement and permitted a final hearing on the disclosure statement to be combined with the hearing on

confirmation.

The Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (“BAPCPA”) significantly

changed the small business provisions. Importantly, it eliminated the debtor’s option to choose small business

treatment. As such, a business that qualifies as a small business debtor became subject to all of the provisions

governing small business cases.

BAPCPA replaced both § 1121(e) and § 1125(f).

BAPCPA’s § 1121(e)(1) extended the exclusive time for the debtor to file a plan to 180 days and imposed a

new 300-day deadline for the filing of a plan. BAPCPA also added § 1129(c) to require confirmation of a plan in a

small business case within 45 days of its filing, unless the court extended the time.

BAPCPA’s § 1125(f) added a provision that permitted the court to determine that the plan provided

adequate information such that a separate disclosure statement was not required.

BAPCPA also added § 1116 to prescribe additional filing, reporting, disclosure, and operating duties

applicable only to small business debtors.

Although some of BAPCPA’s small business provisions facilitated chapter 11 reorganization for a small

business debtor, others appeared to reflect skepticism about the prospects for success of a small business debtor in a

chapter 11 case and specific, more intensive supervision of the administration of their cases. In practice, reporting

and confirmation requirements applicable to small business debtors remained burdensome or unworkable for many

small businesses. See, e.g., Amer. Bankr. Inst. Comm’n to Study the Reform of Chapter 11: 2012-14 Final Report &

Recommendations, 23 A

MER. BANKR. INST. L. REV. 1, 324 (2015) (For many small or medium-sized businesses,

“the common result of plan confirmation extinguishing pre-petition equity interests in their entirety [are]

unsatisfactory or completely unworkable.”).

Because SBRA did not repeal SBRA’s provisions relating to a “small business debtor,” a small business

debtor that does not elect subchapter V is in a small business case and subject to the provisions that BAPCPA added.

H.R. REP. NO. 116-171, at 4 (statement of Rep. Ben Cline). The court in In re Progressive Solutions, Inc., 615

B.R. 894, 896-98 (Bankr. C.D. Cal. 2020), reviewed the legislative progress of SBRA and included public

statements from several cosponsors of the law, including Senators Charles Grassley, Sheldon Whitehouse, Amy

Klobuchar, Joni Ernst, and Richard Blumenthal. See also Michael C. Blackmon, Revising the Debt Limit for “Small

Business Debtors”: The Legislative Half-Measure of the Small Business Reorganization Act, 14 B

ROOK. J. CORP.

FIN. & COM. L. 339, 344-45 (2020).

E.g., In re Ventura, 615 B.R. 1 , 6, 12-13 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory

Funding v. Ventura (In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022); In re Progressive Solutions, Inc, 615

B.R. 894, 896-98 (Bankr. C.D. Cal. 2020).

would qualify.

Subchapter V thus changes the chapter 11 environment for both debtors and

creditors.

A study of 438 cases filed between subchapter V’s effective date of February 19,

2020 and December 31, 2020 indicates that it is working as intended.

Subchapter V resembles chapter 12

and chapter 13

in some respects. As in

subchapter V cases, both chapters 12 and 13 provide for a trustee in the case while leaving the

debtor in possession of assets and control of the business. The trustee in all of the cases has

Ralph Brubaker, The Small Business Reorganization Act of 2019, 39 Bankruptcy Law Letter, no. 10, Oct. 2019, at

5-6 (discussing Bob Lawless, How Many New Small Business Chapter 11s?, C

REDIT SLIPS (Sept. 14, 2019),

http://www.creditslips.org/creditslips/2019/09/how-many-new-small-business-chapter-11s.html. Professor Brubaker

points out that the percentage may ultimately be higher because pre-SBRA law provided incentives for a debtor to

avoid qualification as a small business debtor and because debtors who might not have filed under pre-SBRA law

because of its obstacles might now do so. The estimate does not take into account the increase in the debt limit that

the CARES Act temporarily made.

For a discussion of strategies for creditors in view of the enactment of subchapter V, see Christopher G. Bradley,

The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act,

28 A

MER. BANKR. INST. L. REV. 251 (2020).

Michelle M. Harner, Emily Lamasa, and Kinberly Goodwin-Maigetter, Subchapter V Cases By the Numbers, 40-

Oct Am. Bankr. Inst. J. 12 (Oct. 2021). Of the 438 cases filed in the period, 117 (27 percent) were individual cases,

of which 52 were jointly administered. As of June 30, 2021, confirmation had occurred in 221 cases, the debtor had

filed a plan that had not yet been confirmed in 105 cases, and the court had dismissed 82 cases. Id. at 59. Thus, the

debtor was able to confirm a plan in more than 62 percent of the cases not dismissed and in more than half of all of

the cases in the study.

Id.

In 130 of the 221 cases with confirmed plans, confirmation was consensual under § 1191(a) in 130 of them

(69 percent). In the 91 cases where cramdown confirmation occurred, 40 involved at least one class of creditors

voting against the plan and 51 had impaired classes that did not vote. Id.

The average number of days between filing of the case and confirmation was 184 days, and the median was

168. Id.

The authors concluded, id. at 60:

Overall, subchapter V appears to be working as intended. Small businesses are using the subchapter with

some regularity. The businesses also are, for the most part, confirming reorganization plans at a relatively

high rate in a relatively short period of time. Although more data is needed to fully understand the impact

of invoking the subchapter on both the short- and longer-term prospects of financially distressed small

businesses, the initial results are promising. Small businesses appear now to have a restructuring tool that is

both affordable and effective for addressing their financial needs.

As the court observed in In re Trepetin, 617 B.R. 841, 848, n. 14 (Bankr. D. Md. 2020):

Subchapter V and chapter 12 are not identical, and invoking chapter 12 standards may not be warranted in

every instance. Subchapter V starts with chapter 11 as its base and then draws on the structure of chapter

12, certain elements of chapter 13, and the recommendations of the American Bankruptcy Institute's

Commission to Study the Reform of Chapter 11 and the National Bankruptcy Conference.

See In re Louis, 2022 WL 2055290 at * *14 (Bankr. C.D. Ill. 2022) (The court noted that chapter 11 cases impose

fiduciary duties and administrative tasks such as preparing and filing operating reports and producing other financial

information that typically do not arise in chapter 13 cases and that representation requires understanding of

subchapter V provisions, including the advantages of consensual confirmation for an individual.).

oversight and monitoring duties and the right to be heard on certain matters. The subchapter V

trustee in some cases may make disbursements to creditors in a similar manner to disbursements

in chapter 12 and 13 cases.

But subchapter V differs from chapters 12 and 13 in significant ways. For example,

whereas confirmation standards requirements in chapter 12 (§ 1225) and chapter 13 (§ 1325) are

similar and do not contemplate voting by creditors, subchapter V confirmation requirements

incorporate most of the existing confirmation requirements in § 1129(a) and contemplate voting

by classes of creditors.

Unlike chapter 13, subchapter V does not provide for a codebtor stay.

Enactment of SBRA required revisions to the Federal Rules of Bankruptcy Procedure and

the Official Forms. The Committee on Rules of Practice and Procedure of the Judicial

Conference of the United States (the “Rules Committee”) had authority to make changes in the

Official Forms to take effect on SBRA’s effective date. Changes to the Bankruptcy Rules,

however, take three years or more under procedures that the Rules Enabling Act, 28 U.S.C.

§§ 2071-77, require.

To take account of the new law, the Rules Committee made changes to the Official

Forms and promulgated interim rules (the “Interim Rules”) that amend the Federal Rules of

Bankruptcy Procedure.

The changes to the Official Forms became effective as of the effective

Part IX discusses disbursements in subchapter V cases.

Part VIII discusses confirmation requirements in subchapter V cases. For a discussion of debt limits in chapter 13

cases, see W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure §§

12:8 – 12:10.

On December 5, 2019, the Advisory Committee on Bankruptcy Rules proposed Interim Amendments to the

Federal Rules of Bankruptcy Procedure (“Interim Rules”) to address provisions of SBRA for adoption in each

judicial district by local rule or general order and new Official Forms. The proposed Interim Rules and Official

Forms reflected changes in response to comments received. A

DVISORY COMMITTEE ON BANKRUPTCY RULES,

REPORT OF THE ADVISORY COMMITTEE ON BANKRUPTCY RULES (Dec. 5, 2019),

https://www.uscourts.gov/sites/default/files/december_5_2019_bankruptcy_rules_advisory_committee_report_0.pdf

On December 19, 2019, the Committee on Rules of Practice and Procedure approved the Interim Rules,

recommended their local adoption, and approved the new Official Forms. The Executive Committee of the Judicial

date of SBRA. The Rules Committee recommended that each judicial district adopt the Interim

Rules as local rules or by general order. Enactment of later legislation expanding the debt limit

required technical revisions in Interim Rule 1020 in and the Official Forms for voluntary

petitions.

Appendix B summarizes the changes that the Interim Rules made.

If a small business debtor does not elect subchapter V, the provisions that govern small

business cases apply.

The existence of two sets of provisions in chapter 11 for small business

debtors requires terminology to distinguish them. The Rules Committee refers to “small

business cases” and to “cases under subchapter V of chapter 11.”

This terminology is technically accurate. Under the SBRA amendments, a “small

business debtor” is not necessarily a debtor in a “small business case.” Rather, a “small business

case” is only a case under chapter 11 in which a small business debtor has not elected application

of subchapter V. In other words, a small business debtor that has elected application of

subchapter V is not in a small business case. Moreover, under the temporary extension of the

debt limits under later legislation, a debtor can be a subchapter V debtor, but not a small business

debtor, if its debts are less than $ 7.5 million but more than the limit for a small business debtor.

Conference, acting on an expedited basis on behalf of the Judicial Conference, approved the Interim Rules for

distribution to the courts.

The Interim Rules are located on the Current Rules of Practice & Procedure page of the U.S. Courts public

website (

USCOURTS.GOV). The new Official Forms are posted on the Forms page of the website, under the

Bankruptcy Forms table.

On April 6, 2020, the Advisory Committee on Bankruptcy Rules proposed one-year technical amendments to

Interim Rule 1020 to take account of the revised definition of “debtor” under the CARES Act, which Section III(B)

discusses. The Advisory Committee also proposed conforming technical changes to official forms, including

Official Forms 101 and 202, which are the forms for the filing of a voluntary petition by an individual and a non-

individual, respectively.

On April 20, 2020, the Committee on Rules of Practice and Procedure approved the amendments and

recommended their local adoption. It also approved the one-year technical change to the Official Forms.

For a summary of key features of a non-sub V small business case governed by the provisions for small business

cases, see supra note 6.

The distinction is important for at least one reason. Section 362(n) makes the automatic

stay inapplicable in certain circumstances when the debtor in the current case is or was a debtor

in a pending or previous small business case. Because a subchapter V debtor is not in a small

business case, § 362(n) will not apply in a later case of the subchapter V debtor.

Three types of cases are now possible under chapter 11: (1) a non-small business case

under traditional chapter 11 for a debtor who is not a small business debtor and either (a) has

debts in excess of the sub V debt limit or (b) has debts below the limit and is eligible for

subchapter V but does not elect it; (2) a small business case for a small business debtor that does

not elect subchapter V; and (3) a subchapter V case for a qualifying debtor who elects it. This

paper generally uses “traditional” to describe a chapter 11 case (including a small business case)

that is not a subchapter V case.

II. Overview of Subchapter V

For electing debtors who qualify, subchapter V: (1) modifies confirmation requirements;

(2) provides for the participation of a trustee (the “sub V trustee”) while the debtor remains in

possession of assets and operates the business as a debtor in possession; (3) changes several

In In re Abundant Life Worship Center of Hinesville, GA., Inc., 2020 WL 7635272 (Bankr. S.D. Ga. 2020), a

debtor whose earlier small business case had been dismissed seven months earlier filed a new chapter 11 case and

amended the petition to elect subchapter V. The debtor contended that § 362(n)(1) did not apply because, upon its

subchapter V election, it ceased being a debtor in a “small business case.” Id. at *8. The court ruled that the status

of the debtor in the current case made no difference: “The statute plainly requires only that the prior case was a

small business case, not the subsequent case.” Id. at * 18.

The debtor also contended that the exception in paragraph (n)(2) of § 362 to the operation of paragraph

(n)(1) applied. Section 362(n)(2)(B) provides that paragraph (n)(1) does not apply if the debtor establishes “that the

filing of the petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the

case then pending was filed” (emphasis added) and that “it is more likely than not that the court will confirm a

feasible plan, but not a liquidating plan, within a reasonable time.”

The court rejected this argument, concluding that the language, “the case then pending” refers to a separate

case pending at the time of the filing of the second case. Because the debtor’s previous case was not a “case then

pending,” the court ruled, the exception did not apply. Id. at *11-12. The court thus followed Palmer v. Bank of the

West, 438 B.R. 167 (E.D. Wis. 2010).

administrative and procedural rules; and (4) alters the rules for the debtor’s discharge and the

definition of property of the estate with regard to property an individual debtor acquires

postpetition and postpetition earnings (which has implications for operation of the automatic stay

of § 362(a)). Only the sub V debtor may file a plan or a modification of it.

This Part provides an overview of these provisions. Later Parts discuss these and other

provisions in more detail. Appendix C is a chart that compares provisions of subchapter V with

those that govern traditional chapter 11, chapter 12, and chapter 13 cases.

A. Changes in Confirmation Requirements

The court may confirm a sub V plan even if all classes reject it. Moreover, the “fair and

equitable” requirement for “cramdown” confirmation does not include the absolute priority rule.

Instead, the plan must comply with a new projected disposable income requirement (applicable

in cases of entities as well as those of individuals). The cramdown requirements for a secured

claim are unchanged. (Part VIII).

A sub V plan may modify a claim secured only by a security interest in the debtor’s

principal residence if the new value received in connection with the granting of the security

interest was not used primarily to acquire the property and was used primarily in connection with

the small business of the debtor. Such modification is not permitted in traditional chapter 11

cases or in chapter12 or 13 cases. (Section VII(B)).

B. Subchapter V Trustee and the Debtor in Possession

Subchapter V provides for the debtor to remain in possession of assets and operate the

business with the rights and powers of a trustee unless the court removes the debtor as debtor in

possession. (Part V).

The United States Trustee appoints the sub V trustee. The role of the sub V trustee is to

oversee and monitor the case, to appear and be heard on specified matters, to facilitate a

consensual plan, and to make distributions under a nonconsensual plan confirmed under the

cramdown provisions. (Part IV).

C. Case Administration and Procedures

Subchapter V modifies the usual procedures in chapter 11 cases in several respects.

Appendix D summarizes the key events in a subchapter V case and the timeline for them.

No committee of unsecured creditors. A committee of unsecured creditors is not

appointed unless the court orders otherwise. (SBRA also makes this the rule in a non-sub V

small business case.) (Section VI(A)).

Required status conference and report from debtor. The court must hold a status

conference within 60 days of the filing “to further the expeditious and economical resolution” of

the case. Not later than 14 days before the status conference, the debtor must file a report that

details the efforts the debtor has undertaken and will undertake to achieve a consensual plan of

reorganization. (Section VI(C)).

Time for filing of plan. The debtor must file a plan within 90 days of the date of entry of

the order for relief, unless the court extends the time based on circumstances for which the

debtor should not justly be held accountable. The requirements in a non-sub V small business

case that a plan be filed within 300 days of the filing date (§ 1121(e)) and that confirmation

occur within 45 days of the filing of the plan (§ 1129(e)) do not apply in a sub V case. (Section

VI(D)).

No disclosure statement. Section 1125, which states the requirements for a disclosure

statement in connection with a plan and regulates the solicitation of acceptances of a plan, does

not apply in a sub V case, unless the court orders otherwise. Although no disclosure statement is

required, the plan must include: (1) a brief history of the business operations of the debtor; (2) a

liquidation analysis; and (3) projections with respect to the ability of the debtor to make

payments under the proposed plan. (Sections VI(B), VII(B)).

No U.S. Trustee fees. A sub V debtor does not pay U.S. Trustee fees. (Section VI(E)).

D. Discharge and Property of the Estate

1. Discharge – consensual plan

If the court confirms a consensual plan, a sub V debtor (including an individual debtor)

receives a discharge under § 1141(d)(1)(A) upon confirmation. The provision in § 1141(d)(5)

for delay of discharge in individual cases until completion of payments does not apply in a sub V

case. In the case of an individual, the § 1141(d)(1)(A) discharge does not discharge debts

excepted under § 523(a).

One effect of the grant of the discharge is that the automatic stay

terminates under § 362(c)(2)(C). (Section X(A)).

2. Discharge – cramdown plan

When cramdown confirmation occurs in a sub V case, § 1141(d) does not apply, and

confirmation does not result in a discharge. Instead, §1192 governs the discharge, which does

not occur until the debtor completes plan payments for a period of at least three years or such

longer time not to exceed five years as the court fixes. (Section X(B)).

§ 1141(d)(2).

Under §1192, the discharge in a cramdown case discharges the debtor from all debts

specified in § 1141(d)(1)(A) and all other debts allowed under § 503 (administrative expenses),

with the exception of: (1) debts on which the last payment is due after the first three years of the

plan or such other time not exceeding five years as the court fixes; and (2) debts excepted under

§ 523(a). (Section X(C)(2)). Under § 362(c)(2), the automatic stay remains in effect after

confirmation of a cramdown plan until the case is closed or dismissed, or the debtor receives a

discharge.

3. Property of the estate

Section 1115 provides that, in an individual chapter 11 case, property of the estate

includes assets that the debtor acquires postpetition and earnings from postpetition services.

Section 1115 does not apply in a subchapter V case.

If the court confirms a plan under the

cramdown provisions of §1191(b), however, property of the estate includes (in cases of both

individuals and entities) postpetition assets and earnings.

See Section XI(B).

III. Debtor’s Election of Subchapter V and Revised

Definition of “Small Business Debtor”

A. Debtor’s Election of Subchapter V

The provisions of subchapter V apply in cases in which an eligible debtor elects them.

If an eligible debtor does not make the election, the traditional provisions of Chapter 11 apply. If

§ 1181(a).

§ 1186(a).

One commentator has suggested that a creditor may want to attempt to limit the availability of subchapter V by

including in the credit agreement a commitment from the debtor not to make the election or to waive it, noting that

such a contractual provision may not be enforceable. Christopher G. Bradley, The New Small Business Bankruptcy

Game: Strategies for Creditors Under the Small Business Reorganization Act, 28 A

MER. BANKR. INST. L. REV. 251,

264 (2020). Professor Bradley suggests alternatively that a creditor could require a “springing” (sometimes referred

to as a “bad boy”) guarantee from a debtor’s insider that would arise if the debtor elected subchapter V. Id. at 264-

65.

the non-electing debtor is a small business debtor as defined in § 101(51D), the debtor is in a

“small business case” under § 101(51C), and the special provisions governing such cases apply.

As Section III(B) discusses, § 1182(1) defines eligibility for subchapter V until June 20,

2024. Thereafter, a debtor must be a small business debtor under § 101(51D) to be eligible for

subchapter V. Except for the debt limit ($ 3,024,725 under § 101(51D) and $ 7.5 million under

§ 1182(1)), eligibility for subchapter V is the same under both provisions.

An individual eligible for subchapter V will also be eligible for chapter 13 if the debtor

has regular income and debts that do not exceed the chapter 13 debt limits.

Effective June 21,

2022, the debt limit in a chapter 13 case was temporarily increased to $ 2,750,000 for both

secured and unsecured debts under the Bankruptcy Threshold Adjustment and Technical

Corrections Act (“BTATCA”).

On June 20, 2024, the debt limits return to $ 465,275 for

unsecured debts and $ 1,395,875 for secured debts.

Appendix E compares subchapter V cases with chapter 13 cases, small business cases,

and traditional chapter 11 cases.

The statute does not state when or how the debtor makes the election. Bankruptcy Rule

1020(a) requires a debtor to state in the petition whether it is a small business debtor.

In an

involuntary case, the Rule requires the debtor to file the statement within 14 days after the order

for relief. The case proceeds in accordance with the debtor’s statement unless and until the court

enters an order finding that the statement is incorrect.

§ 109(e) governs chapter 13 eligibility.

Bankruptcy Threshold Adjustments and Technical Corrections Act § 2(a), Pub. L. No. 117-151, 136 Stat. 1298

(June 21, 2022) (hereinafter “BTATCA”). The increased debt limits apply retroactively in any bankruptcy case

commenced on or after March 27, 2020 that is pending on the date of BTATCA’s enactment. Id. § 2(h)(2(A).

BTATCA § 2(i)(1)(A). The court may convert a chapter 11 case to chapter 13 if the debtor requests it. § 1112(c).

FED. R. BANK. P. 1020(a).

Interim Rule 1020(a) as originally promulgated added the requirement that the debtor

state in the petition whether the debtor elects application of subchapter V and provided that the

case proceed in accordance with the election unless the court determined that it is incorrect. In

an involuntary case, the Interim Rule required the debtor to state whether it is a small business

debtor and to make the election within 14 days after the order for relief.

In response to

temporary legislation that changed the debt limit for subchapter V eligibility to $7.5 million and

put the eligibility requirements in § 1182(1),

revised Interim Rule 1020 provides in both

instances for the debtor to state whether the debtor is a small business debtor or a debtor as

defined in § 1182(1) and, if the latter, whether the debtor elects application of subchapter V.

Revisions to the Official Forms for voluntary chapter 11 cases require the debtor to state

whether it is a small business debtor or a § 1182(1) debtor and whether it does or does not make

the election.

Revised Official Forms also provide for creditors to receive notice of the

debtor’s statement of its status and the election that it makes.

Parties in interest may object to a debtor’s statement of whether it is a small business

debtor or is eligible for subchapter V. Bankruptcy Rule 1020(b) requires an objection to a

debtor’s statement of its small business status within 30 days after the later of the conclusion of

the § 341(a) meeting or amendment of the statement. Interim Rule 1020(b) makes the same

INTERIM RULE 1020.

See Section III(B).

OFFICIAL FORM B101 ¶ 13 (Voluntary Petition for Individuals Filing for Bankruptcy); OFFICIAL FORM B102 ¶ 8

(Voluntary Petition for Non-Individuals Filing for Bankruptcy).

OFFICIAL FORM B309E2 is the form for individuals or joint debtors under subchapter V, and OFFICIAL FORM

B309F2 is the form for corporations or partnerships under subchapter V. Existing O

FFICIAL FORMS B309E

(individuals or joint debtors) and B309F (corporations or partnerships) were renumbered as B309E1 and B309F1.

Both new forms contain the same information as the existing notices but provide additional information applicable

in subchapter V cases.

The new forms require inclusion of the trustee and the trustee’s phone number and email address. The new

notices state that the debtor will generally remain in possession of property and may continue to operate the business

and advise that, in some cases, debts will not be discharged until all or a substantial portion of payments under the

plan are made.

requirement applicable to the statement regarding the debtor’s statement that it is an eligible

subchapter V debtor.

Most courts have determined that the burden is on the debtor to establish eligibility for

subchapter V if challenged.

A contrary view is that the objecting party as the moving party has

the burden of proving that the debtor is not eligible.

The issue may be academic in most cases

dealing with eligibility. For the most part, the outcomes do not appear to turn on the resolution

of factual disputes but on the legal conclusions to be drawn from the facts.

It is not clear whether a bankruptcy court’s order determining that a debtor is eligible is a

final order for purposes of appeal under 28 U.S.C. § 158(a)(1).

A district court or bankruptcy

NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 2022 WL 1288608 at *8-9 (B.A.P. 9

Cir. 2022); In re

Blue, 630 B.R. 179, 187 (Bankr. M.D.N.C. 2021); National Loan Invs., L.P. v. Rickerson (In re Rickerson), 636

B.R. 416, 422 (Bankr. W.D. Pa. 2021); Lyons v. Family Friendly Contracting LLC (In re Family Friendly

Contracting LLC), 2021 WL 5540887 at * 2 (Bankr. D. Md. 2021); In re Vertical Mac Construction, LLC, 2021

WL 3668037 at *2 (Bankr. M.D. Fla. 2021); In re Port Arthur Steam Energy, L.P., 629 B.R. 233, 235 (Bankr. S.D.

Tex. 2021); In re Offer Space, LLC, 629 B.R. 299, 304 (Bankr. D. Utah 2021); In re Ikalowych, 629 B.R. 261, 275

(Bankr. D. Colo. 2021); In re Johnson, 2021 WL 825156 at *4 (Bankr. N.D. Tex. 2021); In re Thurman, 625 B.R.

417, 419 n.4 (Bankr. W.D. Mo. 2020).

E.g., Hall L.A. WTS, LLC v. Serendipity Labs, Inc. (In re Serendipity Labs, Inc.), 620 B.R. 679, 680 n.3 (Bankr.

N.D. Ga. 2020); In re Body Transit, Inc., 613 B.R. 400, 409 n. 15 (Bankr. E.D. Pa. 2020) (“It is appropriate to place

the burden of proof on [the objecting party], as it is the de facto moving party.”).

In NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 2022 WL 1288608 (B.A.P. 9

Cir. 2022), the court

reviewed the bankruptcy court’s eligibility order in connection with an appeal of the order confirming the

subchapter V plan. The court stated, “The interlocutory Subchapter V Order merged into the final Confirmation

Order.” Id. at *3 n. 3. The court cited United States v. Real Prop. Located at 475 Martin Lane, 545 F.3d 1134 ,

1141 (9

Cir. 2008) (under merger rule, interlocutory orders entered prior to the judgment merge into the judgment

and may be challenged on appeal).

In Gregory Funding v. Ventura (In re Ventura), 638 B.R. 499 (E.D. N.Y. 2022), however, the court in

reversing an order of the bankruptcy court determining that the debtor was eligible for subchapter V, without

discussing the finality issue, stated that district courts have appellate jurisdiction over final judgments, orders, and

decrees. Id. at *3.

The district court’s ruling in Guan v. Ellingsworth Residential Community Association, Inc. (In re

Ellingsworth Residential Community Association, Inc.), 2021 WL 3908525 (M.D. Fla. 2021), appeal dismissed,

2021 WL 6808445 (11

Cir. 2021) (unpublished), cert. denied, 2022 WL 1131391 (2022), indicates that an

eligibility determination is a final order. The creditor filed a notice of appeal after the bankruptcy court issued an

order scheduling a hearing on confirmation of the debtor’s subchapter V plan after a hearing at which it took the

eligibility objection under advisement. The creditor appealed the scheduling order, and the bankruptcy court denied

the creditor’s motion for a stay pending appeal. In a later order, the bankruptcy court determined that the debtor was

eligible. See In re Ellingsworth Residential Community Association, Inc., 619 B.R. 519 (Bankr. M.D. Fla. 2019).

The creditor did not seek leave to amend her notice of appeal to include the order denying a stay pending appeal or

the eligibility order.

appellate panel has jurisdiction to hear an appeal from an interlocutory order, with leave of the

court, under 28 U.S.C. § 158(a)(3) and § 158(b)(1), respectively.

Courts of appeals have

discretionary jurisdiction to hear an appeal of an interlocutory order (as well as a final one) of the

bankruptcy court under 28 U.S.C. § 158(d)(2) that a bankruptcy court, district court, or

bankruptcy appellate panel certifies on various grounds.

Bankruptcy Rule 1009(a) gives a debtor the right to amend a voluntary petition, list,

schedule, or statement “as a matter of course at any time before the case is closed.” A question

is whether a debtor may amend the small business designation or the subchapter V election that

the voluntary petition includes. Current Bankruptcy Rule 1020 does not address whether a

debtor can amend the small business designation, and Interim Rule 1020 likewise does not

address the issue of whether a delayed sub V election should be allowed and, if so, under what

circumstances.

The district court held that the scheduling order was interlocutory and that the order denying the eligibility

objections was not properly before the court. Guan v. Ellingsworth Residential Community Association, Inc. (In re

Ellingsworth Residential Community Association, Inc.), 2021 WL 3908525 at * 2 (M.D. Fla. 2021), appeal

dismissed, 2021 WL 6808445 (11

Cir. 2021) (unpublished), cert. denied, 2022 WL 1131391 (2022). The

implication is that the eligibility order was a final order because it finally resolved the objection to eligibility. The

district court nevertheless determined that, even if the creditor had properly raised the issue, the appeal would be

denied on the merits. Id.

The Eleventh Circuit dismissed the appeal sua sponte for lack of jurisdiction because the district court’s

order affirming the bankruptcy court’s interlocutory scheduling order was not a final order of the district court

within its appellate jurisdiction under 28 U.S.C. § 158(d)(1). Guan v. Ellingsworth Residential Community

Association, Inc. (In re Ellingsworth Residential Community Association, Inc.), 2021 WL 6808445 (11

Cir. 2021)

(unpublished), cert. denied, 2022 WL 1131391 (2022).

In re Parkinson, 2021 WL 1554068 at * 2 (D. Idaho 2021). (“[R]eviewing and resolving any questions

concerning Subchapter V will not waste litigation resources, but will conserve them. In like manner, taking up

Appellants’ appeal at the current juncture will advance the ultimate termination of the underlying bankruptcy

litigation.”).

The lower court must certify either: (1) that the order involves a question of law as to which no controlling circuit

or Supreme Court authority exists or a matter of public importance; (2) that the order involves a question of law

requiring resolution of conflicting decisions; or (3) that an immediate appeal may materially advance the progress of

the case or proceeding in which the appeal is taken. 28 U.S.C. § 158(d)(2)(A)(i)-(iii).

The Advisory Committee Note to Interim Rule 1020 states, “The rule does not address whether the court, on a

case-by-case basis, may allow a debtor to make an election to proceed under subchapter V after the times specified

in subdivision (a) or, if it can, under what conditions.”

Part XIII discusses whether a debtor who does not make the subchapter V election in the

original petition may later amend the petition to elect application of Subchapter V. The issue

arose in cases filed before enactment of SBRA in which the debtor sought to proceed under

subchapter V when it became available. A similar issue may arise in a case filed by a debtor

between March 27 and June 20, 2022, if the debtor was not eligible for subchapter V at the time

of filing based on the amount of its debt but became eligible after enactment of the Bankruptcy

Technical Adjustments and Technical Correction Act on the latter date that increased the debt

limit, as Section III(B) discusses.

One problem with permitting a debtor to change the election is that deadlines for

conducting a status conference

and for filing a plan

run from the date of the order for relief.

The Advisory Committee in its Report observed, “Should a court exercise authority to allow a

delayed election, it is likely that one of the court’s prime considerations in ruling on a request to

make a delayed election would be the time restriction imposed by subchapter V. . . .”

Section

VI(J) and Part XIII discuss extension of the time limits and their effect on the ability of a debtor

to amend the petition to make an election after their expiration.

See Section VI(C).

See Section VI(D).

Advisory Committee on Bankruptcy Rules, REPORT OF THE ADVISORY COMMITTEE ON BANKRUPTCY RULES (Dec.

5, 2019), at 3, available at

https://www.uscourts.gov/sites/default/files/december_5_2019_bankruptcy_rules_advisory_committee_report_0.pdf

B. Eligibility for Subchapter V; Revised Definitions of “Small Business Debtor” and

“Small Business Case”

1. Statutory provisions governing application of subchapter V and the debt limit

The operative statutory provision for application of subchapter V is § 103(i), which

SBRA added.

As amended by the Coronavirus Aid, Relief, and Economic Security Act (the

“CARES Act”)

in March 2020, it provides:

Subchapter V of chapter 11 of this title applies only in a case under chapter 11 in

which a debtor (as defined in section 1182) elects that subchapter V of title 11

shall apply.

As originally enacted by SBRA, § 1182(1) defined “debtor” as meaning a “small

business debtor,”

a term defined in § 101(51D). As Section III(B)(2) discusses below,

SBRA also revised the § 101(51D) definition of “small business debtor,” but did not

change the then-existing debt limit of $ 2,725,625 (now $ 3,024,725 as adjusted on April

1, 2022, under § 104).

The CARES Act increased the debt limit to $ 7.5 million through amendments to

§ 1182(a) and § 103(i). The CARES Act amended § 1182(1) so that its definition of

“debtor” is the same as the definition of “small business debtor” in revised §101(51D),

with a technical correction that it also made,

except that the debt limit in § 1182(1) is

$ 7.5 million.

It did not change the debt limit in revised § 101(51D). The CARES Act

changed § 103(i) to replace “small business debtor” with “debtor (as defined in section

SBRA inserted new subsection (i) in § 103 and renumbered existing subsections (i) through (k) as (j) through (l).

SBRA § 4(a)(2).

Coronavirus Aid, Relief, and Economic Security Act § 1113(a)(2), Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27,

2020). Before enactment of the CARES Act, § 103(i) provided:

Subchapter V of chapter 11 of this title applies only in a case under chapter 11 in which a small business

debtor elects that subchapter V of title 11 shall apply.

SBRA § 2(a).

The technical correction involved the exclusion of public companies. Later legislation changed the provision.

See Section III(G) and note 95 infra.

CARES Act § 1113(a)(1).

1182).” As thus amended, § 103(i) provides that subchapter V applies in the case of a

debtor as defined in § 1182 who elects is application.

The CARES Act provided for the increased debt limit to be effective for only one year

after its enactment on March 27, 2020.

The Covid-19 Bankruptcy Relief Extension Act of

2021

amended the CARES Act to extend the amended provisions for an additional year. On

March 27, 2022, §§ 1182(1) returned to its original language in the SBRA. At that time,

§ 1182(1) again defined “debtor” as “a small business debtor,” and § 103(i) therefore limited

application of subchapter V to a small business debtor who elected it.

The Bankruptcy Threshold Adjustment and Technical Corrections Act (“BTATCA”),

enacted on June 21, 2022, temporarily reinstated for two years the expired provisions of

§ 1182(a), with some changes relating to affiliated debtors. BTATCA made the same changes in

the definition of a small business debtor in § 101(51D).

The sunset provision of BTATCA

provides that, on June 21, 2024, § 1182(1) will define debtor as a “small business debtor.” At

that time, § 103(i) will make subchapter V applicable only if the debtor is a small business debtor

who elects it. The BTATCA changes to the definition of “small business debtor” do not

expire.

These temporary amendments in BTATCA became effective on the date of enactment.

They are retroactive to cases filed on or after March 27, 2020 that were pending on the date of its

CARES Act § 113(a)(5).

Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021).

Bankruptcy Threshold Adjustment and Technical Corrections Act, §§ 2(a), (d), Pub. L. No. 117-151, 136 Stat.

1298 (June 21, 2022) (hereinafter “BTATCA”).

See Sections III(F), (G).

It is somewhat amusing that, in the course of one week, three different debt limits governed eligibility for

subchapter V. On Sunday, March 27, 2022, the debt limit was $ 7.5 million. When that limit expired the next day,

it was $ 2,725,625, the debt limit under § 101(51D). On Friday, April 1, 2022, adjustments under § 104 made the

debt limit under § 101(51D) $ 3,024,725.

BTATCA § 2(i)(1)(B).

BTATCA § 2(h)(1).

enactment.

A debtor who filed a chapter 11 petition between March 27, 2022 and the effective

date of BTATCA but was not eligible for subchapter V because its debts exceeded the debt limit,

therefore, has the opportunity to seek to amend its petition to elect subchapter V.

Section XIII discusses the issues that arose when a debtor sought to amend its petition to

elect subchapter V in a case filed before the effective date of SBRA. That caselaw may provide

guidance in addressing retroactivity issues under the BTATCA amendments.

In summary, the effect of BTATCA is that until June 20, 2024, § 1182(1) states

the definition of a debtor eligible to be a sub V debtor. After that, a debtor must be a

small business debtor under the revised definition in § 101(51D). The only difference in

the language of the two statutes is the higher debt limit in the temporary version of

§ 1182(1). (Because none of this legislation changed the debt limit in the definition of

“small business debtor,” a debtor with debts in excess of the § 101(51D) limit but below

$ 7.5 million that does not elect subchapter V cannot be a small business debtor.)

BTATCA provides for an inflationary adjustment to the debt limit in § 1182(1)

under § 104.

Although this amendment does not expire, the next adjustment does not

take place until April 1, 2025, by which time § 1182(1) will no longer state the debt limit.

2. Overview of eligibility for subchapter V

In general, a debtor is eligible to elect subchapter V if the debtor: (1) is a “person;” (2) is

engaged in “commercial or business activities;” (3) does not have aggregate debts in excess of

the debt limit; and (4) at least 50 percent of the debts arise from the debtor’s commercial or

business activities,

subject to certain exceptions. (“Person” under § 101(41) includes an

BTATCA § 2(h)(2).

BTATCA § 2(b).

See generally, e.g., In re Blue, 630 B.R. 179, 191-93 (Bankr. M.D.N.C. 2021).

individual, corporation, or partnership but does not generally include a governmental unit. A

limited liability company is a “person.”

)

A debtor is ineligible for sub V if: (1) its primary activity is the business of owning single

asset real estate; (2) it is a member of a group of affiliated debtors that has aggregate debts in

excess of the debt limit; (3) it is a corporation subject to reporting requirements under the

Securities Exchange Act of 1934; or (4) it is an affiliate of a reporting corporation.

Although, as Section III(B)(1) explains, the statutory basis for determining a debtor’s

eligibility for subchapter V is § 1182(1) until June 20, 2024, the § 1182(1) definition contains the

same language as the definition of a small business debtor in § 101(51D), with the exception of

the amount of the debt limit ($ 7.5 million in § 1182(1), $ 3,024,725 in § 101(51D)). Because

the eligibility requirements in § 1182(1) are the same as those in § 101(51D) (and will return to

§ 101(51D) under BTATCA’s sunset provision), the next section discusses the definition of a

small business debtor, as SBRA and later legislation revised it.

Later sections discuss in detail: the requirement that the debtor be “engaged in

commercial or business activities” (Section III(C)); what debts “arose from” such activities

(Section III(D)); whether the commercial or business debts must be connected to the debtor’s

current commercial or business activities (Section III(E)); what debts are included in

determination of the debt limit (Section III(F)); and the exclusion of reporting companies and

affiliates of an issuer (Section III(G)).

E.g., In re QDN, LLC, 363 Fed. Appx. 873, 876 n. 4 (3d Cir. 2010); In re CWNevada, LLC, 602 B.R. 717 (Bankr.

D. Nev. 2019); In re 4 Whip, LLC, 332 B.R. 670, 672 (Bankr. D. Conn. 2005); In re ICLNDS Acquisition, LLC,

259 B.R. 289, 292-93 (Bankr. N.D. Ohio (2001); see In re Asociación de Titulares de Condominio Castillo, 581

B.R. 346, 358-60 (B.A.P. 1

Cir. 2018) (collecting cases).

3. Revisions to the definition of “small business debtor” and requirements for

eligibility for subchapter V in general

Under pre-SBRA law, paragraph (A) of § 101(51D) defined a “small business debtor” as

a person

(1) engaged in commercial or business activities, (2) excluding a debtor whose

principal activity is the business of owning or operating real property, (3) that has aggregate

noncontingent liquidated secured and unsecured debts

as of the date of the filing of the petition

or the date of the order for relief in an amount not more than $ 2,725,625 (adjusted on April 1,

2022 under § 104 to $ 3,024,725), (4) in a case in which the U.S. Trustee has not appointed a

committee of unsecured creditors or the court has determined that the committee is not

sufficiently active and representative to provide effective oversight of the debtor.

Paragraph (B) of former § 101(51D) excluded any member of a group of affiliated

debtors that had aggregate debts in excess of the debt limit (excluding debts to affiliates and

insiders).

SBRA amended the § 101(51D) definition of “small business debtor” and provided that a

small business debtor could elect application of subchapter V. As Section III(B)(1) explains,

later legislation temporarily put the eligibility requirements for subchapter V in § 1182(1),

increased the debt limit for subchapter V to $ 7.5 million, and made other revisions.

Except for the difference in the debt limits, the temporary language of § 1182(1) is

identical to the language of § 101(51D). Specifically, paragraphs (A) and (B) of § 1182(1) are

the same as paragraphs (A) and (B) of § 101(51D), as amended by both SBRA and later

legislation.

A trust is not a “person” unless it is a business trust. E.g., In re Quadruple D Trust, 639 B.R. 204 (Bankr. D. Col.

2022). The court’s opinion includes a comprehensive analysis of the standards for determining what is a business

trust, concluding that the debtor was not a business trust and that it was not eligible to file for bankruptcy protection.

§ 101(51D)(A). Debts owed to one or more affiliates or insiders are excluded from the debt limit. Id. See Section

III(F).

SBRA did not change the provision that a “small business debtor” does not include a

debtor that is “a member of a group of affiliated debtors” that has aggregate debts in excess of

the debt limit. § 101(51D)(B)(i). The Bankruptcy Threshold Adjustment and Technical

Corrections Act (“BTATCA”),

enacted on June 21, 2022, made a technical correction to this

language, which Section III(F) discusses. The same language is in § 1182(1).

SBRA also retained the requirement in § 101(51D) that the debtor be “engaged in

commercial or business activities.” SBRA revised paragraph (A), however, to add the

requirement that 50 percent or more of the debtor’s debt must arise from the debtor’s commercial

or business activities. The same requirements are temporarily in § 1182(1). Section III(C)

discusses eligibility issues that have arisen as to whether the debtor is “engaged in commercial or

business activities,” and Section III(D) considers what constitutes a debt arising from

commercial or business activity. Section III(E) addresses whether the debts arising from the

debtor’s commercial or business activities must arise from the debtor’s current commercial or

business activities.

SBRA made three other definitional changes in § 101(51D). Later legislation made a

technical correction to one of them. As amended, § 101(51D) and § 1182(1) contain identical

paragraphs (A) and (B).

First, amended paragraph (A) excludes a debtor engaged in owning or operating real

property from being a small business debtor only if the debtor owns or operates single asset real

Bankruptcy Threshold Adjustment and Technical Corrections Act, §§ 2(a)(1), Pub. L. No. 117-151, 136 Stat.

1298 (June 21, 2022) (hereinafter “BTATCA”).

estate.

Pre-SBRA § 101(51D) excluded a debtor whose principal activity was the business of

owning or operating real property.

Second, the requirement that no committee of unsecured creditors exist (or that it not

provide effective oversight) is eliminated. (Recall that SBRA provides that no committee will be

appointed in a non-sub V small business case unless the court orders otherwise.)

Finally, SBRA added subparagraphs (B)(ii) and (B)(iii) to exclude two additional types

of debtors to those that paragraph (B) excludes from being a small business debtor.

The first new exclusion, in (B)(ii), is for a corporation subject to reporting requirements

under § 13 or § 15(d) of the Securities Exchange Act of 1934.

As amended by later legislation,

the second new exclusion, in (B)(iii),

is for a debtor that is an affiliate of a corporation subject to

those reporting requirements.

Section III(G) discusses the exclusions for a public company and its affiliates.

An individual who does not have regular income may be a chapter 13 debtor in a joint

case with the individual’s spouse who does have regular income,

and an individual who is not a

family farmer or fisherman may be a chapter 12 debtor in a joint case with the individual’s

spouse who is engaged in a farming operation or a commercial fishing operation.

Section 101(51B) defines “single asset real estate” as “real property constituting a single property of project, other

than residential real property with fewer than 4 residential units, which generates substantially all of the gross

income of a debtor who is not a family farmer 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.” § 101(51B). For a

discussion of case law relating to the definition of “single asset real estate” in the sub V context, see In re NKOGS1,

LLC, 626 B.R. 860 (Bankr. M.D. Fla. 2021) (Debtor is qualified for subchapter V because the hotel that it owns and

operates is not a “single asset real estate” project.). See also In re Caribbean Motel Corp., 2022 WL 50401 (Bankr.

D. P.R. 2022) (motel renting rooms by the hour generating five to seven percent of income from providing food

service on request and selling goods such as prophylactics and aspirin is not a single asset real estate debtor).

§ 101(51D)(B)(ii).

11 U.S.C. § 109(e).

11 U.S.C. § 109(f) (only a family farmer or family fisherman may be a chapter 12 debtor); 11 U.S.C.

§ 101(18)(A) (definition of family farmer includes spouse); 11 U.S.C. § 101(19A) (definition of family fisherman

includes spouse).

Subchapter V has no such provision. Although an affiliate of an eligible subchapter V

debtor may be a subchapter V debtor even if the affiliate is not otherwise eligible, a spouse is not

an affiliate as defined in § 101(2).

SBRA amended the definition of “small business case” in § 101(51C) to exclude a

subchapter V debtor. Thus, a “small business case” is a case in which a small business debtor

has not elected application of subchapter V. In other words, the case of a sub V debtor is not a

“small business case,” even if the sub V debtor is a “small business debtor.” And as a result of

the amendments increasing the debt limit for subchapter V, a debtor may be eligible to be a sub

V debtor under § 1182(1) (until its expiration), but not a “small business debtor.”

C. Debtor Must Be “Engaged in Commercial or Business Activities”

If a debtor is conducting active operations at the time of filing, it plainly meets the

eligibility requirement that the debtor be “engaged in commercial or business activities.” A

profit motive is not necessary for a debtor to qualify as being “engaged in commercial or

business activities.” Thus, a nonprofit entity, such as a homeowner’s association, meets the

requirement.

Similarly, an entity formed for the sole purpose of acquiring and selling interests

In re Johnson, 2021 WL 825156 (Bankr. N.D. Tex. 2021).

In re Ellingsworth Residential Community Association, Inc., 619 B.R. 519 (Bankr. M.D. Fla. 2019). The district

court agreed with the bankruptcy court in an order affirming the issuance of a scheduling order. Guan v.

Ellingsworth Residential Community Association, Inc. (In re Ellingsworth Residential Community Association,

Inc.), 2021 WL 3908525 (M.D. Fla. 2021), appeal dismissed, 2021 WL 6808445 (11

Cir. 2021) (unpublished),

cert. denied, 2022 WL 1131391 (2022).

in aircraft and providing depreciation tax benefits to its sole member is eligible for subchapter V

even though it has no profit motive.

An individual who is the principal of an entity such as a corporation or limited liability

company may want to file a subchapter V case to deal with personal liabilities arising out of

guarantees or other obligations when the entity fails and is no longer operating. The entity that is

out of business may itself want to deal with its assets and debts under subchapter V.

Courts have dealt with two eligibility issues when the business is no longer operating.

The first is whether eligibility depends on the debtor being engaged in commercial or business

activities at the time of the filing of the petition. If so, the second question is what types of

activities satisfy the requirement that the debtor be engaged in commercial or business activities.

1. Whether debtor must be engaged in commercial or business activities on the

petition date

In In re Wright, 2020 WL 2193240 (Bankr. D. S.C. 2020), the court held that nothing in

the definition limits it to a debtor currently engaged in business and ruled that an individual who

had guaranteed debts of two limited liability companies that were no longer in business could

proceed in a subchapter V case. Accord, In re Bonert, 619 B.R. 248, 255 (Bankr. C.D. Cal.

2020); see In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La., 2020).

Other courts have concluded that a debtor must be currently engaged in business to be

eligible for subchapter V. Thus, in In re Thurmon, 625 B.R. 417 (Bankr. W.D. Mo. 2020), The

court reasoned, “The plain meaning of ‘engaged in’ means to be actively and currently involved.

In § 1182(a)(1)(A) of the Bankruptcy Code, ‘engaged in’ is written not in the past or future but

NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 2022 WL 1288608 at *6-8 (B.A.P. 9

Cir. 2022). The

court’s holding on this point is broad: “[N]o profit motive is required for a debtor to qualify for subchapter V relief.

To hold otherwise would wrongfully exclude nonprofits and other persons that lack such a motive.” Id. at *8.

in the present tense.”

Accord, e.g., In re Blue, 630 B.R. 179, 188-89 (Bankr. M.D.N.C. 2021)

(collecting and discussing cases); In re Offer Space, LLC, 629 B.R. 299, 305-06 (Bankr. D. Utah

2021); In re Ikalowych, 629 B.R. 261, 280-83 (Bankr. D. Colo. 2021); In re Johnson, 2021 WL

825156 (N.D. Tex. 2021).

In In re Johnson, 2021 WL 825156 (N.D. Tex. 2021), the debtor and the debtor’s spouse

had filed a chapter 7 petition, before enactment of subchapter V, to deal with business debts

arising from the debtor’s ownership of several limited liability companies.

After the U.S. Trustee filed a complaint objecting to their discharge, and after subchapter

V’s effective date, the debtor and the spouse filed a motion to convert their case to chapter 11,

conditioned on the court’s authorization for the case to proceed under subchapter V.

The U.S. Trustee and a number of creditors objected, asserting that a debtor must be

“actively carrying out” commercial or business activities at the time of the filing of the petition

to be “engaged in” commercial or business activities for purposes of subchapter V eligibility.

The court rejected the “actively carrying out” test as too narrow because it would

preclude subchapter V relief for debtors with businesses temporarily closed for unexpected non-

financial reasons such as weather, natural disaster, regulatory requirements, or a pandemic. But

the court concluded that the inquiry is “inherently contemporary in focus instead of retrospective,

In re Thurmon, 625 B.R. 417, 422 (Bankr. W.D. Mo. 2020), Although the U.S. Trustee timely raised the issue of

eligibility by objecting to the sub V election, the U.S. Trustee did not request a hearing on it. Accordingly, the

ruling on eligibility occurred in connection with the hearing on confirmation of the plan, which all impaired classes

of creditors had accepted. Id. at 423-24.

The only party objecting to the plan was the U.S. Trustee, who contended that the court could not confirm

the plan of a debtor ineligible for subchapter V because it was not accompanied by a disclosure statement. The court

overruled the objection and confirmed the plan in the unusual circumstances of the case. The court reasoned that

(1) the U.S. Trustee had in essence waived the right to request a disclosure statement by not requesting that the court

require a disclosure statement while the eligibility objection was pending; and (2) the plan substantially complied

with disclosure statement requirements by containing “adequate information.” Id. at 424.

requiring the assessment of the debtor’s current state of affairs as of the filing of the bankruptcy

petition.” Johnson, 2021 WL 825156 at *6.

Because nothing indicated that the debtor’s companies were only temporarily out of

business or that the debtor intended to cause any of them to resume operations, the court

concluded that the debtor’s prior ownership and management of them did not qualify the debtor

for subchapter V. Id. at *7.

The Johnson court advanced three reasons for this conclusion.

First, applying the dictionary definition of “engaged” as “involved in activity: occupied,

busy” to the statutory language, the court determined that a person “engaged in business or

commercial activities” is a person “occupied with or busy in commercial or business activities –

not a person who at some point in the past had such involvement.” Id. at * 6.

Second, the Johnson court noted that the purpose of subchapter V is to facilitate

expedience and minimize cost for the reorganization of a small business. Such benefits are

essential to the successful the reorganization of a small business that is “currently occupied

with/busy in commercial or business activities” but not to a small business no longer so

occupied. Id. at *6.

Finally, the court relied on interpretations of “engaged in” in eligibility provisions

applicable to railroads under subchapter IV of chapter 11 and to chapter 12 debtors that apply a

contemporary analysis to eligibility. Id. at *7. Thus, a former railroad did not qualify for

subchapter IV,

and a family farmer must be currently engaged in a farming operation or intend

to continue to engage in a farming operation at the time of the filing of the petition.

Hileman v. Pittsburgh & Lake Erie Props., Inc. (In re Pittsburgh & Lake Erie Props., Inc.), 290 F.3d 516, 519 (3rd

Cir. 2002).

Watford v. Federal Land Bank of Columbia (In re Watford), 898 F.2d 1525, 1528 (11th Cir. 1990). See also In re

McLawchlin, 511 B.R. 422, 427-28 (Bankr. S.D. Tex. 2014).

In In re Two Wheels Properties, LLC, 625 B.R. 869 (Bankr. S.D. Tex. 2020),

corporation’s charter had been forfeited under state law for tax reasons, state law did not permit

its reinstatement in that circumstance, and state law permitted only the liquidation of its assets.

The court ruled that, because the corporation could not be “engaged in commercial or business

activities” under state law, it was ineligible to be a sub V debtor.

National Loan Invs., L.P. v. Rickerson (In re Rickerson), 636 B.R. 416, 422 (Bankr. W.D.

Pa. 2021) also ruled that eligibility requires that the debtor be engaged in commercial or business

activities on the petition date.

The Bankruptcy Appellate Panel of the Ninth Circuit extensively reviewed the subchapter

V case law on the issue in NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 2022 WL

1288608 (B.A.P. 9

Cir. 2022). The Ninth Circuit BAP adopted the majority view that “engaged

in” is “inherently contemporary in focus and not retrospective.” Id. at *5. The court ruled, id.:

Thus, a debtor need not be maintaining its core or historical operations on the petition

date, but it must be “presently” engaged in some type of commercial or business

activities to satisfy [the eligibility requirement].

2. What activities are sufficient to establish that the debtor is “engaged in

commercial or business activities” when the business is no longer operating

When an entity has gone out of business at the time of the filing of the bankruptcy case,

courts concluding that sub V eligibility requires current commercial or business activities have

considered whether the principal of the entity or the entity itself is nevertheless eligible based on

current activities other than operating it, such as winding down its affairs or dealing with assets

or creditors.

Cf. In re BK Technologies, Inc., 2021 WL 1230123 (Bankr. N.D. W.Va. 2021) (Dismissing sub V case based on

bad faith because, among other things, the debtor had liquidated its assets prior to filing the petition and, therefore,

was not engaged in business).

In In re Johnson, 2021 WL 825156 (N.D. Tex. 2021), discussed in Section III(B)(1), the

individual debtor and the debtor’s spouse sought to proceed under subchapter V to deal with the

debtor’s personal liabilities arising out of his ownership and operation of defunct limited liability

companies.

After the court concluded that that eligibility required that the debtor be engaged in

commercial or business activities at the time of the filing of the petition, the court considered the

debtor’s argument that he was currently engaged in commercial or business activities because, as

an employee, he managed the business of a limited liability company owned by the debtor’s

mother. The mother had acquired her interest by inheritance upon the death of her husband, who

had originally organized and owned it. The debtor and spouse had no ownership interest in the

mother’s company.

The Johnson court rejected the debtor’s argument. Applying dictionary definitions of

“commerce” and “business” to the eligibility statute’s language, the court concluded that a

person engaged in “commercial or business activities” is “a person engaged in the exchange or

buying and selling of economic goods or services for profit.” Id. at *8.

Neither the debtor nor the spouse was engaged in the exchange or buying and selling of

goods or services for their own profit. Because they had no ownership in the mother’s company,

the debtor’s management of the company could not be for their indirect profit. Accordingly, the

debtor’s management of the mother’s company as an employee and officer did not meet the

requirement that the debtor be engaged in commercial or business activities. Id. at *8.

The court in In re Ikalowych, 629 B.R. 261 (Bankr. D. Colo. 2021), agreed with the

rulings in Thurmon and Johnson that whether a debtor is engaged in commercial or business

activities must be determined as of the petition date. Id. at 280-83.

The Ikalowych court,

however, held that an individual was eligible for subchapter V when the limited liability

company that the debtor managed and in which the debtor held an indirect 30 percent ownership

interest had surrendered its assets to the secured lender immediately before filing, but the

individual was still engaged in wind down work relating to the company. Id. at 284-85.

Based on the text of the statute, dictionary definitions of “commercial”, “business”, and

“activities”, and phrases analogous to “commercial or business activities” in other federal

statutes, id. at 275-79, the Ikalowych court reasoned that the phrase “commercial or business

activities” is “exceptionally broad.” Id. at 276.

Thus, the Ikalowych court interpreted “commercial or business activities” to mean, id. at

276:

[A]ny private sector actions related to buying, selling, financing, or using goods,

property, or services, undertaken for the purpose of earning income (including by

establishing, managing, or operating an incorporated or unincorporated entity to do so).

In determining whether a debtor is engaged in “commercial or business activity,” the

court employed a “totality of the circumstances” test, which includes consideration of the

circumstances immediately before and after the date of the sub V filing as well as the debtor’s

conduct and intent. Id. at 283.

The Ikalowych court qualified its ruling, id. at 283:

[F]ocusing only on the exact nanosecond the Petition was filed is a bit too narrow. For example, perhaps

the Debtor did no work on the Petition Date itself. So, in considering whether the Debtor was engaged in

“commercial or business activity” as of the Petition Date, the Court deems relevant the circumstances

immediately preceding and subsequent to the Petition Date as well as the Debtor’s conduct and intent.

The court cited Watford v. Fed. Lank Bank of Columbia (In re Watford), 898 F.2d 1525, 1528 (11

Cir. 1990),

which adopted a “totality of the circumstances” test to decide whether the debtor in a chapter 12 case was “engaged

in a farming operation.”

The Ikalowych court acknowledged that the facts in Thurmon and Johnson (both

discussed in Section III(B)(1)) were similar to, but not the same as, the facts in the case before it.

Id. at 285-86. The distinguishing factor was the wind down work, which included interactions

with the lender and a landlord, cleanup and turnover of leased premises, assisting with payroll,

dealing with tax accountants and tax issues, and organization and storage of business records. Id.

at 285. The court reasoned, “Each category of Wind Down Work itself constitutes ‘commercial

or business activities’ in the broad sense.” Id. at 286.

The Ikalowych court also considered whether the debtor was “engaged in commercial or

business activities” based on two other activities.

First, the debtor was the sole owner of a limited liability company that he formed and

managed as a mechanism to obtain income through investments and the provision of services.

This limited liability company owned 30 percent of the operating company just discussed and

also received income from the debtor’s services as a board member of a cemetery company and

as a consultant for other companies. The court concluded, “Managing or directing the operations

of a limited liability company is a ‘commercial or business activity.’” Id. at 284.

Second, the court considered the debtor’s employment by an insurance brokerage

company (in which the debtor had no ownership interest) to sell its commercial insurance

products, which had begun shortly before filing, qualified as “commercial or business activities.”

Under the broad scope of the definition, the court ruled, id. at 286 (citations to dictionary

definitions omitted):

[T]he Debtor’s work as a wage earner with [the insurance company] constitutes

“commercial or business activities.” After all, his role is selling a product in the private

marketplace in order to make money for himself and his employer. That is what

“commercial activity” and “business activity” means.

The Ikalowych court realized that its conclusion “suggests that virtually all private sector

wage earners may be considered as ‘engaged in commercial or business activities.’ So be it.” Id.

at 286-87. But the court continued, this does not mean that every private sector wage earner is

eligible for subchapter V because most such individuals will rarely meet the requirement that 50

percent of the debt arise from such activity. Id. at 287. Section III(E) discusses this aspect of the

court’s ruling.

National Loan Invs., L.P. v. Rickerson (In re Rickerson), 636 B.R. 416 (Bankr. W.D. Pa.

2021), rejected Ikalowych’s conclusion that an employee is “engaged in commercial or business

activities” for purposes of sub V eligibility. The court reasoned that the ordinary meaning of the

phrase does not encompass “an employee who is in an employment relationship with an

employer – at least where the employee has no ownership or other special interest with an

employer.” Id. at 426.

Ikalowych’s broad reading, the court explained, “threatens to virtually drain it of any

meaning.” 636 B.R. at 426. The court continued, id. at 426:

If any person who is an employee is thus engaging in commercial or business activities,

and thus potentially eligible to proceed under Subchapter V, why limit it there? What

about a debtor whose only source of income is Social Security – cannot such a person

nonetheless be said to be engaging in commercial or business activity by purchasing food

and gasoline on a regular basis, and therefore potentially be eligible to proceed under

Subchapter V?

The court in In re Offer Space, LLC, 629 B.R. 299 (Bankr. D. Utah), concluded that a

debtor no longer operating its business was nevertheless “engaged in commercial or business

activities” in the circumstances of the case.

About three months before the subchapter V filing, after several months of difficulties

due to legal claims and chargebacks, the debtor began informing its customers that it would be

unable to continue to provide vendor marketing services, which included customer relations

management, merchant account management, and marketing campaign management using

proprietary software. One of its customers purchased the software in exchange for shares of its

publicly traded stock. Id. at 302.

At the time of filing, the debtor was no longer conducting business, had no employees,

and did not intend to reorganize. It had been marshaling its assets and taking steps to realize

value from its assets and pay its creditors. Its assets consisted of a bank account, accounts

receivable, counterclaims in a lawsuit, and the stock. Id. at 303

The U.S. Trustee objected to eligibility because the debtor was not an operational

business on the petition date. Id. at 304.

Like the Ikalowych court, the Offer Space court looked to the dictionary definitions of

relevant terms (“engaged,” “commercial,” “business,” and “activity”), Offer Space, 629 B.R. at

305, and noted that Congress had chosen “very broad language.” Id. at 306. The court observed

that, in contrast to the definition of a family farmer in § 101(18A), which refers to a debtor

engaged in a farming operation, the subchapter V definition uses the broader and more inclusive

term, activities. Id. at 307.

Considering the “totality of the circumstances,” the Offer Space court concluded that the

debtor was “engaged in commercial or business activities” because it had active bank accounts,

had accounts receivable, was analyzing and exploring counterclaims in a lawsuit, was managing

the publicly traded stock it acquired from the earlier sale of its main operational asset, and was

winding down its business, including steps to pay creditors and realize value from its assets.

Offer Space, 629 B.R. at 306.

The Offer Space court rejected the U.S. Trustee’s contention that the legislative history of

SBRA demonstrated that subchapter V is not available for a debtor seeking to liquidate its

shutdown operations.

After concluding that the plain language of the statute made it unnecessary to consider

legislative history, the court concluded that, although successful reorganizations might be the

primary purpose of SBRA, noting indicated that it did not have other purposes, including “relief

for small business debtors who intend to liquidate their businesses without the cumbersome

structure that otherwise exists in Chapter 11.” Id. at 307-08. Moreover, the court observed,

chapter 11 permits confirmation of liquidation plans under § 1129(a)(11),

and Congress did not

include this section in the list of those that it made inapplicable in subchapter V cases. Id. at 308.

The debtor in In re Port Arthur Steam Energy, L.P., 629 B.R. 233 (Bankr. S.D. Tex.

2021), similarly had terminated its historical business operations before it filed its subchapter V

case but was engaged in other activities that the court concluded were sufficient for it to be

“engaged in commercial and business activities.”

Section 1129(a)(11) conditions confirmation of a plan on a determination that confirmation “is not likely to be

followed by the liquidation . . . of the debtor or any successor to the debtor, unless such liquidation . . . is proposed

in the plan.”

The court in In re Port Arthur Steam Energy, L.P., 629 B.R. 233, 237-38 (Bankr. S.D. Tex. 2021), also

noted that a subchapter V debtor may propose a plan that includes selling all assets to pay creditors. The court

observed that § 1123(b)(4) permits a chapter 11 plan to provide for the sale of all or substantially all of its assets and

that it is not one of the sections that is inapplicable in a subchapter V case.

Two principals of the debtor’s limited partner and an independent contractor managed the

debtor and maintained its facility and vehicles to preserve the value of the assets, including

running technical parts of the facilities, maintaining utilities like power and water, making

repairs after severe storms, and filing reports and tax returns that state and federal agencies

required. The managers worked on a plan to sell assets and pay creditors in the chapter 11 case

and sold one asset in the months preceding the bankruptcy filing. The debtor was also litigating

a multi-million dollar lawsuit and pursuing collection remedies on an account receivable, both

arising out of its prepetition transactions with a party who claimed to be a creditor in the case and

objected to the subchapter V election. Id. at 236-37.

The court concluded that, because all of these activities were “commercial or business

activities,” the debtor was eligible for subchapter V relief. Id. at 237.

The Port Arthur Steam Energy court addressed the argument that eligibility for

subchapter V required current operation of a business because SBRA’s legislative history

demonstrated that the Congressional purpose of subchapter V was to promote reorganizations.

The court rejected the argument, concluding that, because the eligibility statute is not ambiguous,

consideration of legislative history was not properly a part of the analysis. In any event, the

court continued, a subchapter V debtor may propose a plan that includes selling all assets to pay

creditors. Id. at 237.

The court in In re Blue, 630 B.R. 179 (Bankr. M.D.N.C. 2021), held that a salaried

employee who received a material contribution to her income from part-time consulting work as

an independent contractor was “engaged in commercial or business activities.” Agreeing with

the Offer Space reasoning that “activities” is a much broader term than “operations,” the court

concluded, “[N]othing in the Bankruptcy Code or legislative history of subchapter V mandates

that commercial or business activities must be full-time to qualify, and Debtor’s activities in this

case are substantial and material.” Id. at 190.

The Blue court also concluded that the debtor’s rental of her former residence to tenants

was within the broad scope of commercial or business activities. Id. at 194.

The Blue court ruled that more than 50 percent of the debtor’s debts arose from

commercial or business activities and that such debts did not have to arise from the debtor’s

current commercial or business activities for purposes of sub V eligibility. Sections III(D) and

(III(E)), respectively, discuss these aspects of the court’s decision.

In In re Vertical Mac Construction, LLC, 2021 WL 3668037 (Bankr. M.D. Fla. 2021),

the debtor filed a subchapter V case to liquidate its assets and disburse the sale proceeds to

creditors. Shortly after filing the petition, the debtor moved to sell its assets under § 363, and the

court approved the sale.

The court denied the U.S. Trustee’s objection to eligibility based on the fact that the

debtor was no longer operating a business on the filing date. The court concluded that the debtor

was engaged in commercial or business activities on the filing date “by maintaining bank

accounts, working with insurance adjusters and insurance defense counsel to resolve [various

claims] and preparing for the sale of its assets.” Id. at * 4.

The Bankruptcy Appellate Panel of the Ninth Circuit in NetJets Aviation, Inc. v. RS Air,

LLC (In re RS Air, LLC), 2022 WL 1288608 at *5-6 (B.A.P. 9

Cir. 2022), adopted a broad

approach to what activities qualify as “commercial or business activities” on the petition date,

citing cases that earlier text discusses.

The bankruptcy court in RS Air had found that the debtor was engaged in commercial or

business activities on the petition date by litigating with the objecting creditor, paying registry

fees for its aircraft, remaining in good standing as a limited liability company under state law,

filing tax returns, and paying taxes. The bankruptcy court also found that the debtor intended to

resume business operations once it was able to do so. The BAP concluded that these activities

were “commercial or business activities” within the meaning of the eligibility statute. Id. at *6.

In a chapter 12 case, the court in In re Mongeau, 633 B.R. 387 (Bankr. D. Kansas 2021),

ruled that debtors who had discontinued their own farming operations were nevertheless

“engaged in farming” based on their involvement in the operation of farms of their extended

family, their intent to continue farming operations in the future, and their ownership of some

farm assets. The court relied in part on subchapter V cases concluding that winding down a

business that had ceased operations on the filing date is sufficient to be “engaged” in business

activities. Id. at 397.

D. What Debts Arise From Debtor’s Commercial or Business Activities

Eligibility for subchapter V requires that not less than 50 percent of the debtor’s debts

arise from the commercial or business activities of the debtor.

