Although redesignation under subchapter V of chapter 11 can save a chapter 11 reorganization from imminent failure, that’s not true if the debtor is proceeding in bad faith.
Designed to facilitate the reorganization of small businesses for which traditional chapter 11 is infeasible or too costly, Congress enacted the Small Business Reorganization Act, or SBRA. It became effective on February 19 and is largely codified at 11 U.S.C. §§ 1181 – 1195. We reported chapter 11 cases from New Mexico and Long Island, N.Y., that were on the verge of failure because the debtors were unable to confirm reorganization plans.
Over objections, Bankruptcy Judges Robert H. Jacobvitz of Albuquerque, N.M., and Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., permitted the debtors to stave off conversion or dismissal by electing treatment under the SBRA, where confirmation might be feasible. To read ABI’s reports, click here and here.
A reorganization under subchapter V looks more like chapter 13 than chapter 11. For many small businesses and individuals in traditional chapter 11s, the absolute priority rule can be a bar to confirmation. The SBRA in substance abrogated the absolute priority rule for businesses with less than $7.5 million in debt and instead requires devoting disposable income to the payment of creditors’ claims. There is ordinarily no creditors’ committee, and plans under subchapter V often can be confirmed without a vote of creditors.
A June 11 opinion by Bankruptcy Judge Sarah H. Hall of Oklahoma City shows that facts matter. Because the failing chapter 11 case had been an abuse of the bankruptcy process, she effectively barred the debtor from refiling under the SBRA.
A husband and wife had been in chapter 11 for 20 months. Ninety percent of claims were held by one creditor with a judgment for more than $500,000. The debtors were on their sixth amended plan and fifth amended disclosure statement. The plans were failing because the debtors could not satisfy the absolute priority rule, among other reasons.
On the eve of the failure of the most recently amended plan, the debtors agreed with the judgment creditor to dismiss the chapter 11 case. However, the debtors did not disclose that they intended to refile immediately under subchapter V.
Less than six hours after dismissing the 20-month old chapter 11 case, the debtors filed a new chapter 11 petition designating treatment under subchapter V. To avoid automatic termination of the automatic stay in 30 days under Section 362(c)(3)(A), the debtors filed a motion to extend the automatic stay.
Judge Hall denied the motion and allowed the stay to lapse because the debtors did not show under Section 362(c)(3)(B) that the new case was “filed in good faith as to the creditors to be stayed.”
The miscreant debtors were guilty of more than failing to confirm a plan after 20 months in chapter 11. Judge Hall recited how they paid counsel without court authorization and had spent cash assets of the estate that should have been held in escrow pursuant to court order.
Judge Hall’s opinion is a superb treatise laying out the presumptions alongside the shifting burdens of proof under Section 362(c)(3)(B)-(C). She said that the debtors “had utterly failed to present any evidence” of their ability to confirm a plan in the subchapter V case.
Judge Hall found that the debtors had been “desperately and greedily holding on to non-exempt assets in the First Case under the guise of reorganizing at the sole expense of the” judgment creditor.
Judge Hall had no difficulty in finding that the new case had been filed in bad faith. She ruled that the automatic stay had been automatically terminated in 30 days after the new filing and would not be extended.
The opinion is In re Crilly, 20-11637 (Bankr. W.D. Okla. June 30, 2020).
Although redesignation under subchapter V of chapter 11 can save a chapter 11 reorganization from imminent failure, that’s not true if the debtor is proceeding in bad faith.
Designed to facilitate the reorganization of small businesses for which traditional chapter 11 is infeasible or too costly, Congress enacted the Small Business Reorganization Act, or SBRA. It became effective on February 19 and is largely codified at 11 U.S.C. §§ 1181 – 1195. We reported chapter 11 cases from New Mexico and Long Island, N.Y., that were on the verge of failure because the debtors were unable to confirm reorganization plans.
Over objections, Bankruptcy Judges Robert H. Jacobvitz of Albuquerque, N.M., and Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., permitted the debtors to stave off conversion or dismissal by electing treatment under the SBRA, where confirmation might be feasible. To read ABI’s reports, click here and here.
A reorganization under subchapter V looks more like chapter 13 than chapter 11. For many small businesses and individuals in traditional chapter 11s, the absolute priority rule can be a bar to confirmation. The SBRA in substance abrogated the absolute priority rule for businesses with less than $7.5 million in debt and instead requires devoting disposable income to the payment of creditors’ claims. There is ordinarily no creditors’ committee, and plans under subchapter V often can be confirmed without a vote of creditors.
A June 11 opinion by Bankruptcy Judge Sarah H. Hall of Oklahoma City shows that facts matter. Because the failing chapter 11 case had been an abuse of the bankruptcy process, she effectively barred the debtor from refiling under the SBRA.