With qualifications, three more bankruptcy judges have allowed debtors to redesignate their pending cases as small business reorganizations under the Small Business Reorganization Act, or SBRA.
One court allowed redesignation when a creditors’ committee had already been formed in a “traditional” chapter 11 case, and another allowed debtor to convert his chapter 7 case to a case under the SBRA after the chapter 7 trustee had issued a no-asset report. The third evidently would permit refiling under the SBRA, but without shortchanging the chapter 11 creditors’ committee in the process.
Effective in February, the SBRA is codified primarily in subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195.
Converting from Chapter 7 to Subchapter V Is Ok
Bankruptcy Judge Michelle M. Harner of Baltimore ruled in a case where the debtor had filed his chapter 7 petition nine days before the SBRA came into effect. The debtor had operated a small business; the case went smoothly; the trustee issued a report of no distribution, and the debtor “appeared” eligible for a discharge, the judge said.
The debtor filed a motion for conversion of his chapter 7 case to subchapter V of chapter 11, along with a motion to reset the deadlines under subchapter V. Section 1188(b) requires a status conference within 60 days of the order for relief, and Section 1189 requires the filing of a plan within 90 days of the order for relief. Because redesignation under subchapter V does not reset the order for relief, both deadlines had passed before the debtor filed the conversion motion.
In her July 7 opinion, Judge Harner cited three decisions permitting redesignation under subchapter V. To read ABI’s reports of those cases, click here, here, and here. She noted how both Sections 1188 and 1189 allow extensions of the deadlines under circumstances “for which the debtor should not justly be held accountable.”
Examining the facts of the case, Judge Harner said the debtor acted as quickly as he could under subchapter V and had complied with his obligations in chapter 7. She allowed conversion and set new deadlines because the debtor was not acting in bad faith and the need for extension of the deadlines was “fairly attributable to factors outside of his control.”
In dicta, Judge Harner said that redesignation might not be allowed if the debtor had not complied with its obligations or missed a deadline to file a plan.
Redesignation Can Extinguish an Existing Committee
Bankruptcy Judge Ernest M. Robles of Los Angeles presided over a case where a couple had filed a traditional chapter 11 petition last year without designating themselves as a small business. An official creditors’ committee had been formed and selected counsel, but Judge Robles had not ruled on the committee’s retention application when the debtors amended the petition to seek redesignation under subchapter V.
The committee opposed redesignation, but to no avail.
In his June 3 opinion, Judge Robles said the committee would not be “unduly prejudiced” by redesignation, even though the committee might come to an end because there ordinarily are no committees in SBRA cases. He said the committee could demonstrate “cause” for continuation of the committee under Section 1102(a)(3).
To show “cause,” Judge Robles said the committee would need to “demonstrate that its continued existence will improve recoveries to creditors, will assist in the prompt resolution of this case, and is necessary to provide effective oversight of the Debtors.”
Judge Robles permitted the debtors to proceed in subchapter V, rejecting the idea that “the Debtors’ Subchapter V election was motivated primarily by a desire to divest the Committee of its role in this case.”
Redesignation Is Ok, but the Committee Must Be Paid
Bankruptcy Judge Frederick E. Clement of Sacramento, Calif., barred a corporate chapter 11 debtor from redesignating under subchapter V if it meant shortchanging counsel for the creditors’ committee.
The committee had retained counsel with court approval, but the committee’s counsel had not been paid. The debtor wanted Judge Clement to permit dismissal with an immediate refiling under subchapter V.
Based on the notion that estate assets revest in the debtor on dismissal, the debtor intended to pay its counsel after dismissal but not committee counsel.
Judge Clement said “no” in his July 6 opinion.
The committee argued that the strategy was akin to an impermissible structured dismissal precluded by Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017). To read ABI’s report on Jevic, click here. Judge Clement agreed, to the extent of observing that the committee would lose its priority claim, even though the debtor’s counsel would be paid.
Judge Clement dismissed the case but retained jurisdiction to approve fee applications. He gave the committee’s counsel a deadline for filing a fee application and barred the debtor from paying any professionals, including its own, until all fee applications had been resolved and paid in full.
The opinions are:
- In re Trepetin, 20-11718 (Bankr. D. Md. July 7, 2020)
- In re Bonert, 19-20836 (Bankr. C.D. Calif. June 3, 2020)
- In re Slidebelts Inc., 19-25064 (Bankr. E.D. Calif. July 6, 2020)
With qualifications, three more bankruptcy judges have allowed debtors to redesignate their pending cases as small business reorganizations under the Small Business Reorganization Act, or SBRA.
One court allowed redesignation when a creditors’ committee had already been formed in a “traditional” chapter 11 case, and another allowed debtor to convert his chapter 7 case to a case under the SBRA after the chapter 7 trustee had issued a no-asset report. The third evidently would permit refiling under the SBRA, but without shortchanging the chapter 11 creditors’ committee in the process.
Effective in February, the SBRA is codified primarily in subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195.
Converting from Chapter 7 to Subchapter V Is Ok
Bankruptcy Judge Michelle M. Harner of Baltimore ruled in a case where the debtor had filed his chapter 7 petition nine days before the SBRA came into effect. The debtor had operated a small business; the case went smoothly; the trustee issued a report of no distribution, and the debtor “appeared” eligible for a discharge, the judge said.
The debtor filed a motion for conversion of his chapter 7 case to subchapter V of chapter 11, along with a motion to reset the deadlines under subchapter V. Section 1188(b) requires a status conference within 60 days of the order for relief, and Section 1189 requires the filing of a plan within 90 days of the order for relief. Because redesignation under subchapter V does not reset the order for relief, both deadlines had passed before the debtor filed the conversion motion.