Chapter 12 similarly conditions

eligibility on a specified percentage of debt arising from a farming or fishing operation.

The

court in In re Ikalowych, 629 B.R. 261, 288 (Bankr. D. Colo. 2021), applying chapter 12 case

The requirement is in paragraph (A) of § 1182(1), which governs subchapter V eligibility under the CARES Act,

which increased the debt limit for subchapter V eligibility. When the increased debt limit sunsets on March 27,

2022, § 101(51D) will govern sub V eligibility. See Section III(B). Paragraph (A) is the same in both statutes. See

Section III(B).

For a family farmer, 50 percent of the debts must arise from a farming operation. § 101(18)(A). In addition, 50

percent of the debtor’s income must be received from the farming operation. Id. The same percentages apply in the

definition of a family fisherman who is an individual. § 101(19A)(A). For a family fisherman that is a corporation

or partnership, the debt relating to the fishing operation must be 80 percent, and more than 80 percent of the value of

its assets must be related to the fishing operation. § 101(19A)(B).

law, concluded that qualifying business debts “must be directly and substantially connected to

the ‘commercial or business activities’ of the debtor.”

The Ikalowych court determined that the individual debtor’s liability on guarantees of

certain debts of a limited liability company that he managed and was winding down and of his

wholly-owned operating company that provided his services and that owned 30 percent of the

limited liability company met this standard.

Because these debts were 86 percent of his total

debts, the court concluded he was eligible for subchapter V. Ikalowych, 629 B.R. at 288.

In In re Blue, 630 B.R. 179 (Bankr. M.D. N.C. 2021), the debtor had retained her former

residence when she bought a new one and rented it until she evicted a tenant approximately three

years before filing. Because the tenant had substantially damaged the property, the debtor owed

$ 38,271.31 for partial repairs but had not been able to complete them and had not rented it in the

meantime.

After determining that her rental of the property fell within the “broad scope of

commercial or business activities,” id. at 195, the court considered the question of whether the

mortgage debt on the property and the repair debts arose from such activities.

The court concluded that the debtor had originally incurred mortgage debt when she

purchased it for her residence and that she did not intend to lease it at that time. The court ruled,

therefore, that the mortgage debt did not arise from commercial or business activities. Id. at 194.

The court quoted In re Woods, 743 F.3d 689, 698 (10

Cir. 2014), which in the chapter 12 context stated, “a debt

‘for’ a principal residence ‘arises out of’ a farming operation only if the debt is directly and substantially connected

to the farming operation.”

Section (III)(C)(2) discusses the Ikalowch court’s ruling that the debtor was “engaged in commercial or business

activities.” The court also determined that the debtor was engaged in commercial or business activities as a salaried

employee, but the court concluded that those activities did not make the debtor eligible for subchapter V because

none of the debts arose from that activity.

The court found that the debtor had continuously rented the property until the damage to

the property occurred and that she had not rented it since then because of her inability to finance

and complete necessary repairs. Because the damage occurred when she was actively renting the

property, the court concluded, the debts arose from commercial or business activities. Id. at 195.

In Lyons v. Family Friendly Contracting LLC (In re Family Friendly Contracting LLC),

2021 WL 5540887 (Bankr. D. Md. 2021), the former owner of the business and an affiliate that

owned the business premises had sold their interests to the current owners of the debtor and an

affiliate. The sale had been financed with bank loans on which the debtor and its affiliate were

jointly and severally liable. The bank loans comprised over 90 percent of the debt.

The former owner objected to the debtor’s eligibility on the ground that most of the

debtor’s obligations to the bank were incurred primarily for the benefit of the debtor’s owners

and affiliate and, therefore, did not arise out of the debtor’s commercial or business activities.

The court concluded that the loans were part of a “fully integrated transaction” that provided

benefits to the debtor. Id. at * 4.

In determining how much of the debtor’s debt arose from its commercial or business

activities, the court concluded that the eligibility statute “does not require the court to dissect the

various benefits obtained by all the parties and, for purposes of § 1182(1)(A), include only debt

that is linked to a direct benefit obtained by a debtor, while excluding debt that directly

benefitted others.” Id. at * 5. Accordingly, the court ruled that the debtor was eligible.

National Loan Invs., L.P. v. Rickerson (In re Rickerson), 636 B.R. 416 (Bankr. W.D. Pa.

2021), considered whether an individual’s personal tax obligation qualified as a business debt.

The court noted that courts had concluded that, for purposes of determining whether a debtor’s

debts are “primarily consumer debts” for purposes of dismissal for abuse under § 707(b), a

personal tax obligation is neither a consumer nor a business debt. Id. at 428.

The Rickerson court declined to rule on that basis, however. Instead, the court concluded

that taxes owed with regard to income the debtor earned from previous businesses did not arise

from commercial or business activities. The obligation arose from the debtor’s failure to address

taxes she owned on her income, not her commercial and business activities. Id. at 429.

In re Sullivan, 626 B.R. 326 (Bankr. D. Colo. 2021), examined the question of how to

determine whether debts “arose from the commercial or business activities of the debtor” in

detail.

The debt in question was the debtor’s obligation imposed in a divorce proceeding to pay

the former spouse an “equalization payment” for the former spouse’s share of the value of the

debtor’s business that the debtor retained. Shortly after the filing of the case, the COVID-19

pandemic hit and resulted in the liquidation of the business.

Proper characterization of the equalization payment was critical because, if it were not a

business debt, the debtor’s business debts would be less than 50 percent of the total, and the

debtor would be ineligible to be a sub V debtor. Because the court concluded that the

equalization debt did not arise from a business or commercial purpose, the court ruled that the

debtor was ineligible and denied confirmation of the sub V plan. Sullivan, 626 B.R. at 333.

The court cited In re Brashers, 216 B.R. 59 (Bankr. D. Okla. 1998) and In re Stovall, 209 B.R. 849 (Bankr. E.D.

Va. 1997).

The definition in effect under the CARES Act is in § 1182(a)(1). See Section III(B). The Sullivan court discussed

the definition in § 101(51D)(A), which has the same language, because the case was filed before enactment of the

CARES Act, and the CARES Act applies only to cases filed after its enactment.

The situation in Sullivan suggests two questions.

The first is whether the former spouse or any other party in interest timely objected to the debtor’s sub V

election as Interim Bankruptcy Rule 1020(b) requires. The court did not address whether a court may consider an

out-of-time objection to the subchapter V election or whether the court may raise the issue sua sponte after the time

for an objection has expired.

The Sullivan court began its analysis by noting that, although the Bankruptcy Code does

not define when a debt arises from “commercial or business activities,” it defines “consumer

debts” in § 101(18) as “debts incurred by an individual primarily for a personal, family, or

household purpose.” In determining whether a debt is for a “personal, family, or household

purpose,” the court continued, courts have focused on the debtor’s purpose in incurring the

debt,

reasoning that a debt incurred with a “profit motive” or an “eye toward profit” is not a

consumer debt. Id. at 330-31.

The court noted rulings that student loans,

alimony

obligations,

and divorce-related debts are consumer debts.

The debtor argued that the equalization debt arose from business or commercial activities

because it represented a transfer of the value of the business, akin to one partner’s buy-out of

another’s interest in a business. The court acknowledged, “[I]t is possible to characterize this

debt as a business debt and it is possible to treat many otherwise personal or family debts as

debts incurred with an eye toward profit,” but noted that the profit motive inquiry raised

difficulties: “Probably all courts would agree that the home mortgage debt is a consumer debt

and yet the family home is the asset that most families view as their greatest investment – the one

that they purchase with an eye toward appreciation in value.” Sullivan, 626 B.R. at 331.

Because the legislative history of the definition of “consumer debt” in § 101(8) indicated

that it was adapted from consumer protection laws and because the § 101(8) definition mirrors

A second, more practical, question is what benefit the debtor expected to gain from a successful subchapter

V case. Any debt arising from a separation agreement or divorce decree that is not a domestic support obligation is

excepted from discharge under § 523(a)(15), and the sub V discharge of an individual is subject to all exceptions in

§ 523(a). See Part IX. A plan could not have eliminated the debtor’s liability for the equalization payment.

The court cited In re Garcia, 606 B.R. 9, 106 (Bankr. D. N.M. 2019).

The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 806 (10

Cir. 1999) and In re Booth, 858

F.2d 1051, 1055 (5

Cir. 1988).

The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 807 (10

Cir. 1999).

The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 807 (10

Cir. 1999).

The court cited Kestell v. Kestell (In re Kestell), 99 F.3d 146, 149 (4th Cir. 1996); In re Garcia, 606 B.R. 98, 105

(Bankr. D. N. M. 2019), and In re Traub, 140 B.R. 286 (Bankr. D. N.M. 1992).

the definition of consumer debt in the Truth in Lending Act (“TILA”), the court sought further

guidance from cases interpreting the TILA. Id. at 331-32.

Cases under the TILA, the court explained, focus on the purpose of the loan transaction.

The Sullivan court quoted a five-factor test that another court employed in Sundby v. Marquee

Funding Group, Inc., 2020 WL 5535357 at * 8-9 (S.D. Ca. 2000) (internal quotations and

citations omitted):

1. The relationship of the borrower’s primary occupation to the acquisition. The

more closely related, the more likely it is to be a business purpose.

2. The degree to which the borrower will personally manage the acquisition. The

more personal involvement there is, the more likely it is to be business purpose.

3. The ratio of income from the acquisition to the total income of the borrower.

The higher the ratio, the more likely it is to be business purpose.

4. The size of the transaction. The larger the transaction, the more likely it is to

be business purpose.

5. The borrower’s statement of purpose for the loan.

The Sullivan court concluded that the first four of these factors favored characterization

of the equalization debt as a business debt. But the court questioned whether it had a business

purpose. “While the debtor characterizes the equalization payment as payment for the [debtor’s

business], the separation agreement does not describe it in that fashion. Rather, it states that it

was a payment ‘to equalize the division of marital property . . . .’, and [the business] was only

one asset of their marital property.” Sullivan, 626 B.R. at 332.

The Sullivan court next looked to federal tax law as a source for distinguishing between

“business” and “personal” payments in that it generally permits a deduction for “ordinary and

necessary business expenses,” but not for most personal expenses. Id. at 332-33.

The court analyzed the Supreme Court’s decision in United States v. Gilmore, 372 U.S.

39 (1963), which held that a taxpayer could not deduct legal fees incurred in connection with the

division of business interests in a divorce proceeding as a business expense. Rejecting the

taxpayer’s argument that the legal fees were a business expense because they were incurred to

protect interests in various corporations, the Supreme Court held that the focus should be on “the

original character of the claim with respect to which an expense was incurred, rather than its

potential consequences on the fortunes of the taxpayer.” 372 U.S. at 49. Because the spouse’s

claims stemmed entirely from the marital relationship, and not from income-producing activity,

the Supreme Court concluded that the legal fees were not business expenses and denied the

deduction. Id. at 52. The Sullivan court noted that the Supreme Court stated, “[T]he marriage

relationship can hardly be deemed an income-producing activity.” Sullivan, 626 B.R. at 333,

quoting Gilmore, 372 U.S. at 52 n. 22.

After analyzing marriage dissolution under state law as an equitable proceeding including

the division of marital property to each spouse of what equitably belongs to each spouse, the

Sullivan court concluded, 626 B.R. at 333 (citations omitted):

[T]he equalization payment debt is rooted and grounded in the equitable

termination of their marriage. The equitable distribution of their marital property was not

a business or commercial transaction – it did not stem from a profit motive. Instead, it

was a method of ensuring that each spouse received their fair share of marital property.

This is inherently a personal and family-related purpose. The fact that the parties’ marital

property included a business does not alter the underlying purpose of the property

division.

E. Whether Debts Must Arise From Current Commercial or Business Activities

Eligibility for subchapter V requires that the debtor be “engaged in commercial or

business activities” and that not less than 50 percent of the debtor’s debts arise from “the

commercial or business activities of the debtor.” § 101(51D)(A); §1182(1)(A).

In In re Ikalowych, 629 B.R. 261 (Bankr. D. Colo. 2021), the court concluded that an

individual working as a salaried employee was engaged in commercial or business activities. Id.

at 286. The court observed that, although this ruling suggested “that virtually all private sector

wage earners may be considered as ‘engaged in commercial or business activities,’” id. at 286-

87, this did not mean that every private sector wage earner is eligible for subchapter V relief

because most such individuals will rarely meet the requirement that 50 percent of the debt arise

from such activity. Id. at 287. Thus, the court concluded that debtor’s employment did not make

him eligible for subchapter V because none of the debts arose from that activity. Id. at 287.

The court’s conclusion was not necessary for the decision; the court determined that most

of the debtor’s debts arose from other commercial or business activities. Nevertheless, the

implication may be that eligibility requires that more than 50 percent of the debtor’s debts must

be connected to current commercial or business activities.

The court in In re Blue, 630 B.R. 179 (Bankr. M.D. N.C. 2021), addressed this issue and

ruled that no connection is necessary. There, the debtor filed a subchapter V case to deal with

debts arising from her ownership and operation of a corporation that had discontinued its

operations about 21 months earlier, as well as other debts. At the time of filing, the debtor was a

salaried, full-time, W-2 employee. In addition to her income, the debtor worked part-time for

two different companies as an independent contractor.

As section III(C)(2) discusses, the Blue court determined that the debtor’s work as an

independent contractor constituted “commercial or business activities.” The Bankruptcy

Administrator, however, argued that the debtor was not eligible for subchapter V because no

nexus existed between the debtor’s current activities as an independent contractor and the debts

arising from her previous activities. Id. at 191.

The premise of the argument is based on the language of the eligibility requirement,

which states that not less than 50 percent of the debtor’s debt must arise from “the commercial or

business activities of the debtor.” § 101(51D)(A); § 1182(1)(A) (emphasis added). Use of the

word “the” at the end of paragraph (A), the argument continues, implies a reference to the same

“commercial or business activities” in which the debtor must be engaged under the language at

the beginning of paragraph (A).

The Blue court rejected the argument, concluding, “Such an implication is not required

by the language of the statute, and would be far too limiting for the remedial purposes of

subchapter V.” Id. at 191. The court reasoned that courts have interpreted and applied the

eligibility statute broadly, citing cases noting that the purposes of SBRA include providing relief

for debtors that intend to liquidate their businesses without the cumbersome structure that

otherwise exists in chapter 11

and that debtors may proceed under subchapter V even though

their debts stem from both currently operating and non-operating businesses.

Id. at 191.

The Blue court concluded, id. at 191:

The court cited In re Offer Space, LLC, 629 B.R. 299, 303 (Bankr. D. Utah 2021).

The court cited In re Blanchard, 2020 WL 4032411 at *2 (Bankr. E.D. La. 2020).

[D]ebtor intends to use subchapter V to address both defunct and non-defunct

commercial and business activities, and the more straightforward interpretation of

§ 1182(1)(A) does not require a connection of debts to current business activities.

Nothing in the statute requires that there be a nexus between the qualifying debts and the

Debtor's current business or commercial activities. Moreover, such an interpretation

could, for example, disqualify meritorious small businesses from the remedial purposes

of subchapter V simply by having significant debts from former operations. The Court

will not interpret subchapter V as narrowly as suggested by the BA.

F. What Debts Are Included in Determination of Debt Limit

A debtor is not eligible for subchapter V if the “aggregate noncontingent liquidated

secured and unsecured debts as of the date of the filing of the petition or the date of the order for

relief” exceed the applicable debt limit. Debts owed to affiliates or insiders are excluded from

the calculation.

As Section III(B) explains, the Bankruptcy Threshold Adjustments and

Technical Corrections Act (“BTATCA”)

provides that § 1182(1) governs eligibility for

subchapter V until June 20, 2024. Thereafter, a debtor must be a “small business debtor” as

defined in § 101(51D) to be eligible for subchapter V.

Under both statutes, however, a debtor is ineligible if the debtor is a member of a group

of affiliated debtors when the aggregate of all such debts of all of the affiliates exceeds the debt

limit. § 101(51D)(B)(i); § 1182(1)(B)(i). Only the debts of affiliates who are debtors in a

bankruptcy case are included.

Bankruptcy Threshold Adjustment and Technical Corrections Act, Pub. L. No. 117-151, 136 Stat. 1298 (June 21,

2022) (hereinafter “BTATCA”).

As enacted by SBRA, both statutes excluded “any member of a group of affiliated debtors” with debts in excess of

the debt limit. The Bankruptcy Threshold Adjustment and Technical Corrections Act (“BTATCA”), effective June

21, 2022, added “under this title” after “affiliated debtor.” BTATCA §§ 2(a)(1), 2(d). Thus, both § 101(51D)(i) and

The requirement that debts be “liquidated” and “noncontingent” for inclusion in the debt

limit also appears in the eligibility requirements for relief under chapters 12

and 13.

The court in In re Parking Management, Inc., 620 B.R. 544 (Bankr. D. Md. 2020),

considered subchapter V’s eligibility debt limits, noting that courts had addressed similar

language governing debt limitations in chapter 12 and 13 cases. The court observed that the

standards in those cases provide useful guidance but that subchapter V cases involve more

complex creditor relationships. Id. at *5.

The court concluded that claims for damages arising from the rejection of unexpired

leases were contingent, id. at *5-7, and that the debtor’s obligations under a note pursuant to the

Paycheck Protection Funding Program of the CARES Act were both contingent and

unliquidated, id. at 9-12. Because these debts were not included in the debt eligibility

calculation, the court ruled that the debtor was eligible for subchapter V.

In re 305 Petroleum, Inc., 622 B.R. 209 (Bankr. S.D. Miss. 2020), considered the

exclusion of debts of debtors in an affiliated group. Four affiliated debtors filed chapter 11

cases. Each of them had elected subchapter V, but one was a single asset real estate debtor that

was ineligible for subchapter V. In this opinion, the court considered whether the three debtors

were also ineligible because the debt of all of the affiliates exceeded $ 7.5 million. Without

including the SARE debtor, the debt of all of the affiliates was less than $ 7.5 million.

§ 1182(1)(B)(i) now provide for the exclusion of “any member of a group of affiliated debtors under this title” with

debts that exceed the debt limit. Under the amendment, therefore, debts of affiliates who are not in bankruptcy are

disregarded. BTATCA resolved another issue discussed infra note 95.

The amendments apply in cases commenced on or after March 27, 2020, that were pending on the effective

date. BTATCA § 2(h)(2).

Chapter 12 is available only to a “family farmer” or “family fisherman” under § 109(f). Definitions of the terms

include the debt limit requirement. §§ 101(18)(A); 101(19A)(A)(i).

§ 109(e). For a discussion of what debts are “liquidated” and “noncontingent” for purposes of the debt limitation

in chapter 13 cases, see generally W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13

PRACTICE AND PROCEDURE §§ 12:8, 12:9.

The court concluded that the debts of all filing affiliates were included in the debt limit

and that, therefore, none of them were eligible because their collective debts exceeded $ 7.5

million.

The court analyzed the issue under the definition of small business debtor in § 101(51D) and reached the correct

result under its provisions. Paragraph (B) of § 101(51D) excludes “any member of a group of affiliated debtors”

(emphasis added) if the group’s debts collectively exceed the limit. “Debtor” is defined in § 101(13) as a person

“concerning which a case under [title 11] has been commenced.” Because all of the entities had filed bankruptcy

petitions and they were affiliates, each was a member of a group of affiliated debtors with aggregate debts in excess

of the limit. Therefore, none of them were eligible.

But because the case arose after the CARES Act, the applicable statute was § 1182(1), as section III(B)

discusses. Although § 1182(1) at the time used the same language as § 101(51D), the outcome was potentially

different.

As amended by the CARES Act, § 1182(1)(A) defined “debtor” for purposes of subchapter V, and it was

part of subchapter V. BTATCA enacted a revised § 1182(1)(A), discussed below.

Because § 1182(1)(A) defined “debtor” at the time of the 305 Petroleum case, the definition of “debtor” in

§ 101(13) arguably did not apply. The definition of “debtor” in § 1182(1)(A) excluded an SARE debtor. Because

the SARE was not a “debtor” under the § 1182(1)(A) definition, it arguably was not in the group of “affiliated

debtors” for purposes of the exclusion in § 1182(1)(B)(i). Consequently, its debts would not be included in

determining eligibility. In other words, “debtors” in § 1182(1)(B)(i) meant “debtors” under (1)(A), which did not

include an SARE.

An argument in favor of this reading is that, if Congress had intended otherwise, it would have used

“persons” in (B)(i), or more simply, “affiliates”, so that § 1182(1)(B)(i) would read as follows:

(1) Debtor. -- The term “debtor”—

(B) does not include –

(i) any member of a group of [affiliates or affiliated persons] that has [debts greater than $7.5 million].

Under this analysis, the non-SARE debtors in 350 Petroleum would be eligible for subchapter V because

the SARE entity is excluded.

The argument against this interpretation is that Congress in the CARES Act amendments did not intend to

change the eligibility requirements of § 101(51D) other than to increase the debt limit. Moreover, the contrary

interpretation involves a circular definition of “debtor.” It requires use of the § 1182(1) definition of “debtor” to

determine the meaning of “debtors” in one part of the definition. This creates an ambiguity that leads to an

interpretation that uses the general definition of debtor in § 101(13) as the proper definition of the term in (1)(B).

The ineligibility of all of the debtors in 350 Petroleum then follows even under the CARES Act version of

§ 1182(1).

BTATCA resolves the issue. It added language to paragraph (B)(1) of both § 101(51D) and § 1182(1) so

that both provisions now exclude “any member of a group of affiliated debtors under [title 11]” (emphasized

language added) whose debts exceed the debt limit. BTATCA §§ 2(a)(1), (d). Accordingly, the debts of affiliates

who are not bankruptcy debtors are not included in the debt limits.

G. Ineligibility of Corporation Subject to SEC Reporting Requirements and of

Affiliate of Issuer

The SBRA added two exclusions from the definition of “small business debtor” that did

not previously exist. Later legislation made a technical correction to the SBRA language.

As amended by SBRA, the definition of “small business debtor” does not include a

debtor that “is a corporation subject to the reporting requirements under section 13 or 15(d) of

the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d).” § 101(51D)(B)(ii). Under

§ 1182(1), which governs sub V eligibility until June 20, 2024,

identical language makes such

a debtor ineligible for subchapter V. § 1182(1)(B)(ii). In general, the provisions of the

Securities Exchange Act require reporting by any public company.

As amended by the Bankruptcy Threshold Adjustment and Technical Corrections Act

(“BTATCA”),

paragraphs (B)(iii) of both § 101(51D) and § 1182(1) also exclude “an affiliate

of a corporation described in clause (ii)” that, as just explained, is a public company.

See Section III(B).

BTATCA §§ 2(a), (d), Pub. L. No. 117-151, 136 Stat. 1298 (June 21, 2022) (hereinafter “BTATCA”). The

amendment applies to cases commenced on or after March 27, 2020, that were pending on the effective date.

BTATCA § 2(h)(2).

As originally enacted by SBRA, paragraph (B)(iii) provided that a small business debtor did not include “an

affiliate of a debtor.” SBRA § 4(a)(1). For a discussion of the issues relating to this provision, see Ralph Brubaker,

The Small Business Reorganization Act of 2019, 39 Bankruptcy Law Letter, no. 10, Oct. 2019, at 7.

The CARES Act made a technical correction to (B)(iii). CARES Act § 1113(a)(4)(A). The revised (B)(iii)

excluded “any debtor that is an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934

(15 U.S.C. 78c)).” The temporary § 1182(1) that the CARES Act enacted contained the identical exclusions in

(B)(iii). CARES Act § 1113(a)(1).

Section 3(8) of the Securities Exchange Act defines “issuer” as “any person who issues or proposes to issue

any security.” 15 U.S.C. § 78(c)(8). Section 3(10) broadly defines “security” as including, among other things, any

“stock,” “certificate of interest or participation in any profit-sharing agreement,” or “investment contract.” 15

U.S.C. § 78(c)(10).

Read broadly, the exclusion for the affiliate of an issuer under the CARES ACT version of (B)(iii) would

render ineligible any debtor that is an affiliate of any corporation or other limited liability entity. By definition,

stock in a corporation or an interest in a limited liability entity is a “security.” Thus, for example, if an individual

has a sufficient equity interest in two or more such entities to qualify as an “affiliate” under § 101(2), all of the

affiliates would be disqualified. Similarly, if one entity is an affiliate of another, neither could be a small business or

sub V debtor.

In re Serendipity Labs, Inc., 620 B.R. 679 (Bankr. N.D. Ga. 2020), considered whether

the corporate debtor was an affiliate of a publicly traded company. The public company owned

more than 27 percent of the voting shares of the debtor but only 6.51 percent of the voting shares

of the debtor entitled to vote on the debtor’s bankruptcy filing. The debtor argued that, in

determining whether the public company was an “affiliate” within the definition of § 101(2)(a),

the court should count only the shares with power to vote on the matter before the court, i.e., the

bankruptcy filing.

Section 101(2)(a) defines “affiliate” to include “an entity that directly or indirectly owns,

controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of

the debtor.” The Serendipity Labs court noted that the Bankruptcy Code does not define “voting

securities” but that the Securities Exchange Commission in 17 C.F.R. § 230.405 defined “voting

securities” as “ securities the holders of which are presently entitled to vote for the election of

directors.” The court concluded that this unambiguous definition is the appropriate one to use

for purposes of § 101(2)(a). 620 B.R. at 683. All of shares held by the public company met this

requirement.

The court in In re Phenomenon Marketing & Entertainment, LLC, 2022 WL 1262001 (Bankr. C.D. Cal.

2022), applied this reading of the statute to conclude that a limited liability company was not eligible to be a

subchapter V debtor because affiliates of the debtor were “issuers.” One of the affiliates was the sole member of the

debtor, and another affiliate was the sole member of the debtor’s member.

The court ruled that the affiliates were “issuers” under the Securities Exchange Act even though the

securities were not publicly traded. Id. at *3-4. The court ruled that the plain meaning of the statute required the

result and that it was not absurd. Id. at *5

Congress could not have intended this result. The appropriate interpretation of the CARES ACT version of

(B)(iii) would limit its application to an affiliate of an issuer that is subject to the reporting requirements specified in

(B)(ii). See Mark T Power, Joseph Orbach, and Christine Joh, et al, Not so Technical: A Flaw in the CARES Act’s

Correction to “Small Business Debtor, 41-Feb Amer. Bankr. Inst. J 32, 33 (2022) (“It is evident that Congress

intended to exclude from subchapter V eligibility public companies, including affiliates.”).

BTATCA amended (B)(iii) in both § 101(51D) and § 1182(1) to resolve the issue. As the text states,

(B)(iii) excludes an affiliate of a public company rather than an affiliate of an issuer. The amendment thus abrogates

the ruling in In re Phenomenon Marketing & Entertainment, LLC, 2022 WL 1262001 (Bankr. C.D. Cal. 2022).

Analyzing a split of authority on the issue in other contexts, the Serendipity Labs court

ruled that the language of § 101(2)(a) did not limit the meaning of “voting securities” to those

entitled to vote on the matter before the court. The court reasoned that “power to vote” in

§ 101(2)(a) modifies only the holding of securities, not their ownership or control. Because the

public company owned more than 20 percent of the debtor’s voting securities, it was an affiliate.

Accordingly, the debtor, as an affiliate of an issuer, was ineligible for subchapter V. 620 B.R. at

685.

IV. The Subchapter V Trustee

A. Appointment of Subchapter V Trustee

Subchapter V provides for a trustee in all cases.

The trustee is a standing trustee, if the

U.S. Trustee has appointed one, or a disinterested person that the U.S. Trustee appoints. SBRA

§ 4(b) amends 28 U.S.C. § 586 to make its provisions for the appointment of standing chapter 12

and 13 trustees applicable to the appointment of standing sub V trustees. The court has no role

in the appointment of the trustee.

The United States Trustee Program has selected a pool of persons who may be appointed

on a case-by-case basis in sub V cases rather than appointing standing trustees.

The

appointment of a sub V trustee in each case instead of a standing trustee appears to be contrary to

the expectations of proponents of the SBRA. In his testimony in support of the legislation on

behalf of the National Bankruptcy Conference, retired bankruptcy judge A. Thomas Small stated,

§ 1183(a). SBRA § 4(a)(3) amends § 322(a) to provide for a sub V trustee to qualify by filing a bond in the same

manner as other trustees.

§ 1181(a). Section 1104, which governs the appointment of a trustee in a traditional chapter 11 case, does not

apply in sub V cases. In a sub V case, the U.S. Trustee’s appointment of the trustee is not subject to the court’s

approval as it is under § 1104(d).

See Adam D. Herring and Walter Theus, New Laws, New Duties; USTP’s Implementation of the HAVEN Act and

the SBRA, 38 A

MER. BANKR. INST. J. 12 (Oct. 2019).

“There will be a standing trustee in every subchapter V case who will perform duties similar to

those performed by a chapter 12 or chapter 13 trustee.”

The trustee must be a “disinterested person. § 1183(a). Section 101(14) defines a

disinterested person as a person that, among other things, “does not have an interest materially

adverse to the interest of the estate or of any class of creditors or eq uity security holders, by

reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for

any other reason.” § 101(14)(C).

In In re 218 Jackson LLC, 631 B.R. 937 (Bankr. M.D. Fla. 2021), the court ruled that the

sub V trustee was not a disinterested person because he was not impartial. The trustee

represented a creditor in a chapter 11 bankruptcy case in which the principals of the debtor were

the same as those in the case before it. The trustee’s representation of the creditor included

representation in a state court lawsuit against the principals.

Noting that a unique duty of a sub V trustee is the facilitation of a consensual plan (see

Section IV(B)(1)), the court concluded that a sub V trustee must be independent and impartial.

Id. at 948. The court observed that the trustee had been “openly and actively adverse” to the

debtor and that time records showed “no time trying to bring the parties together or encouraging

a consensual plan of reorganization.” Id.

On the facts before it, the court determined that cause existed to remove the trustee under

§ 324 because the trustee was not independent and impartial and had an interest materially

adverse to the debtor’s principals. Id. at 949. Because, due to the conflict, the trustee’s fees

were not reasonable or necessary, the court denied the request for compensation.

Hearing on Oversight of Bankruptcy Law & Legislative Proposals Before the Subcomm. On Antitrust,

Commercial and Admin. Law of the H. Comm. On the Judiciary, 116th Cong. 2 (Revised Testimony of A. Thomas

Small on Behalf of the National Bankruptcy Conference), available at

https://www.fjc.gov/sites/default/files/REVISED_TESTIMONY_OF_A_THOMAS_SMALL.pdf.

B. Role and Duties of the Subchapter V Trustee

The role of the sub V trustee is similar to that of the trustee in a chapter 12 or 13 case.

But as later text discusses, a sub V trustee has the specific duty to “facilitate the development of

a consensual plan of reorganization.” §1183(b)(7). Sub V trustees may, therefore, confront

issues that are quite different from those that trustees in other cases deal with.

100

Section 1183 enumerates the trustee’s duties. Section 1106, which specifies the duties of

the trustee in a traditional chapter 11 case, does not apply in sub V cases.

101

§1183, however,

makes many of its provisions applicable in some circumstances. As in chapter 12 and 13 cases,

the debtor remains in possession of assets and operates the business. If the court removes the

debtor as debtor in possession under §1185(a), the trustee operates the business of the debtor.

102

For a general discussion of a subchapter V trustee’s role and duties, see In re 218 Jackson

LLC, 631 B.R. 937, 946-48 (Bankr. M.D. Fla. 2021).

1. Trustee’s duties to supervise and monitor the case and to facilitate

confirmation of a consensual plan

In general, the role of the trustee is to supervise and monitor the case and to participate in

the development and confirmation of a plan.

103

Because the subchapter V trustee is a fair and

100

The United States Trustee Program has promulgated its expectations with regard to the duties of the sub V trustee

and the trustee’s role in the case. U.S.

DEP’T OF JUSTICE, HANDBOOK FOR SMALL BUSINESS CHAPTER 11

SUBCHAPTER V TRUSTEES (Feb. 2020), https://www.justice.gov/ust/private-trustee-handbooks-reference-

materials/chapter-11-subchapter-v-handbooks-reference-materials [hereinafter SUBCHAPTER V TRUSTEE

HANDBOOK]. For a discussion of the sub V trustee’s duties and role in the case, and strategic considerations for

creditors, see Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors Under

the Small Business Reorganization Act, 28

AMER. BANKR. INST. L. REV. 251, 260-62, 267-71 (2020).

101

§ 1181(a).

102

§ 1183(b)(5).

103

The SUBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 1-1, provides an overview of the sub V trustee’s

duties:

In general, among the most important subchapter V trustee duties are assessing the financial viability of the

small business debtor, facilitating a consensual plan of reorganization, and helping ensure that the debtor

files or submits complete and accurate financial reports. The subchapter V trustee also may be required to

act as a disbursing agent for the debtor’s payments under the confirmed plan of reorganization. In certain

impartial fiduciary with monitoring and supervisory duties and the duty to facilitate a consensual

plan, courts are likely to request that the subchapter V advise the court of the trustee’s positions

and recommendations concerning issues affecting administration of the case.

104

The sub V

trustee’s role arises from several provisions that are the same as those in chapter 12 cases, with

some significant additions.

First, the sub V trustee has the duty to “facilitate the development of a consensual plan of

reorganization.”

105

No other trustee has this duty, although a chapter 13 trustee has the duty to

“advise, other than on legal matters, and assist the debtor in performance under the plan.”

106

One practitioner has suggested that the sub V trustee should be a “financial wizard” who can

work with all parties on cash flows, interest rates, payment requirements, and “all the numbers

puzzles that comprise a plan,” and that the statutory goal of a consensual plan suggests that the

trustee also fill a mediation role.

107

The United States Trustee Program expects sub V trustees to

be proactive in the plan process.

108

instances, the subchapter V trustee may be required to administer property of the debtor’s bankruptcy estate

for the benefit of creditors.

The Handbook notes, “The subchapter V trustee is an independent third party and a fiduciary who must be

fair and impartial to all parties in the case.” Id. at 2-2. For a summary of the U.S. Trustee Program’s views of the

sub V trustee’s duties, see id. at 1-5 to 1-7.

104

E.g., In re Major Model Management, Inc., 2022 WL 2203143 at *16 (Bankr. S.D.N.Y. 2022) (Requesting sub V

trustee’s views concerning whether class proof of claim should be permitted and agreeing that claims allowance

process was the better approach).

105

§ 1183(b)(7).

106

§ 1302(b)(4).

107

Donald L. Swanson, SBRA: Frequently Asked Questions and Some Answers, 38 AMER. BANKR. INST. J. 8 (Nov.

2019). See also Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors

Under the Small Business Reorganization Act, 28

AMER. BANKR. INST. L. REV. 251, 261 (2020) (“Trustees seem

likely to play the role of mediator.”).

108

The SUBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 3-9, states:

As soon as possible, the trustee should begin discussions with the debtor and principal creditors about the

plan the debtor will propose, and the trustee should encourage communication between all parties in

interest as the plan is developed. The trustee should be proactive in communicating with the debtor and

debtor’s counsel and with creditors, and in promoting and facilitating plan negotiations. Depending upon

Second, the trustee must appear and be heard at the status conference that §1188(a)

requires.

109

Although § 105(d) (which does not apply in a sub V case under §1181(a)) provides

for a status conference in any case on the court’s own motion or on the request of a party in

interest, it does not require one. Thus, a status conference is not required in any other type of

case. Section VI(C) discusses the status conference.

Finally, the trustee must appear and be heard at any hearing concerning: (1) the value of

property subject to a lien; (2) confirmation of the plan; (3) modification of the plan after

confirmation; and (4) the sale of property of the estate.

110

The trustee’s duty to appear and be

heard regarding confirmation gives the trustee standing to object to confirmation.

111

The responsibility of the sub V trustee to participate in the plan process and to be heard

on plan and other matters implies a right to obtain information about the debtor’s property,

business, and financial condition.

112

Like a chapter 12 trustee, however, a sub V trustee does not

have the duty to investigate the financial affairs of the debtor. Section 704(a)(4) imposes such a

duty on a chapter 7 trustee, and it is a duty of a chapter 13 trustee under § 1302(b)(1). A trustee

in a traditional chapter 11 case has a broad duty of investigation under § 1106(a)(3) unless the

court orders otherwise.

the circumstances, the trustee also may participate in the plan negotiations between the debtor and creditors

and should carefully review the plan and any plan amendments that are filed.

When the plan is filed, the Handbook advises the sub V trustee to “review the plan and communicate any concerns

to the debtor about the plan prior to the confirmation hearing.” Id.

109

§ 1183(b)(3). See SUBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 3-8 (“The trustee should review the

debtor’s report carefully. . .” and “should be prepared to discuss the debtor’s report, to respond to any questions by

the court, and to discuss any other related matters that may be raised at the status conference.”).

110

§ 1183(b)(3). A chapter 12 trustee must also appear at hearings on all of these matters. § 1202(b)(3). A chapter

13 trustee must appear and be heard on all of them except the sale of property of the estate. § 1302(B)(2).

111

In re Topp’s Mechanical, Inc., 2021 WL 5496560 at *1 n.1 (Bankr. D. Neb. 2021)

112

In re Ozcelebi, 2022 WL 990283 at * 8 (Bankr. S.D. Tex. 2022) (“The responsibility of the subchapter V trustee

to participate in the plan process and to be heard on the plan and other matters cloaks the subchapter V trustee with

the statutory right to obtain information about the debtor’s property, business, and financial condition.”).

The court may impose the investigative duties that § 1106(a)(3) specifies for a chapter 11

trustee in a traditional case on the sub V trustee. Under §1183(b)(2), the court (for cause and on

request of a party in interest, the sub V trustee, or the U.S. Trustee) may order that the sub V

trustee perform certain duties of a chapter 11 trustee under § 1106(a).

The specified duties are: (1) to investigate the acts, conduct, assets, liabilities, and

financial condition of the debtor, the operation of the debtor’s business, the desirability of its

continuance, and any other matter relevant to the case of formulation of a plan (§ 1106(a)(3)); (2)

to file a statement of the investigation, including any fact ascertained pertaining to fraud,

dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the

affairs of the debtor or to a cause of action available to the estate, and to transmit a copy or

summary of it to entities that the court directs (§ 1106(a)(4)

113

); and (3) to file postconfirmation

reports as the court directs (§ 1106(a)(7)).

114

The same procedures apply to a chapter 12

trustee’s duty to investigate under § 1202(b)(2).

In In re 218 Jackson LLC, 631 B.R. 937, 947 (Bankr. M.D. Fla. 2021), the court observed

that, given (1) the trustee’s duty to facilitate a consensual plan, (2) the fact that the debtor

remains in possession of estate property, and (3) the absence of a requirement that the trustee

investigate the financial affairs of the debtor unless the court orders otherwise, “It is not a stretch

then to conclude that the subchapter V trustee’s role was intentionally designed to be less

adversarial.”

113

Section 1106(a)(4)(B) directs a chapter 11 trustee to transmit the copy or summary to any creditors’ committee,

equity security holders’ committee, and indenture trustee. Committees do not exist in a small business case unless

the court orders otherwise under § 1102(a)(3) as amended, and a small business debtor is unlikely to have an

indenture trustee as a creditor.

114

§ 1183(b)(2). In In re AJEM Hospitality, LLC, 2020 WL 3125276 (M.D.N.C. 2020), the court on motion of the

bankruptcy administrator, and with the consent of the debtor and sub V trustee, authorized the trustee to conduct an

investigation limited to the investigation of potential intercompany claims. The court noted, “The language of

[§ 1106(a)(3)] specifically allows the Court to limit the scope of an investigation ‘to the extent that the court

orders . . . .’” Id. at *2.

Nevertheless, the trustee’s monitoring and supervisory responsibilities include oversight

of the debtor’s compliance with the Bankruptcy Code.

115

Thus, when circumstances in the case

raise significant questions such as the debtor’s true financial condition, what property is property

of the estate, the debtor’s management of the estate as debtor-in-possession, and the accuracy

and completeness of the debtor’s disclosures and reports, a court may expect parties who have

identified potential issues – including creditors, the U.S. Trustee, or the subchapter V trustee – to

request an order under § 1183(b)(2) requiring the trustee to investigate the acts, conduct, assets,

liabilities, and financial condition of the debtor, as well as other matters relevant to the case or

formulation of a plan.

116

2. Other duties of the trustee

Like chapter 12 and 13 trustees under §§ 1201(b)(1) and 1302(b)(1),

117

a sub V trustee

under §1183(b)(1) has the duties of a trustee under § 704(a): (1) to be accountable for all

property received (§ 704(a)(2)); (2) to examine proofs of claim and object to allowance of any

claim that is improper, if a purpose would be served (§ 704(a)(5)); (3) to oppose the discharge of

the debtor, if advisable (§ 704(a)(6)); (4) to furnish information concerning the estate and the

estate’s administration that a party in interest requests, unless the court orders otherwise

(§ 704(a)(7)); and (5) to make a final report and to file it (§ 704(a)(9)).

118

Under §1183(b)(4),

115

See In re Major Model Management, Inc., 2022 WL 2203143 at *16 (Bankr. S.D.N.Y. 2022) (The subchapter V

trustee “has a fiduciary duty to ensure compliance with the Bankruptcy Code.”).

116

In re Ozcelebi, 2022 WL 990283 at * 8 (Bankr. S.D. Tex. 2022).

117

Chapter 12 (§ 1202(b)(1)) and chapter 13 (§ 1302(b)(1)) trustees also have the duty of a chapter 7 trustee under

§ 704(a)(3) to ensure that the debtor performs the debtor’s intentions under § 521(a)(2)(B) to surrender, redeem, or

reaffirm debts secured by property of the estate. The imposition of this duty in chapter 12 and 13 cases is curious in

that § 521(b)(2)(B) applies only in chapter 7 cases. SBRA does not impose this anomalous duty on the sub V

trustee.

118

§ 1183(b)(1).

the sub V trustee also has the same duty as chapter 12 and 13 trustees to ensure that the debtor

commences timely payments under a confirmed plan (§§ 1202(b)(4), 1302(b)(5)).

119

The U.S. Trustee has the duty to monitor and supervise subchapter V cases and

trustees.

120

The U.S. Trustee Program has developed procedures for reporting by sub V trustees

to enable U.S. Trustees to evaluate and monitor their performance.

121

3. Trustee’s duties upon removal of debtor as debtor in possession

Under § 1185(a), the court may remove the debtor as debtor in possession. If the court

does so, the sub V trustee under § 1183(b)(5) has the duties of a trustee specified in paragraphs

(1), (2), and (6) of § 1106.

122

In addition, § 1183(b)(5)(B) authorizes the trustee to operate the

debtor’s business when the debtor is removed from possession.

123

Similar provisions apply in

chapter 12 cases.

124

119

§ 1183(b)(4).

120

28 U.S.C. § 586(a)(3). SBRA § 4(b)(1)(A) amended 28 U.S.C. § 586(a)(3) to include sub V cases within the

types of cases that the U.S. Trustee supervises.

121

SUBCHAPTER V TRUSTEE HANDBOOK, supra note 100, ch. 8. See also U.S. DEP’T OF JUSTICE, 3 UNITED STATES

TRUSTEE PROGRAM POLICY AND PRACTICES MANUAL: CHAPTER 11 CASE ADMINISTRATION (Feb. 2020) §§ 3-17.16,

3-17.16.1, 3.17.1.2, 3.17.16.3, 3.17.16.5, 3.17.16.6,

https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/download.

The S

UBCHAPTER V TRUSTEE HANDBOOK, supra, directs sub V trustees to consult with the U.S. Trustee

before filing an objection to confirmation (id. at 3-9, 3-10, 3-12), objecting to a claim (id. at 3-15), or filing a motion

to dismiss or convert (id. at 3-17).

122

Section 1183(b)(5) also requires the sub V trustee to perform duties specified in § 704(a)(8). The specification of

the duty is duplicative because the § 704(a)(8) duty is one of the duties listed in § 1106(a)(1) that the sub V trustee

must perform.

123

As originally enacted by SBRA, § 1183(b)(5) required that, upon removal of the debtor in possession, the trustee

“perform the duties specified in section 704(a)(8) and paragraphs (1), (2), and (6) of [§ 1106(a)], including operating

the business of the debtor.”

The Bankruptcy Threshold Adjustment and Technical Corrections Act (“BTATAC”), effective June 21,

2022, amended § 1183(b)(5), dividing it into two subparagraphs. Subparagraph (A) retains the requirement that the

trustee perform the duties specified in the enumerated sections of § 1106(a). Subparagraph (B) states that the trustee

is “authorized to operate the business of the debtor,” thus removing operation of the business as a mandatory

requirement. BTATCA § 2(e). The amendment applies in cases commenced on or after March 27, 2020, that were

pending on the effective date. BTATCA § 2(h)(2).

124

The court may remove a chapter 12 debtor from possession under § 1204. Under § 1202(b)(5), the chapter 12

trustee then has the duties of a trustee under § 1106(a)(1), (2), and (6). §§ 1106(a), 1202(b).

Under paragraph (1) of § 1106(a), the trustee must perform the duties of a trustee under

paragraphs (2), (5), (7), (8), (9), (10), (11) and (12) of § 704(a). These duties are: (1) to be

accountable for all property received (§ 704(a)(2)); (2) to examine and object to proofs of claim

if a purpose would be served (§ 704(a)(5)); (3) to furnish information concerning the estate and

its administration as requested by a party in interest, unless the court orders otherwise

(§ 704(a)(7)); (4) to file reports (§ 704(a)(8)); (5) to make a report and file a final account of the

administration of the estate with the court and the U.S. Trustee (§ 704(a)(9)); (6) to provide

required notices with regard to domestic support obligations (§ 704(a)(10)); (7) to perform any

obligations as the administrator of an employee benefit plan (§ 704(a)(11)); and (8) to use

reasonable and best efforts to transfer patients from a health care business that is being closed

(§ 704(a)(12)).

125

Paragraph (2) of § 1106(a) requires the trustee to file any list, schedule, or statement that

§ 521(a)(1) requires if the debtor has not done so. Paragraph (6) requires the trustee to file tax

returns for any year for which the debtor has not filed a tax return.

The trustee’s duties do not, however, include the filing of a plan, which only the debtor

can do under §1189(a). Section V(C) discusses issues arising from the trustee’s lack of authority

to file a plan.

C. Trustee’s Disbursement of Payments to Creditors

1. Disbursement of preconfirmation payments and funds received by the trustee

Paragraphs (a) and (c) of §1194 contain provisions dealing with the trustee’s

disbursement of money prior to confirmation. It is not clear, however, how they can have any

125

§ 1106(a)(1).

operative effect. Nothing in subchapter V requires preconfirmation payments to the trustee or

authorizes the court to require them.

Section 1194(a) states that the trustee shall retain any “payments and funds” received by

the trustee until confirmation or denial of a plan.

126

Although the statute by its terms is not

limited to preconfirmation payments and funds, the paragraph’s direction for their disbursement

based on whether the court confirms a plan or denies confirmation indicates that it deals only

with money the trustee receives prior to confirmation.

If a plan is confirmed, §1194(a) directs the trustee to disburse the funds in accordance

with the plan. If a plan is not confirmed, the trustee must return the payments to the debtor after

deducting administrative expenses allowed under § 503(b), any adequate protection payments,

and any fee owing to the trustee. The provision is effectively the same as the provisions that

govern disbursement of preconfirmation payments in chapter 12 and 13 cases.

127

Provisions for a trustee’s disbursement of preconfirmation funds make sense in a chapter

13 case because a chapter 13 debtor must begin making preconfirmation payments to the trustee,

adequate protection payments to creditors with a purchase-money security interest in personal

property, and postpetition rent to lessors of personal property within 30 days of the filing of the

126

§ 1194(a).

127

§§ 1194(a), 1226(a), 1326(a)(2). The chapter 12 provision, § 1226(a), does not specifically provide for fees of a

trustee who is not a standing trustee and does not permit a deduction for adequate protection payments. The fees of

a non-standing chapter 12 trustee are allowable as an administrative expense and as such are within the scope of the

deduction.

The chapter 13 provision, § 1326(b)(2), does not specifically provide for fees of the chapter 13 trustee. It

does provide for the trustee to deduct adequate protection payments.

A standing chapter 13 trustee collects a percentage fee as the debtor makes payments. 28 U.S.C.

§ 586(e)(2) (2018); see W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13 PRACTICE AND

PROCEDURE § 17:5. Thus, the funds a standing chapter 13 trustee has upon denial of confirmation are net of the

trustee’s fee that has already been paid. A non-standing chapter 13 trustee’s fee is included in the deduction because

it is an administrative expense.

chapter 13 case.

128

If the court denies confirmation in a chapter 13 case, therefore, it is possible

that the chapter 13 trustee will be holding money that the debtor paid.

No such provisions for preconfirmation payments exist in a sub V case. Subchapter V

contains no requirement for the debtor to make preconfirmation payments to the trustee, secured

creditors, or lessors, and nothing in subchapter V authorizes the court to require the debtor to

make preconfirmation payments to the trustee.

Nevertheless, paragraph (c) of §1194 authorizes the court, prior to confirmation and after

notice and a hearing, to authorize the trustee to make payments to provide adequate protection

payments to a holder of a secured claim.

129

But a court can hardly require a sub V trustee to

make adequate protection payments as §1194(c) contemplates if the trustee has no money to

make them.

It is perhaps arguable that the §1194(a) and (c) provisions impliedly authorize the court to

require a debtor to make preconfirmation payments to the trustee, particularly if the court orders

the trustee to make adequate protection payments. But the concept of the sub V debtor

remaining in possession of its assets and operating its business includes the debtor retaining

control of its funds. It is more appropriate (and simpler) for a court to require the debtor, not the

trustee, to make whatever adequate protection or other payments the court orders.

2. Disbursement of plan payments by the trustee

Whether the sub V trustee makes disbursements to creditors under a confirmed plan

depends on the type of confirmation that occurs. Under §1194(b), the trustee makes payments

under a plan confirmed under the cramdown provisions of §1191(b), unless the plan or

128

§ 1326(a).

129

§ 1194(c).

confirmation order provides otherwise.

130

If a consensual plan is confirmed under §1191(a),

however, the trustee’s service terminates under §1183(c) upon “substantial consummation,”

131

and the debtor makes plan payments.

132

Part IX discusses payments under the plan.

D. Termination of Service of the Trustee and Reappointment

1. Termination of service of the trustee

When termination of the trustee’s service occurs depends on whether the court confirms a

consensual plan under §1191(a) or confirms a plan that one or more impaired classes of creditors

have not accepted under the cramdown provisions of §1191(b).

When the court confirms a consensual plan under §1191(a), the trustee’s service

terminates upon substantial consummation,

133

which ordinarily occurs when distribution

commences.

134

Confirmation of a plan under the cramdown provisions of §1191(b) does not

terminate the trustee’s service. As just discussed, the trustee continues to serve and makes

payments under the plan as §1194 requires.

Part IX further discusses these provisions.

Termination of the service of the sub V trustee also occurs, of course, upon dismissal of

the case or its conversion to another chapter.

135

130

§1194(b).

131

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

132

§ 1191(a).

133

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

134

§ 1183(c). Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation

modification of a consensual plan.

135

Section 701(a) directs the U.S. Trustee to appoint an interim trustee promptly after entry of an order for relief

under chapter 7. In a converted case, the U.S. Trustee may appoint the trustee serving in the case immediately

before entry of the order for relief.

Sections 1202 and 1302 provide for a standing trustee to serve in cases under those chapters, if one has

been appointed, or for the U.S. Trustee to appoint a disinterested person to serve as trustee.

2. Reappointment of trustee

Section 1183(c)(1) provides for the reappointment of a trustee after termination of the

trustee’s service in two circumstances.

First, §1183(c)(1) permits reappointment of the trustee if necessary to permit the trustee

to perform the trustee’s duty under §1183(b)(3)(C) to appear and be heard at a hearing on

modification of a plan after confirmation.

136

The reason for this provision is unclear.

Cramdown confirmation does not terminate the service of the sub V trustee. Therefore, if

a debtor seeks modification after cramdown confirmation, the trustee is in place, so

reappointment is unnecessary. When confirmation of a consensual plan has occurred, the

trustee’s service terminates upon substantial consummation,

137

after which §1193(b) prohibits

modification. Perhaps the purpose of the reappointment provision is to make sure that someone

appears at the hearing to point this out to the court if a debtor attempts to modify a confirmed

consensual plan after its substantial consummation.

Second, §1183(c) permits reappointment of the trustee if necessary to perform the

trustee’s duties under §1185(a). §1185(a) provides for the removal of the debtor in possession,

among other things, for “failure to perform the obligations of the debtor under a plan confirmed

under this chapter.”

138

Because §1185(a) contemplates the postconfirmation removal of the

debtor in possession, a trustee must be available to take charge of the assets and the business.

Section XII(B) further discusses the postconfirmation removal of the debtor in possession.

136

§ 1183(c)(1).

137

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

138

§ 1185(a).

E. Compensation of Subchapter V Trustee

If the trustee in a sub V case is a standing trustee, the trustee’s fees are a percentage of

payments the trustee makes to creditors under the same provisions that govern compensation of

standing chapter 12 and chapter 13 trustees.

If the sub V trustee is not a standing trustee, the trustee is entitled to fees and

reimbursement of expenses under the provisions of § 330(a), without regard to the limitation in

§ 326(a) on compensation of a chapter 11 trustee based on money the trustee disburses in the

case. As Section IV(E)(2) discusses, some observers expected that technical amendments would

impose a limit on compensation of five percent of payments under the plan, which is the rule for

a non-standing chapter 12 or 13 trustee.

139

Some of them, however, have indicated that it is

unlikely that this will occur in the foreseeable future.

1. Compensation of standing subchapter V trustee

For a standing trustee, amendments to § 326 require compensation under 28 U.S.C.

§ 586.

140

As amended, § 326(a) excludes a subchapter V trustee from its provisions governing

compensation of a chapter 11 trustee, and § 326(b) provides that the court may not allow

compensation of a standing trustee in a subchapter V case under § 330.

Under SBRA’s amendments to 28 U.S.C. § 586(e),

141

the U.S. Trustee Program

establishes the compensation for a standing sub V trustee in the same manner it does for standing

chapter 12 and 13 trustees.

142

Existing provisions of 28 U.S.C. § 586(e) that apply in chapter 12

and 13 cases are extended to cover subchapter V standing trustees. Thus, the standing

139

The observers are bankruptcy judges, lawyers, and professors who have followed and supported enactment of

SBRA with whom the author has discussed the issue.

140

SBRA § 4(a)(4).

141

SBRA § 4(b)(1)(D).

142

28 U.S.C. § 586(e).

subchapter V trustee receives a percentage fee (as fixed by the U.S. Trustee Program) from all

payments the trustee disburses under the plan.

If the service of a standing trustee is terminated by dismissal or conversion of the case or

upon substantial consummation

143

of a consensual plan under §1181(a) (as Section IX(A)

discusses, the trustee does not make payments under a consensual plan), new 28 U.S.C.

§ 586(e)(5) provides that the court “shall award compensation to the trustee consistent with the

services performed by the trustee and the limits on the compensation of the trustee established

pursuant to [28 U.S.C. § 586(e)(1)].”

144

The limits require reference to the standing trustee’s

maximum annual compensation, 28 U.S.C. § 586(e)(1)(A), and to the maximum percentage fee,

28 U.S.C. § 586(e)(1)(B).

2. Compensation of non-standing subchapter V trustee

Questions have arisen concerning the provisions of the new statute for compensation of a

subchapter V trustee who is not a standing trustee.

Section 330(a) permits the court to award compensation to trustees. Sections 326(a) and

(b) impose limits on compensation of trustees. SBRA does not amend § 330(a), but it does

amend §§ 326(a) and (b). Under a “plain meaning” interpretation of these provisions as

amended, a non-standing sub V trustee is entitled to “reasonable compensation for actual,

necessary services rendered” and “reimbursement for actual, necessary expenses” under

§ 330(a), and §§ 326(a) and (b) do not impose any limits on compensation.

143

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

144

28 U.S.C. § 586(e)(5).

In In re Tri-State Roofing, 2020 WL 7345741 (Bankr. D. Idaho 2020), the court ruled that

§ 326(b) does not prevent an award of compensation to a sub V trustee under § 330(a)(1) and

that it does not place a cap on such compensation.

Some observers who participated in the drafting of SBRA and the legislative process

leading to its enactment attribute this result to a drafting error.

145

The drafters of subchapter V

intended that provisions for compensation of non-standing sub V trustees be the same as those

for non-standing chapter 12 and 13 trustees.

146

Specifically, § 326(b) limits compensation of a non-standing chapter 12 or chapter 13

trustee to “five percent upon all payments under the plan.” Although it appears the drafters

intended this limitation to apply to compensation of sub V trustees, the language of the SBRA

amendments to § 326(b) do not make this limitation applicable to a non-standing sub V

trustee.

147

Observers close to the legislative process expected a technical amendment to resolve

145

See supra note 139.

146

See generally In re Louis, 2022 WL 2055290 at * 11 n. 10 (Bankr. C.D. Ill. 2022) (Noting that the absence of a

cap on compensation may have been a drafting error and but that the United States Trustee Program’s position is

that compensation may be awarded without regard to a cap, the court awarded compensation to the subchapter V

trustee without applying a cap and without deciding the issue in the absence of any objections).

147

A full understanding of the issue requires further elaboration.

Section 330(a) provides for the allowance of compensation to “trustees,” subject to § 326 (and other

sections). SBRA does not amend § 330(a).

SBRA did not change the provisions of subsections (a) and (b) of § 326(a) with regard to compensation of

trustees other than sub V trustees. Thus, § 326(a) limits the compensation of a chapter 11 (and chapter 7) trustee to

a percentage of moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor.

Section 326(b) deals with compensation of trustees in chapter 12 and 13 cases in two ways. First, it

provides that a standing chapter 12 or 13 trustee is not entitled to compensation under § 330(a); instead, a standing

chapter 12 or 13 trustee receives compensation, and collects percentage fees, under 28 U.S.C. § 586(e). Second,

§ 326(b) limits the compensation of a non-standing chapter 12 or 13 trustee to “five percent upon all payments under

the plan.” § 326(b). The exact language of § 326(b) is that the limitation applies to a “trustee appointed under

section 1202(a) or 1302(a) of this title.” Id.

Generally, then, pre-SBRA § 326(a) dealt with chapter 7 and 11 cases and § 326(b) dealt with chapter 12

and 13 trustees. Without an amendment, a sub V trustee would be a chapter 11 trustee, and § 326(a) would apply.

Similarly, unamended §326(b) would not apply because it is for chapter 12 and 13 cases.

SBRA § 4(a)(4)(A) amended § 326(a) by excluding sub V trustees from its application. SBRA § 4(a)(4)(B)

amended § 326(b) to prohibit a standing sub V trustee from receiving compensation under § 330. SBRA’s

amendments to 28 U.S.C. § 586(e) provide for compensation of a standing sub V trustee under its provisions, so the

same provisions that govern compensation of standing chapter 12 and 13 trustees apply. SBRA § 4(b)(1).

this issue by making the five percent limitation also applicable to sub V trustees.

148

Technical

corrections in the CARES Act, however, did not address this issue.

149

Some of the observers

have indicated that it is unlikely that this will occur in the foreseeable future.

Although SBRA addresses compensation of a standing trustee upon conversion or

dismissal of a sub V case prior to confirmation in its amendment of 28 U.S.C. § 586(e)(5), it

does not address allowance or payment of compensation of a non-standing trustee in those

circumstances.

If the case is converted, the sub V trustee may file an application for compensation, and

the allowed amount will be entitled to administrative expense priority under § 503(b)(1), subject

in priority to administrative expenses in the chapter 7 case. § 726(b).

Dismissal of the case raises the prospects that the sub V trustee may find the

compensation disputed if the trustee seeks payment under applicable nonbankruptcy law and that

the trustee will not be paid, given the debtor’s distressed financial circumstances.

What the SBRA amendments did not do was add “§ 1183” (the new subchapter V section that calls for the

appointment of a sub V trustee) before “§ 1202(a) and 1302(a)” (the sections under which chapter 12 and 13 trustees

are appointed) in the language quoted above. Without this insertion, amended § 326(b) does not limit the

compensation of a non-standing sub V trustee. As the next footnote discusses, one reading of amended § 326(b) is

that nothing authorizes compensation of a non-standing sub-V trustee.

148

Such an amendment would also clarify that a non-standing trustee is entitled to compensation. As amended,

§ 326(b) applies to cases under subchapter V, chapter 12, and chapter 13. Before and after the amendment, § 326(b)

states that the court “may allow reasonable compensation under section 330 of this title to a trustee appointed under

section 1202(a) or 1302(a) of this title,” but it does not state that the court may allow compensation under § 330 of a

trustee appointed under § 1183. § 326(b). Because § 330(a) is subject to § 326, and § 326(b) does not provide for

compensation of a non-standing sub V trustee, it may be arguable that a sub V trustee is not entitled to

compensation. The position of the United States Trustee Program is, “Case-by-case trustees are compensated

through § 330(a)(1) which allows for ‘reasonable compensation for actual, necessary services rendered by the

trustee . . . and by any paraprofessional person employed by such person.’” S

UBCHAPTER V TRUSTEE HANDBOOK,

supra note 100, at 3-21.

149

The technical corrections in the CARES Act involved the exclusion of public companies from the definition of a

small business debtor and unclaimed funds in subchapter V cases. CARES Act § 1113(a)(4).

A trustee may seek to avoid the former issue by filing an application for compensation in

response to a motion to dismiss and requesting that the court rule on it, preferably before

dismissal of the case.

Allowance of an administrative expense claim in a dismissed case, however, may still

leave the sub V trustee without compensation. In allowing compensation to the sub V trustee

after dismissal of the case, the court in In re Tri-State Roofing, 2020 WL 7345741 at *1, n. 1

(Bankr. D. Idaho 2020), observed, “[A]dministrative expense claims are not monetary judgments

but rather entitle the claimant to receive a distribution from the bankruptcy estate. If there are no

funds currently held by the Trustee, it is difficult to understand how this claim would be paid.”

(Citation omitted).

A potential solution to all of these problems is to request that the court condition

dismissal on allowance and payment of the trustee’s compensation.

In re Slidebelts, Inc., 2020 WL 3816290 (Bankr. E.D. Cal. 2020), supports this

proposition. There, the debtor in a traditional chapter 11 case sought its dismissal for the

purpose of obtaining a loan under the Paycheck Protection Funding Program of the CARES Act

of the case and then re-filing a case under subchapter V. Professionals employed by the

committee of unsecured creditors requested that the court condition dismissal on allowance and

payment of their fees.

The court observed that § 349(b)(3) ordinarily revests the property of the estate in the

debtor, but that, as the Supreme Court recognized in Czyzewski v. Jevic Holding Corp., 137 S.Ct.

973, 979 (2017), the court may order otherwise “for cause.” The court reasoned that committee

professionals had rendered services in reliance on provisions of the Bankruptcy Code for

payment of their compensation in the case. This reliance, the court concluded, constituted

“cause” under § 349(b) for conditioning dismissal on allowance and payment of the committee

professionals. Id. at * 3.

In In re Hunts Point Enterprises, LLC, 2021 WL 1536389 (Bankr. E.D.N.Y. 2021), a

debtor requested dismissal of its case after a creditor filed a motion to disallow its sub V election

or, alternatively, to dismiss the case. Because the case revolved around a two-party dispute and

the debtor’s request for dismissal demonstrated that it no longer wanted to file a plan of

reorganization, the court concluded that cause existed for dismissal of the case, conditioned on

the debtor’s payment of the sub V trustee’s compensation.

In traditional chapter 11 cases, cash collateral or debtor in possession financing orders

often provide for a so-called “carve-out” to provide money to pay professionals employed by the

debtor and the committee of unsecured creditors. It seems appropriate to include the sub V

trustee in any carve-out in a subchapter V case.

Even if the case does not involve cash collateral or debtor in possession financing – or if

the cash collateral or financing order does not provide for a carve-out – it may be advisable for

the sub V trustee, the debtor, or both to request that the court require the debtor to make regular

payments to a fund dedicated to the payment of professional fees.

Judges in the Middle District of Florida have included a provision for interim trustee

compensation in subchapter V cases in an “Order Prescribing Procedures in Chapter 11

Subchapter V Case, Setting Deadline for Filing Plan, and Setting Status Conference.”

150

The

orders require the debtor to pay $ 1,000 as interim compensation to the sub V trustee within 30

days of the petition date and monthly thereafter. The amount is subject to adjustment upon

150

E.g., In re Nostalgia Family Medicine P.A., Case No. 6:21-bk-00274-LVV, Doc. No. 22, at ¶ 3 (Bankr. M.D. Fla.

Mar. 26, 2021).

request of any interested party and to the court’s approval of the trustee’s compensation under

§ 330. The debtor must include the interim compensation in any cash collateral budget.

3. Deferral of non-standing subchapter V trustee’s compensation

A standing sub V trustee receives compensation as a percentage of payments the trustee

makes from funds paid by the debtor under a plan. The percentage fees of a standing trustee are

necessarily deferred until payments are made.

A non-standing trustee’s compensation is allowable as an administrative expense, which

has priority under § 507(a)(2) subject only to claims for domestic support obligations. Under

§ 1129(a)(9)(A), a plan must provide for payment of administrative expenses in full on or before

the effective date of the plan.

151

This requirement applies in subchapter V cases to confirmation

of a consensual plan under §1191(a).

152

Section 1191(e) permits payment of administrative expense claims through the plan if the

court confirms it under the cramdown provisions of §1191(b).

153

Accordingly, a non-standing

sub V trustee faces deferral of payment of compensation for services in the case.

As Section IV(E)(2) discusses, it is possible that a technical amendment to § 326(b) will

impose a limitation on a non-standing trustee’s compensation to five percent of payments under

the plan. If this occurs, a non-standing trustee’s compensation may arguably be limited to five

percent of payments as they are made.

F. Trustee’s Employment of Attorneys and Other Professionals

Section 327(a) permits a bankruptcy trustee to employ attorneys and other professionals

“to represent or assist the trustee in carrying out the trustee’s duties.” SBRA does not modify

151

§ 1129(a)(9)(A).

152

§ 1191(a).

153

§ 1191(e).

this provision for subchapter V cases. If a standing sub V trustee is appointed, the standing

trustee presumably would follow the practice of standing trustees in chapter 12 and 13 cases and

not retain counsel or other professionals except in exceptional circumstances.

A non-standing sub V trustee’s employment of attorneys or other professionals has the

potential to substantially increase the administrative expenses of the case. In view of the intent

of SBRA to streamline and simplify chapter 11 cases for small business debtors and reduce

administrative expenses, courts may be reluctant to permit a sub V trustee to retain attorneys or

other professionals except in unusual circumstances.

