Disagreeing with three decisions by judges in other states, Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, Fla., refused to allow a debtor in a chapter 11 reorganization to redesignate the case for treatment under the newly enacted subchapter V after the deadlines in subchapter V had already lapsed.
The Small Business Reorganization Act, or SBRA, was enacted one year ago and became effective on February 19. The SBRA is codified primarily in subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. It is designed for chapter 11 reorganizations to be more streamlined and less costly for small businesses.
The so-called CARES Act, adopted on March 27 in response to the coronavirus pandemic, made subchapter V even more widely available. It raised the debt limit in subchapter V to $7.5 million, although “not less than 50 percent of [the debt must have arisen] from the commercial or business activities of the debtor.” See Section 101(51D).
The SBRA has no mandatory creditors’ committee or disclosure statement. Only the debtor has the right to file a plan, and there is no absolute priority rule. Plans can sometimes be confirmed without a vote of creditors.
In return for streamlining, subchapter V has short deadlines. Section 1188(a) requires a status conference within 60 days of the order for relief, and Section 1189(b) requires the filing of a plan within 90 days of the order for relief. Both sections allow extensions of the deadlines under circumstances “for which the debtor should not justly be held accountable.”
The debtor in Judge Grossman’s case had filed a chapter 11 petition in June 2019, designating itself as a small business debtor under the statute as it then read. The inability to assume a franchise agreement and a lease had prevented the debtor from confirming a plan.
On June 19, four months after the SBRA became effective, the debtor amended the petition to elect treatment under subchapter V. The debtor’s ability to confirm a plan under the SBRA was questionable because Judge Grossman had ruled that the debtor must pay the landlord $130,000 in post-petition rent on the effective date. Furthermore, the debtor’s business was one that had been effectively shut down by the pandemic.
Although redesignation under subchapter V does not require court approval, Judge Grossman entered an order requiring the debtor to show cause why the case should not be dismissed, because the deadlines under the SBRA had already passed.
The debtor and the subchapter V trustee both opposed dismissal, but Judge Grossman dismissed the case in his August 7 opinion, based on the “plain text” of the statute.
Judge Grossman disagreed with three cases allowing debtors to pursue subchapter V reorganization even though the deadlines had already passed. See In re Trepetin, 20-11718, 2020 WL 3833015 (Bankr. D. Md. July 7, 2020); In re Ventura, 18-77193, 2020 BL 134496, 2020 WL 1867898 (Bankr. E.D.N.Y. April 10, 2020); and In re Twin Pines LLC, 19-10295, 2020 Bankr. Lexis 1217 (Bankr. D.N.M. April 30, 2020). To read ABI’s reports on those cases, click here, here, and here.
Judge Grossman focused on the language in Sections 1188(b) and 1189(b), which provide that the status conference and plan-filing deadlines may be extended under circumstances “for which the debtor should not justly be held accountable.” He said that the debtor “immediately put itself in default” of the deadlines by making the election for SBRA treatment after the deadlines had passed.
The “justly accountable” standard is higher than the “for cause” standard in Rule 9006(b), Judge Grossman said. He cited the Collier treatise for saying that similar language in chapter 12 imposes a “stringent burden.”
When a debtor elects treatment under subchapter V after the deadlines have lapsed, Judge Grossman held that “the debtor should justly be held accountable for those circumstances, because the debtor created them. It was the debtor that made the decision to elect into Subchapter V after expiration of these deadlines. No circumstances beyond the debtor’s control caused the debtor to make that decision.”
Judge Grossman said that a debtor cannot attempt to reorganize in a traditional chapter 11 case, then give it “another try under Subchapter V after expiration of the statutory deadlines.”
Judge Grossman dismissed the chapter 11 case because the debtor was accountable for missing the subchapter V deadlines by filing the redesignation after the deadlines had passed.
Had the debtor redesignated under the SBRA soon after February 19, Judge Grossman said that the later advent of the pandemic could have justified an enlargement of the deadlines.
Disagreeing with three decisions by judges in other states, Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, Fla., refused to allow a debtor in a chapter 11 reorganization to redesignate the case for treatment under the newly enacted subchapter V after the deadlines in subchapter V had already lapsed.
The Small Business Reorganization Act, or SBRA, was enacted one year ago and became effective on February 19. The SBRA is codified primarily in subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. It is designed for chapter 11 reorganizations to be more streamlined and less costly for small businesses.
The so-called CARES Act, adopted on March 27 in response to the coronavirus pandemic, made subchapter V even more widely available. It raised the debt limit in subchapter V to $7.5 million, although “not less than 50 percent of [the debt must have arisen] from the commercial or business activities of the debtor.” See Section 101(51D).
The SBRA has no mandatory creditors’ committee or disclosure statement. Only the debtor has the right to file a plan, and there is no absolute priority rule. Plans can sometimes be confirmed without a vote of creditors.
In return for streamlining, subchapter V has short deadlines. Section 1188(a) requires a status conference within 60 days of the order for relief, and Section 1189(b) requires the filing of a plan within 90 days of the order for relief. Both sections allow extensions of the deadlines under circumstances “for which the debtor should not justly be held accountable.”
The debtor in Judge Grossman’s case had filed a chapter 11 petition in June 2019, designating itself as a small business debtor under the statute as it then read. The inability to assume a franchise agreement and a lease had prevented the debtor from confirming a plan.