Differing with a nonprecedential opinion from the Ninth Circuit Bankruptcy Appellate Panel, a district judge in Idaho held that an order finding the debtor ineligible for Subchapter V is a final, appealable order. It is possible, however, that the outcome in Idaho is reconcilable with the BAP decision, because the results in the two bankruptcy courts were the polar opposites of one another.

On the merits after finding an appealable order, District Judge B. Lynn Winmill of Boise, Idaho, affirmed the late Chief Bankruptcy Judge Joseph M. Meier of Boise, Idaho, by holding that student loans obtained to attend medical school are not debts arising from “commercial or business activities” making someone eligible for Subchapter V.

The Student Loan Debt

The debtor had been an addiction counselor who decided to attend medical school to enhance her financial wellbeing and better serve her patients. After obtaining her medical degree and serving a residency, the debtor practiced medicine as an employee for several organizations for most of 13 years before bankruptcy.

More than 10 years after obtaining her medical degree, the debtor for the first time opened her own practice, but it failed within months. She was an employee on filing a chapter 11 petition and electing to proceed under Subchapter V.

All obtained to attend medical school, the debtor’s student loan debt had grown from $325,000 to almost $650,000 with interest. The student loans were substantially more than half of the debtor’s total debt.

The U.S. Trustee objected to confirmation of the debtor’s chapter 11 plan, arguing that the debtor was not entitled to proceed under Subchapter V. According to the objection, the student loan debt did not arise from “commercial or business activities.”

Aside from the question of eligibility for Subchapter V, Bankruptcy Judge Meier decided that the debtor had satisfied all requisites for confirmation of a chapter 11 plan.

However, Judge Meier concluded that the debtor was ineligible for Subchapter V because there was no nexus between the medical school student debt incurred years earlier and the commercial activity in which the debtor engaged while operating her own practice. In re Reis, 22-00517, 2023 BL 148604 (Bankr. D. Idaho May 2, 2023). To read ABI’s report, click here.

Appealability

On the debtor’s appeal, the U.S. Trustee took the position that the order finding ineligibility was not final and was not subject to appeal under 28 U.S.C. § 157(a)(1).

In his June 20 opinion, District Judge Winmill naturally took counsel from the two controlling Supreme Court decisions on finality in bankruptcy, Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), and Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020). He explained how Bullard decided that an order denying confirmation was not a final order because only confirmation or dismissal fixes the rights and obligations of the parties.

On the other hand, denial of a motion to modify the stay was found to be appealable in Ritzen, because denial of stay relief gave the bankruptcy court nothing more to do.

From the two cases, Judge Winmill distilled two controlling questions: (1) Was the order made in a “distinct procedural unit”; and (2) did the order “terminate” the “distinct proceeding”?

In the realm of Subchapter V, Judge Winmill said there was “a dearth of authority on whether an order sustaining a trustee’s objection to a debtor’s election to proceed under Subchapter V is a final, appealable order.” He found only one case of import, the Ninth Circuit Bankruptcy Appellate Panel’s unreported order in NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 21-1053 (B.A.P. 9th Cir. May 26, 2021).

The bankruptcy court had decided in RS that the debtor was eligible for Subchapter V. The BAP dismissed the appeal, finding that the order was interlocutory and not appealable because the “determination of whether a debtor qualifies for subchapter V relief under 11 U.S.C. § 1182(1)(A) is part of the Chapter 11 confirmation process and as such, does not definitively dispose of a discrete issue within the bankruptcy case.”

Judge Winmill “respectfully” disagreed with RS Air. He said that “Subchapter V eligibility determination is a discrete procedural unit that occurs before, and separately from, plan-confirmation proceedings.”

In the case before him, Judge Winmill said that “the entire outcome of this case will be affected, given that the Debtor will be pushed into proceeding as an ordinary Chapter 11 debtor . . . as opposed to under Subchapter V[, which has] many advantages over proceeding as a regular chapter 11 debtor.”

“If a debtor is going to be vaulted into a different chapter of the bankruptcy code, with all the different rules that will apply,” Judge Winmill decided, “the bankruptcy court’s order denying Dr. Reis’s Subchapter V election was a final, appealable order.”

The Merits

Turning to the merits, Judge Winmill was faced with deciding whether review would be de novo or a search for clear error, in terms of the finding that medical school debts were not commercial.

Judge Winmill found the answer in Judge Meier’s refusal to “lay down a categorical rule” saying that debts incurred before opening a business are never commercial debts.

Because Judge Meier did not announce a “per se” rule, Judge Winmill concluded that “the bankruptcy court did not clearly err in determining that [the debtor’s] student loan [debt] did not arise from commercial or business activities.” He affirmed Judge Meier’s order sustaining the U.S. Trustee’s objection to the debtor’s eligibility for Subchapter V.

Observations

The decisions by Judge Winmill and by the Ninth Circuit BAP are not necessarily irreconcilable, because the outcomes differed in bankruptcy court. In the BAP appeal, the debtor had been found eligible for Subchapter V. In the case before Judge Winmill, the debtor had been found ineligible.

In the BAP appeal, eligibility was but one of more than a dozen issues along the road to confirmation. In the appeal to Judge Winmill, the finding of ineligibility meant “game over” in Subchapter V.

A finding of eligibility is akin to denial of a motion to dismiss a chapter 11 petition. By analogy to denial of dismissal, a finding of eligibility is interlocutory.

A finding that a debtor has no commercial debts is similar to a finding that the debtor has too much debt for Subchapter V. Findings of too much debt or too little commercial debt are both “game over.”

In this writer’s view, both opinions point in the same direction. The effect of the order in the progress of the case should illuminate the dividing line between final and interlocutory.