154

In this regard, a person serving as a sub

V trustee should have a sufficient understanding of applicable legal principles to perform the

trustee’s monitoring and supervisory duties, and appear and be heard on specified issues, without

the necessity of separate legal advice.

A question exists whether a trustee who is not an attorney may appear and be heard in a

bankruptcy case. Section 1654 of title 28 provides as follows:

In all courts of the United States the parties may plead and conduct their own cases

personally or by counsel as, by the rules of such courts, respectively, are permitted to

manage and conduct causes therein.

155

154

See In re Penland Heating and Air Conditioning, Inc., 2020 WL 3124585 (E.D.N.C. 2020). The court declined to

approve the sub V trustee’s application to approve the employment of the trustee’s law firm, stating, “[A]uthorizing

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 *2. In a footnote, the court

cautioned that “overzealous and ambitious Subchapter V trustees that unnecessary or duplicative services may not

be compensated, and other fees incurred outside of the scope and purpose of the SBRA may not be approved.” Id. at

*2 n. 2.

The S

UBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 3-17 to 3-18, states:

Although the trustee may employ professionals under section 327(a), SBRA is intended to be a quick and

low cost process to enable debtors to confirm consensual plans in a short period with less expense while

returning appropriate dividends to creditors. Therefore, the services required of outside professionals, if

any, will be limited in many cases. This is especially important in cases in which the debtor remains in

possession and the debtor already has employed professionals to perform many of the duties that the trustee

might seek to employ the professionals to perform. See 11 U.S.C. § 1184. The trustee should keep the

statutory purpose of SBRA in mind when carefully considering whether the employment of the

professional is warranted under the specific circumstances of each case.

155

28 U.S.C. § 1654.

The statute applies only to natural persons; it does not permit a corporation or other entity to

appear in federal court except through licensed counsel.

156

Courts have applied the rule to prohibit an individual who serves as the trustee for a trust

or as the personal representative of an estate from representing the trust or estate unless the trust

or estate has no creditors and the individual is the sole beneficiary.

157

Because a bankruptcy

trustee acts as the representative of the estate

158

and creditors have an interest in the estate, the

same rule would appear to require a non-attorney trustee to retain a lawyer in order to appear and

be heard in a bankruptcy court.

In In re McConnell, 2021 WL 203331 at *16-18 (Bankr. N.D. Ga. 2021), however, the

court determined that 28 U.S.C. § 1654 did not apply to require a nonlawyer panel trustee in a

chapter 7 case to retain a lawyer to file an application for the retention of a real estate broker.

The McConnell court reasoned, “The nature of proceedings in bankruptcy courts for the

administration of estate assets in Chapter 7 cases suggests that the rule of 28 U.S.C. § 1654

applicable in a federal lawsuit between discrete parties should not be extended to apply to a

chapter 7 trustee’s filing of routine papers that the Bankruptcy Code and Bankruptcy Rules

require in connection with the sale of property.” Id. at *17. The court observed that, without

discussing § 1654, bankruptcy courts have recognized that a trustee may file papers in a

bankruptcy court without a lawyer in the course of performing the trustee’s duties, such as the

156

E.g., Rowland v. California Men’s Colony, 506 U.S. 194, 202 (1993) (“[T]he lower courts have uniformly held

that 28 U.S.C. § 1654, providing that ‘parties may plead and conduct their own cases personally or by counsel,’

does not allow corporations, partnerships, or associations to appear in federal court otherwise than through a

licensed attorney.”).

157

E.g., J. J. Rissell, Allentown, P.A. Trust v. Marchelos, 976 F. 3d 1233 (11th Cir. 2020) (trust); Guest v. Hansen,

603 F.3d 15 (2d Cir. 2010) (estate); Knoefler v. United Bank of Bismarck, 20 F.3d 347 (8th Cir. 1994) (trust); C.E.

Pope Equity Trust v. United States, 818 F.2d 696 (9th Cir. 1987) (trust).

158

§ 323(a).

filing of applications to retain professionals

159

and routine objections to claims.

160

Id. at *18 &

nn. 59-60.

The nature of reorganization proceedings in bankruptcy courts and the facilitative,

advisory, and monitoring role that subchapter V specifically contemplates for the trustee suggest

that 28 U.S.C. § 1654 likewise should not apply to a nonlawyer subchapter V trustee unless the

trustee is a party to a discrete controversy in an adversary proceeding or contested matter.

In this regard, 28 U.S.C. § 1654 and the case law establishing the rule have their roots in

and 19

century practice in federal courts

161

when the availability of bankruptcy relief was

either nonexistent or short-lived.

162

The statute could not have contemplated a reorganization

case involving many parties and many inter-related moving parts that involve business issues and

often require negotiations and compromise to achieve a successful outcome for all the parties. In

159

The court cited: In re Garcia, 335 B.R. 717, 726 (B.A.P. 9th Cir. 2005); In re Jay, 2018 WL 2176082 at *12

(Bankr. D. Utah 2018), aff'd 2019 WL 4645385 (D. Utah 2019) (“[I]n simple cases, trustees should prepare

applications to employ realtors or accountants as they are seldom contested and routinely granted.”); In re McLean

Wine Co., Inc., 463 B.R. 838. 848-49 (Bankr. E.D. Mich. 2011) (application to employ other professionals is trustee

work); In re Peterson, 566 B.R. 179, 195, 207-08 (Bankr. M.D. Tenn. 2017) (application for employment of

professionals, including accountant and special counsel, is trustee duty). Contra, e.g., In re Yovtcheva, 590 B.R. 307

(Bankr. E.D. Pa. 2018); In re Hambrick, 2012 WL 10739279, at * 5 (Bankr. N.D. Ga. 2012); In re Holub, 129 B.R.

293, 296 (Bankr. M.D. Fla. 1991).

160

The court cited: In re King, 546 B.R. 682, 699 (Bankr. S.D. Tex. 2016) (Routine objection to claim that is

unopposed and does not require legal analysis or a brief falls within trustee's duty); In re Lexington Hearth Lamp

and Leisure, LLC, 402 B.R. 135 (Bankr. M.D.N.C. 2009) (Although the court concluded that compensation is

allowed for services that require a law license, id. at 142, the court ruled that the filing of objections to claims that

require no legal analysis is a trustee duty. Id. at 144-45.) In re Perkins, 244 B.R. 835 (Bankr. D. Montana 2000); In

re Holub, 129 B.R. 293, 296 (Bankr. M.D. Fla. 1991). Contra, e.g., In re Howard Love Pipeline Supply Co., 253

B.R. 790 (Bankr. E.D. Tex. 2000) (“[T]he express duty of the trustee to object to improper claims does not authorize

a non-attorney trustee to engage in the unauthorized practice of law.”).

161

Section 35 of the Judiciary Act of 1789 is the statutory predecessor to 28 U.S.C. § 1654 (2018) and contained

substantially the same language. See United States v. Dougherty, 473 F.2d 1113, 1123 n. 10 (D.C. Cir. 1972).

Section 35 of the Judiciary Act of 1789, 1 Stat. 73, 92 (1789), provided “that in all the courts of the United

States, the parties may plead and manage their own causes personally or by the assistance of such counsel or

attorneys at law as by the rules of the said courts respectively shall be permitted to manage and conduct causes

therein.”

162

See Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AMER. BANKR. INST. L.

REV. 5, 12-23 (1995). See also W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13

PRACTICE AND PROCEDURE § 1:2.

other words, a bankruptcy reorganization is quite different from a lawsuit that involves discrete

parties asserting claims and defenses to establish their rights and obligations.

This distinction is particularly important in a subchapter V case. Specific duties of the

sub V trustee are to facilitate the development of a consensual plan of reorganization,

163

and to

appear and be heard on confirmation and other significant issues that relate to confirmation.

164

The statute makes it clear that the trustee’s primary role is to work with the parties and then to

report to the court, not to engage in litigation with them.

A nonlawyer trustee does not need an attorney to work with the parties on business

issues, to investigate and obtain information about the debtor and its business, to facilitate

confirmation, and to report to the court. When the time comes to report to the court, the trustee

should be permitted to perform the reporting function without a lawyer.

Assuming that the nonlawyer trustee is knowledgeable about reorganization law and

practice (and a sub V trustee who is not knowledgeable should not be a sub V trustee), neither

the debtor, creditors, nor the court need a lawyer to present the trustee’s reports and views to the

court. In short, unless a sub V trustee needs to litigate something, the trustee does not need

counsel. The statute and case law governing federal litigation should not be extended to the

trustee’s appearance in court to report.

The subchapter V trustee’s primary role is analogous to the role of an examiner in a

traditional chapter 11 case,

165

or an expert witness that a court appoints.

166

Such parties provide

163

§ 1183(b)(7).

164

§ 1183(b)(3).

165

§ 1106(b). Although bankruptcy courts often authorize an examiner to employ counsel or other professionals,

§ 327(a) does not provide authority for an examiner to employ a professional person. See generally 5 N

ORTON

BANKRUPTCY LAW AND PRACTICE § 99:29. See also In re W.R. Grace & Co., 285 B.R. 148, 156 (Bankr. D. Del.

2002) (“[T]he basic job of an examiner is to examine, not to act as a protagonist in the proceedings. The Bankruptcy

Code does not authorize the retention by an examiner of attorneys or other professionals.” (citation omitted)).

166

FED. R. EVID. 706.

information to the court and the parties and may do so without counsel. A sub V trustee with

similar advisory duties should similarly be permitted to provide information to the court without

the necessity of having to do so through a lawyer.

167

Finally, the trustee is an officer of the court. The court need not insist that its officer hire

a lawyer to hear what the officer has to say.

If a nonlawyer is the sub V trustee, the trustee’s ability to appear in court without a

lawyer is critical to accomplishment of the objective of subchapter V of providing debtors – and

creditors – with the opportunity to accomplish an expeditious and economic reorganization,

hopefully on a consensual basis. A requirement for employment of counsel adds an additional

layer of expense that should not ordinarily be necessary and that threatens accomplishment of

subchapter V’s primary objective.

168

Moreover, if a nonlawyer trustee must have a lawyer, the

additional expense may as a practical matter preclude the appointment of a nonlawyer trustee.

If a court determines that the rule prohibiting a nonlawyer trustee from appearing in

federal court requires the trustee to retain counsel to be heard, economic considerations may lead

the court to limit the services that will be compensated to those for which a lawyer is legally

required. Non-compensable services might include, for example, work in connection with the

investigation of the debtor and its business or negotiations or development of business

information to facilitate a consensual plan. And because it is the trustee, not the lawyer, who is

to be heard, any written report concerning confirmation and other matters would seem to be the

responsibility of the trustee, not the lawyer.

167

In some jurisdictions, some chapter 7 panel trustees are not lawyers. The author’s informal discussions with

bankruptcy judges indicate that in some courts nonlawyer trustees appear without counsel when the matter does not

require actual litigation.

168

This consideration suggests that a court may invoke § 105(a) to permit a nonlawyer to appear without counsel as

being “necessary or appropriate” to carry out the provisions of the Bankruptcy Code.

V. Debtor as Debtor in Possession and Duties of Debtor

A. Debtor as Debtor in Possession

The debtor, as debtor in possession, remains in possession of assets of the estate.

169

sub V debtor in possession has the rights, powers, and duties of a trustee that a traditional chapter

11 debtor in possession has, including the operation of the debtor’s business.

170

The court may

remove the debtor as debtor in possession under §1185(a). The court may reinstate the debtor in

possession.

171

It is important to note that many of the requirements applicable in a traditional chapter 11

case govern a subchapter V case. The court must approve retention of the debtor’s lawyers and

other professionals

172

and their compensation.

173

The debtor cannot use cash collateral

174

or use,

sell, or lease property outside the ordinary course of business

175

without court approval. The

debtor must comply with guidelines of the U.S. Trustee, including the closing of prepetition bank

accounts and the establishment of new debtor-in-possession accounts. The debtor must file

169

§ 1186(b).

170

§ 1184. Section 1107(a), which provides for the debtor to remain in possession with the rights, powers, and

duties of a trustee, is inapplicable in a sub V case. § 1181(a). Section 1184 replaces § 1107(a) in sub V cases.

171

§ 1185(b).

172

§ 327(a).

173

§ 330(a). See generally In re Rockland Industries, Inc., 2022 WL 451542 (Bankr. D. S.C. 2022) (disallowing

portion of requested fees of attorney for subchapter V debtor). The court commented on the review of applications

for compensation under § 330 in a subchapter V case, id. at *6:

As a threshold matter, the Court emphasizes that the more cost-effective and streamlined approach to

Chapter 11 bankruptcy offered by Subchapter V should not revive “economy of the estate” considerations

that previously existed under the Bankruptcy Act and which have long since been abandoned. To be clear,

the UST does not espouse, or even seemingly favor, an economy-of-the-estate standard. However, any

deviation from the § 330 compensation standard because this is a Subchapter V case is a step on, or toward,

a slippery slope that must be avoided. Professional services rendered in bankruptcy cases are scrutinized for

necessity and reasonableness, and following the testimony of counsel at the Hearing, the Court is satisfied

that this case presents more complexity than originally acknowledged by the UST and that this complexity

should not prevent the Debtor from availing itself of the advantages of the Subchapter V designation. While

the streamlined nature of Subchapter V means that reduced fees is a likely natural consequence, it should

not be a forced result.

174

§ 363(c)(2).

175

§ 363(b).

appropriate “first day motions” to deal with issues such as payment of prepetition wages or other

employee benefits, payment of prepetition taxes, or payment of other prepetition obligations

(such as customer deposits or warranty obligations).

A subchapter V case is subject to dismissal or conversion for cause under § 1112(b)(1)

under the same standards that apply in a traditional chapter 11 case.

176

Thus, failure to take such

actions may constitute cause for dismissal or conversion under § 1112(b)(1).

177

B. Duties of Debtor in Possession

Upon the filing of a voluntary case, a small business debtor must file documents required

of a small business debtor in a non-sub V case under §§ 1116(1)(A) and (B).

178

In a sub V case,

§1116 is inapplicable, but §1187(a) requires the sub V debtor to comply with §§ 1116(1)(A) and

(B) upon making the election.

179

The timing of the election does not change the time for a debtor who qualifies as a small

business debtor to file the required documents. In a voluntary case, it is the date of the filing of

the petition. If a small business debtor makes the election in the petition (as Interim Rule

1020(a) requires), § 1187(a) requires the debtor to file the documents at that time. If the debtor

does not make the election in the petition, § 1116(1) is applicable and requires the debtor to

176

See generally In re Ozcelebi, 2022 WL 990283 (Bankr. S.D. Tex. 2022).

177

E.g., In re MCM Natural Stone, Inc., 2022 WL 1074065 (Bankr. W.D. N.Y. 2022).

178

New. § 1187(a).

179

Section 1116 does not apply in a sub V case, § 1181(a), but § 1187 incorporates all its requirements. In view of

this, it is unclear why SBRA made § 1116 inapplicable in subchapter V cases. Perhaps it is because § 1116 also

applies to a trustee. This statutory scheme is important in the case of a debtor who is not a small business debtor

because its debts exceed $2,725,625 but qualifies for subchapter V because its debts are less than $ 7.5 million.

Because § 1116 applies only in a small business case, it would not apply to such a debtor, but § 1187 requires such a

debtor to comply with its requirements.

append the documents to the petition. In an involuntary case, the debtor must file the documents

within seven days after the order for relief.

180

The timing requirements operate differently in the case of a debtor who is not a small

business debtor because its debts exceed $ 2,725,625. In this situation, § 1116 does not apply

because the case is not a small business case. In a voluntary or involuntary case, §1187(a)

requires the debtor to comply with § 1116 upon making the sub V election, which could occur

after the filing of a voluntary petition or entry of an order for relief in an involuntary case.

The documents that § 1116(1) requires are: the debtor’s most recent balance sheet,

statement of operations, cash-flow statement, and federal income tax return, or a statement under

penalty of perjury that no balance sheet, statement of operations or cash-flow statement has been

prepared and no federal tax return has been filed.

181

SBRA also requires a sub V debtor to file periodic reports under § 308, which continues

to apply in a non-sub V small business case.

182

Section 308(b) requires periodic reports that

must contain information including: (1) the debtor’s profitability; (2) reasonable approximations

of the debtor’s projected case receipts and cash disbursements; (3) comparisons of actual case

receipts and disbursements with projections in earlier reports; (4) whether the debtor is in

180

Section 1116(1) requires a small business debtor in an involuntary case to file the required documents within

seven days after the order for relief. Interim Rule 1020(a) permits a debtor to make the subchapter V election within

14 days after entry of the order for relief in an involuntary case. Section 1187(a) requires compliance with the

requirements of § 1116(1) upon the debtor’s election to be a subchapter V debtor.

Unless and until the debtor makes the election, § 1116 applies. Accordingly, the debtor must comply with

§ 1116(1) and file the required documents within seven days after the order for relief, regardless of when the debtor

makes the election.

181

§ 1116(1).

182

§ 1187(b). Although § 308 applies only in a small business case, § 1187(b) requires all sub V debtors to comply

with it.

Bankruptcy Rule 2015 implements § 308. Interim Bankruptcy Rule 2015(a)(6) provides that the duty to

file periodic reports in a chapter 11 small business case terminates on the effective date of the plan. Interim

Bankruptcy Rule 2015(b) requires a subchapter V debtor to perform the duties prescribed in (a)(6). See In re

Gui-Mer-Fe, Inc., 2022 WL 1216270 at * 6 (Bankr. D. P.R. 2022).

compliance with postpetition requirements of the Bankruptcy Code and the Bankruptcy Rules

and whether the debtor is timely filing tax returns and paying taxes and administrative expenses

when due; and (5) if the debtor has not complied with the foregoing duties, how, when, and at

what cost the debtor intends to remedy any failures.

183

The debtor must also comply with the duties of a debtor in possession in small business

cases specified in § 1116(2) – (7).

184

Thus, the debtor’s senior management personnel and

counsel must: (1) attend meetings scheduled by the court or the U.S. Trustee (including initial

debtor interviews, scheduling conferences, and § 341 meetings, unless waived for extraordinary

and compelling circumstances

185

); (2) timely file all schedules and statements of financial affairs

(unless the court after notice and a hearing grants an extension not to exceed 30 days after the

order for relief, absent extraordinary and compelling circumstances); (3) file all postpetition

financial and other reports required by the Bankruptcy Rules or local rule of the district court;

186

(4) maintain customary and appropriate insurance; (5) timely file required tax returns and other

government filings and pay all taxes entitled to administrative expense priority; and (6) allow the

U.S. trustee to inspect the debtor’s business premises, books, and records.

187

A sub V debtor in possession has the duties of a trustee under § 1106(a), except those

specified in paragraphs (a)(2) (file required lists, schedules, and statements), (a)(3) (conduct

investigations), and (a)(4) (report on investigations).

188

183

§ 308.

184

§ 1187(b).

185

As in non-sub V small business cases, the debtor and counsel must attend the initial debtor interview scheduled

by the U.S. Trustee and must attend the § 341 meeting of creditors, at which the U.S. Trustee presides. See

UBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 3-3, 3-5. The U.S. Trustee expects the sub V trustee to

participate in both. Id.

186

That is not a typo. The statute specifies local rule of the district court.

187

§ 1118.

188

§ 1184.

The duties under § 1106(a)(1) include the duties of a trustee under paragraphs (2), (5),

(7), (8), (9), (10), (11) and (12) of § 704(a).

189

These provisions include duties: to be

accountable for all property received; to examine and object to proofs of claim if a purpose

would be served; to furnish information concerning the estate and its administration as requested

by a party in interest, unless the court orders otherwise; to file reports; to make a report and file a

final account of the administration of the estate with the court and the U.S. Trustee; to provide

required notices with regard to domestic support obligations; to perform any obligations as the

administrator of an employee benefit plan; and to use reasonable and best efforts to transfer

patients from a health care business that is being closed.

Other § 1106(a) duties applicable to the sub V debtor under §1184 are the duties under §

1106(a)(5) through (a)(8): to file a plan;

190

to file tax returns for any year for which the debtor

has not filed a tax return; to file postconfirmation reports as are necessary or as the court orders;

and to provide required notices with regard to any domestic support obligations.

191

Subchapter V does not expressly impose on a sub V debtor the duties to communicate

and cooperate with the sub V trustee and to negotiate with creditors in an effort to obtain

consensual confirmation, but at least one court has noted the debtor’s failure to do so, despite

189

§ 1106(a)(1).

190

The duty under § 1106(a)(5), applicable to the sub V debtor under § 1184, is to “as soon as practicable, file a plan

under section 1121 of this title, file a report of why the trustee will not file a plan, or recommend conversion of the

case to a case under chapter 7, 12, or 13 of this title or dismissal of the case.”

The § 1106(a)(5) language is somewhat problematical in a sub V case. First, § 1121 (dealing with who

may file a plan) does not apply in a sub V case because only the debtor may file a plan. Second, the statutory

deadline of 90 days for the debtor to file a plan, § 1189(b), is inconsistent with the “as soon as practicable” direction

in § 1106(a)(5). § 1106(a)(5).

Nevertheless, the clear import of the statutory scheme is that the sub V debtor has a duty to file a plan.

191

§ 1106(a)(5-8).

encouragement from the court, in connection with dismissal of the case and denial of

confirmation.

192

C. Removal of Debtor in Possession

Section 1185(a) provides for removal of a debtor in possession, for cause, on request of a

party in interest and after notice and hearing.

193

“Cause” includes “fraud, dishonesty,

incompetence, or gross mismanagement of the affairs of the debtor, either before or after the date

of commencement of the case.” This language is identical to § 1104(a),

194

which governs

appointment of a trustee in a traditional chapter 11 case, and to § 1204(a), which provides for

removal of the debtor in possession in a chapter 12 case. Although § 1185(a) does not list the

debtor’s bad faith as a ground for removal of the debtor from possession, the specified grounds

are not exhaustive, and a court may consider it.

195

An incurable conflict of interest between the

debtor’s principal and the estate – such as the possibility of claims against the principal or

affiliates – may also establish cause.

196

192

In re U.S.A. Parts Supply, Cadillac U.S.A. Oldsmobile U.S.A. Limited Partnership, 2021 WL 1679062 at *2 n. 4,

*5 (Bankr. N.D. W. Va. 2021). The court concluded its Memorandum Opinion dismissing the debtor’s case, in

which it also determined that the debtor’s plan was not feasible, as follows, id. at * 5:

The Debtor had ample opportunities as it meandered through this case to negotiate with interested parties

and propose a confirmable plan of reorganization. Specifically, the court encouraged the Debtor to engage

with the Subchapter V Trustee and negotiate with the Creditors. By all accounts, however, the Debtor

lacked motivation in those regards while evading certain of its responsibilities to the bankruptcy estate.

Cause undoubtedly exists to dismiss this case, and the Debtor has been in bankruptcy for over a year

without putting forth a feasible, confirmable plan. The court will therefore enter a separate order dismissing

the Debtor's case.

193

§ 1181(a). Sections 1104 and 1105, which deal with appointment of a trustee and termination of the trustee’s

appointment, are inapplicable in a sub V case.

Section 1104 also permits appointment of a trustee if it is “in the interests of creditors, any equity security

holders, and other interests of the estate.” § 1185(a) does not include this reason as “cause” for removing a debtor in

possession.

Section 1104 also permits the appointment of an examiner. Subchapter V has no provision for appointment

of an examiner. As Section IV(B)(1) notes, the court may authorize a trustee to investigate for cause shown under

§ 1183(b)(2).

194

Section 1104 does not apply in a sub V case. § 1181(a).

195

In re Young, 2021 WL 1191621 at * 6-7 (Bankr. D. N.M. 2021).

196

In re No Rust Rebar, Inc., 2022 WL 1639322 at * 8 (Bankr. S.D. Fla. 2022).

A court may, after notice and a hearing, remove a debtor from possession sua sponte.

197

In In re Neosho Concrete Products Co., 2021 WL 1821444 at * 8 (Bankr. W.D. Mo.

2021), the court found guidance for the standards a court should consider in determining whether

to remove a sub V debtor from possession under § 1185(a) in case law construing the provisions

of § 1104(a) for appointment of a trustee in a traditional chapter 11 case.

198

Applying rulings in § 1104(a) cases, the court concluded that it had discretion to

determine whether “cause” exists to remove a sub V debtor in possession. The court determined

that the party seeking removal of the sub V debtor bears the burden of establishing cause by a

preponderance of the evidence. The court noted, “Because removal of a debtor in possession is

an “extraordinary remedy,’ the movant’s burden is high.” Id. at *8.

199

The court adopted a “flexible” approach to determining whether cause exists for removal

of a sub V debtor from possession and identified the following factors that a court may consider,

among others: (1) the materiality of any misconduct; (2) the debtor’s evenhandedness or lack

thereof in dealing with insiders and affiliated entities in relation to other creditors; (3) the

existence of prepetition avoidable transfers; (4) whether any conflicts of interest on the part of

In situations in which potential disputes between the estate and insiders exist, the debtor should consider

ways to avoid losing possession through effective management of the conflict. This includes transparency and full

and accurate disclosure of information relating to potential claims. If creditors, the subchapter V trustee, or the U.S.

Trustee raise substantial issues about the potential claims, the debtor should consider asking the court, pursuant to

§ 1183(b)(5), to expand the subchapter V trustee’s duties to include duties under § 1106(b)(3) and (4) to investigate

the potential claims and to file a report of the investigation.

If a dispute over claims against insiders cannot be resolved consensually, a potential solution is to provide

in the plan for the subchapter V trustee, or perhaps a creditor, to prosecute potential claims for the benefit of

creditors. Although the provisions of subchapter V do not contemplate that the subchapter V trustee prosecute

claims of the estate, such an approach seems possible under the procedure developed in traditional chapter 11 cases

under which the court authorizes the committee of unsecured creditors or a creditor to pursue claims against insiders

through “derivative standing.”

197

In re Pittner, 2022 WL 348188 (Bankr. E.D. Mass. 2022).

198

Accord, see In re No Rust Rebar, Inc., 2022 WL 1639322 at * 8 n. 48 (Bankr. S.D. Fla. 2022).

199

The court cited Keeley and Grabanski Land Partnership v. Keeley (In re Keeley and Grabanski Land

Partnership), 455 B.R. 153, 162 (B.A.P. 8

Cir. 2011) (construing § 1104).

the debtor are interfering with its ability to fulfill its fiduciary duties; and (5) whether any self-

dealing or squandering of estate assets had occurred. Id. at 8.

200

The court concluded that cause did not exist to remove the debtor from possession

because its principal had “competently managed the estate and adapted to challenges as it

encountered them,” had agreed to reimburse the estate for the value of preferential transfers he

had received, had retained separate counsel, and had prioritized the interests of the debtor above

his own. Id. at 9.

201

Removal of a debtor from possession may be an alternative to dismissal or conversion of

a subchapter V case for cause under § 1112(b)(1).

202

In In re Pittner, 2022 WL 348188 (Bankr.

E.D. Mass. 2022), the debtor, who was in his fifth bankruptcy case and had been in bankruptcy

for ten years, failed to comply with an order of the court that the debtor either file a motion to

retain a real estate broker or a motion under § 363(b) to sell two parcels of real estate. After

concluding that the violation of the order constituted cause to convert or dismiss under

§ 1112(a)(4)(E) and that the debtor had not invoked the exception in § 1112(b)(2) to the

200

The court cited Keeley and Grabanski Land Partnership v. Keeley (In re Keeley and Grabanski Land

Partnership), 455 B.R. 153, 162 (B.A.P. 8

Cir. 2011) (construing § 1104).

201

The court also denied a motion to convert the case to chapter 7.

202

Section 1112(b)(1) requires dismissal or conversion to chapter 7 of a chapter 11 case for “cause,” unless the court

determines that the appointment of a trustee or an examiner under § 1104 is in the best interests of the estate.

Section 1112(b)(2) states an exception if the court “finds and specifically identifies unusual circumstances

establishing that converting or dismissing the case is not in the best interests of creditors and the estate” and the

debtor or another party in interests establishes a reasonable likelihood of confirmation of a plan and that (1) the

grounds for converting or dismissing the case do not include substantial or continuing loss to or diminution of the

estate and the absence of a reasonable likelihood of rehabilitation; (2) a reasonable justification exists for the act or

omission; and (3) the act or omission will be cured within a reasonable period of time fixed by the court.

Because § 1104 does not apply in a subchapter V case, § 1181(a), some courts have stated that § 1112(b)(1)

permits no alternative other than conversion or dismissal if cause exists, unless the exception in § 1112(b)(2)

applies. E.g., In re Ozcelebi, 2022 WL 990283 at * 9 (Bankr. S.D. Tex. 2022); In re MCM Natural Stone, Inc.,

2022 WL 1074065 at * 4 (Bankr. W.D. N.Y. 2022). These courts did not consider removal of the debtor from

possession as an alternative.

requirement of conversion or dismissal for cause, the court considered whether dismissal or

conversion was in the best interest of creditors and the estate. Id. at *3.

203

The court reasoned that dismissal would likely provide no recovery for unsecured

creditors and that dismissal would bring no resolution to the disputes between the debtor and

secured creditors based on the “long, contentious history” between them. It would result, the

court predicted, in the filing of a sixth case. Id. at *3. The court agreed with the subchapter V

trustee that conversion would result in abandonment of the debtor’s principal assets and “would

likely end no differently than a dismissal.” Id.

The court noted that § 1112(b)(1) requires conversion or dismissal for cause “unless the

court determines that the appointment under section 1104(a) of a trustee or an examiner is in the

best interests of creditors and the estate.” Although § 1104(a) does not apply in a subchapter V

case,

204

the court continued, subchapter V contains “its own parallel provision in § 1185(a)’s

authorization for the court to remove a debtor in possession for cause, with a resulting increase

under § 1183(b)(5) in the powers of the subchapter V trustee.” Id. at *3.

The court reasoned, id. at *4:

Removal of a debtor from possession is simply a lesser form of the conversion option. It

is precisely that in every motion to convert or dismiss under § 1112(b)(1), where the

Court is obligated to ask in every instance where cause is shown whether the appointment

of a chapter 11 trustee might better serve the interests of creditors and the estate.

The court ruled that the debtor’s deliberate refusal to obey the court’s order was cause for

removal of the debtor from possession under § 1185(a) and that removal, with the resulting

203

Not surprisingly, the court rejected the debtor’s contention that “moving forward on a purchase and sale

agreement outside of the Court-established deadlines would be a better option” as an appropriate response to the

failure to comply with the order. 2022 WL 348188 at *2.

204

§ 1181(a).

increase in the subchapter V trustee’s powers and duties under § 1183(b)(5), was in the best

interests of creditors and the estate and better served those interests than either conversion or

dismissal. Id.

From a debtor’s standpoint, the removal remedy may be more advantageous than

conversion or dismissal. The debtor retains the exclusive right to file a plan and has the right to

seek reinstatement of possession under § 1185(b). A debtor thus has at least the opportunity of

“repenting” from the conduct that led to the debtor’s ouster and cooperating with the subchapter

V trustee and creditors to achieve a result that benefits everyone more than conversion,

dismissal, or liquidation of assets in the subchapter V case.

Section 1185(a) also provides for removal of the debtor in possession “for failure to

perform the obligations of the debtor” under a confirmed plan, as Sections V(C) and XII(B)

discuss. Sections 1104(a) and 1204(a) do not contain this ground for removal of a debtor in

possession in traditional chapter 11 cases and in chapter 12 cases.

205

Section 1185(b) permits the court to reinstate the debtor in possession on request of a

party in interest and after notice and a hearing.

206

Section 1202(b) contains identical language in

chapter 12 cases, and § 1105 similarly permits the court to terminate the appointment of a

chapter 11 trustee and restore the debtor to possession and management of the estate and

operation of the debtor’s business.

Like §§ 1104(a) and 1204(a), §1185(a) states that the court shall remove the debtor in

possession if a specified ground exists.

207

A potential issue is whether removal of the debtor for

failure to perform under a confirmed plan is mandatory if the failure is not material or if the

205

§ 1185(a).

206

§ 1185(b).

207

§ 1185(a).

debtor has cured or can cure defaults. If a debtor establishes that reinstatement is appropriate at

the same time that removal is sought, a court might find sufficient reason not to remove the

debtor.

If the court removes the debtor in possession, the trustee is authorized to operate the

business of the debtor

208

and has other duties that Section IV(B)(3) discusses.

The removal of a sub V debtor from possession has one significant legal difference from

appointment of a trustee in a traditional chapter 11 case.

In a traditional case, § 1121(c)(1) provides that appointment of a trustee terminates the

debtor’s exclusivity period to file a plan under § 1121(b) and permits the trustee to file a plan.

One of the duties of a trustee in a chapter 11 case under § 1106(a)(5) is to file a plan, to file a

report of why the trustee will not file a plan, or to recommend conversion or dismissal of the

case.

In a subchapter V case, however, § 1121 does not apply, §1181(a), and the debtor thus

remains the only party who can file a plan under §1189(a). Moreover, the duties of a sub V

trustee upon removal of the debtor in possession do not include the duty to file a plan or report or

to recommend conversion or dismissal. §1183(b)(5)

When a sub V trustee after removal of the debtor’s possession thinks that confirmation of

a reorganization plan is possible, therefore, the trustee will have to convince the debtor to file a

satisfactory plan or to amend the petition to eliminate the sub V election so that the case becomes

a traditional chapter 11 case in which the trustee may file a plan.

Unless the debtor files a plan that the court confirms or amends the election, or unless the

court reinstates the debtor’s possession, the case must conclude through either dismissal or

208

§ 1183(b)(5).

conversion. One possibility is for the trustee to liquidate the debtor’s assets and then seek their

distribution through conversion to chapter 7 or a structured dismissal of the case.

209

In re Young, 2021 WL 1191621 at *7 (Bankr. D. N.M. 2021), suggested such an

alternative. There, the court removed the debtor from possession due to gross mismanagement,

bad faith, and dishonesty instead of converting the case on those grounds. The court reasoned

that, because the sub V trustee was familiar with the case and might be able to liquidate the

estate’s assets and make distributions to creditors for a lower fee than a chapter 7 trustee would

charge, removal of the debtor in possession was a better option than conversion. Id. at 7. The

court reserved for a later day the possibility that eventual conversion to chapter 7 might be

necessary.

An eventual consequence of removal of the debtor from possession may be the court’s

revocation of the subchapter V election so that the case proceeds as a traditional chapter 11 case,

with the appointment of a trustee to administer it. In In re National Small Business Alliance,

2022 WL 2347699 (Bankr. D.C. 2022), the court had spent over a year following its removal

from possession trying to confirm a plan. After the court denied the debtor’s fifth attempt, the

court revoked the debtor’s subchapter V election so that the case could proceed as a traditional

209

A so-called “structured dismissal” involves payment of allowed administrative expenses and distributions on

allowed claims, followed by dismissal of the case. See generally, Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973

(2017). The Supreme Court observed in Jevic Holding Corp., id. at 979:

[T]he [Bankruptcy] Code permits the bankruptcy court, “for cause,” to alter a Chapter 11 dismissal's

ordinary restorative consequences. § 349(b). A dismissal that does so (or which has other special conditions

attached) is often referred to as a “structured dismissal,” defined by the American Bankruptcy Institute as a

“hybrid dismissal and confirmation order ... that ... typically dismisses the case while, among other

things, approving certain distributions to creditors, granting certain third-party releases, enjoining

certain conduct by creditors, and not necessarily vacating orders or unwinding transactions

undertaken during the case.” American Bankruptcy Institute Commission To Study the Reform of

Chapter 11, 2012–2014 Final Report and Recommendations 270 (2014).

Although the Code does not expressly mention structured dismissals, they “appear to be increasingly

common.” Ibid., n. 973.

chapter 11 case and directed the appointment of a chapter 11 trustee. The court granted this

relief based on its determination that neither conversion to chapter 7 nor dismissal of the case for

inability to confirm a plan was in the best interest of creditors and the estate.

Although subchapter V does not expressly permit revocation of the election, the court

concluded that “the ability to revoke a Subchapter V election is consistent with the Bankruptcy

Code [and] the Congressional goals of ensuring that Subchapter V cases provide a quicker

reorganization process” and that the revocation option “provides the ability to continue to

attempt to reorganize under the rigors and requirements of standard chapter 11.” Id. at *3. The

court noted that § 105(a) authorized the revocation because it was “consistent with the right of a

debtor to convert the case to another chapter under § 1112(a).” Id.

The court concluded that revocation of the subchapter V election, although not expressly

authorized, is permissible “in appropriate situations and based upon a totality of the

circumstances.” Id. at 3.

Revocation of the election is arguably inconsistent with the right of the debtor to control

its own destiny under the provisions of subchapter V that permit only the debtor to make the

subchapter V election and to file a plan. Nevertheless, the result from the debtor’s standpoint is

no different from conversion to chapter 7, in which the debtor also loses control over its assets

and operation of its business.

When the debtor is removed from possession, a question arises whether the debtor’s

attorney (or any other professional employed by the debtor) is entitled to compensation for

services rendered to the debtor after the removal.

The Supreme Court in Lamie v. United States Trustee, 540 U.S. 526, 124 S. Ct. 1023

(2004), ruled that an attorney for a former chapter 11 debtor in possession who provides services

after conversion to chapter 7 is not entitled to compensation under § 330(a) for postconversion

services because § 330(a) does not authorize compensation for a debtor’s attorney. The same

principle applies when a trustee is appointed in a chapter 11 case, thus removing the debtor as

debtor in possession.

Subchapter V does not address this issue. If the Lamie ruling precludes compensation of

a sub V debtor’s attorney after removal and the debtor cannot find an attorney to provide counsel

without compensation, the debtor will not have a realistic chance of obtaining reinstatement or

filing a plan and may not be able to participate effectively in the case.

VI. Administrative and Procedural Features of Subchapter V

Subchapter V includes several features designed to facilitate the efficient and economical

administration of the case and the prompt confirmation of a plan. This Part discusses: the

elimination of the committee of unsecured creditors (Section VI(A)) and the § 1125(b) disclosure

statement (Section VI(B)), unless the court orders otherwise; the mandatory status conference

(Section VI(C)); the 90-day deadline for the debtor to file a plan (Section VI(D)), unless the

court extends it (Section VI(J)); elimination of U.S. Trustee fees (Section VI(E)); and the

modification of the disinterestedness requirement applicable to the retention of professionals by

the debtor under § 327(a) (Section VI(F)).

This Part also discusses: procedures relating to a creditor’s § 1111(b) election (Section

VI(G)); voting on the plan and confirmation procedures (Section VI(H)); the filing of claims and

the fixing of a bar date for the filing of proofs of claim (Section VI(I)); and the debtor’s

performance of postpetition obligations as lessee under an unexpired lease under § 365(d).

(Section VI(K)).

A. Elimination of Committee of Unsecured Creditors

SBRA amended § 1102(a)(3) to provide that a committee of unsecured creditors will not

be appointed in the case of a small business debtor unless the court for cause orders otherwise.

210

Prior to the amendment, § 1102(a)(3) provided for the U.S. Trustee to appoint a committee in a

small business case unless the court, for cause, ordered that a committee not be appointed.

The same rule applies in a subchapter V case. The provisions of § 1102,

211

which require

the appointment of a committee of unsecured creditors and permit the appointment of other

committees, and of § 1103, which states the powers and duties of committees, do not apply in a

sub V case unless the court orders otherwise. §1181(b).

Although SBRA eliminates the appointment of a committee of unsecured creditors in

both sub V and non-sub V small business cases unless the court orders otherwise, the Interim

Rules did not change the requirement of Bankruptcy Rule 1007(d) that a debtor in a voluntary

chapter 11 case file a list of its 20 largest unsecured creditors, excluding insiders.

The requirement of the list serves two purposes. First, an objection to the debtor’s

designation of itself as a small business debtor or to its election of subchapter V

212

must be

served on the creditors on the Rule 1007(d) list under Interim Rule 1020(c). Second, if the court

directs the appointment of a committee, the list provides the information that the U.S. Trustee

needs to identify the largest unsecured creditors for purposes of selecting committee members

from the holders of the largest claims willing to serve under § 1102(b)(1).

210

SBRA § 4(a)(11).

211

The provisions are paragraphs (1), (2), and (4) of § 1102(a) and § 1102(b).

212

See Section III(A).

B. Elimination of Requirement of Disclosure Statement

Section 1125 regulates postpetition solicitation of acceptances or rejections of a plan. It

requires that creditors receive “adequate information”

213

about the debtor and the plan before

solicitation occurs in the form of a written disclosure statement that the court approves.

214

The

court must hold a hearing on approval of the disclosure statement after at least 28 days’ notice

before solicitation of votes on the plan may occur.

215

In a small business case, § 1125(f)(3) permits the court to conditionally approve a

disclosure statement, subject to objection after notice and hearing,

216

so that solicitation may

occur without prior notice and hearing on the disclosure statement.

217

The hearing on approval

of the disclosure statement may be combined with the hearing on confirmation.

218

In addition,

the court in a small business case may determine that the plan itself provides adequate

information and that a separate disclosure statement is not necessary,

219

and may approve a

disclosure statement submitted on a standard form approved by the court or on Official Form

B425B.

220

In a sub V case, § 1125 is inapplicable unless the court orders otherwise.

221

Thus, the

debtor need not file a disclosure statement in connection with its plan unless the court requires it.

If the court orders that § 1125 apply, the provisions of § 1125(f) apply.

213

Section 1125(a)(1) defines “adequate information” as information that would enable “a hypothetical investor of

the relevant class to make an informed judgment about the plan.” § 1125(a)(1).

214

§ 1125(b).

215

FED. R. BANKR. P. 3017(a).

216

§ 1125(f)(3)(A).

217

§ 1125(f)(3)(B).

218

§ 1125(f)(3)(C).

219

§ 1125(f)(1).

220

§ 1125(f)(2).

221

§ 1181(b).

A sub V debtor’s plan must contain certain information that a disclosure statement

typically contains, including: (1) a brief history of the business operations of the debtor; (2) a

liquidation analysis; and (3) projections with respect to the ability of the debtor to make

payments under the proposed plan of reorganization. §1181(a)(1).

Subchapter V does not require that the plan contain “adequate information,” and it does

not provide for prior judicial review of the required information before solicitation of

acceptances of the plan. Nevertheless, confirmation of a sub V plan requires that a plan comply

with the applicable provisions of § 1129(a),

222

among which are the requirements that a plan

223

and its proponent

224

comply with applicable provisions of chapter 11 and that the plan be

proposed in good faith.

225

These provisions provide the basis for a court to consider whether a

debtor’s plan contains the information that § 1181(a) requires. Material or intentional errors or

omissions could provide a basis for denial of confirmation.

226

C. Required Status Conference and Debtor Report

Section 105(d) permits, but does not require, the court to convene a status conference in a

case under any chapter, on its own motion or on request of a party in interest.

227

Section 105(d)

does not apply in a sub V case.

228

Instead, §1188(a) makes a status conference mandatory and

requires the court to hold it not later than 60 days after the entry of the order for relief in the

case.

229

The court may extend the time for holding the status conference if the need for an

222

§ 1191(a), (b). See Section VIII(A).

223

§ 1129(a)(1).

224

§ 1129(a)(2).

225

§ 1129(a)(3).

226

See generally Ralph Brubaker, The Small Business Reorganization Act of 2019, 39 Bankruptcy Law Letter, no.

10, Oct. 2019, at 10.

227

§ 105(d).

228

§ 1181(a).

229

Section VI(J) discusses the date of the order for relief in a subchapter V case converted from another chapter.

extension is “attributable to circumstances for which the debtor should not justly be held

accountable.”

230

Section VI(J) discusses extension of the deadline. The statutory purpose of the

status conference is “to further the expeditious and economical resolution” of the case.

Not later than 14 days prior to the status conference, the debtor must file, and serve on

the trustee and all parties in interest, a report that “details the efforts the debtor has undertaken

and will undertake to attain a consensual plan of reorganization.”

231

The trustee has the duty to

appear and be heard at the status conference.

232

Subchapter V does not specify any consequences if the status conference does not timely

occur or if the debtor fails to file a report. Courts have noted that the deadline for the status

conference is a deadline for the court, not the debtor, and that a debtor is not in default until the

status conference has been set and the debtor fails to file the report at least 14 days before that

date.

233

A debtor’s unexcused failure to file the report timely or to attend the status conference

could be cause for dismissal or conversion of the case under § 1112(b) or denial of confirmation.

“Cause” for dismissal includes unexcused failure to satisfy timely any filing or reporting

requirement under the Bankruptcy Code, § 1112(b)(4)(F), and the failure to comply with an

order of the court, § 1112(b)(4)(E). Confirmation of a subchapter V plan requires compliance by

the proponent with applicable provisions of the Bankruptcy Code. § 1129(a)(2). Section VI(D)

considers these issues further in the context of a debtor’s failure to file a plan within the 90-day

deadline of §1189(a).

230

§ 1188(b).

231

§ 1188(c).

232

New§ 1183(b)(3).

233

In re Tibbens, 2021 WL 1087260 at * 8 (Bankr. M.D. N.C. 2021); In re Wetter, 620 B.R. 243, 252 (Bankr. W.D.

Va. 2020).

Neither subchapter V nor the Interim Rules specify how the court schedules the status

conference, the agenda for the status conference, or the contents of the debtor’s report. The

practitioner must consult local rules, orders, and procedures to determine how the bankruptcy

judge will address these matters and the judge’s expectations about the report and the status

conference.

234

Some courts include the time for the status conference in the Notice of Chapter 11

Bankruptcy Case that the clerk sends at the outset of the case. Others schedule it in a separate

notice, or include it in a scheduling order, that the clerk or debtor’s counsel mails to parties in

interest.

§1188(a) states only that the purpose of the status conference is “to further the

expeditious and economical resolution” of the subchapter V case, and §1188(c) requires only that

the report detail “the efforts the debtor has undertaken and will undertake to attain a consensual

plan of reorganization.” While some courts are scheduling the status conference without further

direction, others have provided more specific instructions.

For example, a scheduling order for the status conference may remind counsel that senior

management must attend the conference, that the report will be covered, and that the debtor

should be prepared to discuss any anticipated complications in the case (such as adversary

proceedings, discovery, or valuation disputes), the timing of the confirmation hearing and related

procedures and deadlines, and monthly operating reports.

A scheduling order may also outline specific items to be included in the report, which

may include one or more of the following: (1) the efforts the debtor has undertaken or will

234

For example, the New Jersey bankruptcy court has promulgated a mandatory form for the debtor’s report,

http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms

. Bankruptcy courts in the District of Maryland,

https://www.mdb.uscourts.gov/content/local-bankruptcy-forms, and in the Central District of California,

http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms, have published suggested forms.

undertake to obtain a consensual plan of reorganization, as §1188(c) requires; (2) the goals of the

reorganization plan; (3) any complications the debtor anticipates in promptly proposing and

confirming a plan, including any need for discovery, valuation, motion practice, claim

adjudication, or adversary proceeding litigation; (4) a description of the nature of the debtor’s

business or occupation, the primary place of business, the number of locations from which it

operates, and the number of employees or independent contractors it utilizes in its normal

business operations; and the goals of the reorganization plan; (5) any motions the debtor

contemplates filing or expects to file before confirmation; (6) any objections to any claims or

interests the debtor expects to file before confirmation and any potential need to estimate claims

for voting purposes; (7) the estimated time by which the debtor expects to file its plan;

(8) whether the debtor is current on all required tax returns; (9) other matters or issues that the

debtor expects the court will need to address before confirmation or that could have an effect on

the efficient administration of the case.

Regardless of whether the court specifies its requirements with regard to the debtor’s

report or sets an agenda for the scheduling conference, counsel for the parties should anticipate

that the court will be interested in any of these matters that the case involves and that debtor’s

counsel must ultimately address in connection with plan confirmation. Creditors may use the

status conference as an opportunity to obtain information about the financial affairs of the debtor

and to articulate their views and concerns about the debtor’s operations, prospects for a feasible

plan, and other matters.

235

See Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors Under the

Small Business Reorganization Act, 28

AMER. BANKR. INST. L. REV. 251, 256, 272-72, 281 (2020).

D. Time for Filing of Plan

Only the debtor may file a plan.

236

The debtor has a duty to do so.

237

The deadline for the sub V debtor to file the plan is 90 days after the order for relief.

238

The court may extend the deadline if the need for extension is attributable to circumstances for

which the debtor should not justly be held accountable,

239

the same standard that governs

extension of the 90-day deadline to file a chapter 12 plan under § 1221.

240

Section 1193(a)

permits preconfirmation modification of a plan.

241

Section VI(J) discusses extension of the

deadline.

Section 1121(e) requires that a debtor in a small business case file a plan within 300 days

of the filing date,

242

and § 1129(e) requires that confirmation occur within 45 days of the filing

of the plan.

243

These requirements do not apply in a subchapter V case.

244

They continue to

apply in the case of a small business debtor who does not elect subchapter V.

The schedule for the filing of the plan in a sub V case thus differs from the schedule in a

non-sub V small business case in two ways. First, a sub V debtor must file a plan much more

promptly than a non-sub V debtor – 90 days instead of 300.

245

Second, the sub V debtor faces

no deadline for obtaining confirmation after the filing of the plan.

236

§ 1189(a).

237

See supra note 190.

238

§ 1189(b). Section VI(J) discusses the date of the order for relief in a subchapter V case converted from another

chapter.

239

Id.

240

The court in In re Trepetin, 617 B.R. 841, 848-49 (Bankr. D. Md. 2020), found guidance for determining whether

to extend the deadline in a chapter 12 case that addressed the issue under § 1221, In re Gullicksrud, 2016 WL

5496569, at *2 (Bankr. W.D. Wis. 2016).

241

§ 1193(a).

242

§ 1121(e).

243

§ 1129(e).

244

§ 1181(a).

245

Because of the short time to file a plan, counsel for a sub V debtor should promptly request the court to issue a

bar order establishing a deadline for the filing of proofs of claim if the court by local rule or general order has not

fixed a deadline for filing proofs of claim in sub V cases.

Subchapter V does not provide any consequences when a debtor does not timely file a

plan. Under other provisions of chapter 11, however, a debtor’s failure to comply with a plan

deadline subjects the debtor to the risks of dismissal of the case, its conversion to chapter 7, or

denial of confirmation of a plan.

As in all chapter 11 cases, a debtor’s failure to file a plan within the time the Bankruptcy

Code requires (or the court orders) is cause for conversion or dismissal under § 1112(b)(4)(J).

When cause exists, § 1112(b)(1) states that the court, on request of a party in interest, shall

dismiss or convert a chapter 11 case for cause, whichever is in the best interests of creditors and

the estate, unless the court determines that the appointment of a trustee or examiner under § 1104

is in the best interests of the estate. Because § 1104 does not apply in a subchapter V case,

246

§ 1112(b)(1) requires the court to convert or dismiss the case if the debtor does not timely file a

plan upon request of the sub V trustee, a creditor, or other party in interest.

247

Section 1112(b)(2), however, provides an exception to this requirement. It prohibits

dismissal or conversion if: (1) the court “finds and specifically identifies unusual circumstances”

establishing that conversion or dismissal is not in the best interests of creditors; and (2) the

debtor (or other party in interest) satisfies two other requirements, unless the ground for

conversion or dismissal is (1) substantial or (2) continuing loss to or diminution of the estate and

the absence of a reasonable likelihood of rehabilitation.

The first requirement for application of the exception is a reasonable likelihood that a

plan will be confirmed within a reasonable time. § 1112(b)(4)(A). The second is that a

246

§ 1181(a).

247

E.g., In re Online King LLC, 628 B.R. 340, 348 (Bankr. E.D.N.Y. 2021); In re Seven Stars on the Hudson Corp.,

618 B.R. 333, 343 (Bankr. S.D. Fla. 2020); see In re Majestic Gardens Condominium C Association, Inc., 2022 WL

789447 at * 2 (Bankr. S.D. Fla. 2022) (Failure to file plan within deadline generally requires dismissal, but court

allows debtor’s request to amend petition to remove subchapter V election instead of dismissing case).

reasonable justification for the act or omission constituting cause exist and that it be fixed within

a reasonable time fixed by the court. § 1112(b)(4)(B).

Under these provisions, a debtor can overcome a motion for dismissal or conversion

based on failure to timely file a plan by establishing (1) that conversion or dismissal is not in the

best interest of creditors; (2) a reasonable justification for missing the deadline; (3) an ability to

cure the omission (preferably by pointing to a plan already filed or a well-founded motion for an

extension of the time to do so); and (4) the likelihood of confirmation of a plan within a

reasonable time.

248

Confirmation of a subchapter plan requires compliance with §§ 1129(a)(1) and (a)(2).

249

Paragraph (a)(1) requires that the plan comply with the applicable provisions of the Bankruptcy

Code, and paragraph (a)(2) requires that the proponent of the plan comply with the applicable

provisions of the Bankruptcy Code.

In In re Seven Stars on the Hudson Corp., 618 B.R. 333, 343-44 (Bankr. S.D. Fla. 2020),

the court concluded that the failure to comply with the § 1189(a) deadline for the filing of a plan

would preclude confirmation of a plan under §§ 1129(a)(1) and (2). The debtor had elected

application of subchapter V in a case filed before subchapter V’s effective date, and the plan

deadline had already expired. After the court refused to extend the deadline based on the

determination that the election to proceed under subchapter V in these circumstances was within

the debtor’s control, the court dismissed the case because the debtor could not possibly confirm a

plan in view of the default.

250

248

Dismissal is not necessarily fatal for the debtor. Upon dismissal, the debtor can file another subchapter V case.

The provisions of 11 U.S.C. § 362(n) that make the automatic stay inapplicable in a case pending within the

previous two years apply only in a “small business case.”

249

§ 1191(a) (confirmation of a consensual plan); § 1191(b) (cramdown confirmation). See Section VIII(A).

250

Other courts have concluded that the court may extend the deadline for filing a plan (and for the status

conference) in these circumstances. See Part XIII.

The court in In re Tibbens, 2021 WL 1087260 at *6 (Bankr. M.D.N.C. 2021), reached a

contrary conclusion: “Although the failure to timely file a plan constitutes cause for dismissal

under § 1112(b)(4)(J), nothing in the Bankruptcy Code suggests that this failure alone is fatal to

confirmation.”

The Tibbens court noted that the provisions of § 1112(b)(2) that prohibit dismissal or

conversion under the circumstances just discussed apply, among other things, when the debtor

can establish the likelihood of confirmation. Because Congress permitted a debtor to avoid

conversion or dismissal by establishing an ability to confirm a plan, the court reasoned, a failure

to comply with plan-filing deadlines does not prevent confirmation. Tibbens, 2021 WL 1087260

at *6. The court also concluded that legislative history and cases interpreting §§ 1129(a)(1) and

(2) focused on contents of the plan and compliance with disclosure and solicitation requirements,

not matters such as failure to comply with a deadline. Id. at 7.

251

The Tibbens court permitted a debtor to convert a chapter 13 case, filed after enactment

of subchapter V but before its effective date, to chapter 11 after the plan-filing deadline had

expired but declined to extend the deadline because delays the debtor caused in the chapter 13

case and failures to comply with directives of the court were within the debtor’s control and were

circumstances for which the debtor justly should be held accountable. The issue of dismissal or

conversion of the case was not before the court, and the court did not address it.

251

The Tibbens court cited Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988) (§ 1129(a)(1)); In re Multiut

Corp., 449 B.R. 323 (Bankr. N.D. Ill. 2011) (§ 1129(a)(1)); In re Cypresswood Land Partners, I, 409 B.R. 396, 423-

24 (Bankr. S.D. Tex. 2009) (§ 1129(a)(2)) (“Bankruptcy courts limit their inquiry under § 1129(a)(2) to ensuring

that the plan proponent has complied with the solicitation and disclosure requirements of § 1125.”); and 7 C

OLLIER

BANKRUPTCY ¶ 1129.02[1] (§ 1129(a)(1)) (“[T]he courts have recognized that the complexity of plan

confirmation permits notions of ‘harmless error,’ so that technical noncompliance with a provision that does not

significantly affect creditor rights will not block confirmation.”).

100

E. No U.S. Trustee Fees

28 U.S.C. § 1930(a)(6)(A) requires the quarterly payment of U.S. Trustee fees in chapter

11 cases based on disbursements in the case. SBRA amended this subparagraph to except cases

under subchapter V from this requirement.

252

F. Modification of Disinterestedness Requirement for Debtor’s Professionals

Section 327(a) permits employment of professionals by a debtor in possession in a

chapter 11 case only if, among other things, the professional is a “disinterested person.” A

person who holds a claim against the debtor is not a disinterested person under the term’s

definition in § 101(14)(A).

253

A disinterested person cannot not have an interest “materially

adverse to the interest of the estate.”

254

These provisions disqualify an attorney or other professional to whom the debtor owes

money at the time of filing because the professional is a creditor. Moreover, because payment of

amounts owed to the professional prior to filing would in most instances be a voidable

preference under § 547 and result in the professional having a material adverse interest to the

estate in a preference action, the debtor’s professionals must either waive any unpaid fees or

forego representation of the debtor.

New§ 1195 addresses this issue in part. It provides that a person is not disqualified from

employment under § 327(a) solely because the professional holds a prepetition claim of less than

$ 10,000.

255

252

SBRA § 4(b)(3).

253

§ 327(a).

254

§ 101(14)(C).

255

§ 1195.

101

Depending on what the debtor’s plan will propose to pay to unsecured creditors, the

economic impact of the new provision may be limited. An important practical implication is that

debtor’s counsel will no longer have to explain to accountants and other professionals who are

not familiar with bankruptcy practice that they must waive their fees to provide services to the

debtor in the case – something that may be contrary to their standard practice of declining to

provide services if the client fails to pay fees in a timely manner.

G. Time For Secured Creditor to Make § 1111(b) Election

Section 1111(b) permits a secured creditor to make an election under certain

circumstances for allowance or disallowance of its claim the same as if it had recourse against

the debtor on account of such claim, whether or not it has recourse.

256

If the election is made,

the claim is allowed as secured to the extent it is allowed. The election may be made at any time

prior to the conclusion of the hearing on the disclosure statement.

257

Alternatively, if the

disclosure statement is conditionally approved under Bankruptcy Rule 3017.1 and a final hearing

on the disclosure statement is not held, the election must be made within the date fixed for

objections to the disclosure statement under Bankruptcy Rule 3017.1(a)(2) or another date fixed

by the court.

258

Interim Rule 3017 takes account of the fact that subchapter V does not contain a

requirement for a disclosure statement unless the court orders otherwise. It provides that, in a

subchapter V case, the § 1111(b) election may be made not later than a date the court may fix.

259

256

§ 1111(b). For a discussion of strategic considerations for creditors regarding the § 1111(b) election, see

Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small

Business Reorganization Act, 28

AMER. BANKR. INST. L. REV. 25, 275-76 (2020). Section VIII(E) discusses the

operation and effect of the § 1111(b) election and how courts have applied it in subchapter V cases.

257

FED. R. BANKR. P. 3014.

258

FED. R. BANKR. P. 3017.1.

259

INTERIM RULE 3017.

102

Courts have taken varied approaches to scheduling the date for the § 1111(b) election.

Many do not address it unless a party requests it. Others fix the date by reference to the date the

plan is filed (such as 14 or 30 days after the plan’s filing) in a scheduling or other order or notice.

When the court on its own does not set a date and a party anticipates that a creditor will make the

election, the party should request that the court establish a deadline.

If the court does not establish a deadline for making the § 1111(b) election, a creditor

may nevertheless decide to make the election in response to the filing of the debtor’s plan. In In

re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D.N.Y. 2020), the court overruled the

debtor’s objection to the § 1111(b) election in this situation.

The court rejected the debtor’s argument that the creditor had to file the election before

the filing of the plan, concluding that Bankruptcy Rule 3014 provides for the court to set the

deadline. Because no one had asked the court to set a deadline, the court permitted the election,

noting that the creditor had filed it before any actions to solicit votes or any steps in

contemplation of confirmation had occurred. The court also rejected the debtor’s arguments that

the creditor had waived its right to make the election by filing a proof of claim that did not

invoke § 1111(b). Id. at 6.

H. Times For Voting on Plan, Determination of Record Date for Holders of Equity

Securities, Hearing on Confirmation, Transmission of Plan, and Related Notices

Bankruptcy Rule 3017: (1) requires the court to fix the time for holders of claims or

interests to vote to accept or reject a plan on or before approval of the disclosure statement;

(2) provides that the record date for creditors and holders of equity securities is the date that the

order approving the disclosure statement is entered or another date fixed by the court; (3) permits

the court to set the date for the hearing on confirmation in connection with approval of the

disclosure statement; and (4) requires that, upon approval of the disclosure statement, the court

103

must fix the date for transmission of the plan, notice of the time for filing acceptances or

rejections, and notice of the hearing on confirmation.

260

New Interim Rule 3017.2 provides for the court to establish all these times in a

subchapter V case in which the disclosure statement requirements of § 1125 do not apply.

261

I. Filing of Proof of Claim; Bar Date

Bankruptcy Rule 3003 governs the filing of proofs of claim or interest in a chapter 11

case. The Interim Rules made no change in its provisions.

Rule 3003 does not establish a deadline for filing a proof of claim in any chapter 11 case.

Instead, Rule 3003(c) provides that the court “shall fix and may extend the time within which

proofs of claim or interest may be filed.”

Many courts have adopted procedures for fixing the bar date for the filing of proofs of

claim at the outset of a sub V case. Some include the bar date in the Notice of Chapter 11

Bankruptcy Case that the clerk sends. Others establish the deadline in a separate document, such

as a scheduling order or other notice. Lawyers representing creditors in subchapter V cases who

are accustomed to the usual practice in chapter 11 cases – the issuance of a separate bar date

order – must check local practice to make sure that they know the deadline.

Some courts have set the bar date as 70 days after the filing of the petition. This is the

same time that Bankruptcy Rule 3002(c) establishes in chapter 12 and 13 cases. Others have set

the date as 90 days after the § 341(a) meeting of creditors.

An advantage of fixing the bar date as 70 days after the filing date is that it expires before

the deadline under §1189(b) for the debtor to file a plan, which is 90 days after the order for

260

FED. R. BANKR. P. 3017.1.

261

INTERIM RULE 3017.2.

104

relief. If a debtor must know with certainty what the claims in the case are before it can file its

plan, the debtor will need to ask the court to extend the time until the bar date has expired. The

debtor will have to establish that the need for the extension is “attributable to circumstances for

which the debtor should not justly be held accountable” under §1189(b).

The court cannot shorten the time for a governmental unit to file a proof of claim, which

is 180 days after the order for relief under § 502(b)(9). Although it would be helpful for tax

claims to be filed before the debtor files a plan, this should rarely be an obstacle. Most taxes are

self-assessed by the debtor upon filing a return. If the debtor does not know its tax liability, it is

unlikely that the taxing authority does either. A debtor might not be able to accurately calculate

the exact amount of interest and penalties, but it should know the principal amount.

262

In In re Wildwood Villages, LLC, 2021 WL 1784408 (Bankr. M.D. Fla. 2021), plaintiffs

in a state court class action sought to file a proof of claim on behalf of the class under Rule 7023

of the Federal Rules of Civil Procedure in the sub V case. The court explained that most courts

conclude that class proofs of claim are permissible and that the determination of whether to

allow and certify a class claim is within the court’s discretion. Id. at *2 & n. 8 (collecting cases).

The court rejected the debtor’s argument that class claims should not be permitted in subchapter

V cases because it would circumvent Congress’ intent that creditors’ committees should not exist

in them. Instead, the court addressed the issue under the traditional analysis of the exercise of

the court’s discretion. Id. at *4.

262

But see In re Baker, 625 B.R. 27, 37 (Bankr. S.D. Tex. 2020) (The court noted that the expiration of the time for

governmental claims is important because the amount of the claims will affect the drafting of the plan and

consideration of its feasibility; this supported granting the debtor an extension of time to file the plan until the bar

date had passed.).

105

Under those principles, the court declined to allow a class claim. Id. at *4-7. The court

directed the debtor to send a proof of claim form to all of the class members identified in the

motion for allowance of a class claim, with notice of the bar date. Id. at *7.

The court in In re Major Model Management, Inc., 2022 WL 2203143 (Bankr. S.D.N.Y.

2022), also declined to permit the filing of a class proof of claim based on its analysis of factors

that apply in traditional chapter 11 cases.

J. Extension of deadlines for status conference and debtor report and for filing of

plan

Section 1188 requires a status conference within 60 days after entry of the order for relief

and the filing by the debtor of a report that details the efforts the debtor has undertaken and will

undertake to attain a consensual plan of reorganization at least 14 days before the status

conference. Section 1189(b) requires the debtor to file a plan within 90 days after the order for

relief.

Both provisions state that the times run from the date of the order for relief “under this

chapter.” Under this language, if a debtor in a chapter 7 or 13 case seeks to convert the case to

chapter 11 and elect sub V status, it is arguable that the time periods begin on the date of

conversion.

Section 348(a), however, provides that conversion of a case from one chapter to another

“does not effect a change in the date of the . . . order for relief.” Courts have therefore ruled that

the deadlines are measured from the date of the order for relief in the original case.

263

Part XIII

considers extensions of the deadlines in the context of the availability of subchapter V in cases

pending before enactment of subchapter V.

263

In re Tibbens, 2021 WL 1087260 at * 8 (Bankr. M.D. N.C. 2021); In re Trepetin, 617 B.R. 841, 844 (Bankr. D.

Md. 2020).

106

The court may extend the deadlines if the need for an extension is “attributable to

circumstances for which the debtor should not justly be held accountable.” §§ 1188(b), 1189(b).

Courts have noted that the requirement for an extension is more stringent that the “for cause”

standard of Bankruptcy Rule 9006(b), which governs extensions generally, and § 1121(d)(1),

which permits extension of the exclusivity period for the debtor to file and obtain confirmation

of a plan in a traditional chapter 11 case.

264

Sections 1188(b) and 1189(b) use the same language to provide for extension of their

deadlines as § 1221, which governs extension of the 90-day period for the debtor to file a plan in

a chapter 12 case. Courts have, therefore, looked to chapter 12 cases applying § 1221 for

guidance in interpreting the identical language in subchapter V.

265

The court in In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020), noted that courts and

commentators had interpreted § 1221 to permit an extension if the debtor “clearly demonstrates

that the debtor’s inability to file a plan is due to circumstances beyond the debtor’s control.”

266

The court reasoned that it was appropriate to apply a similar standard to requests for extensions

under §§ 1188(b) and 1189(b). Id. at 848-49. Other courts have done the same.

267

264

E.g., In re Online King, LLC, 349 B.R. 340, 349 (Bankr. E.D.N.Y. 2021); In re Northwest Child Development

Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re Seven Stars on the Hudson Corp., 618 B.R.

333, 344 (Bankr. S.D. Fla. 2020).

265

E.g., In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021); In re Baker, 625 B.R. 27, 33 (Bankr. S.D. Tex.

2020); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re

Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020); In re Trepetin, 617 B.R. 841, 847-48

(Bankr. D. Md. 2020).

266

In re Trepetin, 617 B.R. 841, 848 (Bankr. D. Md. 2020) (quotations and punctuation omitted), quoting In re

Gullicksrud, 2016 WL 5496569, at *2 (Bankr. W.D. Wis. 2016) (quoting 7 C

OLLIER ON BANKRUPTCY

¶ 221.012[2]), and also citing In re Marek, 2012 WL 2153648, at *8 (Bankr. D. Idaho 2012), and In re Raylyn AG,

Inc., 72 B.R. 523, 524 (Bankr. S.D. Iowa 1987).

267

E.g., In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021); In re Baker, 625 B.R. 27, 33 (Bankr. S.D. Tex.

2020); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re

Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020).

107

Courts have taken different approaches to the determination of whether circumstances are

“beyond the debtor’s control.” The Trepetin court formulated the inquiry as whether the debtor

is “fairly responsible” for the inability to comply with the deadline.

268

In In re Seven Stars on

the Hudson Corp., 618 B.R. 333, 345 (Bankr. S.D. Fla. 2020), however, the court concluded that

the language asks whether the need for an extension is due to circumstances beyond the debtor’s

control, not whether the debtor was responsible for the inability to meet the deadlines.

Trepetin and Seven Stars involved a debtor’s request to proceed under subchapter V in a

case pending prior to its enactment when the deadlines had already expired. The Trepetin court

concluded that the deadlines could be extended because the debtor was not responsible for the

inability to meet the deadlines that had not previously existed. The Seven Stars court concluded

that the circumstances were entirely within the debtor’s control and that no external factors

beyond the debtor’s control contributed to the inability to meet the deadlines.

In In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021), a chapter 13 debtor, in a

case filed after enactment of subchapter V but a month before its effective date, sought to

convert it to chapter 11 and proceed under subchapter V five months after the effective date. The

court concluded that an extension of the already expired deadline for filing a plan was not

justified under either the Trepetin or Seven Stars approach because of numerous delays in the

chapter 13 case that were within the debtor’s control and for which the debtor should justly be

held accountable. Id. at *9.

In re Keffer, 2021 WL 1523167 (Bankr. S.D. W.Va. 2021), also considered a chapter 13

debtor’s request to convert to chapter 11 and elect sub V after the deadlines for the status

conference and the filing of a plan had expired. The need for chapter 11 relief arose, the court

268

Accord, In re Wetter, 620 B.R. 243 (Bankr. W.D. Va. 2020).

108

explained, after the Internal Revenue Service filed a proof of claim for substantially more than

the debtor anticipated, increasing his liabilities above the chapter 13 debt limit and making the

debtor ineligible for chapter 13.

269

The propriety of conversion, the court explained, turned on whether to extend the

deadlines. Without an extension, the debtor’s chapter 11 case would be subject to dismissal or

conversion to chapter 7 for cause for failure to file a plan timely. Id. at *9.

The Keffer court concluded that Trepetin provided a superior approach to the extension

issue and rejected the Seven Stars view. Id. at *9. Because the debtor had proceeded

appropriately in the chapter 13 case, and because the debtor was not aware of the large amount of

his tax liability until the IRS filed its proof of claim and therefore did not know that chapter 13

would be unavailable, the court ruled that the debtor was not justly accountable for the

circumstances necessitating an extension of the deadlines. Id. at *9. The court directed that the

deadlines run from the date of its order. Id at *10.

The court in In re Baker, 625 B.R. 27 (Bankr. S.D. Tex. 2020), identified four factors to

consider in determining whether to extend the deadline for the filing of a plan: (1) whether the

circumstances raised by the debtor were within the debtor’s control; (2) whether the debtor had

made progress in drafting a plan; (3) whether the deficiencies preventing that draft from being

filed were reasonably related to the identified circumstances; and (4) whether any party-in-

interest had moved to dismiss or convert the case or otherwise objected to a deadline extension in

any way.

269

The court did not address whether chapter 13 eligibility should be determined as of the petition date based on the

debtor’s schedules, which showed that he was eligible. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M.

Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE §§ 12:8.

109

Regardless of the standard for extending the deadlines, the debtor must describe the

circumstances beyond its control and explain why they preclude the timely filing of a plan. For

example, although circumstances such as the Covid-19 pandemic, inclement weather, and the

Jewish holidays may constitute acceptable reasons for an extension, they do not warrant an

extension when the debtor does not demonstrate how they affected the debtor’s ability to meet

the deadline.

270

Circumstances such as the amount of work required to negotiate and propose a

plan and competing demands on the debtors – common to any bankruptcy case – are insufficient

to justify an extension.

271

Similarly, an error in calendaring the deadline for filing a plan may

not provide a basis for an extension.

272

The need to resolve disputes concerning the debtor’s interests in property before filing a

plan may justify extending the deadline,

273

but not if the debtor has failed to show that the

dispute could not have been resolved prior to the deadline, what progress the debtor has made

proposing a plan, and that its resolution is essential to the plan, even in the absence of any

objection to the extension.

274

270

In re Online King, LLC, 629 B.R. 340, 351-52 (Bankr. E.D. Tex. 2021) (pandemic and Jewish holidays); In re

Northwest Child Development Centers, Inc., 2020 WL 8813586 at *2 (Bankr. M.D. N.C. 2020) (pandemic and

inclement weather preventing inspection of business premises for appraisal).

271

In re Online King, LLC, 629 B.R. 340, 351 (Bankr. E.D. Tex. 2021).

272

In re Majestic Gardens Condominium Association, Inc., 2022 WL 789447 (Bankr. S.D. Fla. 2022). The court

declined to extend the deadline even though the debtor’s lawyer filed the plan three days after expiration of the

deadline. The court noted that the standard for extension of the plan filing deadline is more stringent than the

“excusable neglect” standard of Bankruptcy Rule 9006(b)(1) for extending a deadline after its expiration.

The court allowed the debtor to amend the petition to remove the subchapter V election instead of

dismissing the case. It is unclear what dismissal would accomplish in this situation: the debtor could simply re-file

another case and promptly file the plan in the new one.

273

In re HBL SNF, LLC, 635 B.R. 725 (Bankr. S.D.N.Y. 2022). The court granted an extension of 60 days rather

than 90 as the debtor requested. The court reasoned that the 60-day extension would extend the deadline beyond the

date of a scheduled hearing on a motion for summary judgment in an adversary proceeding regarding the debtor’s

lease of its facility and that the court at that time could assess the status of the case and rule on a further extension

request, if necessary. The court observed that its “wait and see” approach is “sometimes used by bankruptcy courts

when confronted with contested requests for an extension of a debtor’s exclusivity period under Section 1121(d) in a

traditional Chapter 11 case.” Id. at 731.

274

In re Excellence 2000, Inc., 2022 WL 163400 (Bankr. S.D. Tex. 2022).

110

The court may grant an extension even if the deadline has expired at the time the debtor

requests it.

275

Nevertheless, the better practice is for the debtor to file a motion for an extension

in time to permit the court to schedule a hearing on it before the deadline terminates because the

failure to timely file a plan constitutes “cause” for dismissal or conversion of the case under

§ 1112(b)(4)(J).

276

Because subchapter V does not contain a deadline for confirmation of a plan and §1193

permits preconfirmation modification of a plan at any time, a debtor may consider the timely

filing of a “placeholder” plan with the expectation of a later modification instead of seeking an

extension.

277

The court in In re Baker, 625 B.R. 27, 38 (Bankr. S.D. Tex. 2020), criticized the strategy

as “a waste of time and resources for all parties-in-interest” that “does not represent Congress’s

intent” in enacting subchapter V. . . . The intentionally expedited nature of subchapter V cases

dictates an abbreviated deadline under § 1189 that is not intended to be manipulated by

placeholder plans.”

Stating that “filing a placeholder plan merely to satisfy the statutory plan deadline serves

no justiciable purpose, contributes to increased costs, and subverts the intent underlying

subchapter V, the Baker court announced, id. at 38:

275

E.g., In re Excellence 2000, Inc., 2022 WL 163400 (Bankr. S.D. Tex. 2022); In re Tibbens, 2021 WL 1087260 at

* 8 (Bankr. M.D.N.C. 2021); In re Online King LLC, 629 B.R. 340, 350-351 (Bankr. E.D.N.Y. 2021); 8 C

OLLIER

BANKRUPTCY ¶ 1189.03.

276

In re Online King LLC, 629 B.R. 340, 350-51 (Bankr. E.D.N.Y. 2021); 8 COLLIER ON BANKRUPTCY ¶ 1189.03.

See Section VI(D).

277

In In re Baker, 625 B.R. 27, 37 (Bankr. S.D. Tex. 2020), the court described a “placeholder plan” as “a skeletal

document filed to satisfy a filing deadline, with the intent to file a completed, substantive document later.”

111

[T]his Court disfavors placeholder plans and expects debtors to file substantive,

confirmable plans unless situations arise such that an extension is warranted because of

circumstances for which the debtor should not justly be held accountable.

K. Debtor’s postpetition performance of obligations under lease of nonresidential

real property – § 365(d)

Section 365(d)(3) requires the timely performance of all obligations of a debtor that is the

lessee under an unexpired lease of nonresidential real property, unless the court for cause extends

the time for performance. SBRA did not change § 365(d)(3), but the Consolidated

Appropriations Act, 2021 (the “CAA”) enacted a temporary amendment that permits the court to

extend the time for performance in subchapter V cases that was effective until December 26,

2022.

278

Pre-CAA § 365(d)(3), which remains in effect, redesignated as § 365(d)(3)(A),

279

permits

the court to extend the time for performance of postpetition obligations arising within 60 days

after the order for relief, but not beyond such 60-day period.

The CAA temporarily added subparagraph (B) to § 365(d)(3) to permit an extension of

the time for performance in a subchapter V case if the debtor “is experiencing or has experienced

a material financial hardship due, directly or indirectly, to the coronavirus disease 2019

(COVID-19) pandemic.”

280

Subparagraph (B) permitted extension of the time for performance

278

Consolidated Appropriations Act, 2021 (the “CAA”), Pub. L. No. 116-260, Title X, § 1001(f), 134 Stat.1182,

3219 (December 27, 2020). The CAA also temporarily amended § 365(d)(4). Pre-CAA § 365(d)(4) provided that,

if assumption of a lease of nonresidential real property under which the debtor is the lessee did not occur by the

earlier of confirmation of a plan or 120 days after the order for relief, the lease was deemed rejected and the trustee

(or debtor in possession) must surrender the property to the lessor. The court for cause could extend the time by 90

days, for a maximum time of 210 days. The CAA extended the 120-day period to 210 days and permits extension to

a maximum of 300 days. CAA § 1010(f)(1)(B). The extended period sunsets two years after enactment of CAA, or

December 26, 2022. CAA § 1001(f)(2)(A)(ii).

279

CAA § 1001(f)(1)(A)(i).

280

CAA § 1001(f)(1)(A)(iii).

112

to the earlier of 60 days after the order for relief or the date of assumption or rejection of the

lease.

281

In addition, subparagraph (B) permitted the court to extend the time for an additional

60 days if the debtor is continuing to experience a material financial hardship due to the COVID-

19 pandemic.

CAA also temporarily added subparagraph (C) to § 365(d)(3). It provided that, if the

court extended the time for performance of an obligation under subparagraph (B), the obligation

would be treated “as an administrative expense described in section 507(a)(2) for the purpose of

section 1191(e).”

282

Section VII(C) considers this provision in its discussion of §1191(e), which

permits deferral of administrative expenses under a cramdown plan.

The amended provisions expire on December 26, 2022.

283

They continue to apply,

however, in any subchapter V case filed before the sunset date.

284

It is unclear whether a sub V debtor who has not experienced financial hardship due to

COVID-19 could seek relief under subparagraph (A). Although subparagraph (B) arguably

states the rule for all sub V cases, its apparent purpose is to relax the rule in a subchapter V case

for a debtor whose problems arise from the COVID-19 pandemic. A sub V debtor who cannot

establish that it has experienced Covid-related financial distress, therefore, should be able to

proceed under subparagraph (A).

281

This provision in subparagraph (B) differs from subparagraph (A) (the pre-CAA rule in § 365(d)(3)).

Subparagraph (A) permits extension of the time for performance for 60 days without regard to whether the lease is

assumed or rejected. Subparagraph (B) does not permit extension of time beyond the date of assumption or

rejection. Arguably, the purpose of subparagraph (B) is to relax the rules for postpetition performance in a

subchapter V case so that a sub V debtor could still seek an extension of time for 60 days to perform postpetition

obligations notwithstanding the earlier rejection of a lease.

282

CAA § 101(f)(1)(A)((iii).

283

CAA § 101(f)(2)(A)(i).

284

CAA § 101(f)(2)(B).

113

VII. Contents of Subchapter V Plan

The requirements for the contents of a sub V plan are contained in §§ 1122 and 1123

285

(with two exceptions) and in §1190. An important provision is that §1190(3) permits

modification of a claim secured only by a security interest in real property that is the principal

residence of the debtor if the loan arises from new value provided to the debtor’s business.

286

Section 1122 states rules for classification of claims in a chapter 11 plan, and § 1123

states what provisions a plan must and may have. Two provisions in § 1123 – (a)(8) and (c) –

are not applicable in sub V cases.

287

A subchapter V plan must comply with the other

requirements of §§ 1122 and 1123.

Official Form 425A, which is a permissible, but not required, form for a chapter 11 plan,

has been modified and may be used in a subchapter V case. Courts may adopt local forms for

subchapter V plans

288

or make the use of Official Form 425A mandatory and provide guidance

on its preparation.

289

A. Inapplicability of §§ 1123(a)(8) and 1123(c)

Section 1123(a)(8) requires the plan for an individual debtor to provide for payment to

creditors of all or such portion of earnings from postpetition services or other future income as is

necessary for the execution of the plan.

290

Section 1123(c) prohibits a plan filed by an entity

285

A plan may include a provision for settlement of a dispute with a creditor over the avoidance of its lien. E.g.,

Kopleman & Kopleman, LLP v O’Grady (In re O’Grady), 2022 WL 1058379 at *6 (D. N.J. 2022).

286

§ 1190(3).

287

§ 1181(a).

288

E.g., Debtor’s Chapter 11, Subchapter V Plan (D. Md.) (suggested), available at

https://www.mdb.uscourts.gov/content/local-bankruptcy-forms

; Chapter 11 Subchapter V Small Business Debtor’s

Plan of Reorganization [or Liquidation] (D. New Jersey) (mandatory), available at

http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms; Plan of Reorganization (W.D. Wisconsin)

(suggested), available at https://www.wiwb.uscourts.gov/forms.

289

E.g., SBRA Plan Instructions, available at http://www.canb.uscourts.gov/forms/district. The full text of a

somewhat elaborate subchapter V plan is attached to the confirmation order in In re Abri Health Services, LLC,

2021 WL 5095489 at * 11 (Bankr. N.D. Tex. 2021).

290

§ 1123(a)(8).

114

other than the debtor from providing for the use, sale, or lease of exempt property, unless the

debtor consents.

291

SBRA replaced § 1123(a)(8) with a disposable income provision applicable to all

debtors in §1190, which contains additional provisions for the content of a plan. Section 1123(c)

is superfluous in a subchapter V case because only the debtor can propose a plan.

292

B. Requirements of §1190 for Contents of Subchapter V Plan; Modification of

Residential Mortgage

Section 1190 contains three provisions governing the content of a sub V plan.

First, §1190(1)

293

requires information that would otherwise be included in a disclosure

statement. The plan must include: (1) a brief history of the operations of the debtor; (2) a

liquidation analysis; and (3) projections regarding the ability of the debtor to make payments

under the proposed plan.

Second, §1190(2) requires the plan to provide for the submission of “all or such portion

of the future earnings or other future income of the debtor to the supervision and control of the

trustee as is necessary for the execution of the plan.” In an individual case, this provision

replaces the similar rule in the inapplicable § 1123(a)(8). In non-individual cases, it imposes a

new requirement.

Because a plan ordinarily must provide for payment of creditors from the debtor’s

income, the requirement for the submission to the trustee of income as necessary for the

execution of the plan states nothing more than a feasibility requirement.

291

§ 1123(c).

292

§ 1189(a).

293

No apparent reason exists for using numbers for the subsections of this section instead of the customary lower-

case letters.

115

Section 1190(2) raises interpretive issues regarding the requirement that future income be

submitted to the “supervision and control” of the trustee.

If a consensual plan is confirmed under §1191(a), §1194 does not contemplate that the

trustee make the payments. Moreover, §1183(c)(1) provides for termination of the trustee’s

service upon substantial consummation of a consensual plan under §1191(a). Under

§ 1101(2)(C), “substantial consummation” occurs upon (among other things

294

) “commencement

of distribution under the plan.” An issue is whether a consensual plan must provide for

submission of future income to the trustee’s supervision and control when the trustee’s service

will terminate once the first plan payment is made.

295

The third content provision in §1190(3) changes the rule of § 1123(b)(5) that a plan may

not modify the rights of a claim secured only by a security interest in real property that is the

debtor’s principal residence.

296

The same antimodification rule applies in chapter 13 cases under

§ 1322(b)(2).

297

Section 1190(3) permits modification of such a claim if the two circumstances specified

in subparagraphs (A) and (B) exist. The requirement of subparagraph (A) is that the new value

received in connection with the granting of the security interest was “not used primarily to

294

Substantial consummation also requires transfer of all or substantially all of the property proposed by the plan to

be transferred, § 1101(2)(A) (2018), and assumption by the debtor or by the successor to the debtor of the business

or of the management of all or substantially all of the property dealt with by the plan, § 1101(2)(B). Section

VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a consensual plan.

295

See Section IX(A).

296

E.g., Mechanics Bank v. Gewalt (In re Gewalt), 2022 WL 305271 (B.A.P. 9

Cir. 2022). The court held that a

subchapter V liquidation plan providing for payment of the mortgage from the sale of the debtor’s principal

residence within two years, without a provision for current mortgage payments, violated § 1123(b)(5) because it

impermissibly modified the mortgage lender’s rights under the Supreme Court’s interpretation of 11 U.S.C. §

1322(b)(2) in Nobleman v. American Savings Bank. 508 U.S. 324, 329, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).

The court noted that it had reached the same result in a chapter 13 case. Philadelphia Life Ins. Co. v. Proudfoot (In

re Proudfoot), 144 B.R. 876, 877-78 (B.A.P. 9

Cir. 1992). The exception in in § 1190(3) was not relevant in the

case. Gewalt at *4 n. 7.

297

For a discussion of the antimodification provision in chapter 13 cases, see W. Homer Drake, Jr., Paul W.

Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure §§ 5:39-5:42.

116

acquire the real property.” Subparagraph (B) requires that the new value have been “used

primarily in connection with the small business of the debtor.”

298

(Query whether an individual

whose debts exceed the limits for qualification as a “small business debtor” under § 101(51D)(A)

but who qualifies for subchapter V under the temporary $ 7.5 million debt limit under the

CARES Act meets the requirement in (B) for use of loan proceeds for the debtor’s “small

business.”)

Courts have considered whether the prohibition on modification of a residential mortgage

applies when the property in which the debtor resides has nonresidential characteristics or uses,

usually in chapter 13 cases.

299

For example, the property may be a multi-family dwelling that

does or can generate rental income or a farm. The debtor may use it for business purposes, or it

may include additional tracts or acreage beyond a residential lot.

The issue in such cases is whether the claim is secured by property other than the debtor’s

residence. Some courts have ruled that antimodification protection extends to a mortgage

secured by any real property that the debtor uses, at least in part, as a residence. Other courts,

however, have concluded that the debtor’s use of real property as a residence does not alone

mean that the debt is secured only by the debtor’s principal residence, and that a mortgage on

property the debtor uses as a residence is subject to modification if the property has sufficient

nonresidential characteristics or uses.

300

298

§ 1190(3). For a discussion of strategies for lenders to consider to preclude application of the subchapter V

exception to the anti-modification rule, see Christopher G. Bradley, The New Small Business Bankruptcy Game:

Strategies for Creditors Under the Small Business Reorganization Act, 28

AMER. BANKR. INST. L. REV. 251, 282-83

(2020). Professor Bradley suggests lenders might require more than half of the loan proceeds to be used for

personal expenses or that, in the case of a proposed loan secured by a second mortgage, the lender instead pay off

the first mortgage and refinance that amount so that most of the loan is not for the business. Id.

299

See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13 PRACTICE AND PROCEDURE

§ 5:42.

300

Id.

117

The court in In re Ventura

301

concluded that application of §1190(3) requires a different

analysis. There, an individual operated a bread and breakfast business in her residence through a

limited liability company she owned. In her chapter 11 case filed prior to SBRA’s enactment,

the court had ruled that she could not modify the mortgage on the property, applying the cases

holding that a debtor may not modify a mortgage on property in which she resides even if she

uses it for other purposes.

After SBRA’s effective date, the debtor amended her petition to elect application of

subchapter V. In addition to permitting her to proceed under subchapter V,

302

the court

addressed the lender’s contention that she could not invoke § 1190(3) because the proceeds from

the mortgage had been used to acquire the property.

303

The Ventura court concluded that § 1190(3) specifically permits the modification of a

residential mortgage if the conditions of subparagraphs (A) and (B) exist. The questions,

therefore, were whether the mortgage proceeds were “not used primarily to acquire the real

property” (§1190(3)(A)) and were “used primarily in connection with the small business of the

debtor” (§11903(3)(B)).

304

The court focused on two terms in subparagraph (A). “Primarily,” the court said, means

“for the most part,” “of first importance,” or “principally,” rather than “substantial.” The phrase

“real property,” the court continued, refers back to the real property that is the debtor’s

residence.

305

301

In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory Funding v. Ventura

(In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022).

302

Id. at 7-14. Part XIII discusses the court’s ruling on the availability of subchapter V in the case.

303

The lender also argued that § 1190(3) could not be applied to a transaction arising prior to its effective date. Part

XIII discusses the court’s ruling rejecting this contention.

304

In re Ventura, 615 B.R. 1, 23 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory Funding v.

Ventura (In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022).

305

Id. at 24.

118

Based on these definitions, the court phrased the question of subparagraph (A)’s

application in the case before it as “whether the Mortgage proceeds were used primarily to

purchase the Debtor’s Residence.”

306

The inquiry thus differs from the issue under § 1123(b)(5)

(and § 1322(b)(2) in chapter 13 cases) that, under the court’s prior ruling, prohibited

modification of the mortgage because the debtor resided in the property, regardless of its other

uses. §1190(3), the court explained, “asks the court to determine whether the primary purpose of

the mortgage was to acquire the debtor’s residence.”

307

Subparagraph (B), the court stated, required it to determine “whether the mortgage

proceeds were used primarily in connection with the debtor’s business.”

The Ventura court concluded that subparagraphs (A) and (B) directed it “to conduct a

qualitative analysis to determine whether the principal purpose of the debt was not to provide the

debtor with a place to live, and whether the mortgage proceeds were primarily for the benefit of

the debtor’s business activities.”

308

The court proposed five factors to consider in this analysis: “(1) Were the mortgage

proceeds used primarily to further the debtor’s business interests; (2) Is the property an integral

part of the debtor’s business; (3) The degree to which the specific property is necessary to run

the business; (4) Do customers need to enter the property to utilize the business; and (5) Does the

business utilize employees and other businesses in the area to run its operations.”

309

The court found that the debtor bought the property to operate it as a bed and breakfast,

that its primary purpose was the offering of rooms for nightly fees, that the debtor’s LLC

provided additional services to guests for additional fees, and that the mortgage proceeds were

306

Id.

307

Id.

308

Id.

309

Id. at 25.

119

used to purchase the building that houses the business. The court ruled that the evidence was

sufficient to hold a full evidentiary hearing to determine whether the debtor could use § 1190(3)

to modify the mortgage.

310

A business debtor may grant a security interest in a principal residence as additional

collateral without receiving new value, perhaps in connection with a workout involving

forbearance or restructuring of the debt. A potential issue is whether the §1190(3) exception to

the antimodification rule applies in this situation when the debtor receives no additional loan

proceeds.

C. Payment of Administrative Expenses Under the Plan

If the court confirms a plan under the cramdown provisions of §1191(b), §1191(e)

permits the plan to provide for the payment through the plan of claims specified in §§ 507(a)(2)

and (3), notwithstanding the confirmation requirement in § 1129(a)(9) that such claims be paid in

full on the plan’s effective date.

311

Section 507(a)(2) includes administrative expense claims

allowable under § 503(b), and § 507(a)(3) gives priority to involuntary gap claims allowable

under § 502(f).

Administrative expenses include claims under § 503(b)(2) for fees and expenses of the

trustee and of professionals employed by the debtor and the trustee under § 330(a) and claims

under § 503(b)(9) for goods received by the debtor in the ordinary course of business within 20

days before the filing of the petition.

312

310

Id.

311

§ 1191(e).

312

The permission to pay these priority claims “through the plan” without requiring payment in full raises questions

of whether a plan may provide for less than full payment and whether interest is required. Presumably,

Congressional intent is to change the timing requirement for payment of the claims and not to permit partial

payment. See Ralph Brubaker, The Small Business Reorganization Act of 2019, 39 Bankruptcy Law Letter, no. 10,

Oct. 2019, at 15-16.

120

In In re Seven Stars on the Hudson Corp., 618 B.R. 333, 347 n. 82 (Bankr. S.D. Fla.

2020), the court observed that a sub V plan cannot provide for the deferred payment of

postpetition rent obligations under a lease of nonresidential real property.

The Seven Stars court agreed that § 1191(e) permits deferred payment of administrative

expense claims allowed under § 503(b). It concluded, however, that § 365(d)(3), not § 503(b),

governs postpetition rent obligations. The court ruled, “As such, even though new Section

1191(e) permits certain administrative expense claims to be paid out over the term of a plan, this

provision undoubtedly does not apply to administrative rent.” Id. Even if the court permitted the

debtor to proceed under subchapter V in its case that began prior to its enactment, the court

ruled, it could not confirm a plan that did not provide for full payment of postpetition rent on the

effective date of the plan in accordance with earlier orders of the court.

The Consolidated Appropriations Act, 2021 (the “CAA”)

313

made temporary changes to

§ 365(d) dealing with the timely performance of the debtor’s postpetition obligations as lessee

under an unexpired lease of nonresidential real property. As Section VI(K) discusses, the

temporary amendment added subparagraph (B) to § 365(d)(3) to permit the court to extend the

time for the performance of such obligations for up to 120 days in a sub V case if it determined

that the debtor “is experiencing or has experienced a material financial hardship due, directly or

indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.”

314

Importantly, CAA also added subparagraph (C) to § 365(d)(3) to provide that, if the court

granted such an extension, the obligation “shall be treated as an administrative expense described

in section 507(a)(2) for the purpose of section 1191(e).”

315

313

Consolidated Appropriations Act, 2021 (the “CAA”), Pub. L. No. 116-260, Title X, § 1001(f), 134 Stat.1182,

3219 (December 27, 2020).

314

§ 365(d)(3)(B), as enacted by CAA § 1001(f)(1)(A)(iii).

315

§ 365(d)(3)(C), as enacted by CAA § 1001(f)(1)(A)(iii).

121

The provisions expire on December 26, 2022

316

but continue to apply in any subchapter

V case filed before then.

317

Because temporary § 365(d)(3)(C) requires treatment of a deferred postpetition lease

obligation as an administrative expense for purposes of § 1191(e), it seems that, notwithstanding

the Seven Stars analysis, a cramdown plan may provide for the deferral of payment of

obligations that the court extends. The difficulty with the conclusion is that subparagraph (B)

still requires that the court order performance of postpetition obligations within no more than 120

days after the order for relief.

Arguably, a debtor who has not complied with the mandatory requirement of

§ 365(d)(3)(B) has not satisfied the confirmation requirement of § 1129(a)(2) that the plan

proponent comply with all applicable provisions of the Bankruptcy Code. Courts will have to

determine whether temporary § 365(d)(3)(C) grants permission to defer payments that the debtor

had the obligation to make within the time that § 365(d)(3)(B) requires.

VIII. Confirmation of the Plan

A. Consensual and Cramdown Confirmation in General

1. Review of confirmation requirements in traditional chapter 11 cases and

summary of changes for subchapter V confirmation

In a traditional chapter 11 case, the court must confirm a chapter 11 plan if all the

requirements of § 1129(a) are met.

When all of the requirements of § 1129(a) are met in a traditional case except the

requirement in paragraph (a)(8) that all impaired classes accept the plan, § 1129(b)(1) permits

316

CAA § 1001(f)(2)(A).

317

CAA § 1001(f)(2)(B).

122

so-called “cramdown” confirmation “if the plan does not discriminate unfairly, and is fair and

equitable,” with regard to each impaired class that has not accepted it.

318

Section 1129(b)(2)

states the rules for the “fair and equitable” requirement for classes of secured claims

(§ 1129(b)(2)(A)), unsecured claims (§ 1129(b)(2)(B)), and interests (§ 1129(b)(2)(C)).

319

The effects of confirmation in a traditional case do not differ depending on whether

cramdown confirmation under § 1129(b) occurs.

Section 1191 states the rules for confirmation in a sub V case. Section 1129(a) remains

applicable in a sub V case, except for paragraph (a)(15), which imposes a projected disposable

income requirement in the case of an individual if an unsecured creditor invokes it.

320

Because

§ 1129(a)(15) no longer applies, Interim Rule 1007(b) makes the requirement that an individual

debtor in a chapter 11 case file a statement of current monthly income inapplicable to an

individual in a subchapter V case.

321

If all the applicable requirements in § 1129(a) are met in a sub V case except for the

projected disposable income rule of paragraph (a)(15), §1191(a) requires the court to confirm the

plan. Because § 1129(a)(8) requires acceptance of the plan by all impaired classes, confirmation

under § 1191(a) can occur only if all impaired classes have accepted it.

322

This paper refers to it

as a “consensual plan.”

318

§ 1129(b)(1).

319

§ 1129(b)(2).

320

§ 1181(a). For cases applying the applicable § 1129(a) standards, see In re Hyde, 2022 WL 2015538 (Bankr.

E.D. La. 2022); In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020); In re Pearl

Resources, LLC, 622 B.R. 236 (Bankr. S.D. Tex. 2020). See also In re BCT Deals, Inc., 2022 WL 854473 (Bankr.

C.D. Cal. 2022) (Court entered confirmation order on debtor’s motion for confirmation in accordance with local rule

without a hearing based on absence of opposition to motion after notice of opportunity to object).

321

INTERIM RULE 1007(b).

322

§ 1191.

123

Section 1191(b) states the rules for cramdown confirmation in sub V cases. It replaces

the cramdown provisions of § 1129(b), which do not apply in a sub V case.

323

In general,

§1191(b) permits confirmation even if the requirements of paragraphs (8), (10), and (15) of

§ 1129(a) are not met. Thus, cramdown confirmation does not require (1) that all impaired

classes accept the plan (§ 1129(a)(8)) or (2) that at least one impaired class of creditors accept it

(§ 1129(a)(10)).

The requirements in § 1129(b)(2)(A) for cramdown confirmation with regard to a class of

secured claims remain applicable in a sub V case.

324

Importantly, both consensual confirmation and cramdown confirmation require

compliance with all requirements of § 1129(a) except those specifically mentioned above.

Sections VIII(D) and (E) discuss confirmation issues that have arisen in subchapter V cases

under provisions that SBRA did not change.

Cramdown confirmation under §1191(b) does not require that the plan meet the projected

disposable income requirement of § 1129(a)(15), applicable only in the case of an individual if

any unsecured creditor invokes it. Cramdown confirmation does, however, impose a modified

projected disposable income rule, expanded to include all debtors, not just individuals, as Section

VIII(B) discusses.

For an individual, it is significant that the projected disposable income rule comes into

play only if one or more classes do not accept the plan. Unless a class consists of only one

creditor, a single creditor cannot invoke the projected disposable income requirement, which a

323

§ 1181(a).

324

§ 1191(c)(1).

124

single creditor can do in a traditional case even if all impaired classes accept the plan.

325

Section

VIII(D)(8) discusses application of the good faith requirement of § 1129(a)(3) in the context of

confirmation of a consensual plan when an unsecured creditor objects because the debtor is not

paying enough disposable income to creditors.

Official Form B315 contemplates a short confirmation order that identifies the plan and

recites that all requirements for confirmation have been met. As in many traditional chapter 11

cases, however, courts in subchapter V cases have entered lengthy and detailed confirmation

orders with extensive findings of fact and conclusions of law, even in the absence of objections

to confirmation.

326

2. Differences in requirements for and consequences of consensual and cramdown

confirmation

In a subchapter V case, the effects of confirmation differ depending on whether

confirmation occurs under §1191(a) (where all classes have accepted it) or under §1191(b)

(where one or more – or even all – classes have not accepted it).

327

Some effects of consensual confirmation are more advantageous to a debtor – particularly

an individual – than the effects of cramdown confirmation. Some effects of cramdown

confirmation, however, are more advantageous than consensual confirmation.

325

§ 1129(a)(15). One may view the projected disposable income requirement for cramdown confirmation as

protection for a dissenting class of unsecured creditors that substitutes for the inapplicable absolute priority rule.

See In re Moore Properties of Person County, LLC, 2020 WL 995544, at *5 (Bankr. M.D.N.C. 2020). In absolute

priority rule theoretical terms, it recognizes “sweat equity” (i.e., future income) as “new value” that permits equity

owners to retain their interests. The inability of a single creditor to invoke the projected disposable income rule is

consistent with the inability of a single creditor to invoke the absolute priority rule under § 1129(b); both apply only

if a class does not accept.

326

E.g., In re North Richland Hills Alamo, LLC, 2022 WL 2134976 (Bankr. N.D. Tex. 2022); In re Roundy, 2021

WL 5428891 (Bankr. D. Utah 2021). In re Abri Health Services, LLC, 2021 WL 5095489 (Bankr. N.D. Tex. 2021);

In re Triple J Parking, 2021 Bankr. Lexis 2304 (Bankr. D. Utah 2021).

327

Other text explains the consequences of the type of confirmation relating to: payments under the plan by the

trustee and termination of the service of the trustee (Part IX); compensation of the trustee (Section IV(E)); deferral

of administrative expenses (Section VII(C)); postconfirmation modification of the plan (Section VIII(C)); discharge

(Part X); contents of property of the estate (Part XI); and postconfirmation default and remedies (Part XII).

125

In addition, cramdown confirmation imposes different requirements that provide

opportunities for creditors to object to confirmation. Resolution of the objections may require an

evidentiary hearing that exposes the debtor to uncertainty and additional legal fees and other

expenses required for the debtor to prepare for trial and to prevail.

Counsel for a subchapter V debtor must understand these differences in proposing a plan

and engaging in negotiations about it with creditors and the sub V trustee, who must also

understand them to fulfill the duty to facilitate a consensual plan.

328

Differences in requirements for confirmation

Whether consensual or cramdown confirmation occurs, confirmation in a sub V case

requires satisfaction of all the applicable confirmation requirements of § 1129(a) except for

acceptance by all impaired classes (§ 1129(a)(8) and (a)(10)), and, in an individual case,

compliance with the projected disposable income requirement of §1129(a)(15).

Consensual confirmation of a sub V plan under § 1191(a) requires acceptance by all

impaired classes, as § 1129(a)(8) mandates. (This necessarily means that the plan complies with

§ 1129(a)(10), requiring acceptance by at least one class of claims.)

If one or more classes of impaired claims do not accept the plan, cramdown confirmation

under § 1191(b) requires that the plan not discriminate unfairly and that it be “fair and equitable”

under the provisions of § 1191(c), as Section VIII(B) discusses.

Section 1191(c)(1) requires treatment of a secured claim in compliance with

§ 1129(b)(2)(A), which applies in a traditional chapter 11 case.

329

Because the typical method

for meeting this requirement is periodic payments with a value equal to the value of the

328

See In re Louis, 2022 WL 2055290 (Bankr. C.D. Ill. 2022).

329

See Section VIII(B)(2).

126

encumbered property, compliance with this requirement may require an evidentiary hearing with

regard to the property’s value and the proposed rate of interest.

Section 1191(c)(2) requires compliance with the projected disposable income

requirement, which Section VIII(B)(4) discusses. Determination of the issues may require an

evidentiary hearing with regard to the amount of the projected disposable income and the period

over which the debtor must pay it.

Finally, § 1191(c)(3) requires the court to find either that the debtor will be able to make

payments under the plan or that it is reasonably likely that the debtor will do so. If the court

determines that it is reasonably likely that the debtor will make plan payments, the plan must

also include “appropriate remedies. Section VIII(B)(5) explains these provisions. Resolution of

an objection based on the debtor’s ability to make plan payments may, like other cramdown

issues, require an evidentiary hearing.

Different consequences of consensual and cramdown confirmation

In a subchapter V case, the effects of confirmation differ depending on whether

consensual or cramdown confirmation occurs. Section VIII(A)(3) discusses the advantages and

disadvantages for the debtor of consensual or cramdown confirmation based on these

differences.

Discharge. Discharge occurs immediately upon confirmation of a consensual plan.

Discharge does not occur after cramdown confirmation until the debtor completes payments

under the plan. A cramdown discharge does not discharge debts on which the last payment is

due after the three to five year term of the plan. In the case of any entity, courts disagree about

whether a debt excepted from discharge under § 523(a) is excepted from a cramdown discharge,

127

as they are in an individual case regardless of the type of discharge. Part X discusses these

issues.

Property of the estate. Unless the confirmation order or plan provides otherwise,

confirmation of a consensual plan vests property of the estate in the debtor, whereas cramdown

confirmation results in the retention of property of the estate in the debtor. Moreover, after

cramdown confirmation, property of the estate includes property that the debtor acquires after the

filing of the petition and postpetition earnings. See Part XI.

Payments under the plan. When cramdown confirmation occurs, the sub V trustee makes

payments under the plan, unless the confirmation order or plan provides otherwise. Under a

consensual plan, the debtor makes payments. See Part IX.

Termination of services of subchapter V trustee. If the court confirms a consensual plan,

the services of the trustee terminate upon the plan’s substantial confirmation. In the cramdown

situation, the subchapter V continues to serve as trustee. See Part IX.

Deferral of payment of administrative expenses. The debtor may pay administrative

expenses, such as compensation for the subchapter V trustee and the debtor’s attorneys and other

professionals, if the court confirms a plan under the cramdown provisions. A consensual plan

cannot defer administrative expenses without the agreement of the administrative expense

claimant. See Section VII(C).

Postconfirmation modification of the plan. After substantial consummation of a

consensual plan, the debtor may not modify it. The debtor may modify the plan after

confirmation under the cramdown provisions within three to five years after confirmation, as the

court determines. See Section VIII(C).

128

The type of confirmation also affects the remedies available to creditors upon

postconfirmation default, as Part XII discusses.

3. Benefits to debtor of consensual or cramdown confirmation

Two features of subchapter V reflect a policy of encouragement of consensual plans.

One is the unique duty of a subchapter V trustee in § 1183(b)(7) to “facilitate the development of

a consensual plan of reorganization.”

330

The other is the requirement in § 1188(c) that the debtor

file a report prior to the mandatory status conference that “details the efforts the debtor has

undertaken and will undertake to attain a consensual plan of reorganization.”

A strategic question is whether the debtor wants consensual confirmation.

331

Cramdown

confirmation is advantageous to the debtor in one important way: a debtor may seek

postconfirmation modification of a confirmed cramdown plan even if it has been substantially

consummated, but a debtor cannot modify a confirmed consensual plan after substantial

consummation.

332

A debtor who faces default after cramdown confirmation because of unanticipated

postconfirmation business conditions (for example, a material decrease in income or unexpected

expenses) may thus seek postconfirmation modification to deal with the issue, but a debtor

operating under a confirmed consensual plan cannot. Moreover, a debtor may need to modify a

plan for other reasons necessary for or helpful to its business or financial condition.

333

330

See Section IV(B)(1).

331

For a discussion of the advantages of consensual confirmation in an individual case, see In re Louis, 2022 WL

2055290 at * 14-16 & nn. 11, 12 (Bankr. C.D. Ill. 2022).

332

See Section VIII(C). Section VIII(C)(1) discusses substantial consummation.

333

The debtor in In re National Tractor Parts, Inc., 2022 WL 2070923 (Bankr. N.D. Ill. 2022), sought to modify its

consensual plan confirmed under §1191(a) to modify the treatment of the claim of the Small Business

Administration based on a loan under the COVD-19 EIDL program. The debtor wanted to obtain an increase in the

amount of the loan on favorable terms but was not eligible under the terms of the plan that treated SBA’s claim as a

general unsecured claim, payable in quarterly payments.

129

Because postconfirmation modification may be necessary for or helpful to the debtor’s

postconfirmation success, a debtor may want to preserve the flexibility of postconfirmation

modification through cramdown, rather than consensual, confirmation.

Another potential advantage of cramdown confirmation is that postconfirmation payment

of administrative expenses, usually compensation of the subchapter V trustee and the debtor’s

attorney and other professionals, is permissible in a cramdown plan under § 1191(3).

334

As a

practical matter, however, it is likely that the same result can occur under a consensual plan.

If the debtor has proposed a feasible plan that all impaired classes have accepted but does

not have the ability to pay administrative expenses in full on its effective date, the subchapter V

trustee and debtor professionals will be hard-pressed to thwart confirmation of a consensual plan

by insisting on immediate payment in full. The facts that deferral can happen anyway through

cramdown confirmation and that the trustee and the debtor are charged with achieving

consensual confirmation should lead to their agreement to deferred payment so that the plan

complies with § 1129(a)(9)(A).

Several consequences of consensual confirmation are more beneficial to a debtor than

cramdown confirmation. Some of these advantages may be achievable through a cramdown plan

The proposed modification provided for separate classification of the SBA’s claim and payment of it in

accordance with contractual terms if the SBA provided additional funding or treatment as a general unsecured claim

if it did not.

The United States Trustee objected to modification on the ground that “commencement of distribution

under the plan” had occurred such that the plan had been substantially consummated under the definition in

§ 1101(2) and that, therefore, the consensual plan could not be modified under § 1193(b).

The debtor had made de minimis payments totaling $ 1,428.20 to creditors in two classes but had not yet

made a $ 50,000 payment to a creditor in another class or begun quarterly payments to generally unsecured

creditors.

The court held that commencement of payments occurs at the time any payment to any creditor is made.

Accordingly, the court ruled, the plan had been substantially consummated and the debtor could not modify it.

334

See Section VIII(B)(6).

130

or may be relatively unimportant. Two of them that a cramdown plan cannot deal with,

however, are important – one for individual debtors and one for entity debtors.

In an individual case, an important consequence of cramdown confirmation is that

property of the estate under § 1186(a) includes property that the debtor acquires after the filing of

the petition and postpetition earnings. This means that, if conversion to chapter 7 occurs after

confirmation, the chapter 7 estate includes postpetition property and earnings.

335

The result is

the same in a traditional chapter 11 case.

336

Section 1186(a), however, does not apply if

consensual confirmation occurs, so an individual debtor retains postpetition property and

earnings upon conversion of a case after consensual confirmation.

337

This difference is not important in the case of an entity because the distinction between

postpetition and prepetition assets and earnings is immaterial.

338

In the case of an entity, the critical advantage of consensual confirmation is that it is clear

that the exceptions to discharge in § 523(a) do not apply. Upon confirmation of a consensual

plan, an entity receives a discharge under § 1141(d)(1), and the exceptions to discharge under

§ 523(a) apply only to an individual under § 1141(d)(2).

339

Cramdown confirmation, however, results in a discharge under § 1192. Section 1192

does not discharge debts “of the kind” specified in § 523(a), which states that a § 1192 discharge

does not discharge an “individual debtor” from any of the specified debts. Courts disagree about

whether the § 523(a) exceptions apply to the discharge of an entity under § 1192.

340

335

See Section XI(B)(2).

336

See Section XI(A).

337

See Section XI(B)(2).

338

See Section XI(B)(1).

339

See Section X(A).

340

See Section X(D).

131

Note that an entity can achieve this advantage of consensual confirmation only if the

claim of the creditor asserting an exception to discharge (1) is not in a separate class; and (2) is

not so large that the creditor controls acceptance of the class in which it is placed. Rejection by a

creditor in a separate class prevents consensual confirmation. If the creditor is in a class with

other creditors, such as the class of general unsecured claims, its rejection of the plan can prevent

confirmation if the amount of its claim is more than one-third of the amount of all the claims in

the class that vote.

Although provisions in a plan or confirmation order cannot provide these advantages in a

cramdown situation, they can provide other advantages that automatically accompany consensual

confirmation.

Confirmation of a consensual plan results in termination of the sub V trustee’s services

upon “substantial consummation” and distributions to creditors by the debtor.

341

The sub V

trustee continues to serve after cramdown confirmation and makes payments under the plan,

unless the plan or confirmation order provides otherwise.

342

The postconfirmation role of the

sub V trustee and the trustee’s disbursement of funds requires compensation of the trustee, which

increases expenses in the case.

This may not matter to the debtor. A carefully drafted plan will provide for the trustee’s

compensation to be paid from the debtor’s plan payments. If so, creditors effectively bear the

burden of the trustee’s compensation, not the debtor.

For this reason, creditors may support or even encourage payment by the debtor rather

than the trustee. Moreover, the sub V trustee may prefer to avoid the ministerial duty of making

341

See Section IX(A).

342

See Section IX(B).

132

disbursements. In short, parties opposed to confirmation of a cramdown plan may nevertheless

have no objection to provisions of a plan or confirmation order for the debtor to make

disbursements.

Two differences in the consequences of confirmation relating to the discharge may be

somewhat less important to the debtor. One difference is that discharge occurs upon

confirmation of a consensual plan under § 1141(d)(1)

343

but not until completion of payments

after three to five years, as fixed by the court, upon cramdown confirmation under § 1192.

344

The other is that debts on which the last payment is due after the three-to-five year period are not

discharged under the cramdown discharge under § 1192(1). These differences may be of more

concern to an individual debtor than to an entity.

345

A significant advantage of consensual confirmation is that the projected disposable

income and feasibility components of the fair and equitable rule do not apply. The debtor

therefore does not face litigation over those and other potential issues that may arise in

cramdown confirmation, such as valuation of a secured creditor’s collateral and the appropriate

interest rate. Consensual confirmation thus eliminates uncertainty about confirmation and the

expense of litigating cramdown issues.

These benefits are potentially achievable in the cramdown context.

A plan under § 1190(1)(C) must in any event include projections with regard to the

debtor’s ability to make payments as proposed. In many cases it is likely that creditors or the

subchapter V trustee will expect commitment of the equivalent of projected disposable income as

343

See Section IX(A).

344

See Section IX(B).

345

See In re Louis, 2022 WL 2055290 at *14 nn. 11, 12 (Bankr. C.D. Ill. 2022) (Noting that discharge occurs

immediately upon confirmation in consensual plan and that long-term mortgage debts to be paid by owners of

property rather than debtor may not be included in cramdown discharge.).

133

a condition for support of a consensual plan. If the debtor has addressed the amount of payments

to be made to creditors satisfactorily to the sub V trustee and creditors active in the case,

projected disposable income, as well as feasibility, may not be significant issues at confirmation.

Similarly, negotiations with secured creditors may result in settlement of valuation and

interest rate issues.

Thus, it is possible that careful drafting of the plan, negotiations with objecting parties,

and the resolution of objections to confirmation through modification of the plan to address them

can result in cramdown confirmation without objection – what might be called “consensual

nonconsensual confirmation.” If objections cannot be resolved such that the debtor must litigate

them, it is unlikely that consensual confirmation would be possible anyway.

In summary, the primary advantage of cramdown confirmation is the availability of

postconfirmation modification. For an individual, the primary disadvantage of cramdown

confirmation is the inclusion of postpetition property and earnings as property of the estate if the

case later converts to chapter 7.

4. Whether balloting on plan is necessary

Balloting on the plan is obviously necessary if the debtor wants to achieve consensual

confirmation under § 1191(a) because all classes of impaired creditors must accept the plan to

meet the confirmation requirement of § 1129(a)(8).

When the debtor expects that at least one class of claims – typically a major secured

lender in its separate class – will not accept any plan that the debtor can realistically propose, or

when the debtor wants cramdown rather than consensual confirmation based on its evaluation of

the consequences just discussed, the question is whether balloting is required.

134

As Section VIII(A)(3) discusses, subchapter V contemplates efforts to achieve a

consensual plan by imposing a duty on the sub V trustee to facilitate development of a

consensual plan and by requiring the debtor to report at the status conference on the efforts that it

has undertaken and will undertake to attain a consensual plan. Courts have been critical of sub V

trustees and attorneys for debtors who have not attempted to achieve confirmation of a

consensual plan.

346

Subchapter V’s emphasis on consensual confirmation supports a conclusion that balloting

should ordinarily be required and that the debtor should at least try to obtain consensual

confirmation. Nevertheless, circumstances may exist where doing so would be a fruitless

exercise that does not justify the time and expense of doing so.

One such circumstance arises when a creditor with the ability to prevent consensual

confirmation of a plan clearly intends to do so. Because even acceptance by all other impaired

classes will not result in consensual confirmation, no legal reason exists for asking them to vote.

A debtor who expects acceptances from other classes, however, may find it advantageous

to go through the balloting exercise.

As an initial matter, balloting even in the face of expected rejection eliminates the need

for the debtor to explain why balloting should not be required and the efforts it has undertaken to

negotiate with the creditor. It shows that the debtor is trying and lets the court see the effort.

In addition, it is always possible that, once the plan is filed, and maybe even after the

creditor has rejected it, the creditor may re-evaluate its position and be amenable to further

346

See, e.g., In re Louis, 2022 WL 2055290 (Bankr. C.D. Ill. 2022); In re 218 Jackson LLC, 631 B.R. 937 (Bankr.

M.D. Fla. 2021). In Louis, the court observed that the subchapter V trustee had an “absolute duty” to work with the

debtor, the debtor’s attorney, and creditors to try to achieve consensual confirmation of a plan. Louis, 2022 WL

2055290 at * 18.

135

negotiations that will resolve its issues. If all other class have accepted the plan, the creditor’s

acceptance may permit consensual confirmation.

Moreover, acceptance by other creditors may as a practical matter be helpful in

convincing the court to confirm a cramdown plan. If cramdown confirmation issues are close

calls, a court may be sympathetic to resolving them in favor of confirmation when other creditors

have accepted the plan.

The issue is more difficult when the debtor does not want consensual confirmation. It is

arguable that the good faith requirement precludes cramdown confirmation when the debtor has

not attempted confirmation of a consensual plan.

347

It would seem, however, that a debtor’s

good faith efforts to propose a plan that meets cramdown requirements and that resolves

objections of the subchapter V trustee and creditors should satisfy the good faith requirement and

permit cramdown confirmation, if that is the type of confirmation that the debtor has determined

is in the debtor’s best interests. Cramdown confirmation of a plan without balloting that draws

no objections or that is modified to resolve them by agreement – a “consensual nonconsensual

plan” – is consistent with subchapter V’s objectives.

5. Final decree and closing of case

The type of confirmation affects the timing of the entry of a final decree and the closing

of the subchapter V case. Section 350(a) provides for the closing of a case “after an estate has

been fully administered and the court has discharged the trustee.” Bankruptcy Rule 3022

implements § 350 in a chapter 11 case by providing, “After an estate is fully administered in a

347

See In re Louis, 2022 WL 2055290 at *16 (Bankr. C.D. Ill. 2022) (“This Court interprets the provisions of

Chapter 11 Subchapter V to require at least some attempt at consensual confirmation for a plan to be put forth in

good faith.”).

136

chapter 11 reorganization case, the court, on its own motion or on motion of a party in interest,

shall enter a final decree closing the case.”

Full administration of a case necessarily includes entry of the discharge and discharge of

the trustee.

If the court confirms a consensual plan under § 1191(a), discharge occurs upon

confirmation,

348

and the subchapter V trustee’s services are terminated upon substantial

consummation

349

of the plan.

350

Full administration of a subchapter V case, therefore, may

ordinarily occur shortly after confirmation of a consensual plan.

In the cramdown context, in contrast, discharge does not occur until completion of

payments under the plan,

351

and the trustee continues to serve until that time.

352

Full

administration cannot occur until three to five years after confirmation, depending on the period

during which the debtor must make payments.

353

Accordingly, whereas the court may enter a final decree and close a subchapter V case

shortly after confirmation of a consensual plan, entry of a final decree and closing of the case

after cramdown confirmation must await the completion of plan payments.

354

The fact that the subchapter V case after cramdown confirmation must remain open

pending completion of plan payments may prompt a debtor to request “administrative closing” of

the case to reduce the costs of administration after confirmation and before closing of the case.

348

See § X(A).

349

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

350

See § IV(D)(1).

351

See § X(B).

352

See § IV(D)(1).

353

See § VIII(D)(4)(ii).

354

See In re Gui-Mer-Fe, Inc., 2022 WL 1216270 at *3-5 (Bankr. D. P.R. 2022).

137

The court denied the debtor’s request to administratively close a subchapter V case in In

re Gui-Mer-Fe, Inc., 2022 WL 1216270 (Bankr. D. P.R. 2022). The court concluded that a case

can be closed only when it is fully administered and that the debtor’s concerns about

administrative costs were unfounded because the debtor was exempt from paying US. Trustee

fees

355

and because its duty to file reports under § 308

356

and Bankruptcy Rule 2015 terminated

upon confirmation. Id. at *8.

357

See also id. at * 6.

B. Cramdown Confirmation Under §1191(b)

1. Changes in the cramdown rules and the “fair and equitable” test

Discussion of the revised cramdown rules in a sub V case begins with a summary of the

key provisions that govern cramdown confirmation under pre-SBRA law.

Section 1129(a) contains two important requirements for confirmation with regard to

acceptances of a plan. First, paragraph (a)(8) requires that all impaired classes accept the plan.

358

Second, paragraph (a)(10) requires that at least one class of impaired creditors accept the plan.

359

Section 1129(b) permits cramdown confirmation if all the requirements for confirmation

in § 1129(a) are met except the requirement of paragraph (a)(8) that all impaired classes accept

it. Section 1129(b), however, does not affect the confirmation requirement of § 1129(a)(10) that

355

The court discussed cases dealing with administrative closing of traditional chapter 11 cases of individuals (in

which discharge is deferred until completion of payments under the plan) in view of the burden on an individual

debtor of paying U.S. Trustee fees for a lengthy time after confirmation if the case remained open. In re Gui-Mer-

Fe, Inc., 2022 WL 1216270 at *5-8 (Bankr. D. P.R. 2022).

356

Although § 308 applies only in a small business case, § 1187(b) requires a subchapter V debtor to comply with it.

357

Interim Bankruptcy Rule 2015(a)(6) provides that the duty to file periodic reports in a chapter 11 small business

case terminates on the effective date of the plan. Interim Bankruptcy Rule 2015(b) requires a subchapter V debtor to

perform the duties prescribed in (a)(6).

358

§ 1129(a)(8).

359

§ 1129(a)(10).

138

at least one impaired class of creditors accept the plan. Cramdown confirmation under § 1129(b)

is not available if no impaired class of creditors has accepted the plan.

In addition, if the nonaccepting class is the class of unsecured creditors, the absolute

priority rule of § 1129(b)(2)(B) prohibits holders of equity interests from retaining their interests

unless unsecured creditors receive full payment (subject to the new value exception).

360

In an

individual case, many courts conclude that the absolute priority rule prohibits the debtor from

retaining property without payment in full to unsecured creditors.

361

Subchapter V changes these rules. The starting point is that § 1129(b) does not apply.

362

Instead, §1191(b) states revised cramdown rules that (1) permit cramdown confirmation even if

all impaired classes do not accept the plan and (2) eliminate the absolute priority rule.

363

Section 1191(c) states a new “rule of construction” for the requirement that a plan be “fair and

equitable.”

364

It replaces the “fair and equitable” requirements of §1129(b), which do not apply

in a subchapter V case.

The debtor may invoke §1191(b) when all confirmation requirements of § 1129(a) are

met except those in paragraphs (8), (10), and (15). Thus, in addition to eliminating the (a)(8)

requirement that all impaired classes accept the plan, §1191(b) eliminates the requirement of

§ 1129(a)(10) that at least one impaired class accept the plan. The projected disposable income

test of § 1129(a)(15), applicable only in the case of an individual, is replaced by a revised

projected disposable income test applicable to all debtors.

365

360

§ 1129(b)(2)(B).

361

See 7 COLLIER ON BANKRUPTCY ¶ 1129.04[3][d]. For competing views of whether the absolute priority rule

should apply in a traditional case of an individual, see Brett Weiss, Absolute-Priority Rule Should Not Apply in

Individual Cases, 40-May A

MER. BANKR. INST. J. 20 (2021), and Emily C. Eggmann and Robert E. Eggmann,

Absolute-Priority Rule Should Apply in Individual Chapter 11 Cases, 40-May A

MER. BANKR. INST. J. 21 (2021).

362

§ 1181(a).

363

§ 1191(b).

364

§ 1191(c).

365

§ 1191(d).

139

Under the cramdown rules in §1191(b), if all other confirmation standards are met, the

court must confirm a plan, on request of the debtor, if, with respect to each impaired class that

has not accepted it, the plan (1) does not discriminate unfairly and (2) is fair and equitable.

These two general standards are the same as the ones that govern cramdown confirmation under

§ 1129(b).

It does not appear that subchapter V effects any change in the unfair discrimination

requirement.

366

Section 1191(c) does, however, provide a new “rule of construction” in

subchapter V cases for the condition that a plan be “fair and equitable,” to replace the detailed

definition of that term that § 1129(b) contains.

The following text explains the requirements of the “fair and equitable” test in sub V

cases.

2. Cramdown requirements for secured claims

Subchapter V does not change existing law about permissible cramdown treatment of

secured claims. With regard to a class of secured claims, a subchapter V plan is “fair and

equitable” under § 1191(c)(1) if it complies with the standards for secured claims stated in

§ 1129(b)(2)(A).

Subchapter V does limit the ability of a partially secured creditor with an unsecured

deficiency claim to block cramdown confirmation. In a traditional chapter 11 case, an

undersecured creditor with a large deficiency claim often controls the vote of the unsecured

class. If no other impaired class of creditors accepts the plan, cramdown confirmation is not

possible in a traditional case because of the absence of an accepting impaired class of claims,

366

See Section VIII(D)(1).

140

which § 1129(a)(10) requires.

367

This requirement is inapplicable for cramdown confirmation in

a sub V case under §1191(b).

In addition, the creditor in a sub V case cannot invoke the absolute priority rule with

regard to the unsecured portion of its claim.

Section 1129(b) states different requirements for cramdown confirmation for secured and

unsecured claims. Compliance with the absolute priority rule, for example, is not a requirement

for confirmation of a plan over a secured creditor’s objection if the unsecured class accepts the

plan. The absolute priority rule arises from cramdown requirements relating to unsecured claims

in § 1129(b)(2)(B), but it is not in the requirements for cramdown of a secured claim in

§ 1129(b)(2)(A).

In a sub V case, paragraph (1) of § 1191(c) makes the § 1129(b)(2)(A) cramdown

requirements applicable to secured claims, and paragraphs (2) and (3) impose additional

requirements, the commitment of disposable income and a finding of feasibility.

It is unclear whether the additional requirements apply when only the secured creditor

rejects the plan. Without discussing the issue, the court in In re Pearl Resources, LLC, 622 B.R.

236, 267-70 (Bankr. S.D. Tex. 2020), concluded that the plan, accepted by unsecured creditors,

complied with the additional requirements in confirming the plan over the objections of secured

creditors.

3. Components of the “fair and equitable” requirement in subchapter V cases; no

absolute priority rule

Section 1191(c) does not state a “fair and equitable” rule specifically for unsecured

claims. Instead, it imposes a projected disposable income requirement (sometimes called the

367

§ 1129(a)(10).

141

“best efforts” test), requires a feasibility finding, and requires that the plan provide appropriate

remedies if payments are not made. Notably absent is the absolute priority rule.

368

Section 1191(c) states that the “fair and equitable” requirement includes the factors just

mentioned. A plan may also not meet the requirement if it proposes to pay a secured creditor

more than it is entitled to receive, thereby reducing the money available to pay unsecured

claims.

369

4. The projected disposable income (or “best efforts”) test

The projected disposable income (or “best efforts”) requirement is in §1191(c)(2).

370

Section 1191(c)(2) states two alternatives for satisfying the test. The same payments that satisfy

the projected disposable income test may also satisfy the “liquidation” or “best interest of

creditors” test of § 1129(a)(7).

371

368

The court in In re Moore Properties of Person County, LLC, 2020 WL 995544, at *5 (Bankr. M.D.N.C. 2020),

reasoned that the projected disposable income is a substitute for the absolute priority rule. See also supra note 325.

369

In re Topp’s Mechanical, Inc. 2021 WL 5496560 (Bankr. D. Neb. 2021). The secured creditor in the case had a

claim for about $ 3,765,000 secured by collateral worth about $ 2,125,000, resulting in an unsecured deficiency

claim of about $ 1,640,000. The creditor elected treatment under § 1111(b)(2). As Section VIII(E)(1) discusses, the

requirement for cramdown confirmation of an undersecured claim when the creditor elects § 1111(b)(2) requires

payments that (1) have a value equal to the value of the collateral and (2) total the full amount of the claim.

The plan proposed to pay the creditor the full amount of the secured portion of the claim with interest,

about $ 2,625,000. In addition, the plan provided for payment of the unsecured claim, for total payments of about

$ 4,265,000.

The trustee contended that payments of interest on the secured portion of the claim should be taken into

account in satisfying the requirement that the creditor receive payments that totaled the full amount of its claim.

Under this method, the creditor was entitled to receive only approximately $ 1,140,000 on its unsecured claim, about

$ 500,000 less than the $ 1,190,000 the plan proposed to pay. Because the proposed payments to the secured

creditor resulted in $500,000 less being paid to unsecured creditors, the trustee contended, the plan discriminated

unfairly against the unsecured class and was not fair and equitable.

The court concluded that the trustee’s interpretation of the cramdown requirements was correct and that,

therefore, the plan discriminated unfairly against the unsecured creditors and was not fair and equitable.

370

§ 1191(c)(2). Compliance with the projected disposable income requirement is a mandatory condition for

cramdown confirmation under § 1191(b). In chapter 11, 12, and 13 cases, it applies only if a holder of an allowed

unsecured claim or, in a chapter 12 or 13 case, the trustee, invokes it. §§ 1129(a)(15), 1225(b), 1325(b).

371

See Legal Service Bureau, Inc. v. Orange County Bail Bonds (In re Orange County Bail Bonds, Inc.), 2022 WL

1284683 (B.A.P. 9

Cir. 2022); In re Hyde, 2022 WL 2015538 (Bankr. E.D. La.. 2022).. The courts did not discuss

the issue, but the point is implicit in their rulings. See also Homer Drake, Jr., Paul W. Bonapfel, & Adam M.

Goodman, Chapter 13 Practice and Procedure § 7:2 (In a chapter 13 case, “[t]he plan must meet each of the best

interest and projected disposable income tests, but the same payments may satisfy both of them. Thus, the debtor

must pay the greater of the amount that the best interest test or the projected disposable income test requires.”).

142

The first is in subparagraph (A). Section 1191(c)(2)(A) requires that the plan provide

that all of the projected disposable income of the debtor to be received in the three-year period

after the first payment under the plan is due, or in such longer period not to exceed five years as

the court may fix, will be applied to make payments under the plan.

372

The second alternative in subparagraph (B) is that the plan provide that the value of

property to be distributed under the plan within the three-year or longer period that the court

fixes is not less than the projected disposable income of the debtor.

373

Courts have confirmed

plans under the § 1191(c)(2)(B) alternative that provide for pro rata distributions to unsecured

creditors from cash derived from a capital contribution from the debtor’s equity owner

374

or the

postpetition liquidation of an asset

375

in an amount not less than the value of the debtor’s

disposable income.

372

§ 1191(c)(2)(A). The projected disposable income test in chapter 11 and 12 cases likewise requires the use of

projected disposable income to make payments under the plan. §§ 1129(a)(15), 1225(b)(1).

This was the chapter 13 rule until the enactment of Bankruptcy Abuse Prevention and Consumer Protection

Act (BAPCPA) of 2005. BAPCPA in 2005, which amended 1325(b)(1) to require the use of projected disposable

income to make payments to unsecured creditors.

Presumably, the amended chapter 13 provision takes account of the fact that the “means test” standards that

govern the reasonably necessary expenses that an above-median debtor may deduct from current monthly income in

calculating disposable income permit deductions for payments on secured and priority claims. See W. Homer

Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE §§ 8:29, 8:44, 8:60.

Although the definition of disposable income does not specifically permit a below-median debtor to deduct

payments on secured and priority claims in calculating disposable income, the statute of necessity must be

interpreted to include them. See id. § 8:29.

The difference in how the debtor must use projected disposable income may affect the timing of payments to

unsecured creditors but appears to have no material effect on the amount of money that must be paid under the plan

or how much of it goes to unsecured creditors. See id. § 8:68.

373

The projected disposable income tests in chapters 11 and 12 also contain this alternative, but the chapter 13 one

does not.

374

In re The Lost Cajun Enterprises, LLC, 2021 WL 6340185 (Bankr. D. Col. 2021). The court confirmed a plan,

over the objection of a creditor, that provided for pro rata cash payments to unsecured creditors on the plan’s

effective date, funded by a capital contribution from the debtor’s sole member, equal to the debtor’s projected

disposable income for three years. The court did not consider whether the time should be longer.

375

Legal Service Bureau, Inc. v. Orange County Bail Bonds (In re Orange County Bail Bonds, Inc.), 2022 WL

1284683 (B.A.P. 9

Cir. 2022). The plan provided for the pro rata distribution to creditors of proceeds realized

from the postpetition sale of real property obtained through foreclosure of a deed of trust it held to secure a bail

bond. The proceeds exceeded the value of the debtor’s disposable income for three years. The court ruled that a

three-year period applied because the bankruptcy court had not fixed a longer time. Section VIII(B)(4)(ii) further

discusses the case.

143

The court in In re Young, 2021 WL 1191621 at *5 (Bankr. D. N.M. 2021), ruled that

individuals who claimed that they had no disposable income could not obtain confirmation of

their sub V plan.

376

The language is substantially the same as the projected disposable income test applicable

in chapter 12 cases.

377

Like the chapter 12 requirement (and unlike the requirement in traditional

chapter 11 cases), it applies to entities as well as individuals.

Key confirmation issues are: (1) How is projected disposable income determined?

(2) How does the court determine whether the required period should be longer than three years;

and (3) If so, how does the court determine how much longer the period must be?

i. Determination of projected disposable income

The Bankruptcy Code does not define “projected disposable income,” but it defines

“disposable income” in chapters 12

378

and 13.

379

In chapter 11 cases, § 1129(a)(15) incorporates

the chapter 13 definition.

380

Section 1191(d) defines disposable income as income that is received by the debtor and

that is not “reasonably necessary to be expended” for these specified purposes:

— the maintenance or support of the debtor or a dependent of the debtor;

381

376

The Young court reasoned, “Debtors who elect not to make plan payments should not get the benefit of

subchapter V. If making reasonable plan payments while working is unpalatable to the Debtors, they should have

filed a chapter 7 case.” In re Young, 2021 WL 1191621 at *5 (Bankr. D. N.M. 2021).

377

See § 1225(b). Section 1225(b)(1)(A) provides that the debtor need not commit projected disposable income if

the plan provides for full payment. § 1191(c)(2) does not contain this provision, raising the possibility that a

creditor could insist on commitment of disposable income to pay more than the allowed amount of the claim. See

Brubaker, Ralph Brubaker, The Small Business Reorganization Act of 2019, 39 Bankruptcy Law Letter, no. 10, Oct.

2019, at 13. It seems unlikely that Congress could have intended such a result that is inconsistent with the common-

sense principle, even if unstated, that payment of the full amount of the claim (perhaps with interest) resolves it.

378

§ 1225(b)(2).

379

§ 1325(b)(2).

380

§ 1129(a)(15).

381

§ 1191(d)(1)(A).

144

— a domestic support obligation that first becomes payable after the date of the

filing of the petition;

382

— payment of expenditures necessary for the continuation, preservation, or

operation of the business of the debtor.

383

The definition of disposable income in §1191(d) is substantially the same as the

definition of disposable income in § 1225(b)(2). It is also substantially the same definition as in

§ 1325(b)(2), except that § 1325(b)(2) defines the income component as “current monthly

income” (defined in § 101(10A)) and permits a deduction for charitable contributions. The

chapter 11 provision incorporates the chapter 13 definition.

384

The definition of “current monthly income” in § 101(10A) specifically excludes Social

Security benefits, § 101(10A)(B)(ii)(I), but the subchapter V definition of disposable income

does not base the income component on “current monthly income.” One commentator has

concluded that Social Security benefits are not taken into account in determining projected

disposable income in a subchapter V case.

385

Although the definitions of disposable income in all cases are similar, the manner of

determining permissible deductions in calculating disposable income differs materially with

regard to expenditures for the “maintenance or support” of the debtor and the debtor’s

dependents.

382

§ 1191(d)(1)(B).

383

§ 1191(d)(2).

384

§ 1129(a)(15).

385

Alyssa Nelson, Are Social Security Benefits “Disposable Income” for the Purposes of Subchapter V?, 40-Sept

Amer. Bankr. Inst. J. 30 (2021).

145

In chapter 13 cases, the so-called “means test” standards govern the deductions that an

“above-median”

386

debtor may take in calculating disposable income.

387

The means test rules do

not apply in a chapter 12 case or in the case of a below-median chapter 13 debtor. It is not clear

whether the means test applies in chapter 11 cases.

388

Section 1191(d) does not incorporate the means test in the calculation of disposable

income. The test for determining what maintenance and support expenditures are “reasonably

necessary to be expended” for “maintenance or support” in §1191(d)(1) in sub V cases is the

same as it is in chapter 12 and below-median chapter 13 cases, and as it was in chapter 13 cases

prior to the introduction of the means test standards in BAPCPA.

389

The case law on disposable

income in such cases should provide guidance in making such determinations.

390

386

Generally, an “above-median” debtor is a debtor whose income is above the median income of the state in which

the debtor resides, and a “below-median” debtor is one whose income is below the median. See W. Homer Drake,

Jr., Paul W. Bonapfel, & Adam M. Goodman,

CHAPTER 13 PRACTICE AND PROCEDURE § 8:12. The rules for

determining the debtor’s status are set forth in § 1322(d), which governs the permissible term of a plan;

§ 1325(b)(3), which requires an above-median debtor to use the “means test” rules for determination of disposable

income; and § 1325(b)(4), which defines “applicable commitment period” for purposes of determining the period for

which the debtor must commit disposable income to pay unsecured creditors. Generally, an “above-median” debtor

must use the means test rules and pay projected disposable income for five years. A “below-median” debtor does

not use the means test rules and must pay projected disposable income for only three years. A below-median

debtor’s plan cannot provide for payments longer than three years unless the court, for cause, approves a longer

period not to exceed three years. See id. §§ 4:9, 8:12.

387

§ 1325(b)(3).

388

In chapter 11 cases, § 1129(a)(15) states that projected disposable income is “as defined in [§ 1325(b)(2)].”

§1129(a)(15) (2018). Section 1325(b)(2) does not refer to the means test standards. Instead, they become applicable

to an above-median debtor because § 1325(b)(3) states that they govern determination of “amounts reasonably

necessary to be expended” under § 1325(b)(2) for an above-median debtor. § 1325(b)(3). The argument against

application of the means test standards in a chapter 11 case is that § 1129(a)(15) incorporates only the definition in

§ 1325(b)(2) and does not incorporate § 1325(b)(3). The contrary argument is that determination of projected

disposable income under § 1325(b)(2) necessarily includes reference to § 1325(b)(3) to calculate reasonably

necessary expenses and that congressional intent in enacting § 1129(a)(15) was to make the chapter 13 rules

applicable in chapter 11 cases.

389

Prior to the amendment of the projected disposable income test by BAPCPA in 2005, the standard in all chapter

13 cases was whether expenditures were reasonably necessary for the support of the debtor and the debtor’s

dependents. No distinction between above-median and below-median debtors existed under pre-BAPCPA law.

Accordingly, the pre-BAPCPA case law deals with the same standard that § 1191(d)(1) states. For a discussion of

application of the “reasonably necessary” standard for expenditures for maintenance and support in chapter 13 cases,

see W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE § 8:28.

390

E.g., In re Hyde, 2022 WL 2015538 at * 9 (Bankr. E.D. La. 2022).

146

With regard to expenditures for the business, income is not “disposable income” under

§1191(d)(2) if it is “reasonably necessary to be expended” for expenditures “necessary for the

continuation, preservation, or operation” of the business.

391

The rule contemplates the payment

of items such as payroll, utilities, rent, insurance, taxes, acquisition of inventory or raw materials,

and other expenses ordinarily incurred in the course of running the business.

Questions may arise when the debtor wants to establish a reserve for various purposes,

such as capital expenditures that are anticipated (e.g., the need to repair or replace existing

equipment), or when the debtor needs to use income to grow the business (e.g., increasing

inventory levels, marketing expenses, or payroll) to improve its profitability. Creditors may

reasonably argue that the disposable income they must receive should not be depleted when the

debtor will gain the benefit of the investment of income in the business.

Chapter 12 cases have indicated that a reserve is permissible in appropriate

circumstances.

392

As later text discusses, an extension of the period that the debtor must make

payments of projected disposable income may be appropriate if the court permits its reduction

for a reserve or for expenditures to grow the business. The court in In re Urgent Care

Physicians, Ltd., 2021 WL 6090985 at * 10 (Bankr. E.D. Wisc. 2021), permitted an operating

reserve based on testimony of the debtor’s principal that the reserve was necessary to protect

against shortfalls in cash due to the cyclical nature of the debtor’s income.

391

§ 1191(d)(2).

392

See, e.g., Hammrich v. Lovald (In re Hammrich), 98 F.3d 388 (8th Cir. 1996) (affirming confirmation of a plan

including a reserve); In re Schmidt, 145 B.R. 983 (Bankr. D.S.D. 1991) (capital reserve permissible only if debtor

demonstrates that obtaining financing is not feasible); In re Kuhlman, 118 B.R. 731 (Bankr. D.S.D. 1990) (debtor

has burden of proving expenditures reasonably necessary for farming operation and living expenses); In re Janssen

Charolais Ranch, Inc., 73 B.R. 125 (Bankr. D. Mont. 1987) (dicta) (reserve is allowable). But see Broken Bow

Ranch, Inc. v. Farmers Home Admin. (In re Broken Bow Ranch, Inc.), 33 F.3d 1005 (8th Cir. 1994).

147

Another question arises if a debtor is a “pass-through” entity for income tax purposes

(e.g., a subchapter S corporation or an entity taxed as a partnership, including a limited liability

company). Such a business does not pay tax on its income. Rather, its income is “passed

through” to its owners, who must pay tax on it regardless of whether the income is distributed to

them. Payment of profits to owners of a business does not easily fit within the concept of an

expenditure reasonably necessary for its continuation, preservation, or operation.

If the debtor’s disposable income cannot take account of distributions to owners for at

least the amount of tax that they owe based on its income, the owners will owe a tax on the

business income

393

but will receive no money to pay it. When the generation of income by a

business gives rise to taxation, it seems appropriate to determine disposable income on an after-

tax basis, regardless of the tax status of the business. Moreover, in most cases the owners of the

business are also its managers, and their financial difficulties arising from inability to meet tax

obligations could adversely affect the business.

Courts will have to decide whether distributions to owners to pay taxes the owners incur

are an appropriate expenditure that is “reasonably necessary for the continuation, preservation, or

operation of the business” when the debtor is not obligated to pay the tax.

The projected disposable income test has its genesis in chapter 13, which contemplates

periodic, usually monthly, payments to the trustee for disbursement to creditors in accordance

with the plan. In some cases, the amount of the monthly payment may increase by a specified

393

Payments to creditors under the plan are not necessarily allowable as a deduction in determining taxable income.

No deduction is permissible to the extent that the debtor is repaying principal on a loan. With regard to trade debt,

no deduction will be allowed if the debtor calculates taxable income on an accrual basis (as the IRS requires for

many businesses) and has already deducted the amount due as an expense.

148

amount at one or more specified times.

394

In any event, chapter 13 plans typically provide for

the debtor to pay a regular fixed amount.

While fixed payment plans are the standard in individual cases where material variations

in income are not expected, debtors in business cases may be concerned that unpredictable

changes in the economy may depress earnings or increase expenses and make it difficult or

impossible to pay a fixed amount. Creditors, on the other hand, may expect that, if conditions

improve, the debtor should pay more.

Thus, a debtor might propose, or creditors might insist on, the payment of actual

disposable income over the required period rather than a fixed monthly amount. Variations

could include minimum or maximum requirements or some percentage of disposable income in

excess of specified amounts.

Such provisions are clearly permissible in a consensual plan that arises from negotiations

between the debtors and creditors. The statutory requirements seem flexible enough that a

debtor’s plan that included them would satisfy the PDI test. Whether a court could impose such

provisions is a more difficult question, in part because of difficulties in defining how to calculate

projected disposable income when the payment is not fixed and in specifying how the debtor

accounts for and reports it.

A debtor must also pay careful attention to the drafting of such a provision. In re Patel,

621 B.R. 245 (Bankr. E.D. Cal. 2020), illustrates the issues that arise when a plan provides for

payment other than fixed amounts.

394

Such plans are commonly referred to as “step” plans. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M.

Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE § 8:23.

149

In Patel, the chapter 11 plan of the individual debtors, confirmed in 2011, provided for

payment to creditors of all of the debtor’s “disposable income as defined in § 1129(a)(15)(B)” in

quarterly payments over seven years. The plan required reports every 120 days, but the debtor

stopped making them after 24 months.

The debtor never made any payments, and an unsecured creditor filed a motion to convert

the case to chapter 7 based on the default. The debtor contended that no default existed because

there had been no disposable income.

Construing the plan as a contract and applying state contract law, the court concluded that

disposable income included income from all sources, not just income from the business, as the

debtor argued, and that the debtor had fiduciary or contractual duties under the plan to account

for disposable income. Accordingly, although state law ordinarily places the burden on the

creditor to show a default, the court concluded that the debtor must show the completion of

payments to receive a discharge.

The court concluded that the debtor had not shown that he had not had any disposable

income and converted the case to chapter 7.

The determination of objections to confirmation based on the PDI requirement requires

the court to receive evidence about their accuracy and reliability, which may include testimony

from an accountant or financial advisor as well as the debtor’s principal.

395

In re The Lost Cajun Enterprises LLC, 2021 WL 6340185 (Bankr. D. Col. 2021).

150

ii. Determination of period for commitment of projected disposable income for

more than three years

A projected disposable income test applies in cases under chapter 12

396

and 13

397

and in

traditional chapter 11 cases of individuals.

398

Each section prescribes the period of time for

which the debtor must commit projected disposable income to make payments under the plan.

The required time is colloquially referred to as the “commitment period,” but only chapter 13

specifically uses the term by defining the “applicable commitment period” – the period for which

the debtor must use projected disposable income to pay unsecured creditors – as three years for

“below-median” debtors and five years for “above-median” debtors.

399

For sub V cases, §1191(c)(2) provides for a commitment period of three years or such

longer time, not to exceed five years, that the court fixes.

400

The five-year maximum

commitment period in a sub V case is the same as the longest minimum commitment period

under the chapter 11 and above-median chapter 13 tests.

401

Section 1191(c)(2) contains no standards for fixing the commitment period. And because

the involvement of the court in choosing the commitment period is unique to subchapter V,

practice and precedent under the tests in other chapters may not provide guidance.

In chapters 12 and 13 and in traditional chapter 11 cases of individuals, the court has no

role in determining the commitment period for projected disposable income. The court in a

chapter 12 case and in the case of a below-median chapter 13 debtor must approve the term of a

396

§ 1225(b).

397

§ 1325(b).

398

§ 1129(a)(15). The requirement applies only if an unsecured creditor invokes it.

399

§ 1125(b)(4).

400

§ 1191(c)(2).

401

The maximum commitment period in a chapter 12 case is five years. § 1225(b)(1)(B). Chapter 13 sets specific

commitment periods of three years for below-median debtors, § 1325(b)(4)(A), and five years for above-median

debtors, § 1325(b)(4)(B). The commitment period in a chapter 11 case is the longer of five years or the period for

which the plan provides for payments. § 1129(a)(15).

151

plan in excess of three years if the debtor proposes it, but whether to approve a longer plan term

that the debtor wants is different than whether to require the debtor to pay more than the debtor

wants.

402

Case law dealing with the length of a plan under the other tests does not deal with the

issue that §1191(c)(2) presents.

403

402

In a chapter 12 case, a plan may not provide for payments in excess of three years unless the court, for cause,

approves a longer period, not to exceed five years. § 1222(c). Approval of a longer period in a chapter 12 case

extends the commitment period for the period that the court approves, § 1225(b)(1)(B), but only the debtor may file

a plan, § 1221, so it is the debtor who chooses the commitment period.

In chapter 13 cases, the court has no choice to make. The statute fixes the “applicable commitment period”

as three years for a below-median debtor and five years for an above-median debtor. The only dispute for the court

is whether the debtor is below-median or above-median.

In chapter 11 cases, § 1129(a)(15) specifies the commitment period as the longer of five years or the period

for payments under the plan. The court neither approves nor fixes the commitment period.

403

The court in chapter 12 cases and in chapter 13 cases of below-median debtors must approve a plan that has a

term exceeding three years. §§ 1222(c), 1322(d).

In chapter 13 cases, the fact that the plan of a below-median debtor extends beyond three years does not

affect the applicable commitment period or how much projected disposable income the debtor must pay.

In a traditional chapter 11 case of an individual, § 1129(a)(15) sets the commitment period as the longer of

five years or the period for which the plan provides payments. Thus, the terms of the plan, not a separate

determination by the court, govern the length of time that the debtor must use projected disposable income to make

payments.

Until enactment of BAPCPA in 2005, which increased the minimum commitment period in chapter 13

cases for above-median debtors to five years, a chapter 13 plan of any debtor could not provide for payments for

more than three years unless the court, for cause, approved a longer period, up to five years. § 1322(c) (2000)

(current version at § 1322(d) (2018)) (BAPCPA renumbered subsection (c) as subsection (d)); see W. Homer Drake,

Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE § 4:9. And the pre-BAPCPA

projected disposable income test required use of projected disposable income for only three years, regardless of the

length of the plan. 11 U.S.C. § 1325(b)(1)(B) (2000) (current version at 11 U.S.C. § 1325(b)(4) (2018)).

The pre-BAPCPA rules for chapter 12 cases were different, and BAPCPA did not change them. As in pre-

BAPCPA chapter 13 cases (and as in cases of below-median chapter 13 debtors under current law), the maximum

duration of a plan under § 1222(c) is three years unless the court approves a longer period for cause. But unlike pre-

BAPCPA chapter 13, the chapter 12 projected disposable income test in § 1225(b)(1) requires use of projected

disposable income during any longer period that the court approves.

Some pre-BAPCPA case law concerning the maximum period for a chapter 13 plan suggests that the pre-

BAPCPA limitation to three years absent a showing of cause was to protect the debtor from being bound for a

lengthy period. Under this reasoning, a three-year limitation on the plan period for a below-median chapter 13

debtor is mandatory unless a longer period is in the interest of the debtor. See C

HAPTER 13 PRACTICE AND

PROCEDURE § 4:9 (citing cases). This conclusion is consistent with the facts that (1) only the debtor may file a

chapter 13 plan under § 1321 (although an unsecured creditor or trustee may request modification of a confirmed

plan under §1329(a)); and (2) the court must approve a period longer than three years for cause under § 1322(d)).

The issue is moot for an above-median chapter 13 debtor because the BAPCPA amendment to the projected

disposable income rule makes a five-year period mandatory if the trustee or an unsecured creditor invokes the

projected disposable income rule (and someone always does).

Although the case law deals with the question of how long a plan should be, it does so in the context of a

debtor’s proposal of a longer period. The case law does not consider the different question of whether the court

should require the debtor to make payments for a longer period than the plan proposes.

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Courts will have to determine what facts and circumstances justify a longer commitment

period and, if so, how much longer the period should be.

One reason to extend the period could be a debtor’s deduction from projected disposable

income of amounts required for anticipated capital needs or expenses to grow the business, as

earlier text discusses. If the court permits such deductions, existing creditors are effectively

funding the business for the future benefit of the debtor. An extension of the commitment period

could be an appropriate way for creditors to share in the debtor’s success that depends in part on

their involuntary contributions in the form of reduced projected disposable income.

404

Courts will also have to decide how to proceed when a creditor or trustee asks to fix the

commitment period for a longer time than proposed in the debtor’s plan.

405

The authority of the

court to fix the commitment period implies authority to order more payments than the debtor’s

plan proposes. The contrary position is that the court may only deny confirmation unless the

debtor modifies the plan to conform with the court’s determination. As a practical matter, it may

make no difference to a debtor who wants a confirmed plan.

The court’s authority to fix the commitment period implies that the court may raise the

issue sua sponte.

Several courts have addressed the issue of the period over which the debtor must pay

disposable income to creditors.

404

See 8 COLLIER ON BANKRUPTCY ¶ 1225.04 (stating that in a chapter 12 case, if reserves for capital or other

discretionary expenditures are necessary, commitment period is properly extended).

405

Subchapter V does not expressly give the trustee standing to object to confirmation. The trustee’s duty to appear

and be heard at the confirmation hearing, § 1183(b)(3)(B), at a minimum contemplates that the trustee may express

the trustee’s views on any confirmation issue to the court.

If the trustee is not a lawyer, a trustee’s “objection” may initiate a dispute that requires legal representation,

whereas a trustee’s report bringing potential issues to the attention of the court may not. See Section IV(F). Unless

the court concludes as a legal matter that it has no independent duty to determine compliance with confirmation

requirements, it makes no practical difference, unless the trustee plans to appeal an adverse determination. Failure

to object might be a waiver of it for appellate purposes.

153

In re Walker, 628 B.R. 9 (Bankr. E.D. Pa. 2021), which Section VIII(D)(8) discusses in

detail, involved a plan that all impaired classes had accepted, so the PDI requirement did not

apply. The court rejected the objecting creditor’s contention that the debtor’s failure to propose

payments for more than three years established a lack of good faith.

In re Urgent Care Physicians, Ltd., 2021 WL 6090985 (Bankr. E.D. Wisc. 2021),

considered arguments by the U.S. Trustee and creditors that the court should require the debtor

to make payments for five years instead of the three years that the plan proposed for the plan to

be fair and equitable. The court concluded that a three-year term was appropriate.

The legislative history of subchapter V, the court said, indicated that Congress had

recognized that small businesses typically have shorter life-spans than large businesses and that

it had enacted subchapter V to permit small businesses to obtain bankruptcy relief in a timely,

cost-effective manner and remain in business, thereby benefitting not only the owners, but also

employees, suppliers, customers, and others who rely on the business.

Congress’s recognition that small businesses typically have shorter life-spans, the court

reasoned, “suggests that a plan term of three years is more reasonable, generally speaking (or as

a default), than a five-year term, absent unusual circumstances.” Id. at *10. The court added that

Congress’s concern for employees, customers, and others, as well as for the small business itself,

“reflects an intent to balance the shorter life-span planning of small businesses and timely cost-

effective benefits to debtors, against the benefits to creditors.” Id.

The Urgent Care Physicians court concluded that a three-year term achieved the proper

balance. The court noted that the debtor provided outpatient health care for urgent needs, had

deferred payments to insiders and some healthcare equipment payments, and had committed to

paying at least its projected disposable income. Extending the term for two more years, the court

154

continued, would further defer salary restoration to key staff, and further deferring full

repayment of equipment charges could jeopardize availability of the equipment. Id. at *11.

The court concluded, id. at *11 (citation omitted):

While at first blush the simple math of an extended plan term might seem to generate a

higher payment to unsecured creditors, the inherent risks to the small business debtor of

that extension could defeat the unsecured creditors’ desire for greater recovery. The

three-year term here is fair and equitable, as it properly balances the risks and rewards for

both the debtor and its creditors. In these circumstances, the Court declines to fix a

longer plan period. A longer plan term would disproportionately harm the debtor in

forcing it to accrue additional unpaid expenses and potentially emerge from its

reorganization saddled with more debt.

In Legal Service Bureau, Inc., v. Orange County Bail Bonds, Inc. (In re Orange County

Bail Bonds, Inc.), 2022 WL 1284683 (B.A.P. 9

Cir. 2022), the Bankruptcy Appellate Panel of

the Ninth Circuit described the three-year period as a “baseline requirement.” Id. at *5. The

court explained, id.:

As part of the streamlined, flexible process under subchapter V, the Bankruptcy Code

sets a baseline requirement that a debtor commit three years of disposable income, while

it also affords the bankruptcy court discretion to require more as a condition of finding a

plan fair and equitable.

The court observed that the court’s role in setting a period longer than three years is

“unique to subchapter V, noting that the period for payment of disposable income in chapter 13

cases is set by statute and in chapter 12 cases by the debtor, id. at *5, as earlier text discusses.

Because the bankruptcy court had not set a commitment period longer than three years, the court

155

ruled, the plan satisfied the minimum confirmation requirement if it provided for payment of

disposable income based on a three-year period.

The Orange County Bail Bonds court affirmed confirmation of the plan because it met

the alternative requirement of subparagraph (B) of § 1191(c)(2) that the plan provide for

payments having a present value of not less than the debtor’s disposable income for three years.

Specifically, the plan provided for about $ 433,000 that the debtor realized from the postpetition

liquidation of an estate asset to make payments under the plan, which exceeded its projected

disposable income for three years of about $ 287,000. Id. at *6.

406

The opinion in Legal Service Bureau, Inc., v. Orange County Bail Bonds, Inc. (In re Orange County Bail Bonds,

Inc.), 2022 WL 1284683 (B.A.P. 9

Cir. 2022), states that the liquidation proceeds were about $ 433,000, id. at *3,

that the plan proposed to pay the objecting creditor, Legal Service Bureau, Inc., d/b/a Global Fugitive Recovery

(“Global”), which the plan separately classified, $100,000 of those proceeds, id., and that the bankruptcy court’s

confirmation order required payment to Global of $127,794.35. Id. at *4. The opinion further states that the plan

proposed to pay Global from its actual disposable income for the five years after confirmation, but the debtor stated

that because it would pay only actual disposable income, it was possible that Global could receive nothing from

future earnings or that it might not be paid in full. Id. at *3. The debtor projected total disposable income of about

$287,000 over the three-year period after confirmation and about $493,000 over five years. Id.

The BAP opinion further states that, in response to an objection to confirmation that § 1191(c)(2) requires a

debtor to commit at least three years of projected disposable income to the plan, the debtor amended the plan to

provide that it would not receive a discharge unless it paid all actual disposable income over a five-year period and it

paid the largest creditor, separately classified, a minimum of $181,000 from actual disposable income. Id. at *3.

The BAP opinion does not recite what happened to the liquidation proceeds that Global did not receive or

the treatment of unsecured claims in the other class.

A review of the plan and confirmation order in the bankruptcy court clarifies the provisions of the plan. In

re Orange County Bail Bonds, Inc., Bankruptcy Case No. 8:19-bk-12411-ES (the “Bankruptcy Case”).

Although the confirmed plan separately classified Global and general unsecured creditors, it provided for

the classes to share pro rata in the liquidation proceeds remaining after payment of priority and administrative claims

and in the debtor’s actual disposable income. Plan of Reorganization for Small Business Debtor, Bankruptcy Case

ECF No. 285 (Mar. 2, 2021), at 1 (¶ C), 3 (¶ 4.01, Class 2 and Class 3 treatment). The provisions for treatment of

the two classes are identical except that the provision for Global states that the debtor is pursuing an appeal from the

prepetition judgment it obtained. The debtor in the plan valued the distributions that creditors would receive at

“approximately” 100 cents on the dollar, id. at 2 (Article 1), and the plan provided for payment of interest on the

claims in both classes at the federal judgment rate. Id. at 3 (¶ 4.01, Class 2 and Class 3 treatment). The plan stated

that, after payment of administrative expenses and apriority claims from the liquidation proceeds, Global would

receive $100,000 on its claim and general unsecured creditors would receive pro rata distributions totaling

$3,608.31. Id. at 1 (¶ C).

The confirmation order amended the discharge provision of the plan to provide that, unless all claims were

paid in full, the debtor would not receive a discharge unless the debtor paid all actual disposable income to creditors

for five years and the debtor paid a minimum of $181,000. Confirmation Order, Bankruptcy Case ECF No. 310

(Apr. 13, 2021), at 6-7 (¶ I). It did not provide for $181,000 to be paid to Global.

The confirmation order also ) included specific directions for disbursement of the liquidation proceeds of

$432,972.95. It provided for payment of allowed fees of the debtor’s attorney’s and professionals, the allowed fee

156

5. Requirements for feasibility and remedies for default

SBRA added a feasibility requirement in § 1191(c)(3) as part of the “fair and equitable”

test. The Bankruptcy Threshold Adjustments and Technical Corrections Act (“BTATCA”)

407

amended it to clarify its operation.

408

of the subchapter V trustee, unpaid postpetition compensation due to the debtor’s principal, and priority claims in

the total amount of $ 300,567.37, leaving a balance of $132,405.58 for distribution to unsecured creditors. Global

received $127,794.35, and the only two other unsecured creditors received a total of $4,611.23.

The bankruptcy court confirmed the amended plan, concluding that it met the requirements of subparagraph

(A) of § 1191(c)(2). Legal Service Bureau, Inc., v. Orange County Bail Bonds, Inc. (In re Orange County Bail

Bonds, Inc.), 2022 WL 1284683 at *9 (B.A.P. 9

Cir. 2022).

The Bankruptcy Appellate Panel ruled that the plan did not meet the requirements of subparagraph A

because it did not provide for payment of the debtor’s projected disposable income. “Instead,” the court explained,

“it provides for an effective date payment of $427,972.95 and possible payment of an unknown amount from

Debtor’s actual disposable income.” Id. at *5.

The BAP rejected the debtor’s argument that the plan complied with subparagraph B because the effective

date payment of the liquidation proceeds plus the minimum payment of $181,000 was greater than projected

disposable income over five years.

The court advanced two reasons. First, the plan made discharge contingent on the minimum payments, but

it did not require the payment of any specific amount. Second, the effective-date value of the payments could not be

determined because the plan did not specify the timing or actual amount of any future payment. Id. at *5.

Nevertheless, the BAP concluded that the plan satisfied § 1191(c)(2)(B) because the effective date payment

of the liquidation proceeds (about $433,000) exceeded the debtor’s projected disposable income (about $287,000)

for the minimum three-year period. Id. at *6. Therefore, the BAP ruled that the bankruptcy court “did not clearly

err in finding that the Plan is fair and equitable to [the objecting creditor]. Although the confirmation order

referenced § 1191(c)(2)(A), any such error was harmless. And we may affirm on any ground fairly supported by the

record.” Id. (citations omitted).

407

Bankruptcy Threshold Adjustment and Technical Corrections Act, § 2(f), Pub. L. No. 117-151, 136 Stat. 1298

(June 21, 2022) (hereinafter “BTATCA”). The amendment applies in cases commenced on or after March 27, 2020,

that were pending on the effective date. BTATCA § 2(h)(2).

408

Prior to BTATCA, § 1191(c)(3) had three parts.

Subparagraph (3)(A) contained two of them, stated in the alternative. Clause (3)(A)(i) required that the

debtor will be able to make all payments under the plan, while clause (3)(A)(ii) required only a reasonable

likelihood that the debtor will be able to make the plan payments. The two alternative provisions made no sense

because the first necessarily incorporates the second. (If the debtor will be able to make all payments it must be true

that there is a reasonable likelihood that it will.) The first provision is superfluous as a practical matter because the

court never has to make a distinction and decide that a debtor will be able to make payments; finding a reasonable

likelihood is always sufficient.

The third part of paragraph (3) was subparagraph (B), which required that the plan contain appropriate

remedies. It made sense as an independent directive. Moreover, it is connected to subparagraph (A) with “and”;

such a connection between two requirements normally means that both must be satisfied.

The puzzling language in subparagraph (A), however, provided the basis for an argument that a drafting

error occurred. Thus, it was arguable that former § 1191(c)(3) did not require that the plan provide appropriate

remedies if the court concluded that the debtor will be able to make all plan payments.

The three parts made more sense if the remedies requirement applied only when the court concluded there

is a reasonable likelihood that the debtor will make payments, not that it will be able to. Under such an

interpretation, the alternative requirements are: (1) a finding that the debtor will be able to make payments; or (2) a

157

As amended by BTATCA, § 1191(c)(3) states two alternative standards.

The first alternative, § 1191(c)(3)(A), requires a finding that the debtor “will” be able to

make all payments under the plan.

The second alternative requires only a “reasonable likelihood” that the debtor will be

able to make plan payments, § 1191(c)(3)(B)(i). In this situation, however, § 1183(c)(3)(B)(ii)

requires that the plan provide “appropriate remedies, which may include the liquidation of

nonexempt assets, to protect the holders of claims or interests in the event that the payments are

not made.” Section XII(B) discusses remedies for default in the plan.

A debtor may obtain cramdown confirmation of a plan that does not include “appropriate

remedies” upon default, but doing so subjects the plan to the more stringent feasibility

requirement. It seems risky to let confirmation depend on a bankruptcy judge’s willingness to

make a fine distinction between the two feasibility standards and, more critically, a

determination that the debtor satisfies the higher one.

Each of the alternative feasibility standards is higher than the requirement in

§ 1129(a)(11) that confirmation is “not likely to be followed by liquidation, or the need for

further reorganization” of the debtor, unless the plan contemplates it. Although the

§ 1129(a)(11) requirement remains applicable to subchapter V confirmation as one of the

provisions of § 1129(a) that must be satisfied for consensual or cramdown confirmation, a

finding that the debtor will make, or is reasonably likely to make, plan payments necessarily

means that liquidation or further reorganization will not likely follow.

finding that there is a reasonable likelihood that the debtor will make payments and the plan provides appropriate

remedies. This reading gives meaning to both parts of subparagraph (A).

BTATCA changed § 1191(c)(3) to resolve the issue by requiring appropriate remedies if there is a

“reasonable likelihood” that the debtor will make plan payments but not if the court finds that it will, as the text

explains.

158

The court in In re Moore & Moore Trucking, LLC, 2022 WL 120189 (Bankr. E.D. La.

2022), held that a provision in a plan that permitted the objecting secured creditor to foreclose in

the event of default was an appropriate remedy that met the requirement of § 1191(c)(3)(B).

409

In In re Hyde, 2022 WL 2015538 at *10 (Bankr. E.D. La. 2022), the court concluded that a

provision for the debtor and the debtor’s non-filing spouse to grant a second mortgage on their

home to the trustee for the benefit of creditors in the event of default in payments of projected

disposable was an appropriate remedy.

Courts in sub V cases have addressed objections based on feasibility (under the statute

prior to the BTATCA amendment) in the context of the facts in the case.

In In re Ellingsworth Residential Community Association, Inc., 2020 WL 6122645

(Bankr. M.D. Fla. 2020),

410

the bankruptcy court confirmed the plan of a homeowner’s

association over the objection of a creditor that it was not feasible because its funding depended

on a proposed assessment of owners that the owners had not yet been approved.

Based on testimony from the president of the association that the plan was feasible and

that the homeowners would approve the assessment, the court found that the assessment would

be approved and that the debtor would therefore be able to make payments as proposed. As part

of its ruling, the court imposed a requirement that the homeowners approve the assessment

within four months, in default of which the court would find the debtor in breach of the plan.

409

The case arose prior to BTATCA’s amendment of the statute. The revised section is § 1191(c)(3)(B)(ii). See

supra note 408.

410

In an earlier order, the bankruptcy court had determined that the debtor was eligible for subchapter V even

though as a nonprofit homeowner’s association it had no profit motive. In re Ellingsworth Residential Community

Association, Inc., 619 B.R. 519 (Bankr. M.D. Fla. 2019). The district court agreed with the bankruptcy court in an

order affirming the issuance of a scheduling order. Guan v. Ellingsworth Residential Community Association, Inc.

(In re Ellingsworth Residential Community Association, Inc.), 2021 WL 3908525 (M.D. Fla. 2021), appeal

dismissed, 2021 WL 6808445 (11

Cir. 2021) (unpublished), cert. denied, 2022 WL 1131391 (2022).

159

In In re Pearl Resources, LLC, 622 B.R. 236 (Bankr. S.D. Tex. 2020), the court

confirmed the plan of the jointly administered debtors over the objections of several creditors

that the plan was not feasible because its projections with regard to disposable income were

speculative and subject to market conditions.

The court observed, id. at 269 (footnotes omitted):

The new requirement [of § 1191(C)(3)(A)

411

] fortifies the more relaxed feasibility

test that § 1129(a)(11) contains. Section 1129(a)(11) requires only that confirmation is

not likely to be followed by liquidation or the need for further reorganization unless the

plan proposed it. . . . The feasibility requirement for confirmation requires a showing that

the debtor can realistically carry out its plan. Though a guarantee of success is not

required, the bankruptcy court should be satisfied that the reorganized debtor can stand

on its own two feet.

The court found that expert testimony regarding the plan’s feasibility was credible and

confirmed the plan. In addition, the court found that the plan’s provision for the liquidation of

assets in the event of default satisfied the requirement of § 1191(c)(3)(B) that the plan contain

appropriate remedies.

Other courts have similarly relied on testimony from an accountant

412

or credible

testimony from the debtor’s principal

413

in determining whether a plan meets the feasibility

requirement of § 1191(c)(3)(B)(ii).

In In re Gabbidon Builders, LLC, 2021 WL 1964544 (Bankr. W.D. N.C. 2021), the court

denied confirmation of the debtor’s plan and converted the case to chapter 7. The debtor planned

411

The case was decided before BTATCA’s amendment of the statute. See supra note 408.

412

In re Moore & Moore Trucking, LLC, 2022 WL 120189 (Bankr. E.D. La. 2022).

413

In re Urgent Care Physicians, 2021 WL 6090985 (Bankr. E.D. Wisc. 2021).

160

to sell a parcel of real property, to use the proceeds to make some payments to creditors and to

purchase a new lot, to construct a house on the new lot and sell it, and to use those proceeds to

pay creditors. The plan also proposed monthly payments to creditors from operating income.

The court found that the principal’s testimony in support of confirmation was unreliable

and conflicting. The court concluded that the evidence did not establish that sale of the property

was imminent, that the proposed construction of a new house could occur as proposed, or what

the debtor would receive upon its sale. Id. at *2-3. Similarly, the court concluded that no

evidence supported the debtor’s predictions of future income. Id. at *4.

Testimony from a debtor’s principal was likewise insufficient to establish feasibility in In

re U.S.A. Parts Supply, Cadillac U.S.A. Oldsmobile, U.S.A. Limited Partnership, 2021 WL

1679062 (Bankr. N.D. W. Va. 2021). The court questioned the debtor’s revenue projections,

noting the absence of testimony as to how it would achieve a 50 percent increase over declining

historical results. Id. at *4.

414

The court in In re Lupton Consulting LLC, 2021 WL 3890593 (Bankr. E.D. Wisc. 2021),

concluded that the plan was not feasible because the debtor’s financial projections submitted by

its principal were not reliable in view of historical data and discrepancies with operating reports.

In an individual case, the court in In re Hyde, 2022 WL 2015538 at *10 (Bankr. E.D. La.

2022), concluded that testimony from the debtor and the debtor’s non-filing spouse about the

debtor’s income from Social Security benefits and part-time work, the non-filing spouse’s

income and commitment to assist in the funding of the plan, and annual household expenses

414

The court addressed the feasibility issue after it had decided to dismiss the case for cause, including the failure to

explain ambiguities in monthly reports, postpetition payment of unsecured creditors without court approval, failure

to file postpetition sales tax returns and pay the taxes, and receipt of a postpetition loan from a company owned by

the principal’s spouse without court approval. 2021 WL 1679062 at *3.

161

established that the debtor could realistically carry out the plan providing for payment of

projected disposable income for five years.

6. Payment of administrative expenses under the plan

Section 1191(e) permits confirmation of a plan under §1191(b) that provides for payment

through the plan of administrative expense claims and involuntary gap claims. Section VII(C)

discusses this provision.

C. Postconfirmation Modification of Plan

The rules for postconfirmation modification in §1193 differ depending on whether the

court has confirmed a consensual plan under §1191(a) or a cramdown plan under §1191(b). The

provisions in § 1127 for modification of a plan do not apply in a sub V case.

415

1. Postconfirmation modification of consensual plan confirmed under §1191(a)

If the court has confirmed a consensual plan under §1191(a), §1193(b) does not permit

modification after substantial consummation. The modification must comply with applicable

plan content requirements.

The modified plan becomes the plan only if circumstances warrant the modification and

the court confirms it under §1191(a).

416

The holder of any claim or interest who voted to accept

or reject the confirmed plan is deemed to have voted the same way unless, within the time fixed

by the court, the holder changes the vote.

417

These are the same rules that govern

postconfirmation modification in traditional chapter 11 cases under § 1127(b).

Section 1101(2), defines “substantial consummation.” It requires that three events occur.

The first is the “transfer of all or substantially all of the property proposed by the plan to be

415

§ 1181(a).

416

§ 1193(b).

417

§ 1193(d).

162

transferred.” § 1101(2)(A). The second is the “assumption by the debtor or the successor to the

debtor under the plan of the business or of the management of all or substantially all of the

property dealt with by the plan.” § 1101(2)(B). The third is the “commencement of distribution

under the plan.” § 1101(2)(C).

Typically, the determining factor for substantial consummation is the commencement of

distribution.

In re National Tractor Parts, Inc., 2022 WL 2070923 (Bankr. N.D. Ill. 2022), considered

when distributions commence. There, the debtor sought to modify its consensual plan confirmed

under §1191(a) to modify the treatment of the claim of the Small Business Administration based

on a loan under the COVD-19 EIDL program. The debtor wanted to obtain an increase in the

amount of the loan on favorable terms but was not eligible under the terms of the plan that

treated SBA’s claim as a general unsecured claim, payable in quarterly payments.

The proposed modification provided for separate classification of the SBA’s claim and

payment of it in accordance with contractual terms if the SBA provided additional funding or

treatment as a general unsecured claim under the original plan provisions if it did not.

The United States Trustee objected to modification on the ground that “commencement

of distribution under the plan” had occurred such that the plan had been substantially

consummated under the definition in § 1101(2) and that, therefore, the consensual plan could not

be modified under § 1193(b).

The debtor had made de minimis payments totaling $ 1,428.20 to creditors in two classes

but had not yet made a $ 50,000 payment to a creditor in another class or begun quarterly

payments to general unsecured creditors.

163

The National Tractor Parts court held that “commencement of distribution” occurs at the

time any payment to any creditor is made. Accordingly, the court ruled, the plan had been

substantially consummated and the debtor could not modify it.

The National Tractor Parts court concluded that § 1101(2)(C) is plain and unambiguous.

The court explained, id. at * 4:

The plain language of [§ 1101(2)(C)] does not require commencement of distribution to

every creditor, or every class, or even substantially all creditors or classes. It means,

simply, that the process contemplated in the confirmed plan is underway.

The court observed, further, that the language in § 1101(2)(A) and (B) refers to “all or

substantially all” of property to be transferred or dealt with by the plan, whereas such language is

“conspicuous in its absence from § 1101(2)(C). Id at *4.

National Tractor Parts is consistent with other cases dealing with other cases addressing

the issue in traditional chapter 11 cases.

418

E.g., In re Centrix Fin. LLC, 394 F. App’x 485, 489 (10

Cir. 2010) (“[The] construction of § 1102(A) as

requiring completion of substantially all payments to creditors would render meaningless § 1102(C), which requires

only that distributions under the plan be commenced.”) (Unpublished). In re Wade, 991 F.2d 402, 406 n. 2 (7

Cir.

1993) (“Section 1101(2) states that substantial consummation is reached when, inter alia, distribution has

commenced but not necessarily been completed.” (Emphasis in original); In re JCP Properties, Ltd., 540 B.R. 596,

607 (Bankr. S. D. Tex. 2015) (“To require a substantiality of distribution payments rather than a mere existence of

distribution payments, where the very same definition expressly includes a substantiality component for transferred

property, would render § 1102’s ‘all or substantially all’ a mere surplusage within § 1101(2).”); In re Western

Capital Partners, LLC, 2015 WL 400536 (Bankr. D. Colo. 2015).

164

Some courts, however, have concluded that commencement of distribution does not

occur merely because the debtor has made some payments under the plan.

419

As one court

explained:

420

Applying the plain meaning approach of statutory interpretation, it seems that

commencement should mean not just the beginning of payments to a single creditor, but

the commencement of distribution to all or substantially all creditors.

2. Postconfirmation modification of cramdown plan confirmed under §1191(b)

If the plan has been confirmed under §1191(b), §1193(c) permits the debtor to modify the

plan at any time within three years, or such longer time not to exceed five years as the court

fixes.

421

The modified plan becomes the plan only if circumstances warrant the modification and

the court confirms it under the requirements of §1191(b).

422

The postconfirmation modification rules for a cramdown plan are similar to the

postconfirmation modification provisions in chapters 12 and 13. In these chapters,

postconfirmation modification is permitted at any time prior to the completion of payments

under the plan; the modified plan must meet confirmation requirements.

423

Unlike the provisions

419

E.g., In re Dean Hardwoods, Inc., 431 B.R. 387, 392 (Bankr. E.D.N.C. 2010); In re Litton, 222 B.R. 788 (Bankr.

W.D. Va. 1998) (holding plan not substantially consummated because one distribution made to one creditor), aff'd

on other grounds, 232 B.R. 666 (W.D Va. 1999); In re Heatron, Inc., 34 B.R. 526, 529 (Bankr. W.D. Mo.

1983)(holding plan not substantially consummated 29 months after confirmation when 53% of payments under the

confirmed plan had been made). See also In re McDonnell Horticulture, Inc. 2015 WL 1344254 at *3 (Bankr.

E.D.N.C. 2015) (Noting that “courts in this District have held that distribution of payments under a plan needs to

have commenced with respect to ‘all or substantially all’ creditors,” the court concluded that payments had

commenced.); In re Archway Homes, Inc., 2013 WL 5835714 at * 4 (Bankr. E.D.N.C. 2013) (citing Dean

Hardwoods, supra, with approval but concluding distributions had commenced.).

The National Tractors court characterized this approach as the minority view. In re National Parts, Inc.,

2022 WL. 2070923 at *5 (Bankr. N.D. Ill. 2022).

420

In re Dean Hardwoods, Inc., 431 B.R. 387, 392 (Bankr. E.D. N.C. 2010).

421

§ 1193(c).

422

The provisions of § 1192(d) with regard to acceptances or rejections of the original plan do not apply to

postconfirmation modification of a cramdown plan, presumably because such a plan is confirmed without regard to

acceptances.

423

§§ 1229, 1329.

165

in the other chapters, §1193(c) does not permit modification at the request of creditors or the

trustee.

424

D. § 1129(a) Confirmation Issues Arising in Subchapter V Cases

As Sections VIII(A) and (B) explain, both consensual and cramdown confirmation

require that the plan meet all the requirements of § 1129(a) except those noted. This Section

discusses confirmation issues under § 1129(a) that do not involve subchapter V provisions but

that have arisen in subchapter V cases.

425

Section VIII(E) discusses confirmation and related

issues involving secured claims that have arisen in subchapter V cases.

1. Classification of claims; unfair discrimination

A plan must designate classes of claims, with some exceptions such as priority tax

claims, and interests, § 1123(a), and specify any class that is not impaired, § 1123(b).

Classification is particularly critical if the debtor wants consensual confirmation because

consensual confirmation requires that all classes of claims and interests accept the plan or not be

impaired. § 1129(a)(8).

426

The classification rule in § 1122(a) is that the claims or interests in a

class must be “substantially similar.” An issue related to classification is that cramdown

confirmation of a subchapter V plan requires, among other things, that the plan not “discriminate

unfairly.” §1191(b).

Two cases have considered the classification of secured claims in subchapter V plans.

424

§ 1193(c).

425

For a review and application of requirements for confirmation in a subchapter V case, see In re Pearl Resources,

LLC, 622 B.R. 236 (Bankr. S.D. Tex. 2020). See also In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr.

E.D. Cal. 2020).

426

It is also important in the cramdown context because cramdown confirmation still requires that the plan comply

with the provisions of the Bankruptcy Code. § 1329(a)(1). But a court in the cramdown situation might overlook

the issue if the treatment of all members of the class complies with the cramdown requirements anyway.

166

In In re New Hope Hardware, LLC, 2020 WL 6588615 (Bankr. N.D. Ga. 2020), the debtor

sought confirmation of a consensual plan that put two creditors, each secured by a separate vehicle,

in the same class. Only one of them accepted the plan. The court concluded that, because each

creditor had rights in different collateral, the claims were not substantially similar, and the

classification therefore violated § 1122(a). Id. at * 3.

In In re Olson, 2020 Bankr. Lexis 2439 at * 3 (Bankr. D. Utah 2020), however, the court

confirmed a plan that provided for a class of “miscellaneous secured claims.”

In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020), involved

cramdown confirmation of a sub V plan that provided different treatment for two classes of

unsecured claims. One class consisted of disputed unsecured claims of a group of creditors that

totaled approximately $ 360,000; the other class included all other unsecured claims of

approximately $ 50,000.

The plan provided for creditors in each class to receive payments of 59 percent of their

claims from disposable income over five years, but the method of payments differed. The

undisputed creditors were to receive equal monthly payments. The payments for the disputed

creditors, however, were adjusted to reflect the seasonal nature of the debtor’s business, which

was the sale of retail outdoor sporting goods in South Lake Tahoe, California.

427

Further, the

plan provided for the payments on the disputed claims to be made into a reserve account pending

determination of the objections to the claims. Id. at 6.

427

Payments for the months of April through June and September through November were twice as much as

payments for the months off January through March and July, August, and December.

167

The Fall Line Tree Service court concluded that the differences in treatment were

“rationally related to the rights of the parties and to seasonal cash flow realities of the Lake

Tahoe recreation market” and ruled that the plan did not discriminate unfairly. Id. at 6.

Unfair discrimination may also occur when a plan proposes to pay an undersecured

creditor who exercises the § 1111(b)(2) election

428

more than it is entitled to receive, thereby

reducing the money available to pay unsecured claims.

429

2. Acceptance by all classes and effect of failure to vote

Consensual confirmation requires acceptance by all impaired classes of claims and

interests. § 1129(a)(8). This includes holders of equity interests if the plan impairs them. In re

New Hope Hardware, LLC, 2020 WL 6588615 at * 3 (Bankr. N.D. Ga. 2020).

If a creditor does not vote on the plan, the question is whether the creditor is deemed to

have accepted the plan.

In In re Olson, 2020 Bankr. Lexis 2439 at * 3 (Bankr. D. Utah 2020), the court concluded

that holders of impaired claims that did not vote were bound by the classes that accepted the plan

and confirmed it in the absence of any accepting vote in one class. The court relied on In re

Ruti-Sweetwater, Inc., 836 F.2d 1263, 1267-68 (10

Cir. 1988). Other bankruptcy courts in the

Tenth Circuit have reached the same result.

430

The court in In re New Hope Hardware, LLC, 2020 WL 6588615 at * 3 (Bankr. N.D. Ga.

2020), reached the opposite conclusion. The court reasoned that, in the absence of acceptance by

428

Section VIII(E)(1) discusses the § 1111(b)(2) election.

429

In re Topp’s Mechanical, Inc. 2021 WL 5496560 (Bankr. D. Neb. 2021). Section VIII(B)(3) discusses the case

in the context of the “fair and equitable” requirement of § 1191(c).

430

In re The Lost Cajun Enterprises, LLC, 2021 WL 6340185 at * 7 (Bankr. D. Col. 2021); In re Roundy, 2021 WL

5428891 at * 2 (Bankr. D. Utah 2021); In re Robinson, 632 B.R. 208, 218 (Bankr. D. Kansas 2021).

168

the impaired class of equity interests, the plan did not comply with the mandate of § 1129(a)(8)

that the class either accept the plan or not be impaired.

431

3. Classification and voting issues relating to priority tax claims

A debtor often owes taxes to the Internal Revenue Service as well as to state and local tax

authorities that are entitled to priority under § 507(a)(8). Section 1129(a)(9)(C) requires that a

plan pay the claims over a period ending not later than five years after the entry of the order for

relief in a manner not less favorable than the most favored nonpriority unsecured claim provided

for by the plan (other than “convenience class” creditors paid in cash as § 1122(b) permits). A

priority tax claim must be paid with interest at the rate that applicable nonbankruptcy law

requires. § 511.

Holders of priority tax claims often do not vote on chapter 11 plans that comply with

§ 1129(a)(9)(C). It does not appear that acceptance by a priority tax claimant is an additional

requirement for confirmation under § 1129(a). Section 1123(a)(1) expressly excludes priority

tax claims from its requirement that the plan designate classes of claims, thus recognizing that

voting by such creditors is not required. The court in In re New Hope Hardware, LLC, 2020 WL

6588615 at * 3 (Bankr. N.D. Ga. 2020), confirmed a plan that provided for treatment of a priority

tax claim in compliance with § 1129(a)(9)(C) even though the tax claimant did not accept the

plan.

432

Although § 1123(a)(1) does not require classification of a priority tax claim, chapter 11

plans often provide for them in a class. Better practice is to place each taxing authority in its

own class or to state the treatment for each one separately.

431

The court nevertheless confirmed the plan based on acceptances by all of the holders of equity interests that

occurred at the confirmation hearing.

432

Accord, In re Louis, 2022 WL 2055290 at * 17 (Bankr. C.D. Ill. 2022).

169

4. Timely assumption of lease of nonresidential real estate

Section 365(d)(4)(A) provides for the automatic rejection of a lease of nonresidential real

property unless it is assumed within the time it specifies. The court may, prior to the expiration

of the deadline, extend it for 90 days, for cause. § 365(d)(4)(B). If the lease is rejected, the

debtor must immediately surrender the leased property to the lessor. § 365(d)(4)(A).

The Consolidated Appropriations Act, 2021 (the “CAA”) temporarily amended § 365(d)

to change the deadline for assumption from 120 days to 210 days after the order for relief and to

permit an extension of the time for an additional 90 days.

433

On December 28, 2022, the

deadline reverted to 120 days, which may be extended for up to 90 days.

434

In In re Motif Designs, Inc., 2020 WL 7212713 (Bankr. S.D. Mich., 2020), the sub V

debtor obtained an extension of time to file its plan but had not sought to assume the lease. The

plan, however, provided for the debtor to continue to occupy the property for about four months

after the confirmation hearing. Because the plan provided for occupancy of the property in

violation of § 365(d)(4), the court denied confirmation because the plan did not meet the

requirement of § 1129(a)(1) that the plan comply with the applicable provisions of the

Bankruptcy Code.

433

Consolidated Appropriations Act, 2021 (the “CAA”), Pub. L. No. 116-260, Title X, § 1001(f)(1)(B), 134

Stat.1182, 3219 (December 27, 2020).

434

Id. § 1001(f)(2)(A).

170

5. The “best interests” or “liquidation” test of § 1129(a)(7)

Section 1129(a)(7)(A)(ii) requires that a creditor who has not accepted the plan must

receive under the plan property with a value that is not less than what the creditor would receive

if the debtor were liquidated under chapter 7.

In re Young, 2021 WL 1191621 (Bankr. D. N.M. 2021), determined that a plan did not

comply with this requirement based on its finding that the fees of a chapter 7 trustee would be

less than the anticipated costs of liquidating property under a plan.

In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020), discusses

evidentiary issues in connection relating to the liquidation analysis.

The Fall Line Tree Service court rejected an objecting creditor’s argument that purchased

goodwill, arising from the debtor’s earlier acquisition of its business from the creditor, should be

included in the liquidation analysis under Generally Accepted Accounting Principles. The court

concluded, “[P]urchased goodwill in the original sale of the going concern that has since

devolved into this chapter 11 case is not an asset for purposes of hypothetical chapter 7

liquidation analysis.” Id. at 4.

The court also rejected the creditor’s assertion that the debtor’s monthly operating reports

showed that the value of its inventory was understated, ruling that such reports are not probative

of inventory value. The admissible evidence, the court continued, showed that the debtor had

used book value at actual wholesale cost in its liquidation analysis, which the court thought was

actually more than a chapter 7 liquidation would produce. Id. at *4.

6. Voting by holder of disputed claim

In re Fall Line Tree Service, Inc., 2020 WL 7082416 at *2 (Bankr. E.D. Cal. 2020),

serves as a reminder that only the holder of an allowed claim is entitled to vote on a chapter 11

171

plan under § 1126(a).

435

Bankruptcy Rule 3018(a) permits the court, after notice and a hearing,

to allow a claim temporarily in an amount that the court deems proper for the purpose of

accepting or rejecting a plan, but the creditor had not sought that relief.

436

7. Individual must be current on postpetition domestic support obligations

The confirmation requirement of § 1129(a)(14) is that an individual debtor have paid all

amounts payable on a domestic support obligation (“DSO”) “that first became payable” after the

petition date. It makes no exception when a debtor’s inability to pay a postpetition DSO is due

to circumstances beyond the debtor’s control. In re Sullivan, 626 B.R. 326, 334 (Bankr. D. Colo,

2021).

437

8. Application of § 1129(a)(3) good faith requirement in context of consensual plan

when creditor objects because debtor is not paying enough disposable income

In a traditional chapter 11 case of an individual, § 1129(a)(15) requires a plan to provide

for the debtor to pay projected disposable income, or its value, for the longer of five years or for

the term of the plan, if an unsecured creditor objects. The requirement applies even if the class

of unsecured creditors has accepted the plan.

This rule does not apply in a sub V case. Section 1129(a)(15) is inapplicable, §1181(a),

and neither consensual confirmation under §1191(a) nor cramdown confirmation under §1191(b)

requires that the plan comply with § 1129(a)(15).

435

Section 1126(a) states, “The holder of a claim or interest allowed under section 502 of [the Bankruptcy Code]

may accept or reject a plan.”

436

The creditor in Fall Line Tree Service was the only creditor in the class, rejected the plan, and objected to its

confirmation. The fact that the court disregarded its claim for voting purposes, therefore, did not affect the result in

the case.

437

The problem for the debtor in Sullivan was that his monthly obligations for alimony and child support were

$ 16,835 and his gross monthly income was $ 7,600. The debtor was seeking to modify those obligations in the

divorce case and proposed to modify his plan at a later time to accommodate a future ruling by the divorce court. In

the meantime, he proposed to pay what he hoped the modified amounts would be. Sullivan, 626 B.R. 326, 334. In

addition to ruling that § 1129(a)(14) prevented confirmation, the court noted, “Nor was the chapter 11 process meant

to create a long-term shelter for debtors while they await the outcome of contested divorce litigation.” Id. at 6.

172

Consensual confirmation under §1191(a) requires compliance only with the applicable

provisions of § 1129(a). Accordingly, consensual confirmation requirements do not include a

projected disposable income test.

Cramdown confirmation in a sub V case similarly does not require compliance with

§ 1129(a)(15), but §1191(c)(2) does require payment of projected disposable income for a

minimum of three, and a maximum of five, years, as the court determines.

438

The issue is how the good faith requirement of § 1129(a)(3) applies to an objection to

confirmation of a consensual plan when the debtor could pay more than the plan provides. A

similar issue arises in chapter 13 cases when the debtor could pay more than the projected

disposable income test of § 1325(b) requires.

Objections based on good faith arise in chapter 13 cases, for example, when the debtor

proposes to retain an expensive home, car, or other luxury item (and use income to pay the debts

they secure instead of paying unsecured creditors) or if the debtor receives social security

benefits.

439

The chapter 13 projected disposable income rules permit a deduction for payments

on secured claims

440

and exclude social security benefits. The argument is that good faith

requires a debtor to surrender expensive luxury items rather than pay for them or that the

debtor’s social security benefits permit the debtor to pay more, even though the proposed

payments comply with the projected disposable income test.

441

The same “good faith” objection

exists in the context of a consensual plan in a sub V case, when the projected income test

similarly does not apply.

438

See Section VIII(B)(4).

439

See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13 PRACTICE AND PROCEDURE

§§ 4:34, 8:59.

440

See id. §§ 8:29, 8:56, 8:59.

441

See id. § 4:34.

173

Courts have taken various approaches in chapter 13 cases.

442

Appellate courts have

rejected a “best efforts” approach to good faith (under which good faith requires that a debtor use

“best efforts” to pay creditors).

443

Instead, courts use a “totality of the circumstances” test in

which ability to pay is one of many factors.

444

In re Walker, 628 B.R. 9 (Bankr. E.D. Pa. 2021), examined the issue in a subchapter V

case. There, the debtor’s plan provided for the debtor to make payments for three years,

resulting in a distribution to general unsecured creditors of approximately 7.5 percent. All

classes of creditors accepted the plan,

445

but one creditor objected to its confirmation on the

ground that it did not meet the good faith requirement of § 1129(a)(3) because the distribution to

unsecured creditors was inadequate.

The debtor, with estimated pre-tax annual income over the three-year period ranging

from $ 360,000 to $ 525,000, projected monthly expenses of $ 16,000, including $ 9,000 to pay

the mortgage on his residence (in which he alone would reside), and related taxes, maintenance,

and utilities. The plan provided for payments of $ 488,061.82 over three years, of which

$ 159,500 would be available for distribution to unsecured creditors after payment of

administrative expenses, priority tax claims, a priority domestic support obligation claim, and

prepetition mortgage arrearages.

The creditor asserted that good faith in an individual chapter 11 case required the debtor’s

“best effort” to repay creditors. In view of the debtor’s luxurious lifestyle, the creditor argued

that the debtor should be required to add two years of payments from income for the benefit of

442

See id. § 8:26.

443

See id. § 4:31.

444

See id. § 4:32.

445

Six creditors, holding claims totaling $ 1,871,481.51 (84.6%), accepted the plan. Two creditors, holding claims

totaling $ 340,035.15 (15.4%) rejected it.

174

unsecured creditors, which would add $ 144,000 to the amount unsecured creditors would

receive.

The court noted that courts analyze the good faith requirement of § 1129(a)(3) based on

the “totality of the circumstances.” In addition, the court observed, the good faith requirement

“should be construed narrowly, particularly when raised by a dissenting creditor whose class has

voted to accept the plan.” Walker, 628 B.R. 9, 16.

The court expressed its concerns that “a robust application of the good faith doctrine

creates a risk that the court’s analysis will lapse into an inquiry that ‘may clothe subjective moral

judgments with the force of law”

446

and that “a broad application of the good faith requirement

also would ‘create an undue risk of judicial usurpation of the legislative power to determine the

scope of and eligibility for [bankruptcy] relief.”

447

The Walker court thus rejected the suggestion that good faith under § 1129(a)(3)

inflexibly requires a debtor’s “best effort” to make every possible resource available to repay

creditors. The court reasoned that the rejection of such a rule in a sub V case involving

consensual confirmation under §1191(a) is especially relevant because § 1129(a)(15) is not

applicable. The court stated, 629 B.R. at 17-18 (citation omitted):

The omission of § 1129(a)(15) from the confirmation requirements under § 1191(a) sends

a clear legislative message that decision whether a plan’s funding justifies confirmation

should be resolved by the creditor voting process and chapter 11’s fundamental policy of

“creditor democracy.” When the affected creditors support confirmation of a plan, the

446

In re Walker, 628 B.R. 9, 17 (Bankr. E.D. Pa. 2021), quoting In re Glunk, 342 B.R. 717, 731 (Bankr. E.D. Pa.

2006) (quoting Sarasota, Inc. v. Weaver, 2004 WL 2514290, at *3 (E.D. Pa. Nov. 5, 2004) (quoting In re Woodman,

287 B.R. 589, 592 (Bankr. D. Me. 2003), aff'd 2003 WL 23709465 (D. Me. Sept. 19, 2003), aff'd 379 F.3d 1 (1st

Cir. 2004)).

447

Id. at 17, quoting In re Glunk, 342 B.R. 717, 732 (Bankr. E.D. Pa. 2006).

175

court generally should be circumspect about overriding the expressed will of the voting

creditors based on the good faith requirement of 11 U.S.C. § 1129(a)(3). This narrow

application of 11 U.S.C. § 1129(a)(3) is especially apt in a case under subchapter V.

The court agreed that the debtor could pay more to creditors and noted, “Any court

should have serious concerns about approving an individual’s reorganization plan in which the

debtor proposed to live alone in a large residence, while paying arguably unnecessary carrying

costs – roughly $ 9,000 per month – thereby reducing the available distribution to creditors.”

Walker, 628 B.R. 9, 18.

If it were a creditor, the court continued, it might reject the plan “absent more evidence

that the Debtor is making some tangible sacrifices in order to repay his debts.” Id. at 18. But the

court emphasized, “[T]he subjective reaction of a bankruptcy judge to a debtor’s proposed plan

is not the test by which good faith is measured under 11 U.S.C. § 1129(a)(3).” Id. at 18.

Instead, the court explained, “[T]he good faith determination requires objective

consideration of the totality of the circumstances. In the end, the critical issue is whether a plan

adheres sufficiently to Bankruptcy Code policy and is sufficiently fair to warrant a finding that it

was proposed in good faith.” Id. at 18.

The court found it “extremely significant” that the unsecured class of creditors had voted

overwhelmingly in support of the plan. The court reasoned, “Presumably, these creditors made a

business judgment that any misgivings they may have regarding the Debtor’s lifestyle and the

likely accompanying reduction in their potential distribution under the Plan were outweighed by

the benefits conferred by the Plan.” Id. at 18.

The Walker court also took into account the fact that the debtor had voluntarily put

additional money into the plan that the projected disposable income test applicable to cramdown

176

confirmation would not necessarily require. The additional funding arose from the fact that the

debtor’s payments included the commitment of preconfirmation earnings and that disposable

income as predicted did not account for the full postpetition income tax liability on anticipated

future earnings. 629 B.R. at 15.

In effect, these two adjustments resulted in $ 170,000 more in projected disposable

income than the amount than the statute required. Accordingly, the debtor argued, the plan

provided for more money to be paid to unsecured creditors than they would receive if the debtor

paid adjusted disposable income for five years.

The court agreed that reference to the amount that a debtor would have to pay under the

projected disposable income test of § 1191(c)(2) in the cramdown situation was helpful in

evaluating good faith in connection with confirmation of a consensual plan, even though the test

does not apply. Id. at 15. The court concluded that the debtor’s voluntary commitment of

additional money, which the strict statutory requirements would not require, supported a finding

of good faith. Id. at 18.

The court overruled the good faith objection, id. at 19:

[W]hile it may be true that the Debtor could provide a greater distribution to creditors . . .

the plan is neither so unfair or offensive to basic notions of justice nor so inconsistent

with bankruptcy policy as to warrant court intervention to overrule the will of voting

creditors.

E. § 1129(b)(2)(A) Cramdown Confirmation and Related Issues Dealing With

Secured Claims Arising in Subchapter V Cases

Although the cramdown requirements in § 1129(b) do not apply in subchapter V cases,

§ 1181(a), the provisions of § 1129(b)(2)(A) govern determination of what is “fair and equitable”

with regard to secured claims for purposes of cramdown confirmation under § 1191(c)(1). This

177

Section discusses issues relating to cramdown treatment of secured claims in subchapter V cases

that involve the cramdown standards in § 1129(b)(2)(A) that apply to secured claims in

subchapter V cases and other sections of the Bankruptcy Code that SBRA did not affect.

1. The § 1111(b)(2) election

The § 1111(b)(2) election comes into play when a secured creditor is undersecured in that

its claim exceeds the value of the property in which it has a lien. Before discussing its operation

and effects, it is useful to review the general rule for allowance of secured claims in

a bankruptcy case under § 506(a).

Section 506(a) provides that an allowed claim of a creditor secured by a lien on property

in which the estate has an interest is secured “to the extent of the value of such creditor’s interest

in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value

of such creditor’s interest . . . is less than the amount of such allowed claim.” Simply put,

§ 506(a) gives the secured creditor a secured claim equal to the value of the encumbered property

and an unsecured claim for the deficiency. Bankruptcy professionals colloquially refer to this

result as the “bifurcation” of the claim into a secured claim and an unsecured claim.

448

If the

secured obligation is “nonrecourse” – i.e., the debtor is not personally liable, and the creditor can

collect its debt only from the encumbered property – the creditor does not have an unsecured

claim in the case.

Assume, for example,

449

that a secured creditor has a claim of $ 100,000 secured by

property worth $ 30,000. Under § 506(a), bifurcation results in the creditor having two claims: a

448

See generally see W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13 PRACTICE AND

PROCEDURE § 5:5.

449

The example is taken from the excellent explanation of § 1111(b) in In re Body Transit, Inc., 619 B.R. 816, 831-

33 (Bankr. E.D. Pa. 2020).

178

secured one for $ 30,000 and an unsecured one for $ 70,000. If the claim is non-recourse, the

creditor has no unsecured claim.

Section 1111(b) modifies the treatment of secured claims in chapter 11 cases in two

ways.

First, § 1111(b)(1) provides that a secured claim will be allowed or disallowed under

§ 506(a) regardless of whether the creditor has recourse against the debtor. The effect is that a

nonrecourse secured creditor has an allowed unsecured claim against the debtor.

Second, § 1111(b)(2) permits a secured creditor to elect to have its entire claim treated as

a secured claim, with two exceptions discussed later. In the example, therefore, the electing

secured creditor has a secured claim of $ 100,000 and no unsecured claim.

Whether the undersecured creditor makes the election may make a significant difference

in how much it must receive for the plan to comply with cramdown requirements.

Section 1129(b)(2)(A) states three alternative ways to satisfy the “fair and equitable”

requirement for cramdown confirmation with regard to a secured claim. They apply in a sub V

case under § 1191(c)(1).

450

The most common alternative, in clause (i) of § 1129(b)(2)(A), is for the secured creditor

to retain its liens and receive deferred cash payments. Alternatively, a plan is “fair and

equitable” if it provides for sale of the encumbered property and attachment of liens to the

proceeds, § 1129(b)(2)(A)(ii), or for the realization by the creditor of the “indubitable

equivalent” of the claim, § 1129(b)(2)(A)(iii).

The specific statutory language with regard to permissible cramdown treatment of a

secured claim through deferred cash payments is: the creditor must receive “deferred cash

450

See Section VIII(B)(2).

179

payments totaling at least the allowed amount of such claim, of a value, as of the effective date

of the plan, of at least the value of [the creditor’s] interest in the estate’s interest in such

property.” § 1129(b)(2)(A)(i)(II).

The somewhat complicated language effectively states two requirements. First, the

deferred cash payments must total at least the amount of the allowed secured claim. Second, the

value of the stream of payments must be equal of the value of the encumbered property. The

second requirement requires application of an appropriate present value interest or discount rate.

For purposes of the example, we assume it is six percent.

If the creditor in the example does not make the § 1111(b)(2) election, application of the

cramdown rules is straightforward: the plan must propose to pay the entire amount of the secured

claim, $ 30,000, with interest at six percent. Payment of the claim in full satisfies the first part of

the test, and the provision for interest satisfies the second one. Thus, a plan could amortize

$ 30,000 over, say, five years at six percent interest, in monthly payments of $ 580, a total of

$ 34,800. The plan must treat the deficiency claim of $ 70,000 as an unsecured claim, usually

included in the class of general unsecured claims.

Such a provision would not, however, satisfy the first cramdown requirement if the

creditor elected § 1111(b)(2). The total of payments is only $ 34,800, $ 65,200 short of the

amount of the allowed secured claim, $ 100,000.

451

This assumes that the interest payments of $ 4,800 count in satisfying the total of payments requirements. It is

not clear that they do. See In re Body Transit, Inc., 619 B.R. 816, 833, n. 25 (Bankr. E.D. Pa. 2020), citing 7

OLLIER ON BANKRUPTCY ¶ 1111.03[5][b].

The court in In re Topp’s Mechanical, Inc. 2021 WL 5496560 (Bankr. D. Neb. 2021), after explaining the

competing views, adopted the majority view, concluding that “the interest component of a debtor’s stream of

payments may serve a dual purpose of satisfying the allowed claim of the creditor and providing present value to the

creditor.” Id. at *6. Because the debtor’s plan proposed to pay the secured creditor more than it was entitled to

receive as a result of the § 1111(b)(2) election, the debtor had less money to pay to unsecured creditors, who had not

accepted the plan. The court therefore ruled that the plan discriminated unfairly and was not fair and equitable.

Section VIII(B)(3) discusses the case in the context of the “fair and equitable” requirement of § 1191(c).

180

Payment of the claim over five years would require an additional $ 1,087 per month, a

total monthly payment of $ 1,667.

A longer amortization period would lower the monthly payment because there is more

time to pay the claim and because more interest is paid. The following chart shows payment

schedules that would satisfy both § 1129(b)(2)(A)(II) requirements (amounts rounded except

monthly payment on last line). Whether a court would conclude that the longer lengths of time

are “fair and equitable” is, of course, another question.

Payment Schedules Providing for Payments

Totaling $ 100,000 With a Value of $ 30,000

Amortization

Period

(a)

Payment

On $30,000

(b)

Interest

Paid at 6%

(c)

Total of

Payments

($ 30,000 +

Interest

payments)

(d)

Remaining

Balance

($ 100,000 –

(d))

(e)

Monthly

Payment on

Remaining

Balance

((e)/months)

(f)

Total

Monthly

Payment

(b) + (f)

(g)

5 years

$ 580

$ 4,800

$ 34,800

$ 65,200

$ 1,067

$ 1,667

10 years

$ 333

$ 9,968

$ 39,968

$ 60,032

$ 500

$ 883

15 years

$ 253

$ 15,568

$ 45,568

$ 54,432

$ 302

$ 555

20 years

$ 215

$ 21,583

$ 51,583

$ 48,417

$ 202

$ 417

25 years

$ 193

$ 27,987

$ 57,987

$ 42,013

$ 140

$ 333

30 years

$ 180

$ 34,751

$ 64,751

$ 35,249

$ 98

$ 278

53 yrs, 4 mos

$ 156.43

$ 70,113

$ 100,113

$ 0.00

$ 156.43

Section 1111(b)(1)(B) states two exceptions to the availability of the § 1111(b)(2)

election.

One of the exceptions applies when the encumbered property is sold under § 363 or is to

be sold under the plan. If the creditor has recourse against the debtor, the § 1111(b)(2) election

is not available when the property is being sold. § 1111(b)(1)(B)(ii).

The other exception applies when the undersecured creditor’s interest in the encumbered

property is of “inconsequential value.” § 1111(b)(1)(B)(ii).

181

In a traditional chapter 11 case, a secured creditor for strategic purposes may want to

retain a large unsecured deficiency claim so that it controls the vote of the unsecured class. This

may give the secured creditor a “blocking position” to prevent confirmation because, unless

other classes exist, a debtor cannot meet the requirement of § 1129(a)(10) that at least one

impaired class of claims accept the plan.

Because subchapter V permits confirmation even if no class accepts, a secured creditor

does not have a blocking position regardless of whether it makes the § 1111(b) election.

Especially if a nominal distribution to unsecured creditors is likely, a secured creditor in a sub V

case may conclude that making the § 1111(b) election will enhance its recovery and negotiating

position.

Three courts have considered a creditor’s right to make the § 1111(b) election in a

subchapter V case. The issue was whether the creditor could not invoke the election because its

interest was “inconsequential.” The cases are required reading for judges and practitioners

dealing with § 1111(b) elections in subchapter V cases.

452

In re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D. N.Y. 2020), involved a

taxi business that owned a single taxi medallion in which its only creditor held a security interest

to secure a debt of $ 576,927. The debtor contended that the value of the medallion was

$ 90,000; the creditor claimed it was worth $ 200,000.

The court noted that courts have taken different approaches to determining whether

property is of inconsequential value, but concluded that, under any approach, it was impossible

452

See generally Thomas C. Scherer and Whitney L. Mosby, The Applicability of the § 1111(b) Election in a Small

Business Case, 40 A

MER. BANKR. INST. J. 12 (May 2021).

182

to conclude that the medallion’s value was inconsequential, whether it was worth $ 90,000 or

$ 200,000. Id. at * 3. The court then reviewed the different approaches.

The “most obvious approach,” the court said, it to determine and apply the plain meaning

of the word “inconsequential.” Nothing that various dictionaries defined the word as

“irrelevant,” “of no significance,” “unimportant”, and “able to be ignored,” the court concluded

as “an abstract matter” that neither value was inconsequential. 2020 WL 5806507 at *3.

The court acknowledged that “some context is required,” and that “[a]n item of a certain

value might be relatively ‘inconsequential’ to a multi-billion dollar company.” 2020 WL

5806507 at *3. But the court could not conclude that the value of the medallion was

“irrelevant,” “of no significance,” or something that is “able to be ignored” when it was the

debtor’s most important and valuable asset, essential to its reorganization, regardless of its value.

Id.

The court noted that, if the debtor owned the medallion outright and proposed to abandon

it under § 554 (which permits abandonment of an asset that is “of inconsequential value or

benefit to the estate”), it could not conceivably be treated as having inconsequential value. The

court found no justification for giving the term a different meaning in § 1111(b) than it has in

§ 554. 2020 WL 5806507 at *3.

The VP Williams Trans court then considered the view that the value of the asserted

security interest should be compared to the value of the collateralized asset. Under this

approach, a junior security interest that is “almost completely out-of-the-money” has

inconsequential value. 2020 WL 5806507 at *4.

453

The court saw no difference between this

view and valuation in the abstract but concluded that it did not matter in the current case because

453

The court cited McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 777 (D. Ariz. 2015).

183

the creditor held the only security interest in the collateral and, therefore, the value of its lien

equaled the value of the collateral.

Next, the VP Williams Trans court discussed the view that the court should compare the

value of the security interest to the amount of the debt.

454

Under this approach, the court

explained, a secured claim might have inconsequential value if the collateral is worth only a

small fraction of the total claim. The court questioned application of this view when the value of

the collateral is not small by itself but is significantly less than the debt. 2020 WL 5806507 at

*4.

To illustrate, the court assumed that only one secured creditor with a $ 200,000 debt

holds a security interest in collateral worth $ 100,000, which would not be “inconsequential.”

The result should not be different, the court reasoned, when the claim is $ 2,000,000 because the

value of the collateral, and therefore the value of the secured claim, is the same. The court

observed that denying the § 1111(b)(2) election to the $ 2 million claimant would result in a

debtor having greater rights to retain and use collateral “against the secured creditor’s will” when

the debtor’s economic interests are actually far more out-of-the-money. 2020 WL 5806507 at

*4.

Under yet another approach, the VP Williams Trans court continued, a secured claim may

be deemed inconsequential if the § 1111(b)(2) election would give rise to a claim that could not

as a practical matter be amortized fully under the cramdown confirmation standards in

§ 1129(b)(2)(A)(i), discussed above.

455

The court reasoned that this view conditioned a

creditor’s right to the § 1111(b)(2) election on the debtor having a feasible way to deal with it.

454

The court cited In re Wandler, 77 B.R. 728, 733 (Bankr. N.D. 1987).

455

The court cited In re Wandler, 77 B.R. 728, 733 (Bankr. N.D. 1987) (Holding that collateral worth $ 15,000 was

“inconsequential” in context of claim of $ 390,000 and reasoning that payments having a nominal amount of

$ 390,000 but an actual current value $ 15,000 would not be realistic).

184

The court found nothing in the statute to suggest that “‘feasibility’ from the debtor’s perspective

was intended to be a limit on a creditor’s right to invoke section 1111(b).” 2020 WL 5806507 at

*4.

Finally, the VP Williams Trans court considered and rejected the analysis of the Body

Transit court, discussed below, that took policy considerations into account in making the

“inconsequential value” determination. Later text discusses the court’s reasoning, following

discussion of Body Transit.

After its discussion of the various approaches to the determination of “inconsequential

value,” the VP Williams Trans court concluded that the case before it was not difficult because

the creditor’s interest was not inconsequential under any of them. 2020 WL 5806507 at *6.

In In re Body Transit, Inc., 619 B.R.816, 835 (Bankr. E.D. Pa. 2020), the court ruled that

the correct methodology is to compare the value of the lien position to the total amount of the

claim.

The court reasoned that the statutory text of § 1111(b)(1)(B)(ii) “explains how to value

[the creditor’s interest in the collateral] and then directs the court to determine whether the value

is inconsequential. The statutory text does not state how to make that second determination of

‘inconsequentiality.’” 619 B.R. at 835. To make the second determination, the court continued,

the court must “compare the value of the collateral to something else, and the statutory text

offers no guidance there.” Id.

The court concluded that the proper comparison is between the value of the collateral to

the total amount of the claim. The court stated, id. at 835, quoting 7 COLLIER ON BANKRUPTCY

¶ 1111.03[3][a] (footnotes omitted):

185

Section 1111(b) is intended to preserve creditors' nonbankruptcy rights, not enhance

them.... Since “inconsequential” is not synonymous with “zero,” plain meaning would

suggest that “inconsequential value” has to include something more than zero value. This

leads to the view that a creditor whose lien is almost, but not quite, out-of-the-money

should be treated as if [it] were wholly unsecured, which is for practical purposes the

status the creditor would likely ascribe to itself outside of bankruptcy with collateral of

little or inconsequential value. Put another way, it [sic] if the collateral's value is

inconsequential when compared to the total debt owed to the creditor, the creditor should

be treated as unsecured, not secured [for purposes of § 1111(b)(1)(B)].

The court then turned to consideration of whether the creditor’s interest was of

“inconsequential value” when the value of the collateral was $ 80,000, 8.2 percent of the amount

of the secured debt, $ 970,233. The court stated, 619 B.R. at 836:

[T]he “inconsequential value” determination is not a bean counting exercise; the

determination cannot be based solely on a mechanical, numerical calculation. Some

consideration must be given to the policies underlying both the right to make the

§ 1111(b) election and the exception to that statutory right. In other words, while “the

numbers” provide an important starting point in deciding how much value is

“inconsequential,” the court also must consider other relevant circumstances presented in

the case and make a holistic determination that takes into account the purpose and policy

of the statutory provisions that govern the reorganization case.

Under this analysis, the court concluded that the value of the creditor’s interest was

inconsequential and that it could not make the § 1111(b)(2) election.

186

In the Body Transit court’s view, the purpose of the § 1111(b)(2) election is to protect the

creditor from determination of its secured claim at a time when the value of its collateral is

temporarily depressed, which could permit the debtor to realize a considerable gain upon its sale

when the market rebounds. 619 B.R. at 833. The court reasoned that the case before it involving

a fitness club and exercise equipment as collateral “does not resemble the classic fact pattern that

Congress designed § 1111(b) to prevent. [The creditor] is not a secured creditor being cashed

out during a temporary decline in the value of its collateral, with the Debtor seeking to retain

such collateral and obtain the windfall benefit of a market correction in the foreseeable

appreciation that restores value to the collateral.” 619 B.R. at 836.

Rather, the court found, any increase in the value of the debtor’s enterprise would most

likely be “attributable to some combination of market forces, the entrepreneurial efforts and

acumen of the Debtor's principal and, perhaps, the investment of additional capital.” Id. at 836.

These circumstances, the Body Transit court reasoned, supported the conclusion that the

collateral was of “inconsequential value” within the meaning of § 1111(b)(1)(B)(i). The court

also found support for its conclusion in the purposes and policies underlying subchapter V. Id. at

837.

In re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D. N.Y. 2020), discussed

earlier, rejected consideration of the policies that Body Transit invokes.

With regard to the intended purpose of the § 1111(b)(2) election, the court reasoned,

“Section 1111(b) is not conditioned on a temporary decline in collateral value; it is available to

secured creditors who are not happy with a value that a debtor has proposed, and who are not

happy with the prospect of having to live with a judge’s decision as to what the value of the

collateral is.” Id. at 5.

187

The VP Williams Trans court reasoned that the desire of Congress to foster small

business reorganization had no bearing on the interpretation of § 1111(b). “Congress also desire

to foster other forms of chapter 11 reorganizations,” the court said, “but section 1111(b) applies

in all chapter 11 cases, including subchapter V. If Section 1111(b) was supposed to give way in

a subchapter V case, or to have a different application in such a case, that was for Congress to

say, and Congress did not do so.” 2020 WL 5806507 at *6.

The third case is In re Caribbean Motel Corp., 2022 WL 50401 (D. P.R. 2022). The

creditor held a claim of about $ 3.1 million secured by collateral worth $ 550,000, about 15% of

its claim. Without determining which approach to use, the court concluded that the value of the

collateral was not inconsequential. Id. at *5-6.

2. Realization of the “indubitable equivalent” of a secured claim --

§ 1129(b)(2)(A)(iii)

One of the ways for a plan to meet the “fair and equitable” requirement for cramdown

treatment of a secured claim under § 1129(b)(2)(A) (applicable in subchapter V under

§ 1191(c)(1)) is to provide for the creditor to realize the “indubitable equivalent” of its claim.

The court in In re Pearl Resources, LLC, 622 B.R. 236 (Bankr. S.D. Tex. 2020), examined and

applied this provision in confirming a subchapter V plan of jointly administered debtors over the

objection of creditors holding statutory mineral property liens under Texas law.

The total of the creditors’ claims was $ 1,151,287 million. Their statutory liens extended

to all of the debtors’ gas and oil properties, valued at approximately $ 35 million. The plan

provided that the creditors: (1) would retain their liens on one property, valued at $ 7,440,000;

(2) would release their liens on all other properties; and (3) would receive pro rata payments

from disposable income on a quarterly basis for two years. The plan further provided that, if the

claims were not paid in full, with interest, in two years, the debtors would sell portions of the

188

retained collateral to pay the claims in full. In addition, the plan provided that, if the debtors did

not pay the claims in full within 34 months, the creditors would receive a lien in the debtor’s

interest at that time in another property. Id. at 248-49.

The creditors rejected the plan and objected to its confirmation. Among other things,

they argued that the plan was not fair and equitable because it did not provide for them to retain

their existing liens and did not provide the indubitable equivalent of their claims. 622 B.R. at

266-67.

456

The court overruled their objections and confirmed the plan.

The court explained that the indubitable equivalent requirement is tied to a “claim,” not

to the property securing the claim. Thus, the court rejected the argument that the plan could not

modify their lien rights in any fashion and still meet the indubitable equivalent standard 622 B.R.

at 270.

The court then addressed the creditors’ argument that the plan did not meet the

indubitable equivalent requirement because it reduced their 29 to 1 value-to-debt equity cushion

to a 6 to 1 cushion. The court provided the following review of case law, 622 B.R. at 271-72

(original footnotes omitted):

457

The Fifth Circuit has expressly recognized that one accepted method of providing

indubitable equivalence is the exchange of collateral. Whether the indubitable equivalent

offered is equivalent is a matter left to the discretion of the bankruptcy court in its careful

456

The creditors also objected on the grounds that the plan did not meet the disposable income requirement of

§ 1191(c)(2) and the feasibility requirements of § 1191(c)(3). 262 B.R at 266. The court concluded that the plan

met these requirements and that it provided adequate remedies for default. Id. at 267-70.

457

In footnotes to the first paragraph of the quoted text, the court cited: In re Sun Country Dev, Inc., 764 F.2d 406,

408 (5

Cir. 1985); In re Walat Farms, Inc., 70 B.R. 330, 336 (Bankr. E.D. Mich. 1987) (“a bankruptcy court is

permitted, indeed required, to make these determinations on a case by case basis and to order confirmation of a plan

which indubitably protects and pays the claim of an objecting creditor”); In re Swiftco, Inc., 1988 WL 143714

(Bankr. S.D. Tex. 1988); and In re Philadelphia Newspapers, LLC, 418 B.R. 548, 568 (E.D. Pa. 2009), aff’d 599

F.3d 298 (3d Cir. 2009).

In re Philadelphia Newspapers ruled that a plan providing for the sale of the creditor’s collateral without

permitting the creditor to credit bid satisfied the indubitable equivalent requirement. The Supreme Court later ruled

to the contrary in Radlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 132 S.Ct. 2065 (2012). The

Supreme Court concluded that the specific requirement for credit bidding in § 1129(b)(2)(A)(ii), which permits

cramdown when a plan provides for the sale of collateral, precluded an interpretation of the indubitable equivalent

standard that permitted sale without credit bidding.

189

reliance upon sufficient facts.

Courts should not accept offers of indubitable equivalence

lightly and should insist on a high degree of certainty. Moreover, indubitable equivalence

is a flexible standard. The indubitable equivalent standard requires a showing that the

objecting secured creditor will receive the payments to which it is entitled, and that the

changes forced upon the objecting creditor are completely compensatory, meaning that

the objecting creditor is fully compensated for the rights it is giving up.

For example, the

Fifth Circuit has stated that the “[a]bandonment of the collateral to the class would satisfy

indubitable equivalent, as would a replacement lien on similar collateral.”

In Investment Company of The Southwest, [341 B.R. 298, 325 (B.A.P. 10

Cir.

2006),] the court recognized that a debtor may be permitted to use some portion of the

equity cushion in collateral to help implement a plan without violating the indubitable

equivalent standard, as long as the secured creditor remains over-secured beyond a

reasonable doubt and has sufficient protection. Courts have approved plans that did not

pay a secured lienholder all of its collateral sale proceeds, as long as the court is satisfied

that there will always be more value in the remaining collateral than the lender's lien

amount.

458

Courts also have routinely held that a partial surrender of collateral to an over-

secured creditor provides such creditor with the indubitable equivalent of its claim.

459

sister Court approved a plan over the objection of a secured creditor finding the debtor

had provided the indubitable equivalent because the secured creditor remained over-

secured beyond a reasonable doubt and had sufficient payment protection over the life of

the plan.

460

In essence, in the bankruptcy context, the indubitable equivalent means that

the treatment afforded the secured creditor must be adequate to both compensate the

secured creditor for the value of its secured claim, and also insure the integrity of the

creditor's collateral position.

461

Applying these standards, the court concluded that the plan provided “virtual certainty”

that the claims would be paid in full and that the 6 to 1 value-to-debt ratio provided an equity

cushion that was sufficient adequate protection. 622 B.R. at 272.

The court rejected the creditors’ arguments that a plan could not modify a Texas statutory

mineral lien under any circumstances and that lien-stripping may not be accomplished under any

458

The court cited: In re Pine Mountain, Ltd., 80 B.R. 171 (B.A.P. 9th Cir. 1987) (Concluding that it was unlikely

that creditor's claim would ever become even partially unsecured and that plan provided secured creditor with

variety of safeguards and fair interest rates); and Affiliated Nat'l Bank-Englewood v. TMA Assocs., Ltd. (In re

TMA Associates, Ltd.), 160 B.R. 172, 174 (D. Colo. 1993).

459

The court cited In re May, 174 B.R. 832, 838–839 (Bankr. S.D. Ga. 1994).

460

The court cited In re SCC Kyle Partners, Ltd., 2013 WL 2903453 (Bankr. W.D. Tex.2013).

461

The court cited 4 COLLIER ON BANKRUPTCY ¶ 506.03.

190

circumstances, concluding that § 1123(a)(5)(E) permits a plan to modify any lien as long as it

complies with § 1129(b)(2)(A).

462

IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation

Subchapter V has different provisions for the disbursement of payments to creditors and

the role of the trustee depending on whether the court confirms a consensual plan or a cramdown

plan.

A. Debtor Makes Plan Payments and Trustee’s Service Is Terminated Upon

Substantial Consummation When Confirmation of Consensual Plan Occurs Under

§1191(a)

If all impaired classes accept the plan and it meets the confirmation requirements of

§ 1129(a) other than § 1129(a)(15),

463

the court must confirm the plan.

464

Confirmation of a

consensual plan under §1191(a) leads to the termination of the trustee’s service under

§1183(c)(1) when the plan has been “substantially consummated.”

465

The debtor must file a

notice of substantial consummation within 14 days after it occurs and serve it on the sub V

trustee, the U.S. trustee, and all parties in interest.

466

462

The court cited In re Bates Land & Timber, LLC, 877 F.3d 188 (4th Cir. 2017), which permitted cramdown

confirmation of a plan providing for a secured creditor to receive property valued at $ 13.7 million and cash of

$ 1 million on its $ 14.6 million claim in exchange for the release of prepetition collateral.

The Pearl Resources court distinguished two cases on which the creditors relied, In re CRB Partners, LLC,

2013 WL 796566 (Bankr. W.D. Tex. 2013), and In re Swiftco, Inc., 1988 WL 143714 (Bankr. S.D. Tex. 1988). The

court noted that these cases ruled that the plans did not provide the indubitable equivalent of the creditors’ claims

because of an insufficient equity cushion or reasonable doubt as to payment but recognized that liens could be

modified.

463

Section 1129(a)(15) states chapter 11’s projected disposable income requirement, which applies only in the case

of an individual. See Section VIII(B)(4).

464

§ 1191(a).

465

§ 1183(c)(1).

466

§ 1183(c)(2).

191

Under § 1101(2), “substantial consummation” generally occurs upon “commencement of

distribution under the plan.”

467

Unless the plan implicates other requirements for substantial

consummation, the sub V trustee’s service terminates under §1183(c)(1) when the first payment

under the plan occurs.

Arguably, a sub V trustee could make the first payment under the plan, although the

statute does not appear to require this. But it is clear that, at least after the first payment, the sub

V trustee no longer exists and cannot make payments thereafter.

B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of

Plan Confirmed Under Cramdown Provisions of §1191(b)

When the court confirms a cramdown plan, §1194(b) provides for the sub V trustee to

make payments to creditors under the plan unless the plan or the order confirming it provides

otherwise.

468

Chapters 12 and 13 contain identical provisions for the trustee to make plan

payments.

469

Because the sub V trustee must make payments under a cramdown plan, the trustee’s

service does not terminate upon its substantial consummation.

470

The trustee’s service continues,

at a minimum, until the trustee has made the required disbursements. Subchapter V does not

specify when the trustee’s service is terminated under a cramdown plan. If the trustee makes all

payments that the trustee is to make under the plan, the debtor is entitled to receive a discharge,

467

§ 1101(2)(C). “Substantial consummation” under § 1101(2) also requires: (1) transfer of all or substantially all

of the property proposed to be transferred, § 1101(2)(A) and (2) assumption by the debtor or the successor to the

debtor under the plan of the business or of the management of all or substantially all of the property dealt with by

the plan. § 1101(2)(B). Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation

modification of a consensual plan.

468

§ 1194(b). Curiously, paragraph (b) of § 1194 is titled “Other Plans,” even though it applies exclusively to plans

confirmed under the cramdown provisions of § 1191(b) and no other provisions of § 1194 deal specifically with

payments under a consensual plan confirmed under § 1191(a).

469

§ 1226(c), 1326(c).

470

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

192

as Section X(B) discusses. That seems to be the appropriate time for the trustee or the debtor to

request that the court terminate the trustee’s service and discharge the trustee from any further

obligations in the case.

471

Section 1194 provides for the trustee to make payments under the plan unless the plan or

the order confirming the plan provides otherwise.

472

The statute contains no standards for the

court to determine under what circumstances a plan or confirmation order may provide that the

trustee will not make payments. For example, may a nonconsensual plan provide for the debtor

to make postpetition installment payments on a mortgage or other long-term debt that is being

cured and reinstated, or regular payments on an unexpired lease of real or personal property that

is being assumed?

Because §1194(b) is identical to the chapter 12 and 13 provisions for disbursements to

creditors, courts may look to the case law and practice in chapter 12 and 13 cases for guidance in

determining the extent to which a plan may provide for the debtor to make payments instead of

the trustee. In chapter 13 cases, courts universally require a plan to provide for the trustee to

make disbursements to priority and unsecured creditors and to holders of secured claims that the

plan modifies.

473

Courts vary as to whether the debtor may make direct payments to other types

of creditors.

Typical exceptions to payments by the trustee in chapter 13 cases are for postpetition

installment payments on real estate or other long-term debts that are being cured and reinstated

471

See SUBCHAPTER V TRUSTEE HANDBOOK, supra note 100, at 3-16 (“Upon completion of all plan payments

[pursuant to a cramdown plan], trustees should submit their final report and account of their administration of the

estate in accordance with § 1183(b)(1), which incorporates § 704(a)(9). . . . The trustee’s final report will certify

that the trustee has completed all trustee duties in administering the case and request that the trustee be discharged

from any further duties as trustee.” ).

472

§ 1194.

473

W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13 PRACTICE AND PROCEDURE § 4:10.

193

and postpetition payments due on leases or executory contracts that are being assumed. In such

instances, the trustee usually disburses the amounts required to cure prepetition defaults. Courts

have also permitted a debtor to make direct payments on a secured claim that the plan does not

modify.

474

Some courts require that all postpetition payments, including postpetition payments on a

mortgage or other long-term debt or an assumed lease or other executory contract, be made by

the trustee during the term of the plan.

475

In a sub V case, the trustee under this approach would

make those payments during the three- to five-year period during which the debtor must commit

projected disposable income to the plan, as Section VIII(B)(4) discusses.

The court in In re Spindler, 623 B.R. 543 (Bankr. W.D. Wis. 2020), permitted a chapter

12 debtor to make direct payments to a mortgage lender under a plan that provided for the re-

amortization of the debt in monthly payments over 30 years.

The court reviewed three approaches to direct payments that courts have taken in chapter

12 cases. One view is that the Bankruptcy Code prohibits direct payments on impaired or

modified claims,

476

while a second allows debtors to pay secured creditors directly, regardless of

their impaired status.

477

Id. at 546-47.

Most courts adopt a third approach that permits direct payments depending on the

circumstances of the case.

478

Id. at 547. In deciding whether to permit direct payments, the

474

Id.

475

Id.

476

The court cited Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9

Cir. 1992) and In re Marriott, 161 B.R. 816

(Bankr. S.D. Ill. 1993).

477

The court cited Wagner v. Armstrong (In re Wagner), 36 F.3d 723 (8

Cir. 1994) and In re Crum, 85 B.R. 878

(Bankr. N.D. Fla. 1988).

478

The court cited In re Martens, 98 B.R. 530 (Bankr. D. Colo. 1989); In re Seamons, 131 B.R. 459 (Bankr. D.

Idaho 1991); In re Speir, 2018 WL 3814276 (Bankr. N.D. Miss. Aug. 8, 2018); Westpfahl v. Clark (In re Westpfahl),

168 B.R. 337 (Bankr. C.D. Ill. 1994); In re Golden, 131 B.R. 201 (Bankr. N.D. Fla. 1991); In re Seamons, 131 B.R.

459 (Bankr. D. Idaho 1991); In re Martens, 98 B.R. 530 (Bankr. D. Colo. 1989); and In re Pianowski, 92 B.R. 225

(Bankr. W.D. Mich. 1988).

194

Spindler court explained, these courts consider some or all of the factors that In re Pianowski, 92

B.R. 225 (Bankr. W.D. Mich. 1988) identified: (1) the past history of the debtor; (2) the

business acumen of the debtor; (3) the debtor's post-filing compliance with statutory and court-

imposed duties; (4) the good faith of the debtor; (5) the ability of the debtor to achieve

meaningful reorganization absent direct payments; (6) the plan treatment of each creditor to

which a direct payment is proposed to be made; (7) the consent, or lack thereof, by the affected

creditor to the proposed plan treatment; (8) the legal sophistication, incentive and ability of the

affected creditor to monitor compliance; (9) the ability of the trustee and the court to monitor

future direct payments; (10) the potential burden on the chapter 12 trustee; (11) the possible

effect on the trustee's salary or funding of the U.S. Trustee system; (12) the potential for abuse of

the bankruptcy system; and (13) the existence of other unique or special circumstances.

The Spindler court noted that In re Aberegg, 961 F.2d 1307 (7

Cir. 1992), concluded

that chapter 13 debtors could make direct payments in some cases and that Aberegg took a

pragmatic approach to direct payment of mortgages that extend beyond the term of the plan,

finding that it would be counterproductive to require debtors to make payments through the

trustee until completion of plan payments and then to arrange for direct payments thereafter.

Spindler, 623 B.R. at 547.

The Spindler court adopted the majority approach and, based on the circumstances of the

case, permitted the direct mortgage payments.

479

Among other things, the court noted that the

debtor had negotiated payment terms with the lender and that it did not make sense to require the

payment method to change at the end of the plan. Id. at 548-49.

479

The court also permitted, without objection, direct payment of a student loan.

195

When the subchapter V trustee makes payments under the plan, the trustee will be

entitled to compensation for that service. To avoid this expense, a debtor may propose that the

debtor, rather than the subchapter V trustee, make all payments under the plan. Creditors may

support such a procedure because, at least in theory, they can receive the benefits of the reduced

cost. A subchapter V trustee may prefer that the debtor make payments because it relieves the

trustee of a potentially tedious administrative burden and reduces the risk of nonpayment for

such additional services.

Although chapter 13 caselaw, as earlier text discusses, generally does not permit the

debtor to make all payments under a plan, subchapter V does not expressly prohibit it.

Moreover, the chapter 13 situation is distinguishable because the chapter 13 trustee receives

compensation based on a commission on disbursements the trustee makes, whereas the

subchapter V trustee generally bills on an hourly basis.

Anecdotal evidence and a few cases (that do not discuss the issue)

480

indicate that at least

some courts are permitting the debtor to make all payments under the plan in the absence of any

objection.

The fact that the subchapter V trustee does not make payments under the plan does not,

however, terminate the subchapter V trustee’s services.

481

C. Unclaimed Funds

When a disbursement to a creditor occurs in a bankruptcy case but the creditor does not

timely claim it, § 347 governs the disposition of the unclaimed property.

482

Unclaimed property

typically arises when a check is mailed to the creditor at its address shown on its proof of claim

480

See, e.g., In re Gui-Mer-Fe, Inc., 2022 WL 1216270 at * 2 (Bankr. D. P.R. 2022).

481

E.g., In re Gui-Mer-Fe, Inc., 2022 WL 1216270 at * 8 (Bankr. D. P.R. 2022).

482

SBRA amended § 347 to provide for disposition of unclaimed funds in subchapter V cases, SBRA § 4(a)(5), and

the CARES ACT made a technical amendment to it. CARES Act §1113 (a)(4)(B).

196

or the debtor’s records, but the creditor has changed its address or the creditor simply does not

negotiate the check.

Disposition of unclaimed funds in a subchapter V case depends on who makes the

distribution.

For distributions that the subchapter V trustee makes, § 347(a) requires that, 90 days after

the final distribution, the trustee stop payment on any check remaining unpaid and pay the

money into the court for disposition under chapter 129 of title 28. The applicable provisions of

chapter 129 direct the Court to disburse unclaimed funds to the “rightful owners,” 28 U.S.C.

§ 2041, upon “full proof of the right thereto.” 28 U.S.C. § 2042. Accordingly, a creditor may

later seek to recover the unclaimed funds. This is the same rule that applies to a trustee’s

disbursements in cases under chapters 7, 12, and 13.

For payments that the debtor makes, § 347(b) provides that any funds that remain

unclaimed at the expiration of the time allowed to claim the funds become property of the debtor

or of the entity acquiring the asses of the debtor under the plan. This rule also applies in chapter

9 and traditional chapter 11 cases and to distributions that a debtor or party other than the trustee

makes in chapter 12 cases.

Section 347(b) does not prescribe the method by which the time to claim the funds is

determined. A well-drafted plan, therefore, should establish the deadline, or the debtor or other

party may request that the court fix one. Plans in traditional chapter 11 cases that do not provide

for full payment of unsecured creditors often provide that no further distributions will be made to

197

creditors who do not timely claim their distribution and for the pro rata distribution of unclaimed

funds to creditors who have claimed their distributions.

483

X. Discharge

The discharge that a debtor receives in a sub V case and its timing depend on whether

consensual or cramdown confirmation occurs.

A. Discharge Upon Confirmation of Consensual Plan Under §1191(a)

Section 1141(d) governs discharge in a traditional chapter 11 case. Except for paragraph

(d)(5), all of it remains applicable in a sub V case when the court confirms a consensual plan. It

does not apply when the court confirms a cramdown plan.

484

Section 1141(d)(5) does not apply in a sub V case.

485

The omission is material only in an

individual case because (d)(5) applies only when the chapter 11 debtor is an individual. Section

1141(d)(5) has two primary effects in an individual case.

486

483

If funds in the final distribution are unclaimed, the provision might result in an administrative burden if the

amount of unclaimed funds is insufficient to make a meaningful distribution to other creditors. A plan could resolve

this problem by providing that, if the unclaimed funds in the final distribution are below a specified threshold, the

funds will become property of the debtor instead of being distributed to creditors.

484

§ 1181(c).

485

§ 1181(a).

486

Subparagraph (A) of § 1141(d)(5) defers entry of the discharge in an individual case until the debtor has

completed all payments under the plan unless the court orders otherwise for cause. Alternatively, subparagraph (B)

of § 1141(d)(5) permits a discharge if the debtor has not completed payments if (1) creditors have received

payments under the plan with a value of the amount they would have received if the debtor’s estate had been

liquidated on the effective date; and (2) modification of the plan under § 1127 is not practicable. The subparagraph

(B) provision is similar to the so-called “hardship” discharge that exists in chapter 12 and 13 cases, §§ 1228(b),

1328(b), except that a chapter 12 or 13 debtor must also establish that the failure to complete payments is due to

circumstances for which the debtor should not justly be held accountable.

Subparagraph C of § 1141(d)(5) provides the court may not grant a discharge under either subparagraph

(A) or (B) if the court finds that § 522(q)(1) is applicable, certain criminal proceedings are pending, or the debtor is

liable for a debt described in § 522(q)(1). The same grounds for discharge are in § 727(a)(12). Section 522(q)(1)

denies a debtor an exemption of assets in excess of an aggregate amount of $ 170,350 (as of April 1, 2019; it is

subject to adjustment every three years) under circumstances described in subparagraphs (A) or (B) of § 522(q)(1)

unless the court finds under § 522(q)(2) that certain exempt property is reasonably necessary for the support of the

debtor or any dependent.

Subparagraph (A) denies the exemption if the debtor has been convicted of a felony that under the

circumstances demonstrates that the filing of the case was an abuse of the Bankruptcy Code. Subparagraph (B)

198

First, § 1141(d)(5) prohibits entry of a discharge order until the individual has completed

payments under the plan unless the court orders otherwise for cause.

487

Second, it permits discharge without completion of payments if creditors have received

what they would have gotten in a chapter 7 case and modification of the plan is not

practicable.

488

Because § 1141(d)(5) does not apply in a sub V case, an individual debtor receives a

discharge immediately upon confirmation of a consensual plan under §1191(a).

489

Because the

debtor receives an immediate discharge, there is no need for a provision permitting discharge if

the debtor does not complete payments.

A plan may provide for so-called “lien-stripping” of a junior lien on the debtor’s

property. “Strip-off” of a junior lien may occur if the property’s value is less than the amount of

senior liens; “strip-down” reduces the amount of the lien to the value of the property in excess of

the amount of the senior liens. In a chapter 13 case, lien-stripping does not occur until the end of

the case, when the debtor receives a discharge.

490

In a subchapter V case, however, consensual

confirmation of a plan may result in immediate stripping of the lien.

491

Under § 1141(d)(1)(A), confirmation of a plan results in the discharge, with some

exceptions, of any debt that arose before the date of confirmation and any debt specified in

denies the exemption if the debtor owes a debt arising from (1) violation of state or federal securities laws; (2) fraud,

deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered

under the federal securities laws; (3) any civil remedy under 18 U.S.C. § 1964; or (4) any criminal act, intentional

tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the

preceding five years.

487

§ 1141(d)(5)(A).

488

§ 1141(d)(5)(B).

489

In re Vega Cruz, 2022 WL 2309798 (Bankr. D. P.R. 2022). The individual debtor also does not have to deal with

the § 522(q) issues discussed supra note 486 although they rarely arise.

490

§ 1325(a)(5)(B)(i)(I). See generally W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER

13 PRACTICE AND PROCEDURE § 5:11. See also id. § 21:23 (discussing whether “strip-off” or “strip-down” may

occur when a chapter 13 debtor completes payments under a plan but is not entitled to a discharge).

491

In re Vega Cruz, 2022 WL 2309798 (Bankr. D. P.R. 2022).

199

§ 502(g) (claims from the rejection of an executory contract or unexpired lease lease), § 502(h)

(claims arising from the exercise of avoidance powers), and § 502(i) (claims for taxes arising

after the commencement of the case entitled to priority under § 507(a)(8)). The discharge

applies whether or not a proof of claim was filed or deemed filed, the claim is allowed, or its

holder has accepted the plan.

492

A debtor does not receive a § 1141(d)(1)(A) discharge, however, if the plan provides for

the liquidation of all or substantially all of the property of the estate, the debtor does not engage

in business after consummation of the plan, and the debtor would be denied a discharge under

§ 727(a) if the case were a chapter 7 case.

493

Only an individual is entitled to a discharge in a

chapter 7 case.

494

An individual debtor is entitled to a chapter 7 discharge unless one of the

reasons for its denial in § 727(a)(2) – (12) exists.

495

The § 1141(d)(1)(A) discharge is effective except as otherwise provided in § 1141(d), the

plan, or the confirmation order.

Section X(C)(1) discusses exceptions to the § 1141(d)(1)(A) discharge.

B. Discharge Upon Confirmation of a Cramdown Plan Under § 1191(b)

When the court confirms a cramdown plan, § 1141(d) does not apply, except as provided

in §1192.

496

Instead, the debtor receives a discharge under §1192.

Section 1192 provides for discharge to occur “as soon as practicable” after the debtor

completes all payments due within the first three years of the plan, “or such longer period not to

492

§ 1141(d)(1)(A).

493

§ 1141(d)(3).

494

§ 727(a)(1).

495

§ 727(a).

496

§ 1181(c).

200

exceed five years as the court may fix.”

497

Presumably, any longer period will be the same

length as the court fixes for the commitment of projected disposable income in connection with

cramdown confirmation under §1191(b), but the statute does not expressly so state. Section

VIII(B)(4)(ii) discusses determination of the commitment period.

The cramdown discharge under §1192 discharges the debtor from all debts discharged

under § 1141(d)(1)(A), with certain exceptions that Section X(C)(2) discusses, unless § 1141(d),

the plan, or the confirmation order provides otherwise.

The §1192 discharge also applies to “all other debts allowed under [§ 503] and provided

for in the plan.”

498

Section 503 provides for the allowance of administrative expenses, including

postpetition operating expenses;

499

compensation of the trustee and professionals employed by

the trustee and the debtor;

500

and claims for goods the debtor received within 20 days of the

filing.

501

The discharge provision recognizes that a plan confirmed under §1191(b) may provide

for the payment of administrative expenses through the plan.

502

C. Exceptions to Discharge in Subchapter V Cases

Exceptions to a subchapter V discharge differ depending on whether the court confirms a

consensual plan under § 1191(a) or cramdown confirmation occurs under § 1191(b).

497

§ 1192. Section 1141(d)(5)(A), which defers the discharge of an individual in a chapter 11 plan until the debtor

completes payments, permits the court to order otherwise, for cause, after notice and a hearing. § 1192 contains no

provision for an earlier discharge.

498

§ 1192.

499

§ 503(b)(1).

500

§ 503(b)(2).

501

§ 503(b)(9).

502

§ 1191(e). Administrative expenses allowed under § 503(b) are entitled to priority under § 507(a)(2). § 1191(e)

permits the payment of a claim specified under § 507(a)(2) through a plan confirmed under § 1191(b). See Section

VI(C).

Section 1191(e) also permits payment of claims specified in § 507(a)(3) through the plan. Section

507(a)(3) provides a priority for “involuntary gap claims” allowed under § 502(f).

201

1. Exceptions to discharge after consensual confirmation

As Section X(A) explains, § 1141(d) applies in a subchapter V case after confirmation of

a consensual plan, except for the provisions of § 1141(d)(5) that govern the discharge of an

individual in a traditional case.

The discharge that § 1141(d)(1)(A) grants upon confirmation has two exceptions.

First, in the case of an individual, § 1141(d)(2) provides that the discharge does not

discharge any debt of the kind specified in § 523(a). No such exceptions apply to the discharge

of an entity in a traditional or subchapter V case.

Second, § 1141(d)(6) provides that the discharge does not discharge an entity

503

from any

debt: (1) of the kind specified in § 523(a)(2)(A) or (B)

504

that is owed to a governmental unit or

to a person as the result of an action filed under subchapter III of chapter 37 of title 31 (the False

Claims Act) or similar state laws (§ 1146(d)(6)(A)); or (2) that is for a tax or customs duty with

respect to which the debtor made a fraudulent return or willfully attempted to evade or avoid

(§ 1141(d)(6)(B)). Although § 1141(d)(6) does not apply to an individual, the debts it excepts in

§ 1141(d)(6)(A) are debts in § 523(a) that § 1141(d)(2) excepts from an individual discharge, and

the definition of excepted debts in § 1141(d)(6)(B) is identical to the definition of tax debts

excepted under § 523(a)(1)(C).

Section X(C)(3) discusses procedural requirements for determination of whether a debt is

excepted under § 523(a)(2), (4), or (6).

503

Section 1141(d)(6) uses the term “corporation.” Section 101(9) broadly defines “corporation” to include most

business entities.

504

§ 523(a)(2) applies to debts for money, property, services, or an extension, renewal, or refinancing of credit, to

the extent obtained by: (A) false pretenses, false representation, or actual fraud, other than a statement respecting

the debtor’s or an insider’s financial condition or (B) use of a written statement respecting the debtor’s or an

insider’s financial condition that is materially false, on which the creditor relied, and that the debtor made or

published with intent to deceive.

202

2. Exceptions to discharge after cramdown confirmation

As Section X(A) discusses, § 1141(d) does not apply when cramdown confirmation

occurs under § 1191(b). Instead, § 1192 governs the discharge in that circumstance.

Section 1192 provides for two exceptions to discharge.

First, §1192(1) states that the discharge does not discharge any debt on which the last

payment is due after the first three years of the plan, or such other time not to exceed five years

fixed by the court.

505

Any longer period fixed by the court will presumably be the same period

that the court fixes for the commitment of projected disposable income in connection with

cramdown confirmation.

506

Accordingly, the § 1192(1) exception provides that the discharge does not apply to debts

on which the final payment is due after completion of payments under the plan, which is when

the debtor receives a cramdown discharge. Chapters 12 and 13 similarly except such debts

because they likewise provide for discharge at the end of the plan term.

507

Because the debtor

has a continuing obligation to make payments on such debts after completion of plan payments

and discharge, such debts are excepted from discharge.

Second, §1192(2) excepts any debt “of the kind specified in [§ 523(a)].”

508

The same

exceptions apply to the § 1141(d)(1)(A) discharge of an individual, but not an entity, under

§ 1141(d)(2) when the court confirms a consensual plan. Section X(D) discusses the issue of

whether the § 523(a) exceptions apply to the discharge of an entity upon cramdown

confirmation.

505

§ 1192(1).

506

See Section VIII(B)(4)(ii).

507

See infra note 552.

508

§ 1192(2).

203

Section X(C)(3) discusses procedural requirements for determination of whether a debt is

excepted under § 523(a)(2)(, (4), or (6).

3. Procedure for determination of exceptions to discharge under

§ 523(a)(2), (4), or (6)

Under § 523(c)(1), a debtor is discharged from a debt excepted from discharge under

subparagraphs (2), (4), or (6) of § 523(a) unless, upon request of the creditor, the court

determines that the debt is nondischargeable. Bankruptcy Rule 4007(c) requires the filing of a

complaint to determine the dischargeability of such a debt no later than 60 days after the date

first set for the § 341(a) meeting. If the debtor does not list the creditor, § 523(a)(3) provides for

such a debt to be excepted if the creditor did not have enough notice to permit the timely filing of

a proof of claim and a timely request for the determination, unless the creditor had actual notice

of the deadlines in time to do so.

509

The clerk’s office must give at least 30 days’ notice of the

deadline.

510

D. Whether § 523(a) Exceptions Apply to Cramdown Discharge of Entity

1. Statutory language and background

Section 1192(2) excepts debts from the cramdown discharge “of the kind specified in

§ 523(a).” Unlike § 1141(d)(2), which makes the § 523(a) exceptions applicable after

consensual confirmation only to an individual, § 1192(2) does not limit the applicability of the

§ 523(a) exceptions after cramdown confirmation to individuals. This language indicates that the

exceptions also apply in entity cases.

509

§ 523(a)(3).

510

The Official Forms for the notice of the filing of a sub V case (Form B309E2 for cases of individuals and Form

B309F2 for cases of corporations or partnerships) provide a space for the clerk to state the deadline.

204

The language of § 523(a), however, leads to a different conclusion. As amended by

SBRA, the preamble to § 523(a) is:

A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this

title does not discharge an individual debtor from any debt – [defined in

paragraphs (1) through (19) of § 523(a)].

SBRA added the italicized “1192” to the list of other sections, which are sections under

which a discharge is granted in chapter 7, 11, 12, and 13 cases.

As amended, therefore, § 523(a) states, “A discharge under section . . . 1192 . . . does not

discharge an individual debtor from any debt” that § 523(a) lists. The implication of this

language is that § 1192(2)’s reference to debts “of a kind specified” in § 523(a) includes only

debts that § 523(a) excepts, which are only debts of individuals. In other words, although

§1192(2) states discharge rules for all debtors without regard to whether they are individuals or

not, its reference to § 523(a) in the case of an entity has no operative effect because § 523(a), as

amended, applies only to individuals.

SBRA’s amendment to include § 1192 in § 523(a) seems superfluous if Congress did not

intend to limit the § 523(a) exceptions to individuals. Without the amendment to § 523(a),

§1192(2) alone would except the types of debts listed from any § 1192 discharge, regardless of

whether the debtor is an individual.

Legislative history supports the conclusion that Congress did not intend to make the

§ 523(a) exceptions applicable to a §1192 discharge of a non-individual. The Report of the

Judiciary Committee of the House of Representatives states that the §1192 discharge excepts

debts on which the last payment is due after the commitment period under the plan and “any debt

205

that is otherwise nondischargeable.”

511

The use of the words “otherwise nondischargeable”

logically refers to § 523(a), which applies only to individuals.

Moreover, if the drafters had intended to expand § 523(a) to permit exceptions to the

discharge of non-individuals – a significant change in existing chapter 11 law, as Section

X(D)(2) discusses – one would expect the House Judiciary Committee Report to point that out.

It does not.

512

To the contrary, the Report’s explanation that the exceptions are for “any debt

that is otherwise nondischargeable” demonstrates an intent to apply existing exceptions to

discharge in chapter 11 cases in subchapter V, not to expand them.

Two bankruptcy cases decided under chapter 12, however, support the conclusion that the

§ 523(a) exceptions may apply to a §1192 discharge of an entity.

513

The chapter 12 discharge

provisions have the same language as §1192, and the prefatory language of § 523(a) as amended

refers to them and §1192 in the same way.

514

In the two chapter 12 cases, the corporate debtors contended that the § 523(a) exceptions

to the chapter 12 discharge did not apply to them because § 523(a) states that it only excepts

debts of an individual. Both courts ruled that the § 523(a) exceptions applied to the chapter 12

discharge of a corporation.

511

H.R. REP. NO. 116-171, at 8.

512

Retired Bankruptcy Judge A. Thomas Small, Jr., submitted testimony in support of the legislation. Judge Small’s

explanation of the § 1192 discharge similarly made no reference to the § 523(a) exceptions to the discharges of non-

individuals. Hearing on Oversight of Bankruptcy Law & Legislative Proposals Before the Subcomm. On Antitrust,

Commercial and Admin. Law of the H. Comm. On the Judiciary, 116th Cong. 2 (Revised Testimony of A. Thomas

Small on Behalf of the National Bankruptcy Conference), available at

https://www.fjc.gov/sites/default/files/REVISED_TESTIMONY_OF_A_THOMAS_SMALL.pdf.

513

In re Breezy Ridge Farms, Inc., 2009 WL 1514671 (Bankr. M.D. Ga. 2009); In re JRB Consol., Inc., 188 B.R.

373 (Bankr. W.D. Tex. 1995).

514

The chapter 12 discharge provision applicable when a debtor completes plan payments, § 1228(a), excepts from

discharge any debt “of a kind specified” in § 523(a). § 1228(a)(2), A debtor may receive a so-called “hardship”

discharge under certain conditions even if the debtor does not complete plan payments under § 1228(b). Section

1228(c)(2) uses the same language to except such debts from a hardship discharge.

206

In In re JRB Consolidated, Inc.,

515

the court reasoned that the operative language in

§ 1228(a)(2) (“debts of the kind” specified in § 523(a)) “does not naturally lend itself to also

incorporate the meaning ‘for debtors of the kind’ referenced in § 523(a).”

516

Instead, the court

concluded, “debts of the kind” is limited to the types of debts that the subparagraphs of § 523(a)

identify.

517

Moreover, the court explained, § 1228(a), unlike § 1141(d), does not expressly

provide a broader discharge for corporations than for individuals.

518

The court in In re Breezy Ridge Farms, Inc.,

519

adopted the same reasoning. In addition,

the court noted that the exceptions to discharge for a corporation in § 1141(d)(6)

520

apply to

debts “of a kind specified in paragraph (2)(A) or (2)(B) of section 523(a)” that meet certain other

requirements even though corporate debtors are excluded from § 523(a) by its terms.

521

The

Breezy Ridge Farms court explained that its interpretation harmonized the provisions of § 1228

and § 523(a):

Although § 523(a) applies only to individuals, Congress has used it as shorthand

to define the scope of a Chapter 12 discharge for corporations as well as

individuals. Thus, it is appropriate to rely on § 523(a) to determine whether a

debt is included in the discharge, even when the debtor is a corporation. Even if

the two provisions could not be harmonized, § 1228 would control because it is

more specific, applicable only in Chapter 12, than § 523(a), which applies

regardless of chapter.

522

515

In re JRB Consol., 188 B.R. at 373.

516

Id. at 374.

517

Id.

518

Id.

519

In re Breezy Ridge Farms, 2009 WL 1514671, at *1.

520

Section 1141(d)(6) states an exception to the § 1141(d)(1)(A) discharge. See Section X(A).

521

In re Breezy Ridge Farms, 2009 WL 1514671, at *2.

522

Id.

207

Commentators

523

and courts have disagreed about whether the § 523(a) exceptions are

applicable to the cramdown discharge of an entity. The next section examines the competing

rulings.

2. Judicial debate over application of § 523(a) exceptions to cramdown

discharge of an entity

Four bankruptcy judges – two in the same district – have ruled that the exceptions to

discharge in § 523(a) apply only in an individual case and, therefore, that no § 523(a) exceptions

to a § 1192 cramdown discharge of a corporation (or other entity

524

) exist.

525

Reversing one of

the decisions, the Fourth Circuit in Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re

Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022), concluded that § 1192(2) excepts debts

that are listed in § 523(a) from the cramdown discharge of both individual and corporate debtors.

The debate involves analysis of legislative history and the context of the statutes in support of the

competing textual analyses.

Rulings of the bankruptcy courts that § 523(a) exceptions are inapplicable to entity discharge

The bankruptcy court in Cleary Packaging

526

adopted and expanded the rationale of

Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc.

523

Compare, e.g., 5 NORTON BANKRUPTCY LAW AND PRACTICE § 107:19; James B. Bailey and Andrew J. Shaver,

The Small Business Reorganization Act of 2019,

NORTON BANKR. L. ADVISER, Oct. 2019, Part IX (exceptions are

applicable to discharge of sub V entity) with Richard P. Cook, Discharges in Subchapter V: What Has Changed?

What Remains the Same? Are Elephants Hiding in Mouseholes?, 41-Jun Am. Bankr. Inst. J. 24 (June 2022)

(exceptions should not be applicable to discharge of sub V entity). .

524

“Corporation” is a defined term in the Bankruptcy Code, § 101(9) and includes, among other things, a limited

liability company. E.g., Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 36

F.4th 509, 512 n. 1 (4th Cir. 2022). The text uses “corporate” or “corporation” interchangeably with “entity”).

525

Jennings v. Lapeer Aviation, Inc. (In re LaPeer Aviation, Inc.), 2022 WL 1110072 (Bankr. E.D. Mich. 2022);

Catt v. Rtech Fabrications, LLC (In re Rtech Fabrications LLC), 635 B.R. 559 (Bankr. D. Idaho 2021); Cantwell-

Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466 (Bankr. D. Md. 2021),

rev’d 36 F.4th 509 (4th Cir. 2022); Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite

Restaurants, Inc. Crabcake Factory USA), 626 B.R. 871 (Bankr. D. Md. 2021).

526

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466 (Bankr. D.

Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

208

Crabcake Factory USA), 626 B.R. 871 (Bankr. D. Md. 2021), the first case to address the issue.

Two later bankruptcy court opinions follow the approach of these cases.

527

The bankruptcy courts focused on the text of § 523(a) and invoked two principles of

statutory construction to support the conclusion that the discharge exceptions apply only to an

individual. The first is the familiar rule that the plain meaning of the text governs interpretation

of the bankruptcy statutes unless such an interpretation produces an absurd result.

528

The second

is that “every word must be given meaning so that no word in a statute is rendered

superfluous.”

529

For the bankruptcy courts, the critical text is in the preamble of § 523(a), which states

that a discharge under § 1192 discharges an individual debtor from all debts except the 21 types

of listed debts. This clear and unambiguous language makes the exceptions applicable only to

the § 1192 discharge of the debtor.

A contrary interpretation, the bankruptcy courts continue, would render SBRA’s

amendment of § 523(a) to insert § 1192 superfluous. Section 1192(2) states that a § 1192

discharge does not discharge a debt “of the kind specified in § 523(a).” For the exceptions in

§ 523(a) to apply to discharges of individuals and entities under § 1192(2), it is not necessary to

add § 1192 to § 523(a).

527

Jennings v. Lapeer Aviation, Inc. (In re LaPeer Aviation, Inc.), 2022 WL 1110072 (Bankr. E.D. Mich. 2022);

Catt v. Rtech Fabrications, LLC (In re Rtech Fabrications LLC), 635 B.R. 559 (Bankr. D. Idaho 2021);

528

Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc. Crabcake Factory

USA), 626 B.R. 871, 875-76 (Bankr. D. Md. 2021), citing Lamie v. United States Trustee, 540 U.S. 526, 534

(2004).

529

Id. at 876. The court cited: Montclair v. Ramsdell, 107 U.S. 147, 152 (1883) (A court should “give effect, if

possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the

legislature was ignorant of the meaning of the language it employed.”); Hibbs v. Winn, 542 U.S. 88, 101 (2004)

(“A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or

superfluous, void or insignificant.”); and Star Athletica, L.L.C. v. Varsity Brands, Inc., ––– U.S. ––––, 137 S.Ct.

1002, 1010 (2017) (“We thus begin and end our inquiry with the text, giving each word its ‘ordinary, contemporary,

common meaning.’” (quoting Walters v. Metro. Ed. Enter., Inc., 519 U.S. 202, 207, (1997))).

209

The reference to § 1192 in § 523(a) must mean something, and “the only reasonable

meaning is that Congress intended to limit application of the § 523(a) exceptions in a Subchapter

V case to individuals.”

530

In other words, the only function of the addition of “§ 1192” to the

qualifying language of § 523(a) “is to limit application of § 523(a) to individual debtors in

Subchapter V cases.”

531

“This is not simply the logical reading of the statute but also it is the

result mandated by common principles of statutory construction.”

532

Under this textual analysis, the Cleary Packaging bankruptcy court concluded, “When

giving effect to every word of the statute, the plan language of Section 523(a) is unequivocal and

confirms that the exceptions to a debtor’s discharge, including a discharge under Section 1192,

apply only to an individual.”

533

The bankruptcy court in Satellite Restaurants put it this way:

“[T]he Code, read holistically and in accordance with common principles of statutory

interpretation, limits the application of section 523 in Subchapter V cases to individual

debtors.”

534

The Fourth Circuit ruling: § 523(a) exceptions apply to entity discharge

The Fourth Circuit’s contrary analysis in Cantwell-Cleary Co., Inc., v. Cleary Packaging,

LLC (In re Cleary Packaging LLC, 36 F.4th 509 (4th Cir. 2022), focuses on the text of § 1192(2)

“as the provision that specifically governs discharges” in a subchapter V case. Id. at 515.

535

The

530

Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc. Crabcake Factory

USA), 626 B.R. 876 (Bankr. D. Md. 2021).

531

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 472 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

532

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 472 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

533

Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc. Crabcake Factory

USA), 626 B.R. 871, 876 (Bankr. D. Md. 2021).

534

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 472 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022); Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re

Satellite Restaurants, Inc. Crabcake Factory USA), 626 B.R. 871 (Bankr. D. Md. 2021).

535

More accurately, § 1192(2) governs only one set of exceptions to discharge when the court confirms a cramdown

plan under § 1191(a). It has no application when the court confirms a consensual plan under § 1191(a).

210

critical language of § 1192(2) is that it excepts “any debt . . .of the kind” specified in § 523(a).

The Fourth Circuit concluded that use of the word “debt” was decisive because “it does not lend

itself to encompass the ‘kind’ of debtors discussed in the language of § 523(a).” Id. (original

emphasis).

The Fourth Circuit explained, “the combination of the terms ‘debt’ and ‘of the kind’

indicates that Congress intended to reference only the list of non-dischargeable debts found in

§ 523(a). 36 F.4th at 515 (original emphasis). This interpretation of “of the kind,” the court

continued, is in line with the ordinary dictionary meanings of “kind” as “category” or “sort.”

The court summarized its ruling, 36 F.4th at 515 (original emphasis):

[W]hile § 523(a) does provide that discharges under various sections, including

§ 1192 discharges, do not “discharge an individual debtor from any debt” of the kind

listed, § 1192(2)’s cross-reference to § 523(a) does not refer to any kind of debtor

addressed by § 523(a) but rather to a kind of debt listed in § 523(a). By referring to the

kind of debt listed in § 523(a), Congress used a shorthand to avoid listing all 21 types of

debts, which would indeed have expanded the one-page section to add several additional

pages to the U.S. Code. Thus, we conclude that the debtors covered by the discharge

language of § 1192(2) – i.e., both individual and corporate debtors – remain subject to the

21 kinds of debt listed in § 523(a).

To the extent that tension existed between the language of § 523(a) addressing individual

debtors and the language of § 1192(2) addressing both individual and corporate debtors, the

court added, the more specific language of § 1192(2) dealing only with subchapter V discharges

should govern over the more general provisions of § 523(a) that reference other discharges under

the Bankruptcy Code. 36 F.4th at 515.

The bankruptcy courts support their interpretation with analysis of legislative history, the

underlying objectives of subchapter V, and the historical structure and objectives of the

Bankruptcy Code. The Fourth Circuit finds support for its conclusion in the context of § 1192(2)

211

within the Bankruptcy Code, in the structure of the Bankruptcy Code, and in considerations of

“fairness and equity.”

Reasoning of the bankruptcy courts to support their interpretation

The bankruptcy courts, reviewing the legislative history of subchapter V that earlier text

discusses, found nothing that indicated that Congress intended to expand the exceptions to

discharge in § 523(a) to a corporation.

536

In addition, the bankruptcy courts noted the well-settled law that the pre-SBRA version

of § 523(a) did not apply to a chapter 11 discharge of a corporation.

537

Indeed, in enacting the

Bankruptcy Code in 1978, Congress expressly considered and rejected the approach of one of the

former reorganization chapters under the Bankruptcy Act, Chapter XI, that provided for

objections to the discharge of a corporation.

538

The bankruptcy court in Cleary Packaging

539

pointed out that, according to one

bankruptcy scholar, the exceptions in chapter XI cases to a corporation’s discharge for fraud and

other debts “posed a substantial impediment to the ability of certain debtors to reorganize” under

chapter XI, and the corporate discharge provisions in chapter 11 (the single reorganization

chapter that replaced former Chapters X, XI, and XII) reflected “the considered judgment that

536

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 473 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022); Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re

Satellite Restaurants, Inc. Crabcake Factory USA), 626 B.R. 871, 878 (Bankr. D. Md. 2021).

537

Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc. Crabcake Factory

USA), 626 B.R. 871, 876-77 (Bankr. D. Md. 2021) (collecting and discussing cases).

538

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 473-74

(Bankr. D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

539

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 474 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

212

any corporate discharge exception ‘would leave an undesirable uncertainty surrounding

reorganizations that is unacceptable.’”

540

The court noted that the only exception to the discharge of a corporation in a traditional

chapter 11 case is in § 1141(d)(6).

541

Section 1141(d)(6) provides a limited exception for debts

of a kind specified in §523(a)(2) owed to (1) a domestic governmental unit or to a person

resulting from an action under the False Claims Act or similar state statute and (2) taxes with

respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat.

542

It took eight years for that provision to be enacted.

543

From this, the bankruptcy court in Cleary Packaging concluded, “[T]he 1978 Code

represented an intentional and decisive change by Congress with respect to the scope of a

corporate debtor’s discharge.” 630 B.R. 474. Accordingly, the court reasoned, “[T]he

suggestion that Congress incorporated [21] new exceptions to discharge for small corporations in

a bill [the SBRA] that was introduced in April 2019, and signed into law by the President in

August 2019, seems not only improbable but also contradicts years of bankruptcy law and

policy. ‘Congress does not alter the fundamental details of a regulatory scheme in vague terms

or ancillary provisions – it does not, one might say, hide elephants in mouseholes.’” 630 B.R. at

475.

544

540

Id. at 474, quoting Ralph Brubaker, Taking Exception to the New Corporate Discharge Exceptions, 13 Am.

Bankr. Inst. L. Rev. 757, 764-66 (2005) (internal notes and citations omitted). See also Cleary Packaging, 630 B.R.

at 475, n. 12.

541

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 475 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

542

See generally Roger S. Goldman, et al., Discharging False Claims Liability in Bankruptcy, Section 1141(d)(6)(A)

of the Bankruptcy Code: An Incentive to Settle FCA Cases?, 23 No. 1 Health Law 40 (American Bar Association

2010).

543

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 475 & n. 17

(Bankr. D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022).

544

The court quoted Whitman v. Am. Trucking Associations, 531 U.S. 457, 468 (2001).

213

Simply put, the bankruptcy courts conclude that Congress did not intend that § 1192(2)

change established law regarding exceptions to an entity’s chapter 11 discharge.

The Cleary Packaging bankruptcy court also concluded that the scope of the chapter 11

discharge should be the same in all chapter 11 cases. The court explained, 630 B.R. at 475:

Although the entities at issue in a Subchapter V case are smaller than those in most

traditional chapter 11 cases, the state law structure of these entities and their need for a

balance sheet restructuring are akin to larger chapter 11 cases. These entities act in the

same general manner and should be subject to the same potential liabilities through the

chapter 11 process. In fact, history has shown that individuals running very large

corporations are capable of using the entity for improper purposes, yet the entity receives

a discharge in chapter 11 if its plan is confirmed. It seems incongruent that Congress

would penalize a smaller entity for similar individual conduct.

The Cleary Packaging bankruptcy court also noted that the § 523(a) exceptions do not

apply to a discharge granted upon confirmation of a consensual plan under § 1191(a) – an

outcome determined by class voting, not the actions of individual creditors. Thus, if enough

creditors in a class including a creditor who claims a nondischargeable debt accept it (and all

other impaired classes accept it), consensual confirmation under § 1191(a) discharges the

allegedly nondischargeable claim. 630 B.R. at 476.

The court concluded, “[A]ny such result is arbitrary and undermines the equality

principles of creditor treatment under the Code.” 630 B.R. at 476.

The Cleary Packaging bankruptcy court summarized its ruling as follows, id. at 476:

The nature and purpose of the discharge are different for corporate debtors, and those

differences must, in this Court's opinion, be respected in Subchapter V.

The Court is persuaded by Congress' rejection of prior exceptions to discharge for

corporate debtors and, more importantly, the plain language that Congress used in section

523(a) to confine those exceptions to individual debtors. Absent clear and unambiguous

direction from Congress to deviate from that approach, the Court finds that an entity's

discharge under section 1192 of the Code is unimpeded by section 523(a) of the Code.

214

The Fourth Circuit’s reasoning in support of its interpretation

The Fourth Circuit in Cleary Packaging did not address the bankruptcy court’s analysis

of legislative history, the history of exceptions to discharge in chapter 11 cases, or the need for

consistency in the scope of the discharge of an entity in subchapter V and chapter 11 cases.

Instead, the court made four points about “the context of § 1192(2) within the Bankruptcy Code

and the Bankruptcy Code’s structure” that supported its interpretation. 36 F.4th at 515.

Fourth Circuit’s analysis of distinctions in discharge provisions

The Fourth Circuit’s first point is that “Congress conscientiously defined and

distinguished the kinds of debtors” covered by the discharge provisions in chapters 7, 11, and 13.

36 F.4th at 516. Entities cannot get a discharge in chapter 7 and 13 cases; in traditional chapter

11 cases, Congress “explicitly distinguished” individual and corporate discharges by excluding

different debts from each. In contrast, the court concluded, “Congress purposefully addressed

both individual and corporate debtors when defining the right of discharge in Subchapter V

proceedings.” Id.

As an initial matter, the discharge provisions of chapters 7 and 13 are irrelevant to the

issue. Chapter 7 is a liquidation proceeding, so a corporation effectively no longer exists after

the filing of a chapter 7 case. The reason for denying a discharge to an entity in a liquidation

case is to avoid trafficking in corporate shells and bankrupt partnerships.

545

Section 727(a)(1)

clearly and simply distinguishes individuals and entities by providing that such entities do not

545

5 Norton Bankruptcy Law and Practice § 86:2 (“Beyond removing what was often a meaningless extension of the

discharge provisions, the purpose of Code § 727(a)(1) is to avoid the trafficking in corporate shells and in bankrupt

partnerships. Consistent with this purpose, the discharge provisions of Chapter 11 similarly deny discharge to

debtors who are not individuals if the confirmed Chapter 11 plan provides for the liquidation of all or substantially

all of the property of the estate, the debtor does not engage in business after consummation of the plan, and the

debtor would be denied a discharge under Code § 727(a) if the case were a Chapter 7 case.”) (Citing H.R. Rep. No.

95-595 (1977); S. Rep. No. 95-989 (1978)).

215

receive a discharge. The same prohibition exists in a chapter 11 case when a corporation

liquidates assets and does not remain in business. § 1141(d)(3).

An entity cannot receive a chapter 13 discharge because an entity cannot be a chapter 13

debtor under § 109(e).

546

Chapter 13 distinguishes between entities and individuals by making

only individuals eligible for chapter 13, not through a discharge provision.

The distinctions in the operation of the discharge provisions of chapter 7 and 13 between

individuals and entities, therefore, shed no light on the interpretation of chapter 11 and

subchapter V provisions that deal with exceptions to discharge.

A review of the structure of the discharge provisions of § 1141(d) and § 1192(2) helps to

understand the Fourth Circuit’s point about distinctions between exceptions to discharge for

individuals and debtors in chapter 11 and subchapter V cases.

Section 1141(d) provides for a discharge in a traditional case (and after consensual

confirmation in a sub V case) upon confirmation in one paragraph applicable to all debtors

(§ 1141(d)(1)(A)) and excepts debts specified in § 523(a) from an individuals’ discharge in

another. (§ 1141(d)(2)). In a subchapter V case, § 1192(2) excepts debts in § 523(a) without

limiting its application to individuals. The Fourth Circuit’s conclusion is that Congress must

have intended that the § 523(a) exceptions apply to all debtors because § 1192(2) did not limit

the exceptions to individuals as § 1141(d)(2) does.

The structures of § 1141(d) and § 1192(2) support the Fourth Circuit’s interpretation but

they do not compel it. The legislative history of subchapter V and the history of the enactment

of Chapter 11 without any exceptions to a corporation’s discharge that the bankruptcy courts

546

See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, CHAPTER 13 PRACTICE AND PROCEDURE

§ 12:6.

216

examined demonstrate that Congress did not intend that § 1192 apply to all debtors in a way that

is materially different from the way that the discharge provisions of § 1141(d) apply to all

debtors, as later text discusses in more detail.

Fourth Circuit’s concern about reconciliation with § 1141(d)(6)

The Fourth Circuit’s second point is that the bankruptcy court’s interpretation would

“create difficulty in reconciling § 523(a) with § 1141(d)(6).” 36 F.4th at 516. The Fourth

Circuit did not elaborate on its concern.

Section 1141(d)(6) provides that the discharge does not discharge an entity

547

from any

debt: (A) of the kind specified in § 523(a)(2)(A) or (B)

548

that is owed to a governmental unit or

to a person as the result of an action filed under subchapter III of chapter 37 of title 31 (the False

Claims Act) or similar state laws (§ 1146(d)(6)(A)); or (B) that is for a tax or customs duty with

respect to which the debtor made a fraudulent return or willfully attempted to evade or avoid

(§ 1141(d)(6)(B)). Although § 1141(d)(6) does not apply to an individual, the debts it excepts in

§ 1141(d)(6)(A) are debts that are nondischargeable in an individual case under § 523(a)(2), and

the debts in § 1141(d)(6)(B) are identical to debts excepted under § 523(a)(1)(C).

Two possible concerns involving § 1141(d)(6) arise from the bankruptcy court’s

interpretation.

First, if § 1192(2) does not except debts of an entity after cramdown discharge, the

discharge will discharge debts that § 1141(d)(6) excepts, because § 1141(d) does not apply in the

547

Section 1141(d)(6) uses the term “corporation.” Section 101(9) broadly defines “corporation” to include most

business entities.

548

§ 523(a)(2) applies to debts for money, property, services, or an extension, renewal, or refinancing of credit, to

the extent obtained by: (A) false pretenses, false representation, or actual fraud, other than a statement respecting

the debtor’s or an insider’s financial condition or (B) use of a written statement respecting the debtor’s or an

insider’s financial condition that is materially false, on which the creditor relied, and that the debtor made or

published with intent to deceive.

217

case of cramdown confirmation under § 1181(c). If consensual confirmation occurs, however,

such debts are excepted because § 1141(d) governs the discharge.

The fact that an entity could escape nondischargeability of a § 1141(d)(6) debt through

cramdown confirmation but not through consensual confirmation supports the conclusion that

the § 523(a) exceptions must apply after cramdown confirmation because the § 523(a)

exceptions encompass debts described in § 1141(d)(6). In this situation, under the bankruptcy

court’s interpretation, an entity has an incentive to seek cramdown confirmation rather than

consensual confirmation so that it receives a broader discharge.

This anomalous result with regard to limited types of debts does not provide a persuasive

basis for concluding that Congress intended to except all types of § 523(a) debts from discharge

in order to preserve exceptions for a few. While § 1141(d)(6) debts rarely arisen in reported

chapter 11 cases, the problem of exceptions to discharge in entity cases is widespread. The fact

that the bankruptcy court’s interpretation gives an entity a broader discharge in cramdown cases

with regard to types of debts that rarely arise does not indicate that Congress intended to depart

from the intentional and deliberate elimination of exceptions to discharge in entity cases, as later

text explains.

The second issue involves the specific language of § 1141(d)(6)(A). That subparagraph

provides that it does not discharge debts owed to certain creditors “of the kind specified” in

§ 523(a)(2)(A) or (B).

Again, a review of the statutes helps to clarify the issue.

Section 523(a) states that a discharge under § 1141 and § 1192 (and others) does not

discharge an individual debtor from the listed debts. Section 1192(2) excludes debts “of the kind

218

specified” in § 523(a). Under the bankruptcy court’s interpretation, the inclusion of § 1192 in

§ 523(a)(2) means that §1192(2) does not except debts of an entity.

Application of the bankruptcy court’s interpretation to § 1141(d)(6)(A) would mean that

§ 1141(d)(6) likewise does not except debts of an entity from a discharge in a traditional chapter

11 case under the following syllogism:

1. Both § 1192(2) and § 1141(d)(6)(A) except debts “of the kind specified” in § 523(a).

2. Section 523(a) states that discharges under the listed sections, including § 1141 and

§ 1192, do not discharge “an individual debtor” from the debts it lists.

3. The bankruptcy court’s conclusion that the exception to a § 1192 discharge for debts

“of the kind specified” in § 523(a) does not apply to an entity because § 523(a) applies only to

the discharge of an individual also applies to a § 1141 discharge.

A determination that § 1141(d)(6) does not except debts of an entity contradicts its

express language that it excepts the listed debts from the discharge of a corporation.

Accordingly, the conclusion from this exercise is that the bankruptcy court’s interpretation of

§ 523(a) as limiting exceptions to discharge in § 1192(2) to individuals cannot be correct because

the same interpretation makes no sense when applied to § 1141(d)(6)(A).

The bankruptcy courts do not discuss the point, but their interpretation does not

necessarily require the result that the foregoing discussion posits. Section 1141(d)(6) expressly

states that it provides exceptions to the debts of corporations and was enacted as a stand-alone

amendment to § 1141(d). The bankruptcy court’s interpretation cannot override the express

provisions of § 1141(d)(6)(A) to except the debts it describes by reference to § 523(a) from a

corporate discharge.

219

Further, the bankruptcy courts’ interpretation can be reconciled with § 1141(d)(6)(A)

based on differences in the context of § 1141(d)(6)(A) and in the circumstances of its enactment

and the enactment of amendments to § 523(a) in 1986 and 2019 that added, respectively, the

discharge provisions of chapter 12 and subchapter V. Context of the statutes and the

circumstances of their enactment make it appropriate to interpret the same words differently in

§ 1141(d)(6)(A) than in § 1192(2).

As originally enacted in 1978, § 523(a) referenced only a chapter 7 discharge, a chapter

11 discharge, and the so-called “hardship” discharge in a chapter 13 case under § 1328(b).

549

The limitation of the exceptions to debts of an individual at that time had no effect on the

discharge of an entity. An entity could not be a chapter 13 debtor, and it could not get a chapter

7 discharge. Section 1141(d)(2) specifically excepted debts in § 523(a) only from the chapter 11

discharge of an individual. Chapter 12 did not exist.

In 1986, Congress enacted chapter 12 as a temporary provision

550

and amended § 523(a)

to include the chapter 12 discharge provisions.

551

Chapter 12 was modelled on chapter 13,

552

549

In a chapter 13 case, a debtor receives a discharge under § 1328(a) upon completion of plan payments. As

originally enacted, § 1328(a) excepted only one type of debt listed in § 523(a) from discharge, obligations for

alimony and other support in § 523(a)(5). It was, therefore, called a “superdischarge” because only one exception to

discharge applied. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and

Procedure § 21:13. Later legislation excepted additional debts from the § 1328(a) discharge. Id.

550

Bankruptcy Judges, United States Trustees, and Family Farmer Act of 1986 § 255, Pub. L. No. 99-554, 100 Stat.

3088 (Oct. 27, 1986). After several extensions, the Bankruptcy Abuse Prevention and Consumer Protection Act of

2005 (“BAPCPA”) made it a permanent part of the Bankruptcy Code.

551

Bankruptcy Judges, United States Trustees, and Family Farmer Act of 1986 § 257(n), Pub. L. No. 99-554, 100

Stat. 3088 (Oct. 27, 1986).

552

Chapter 12 closely resembles chapter 13. In both chapters 12 and 13, creditors do not vote. The confirmation

standards are similar, but different from those in chapter 11. Limits on the term of the plan exist in both chapters.

Both permit a plan to provide for the cure of defaults and maintenance of postpetition installment payments for a

long-term debt (typically a real estate mortgage) on which the last payment is due after the final payment under the

plan is due. § 1322(b)(5) (chapter 13); § 1222(b)(5) and (9). Although a chapter 11 plan may provide for the cure

of a default, it does not contain specific provisions for payments on long-term debt beyond the term of the plan. In

fact, chapter 11 contains no limit on the term of the plan.

220

and its provisions for the exception of debts from discharge tracked the two exceptions to a

chapter 13 discharge.

553

One exception is for certain long-term debts on which the final payment is due after the

final payment under the plan.

554

Because the debtor has a continuing obligation to make

payments on such debts after completion of plan payments and discharge, such debts are

excepted from discharge.

The second exception is for debts “of a kind specified” in § 523(a).

Under the chapter 12 discharge provisions standing alone, the § 523(a) exceptions to

discharge in chapter 12 cases are not limited to discharges of individuals. But Congress also

enacted, in the same legislation, an amendment to § 523(a) to add the chapter 12 discharge

Sections 1222(b)(5) and 1322(b)(5) are the same. Both permit a plan to provide for the cure of defaults and

maintenance of postpetition installment payments for a long-term debt (typically a real estate mortgage) on which

the last payment is due after the final payment under the plan is due.

In chapter 12 cases, § 1222(b)(9) permits payment of allowed secured claims “consistent with” § 1225(a),

but over a period of time longer than the term of the plan. Section 1225(a) is the chapter 12 analog of § 1325(a)(5)

in chapter 13 cases. Both permit payment of an allowed secured claim with payments having a value of the allowed

amount of the secured claim. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13

Practice and Procedure §§ 5:10, 5:14. In a chapter 13 case, however, payments under this type of treatment must be

completed within the plan term. Id. § 5:13.

553

More precisely, the exceptions in the chapter 12 discharge provisions are the same as the exceptions to the

“hardship discharge” in chapter 13, with one exception based on a different provision in chapter 12 that permits

payment of allowed secured claims beyond the term of the plan.

In a chapter 13 case at the time of temporary enactment of chapter 12, a debtor received a so-called

“superdischarge” upon completion of plan payments in a chapter 13 case under § 1328(a), subject to only one

exception in § 523(a)(5) for alimony and support obligations. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam

M. Goodman, Chapter 13 Practice and Procedure § 21:13. Later legislation excepted additional debts from the

§ 1328(a) discharge. Id. §§ 21:13, 21:16, 21:17.

A chapter 13 debtor who did not complete all plan payments could receive a so-called “hardship” discharge

under § 1328(b) under certain conditions. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman,

Chapter 13 Practice and Procedure §§ 21:8. Under § 1328(c), the hardship discharge of § 1328(b) is subject to

exceptions for all of the debts in § 523(a). See id. § 21:18.

Like chapter 13, chapter 12 provides for both “completion” and “hardship” discharges. § 1228(a)

(completion discharge); § 1228(b) (hardship discharge). Unlike chapter 13, however, both chapter 12 discharges are

subject to all exceptions in § 523(a). § 1228(a)(2) (completion discharge); § 1228(c)(2) (hardship discharge).

The chapter 12 discharge provision differs from the chapter 13 hardship discharge provision in that it also

excepts debts “provided for” in the plan under § 1222(b)(9), discussed supra note 552. These provisions recognize

that, if a debtor will make payments on a debt beyond the term of the plan and after discharge, the debtor must

remain liable on such a debt.

554

§ 1228(a)(1) (completion discharge); § 1228(c)(1) (hardship discharge). See supra note 552.

221

sections to the list of discharges. As amended, therefore, § 523(a) stated that a chapter 12

discharge “does not discharge an individual debtor from any debt” that it lists.

In enacting subchapter V, Congress did the same thing with respect to the cramdown

discharge in § 1192. First, it modelled the exceptions to the cramdown discharge on the

exceptions in chapter 12. Specifically, § 1192(1) excepts debts on which the last payment is due

after the plan’s term (which is when entry of discharge occurs after cramdown confirmation),

and § 1192(2) excepts debts “of the kind specified” in § 523(a). Second, it added § 1192 to the

list in § 523(a).

The bankruptcy courts’ interpretation in the subchapter V context is that the addition of

§ 523(a) must mean something, and what it means is that only debts of an individual are

excepted from discharge. The same analysis means that the 1986 chapter 12 legislation also

resulted in application of the exceptions in § 523(a) only to individuals (contrary to the rulings of

two bankruptcy courts in chapter 12 cases discussed above).

The bankruptcy courts’ interpretation is subject to debate for other reasons, but its

interpretation is not irreconcilable with § 1141(d)(6)(A).

The Fourth Circuit’s correct premise is that this reading of “of the kind specified” in

§ 1192 makes no sense when applying § 1141(d)(6)(A). But this does not mean that the same

words must have the same effect in § 1141(d)(6)(A), or even that the meaning of the words that

makes sense in § 1141(d)(6)(A) requires that they be interpreted the same way in § 1192 (or in

the chapter 12 discharge provisions).

The reason is that § 1141(d)(6)(A) was enacted in 2019 as a stand-alone provision that

makes a specific exception to the chapter 11 discharge of a corporation. It clearly states an

exception that is applicable to a corporation regardless of how it describes the debts that are

222

excepted. It addressed a specific problem involving a specific category of debts to be excepted

from a corporate discharge.

In contrast, § 1192(2) was enacted in connection with an amendment to § 523(a) in the

same way that § 523(a) had been amended in 1986 upon enactment of chapter 12. Although

enactment of § 1192(2) and the accompanying amendment to § 523(a) occurred after enactment

of § 1141(d)(6)(A), its purpose and effect are the same as those in the chapter 12 legislation

enacted in 1986. Determination of the meaning of the subchapter V legislation, therefore,

properly involves consideration of the meaning of chapter 12 legislation that preceded

§ 1141(d)(6)(A), without regard to how the same language applies in § 1141(d)(6)(A).

The chapter 12 discharge provisions in § 1228 and corresponding amendment to § 523(a)

were part of comprehensive legislation to deal with the reorganization of family farmers that,

unlike chapter 13, permitted entities to file such cases. The similar subchapter V provisions were

a part of comprehensive legislation to facilitate the reorganization of small businesses that

modified important aspects of chapter 11. How congress used the same words in another specific

context does not properly inform their interpretation in the context of comprehensive legislation.

Conversely, the meaning of the words in the comprehensive legislation does not require the same

meaning in a statute with limited effect where a different meaning is clear.

In other words, the bankruptcy courts’ reading of the effect of the limitation of exceptions

in § 523(a) to individuals with regard to the general effect of discharges that it lists does not

mean that the same reading is applicable when a specific statute – § 1141(d)(6)(A) – references

specific subparagraphs of § 523(a)(2) to describe debts that are clearly intended to be excepted

from a corporate discharge.

223

Fourth Circuit’s discussion of exceptions in chapter 12 cases

The third structural point the Fourth Circuit advances, which it describes as “more

telling,” is “Congress’s importation of language into Subchapter V from the conceptually similar

Chapter 12 proceedings.” 36 F.4th at 516. Citing the chapter 12 cases that earlier text

discusses,

555

the Fourth Circuit observed that, under the language of the chapter 12 discharge

provisions materially identical to § 1192, those courts had determined that the § 523(a)

exceptions applied to an entity’s chapter 12 discharge.

The proposition that subchapter V is “conceptually similar” to chapter 12 is imprecise.

Although subchapter V resembles chapter 12 in some ways, it is significantly different in

others.

556

Critically, subchapter V is part of chapter 11, and its requirements for confirmation

incorporate most of the requirements of § 1129(a). Thus, more accurately, subchapter V uses

chapter 11 as its base and then incorporates some of chapter 12’s structure.

557

Nevertheless, because the language of the discharge exceptions in chapter 12 and

§ 1192(2) is identical, the holdings in the chapter 12 cases support the Fourth Circuit’s ruling. In

fact, the Fourth’s Circuit’s textual analysis is similar to the textual analysis those courts used.

Otherwise, the cases add little enlightenment about the proper interpretation of the statutes in

question. All they do is reach the same result as the Fourth Circuit for the same reasons.

The bankruptcy court in Cleary Packaging addressed the chapter 12 cases and

distinguished them based on two important differences between chapter 12 and subchapter V.

555

In re Breezy Ridge Farms, Inc., 2009 WL 1514671 (Bankr. M.D. Ga. 2009); In re JRB Consol., Inc., 188 B.R.

373 (Bankr. W.D. Tex. 1995).

556

See Part I.

557

As the court observed in In re Trepetin, 617 B.R. 841, 848, n. 14 (Bankr. D. Md. 2020):

Subchapter V and chapter 12 are not identical, and invoking chapter 12 standards may not be warranted in every

instance. Subchapter V starts with chapter 11 as its base and then draws on the structure of chapter 12, certain

elements of chapter 13, and the recommendations of the American Bankruptcy Institute's Commission to Study the

Reform of Chapter 11 and the National Bankruptcy Conference.

224

630 B.R. at 472 & n. 9.

558

First, subchapter V is an alternative for a business entity and applies

to a much broader array of entities than those eligible for chapter 12 as family farmers and

fishers. Second, subchapter V incorporates the discharge provisions of § 1141(d) in the context

of a consensual plan. Unlike the chapter 12 discharge provision, § 1141(d) distinguishes

between individual and corporate discharges.

The Cleary Packaging bankruptcy court concluded, “The lack of such distinction within

Chapter 12 considered in conjunction with the narrowly circumscribed type of entity that may be

a Chapter 12 debtor renders analogy between the two discharge provisions unpersuasive.” 630

B.R. at 472, n. 9, quoting United States ex rel. Minge v. Hawker Beechcraft, Inc. (In re Hawker

Beechraft, Inc.), 515 B.R. 416, 430 (S.D.N.Y. 2014).

Further, the bankruptcy court in Cleary Packaging noted that the plain language of the

chapter 12 provision “could support a result different that that reached by the courts” in the

chapter 12 cases. 630 B.R. at 472.

In short, although the chapter 12 cases support the Fourth Circuit’s decision in the sense

that they are consistent with it, they provide no additional basis for it. They support the Fourth

Circuit’s ruling only if their textual analysis is correct – the question before the Fourth Circuit –

and if their reasoning and holdings appropriately apply in the subchapter V context. The much

wider availability of subchapter V than chapter 12 requires a fresh examination of the statutory

language in the subchapter V context.

Fourth Circuit’s consideration of purposes of subchapter V

558

The court in Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite Restaurants, Inc.

Crabcake Factory USA), 626 B.R. 871, 877 (Bankr. D. Md. 2021) similarly distinguished the chapter 12 cases.

225

The fourth point in the Fourth Circuit’s review of context and structure is the

consideration of subchapter V’s “juxtaposition in Chapter 11 with traditional Chapter 11

provisions, reflecting its distinctive purpose within that Chapter.” 36 F.4th at 517. The court

observed that a primary goal of subchapter V is to simplify chapter 11 for small businesses and

to reduce administrative costs for them. To do so, the court said, “Congress deliberately altered

the general provisions of traditional Chapter 11 proceedings by, among other things, eliminating

the absolute priority rule and limiting the applicability of § 1141(d) to Subchapter V

proceedings.” Id.

The Fourth Circuit followed this statement with three sentences dealing with discharge

provisions. The sentences, with commentary, are:

1. “Section 1141(d), in particular, sets forth debts that are eligible for discharge in a

traditional Chapter 11 proceeding, making distinctions between individual debtors and corporate

debtors.” 36 F.4th at 517.

Specifically, § 1141(d)(1)(A) describes the debts that are discharged, and § 1141(d)(2)

states that the discharge does not discharge an individual debtor from any debt excepted from

discharge under § 523.

559

The distinction reflects the simple proposition that an individual

should not be able to use chapter 11 to obtain benefits that are not available in other chapters.

559

Section1141(d)(5) makes three other distinctions between the discharge of individual and entity debts. Section

11141(d)(5), which does not apply in subchapter V, § 1181(1), deals only with individual debtors and provides for

(1) deferral of discharge until completion of plan payments; (2) the grant of a so-called “hardship discharge” under

certain conditions for a debtor who has not completed plan payments; and (3) the court to grant the discharge if it

finds no reasonable cause to believe that § 522(q)(1) is applicable and that no proceeding is pending in which the

debtor may be found guilty of a felony as described in § 522(q)(1)(A) or liable for a debt as described in

§ 522(q)(1)(B). Similar provisions with regard to § 522(q) apply to the grant of a discharges under chapters 7

(§ 727(a)(12)), 12 (§ 1228(f)), and 13 (§ 1328(h). For a discussion of the chapter 13 provision, see W. Homer

Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure § 21:5.

Section 522(q)(1) limits the value of the exemption an individual debtor utilizing the nonbankruptcy

exemptions under § 522(b)(3)(A) may take in a residence, homestead, of burial plot if the debtor has committed a

felony that, under the circumstances, demonstrates that the filing of the case is an abuse of the Bankruptcy Code or

226

2. “In contrast, § 1192 provides benefits to small business debtors, regardless of whether

they are individuals or corporations.” Id.

This correctly states the operation of § 1192 as the court interpreted it. But whether the

benefits are or should be the same is the issue before the court. Logic does not permit a premise

that is the result of the reasoning.

3. “Thus, an important purpose for Subchapter V would be frustrated were we to adopt

[the bankruptcy court’s] interpretation of §§ 1192(2) and 523(a), which would treat individuals

and corporations differently.” Id.

This conclusion raises two questions. What is the “important purpose” for subchapter V

that concerns the court? How is it frustrated by different provisions for the discharge of debts?

The Fourth Circuit’s opinion states earlier that Congress enacted subchapter V “with the

primary goal of simplifying Chapter 11 reorganizations for small businesses and reducing the

administrative costs for those businesses.” 36 F.4th at 517. This is the universally recognized

objective of subchapter V.

But if that is the “important purpose,” it is clear that making an entity’s discharge subject

to exceptions frustrates, rather than furthers, that purpose. As later text explains, the reasons that

led Congress to eliminate exceptions to discharge of an entity when it enacted chapter 11 in 1978

require the same result in a subchapter V case.

The implication of the Fourth Circuit’s reasoning, however, is that the court considers the

“important purpose” to be that the same discharge exceptions in § 1192(2) apply to individuals

if the debtor owes a debt arising from a violation of state or federal securities laws, from any civil remedy under 18

U.S.C. § 1964, or from any criminal act, intentional tort, or willful misconduct that caused serious physical injury or

death to another individual, in the preceding five years.

227

and entities alike. If so, a ruling that different exceptions apply to entities obviously frustrates

that purpose.

Again, however, whether § 1192(2) makes a distinction is the issue before the court. The

court is deciding that the same treatment is an important purpose, but the fact that its ruling has

that result does not provide a reason why that should be the result or why the same treatment is

important. In other words, logic requires that a conclusion that an important purpose of § 1192 is

identical treatment of individuals and entities rest on something more than the determination that

§ 1192 has that result.

Fourth Circuit’s consideration of “equity and fairness” and elimination of the absolute

priority rule

The Fourth Circuit also supported application of the § 523(a) exceptions to discharge to a

corporation based on considerations of “equity and fairness” arising from elimination of the

absolute priority rule. 36 F.4th at 517. After noting that elimination of the absolute priority rule

allows an entity’s owners in a subchapter V case to retain their ownership interests “at the

expense of and over the objection of creditors,” the court stated, id. (original emphasis):

Given the elimination of the absolute priority rule, Congress understandably applied

limitations on the discharge of debts to provide an additional layer of fairness and equity

to creditors to balance against the altered order of priority that favors the debtor. To this

end, all subchapter V debtors are textually subject to the discharge limitations described

in § 523(a), not just individual Subchapter V debtors.

The Fourth Circuit then concluded, id.

To make a distinction between individuals and corporations for how Subchapter V is

applied would not only undermine that balance, but would also make no sense and indeed

would create perverse incentives.

The Fourth Circuit thus connected the cramdown discharge provision with elimination of

the absolute priority rule and concluded that making a distinction with regard to exceptions to

228

discharge would (1) undermine the balancing of its elimination by adding an additional layer of

fairness and equity; (2) make no sense; and (3) create perverse incentives.

Discussion of the Fourth Circuit’s analysis of subchapter V’s juxtaposition with

traditional chapter 11 provisions and its related consideration of fairness and equity requires a

review of related economic and legal issues that the business reorganization of an entity presents,

including the operation and effect of the absolute priority rule and its elimination in subchapter V

cases and the discharge of an entity.

Review of reorganization, absolute priority rule, and exception to discharge principles

A reorganization case under any chapter involves two basic economic issues that inform

analysis of confirmation and discharge matters. The first is how much money can the debtor

generate to pay creditors. The second is how that money is allocated among them. Bankruptcy

principles require allocation to pay the value of secured claims, to pay administrative and priority

claims in full, and to pay unsecured creditors what is left. A fundamental principle is equal

treatment of similarly situated creditors.

Theoretically, the amount that an entity can pay is unlimited: it can just keep making

payments until everyone is paid in full. In the meantime, however, the entity has a financial

structure that makes no sense because it remains insolvent, and equity has no prospect of any

return for the time it takes to pay its debts in full.

Reorganization solves an entity’s financial structure by restructuring the balance sheet to

reduce debt to a manageable amount. If the proposed restructuring is unacceptable to a class of

unsecured creditors, the theory of the absolute priority rule is that the reorganized entity’s value

is then allocated among its stakeholders – creditors and owners – in accordance with their

229

priorities.

560

Because creditors have priority over owners, creditors under the absolute priority

rule receive the ownership interests to the exclusion of existing owners, except in the rare

instance where the reorganized entity is worth more than the amount of the debt.

Reorganization under these principles does not work if the reorganized entity remains

liable for a nondischargeable debt. Professor Brubaker summarized the problem of exceptions to

the discharge of a corporation in reorganization cases under chapter XI (one of the predecessors

of chapter 11):

561

A corporate debtor could be denied a chapter XI discharge [under the prior

Bankruptcy Act] altogether if the debtor had “been guilty of any of the acts or failed to

perform any of the duties which would be a bar to the discharge of an individual]

bankrupt.” Moreover, chapter XI provided that confirmation of a plan of arrangement

discharged a corporate debtor “from all ... unsecured debts and liabilities provided for by

the arrangement,” but expressly excluded from this discharge “such debts as ... are not

dischargeable” in an individual debtor's ordinary bankruptcy case.

The corporate discharge exceptions in chapter XI – particularly the discharge

exception for fraud debts – posed a substantial impediment to the ability of certain

debtors to reorganize under that chapter. Of course, cases precipitated by massive fraud

(where the debtor's fraud liability could easily exceed the going concern value of the

debtor's business) could not be successfully prosecuted under chapter XI, as the non-

dischargeability of fraud debt would preclude any attempt to even address the source of

the business's financial distress. Even more significantly, though, the presence of the

discharge exceptions supplied, to any creditor who could assert colorable allegations of

fraud, a credible threat to “opt out” of the chapter XI restructuring, in an attempt to

receive a greater recovery than other creditors. Consequently, the chapter XI discharge

exceptions invited holdout creditor problems of the sort that plague non-bankruptcy

workouts and that are the very impetus for a federal bankruptcy reorganization process

(that can fully bind dissenters to a restructuring plan).

560

The priority discussion here involves only the priority of unsecured creditors over equity interests. Although a

secured creditor has a “priority” over unsecured creditors in that it has collateral to secure its debt, and unsecured

creditors in a liquidation case cannot generally be paid from that liquidation of a creditor’s collateral until the

secured creditor receives full payment, that type of “priority” is irrelevant to the absolute priority rule. Priority

claims under § 507 are likewise irrelevant to the issue because they must be paid in full. § 1129(a)(9). For

simplicity, the discussion does not include consideration of issues that arise when one class of unsecured creditors is

subordinated to the claims of another unsecured class.

561

Ralph Brubaker, Taking Exception to the New Corporate Discharge Exceptions, 13 Am. Bankr. Inst. L. Rev. 757,

764 (2005) (internal notes and citations omitted).

230

As previous text discusses, and as the bankruptcy court in Cleary Packaging recognized,

Congress enacted chapter 11 in 1978 with no exceptions to the discharge of a corporation’s debts

because any corporate discharge exception “would leave an undesirable uncertainty surrounding

reorganizations that is unacceptable.”

562

The existence of nondischargeable debts of an entity, therefore, is related to the basic

economic questions of how much a debtor can pay and how it is allocated. If the

nondischargeable debt is large enough that the debtor cannot generate enough money to pay it

within a reasonable time, reorganization is not possible. If reorganization is possible, the need to

pay the nondischargeable debt in full affects the allocation of the money available to pay debts.

The absolute priority rule is only tangentially related to the question of what the debtor

can pay. It does not apply if what the debtor can pay is enough to be acceptable to the class of

unsecured creditors so that their acceptance makes it inapplicable. It is not related at all to the

allocation of available money among creditors. The absolute priority rule, rather, involves

allocation of the debtor’s value between creditors and owners.

What the absolute priority rule affects is the ability of a debtor, especially a small

business, to reorganize.

In one sense, ownership interests in an insolvent entity have no value because the entity’s

assets exceed its value. If a reorganization plan obligates the debtor to pay creditors an amount

for pro rata distribution equal to the net liquidation value of the company (i.e., the value of the

debtor as a going concern less the amount of secured and priority debt), the reorganized debtor

562

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 630 B.R. 466, 474 (Bankr.

D. Md. 2021), rev’d 36 F.4th 509 (4th Cir. 2022), quoting Ralph Brubaker, Taking Exception to the New Corporate

Discharge Exceptions, 13 Am. Bankr. Inst. L. Rev. 757, 764-66 (2005).

231

has a net worth of zero. Creditors arguably lose nothing if existing owners retain the ownership

interests that have no value.

Absolute priority rule principles, however, prescribe value to ownership interests in an

insolvent entity and require that, in the absence of payment in full, the creditors become the

owners of the reorganized debtor even in the circumstances just described unless – as a class –

they accept a plan that provides otherwise.

Creditor ownership of a publicly-traded corporation is one thing. Creditor ownership of a

private small business is another. It is unlikely that a market for the equity interests in a

privately held business will exist. Creditors typically are not interested in holding a minority

interest in a private company that they cannot readily turn into cash.

Moreover, the owners of a small business are usually its managers. In many instances,

the value of a small business is dependent on the services that they provide. If reorganization

means that they will lose their ownership interests, they may elect not to pursue reorganization in

the first place. And if they do but are unable to restructure without retaining ownership, they

may well abandon the effort or let the creditors as the new owners manage the business.

These real-life considerations are the bases for elimination of the absolute priority rule in

entity cases under subchapter V. Simply put, its elimination permits the reorganization of small

businesses that would otherwise not be possible or even attempted.

In accordance with the underlying premises of the absolute priority rule that equity in an

insolvent entity has value and that creditors are its equitable owners, subchapter V substitutes the

projected disposable income requirement for it. At bottom, the value of a corporation is its

earning capacity. Instead of giving creditors the right to own the entity if they reject the plan,

subchapter V gives them its earnings for a three to five year period, as the court determines. As

232

such, it turns the ownership interest that unsecured creditors could otherwise claim under the

absolute priority rule into cash in a way that could not be accomplished under the absolute

priority rule in a small business context.

Analysis of the Fourth Circuit’s “fairness and equity” rationale

These principles guide analysis of the Fourth Circuit’s conclusion that considerations of

fairness and equity require exceptions to an entity’s discharge in view of elimination of the

absolute priority rule.

The Fourth Circuit’s consideration of equity and fairness and its connection of exceptions

to discharge with elimination of the absolute priority rule begins with the premise that

elimination of the absolute priority rule allows an entity’s owners to retain their ownership

interests “at the expense of and over the objection of creditors.” 36 F.4th at 517.

The court’s premise is partially correct in that it is true that elimination of the absolute

priority rule means that a class of creditors in a subchapter V case no longer has the ability to

insist on full payment as a condition of the owners’ retention of their interests. But a single

creditor never had the right to invoke the absolute priority rule unless its claim was large enough

to control the class vote.

Elimination of the absolute priority rule in subchapter V cases does not necessarily mean

that owners retain their interests “at the expense” of creditors. In a subchapter V case, as earlier

text discusses, ownership interests in the debtor are likely to have no realizable value.

Reorganization usually depends on continued management by existing owners and therefore

requires their retention of ownership. The liquidation value of assets often is less than the

amount of debt that the assets secure. Retention of ownership interests that have no realizable

value hardly comes at the expense of creditors.

233

In its consideration of fairness and equity, the Fourth Circuit connected elimination of the

absolute priority rule to exceptions to an entity’s discharge and concluded that treating an

entity’s discharge differently from an individual’s would (1) undermine the balance of

elimination of the absolute priority rule by adding an additional layer of fairness and equity; (2)

make no sense; and (3) create perverse incentives. 36 F.4th at 517.

The connection of discharge exceptions to elimination of the absolute priority rule is not

an appropriate one.

Recall that the absolute priority rule is a requirement in traditional cases that unsecured

creditors may invoke collectively if their class rejects that plan. A creditor cannot invoke it on

its own behalf if its class of creditors accepts the plan. It protects classes of creditors, not

individual one creditor.

In contrast, nondischargeable debt involves only the creditor who holds it.

Nondischargeability of a creditor’s debt may improve that creditor’s position, but it provides no

benefits to other creditors.

Limitations on dischargeability of debts that favor some creditors does not balance the

elimination of the absolute priority rule that affects all creditors.

Moreover, elimination of distinctions between individuals and entities for the exception

of debts from discharge cannot possibly add an “additional layer of fairness and equity” for any

creditors except those with nondischargeable debts. Nondischargeability of a particular debt

does not affect determination of the debtor’s PDI – the key determinant of how much the debtor

must pay unsecured creditors. All it does is leave the debtor with an obligation to pay the

nondischargeable debt because it cannot restructure it.

234

Indeed, the existence of a nondischargeable debt in a reorganization case is in most

circumstances adverse to the interests of unsecured creditors generally.

First, it results in competition for available funds between unsecured creditors with

dischargeable debts and those with nondischargeable debts. In general, any chapter 11 plan

(including all subchapter V plans, whether consensual or cramdown) must treat similarly situated

creditors the same. The fact that a debt is nondischargeable presumably will not increase its

share of projected disposable income in a subchapter V case.

563

At best, the plan may be able to

deal with the nondischargeable debt by payment of the remaining balance after application of its

pro rata share of PDI in payments that begin when the period for payment of PDI ends.

This situation creates an incentive for a debtor to minimize payments to creditors with

dischargeable debts. Every dollar not paid to creditors generally is a dollar that is available to

pay the nondischargeable debt. Conversely, every dollar paid on the nondischargeable debt in

excess of a pro rata share of disposable income is a dollar that is not paid to unsecured creditors

generally.

Second, the existence of nondischargeable debt increases the probability of liquidation.

When a feasible plan is otherwise possible, liquidation generally results in a lower recovery for

unsecured creditors than payments under a plan.

To the extent that application of exceptions to discharge in subchapter V affects any

balance, it tips the scale in favor of the creditor whose debt is excepted from discharge and

against creditors whose debts are not dischargeable.

563

The general rule in chapter 13 cases is that a plan must treat a nondischargeable claim in the same manner as

other unsecured claims. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice

and Procedure § 7:10 – 7:14.

235

The Fourth Circuit did not elaborate on its observation that the discharge of an entity’s

debts with no exceptions “would make no sense and indeed would create adverse incentives.”

As earlier text explains, discharge without exceptions furthers the prospects for a successful

reorganization and results in equality of treatment for creditors in a traditional case. For these

reasons, Congress eliminated exceptions to the discharge of an entity when it enacted chapter 11

in 1978.

A subchapter V case is no different. Depending on the amount of a nondischargeable

debt, its existence is likely to doom reorganization of a small business and result in its

liquidation.

A subchapter V debtor may be able to manage nondischargeable debts if, collectively,

they are relatively immaterial in relation to its total debts. For example, assume a debtor with

$300,000 of unsecured debt that will pay $ 75,000 in projected disposable income over three

years to unsecured creditors – a 25 percent distribution.

This debtor could probably pay a nondischargeable debt of, say, $ 50,000. The debtor

could pay the unpaid balance of $ 37,500 by continuing PDI payments at the same level for an

additional year and a half. Owners may elect to pursue reorganization in this situation, reasoning

that retention of ownership rather than liquidation is worth the additional cost.

On the other hand, it is arguable that this debtor should be required to pay projected

disposable income to creditors for five years rather than three, thereby increasing what they

receive. The additional money that unsecured creditors receive is money that would otherwise

be paid on the nondischargeable debt, so it increases the cost of the reorganization from the

owners’ standpoint. At some point, owners will decide that it is better for them to start over in

other employment or a new venture than to devote the fruits of their efforts to payment of debt.

236

In contrast, assume that a debtor has $ 5 million in unsecured debt, including a

nondischargeable judgment of $4.7 million, and projected disposable income over five years of

$280,000. Creditors receive a distribution of about 5.6 percent, and the nondischargeable debt is

reduced to about $4,436,800. It would take this debtor over 16 years to pay the rest of the

nondischargeable debt based on its currently projected income. It is not realistic to expect that

owners will sign on for this type of work. Liquidation is inevitable.

For creditors with the objective of putting the debtor out of business, that is a welcome

result. It is a disaster for owners who have invested their time and money in the business, and it

adversely affects employees who lose their jobs, customers who rely on the business, and

creditors who will be paid less (and often nothing) when liquidation occurs.

The same result can occur with regard to relatively small nondischargeable debts if there

are enough of them. Further, once a creditor’s strategy of asserting a nondischargeable debt

succeeds, the predictable result is that more creditors will assert such claims. Indeed, creditors

will have a significant incentive to do so. A debtor must defend even non-meritorious claims,

increasing administrative expenses and, necessarily, what creditors receive.

The Fourth Circuit’s conclusion that discharge of a subchapter V entity without

exceptions would “make no sense” and “create perverse incentives” is, therefore, suspect.

The availability of exceptions to an entity’s discharge threatens the ability of a debtor to

reorganize. It encourages the assertion and prosecution of exceptions to discharge, resulting in

litigation that requires time that could otherwise be devoted to reorganization efforts and money

for attorney’s fees and expenses that would otherwise be available for creditors.

Moreover, if the result of a nondischargeable judgment is liquidation, the

nondischargeable debt receives only its pro rata share of any net proceeds of liquidation.

237

Anecdotal experience teaches that the liquidation of a small business most often results in

pennies on the dollar for unsecured creditors and, in many cases, nothing at all.

564

The entire

nondischargeability dispute becomes meaningless.

The bankruptcy courts’ interpretation is the better one

The interpretations of the statute by the bankruptcy courts and the Fourth Circuit are both

plausible, as the Fourth Circuit acknowledged in describing the question as a “close one.”

565

Based on the legislative history of subchapter V and the historical background of the treatment of

exceptions to the discharge of a corporation in traditional chapter 11 cases, the interpretation of

the bankruptcy courts is the better one because it accurately reflects Congressional intent.

Exceptions to an entity’s discharge in a subchapter V case create the same problems as

exception of debts from a traditional chapter 11 discharge, whether the plan is consensual or not,

that Congress addressed in 1978 by eliminating exceptions to an entity’s discharge in a chapter

11 reorganization.

Perhaps Congress in 2019 had a different view of exceptions to an entity’s discharge in

the case of cramdown confirmation in a subchapter V case than the Congress in 1978. But it is

difficult to conclude that, in enacting a statute universally proclaimed to have the purpose of

facilitating reorganization of small businesses by, among other things, eliminating the absolute

priority rule in a cramdown situation, Congress in 2019 intended to re-introduce all the problems

with exceptions to the discharge of a corporation that it eliminated over 50 years earlier.

564

This consideration may have been of no concern to the creditor in Cleary Packaging. An employee of the

creditor, apparently related to some of the creditor’s former owners, left to organize the debtor and compete with it,

resulting in litigation and a judgment against the debtor and the former employee for over $4.7 million. The

creditor’s objective in the subchapter V case could have been to put a competitor out of business through liquidation.

565

Cantwell-Cleary Co., Inc., v. Cleary Packaging, LLC (In re Cleary Packaging LLC), 36 F.4th 509, 512 (4th Cir.

2022).

238

Rather, in view of the facts that nothing in the legislative history of subchapter V

mentions such a drastic change and parts of it indicate, to the contrary, that the existing structure

would be continued, the better conclusion is that Congress did not intend that the exceptions to

discharge in § 523(a) apply to the discharge of an entity under § 1192.

Two final observations about the effect of a subchapter V cramdown discharge without

exceptions are appropriate.

First, a concern underlying the issue is the legitimate notion that a debtor should not be

able to escape the consequences of fraud or other misconduct through the subchapter V process.

After all, the classic formulation of the “fresh start” policy of the bankruptcy laws recognizes

that bankruptcy relief is for the “honest but unfortunate debtor.”

566

The same question exists in

traditional chapter 11 cases, but Congress nevertheless provided for the elimination of

nondischargeable debts when it enacted chapter 11, with one later exception in § 1141(d)(6).

The response is that an entity’s discharge in a reorganization case serves a different

function than the “fresh start” discharge that an individual receives. In short, discharge of an

entity without exceptions rests on the need for finality of a confirmed plan. Discharge without

exceptions is essential for the reorganization of the entity, rather than its liquidation, in

accordance with chapter 11’s creditor equality principles that require equal treatment of similarly

situated creditors.

567

Second, as earlier text discusses, a conclusion that an entity’s debt is excepted from an

entity’s discharge does not mean that it will be paid in full. If reorganization fails for reasons

discussed above and liquidation occurs, the creditor will receive only its pro rata share of the

566

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

567

See Ralph Brubaker, Taking Exception to the New Corporate Discharge Exceptions, 13 Am. Bankr. Inst. L. Rev.

757, 761 (2005) Professor Brubaker discusses this point in detail. Id. at 761-62.

239

proceeds from liquidation after satisfaction of secured claims, administrative claims, and priority

claims.

XI. Changes to Property of the Estate in Subchapter V Cases

SBRA makes two changes with regard to property that a debtor acquires postpetition and

earnings from postpetition services. First, SBRA makes § 1115(a) inapplicable in a sub V

case.

568

Section 1115(a), applicable only in the case of an individual, includes postpetition

property and earnings as property of the estate. Second, §1186 provides that, if the court

confirms a plan under the cramdown provisions of §1191(b), property of the estate consists of

property of the estate under § 541(a) and postpetition property and earnings until the case is

closed, dismissed, or converted to another chapter.

569

Section 1186 applies to debtors that are

entities as well as individuals.

Discussion of the effects of these changes begins with a summary of postpetition property

and earnings under pre-SBRA law.

A. Property Acquired Postpetition and Earnings from Services Performed

Postpetition as Property of the Estate in Traditional Chapter 11 Cases

Property of the estate in a chapter 11 case (including the case of any small business

debtor) consists of the same property that is property of the estate under § 541. Under § 541,

property of the estate includes, among other things, all legal or equitable interests in property that

the debtor has in property as of the commencement of the case, § 541(a)(1), subject to certain

exceptions stated in § 541(b).

570

568

§ 1181(a).

569

§ 1186.

570

§ 541.

240

Section 541(a)(7) provides that any interest in property that the estate acquires after the

commencement of the case is property of the estate.

In the case of an entity, the debtor in possession (or trustee) controls the entity and all its

property and acts on behalf of the estate. Bankruptcy does not recognize any distinction between

the property interests of an entity debtor and those of the estate. Any interest in property that an

entity acquires after the commencement of the case (including any postpetition earnings) must be

property that the estate acquires and is property of the estate under § 541(a)(7).

In the case of an individual, a distinction exists under § 541 between property of the

debtor and property of the estate. In general, any property that a debtor acquires postpetition

belongs to the debtor, with limited exceptions,

571

unless the postpetition property represents

proceeds, product, offspring, rents, or property of or from property of the estate (for example,

rental income or interest or dividends on an investment).

572

Moreover, an individual’s chapter 7

estate does not include earnings from postpetition services.

573

In cases under chapters 12 and 13,

property of the estate includes postpetition property and earnings.

574

The rules in chapter 11 cases of individuals were the same as in chapter 7 cases before

enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA.”) Thus, property that an individual chapter 11 debtor acquired after the filing of the

case and earnings from postpetition services were not property of the estate (with limited

exceptions as noted above).

571

Under § 541(a)(5), property that a debtor acquires, or becomes entitled to acquire, within 180 days after the

petition date is property of the estate if the debtor acquires or becomes entitled to acquire it either: (A) by bequest,

devise, or inheritance; (B) as the result of a property settlement agreement or divorce decree; or (C) as a beneficiary

of a life insurance policy or death benefit plan.

572

§ 541(a)(6).

573

Id.

574

§§ 1207(a), 1306(a).

241

BAPCPA added §1115 to make property of the estate of an individual in a chapter 11

case the same as property of the estate in a chapter 12 or 13 case. In language that tracks the

chapter 12 and 13 provisions, § 1115 provides that, in a chapter 11 case in which the debtor is an

individual, property of the estate includes property that the debtor acquires after the

commencement of the case,

575

and earnings from postpetition services,

576

both before the case is

closed, dismissed, or converted to a case under chapter 7, 12, or 13.

B. Postpetition Property and Earnings in Subchapter V Cases

Section 1115 does not apply in subchapter V cases.

577

Section 1186(a), however,

includes postpetition assets and earnings as property of the estate if the court confirms a plan

under the cramdown provisions of § 1191(b).

578

Section 1186(a) uses substantially the same

language as § 1115 and the chapter 12 and 13 provisions on which § 1115 is based, §§ 1206 and

1307.

The effects of these changes differ depending on (1) whether the debtor is an individual

or an entity and (2) whether the court confirms a consensual plan (which all impaired classes of

575

§ 1115(a)(1).

576

§ 1115(a)(2).

577

§ 1181(a).

578

§ 1186(a)

242

creditors must accept) under § 1191(a) or confirms a plan under the cramdown provisions of

§ 1191(b).

1. Property of the estate in subchapter V cases of an entity

Section 1115(a) does not apply to an entity, so its inapplicability in a sub V case has no

effect on the property of the estate in a sub V case of an entity.

Section 1186 deals with property of the estate when cramdown confirmation occurs under

§1191(b). It provides that property of the estate consists of property of the estate under § 541

and postpetition property and earnings before the case is closed, dismissed, or converted to

another chapter.

Discussion of the effects of §1186 when it applies begins with an explanation of what

happens when it does not, i.e., when the court confirms a consensual plan under §1191(a).

Section 1141(b) provides that the confirmation of a plan vests all property of the estate in the

debtor unless the plan or confirmation order provides otherwise. The same rule governs cases

under chapters 12 and 13.

579

The vesting of property of the estate in the debtor means that the automatic stay regarding

acts against property terminates. Section 362(c)(1) provides, “[t]he stay of an act against

property of the estate under [§ 362(a)] continues until such property is no longer property of the

estate.”

580

Confirmation of a consensual plan does not necessarily result in termination of the

stay under § 362(c)(1), because the plan or the confirmation order may provide for vesting to

occur at some later time.

581

579

§§ 1227(b), 1327(b).

580

§ 362(c)(1).

581

§ 1141(b).

243

In the cramdown situation, §1186 provides that property of the estate consists of property

of the estate under § 541 (which covers all the debtor’s property at the time of confirmation, as

earlier text explains) and any postpetition assets and earnings. This means that the automatic

stay does not terminate at confirmation under § 362(c)(1) because all property of the debtor and

all its earnings remain property of the estate.

Section 1186 conflicts with the vesting provisions of § 1141(b), which SBRA does not

amend. Recall that § 1141(b) provides for vesting of property of the estate in the debtor upon

confirmation. Section 1186, however, keeps the property in the estate when cramdown

confirmation occurs.

The purpose seems to be to maintain judicial supervision of a debtor’s assets and earnings

after cramdown confirmation. This objective is consistent with other provisions of subchapter V

that apply in the cramdown situation. For example, the trustee continues to serve after

confirmation

582

and makes payments under the plan,

583

and discharge does not occur until the

debtor has completed payments for the specified period.

584

When statutes conflict, principles of statutory construction favor application of the newer

statute or the more specific one.

585

Section 1186 is newer and more specific. Moreover, its

application carries out the purpose of the statutory scheme of which it is a part. Under these

582

See Section IV(D)(1).

583

See Section IX(B).

584

See Section X(B).

585

“[S]tatutes relating to the same subject matter should be construed harmoniously if possible, and if not, the more

recent or specific statues should prevail over older or more general ones.” United States v. Lara, 181 F.3d 183, 198

(1st Cir. 1999) (citing HCSC-Laundry v. United States, 450 U.S. 1, 6 (1981) and Morton v. Mancari, 417 U.S. 535,

550-51 (1974)); accord, e.g., In re Southern Scrap Material Co., LLC, 541 F.3d 584, 593 n. 14 (5th Cir. 2008); Tug

Allie-B, Inc., v. United States, 273 F.3d 936, 941, 948 (11

Cir. 2001); Southern Natural Gas Co. v. Land, Cullman

County, 197 F.3d 1368, 1373 (11

Cir. 1999); In re Southern Scrap Material Co., LLC, 541 F.3d 584, 593 n. 14 (5th

Cir. 2008); see 2B Sutherland Statutory Construction § 51:2 (7th ed. 2019-20 Supp.).

244

concepts, the provisions of §1186 defining property of the estate appear to control over the

conflicting vesting provisions in § 1141(b).

2. Property of the estate in subchapter V cases of an individual

SBRA’s new rules governing property of the estate just discussed apply in the case of an

individual sub V debtor.

Because § 1115(a) does not apply, postpetition assets and earnings of an individual are

not property of the estate. The pre-BAPCPA rule recognizing the distinction between property

of the estate and property of the debtor comes back into play.

The change is important if the sub V case is converted prior to confirmation. Most

courts conclude that, upon conversion of the chapter 11 case of an individual to chapter 7,

property of the chapter 7 estate includes assets acquired and income earned after the filing of the

case and until it is converted.

586

The result upon preconfirmation conversion will be different for

an individual who is a sub V debtor.

The exclusion of postpetition assets and income from property of the estate of an

individual in a sub V case raises questions. In a chapter 7 case, an individual is free to use

postpetition assets and earnings without restriction or judicial approval. That is the same rule

that governed pre-BAPCPA chapter 11 cases of individuals, and it now applies in a sub V case.

Does this mean, for example, that an individual who acquires assets postpetition, or has earnings

586

E.g., In re Copeland, 609 B.R. 834 (D. Ariz. 2019); In re Meier, 550 B.R. 384 (N.D. Ill. 2016); In re Freeman,

527 B.R. 780 (Bankr. N.D. Ga. 2015); In re Hoyle, 2013 WL 3294273 (Bankr. D. Idaho June 28, 2013); In re

Tolkin, 2011 WL 1302191 (Bankr. E.D.N.Y. Apr. 5, 2011), aff'd sub nom. Pagano v. Pergament, 2012 WL 1828854

(E.D.N.Y. May 16, 2012); accord, e.g., In re Lincoln, 2017 WL 535259 (Bankr. E.D. La. Feb. 8, 2017); In re

Gorniak, 549 B.R. 721 (Bankr. W.D. Wisc. 2016); In re Vilaro Colón, 2016 WL 5819783 (Bankr. D.P.R. Oct. 5,

2016). Contra, e.g., In re Markosian, 506 B.R. 273, 275-77 (9th Cir. BAP 2014); In re Evans, 464 B.R. 429, 438-41

(Bankr. D. Colo. 2011).

245

from postpetition services, may use or dispose of them without supervision by the trustee or

approval by the court?

In re Robinson, 628 B.R. 168 (Bankr. D. Kan. 2021), answered this question

affirmatively. There, the U.S. Trustee sought dismissal of the individual’s sub V case because

the debtor lost $ 4,000 playing slot machines during the first month after he filed the case. At the

time of the hearing, the debtor had filed a plan that all classes of creditors had accepted. The

debtor testified that he would no longer be gambling while he was in bankruptcy because, once

his plan payments began, he would have no disposable income to do so.

The court concluded that the postpetition gambling did not constitute gross

mismanagement of the estate that would provide cause for dismissal under § 1112(b)(4)(B)

because the debtor had disclosed it in his monthly report and because nothing showed that the

loss was material or had an adverse impact on the estate or its creditors. Id. at *7-8.

The court then observed that the gambling loss could not be gross management of the

estate because, in a subchapter V case, the debtor’s postpetition earnings were not property of the

estate. Id.

The fact that postpetition assets and earnings of an individual in a sub V case are not

property of the estate also affects operation of the automatic stay. Because the individual’s

postpetition assets and earnings are not property of the estate, is the automatic stay applicable to

a postpetition creditor’s collection of a postpetition debt through garnishment of wages?

587

Paragraph (1) of § 362(a) does not stay acts with regard to postpetition claims; paragraph (a)(2) precludes

enforcement of a prepetition judgment; paragraphs (a)(3) and (a)(4) prevent acts against property of the estate;

paragraph (a)(5) precludes enforcement of a prepetition lien; paragraphs (a)(6) and (a)(7) do not apply to

postpetition claims; and paragraph (a)(8) deals with tax claims for taxable periods ending before the date of the

petition. See generally W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, C

HAPTER 13 PRACTICE AND

PROCEDURE § 19:6 (discussing the automatic stay with regard to postpetition claims in a chapter 13 case when

property of the estate vests in the debtor upon confirmation).

246

Section 362(b)(2)(B) excepts collection of a domestic support obligation from property that is

not property of the estate.

May the holder of a domestic support obligation seek to enforce the

claim against postpetition property and earnings?

The nature of postpetition assets and earnings changes if cramdown confirmation occurs.

In the cramdown situation, §1186 provides that property of the estate at the time of confirmation

includes both property of the estate that the debtor had at the time of the filing of the petition

under § 541 and postpetition assets and earnings.

588

One consequence of the addition of postpetition assets and earnings to the estate is that, if

conversion to chapter 7 occurs after cramdown confirmation, postconfirmation property and

earnings will be property of the chapter 7 estate. If the court confirms a consensual plan, such

property may not be property of the estate because neither § 1115(a) nor §1186 applies. Sections

XII(C) and (D) further discuss this issue.

Issues may arise because of the retroactive nature of the operation of §1186: Property

that was not property of the estate becomes property of the estate upon cramdown confirmation.

For example, what happens if, at the time of the confirmation hearing, an individual debtor has

disposed of postpetition assets or earnings, which the debtor had the right to do when the

property was not property of the estate? A creditor opposing confirmation could argue that the

court cannot confirm the plan because the estate will not have all the property that §1186

requires it to have.

588

§ 1186.

247

XII. Default and Remedies After Confirmation

If a debtor defaults after confirmation of a plan, creditors must decide what remedies are

available and how to invoke them. If the court confirmed the plan under the cramdown

provisions of §1191(b), the sub V trustee must also decide what to do if a default occurs.

A. Remedies for Default in the Confirmed Plan

Because the provisions of a confirmed plan are binding on the debtor and creditors under

§ 1141(a), the plan’s provisions for default and remedies control. In a consensual plan, the

provisions governing default and remedies ordinarily have their source in negotiations with the

various creditors that lead to terms that result in acceptance of the plan. Secured creditors and

lessors are unlikely to accept a plan unless it includes acceptable remedies in the plan that allow

them to exercise their remedies if the debtor defaults. Unsecured creditors and tax claimants

often do not participate actively in the case of a small business debtor, but if they do, they

likewise have the opportunity to negotiate acceptable terms to deal with defaults.

When one or more classes of impaired creditors do not accept the plan, the requirements

for cramdown confirmation in §1191(c)(3)(B)(ii) may provide the source of remedies for default.

When the court concludes only that there is a “reasonable likelihood” that the debtor will be able

to make plan payments, cramdown confirmation under § 1191(c)(3)(B)(ii) requires that the plan

provide “appropriate remedies, which may include the liquidation of nonexempt assets, to protect

the holders of claims or interests in the event that the payments are not made.”

589

The only

specific remedy in § 1191(c)(3)(B)(ii) is “the liquidation of nonexempt assets.”

The requirement

for appropriate remedies does not apply if the court finds that the debtor will be able to make

589

See Section III(B)(5).

248

plan payments, but debtors who seek cramdown confirmation of a plan that does not contain

them subject themselves to the higher feasibility standard.

590

When creditors are actively participating in the case, they will presumably advise the

court as to what remedies are appropriate to protect them. Active creditors usually include

secured creditors and landlords, but often do not include tax claimants or unsecured creditors.

The sub V trustee is the logical party to propose remedies to protect creditors who do not appear.

Whether the source of the terms governing default and remedies is negotiation between

the debtor and creditors or the requirements of § 1191(c)(3)(B)(ii), creditors will want remedies

that will protect their rights to recover.

For secured creditors and lessors who have property rights in specific assets, the primary

objective is to recover possession of the encumbered or leased property and to exercise their

rights promptly upon the debtor’s default. Secured creditors and lessors will want provisions in

the plan that recognize their rights to proceed against the debtor’s property and that confirm that

neither the automatic stay nor the discharge injunction will apply to their efforts to do so.

An unsecured creditor can subject the debtor’s assets to its debt only through judicial

process, a somewhat cumbersome and potentially lengthy process with uncertain results and

expense that may not justify the effort. An effective remedy for unsecured creditors might

include conversion to chapter 7 to permit a trustee to liquidate the assets. Later text in Section

XII(C) discusses issues that arise upon postconfirmation conversion to chapter 7 that the plan

might appropriately address to protect unsecured creditors.

590

See Section III(B)(5).

249

B. Removal of Debtor in Possession for Default Under Confirmed Plan

Section 1185(a) provides that, on request of a party in interest, and after notice and a

hearing, the court shall order that the debtor not be a debtor in possession for cause or “for

failure to perform the obligations of the debtor under a plan confirmed under this subchapter.”

591

If removal of the debtor in possession occurs after the trustee’s service has been terminated upon

substantial consummation

592

of a consensual plan confirmed under §1191(a), §1183(c)(1)

provides for reappointment of the trustee.

Section 1183(c)(5) specifies the duties of a trustee when the debtor ceases to be a debtor

in possession. Section 1183(c)(5)(B) authorizes the trustee to operate the business of the debtor,

but the trustee’s duties do not include liquidation of the debtor’s assets. Nothing in subchapter V

appears to authorize the trustee to do so.

The trustee’s operation of the business will be difficult, if not impossible, if secured

creditors or lessors take possession of assets on account of the debtor’s defaults. Even if the

trustee can operate the business, its future is unclear. Perhaps the plan will have provisions for

the cure of defaults and the trustee can manage the business to cure defaults so that the plan can

go forward. If not, the plan will remain in default, and the trustee may be able to do nothing

more than observe as creditors exercise their remedies under the plan unless the plan is modified

or the case is converted to chapter 7.

Property of the estate issues arise when reappointment of the trustee based on the debtor’s

default occurs after confirmation of a consensual plan under §1191(a). Under § 1141(b),

property of the estate vests in the debtor upon confirmation of a consensual plan unless the plan

591

§ 1185(a). Section V(C) discusses removal for cause.

592

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

250

or confirmation order provides otherwise.

593

If property of the estate vested in the debtor upon

confirmation, the debtor is in possession of its own assets, not property of the estate. Arguably,

this means that there is no property of the estate that the trustee can manage and no “debtor in

possession” to be removed.

Under this view, §1185(a) operates only when property of the estate does not vest in the

debtor at confirmation, either because cramdown confirmation occurs (and property of the estate

remains property of the estate under §1186

594

) or because the plan or confirmation order so

provides.

It is arguable that Congress did not intend to limit the operation of §1185(a) based on

how property vests at confirmation. One possible interpretation of §1185(a), therefore, is that it

impliedly authorizes the trustee to take possession of property of the debtor. Another potential

interpretation is that it impliedly revests the debtor’s assets into the estate.

In many cases, postconfirmation modification may not be a realistic possibility. First,

only the debtor may modify a plan.

595

Moreover, if the plan was a consensual one confirmed

under §1191(a), postconfirmation modification under §1193(b) is not permissible after

substantial consummation (which presumably occurred unless the debtor made no payments

under the plan).

596

Finally, if cramdown confirmation occurred such that modification is

permissible, the fact that the debtor did not seek to modify it to deal with defaults does not

generate confidence that it can effectively do so once the trustee has taken over.

593

See Section XI(B).

594

See Section XI(B).

595

§ 1193(b).

596

Section VIII(C)(1) discusses substantial consummation in the context of postconfirmation modification of a

consensual plan.

251

Given these considerations, it seems likely that the eventual effect in most cases of

postconfirmation removal of the debtor in possession will be dismissal or conversion to chapter

7. If so, a more effective remedy than removal of the debtor in possession may be dismissal or

conversion. If continuation of the debtor’s business is advisable (perhaps, for example, to

liquidate it as a going concern), the court may authorize a chapter 7 trustee to do so.

597

C. Postconfirmation Dismissal or Conversion to Chapter 7

Section 1112(b)(1) provides that the court, upon request of a party in interest, shall

dismiss a chapter 11 case or convert it to a case under chapter 7 for “cause.” “Cause” includes

“material default by the debtor with respect to a confirmed plan.”

598

Section 1112 remains

applicable in a subchapter V case.

If the court converts the case to chapter 7, the U.S. Trustee appoints an interim trustee

under § 701(a)(1). The interim trustee may be a panel trustee or the sub V trustee. The interim

trustee becomes the trustee in the case unless creditors elect a different trustee at the § 341(a)

meeting.

599

1. Postconfirmation dismissal

The effects of postconfirmation dismissal differ depending on whether the debtor has

received a discharge. The timing of the discharge under subchapter V depends on the type of

confirmation that occurs.

597

§ 721.

598

§ 1112(b)(4)(N).

599

§ 702(d).

252

The debtor receives a discharge under § 1141(d) upon confirmation of a consensual plan

under §1191(a).

600

Courts have ruled that the postconfirmation dismissal of a chapter 11 case

does not affect the discharge that the debtor has received or the binding effect of the plan.

601

If cramdown confirmation occurs, the debtor does not receive a discharge until the

completion of payments.

602

Courts dealing with similar provisions for the delay of discharge in

cases under chapters 11, 12, and 13 have concluded that a plan cannot have binding effect if the

case is dismissed prior to the entry of discharge.

603

Thus, dismissal after confirmation without a

discharge will generally restore the parties to their pre-bankruptcy status.

600

See Section X(A).

601

E.g., National City Bank v. Troutman Enterprises, Inc. (In re Troutman Enterprises, Inc.), 253 B.R. 8, 13 (B.A.P.

Cir. 2002) (“[C]onversion does not disturb confirmation or revoke the discharge of preconfirmation debt.”); In re

T&A Holdings, LLC, 2016 WL 7105903, at *5 (Bankr. N.D. Ill. Nov. 2, 2016) (“[T]he terms of a confirmed

Chapter 11 plan remain binding post-dismissal as does the discharge granted through or in connection with such

plan.”); In re Potts, 188 B.R. 575, 581-82 (Bankr. N.D. Ind. 1995).

602

§ 1192.

603

Chapters 12 and 13 have always delayed discharge until the completion of plan payments or grant of a

“hardship” discharge, §§ 1228, 1328. Chapter 11 has done so in the cases of individuals since the addition of

§ 1141(d)(5) by BAPCPA. In chapter 12 and 13 cases, courts have concluded that a confirmed plan is not binding

upon dismissal of the case without a discharge. See First National Bank of Oneida, N.A. v. Brandt, 597 B.R. 663,

668-69 (M.D. Fla. 2018) (Collecting cases holding that chapter 12 or 13 confirmed plan is no longer binding upon

dismissal). But see Weise v. Community Bank of Central Wisconsin (In re Weise), 552 F.3d 584 (7th Cir. 2009).

The district court in First National Bank of Oneida, N.A. v. Brandt, 597 B.R. 663 (M.D. Fla. 2018)

addressed the binding effect of a confirmed plan upon dismissal of an individual’s chapter 11 case on remand from

the Eleventh Circuit. First National Bank of Oneida, N.A. v. Brandt, 887 F.3d 1255 (11

Cir. 2018). The Eleventh

Circuit noted that case law in chapter 13 cases dealing with dismissal without a discharge “could perhaps become

relevant to a determination of whether and how the dismissal of Brandt’s Chapter 11 case without a discharge

affects the enforceability of his confirmed Chapter 11 plan.” Id. at 1261. The district court determined that it was,

597 B.R. at 669, and ruled that the confirmed plan was not binding upon dismissal prior to confirmation based on

that case law, the provisions of § 349(b), and public policy. Id. at 671.

In Weise v. Community Bank of Central Wisconsin (In re Weise), 552 F.3d 584 (7th Cir. 2009), the

bankruptcy court, on the debtors’ motion, dismissed their chapter 12 case after confirmation of their plan that

incorporated a settlement between debtors and bank that, among other things, released lender liability claims against

the bank. In connection with dismissal, the bankruptcy court determined that, under U.S.C. § 349(b), cause existed

for the plan’s terms with regard to the settlement to remain binding on the parties. The Seventh Circuit ruled that

the bankruptcy court did not abuse its discretion and that cause existed under § 349(b) to keep some terms of the

plan binding on the parties. The Seventh Circuit stated that § 349(b) “explicitly contemplates that the court can

choose to keep some terms binding on the parties where there is cause.” Weise, supra, 552 F3d at 591. The court

observed, “[N]egotiation alone would not be an acceptable standard for ‘cause,’ since every confirmed plan that

required the consent of the creditor would involve some degree of negotiation.” Id. at 589.

The district court in Brandt, supra, 597 B.R. 663, distinguished Weise because the bankruptcy court in

dismissing Brandt’s chapter 11 case made no mention of binding the parties to plan provisions and “chose not to

keep specified plan terms binding.” Id. at 670.

253

The court in In re Akamai Physics, Inc., 2022 WL 1195631 (Bankr. D. N.M. 2022),

addressed the effect of dismissal or conversion after confirmation of a consensual plan under

§ 1191(a) that deferred discharge until completion of plan payments.

604

The plan provided for

pro rata payments to unsecured creditors from the greater of $10,000 per month or the debtor’s

“Disposable Income as defined in 11 U.S.C. § 1191(d).” Id. at *2.

Consensual confirmation occurred after the debtor resolved the objection of the U.S.

Trustee that the plan was not feasible by including a provision in the confirmation order for the

court to entertain a postconfirmation motion to dismiss or convert if the debtor did not generate

any operating income within 120 days after confirmation. Id. at *2.

Although the debtor had timely made plan payments (through sales of assets or loans

from its principal), it did not generate any operating income within 120 days. After concluding

that the U.S. Trustee had not established cause for dismissal or conversion under § 1112(b)(4),

id. at *3-5, the court considered the effect that the confirmed plan could have on the rights of the

parties if it granted the motion, reasoning that the effect of dismissal or conversion is an issue to

consider in determining a motion to dismiss or convert. Id. at *5.

The court determined that, in a traditional chapter 11 case, confirmation binds the

reorganized debtor and creditor to the terms of the plan, revests property of the estate in the

reorganized debtor, and discharges preconfirmation claims. The chapter 7 estate after

conversion, therefore, has no assets because the plan vested all estate property in the debtor, the

court explained, so conversion does not help creditors. Dismissal, the court continued, has no

materially greater benefit because it does not “undo” the plan, which remains binding. Id. at *5.

604

When the court confirms a consensual subchapter V plan under § 1191(a), § 1141(d) governs the discharge. See

Section X(A). Section 1141(d)(1)(A) provides that confirmation discharges the debtor unless the plan or

confirmation order provides otherwise.

254

The court concluded, id. at *6:

In most standard chapter 11 cases with confirmed plans of reorganization, neither

conversion nor dismissal materially benefits creditors. Instead, a creditor’s remedy is to

sue the debtor in state court to enforce the creditor’s rights under the chapter 11 plan.

The Akamai Physics court then noted that a different rule applies to confirmed plans

under chapters 12 and 13 and in individual cases under chapter 11, in which dismissal or

conversion “negates the confirmation order and the plan, restoring parties to the status quo ante.

Id. at 6. The court advanced two policy reasons for the distinction.

First, substituting disposable income for the absolute priority rule and other creditor

protections in chapter 11 is a major benefit to creditors. If the debtor fails to make payments as

the plan requires, the plan should not be binding. Id.

Second, discharge does not occur upon dismissal or conversion of such cases unless the

debtor has completed plan payments. Id.

The court reasoned that a subchapter V cramdown plan is similar to plans in chapters 11,

12, and 13 that require payment of projected disposable income and deferral of discharge until

completion of plan payments. The court suggested, therefore, that dismissal or conversion of a

subchapter V case after cramdown confirmation might negate the plan. Id. at *6.

The court concluded that no reason existed “to think that ‘consensual’ subchapter V plans

would be treated differently than typical chapter 11 plans.” Id. at *7. In the case before it,

however, the plan deferred discharge until completion of all plan payments, a key provision that

also exists in disposable income plans under other chapters. Later dismissal or conversion, the

court stated, might require it to determine whether such a “hybrid” plan would survive or be

negated. Id.

255

Section 349, which deals with the effect of dismissal of a case, remains applicable in a

subchapter V case. Unless the court orders otherwise for cause: (1) § 349(b)(1) provides for the

reinstatement of any receivership proceeding; any transfer avoided under §§ 522, 544, 545, 547,

548, 549, or 724(a); and any lien avoided under § 506(d); and (2) § 349(c) revests property of the

estate in the entity in which such property was before the filing of the case.

605

2. Postconfirmation conversion

When conversion of a subchapter V case to chapter 7 after confirmation occurs, the

question is, what property is property of the estate? The answer depends on whether property of

the estate vested in the debtor upon confirmation and, if it did, the court’s view of the effect of

such vesting.

The general rule of § 1141(b) is that confirmation of a plan results in the vesting of

property of the estate in the debtor unless the plan or the confirmation order provides otherwise.

In a sub V case, the general rule applies when the court confirms a consensual plan under

§1191(a), but not when cramdown confirmation occurs under §1191(b) because §1186 keeps

property in the estate.

606

Some courts have concluded that conversion of a chapter 11 case to chapter 7 does not

revest property in the estate that vested in the reorganized debtor at confirmation unless the plan

or confirmation order provides otherwise.

607

Other courts have ruled that property of the estate

605

§ 349.

606

See Section XI(B).

607

E.g., Bell v. Bell (In re Bell), 225 F.3d 203, 216 (2d Cir. 2000); National City Bank v. Troutman Enterprises,

Inc. (In re Troutman Enterprises, Inc.), 253 B.R. 8, 13 (B.A.P. 6

Cir. 2002) (“Property which revested in a

reorganized debtor at confirmation remains property of that entity; conversion does not bring that property into the

converted case.”); Lacy v. Stinky Love, Inc. (In re Lacy), 304 B.R. 439, 444-46 (D. Col. 2004) (discussing cases); In

re Freeman, 527 B.R. 780 (Bankr. N.D. Ga. 2015) (In chapter 11 case of individual, holding that preconfirmation

assets vested in debtor but income earned postconfirmation and prior to conversion did not, and discussing cases); In

re L & T Machining, Inc., 2013 WL 3368984 (Bankr. D. Kan. July 3, 2013); In re Sundale, Ltd., 471 B.R. 300

(Bankr. S.D. Fla. 2012); In re Canal Street Limited Partnership, 260 B.R. 460, 462 (Bankr. D. Minn. 2001); In re K

256

upon conversion consists of property owned by the debtor at the time of commencement of the

case,

608

on the confirmation date,

609

or on the date of conversion.

610

Under these principles, property of the estate in a sub V case converted to chapter 7 after

cramdown confirmation includes all the debtor’s property. The result is the same if a consensual

plan or the order confirming it provides that property of the estate not vest in the debtor until the

occurrence of some later event that has not occurred at the time of conversion.

If property of the estate vested in the debtor at the time of confirmation of a consensual

plan, however, what constitutes property of the estate at conversion is uncertain. In the first

instance, it depends on whether the court applies the vesting principles in existing case law noted

above and, if so, which view it adopts.

An alternative argument is that the provision in §1185(a) for removal of the debtor in

possession for postconfirmation default under a plan requires a different analysis of property of

the estate upon conversion. As the previous Section discusses, it is arguable that §1185(a)

requires the revesting of property of the estate upon removal of the debtor in possession after

& M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz 1997); Carter v. Peoples Bank and Trust Co. (In re BNW, Inc.),

201 B.R. 838, 848-49 (Bankr. S.D. Ala. 1996); In re T.S. Note Co., 140 B.R. 812, 813-14 (Bankr. D. Kan. 1992)

(The court granted a motion to convert but noted that property of the chapter 7 estate would consist only of non-

administered assets remaining in the preconfirmation estate, such as possible causes of action. “[W]hat is being

converted . . . are the cases and the assets, if any, whether tangible or intangible, remaining in the debtor’s pre-

confirmation estate. . . .); In re TSP Indus., Inc., 117 B.R. 375 (Bankr. N.D. Ill. 1990). See also Pioneer Liquidating

Corp. v. United States Trustee (In re Consol. Pioneer Mortgage Entities), 264 F.3d 803 (9

Cir. 2001) (holding that

“language and purpose” of liquidating plan demonstrated that assets vested in debtor upon confirmation revested in

estate upon conversion); 6

NORTON BANKRUPTCY LAW AND PRACTICE § 114:13 (discussing different approaches to

revesting of assets upon conversion after confirmation).

Property of the estate that vests in a chapter 11 debtor at confirmation may not include avoidance actions.

See Still v. Rossville Bank (In re Wholesale Antiques, Inc.), 930 F.2d 458 (6

Cir. 1991) (Trustee in case converted

to chapter 7 may recover unauthorized postpetition transfers under § 549 that occurred prior to confirmation.); In re

Sundale, Ltd., 471 B.R. 300, 307 n. 15 (Bankr. S.D. Fla. 2012); In re T. S. Note Co., 140 B.R. 812, 813 (Bankr. D.

Kan. 1992).

608

Smith v. Lee (In re Smith), 201 B.R. 267 (D. Nev. 1996), aff’d 141 F.3d 1179 (9th Cir. 1998).

609

Carey v. Flintridge Lumber Sales, Incl (In re RJW Lumber Co.), 262 B.R. 91 (Bankr. N.D. Ca. 2001).

610

In re Midway, Inc., 166 B.R. 585, 590 (Bankr. D.N.J. 1994).

257

default under a consensual plan; otherwise, § 1185(a) has no effective operation in that

circumstance. If so, the same result follows if conversion occurs.

In In re Akamai Physics, Inc., 2022 WL 1195631 (Bankr. D. N.M. 2022), discussed in

detail in Section XII(C)(1), the court suggested that property of the estate that vests in the debtor

under a consensual plan in a subchapter V case confirmed under § 1191(a) is not property of the

chapter 7 estate upon postconfirmation conversion. With regard to conversion after cramdown

confirmation under § 1191(b), however, the court suggested that conversion negates the binding

effect of the plan because discharge does not occur until the completion of plan payments. Id. at

*6.

To avoid these potential issues and to ensure that the estate has property at the time of

conversion, creditors negotiating a consensual plan may want to insist on a provision in the plan

that will keep assets as property of the estate until the debtor completes payments or meets some

other milestone.

XIII. Effective Dates and Retroactive Application of Subchapter V

Section 5 of SBRA provides:

This Act and the amendments made by this Act shall take effect 180 days after the date of

enactment of this Act.

This language does not restrict application of subchapter V to cases filed on or after the

effective date of February 19, 2020. It thus differs from the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, which provided that most of its provisions did not apply “with

respect to cases commenced [under the Bankruptcy Code] before the effective date of this

Act.”

611

Pub. L. 109-8, 119 Stat. 23, § 1501(b) (2005).

258

Debtors in pending chapter 11 cases at the time of SBRA’s enactment sought to amend

their petitions after SBRA’s effective date to elect application of subchapter V. They argued that

Bankruptcy Rule 1009(a) permitted amendment of a petition “as a matter of course at any time

before the case is closed” and that SBRA did not restrict application of subchapter V to cases

filed after its enactment.

As later text discusses, courts upon enactment of SBRA had to decide whether SBRA

applied retroactively and, if so, whether a debtor could amend its petition to elect subchapter V

when mandatory deadlines for the status conference

612

and the filing of a plan

613

had expired.

The provisions in the Bankruptcy Threshold Adjustment and Technical Correction Act

(“BTATCA”)

614

for retroactive application of the $7.5 million debt limit for subchapter V

eligibility present a similar issue when mandatory deadlines have passed in a pending case where

a debtor ineligible for subchapter V becomes eligible under BTATCA. As Section III(B)

explains, the temporary increase in the debt limit to $7.5 million under the CARES Act, as

amended, expired on March 27, 2022. BTATCA, effective June 21, 2024, reinstated the $7.5

million. BTATCA provided for application of the $7.5 million limit (and other technical

amendments to the eligibility requirements) in any case commenced on or after March 27, 2020

that was pending on the date of enactment.

615

A debtor otherwise eligible for subchapter V with

debts in excess of the debt limit of $ 3,024,725 applicable on that date but not in excess of $ 7.5

million who filed a case between March 27 and June 20, 2022 could not elect subchapter V but

became an eligible subchapter V debtor on June 21, 2022. The issue is whether the debtor may

612

See Section VI(C).

613

See Section VI(D).

614

Bankruptcy Threshold Adjustment and Technical Corrections Act, Pub. L. No. 117-151, 136 Stat. 1298 (June 21,

2022) (hereinafter “BTATCA”).

615

BTATCA § 2(h)(2).

259

amend the petition to elect subchapter V in cases filed during this time if a mandatory deadline

has passed.

A number of cases have addressed retroactive application of SBRA. This caselaw may

provide guidance in the determination of retroactive application of the BTATCA amendments.

One court rejected the debtor’s argument that SBRA applied retroactively to pending

cases, concluding, “Nothing in the SBRA enabling statute indicates that the SBRA was intended

to have retroactive effect.”

616

The court observed that to rule otherwise would create a

“procedural quagmire” in that the debtor would be unable to comply with the statute’s

requirement for a status conference within 60 days after the order for relief and the 90-day

deadline for the filing of a plan, both of which expired before SBRA’s effective date. The

debtor’s failure to timely file a plan, the court explained, would require dismissal under

§ 1112(b)(4)(J) for failure to file a plan within the time fixed by the Bankruptcy Code.

617

Other courts, however, have permitted debtors in pending cases to amend their petitions

to proceed under subchapter V.

618

Procedurally, they have ruled that, under Interim Rule

1020(a), a debtor’s amendment to the petition to elect subchapter V in an existing case means

616

In re Double H Transportation, LLC, 614 B.R. 553 (Bankr. W.D. Tex. 2020).

617

Id. at 554.

618

In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory Funding v. Ventura

(In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022); In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa.

2020); In re Moore Properties of Person County, LLC, 2020 WL 995544 (Bankr. M.D.N.C. 2020); In re Progressive

Solutions, Inc., 615 B.R. 894 (Bankr. C.D. Cal. 2020). Accord, In re Easter, 623 B.R. 294 (Bankr. N.D. Miss.

2020) (subchapter V election made after denial of confirmation in pending chapter 11 case); In re Twin Pines, LLC,

2020 WL 5576957 (Bankr. D. N.M. 2020) (subchapter V election made in existing small business case after failure

to obtain confirmation within 45 days of filing of plan); In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La.

2020); In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020) (Permitting conversion from chapter 7 case filed 10 days

before effective date of SBRA); In re Bonert, 619 B.R. 248 (Bankr. C.D. Cal. 2020); In re Bello, 613 B.R. 894

(Bankr. E.D. Mich. 2020) (Chapter 13 case filed May 3, 2019, and converted to chapter 11 on January 15, 2020;

amendment to petition to elect sub V treatment filed March 2, 2020).

260

that the case proceeds under subchapter V unless and until the court orders otherwise;

619

the

court need not approve the election.

620

As an initial matter, courts permitting the debtor to make the election when it occurs after

expiration of the timing requirements for a status conference (60 days after the order for relief)

and the filing of a plan (90 days) have concluded that the expiration of those times at the time of

the election does not bar the election. They observe that the court has the authority to extend

those times for cause, as long as the delay is due to circumstances not justly attributed to the

debtor, and that the debtor cannot comply with procedural requirements that did not exist.

621

619

See Section III(A).

620

In re Body Transit, Inc., 613 B.R. 400, 407 (Bankr. E.D. Pa. 2020) (treating objection to debtor’s motion for

authority to proceed under subchapter V as an objection to amendment of the petition to make the election); In re

Progressive Solutions, Inc., 615 B.R. 894, 900-01 (Bankr. C.D. Cal. 2020).

621

In re Ventura, 615 B.R. 1, 15 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory Funding v.

Ventura (In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022) (“Given that the Debtor’s case was filed over 15

months ago, the Court finds that to argue the Debtor should have complied with the procedural requirements of a

law that did not exist is the height of absurdity. The Debtor is not required to comply with deadlines that clearly

expired before the Debtor could have elected to proceed as a subchapter V debtor.”); In re Progressive Solutions,

Inc., 615 B.R. 894, 899-900 (Bankr. C.D. Cal. 2020) (addressing timing of status conference). Accord, In re Easter,

623 B.R. 294 (Bankr. N.D. Miss. 2020) (subchapter V election made after denial of confirmation in pending chapter

11 case); In re Twin Pines, LLC, 2020 WL 5576957 (Bankr. D. N.M. 2020) (subchapter V election made in existing

small business case after failure to obtain confirmation within 45 days of filing of plan);

In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020).

In In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020), the court considered whether to extend the statutory

deadlines for the debtor’s report, status conference, and filing of a plan after it had granted the debtor’s motion to

convert his pre-SBRA chapter 7 case to chapter 11. In permitting the debtor to proceed under subchapter V and

extending the deadlines, the court reasoned, id. at *6-7:

The Debtor commenced his chapter 7 case in early February 2020, before the effective date of Subchapter

V. The Debtor did not move to convert his case after the effective date and, in fact, waited over four

months to seek conversion. At the time of the requested conversion, a contested motion for relief from stay

was pending and remains outstanding.

The Court can envision a case in which the circumstances surrounding conversion could weigh

against any extension of the deadlines under Subchapter V. For example, if the Debtor were manipulating

the timing of his original bankruptcy filing and his requested conversion in a manner that unfairly

prejudiced some or all of his creditors, an extension would not be warranted. Likewise, if the Debtor failed

to comply with his obligations under the Code in his original bankruptcy case or commenced his case after

the effective date of SBRA and had missed a plan deadline prior to requesting conversion or making a

Subchapter V election, then perhaps an extension would not be warranted. Again, the analysis must be fact-

intensive and focused on the Debtor's conduct and potential prejudice to creditors.

Here, the Debtor has attributed his requested extension to the timing of the case conversion, and

no party has disputed that justification. The Court also observes that the party who filed the relief from stay

motion in the Debtor's chapter 7 case had notice of the requested deadline extensions and has not raised any

opposition to the request. The Court thus concludes on balance that the Debtor should have access to

261

The opposite view is that the inability of a debtor to meet the statutory deadlines when it

elects subchapter V after they have expired is not due to a circumstance beyond its control.

Because the debtor makes the election after the deadlines expired, the circumstances are within

the debtor’s control.

622

If the debtor makes the election after expiration of the deadlines and the

court does not extend them, the election is nevertheless effective, and the debtor is in default of

the deadlines. Thus, the court may dismiss the case under § 1112(b)(4)(J) for failure to file a

plan within the time fixed by the Bankruptcy Code.

623

Consideration of whether a debtor may amend its petition in a case filed before SBRA’s

effective date begins with the threshold issue of whether a new bankruptcy law can retroactively

apply to affect existing debtor-creditor rights, as the bankruptcy court observed in In re Moore

Properties of Person County, LLC.

624

The Moore Properties court and others

625

have noted two

conflicting canons of statutory construction that the Supreme Court considered in Landgraf v.

USI Film Products

626

in determining whether to apply new statutory provisions to prior conduct

in the absence of statutory direction.

Subchapter V of the Code and has established adequate grounds to extend the deadlines imposed by

sections 1188 and 1189 of the Code in this case. The court in In re Wetter, 620 B.R. 243 (Bankr. W.D. Va.

2020), concluded that the Trepetin approach to extension of the deadlines in a case converted from chapter

7 to chapter 11 was the proper one. The court denied the debtor’s motion to convert to chapter 11,

however, because under that approach the court would decline to extend the time to file a plan. In In re

Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021), a chapter 13 debtor, in a case filed after enactment of

subchapter V but a month before its effective date, sought to convert it to chapter 11 and proceed under

subchapter V five months after the effective date. The court concluded that an extension of the already

expired deadline for filing a plan was not justified under either the Trepetin or Seven Stars approach

because of numerous delays in the chapter 13 case that were within the debtor’s control and for which the

debtor should be held accountable. Id. at *9.

622

In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020).

623

In re Seven Stars on the Hudson Corp., 618 B.R. 333, 343-44 (Bankr. S.D. Fla. 2020). Query whether a debtor

may amend the petition to withdraw the election in this situation.

624

In re Moore Properties of Person County, LLC, 2020 WL 995544, at *2-5 (Bankr. M.D.N.C. 2020).

625

In re Ventura, 615 B.R. 1, 15-17 (Bankr. E.D.N.Y. 2020), rev’d on other grounds sub nom. Gregory Funding v.

Ventura (In re Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022); In re Body Transit, Inc., 613 B.R. 400, 406 (Bankr.

E.D. Pa. 2020)

626

Landgraf v. USI Film Products, 511 U.S. 244, 264-71 (1994).

262

One canon, said the Landgraf Court, is that “a court is to apply the law in effect at the

time it renders its decision.”

627

The conflicting one is that “[r]etroactivity is not favored in the

law,” and “congressional enactments and administrative rules will not be construed to have

retroactive effect unless their language requires this result.”

628

The Landgraf Court explained that the presumption against retroactive application arises

from “[e]lementary considerations of fairness . . . that individuals should have an opportunity to

know what the law is and to conform their conduct accordingly,” and from the principle that

“settled expectations should not be lightly disrupted.”

629

The presumption against retroactivity

particularly applies, the Court reasoned, to “new provisions affecting contractual or property

rights, matters in which predictability and stability are of prime importance.”

630

The Court ruled

that amendments to Title VII of the Civil Rights Act of 1964 providing for a jury trial of claims

for certain damages, enacted while an employee’s appeal after a bench trial was pending, did not

apply to the employee’s action.

In its opinion, the Landgraf Court cited United States v. Security Industrial Bank.

631

issue in Security Industrial Bank was a provision of the Bankruptcy Code (which

comprehensively revised bankruptcy law) that, in a change from existing law, permitted a

chapter 7 debtor to avoid a nonpossessory, non-purchase money security interest in exempt

personal property.

632

The Court ruled that the provision could not apply to a security interest

arising from a transaction that occurred prior to the enactment of the new law.

627

Id. at 264, quoting Bradley v. School Board of Richmond, 416 U.S. 696, 711 (1974).

628

Id. at 264, quoting Bowen v. Georgetown Univ. Hospital, 488 U.S. 204, 208 (1988).

629

Id. at 265.

630

Id. at 271. Among other cases, the Court cited United States v. Security Industrial Bank, 459 U.S. 70, 79-82

(1982), which the text discusses next.

631

United States v. Security Industrial Bank, 459 U.S. 70 (1982).

632

11 U.S.C. § 522(f)(1)(B).

263

The Court in Security Industrial Bank recognized that the Constitution’s bankruptcy

clause

633

“has been regularly construed to authorize the retrospective impairment of contractual

obligations”

634

but that the bankruptcy power could not be exercised “to defeat traditional

property interests” because the bankruptcy power is subject to the Fifth Amendment’s

prohibition against taking private property without compensation.

635

The Court thus recognized

a distinction between the contractual right of a secured creditor to obtain repayment of its debt

and its property right in the collateral.

636

The Court avoided the question of the constitutional validity of the provision, choosing

instead to construe it as being inapplicable to pre-enactment security interests under the principle

it deduced from its case law that “[n]o bankruptcy law shall be construed to eliminate property

rights which existed before the law was enacted in the absence of an explicit command from

Congress.”

637

The bankruptcy court in Moore Properties concluded that the application of subchapter V

in a chapter 11 case filed by an LLC prior to its effective date created “none of the taking or

retroactivity concerns” that the Supreme Court expressed in Landgraf and Security Industrial

Bank.

638

With two exceptions inapplicable in the case before it, the court continued, the

provisions of subchapter V incorporated most of existing chapter 11 and did not “alter the rubric

under which debtors may affect pre-petition contractual rights of creditors, much less vested

property rights.”

639

633

U.S. Const. Art. I, § 8, cl. 4.

634

United States v. Security Industrial Bank, 459 U.S. 70, 74 (1982), citing Hanover National Bank v. Moyses, 186

U.S. 181 (1902).

635

Id. at 75, citing Louisville Joint Stock Bank v. Radford, 295 U.S. 555 (1935).

636

Id.

637

Id. at 81, citing Holt v. Henley, 232 U.S. 637 (1913) and Auffm’ordt v. Rasin, 102 U.S. 620 (1881).

638

In re Moore Properties of Person County, LLC, 2020 WL 995544, at *4 (Bankr. M.D. N.C. 2020).

639

Id.

264

The Moore Properties court explained that the modification of prepetition contractual

relationships in a chapter 11 case occurs through a plan. The court then set out the changes that

subchapter V made to existing requirements for the contents of the plan and for its confirmation

and concluded that none of them amounted to an impermissible retroactive taking.

The Moore Properties court noted that subchapter V changes the requirements of § 1123

for the content of a plan in only three ways. Section 1181(a) makes inapplicable (1) the

requirement in § 1123(a)(8) that the plan of an individual provide for payment of earnings from

personal services as is necessary for execution of the plan and (2) the prohibition in § 1123(c), in

an individual case, of the use, sale, or exempt property when an entity other than the debtor

proposes the plan.

640

The third change is that §1190(3) creates an exception to the provisions in

§ 1123(b)(5) that prohibit the modification of a residential mortgage for a non-purchase money

mortgage when the loan proceeds were used primarily in the debtor’s small business.

641

The Moore Properties court concluded that, even if the bankruptcy power could not be

used to alter pre-existing contractual rights, the exclusion of paragraph (a)(8) and subsection (c)

from plan content requirements did not alter such rights, and the exception to the

antimodification provision in § 1123(b)(5) had no bearing in the case.

642

640

See Section VII(A).

641

See Section VII(B).

642

In re Moore Properties of Person County, LLC, 2020 WL 995444, at *4 (Bankr. M.D.N.C. 2020).

In a footnote, the court observed that § 1190(2), which requires any debtor to contribute earnings as

necessary for execution of the plan, rendered § 1123(a)(8) superfluous and that § 1123(c) is inapplicable because

only the debtor can propose a plan. Id. at *4 n. 13.

In another footnote, the court explained that the exception to the antimodification provision did not prohibit

the availability of subchapter V in the case before it for two reasons. First, the exception could not apply because

the debtor was an artificial entity with no principal residence. Second, even if it did apply, the question would be

whether its application would constitute an impermissible taking. If it did, the court said, it would not apply the

exception rather than declare the entirety of subchapter V inapplicable, citing United States v. Security Industrial

Bank, 459 U.S. 70 (1982). Id. at *4, n. 14.

265

The court next considered the changes that subchapter V makes in the requirements for

plan confirmation. When confirmation occurs under §1191(a) because all creditors accept the

plan, the court explained, the plan must meet all the existing requirements of § 1129(a), except

for paragraph (a)(15), which the court concluded was inapposite.

643

Section 11191(b) changes the existing cramdown requirements of § 1129(b) to permit

confirmation without acceptance by any impaired class (as § 1129(a)(1) requires) if the plan does

not discriminate unfairly and is fair and equitable to the dissenting class. Thus, except for

removal of the requirement of an accepting impaired class, subchapter V has the same standard

for confirmation as existing § 1129(b), but it alters the definition of “fair and equitable” for

classes of unsecured creditors and interests by substituting the disposable income requirement for

the absolute priority rule in §§ 1129(b)(2)(B) and (C), respectively.

644

The court concluded, “The alteration of the definition of fair and equitable in an existing

case does not, standing alone, amount to an impermissible retroactive taking.”

645

The court acknowledged that, if a case were pending for an extended period of time on

SBRA’s effective date, the case “could be sufficiently advanced that the substantive alterations

in the requirements for plan confirmation arise to a taking of vested property rights.”

646

In the

case before it pending for only nine days before the effective date, however, the court reasoned

that it did not have to consider “the extent to which parties in interest may have so invested in

such a case or the court may have entered orders that created sufficient vested property interests

or post-petition expectations to prevent the application of subchapter V to those rights or make

643

Id. at *5. The court noted that § 1129(a)(15) applies only in individual cases and that, even in individual cases

confirmed without acceptance by all classes, the disposable income requirement of § 1191(c) makes the (a)(15)

requirement for commitment of disposable income superfluous.

644

Id. See Section VIII(B)(3), (4).

645

Id.

646

Id.

266

its application offend ‘[e]lementary considerations of fairness’ such that the parties ‘have an

opportunity to know what the law is and to conform their conduct accordingly.’”

647

Because the application of new subchapter V in the existing case did not violate the

Supreme Court’s rulings in Landgraf or Security Industrial Bank, the Moore Properties court

concluded, it had the obligation to apply the law in effect at the time of its decision.

648

The bankruptcy court in In re Body Transit

649

applied the Moore Properties analysis in a

small business case that had been pending for a month before SBRA’s effective date to reject the

secured creditor’s contention that the court should follow the presumption against retroactive

application of statutes. The court went on to consider the creditor’s argument that permitting the

debtor to proceed under subchapter V would infringe on its rights to obtain a chapter 11 trustee

who, in addition to taking control of the debtor’s assets and business, would also have the right

to file a plan.

650

The Body Transit court agreed with the Moore Properties court that, in ruling on a

belated objection to a subchapter V election, the court properly considers the extent to which

parties have invested in the case and whether the court has entered orders that create sufficient

vested postpetition expectations such that application of subchapter V would offend elementary

considerations of fairness.

651

In addition, the court noted that a debtor’s ability to amend under

Bankruptcy Rule 1009 is subject to objection if the amendment is made in bad faith or would

647

Id., quoting Landgraf v. USI Film Products, 511 U.S. 244, 265 (1994), and citing In re Progressive Solutions,

Inc., 615 B.R. 894 (Bankr. E.D. Cal. 2020).

648

Id.

649

In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020).

650

The court had scheduled a hearing on the creditor’s motion for appointment of a trustee. The creditor asserted

that debtor had failed to pay postpetition rent, has used its cash collateral without authority, and had failed to file

reports and provide accurate financial information. Id. at 404.

651

Id. at 408.

267

unduly prejudice a party.

652

The court concluded that this Rule 1009 standard stated the same

principle as the Moore Properties formulation and is appropriate in evaluating an objection to a

belated subchapter V election.

653

The Body Transit court ruled that whether a subchapter V trustee’s inability to file a plan

unduly prejudices creditors turns on the facts of each case and that the creditor had not met its

burden of showing prejudice in the case before it.

654

The court summarized, “[I]n the absence of

a particularized showing, and based on the present circumstances of this case, [the creditor] has

not met its burden of showing the level of prejudice required to override the Debtor’s right to

amend its petition under [Bankruptcy Rule] 1009.”

655

In In re Ventura,

656

an individual operating a bed and breakfast business in her residence

through a limited liability company filed a chapter 11 case four months before SBRA’s effective

date, the date before a scheduled foreclosure sale in a judicial foreclosure action. She had

discharged her personal liability on the mortgage in a chapter 7 bankruptcy case filed some six

years earlier.

The debtor proposed a plan to bifurcate the mortgage claim, notwithstanding the anti-

modification provision of § 1123(b)(5), on the theory that the property did not qualify as a

“residence” based on her use of it as a bed and breakfast. After the bankruptcy court had ruled

that the exception applied as long as the debtor used any party of the property for her

652

Id. at 408-09, citing In re Cudeyo, 213 B.R. 910, 918 (Bankr. E.D. Pa. 1997); In re Brooks, 393 B.R. 80, 88

(Bankr. M.D. Pa. 2008); In re Romano, 378 B.R. 454, 467-68 (Bankr. E.D. Pa. 2007); and In re Bendi, Inc., 1994

WL 11704, at *2 (Bankr. W.D. Pa. 1994).

653

213 B,R. at 409.

654

Id. at 409.

655

Id. at 410.

656

In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020), rev’d sub nom. Gregory Funding v. Ventura (In re Ventura),

638 B.R. 499 (Bankr. E.D. N.Y. 2022). .

268

residence,

657

it scheduled a hearing on confirmation of the lender’s plan, which provided for the

sale of the property and a carve-out from the proceeds to pay all other classes in full, for

February 26, 2020 – one week after SBRA’s effective date.

658

The bankruptcy court adjourned the confirmation hearing to give the debtor the

opportunity to determine whether to amend her petition to elect application of subchapter V,

which she did nine days later. The lender objected to the amendment, asserting among other

things that it had vested rights at the time of the amendment in that its plan was ripe for

confirmation.

659

The lender also asserted that the debtor could not modify the mortgage in a

subchapter V case under § 1190(3) because the debtor used the mortgage proceeds to purchase

the property, not to invest in the limited liability company that operated the bed and breakfast.

657

Other courts have accepted the debtor’s position. See generally W. Homer Drake, Jr., Paul W. Bonapfel, and

Adam M. Goodman, C

HAPTER 13 PRACTICE AND PROCEDURE, § 5:42 (2d ed. 2019).

658

In re Ventura, 615 B.R. 1, 10 (Bankr. E.D.N.Y. 2020), rev’d sub nom. Gregory Funding v. Ventura (In re

Ventura), 638 B.R. 499 (Bankr. E.D. N.Y. 2022).

659

Id. at 11. The debtor in the current case and in two previous bankruptcy cases had asserted that her debts were

“primarily consumer debts.” Id. at 8. The debtor owed $ 1,678.664.80 on the mortgage, and the property was worth

no more than $ 1,200,000. Id. at 9. Although the opinion does not reflect what other debts the debtor has, the

context indicates that she had other unsecured debt that were relatively small.

The lender asserted that, in these circumstances, the debtor did not qualify as a small business debtor, and

that, even if she did, she should be judicially estopped from amending her petition to designate herself as a small

business debtor based on her representations in the previous and current cases.

The court acknowledged that a purchase money mortgage on a residence is generally a consumer debt, but

ruled that “the fact that a debtor incurs mortgage debt to buy a residence does not automatically mean that the debt is

a consumer debt.” Id. at 19. The test, the court explained, is whether a debt is incurred with an eye toward profit.

“Courts must look at the substance of the transaction and the borrower’s purpose in obtaining the loan, rather than

merely looking at the form of the transaction,” the court stated. Id., quoting In re Martin, 2013 WL 54233954, at *6

(S.D. Tex. 2013) and citing In re Booth, 858 F.2d 1051, 1055 (5

Cir. 1988) (debt incurred with an eye toward

profit is a business debt, rather than a consumer debt).

The court found that the property was the debtor’s residence but that the primary purpose of purchasing it

was to own and operate a bed and breakfast. The court concluded that the mortgage was a business debt and that she

qualified as a small business debtor. Id. at 20.

The court declined to apply judicial estoppel to bar her amendment to designate herself as a small business

debtor. The court ruled that her amendment to describe the mortgage as a business debt was not necessarily with her

prior descriptions of the debt. She had referred to it as a bed and breakfast and described it on her Schedule A/B as a

“B & B Inn” rather than as a “single-family” home. Moreover, the court had taken no action in any of the cases

based on the description of the mortgage debt as a consumer debt, so it was not misled. Nor had the debtor taken

unfair advantage of the lender by changing the description of her debt to fit within a statute that did not exist when

she filed her cases. Id. at 20-22.

269

The Ventura bankruptcy court first noted that subchapter V properly applies retroactively,

agreeing with the analysis in Moore Properties and Body Transit. In addition, the court

concluded that the revision of the definition of “small business debtor” does not appear to affect

contractual or vested property rights.

660

The bankruptcy court then addressed whether the exception in §1190(3) to the anti-

modification provision of § 123(b)(5) could apply to the lender’s property rights that vested prior

to SBRA’s effective date. The court held that, because the debtor had discharged her personal

liability in her previous chapter 7 case, application of §1190(3) would not deprive the lender of

its right under state law to receive the value of the property.

Moreover, the bankruptcy court observed, even if the debt had not been discharged,

§1190(3) might not “raise significant Constitutional doubts to warrant only prospective

application.”

661

Invoking the principle of Security National Bank that bankruptcy law may

abrogate contractual rights, but not vested property rights, of mortgagees, the court stated that the

contractual right of a secured creditor to obtain repayment of the debt may be quite different in

legal contemplation from property rights in the collateral. Consequently, the court concluded,

application of § 1190(3) to modify the mortgage would not violate the lender’s Fifth Amendment

rights.

662

The court in a later part of its opinion ruled that whether the mortgage qualified for

bifurcation involved factual issues that required an evidentiary hearing.

663

The Ventura bankruptcy court found no prejudice to the lender based on the history of the

case, including the fact that the lender’s plan was before the court for confirmation. The court

660

Id. at 16-17, citing Moore Properties of Person County, LLC, 2020 WL 995544, at *4, n. 10 (Bankr. M.D.N.C.

2020).

661

Id. at 17.

662

Id. at 17.

663

Id. at 24-25. Section VII(B) discusses this aspect of the court’s ruling in connection with consideration of

§ 1190(3).

270

saw no Constitutional issues and declined to treat its prior rulings as creating “vested” rights.

The bankruptcy court reasoned, “Until a plan is confirmed no property rights can be said to have

vested in either [the debtor or the lender].”

664

The district court reversed, concluding that the bankruptcy court had not properly

considered the substantial prejudice that the creditor faced due to the belated amendment to elect

subchapter V. Gregory Funding v. Ventura (In re Ventura), 638 B.R. 499 (E.D. N.Y. 2022).

The district court noted that the amendment did not occur until 16 months after the filing of the

chapter 11 case and that allowing it caused “substantial prejudice” to the creditor. The district

court observed, id. at 505 (emphasis in original; interior punctuation and citation omitted):

By [the time of the amendment], both the parties and the Bankruptcy Court spent

considerable time to get to a point in which [the creditor] was posed to confirm its plan.

The Bankruptcy Court held numerous hearings and the parties, after significant

negotiations, agreed [the creditor] could pursue its unopposed plan of reorganization if

the Debtor failed to submit a plan by September 30, 2019. In reliance on this agreement

and on the Debtor’s representation that her petition would proceed under Chapter 11, [the

creditor] Filed its plan of reorganization, solicited the necessary votes, and was on the

cusp of confirming it when the Debtor sought to amend her petition. Moreover, because

the SBRA grants the Debtor the sole right to confirm a plan of reorganization, the

Debtor’s amendment had the further prejudicial effect of terminating [the creditor’s] right

to pass any plan, thereby completing changing the rights of [the creditor] as a creditor and

resetting the litigation posture of the proceedings.

664

Id. at 18.

271

The district court in Ventura concluded that the amendment to elect subchapter V “cannot

be allowed to cause such prejudice.” 638 B.R. at 505. In addition, the court observed, prejudice

to the debtor did not outweigh prejudice to the creditor because “she remains in the Chapter 11

process. While this may prevent her from accessing some of the tools afforded by Subchapter V,

the Debtor’s interests are still protected by Chapter 11, which requires [the creditor’s plan] to be

‘fair and equitable,’ 11 U.S.C. § 1191(c), proposed in good faith, deemed to be ‘reasonable,’ and

in comportment with existing law. Id. § 1129(a).”

665

638 B.R. at 505. Accordingly, the court

held that the bankruptcy court abused its discretion by overruling the creditor’s objection to the

debtor’s amendment of her petition to proceed under subchapter V.

To summarize, under the analysis of the cases permitting an election in a pending case, a

debtor in an existing chapter 11 case who qualifies as a subchapter V debtor under SBRA’s

revised definition may amend the petition to elect application of subchapter V, and the case will

proceed under subchapter V unless the court orders otherwise. Courts will consider, on a case-

by-case basis, whether the amendment should not be allowed because the amendment is in bad

faith, will cause undue prejudice to other parties, or offends elementary considerations of

fairness.

Courts may also consider the timing of the amendment. One court observed that the

doctrine of laches may apply to a belated amendment to a petition to elect application of

subchapter V.

666

Another court refused to permit a debtor to proceed under subchapter V in a

case filed a month before its effective date. The court determined that the debtor had waited too

665

Id. It is unlikely that the requirements for confirmation the court referenced would provide any material

protection for the interests of the debtor as compared to the provisions of her plan.

666

In re Body Transit, Inc., 613 B.R. 400, 407, n. 11 (Bankr. E.D. Pa. 2020).

272

long to make the sub V election and had amended its petition to do so only after two attempts to

confirm a traditional chapter 11 plan had failed.

667

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted

March 27, 2020, raised the debt limit for a debtor to be eligible to elect subchapter V to $ 7.5

million.

668

Because the statute specifically states that the amendment applies only to cases

commenced on or after the date of its enactment, a debtor in an existing case with debts over the

debt limit in § 101(51D) but less than $ 7.5 million cannot amend its petition to elect application

of subchapter V.

669

Although the CARES Act provided for the increased debt limit to expire on

year after its enactment, the Covid-19 Bankruptcy Relief Extension Act of 2021

670

amended the

CARES Act to extend the increased debt limit for an additional year.

A possible alternative for a debtor in a pre-subchapter V case who wants to be in a

subchapter V case is to obtain dismissal of the pending case and then file a new one in which it

elects subchapter V. In In re Slidebelts, Inc., 2020 WL 3816290 (Bankr. E.D. Cal. 2020), the

court permitted dismissal of a chapter 11 case for this purpose. The court in In re Twin Pines,

LLC, 2020 WL 5576957 at * 6 (Bankr. D. N.M. 2020), noted that a debtor could, upon dismissal

of the pending case, file a new one and elect subchapter V in exercising its discretion to extend

the deadlines for the status conference and filing of a plan so that the debtor could proceed under

subchapter V.

667

In re Greater Blessed Assurance Apostolic Temple, Inc., 624 B.R. 742 (Bankr. M.D. Fla. 2020). Cf. In re

Tibbens, 2021 WL 1087260 at * 9 (Bankr. M.D.N.C. 2021) (After denial of confirmation of two chapter 13 plans,

the debtor sought to convert to chapter 11 and elect subchapter V after the deadline for the filing of a plan had

expired; the court converted the case to chapter 11 but declined to extend the deadline because of numerous delays

in the chapter 13 case that were within the debtor’s control and for which the debtor should be held accountable.).

668

Coronavirus Aid, Relief, and Economic Security Act § 1113(a), Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27,

2020). See Section III(B).

669

See In In re Peak Serum, 623 B.R. 609 (Bankr. D. Col. 2020) (Debtors in pending chapter 11 cases may not elect

application of subchapter V upon becoming eligible for subchapter V under the increase in the debt limit upon

enactment of the CARES Act; increased debt limit applies only in cases filed after enactment.)

670

Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021).

273

In In re Peak Serum, 623 B.R. 609 (Bankr. D. Col. 2020), a corporation and its principal,

in response to a creditor’s motion to appoint a trustee in their jointly administered cases, moved

to dismiss them to permit their re-filing as subchapter V cases after the CARES Act increased the

debt limit so that they became eligible to proceed under subchapter V. The court found cause to

appoint a trustee in the corporate case and concluded that the facts warranted appointment of a

trustee. Because the creditor failed to establish cause for appointment of a trustee in the

individual case, however, the court dismissed it, observing that subchapter V contained sufficient

protections for creditors such that a re-filed case under subchapter V would not unduly prejudice

creditors.

The strategy did not work well for the individual debtors in In re Crilly, 2020 WL

3549848 (Bankr. W.D. Okla. 2020). A few hours after dismissal of their chapter 11 case filed in

2018 for cause, the individual debtors filed a new case and elected subchapter V. The debtors

filed a motion to extend the automatic stay, which under § 362(c)(3) would expire 30 days after

filing the second case unless extended based on a showing that the second case was filed in good

faith. Under § 362(c)(3)(C)(i)(III), a filing is presumptively not in good faith if there has not

been a substantial change in the financial or personal affairs of the debtor since the dismissal of

the previous case.

The court concluded that no change of circumstances had occurred between the filing of

their two cases that would permit them to avoid the presumption. The availability of subchapter

V in the new case, the court explained, could not supply such a change because it was in effect at

the time of the dismissal and filing of the cases. The court for a variety of reasons refused to

extend the automatic stay beyond 30 days.

274

In In re Hunts Point Enterprises, LLC, 2021 WL 1536389 (Bankr. E.D.N.Y. 2021), a

debtor requested dismissal of its case after a creditor filed a motion to disallow its sub V election

or, alternatively, to dismiss it. The court ruled that the debtor’s debts did not exceed the

eligibility limit but concluded that allowing the case to proceed under subchapter V would be an

abuse of its provisions because only the debtor could file a plan, and its request for dismissal

demonstrated that it no longer wanted to do so. The court concluded that cause existed for its

dismissal and prohibited the debtor from filing another bankruptcy petition for a year unless the

debtor sought and obtained relief from that prohibition based on changed circumstances or good

cause shown.

Appendix A - 1

Lists of Sections of Bankruptcy Code

and Title 28 Affected or Amended By

The Small Business Reorganization Act of 2019

Enacted August 23, 2019, Effective February 19, 2020

(As Amended By The CARES Act, Enacted and Effective March 27, 2020; The COVID-19

Bankruptcy Relief Act of 2021 § 2(a), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021)

extended the sunset provisions of the CARES Act for an additional year.)

May 2020

Sections of The Small Business

Reorganization Act of 2019

SBRA § 1

Short Title – “The Small Business Reorganization Act of 2019”

SBRA § 2

Enacts Subchapter V of Chapter 11 of the Bankruptcy Code, new

§§ 1181—1195.

SBRA § 3(a)

Amends 11 U.S.C. § 547(b) to provide that trustee’s avoidance of

preferential transfer must be “based on reasonable due diligence in

the circumstances of the case and taking into account a party’s

known or reasonably knowable affirmative defenses” under § 547(c).

Applicable in all bankruptcy cases.

SBRA § 3(b)

Amends 28 U.S.C. § 1409(b) to provide for venue only in the district of

the defendant, for a proceeding brought by a trustee to recover a

debt from a noninsider when the debt is less than $ 25,000.

Applicable in all bankruptcy cases.

SBRA § 4(a)

Conforming amendments to the Bankruptcy Code.

SBRA § 4(b)

Conforming amendments to Title 28.

SBRA § 5

Effective date.

SBRA § 6

Determination of budgetary effects.

11 U.S.C.

Amendments Relating to

Cases of All Small Business Debtors

SBRA

§ 101(51C)

New definition of “small business case” as a case in which a small

business debtor (defined in § 101(51D)) does not elect application of

subchapter V

§ 4(a)(1)(A)

§ 101(51D)

Revised definition of “small business debtor”; CARES Act makes

technical correction dealing with exclusion of public companies

§ 4(a)(1)(B);

CARES Act

§ 1113(a)(4)(A)

Appendix A - 2

§ 103(i)

New subsection (i) provides that subchapter V applies only to a case

in which a small business debtor elects its application

CARES Act amendment provides that subchapter V applies only to a

case in which a “debtor (as defined in section 1182)” elects its

application.

§ 4(a)(2);

CARES Act

§ 1113(a)(2)

§1102(a)(3)

No committee of unsecured creditors will be appointed in the case of

a small business debtor (regardless of election), unless the court

orders otherwise

§ 4(a)(11)

11 U.S.C.

Sections of Bankruptcy Code Inapplicable

or Modified in Subchapter V Cases

New

Subchapter V

Section

§ 105(d)

§ 105(d) provisions for status conference are inapplicable. New

§ 1188 requires status conference and filing of report by debtor 14

days before it.

New § 1181(a)

§ 327(a)

New § 1195(a) states that person is not disqualified for employment

under § 327 solely because the person holds a prepetition claim of

less than $ 10,000.

New § 1195(a)

§ 365(d)(3)

The Consolidated Appropriations Act, 2021, temporarily added

provisions to extend time for debtor as lessee under a nonresidential

lease of real property to comply with its obligations under the lease

based on financial hardship arising from COVID-19.

§ 1101(1)

§ 1101(1) definition of debtor in possession is inapplicable. Replaced

by new § 1182(2).

New § 1181(a)

§ 1102(a)

§ 1102(b)

§ 1103

Paragraphs (1), (2), and (4) of § 1102(a) and paragraphs (1) and (2) of

§ 1102(b) deal with the appointment of committees. § 1102(b)(3)

governs provision of information to, and communications with,

creditors. Section 1103 describes the powers and duties of

committees.

These provisions are not applicable unless the court orders

otherwise. Under amended § 1102(a)(3), no committee is appointed

in a case of a small business debtor unless the court orders

otherwise.

New § 1181(b)

§ 1104

§ 1105

Provisions for appointment of trustee (§ 1104) and termination of

trustee’s appointment (§ 1105) are inapplicable. Replaced by § 1183

(appointment of trustee in all subchapter V cases) and § 1185

(removal of debtor in possession and reinstatement of debtor in

possession)

New § 1181(a)

§ 1106

§ 1106 specification of duties of trustee and examiner is inapplicable.

New § 1183(b) states the trustee’s duties. The court may order the

trustee to perform certain § 1106 duties (new § 1183(b)(2)), and

several are applicable if the debtor in possession is removed (new

New § 1181(a)

Appendix A - 3

§ 1183(b)(5)). The subchapter V trustee has the same duties

regarding domestic support obligations (new § 1183(b)(6)) that a

chapter 11 trustee has under § 1106(c).

§ 1107

§ 1107 is inapplicable. § 1107(a) gives the debtor most of the rights,

powers, and duties of a trustee. It is replaced by new § 1184, which

gives the subchapter V debtor the same rights, powers, and duties.

§ 1107(b) states that a professional is not disqualified under § 327(a)

from employment by the debtor in possession solely because of the

professional’s representation of the debtor prior to the case. No

comparable provision exists in subchapter V, but the provision in

new § 1195 that a professional is not disqualified solely because the

professional holds a claim of less than § 10,000 impliedly has the

same effect.

New § 1181(a)

§ 1108

§ 1108 authorizes trustee (or debtor in possession) to operate the

debtor’s business. It is inapplicable and replaced by new § 1184

(authorizing debtor to operate business) and new § 1183(b)(5)

(trustee’s duties upon removal of debtor in possession include

operating debtor’s business)

New § 1181(a)

§ 1115

§ 1115 provisions for property of the estate in the chapter 11 case of

an individual do not apply. If a plan is confirmed under the

cramdown provisions of new § 1191(b), language similar to § 1115

provides that such property is property of the estate of any

subchapter V debtor.

New § 1181(a)

§ 1116

§ 1116, which states the duties of trustee or debtor in possession in

a small business case, is inapplicable. New §§ 1187(a) and (b)

require the debtor to perform the specified duties.

New § 1181(a)

§ 1121

Provisions governing who may file a plan are inapplicable. Only the

debtor may file a plan under new § 1189(a).

New § 1181(a)

§ 1123(a)(8)

Requirement that plan provide for payment of earnings or other

income of debtor who is an individual as is necessary for the

execution of the plan is inapplicable.

New § 1191(c)(2) requires, as a condition to confirmation of a

cramdown plan under new § 1191(b), that a plan provide for all

disposable income for a three- to five-year period (or its value) be

applied to make payments under the plan.

New § 1181(a)

§ 1123(c)

Prohibition on use, sale, or lease of exempt property of individual in

a plan without consent of the debtor is inapplicable. It is

unnecessary because only the debtor may file a plan under new §

1189(a).

New § 1181(a)

§ 1125

Provisions in § 1125 for disclosure statement and solicitation of

acceptances or rejections of plan do not apply unless the court

orders otherwise. A plan must include some of the information that

a disclosure statement must have. New § 1190(1). If the court

requires a disclosure statement, the provisions of § 1125(f) apply

under new § 1187(c).

New § 1181(b)

Appendix A - 4

§ 1127

Provisions dealing with modification of plan are inapplicable and are

replaced by new § 1193.

New § 1181(a)

§ 1129(a)(9)(A)

Confirmation requirement of § 1129(a)(9)(A) is that plan must

provide for cash payment of priority claims specified in § 507(a)(2)

(administrative expenses (including professional fees and trustee

fees) and court fees) and § 507(a)(3) (involuntary gap claims), unless

the claimant agrees otherwise. The court may confirm a plan that

provides for payment of these claims through the plan under the

cramdown provisions of new § 1191(b).

New § 1191(e)

§ 1129(a)(15)

Projected disposable income requirement for confirmation in case of

individual is inapplicable. New § 1191(c)(2) requires, as a condition

to confirmation of a cramdown plan under new § 1191(b), that a

plan provide for all disposable income for a three- to five-year period

(or its value) be applied to make payments under the plan.

New § 1181(a)

§ 1129(b)

“Cramdown” provisions are not applicable.

New § 1191(b) states cramdown requirements when the

requirements of § 1129(a)(8) (that all impaired classes accept the

plan) and § 1129(a)(10) (that at least one impaired class of creditors

accept the plan) have not been met.

New § 1191(b) permits cramdown confirmation if the plan does not

discriminate unfairly and if it is “fair and equitable with respect to”

each impaired, nonaccepting class. The “fair and equitable”

requirement in subchapter V does not include the absolute priority

rule.

For a secured creditor, the ”fair and equitable” requirements of

§ 1129(b)(2)(A) govern. New § 1191(c)(1).

To be fair and equitable, (1) the plan must provide for all disposable

income for a three to five year period (or its value) be applied to

make payments under the plan, new § 1191(c)(2); and (2) there must

be a reasonable likelihood that the debtor will be able to make all

payments under the plan, and the plan must provide appropriate

remedies to protect creditors if payments are not made, new

§ 1191(c)(3).

New § 1181(a)

§ 1129(c)

Provisions for confirmation when more than one plan meets

confirmation requirements is inapplicable. It is unnecessary because

only the debtor may file a plan under new § 1189(a).

New § 1181(a)

§ 1129(e)

Provision requiring confirmation of plan in small business case within

45 days of its filing is inapplicable in subchapter V case. New

§ 1189(b) requires filing of plan within 90 days after the order for

relief (unless the court extends the time) but does not contain a

deadline for confirmation.

New § 1181(a)

Appendix A - 5

§ 1141(d)

Provisions for chapter 11 discharge do not apply when the court

confirms a cramdown plan under § 1191(b). New § 1192 states

discharge provisions when cramdown confirmation occurs.

In the cramdown context, discharge does not occur under new

§ 1192 until the debtor has completed payments under the plan for

three years, or such longer period not to exceed five years as the

court determines. The new § 1192 discharge applies to (1) debts

listed in § 1141(d)(1)(A) and (2) all other debts allowed under § 503

and provided for in the plan, except for debts (x) on which the last

payment is due after the applicable three to five year period and (y)

of the kind specified in § 523(a).

New § 1181(c)

Conforming Amendments to Other Sections

of the Bankruptcy Code and to Title 28

to Take Account of New Subchapter V

11 U.S.C.

SBRA

§ 322(a)

Amended to make its provisions for qualification of trustee in a case

applicable to a subchapter V trustee appointed under new § 1183.

§ 4(a)(3)

§ 326(a)

Excepts subchapter V trustee appointed under new § 1183 from

percentage limitations on compensation applicable to trustees in

chapter 11 (and chapter 7) cases.

§ 4(a)(4)(A)

§ 326(b)

Provides that standing subchapter V trustee (like standing chapter 12

and 13 trustees) cannot receive compensation under § 330.

(Standing trustees receive compensation under 28 U.S.C. § 586(e), as

amended to include standing subchapter V trustees.)

§ 4(a)(4)(B)

§ 347

Current § 347(a) provides for a chapter 7, 12, or 13 trustee to pay

into the court, for disposition under chapter 129 of title 28, funds

that remain unclaimed 90 days after final distribution under § 726,

§ 1226, or § 1326. It thus does not apply in chapter 11 cases. SBRA

§ 4(a)(5)(a) adds subchapter V to the list of trustees and adds new

§ 1194 to the list of sections providing for distributions. New § 1194

provides for the subchapter V trustee to make distributions under a

plan confirmed under the cramdown provisions of new § 1191(b).

Current § 347(b) provides that unclaimed property in a case under

chapter 9, 11, or 12 at the expiration of the time for presentation of

a security or performance of any other act as a condition to

participate under any plan confirmed under § 1129, § 1173, or

§ 1225 becomes property of the debtor or any entity acquiring the

debtor’s assets under the plan. SBRA § 4(a)(5)(B) added new § 1194

to the list of plans confirmed, but the CARES Act made a technical

correction to change this to § 1191. Accordingly, § 347(b) as

amended and corrected provides for property that is distributed

§ 4(a)(5);

CARES Act

§ 1113(a)(4)(B)

Appendix A - 6

under a confirmed plan and that is unclaimed to become property of

the debtor.

It is unclear under these amendments what happens to funds that a

trustee disburses under a confirmed plan that a creditor does not

claim. Amended § 347(a) directs the trustee to pay them into court,

but amended § 347(b) makes them property of the debtor. Perhaps

the intended result is that unclaimed disbursements that a trustee

makes become unclaimed funds subject to § 347(a) whereas

unclaimed disbursements that a debtor makes become the debtor’s

property under § 347(b).

§ 363(c)(1)

Extends provisions authorizing trustee who is authorized to conduct

business to enter into transactions in the ordinary course of business

without notice and hearing to subchapter V debtor and subchapter V

trustee. (Other provisions in § 363 are applicable to a trustee, which

includes a subchapter V debtor in possession, new § 1184.)

§ 4(a)(6)

§ 364(a)

Extends provisions authorizing trustee who is authorized to conduct

business to obtain unsecured credit and incur unsecured debt

without notice and hearing to subchapter V debtor and subchapter V

trustee. (Other provisions in § 364 are applicable to a trustee, which

includes a subchapter V debtor in possession, new § 1184.)

§ 4(a)(7)

§ 523(a)

Applies exceptions to discharge to discharge of individual subchapter

V debtor under new § 1192 (which is the discharge that a debtor

receives when a plan is confirmed under the cramdown provisions of

new § 1191(b)). It is unclear whether under new § 1192 the

exceptions apply to the discharge of a debtor that is not an

individual. If the court confirms a consensual plan under new

§ 1191(a), the debtor receives a discharge under § 1141(d)(1)-(4),

under which the § 523(a) discharge exceptions apply only in cases of

individuals.

§ 4(a)(8)

§ 524(a)(1)

Makes discharge injunction applicable to discharge granted under

new § 1192.

§ 4(a)(9)(A)(i)

§ 524(a)(3)

Makes discharge provisions relating to community claims applicable

to discharge under new § 1192.

§ 4(a)(9)(A)(ii)

§ 524(c)(1)

§ 524(d)

Extends provisions governing reaffirmation of debt and for hearing

on proposed reaffirmation (which apply to a discharge under

§ 1141(d)) to discharge granted under new § 1192.

§ 4(a)(9)

§ 557(d)(3)

Makes provisions for expedited consideration of appointment of

trustee and for retention and compensation of professionals subject

to § 1183 in cases of debtors that own or operate grain storage

facilities

§ 4(a)(10)

§ 1146(a)

Prohibition on taxation of issuance, transfer, or exchange, or of the

making or delivery of an instrument of transfer, under a plan

confirmed under § 1129 is extended to a plan confirmed under

§ 1191.

§4(a)(12)

Appendix A - 7

Conforming Amendments to Other Sections

of the Bankruptcy Code and to Title 28

to Take Account of New Subchapter

SBRA

28 U.S.C.

§ 586(a)(3),

(b), (d)(1), (e)

Provisions applicable to U.S. Trustees duties to supervise the

administration of cases and trustees, (a)(3), appoint standing

trustees (b), prescribe qualifications of trustees, (d)(1), and fix

compensation of standing trustees, (e), extended to include cases

and trustees under subchapter V.

Adds new 28 U.S.C. § 586(e)(5), which provides for compensation of

standing trustee in subchapter V case when trustee’s services are

terminated due to dismissal or conversion of the case or substantial

consummation of a plan under new § 1183(c)(1). In these

circumstances, the standing trustee does not make disbursements

on which a percentage fee would be due. The court is to award

compensation “consistent with services performed by the trustee

and the limits on compensation of the trustee established pursuant

to [28 U.S.C. § 586(e)(1)].”

§ 4(b)(1)

28 U.S.C.

§ 589b

Provisions relating to reports of trustees and debtors in possession

made applicable in subchapter V cases.

§ 4(b)(2)

28 U.S.C.

§ 1930(a)(6)(A)

Subchapter V cases excluded from requirement of payment of

quarterly U.S. Trustee fees

§ 4(b)(3)

Amendments Applicable in All Cases

11 U.S.C.

§ 547(b)

As amended, 11 U.S.C. § 547(b) provides that a trustee may avoid a

preferential transfer “based on reasonable due diligence in the

circumstances of the case and taking into account a party’s known or

reasonably knowable affirmative defenses” under § 547(c).

SBRA § 3(a)

28 U.S.C.

§ 1409(b)

As amended, 28 U.S.C. § 1409(b) provides for venue only in the

district of the defendant of a proceeding brought by a trustee to

recover a debt from a noninsider when the debt is less than $

25,000.

SBRA § 3(b)

Appendix B - 1

Summary of SBRA Interim Amendments to

The Federal Rules of Bankruptcy Procedure

To Implement SBRA

Rule 1007(b)(5) – Eliminates requirement for filing statement of current monthly income for

individual in a subchapter V case.

Rule 1007(h) – Modifies exceptions to requirement for filing supplemental schedule of property

the debtor acquires after the filing of the case, as provided in § 541(a)(5), after the closing of the

case. The exception does not apply to a chapter 11 plan confirmed under § 1191(b) (cramdown)

and does apply after the discharge of a debtor in a plan confirmed under § 1191(b).

Rules 1015(c), (d), and (e) are renumbered as (d), (e), and (f).

Rule 1020(a) – Provides for election of subchapter V to be included in voluntary petition.

Rule 1020(c) – Eliminates provisions for case to proceed as small business case depending on

whether committee of unsecured creditors has been appointed or whether an appointed

committee has been sufficiently active.

Rule 1020(d) – Renumbered as Rule 1020(c) and eliminates requirement for service of objection

to debtor’s classification as a small business (or not) or election of subchapter V (unless

committee has been appointed) and instead requires service on 20 largest.

Rule 2009 – permits single trustee in jointly administered case under subchapter V as well as in

cases under chapter 7.

Rule 2011—Amends title of rule dealing with unclaimed funds to include cases under

Subchapter V.

Rule 2012 – makes automatic substitution of trustee in chapter 11 case for debtor in possession

in any pending action, proceeding, or matter in applicable to subchapter V trustee, unless debtor

is removed from possession. (Same rule as Chapter 12).

Rule 2015(a)(1) – Makes requirement for chapter 11 trustee to file complete inventory of

property of debtor (if court directs) inapplicable to subchapter V trustee.

Rule 2015(a)(5) – Makes requirement for payment of UST fees inapplicable in subchapter V

case.

Rule 2015(b) – Rule 2015(b) renumbered as Rule 2015(c). New Rule 2015(b) requires debtor in

possession in subchapter V case to perform duties of trustee described in Rule 2015(a)(2)

through (4) and to file inventory if the court directs. Requires trustee to perform these duties if

debtor is removed from possession.

Appendix B - 2

Rule 3014 – Provides for court to determine the date for making of § 1111(b) election by secured

creditor in case under subchapter V in which § 1125 provisions for disclosure statement do not

apply. (General rule is that election must be made before conclusion of hearing on disclosure

statement.)

Rule 3016(b) – Makes provisions for disclosure statement applicable only if a disclosure

statement is required.

Rule 3016(d) – Makes provisions for use of standard form in “small business case” also

applicable to a case under subchapter V case. (Note: under SBRA, a subchapter V case is not a

“small business case,” although a subchapter V debtor is a “small business debtor.”)

Rule 3017.1(a) – Permits conditional approval of disclosure statement in subchapter V case in

which court has ordered that disclosure statement requirements of § 1125 apply.

Rule 3017.2 – New rule requires court to fix, in a subchapter case in which § 1125 does not

apply: (a) the time for accepting or rejecting a plan; (b) the record date for holders of equity

security interests; (c) the date for the hearing on confirmation; (d) the date for transmission of the

plan and notice of the (1) the time to accept or reject and (2) the confirmation hearing.

Rule 3018 – Conforming amendment to take account of new Rule 3017.2 and change in Rule

3017.1.

Rule 3019(c) – New rule 3019(c) provides that request to modify plan after confirmation in

subchapter V case is governed by Rule 9014 and that provisions of Rule 3019(b) (procedures for

postconfirmation modification of plan in individual chapter 11 case) apply.

Appendix C – 1

Note: The COVID-19 Bankruptcy Relief Act of 2021 § 2(a), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021) extended

the sunset provisions of the CARES Act referenced herein for an additional year.

Summary Comparison of U.S. Bankruptcy Code Chapters 11, 12, & 13

Prepared by Mary Jo Heston’s Chambers

(Updated July 6, 2020)

Unless otherwise indicated, all chapter, section and rule references are to the Federal Bankruptcy Code, 11 U.S.C. §§ 101- 1532, and to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037.

SUBSTANTIVE