Chief Bankruptcy Judge B. McKay Mignault of Charleston, W.Va., allowed a debtor to convert a chapter 13 case to Subchapter V of chapter 11 after the deadlines in the Subchapter V had passed.
In her April 16 opinion, Judge Mignault described Subchapter V as “a valuable tool for qualifying debtors and will facilitate reorganizations that were not possible before.” It “would have been helpful,” she said, if Congress had “provide[d] some guidance with respect to conversion from other bankruptcy chapters, but the drafters of our laws cannot be rightfully expected to think of every single esoteric possibility when undertaking their responsibilities.”
“[I]t is up to the courts to interpret those laws as best they can when confronted with unanticipated fact patterns,” Judge Mignault said.
Unexpected Ineligibility for Chapter 13
The debtor filed his chapter 13 plan alongside his chapter 13 petition. According to Judge Mignault, the debtor had “diligently progressed” until the Internal Revenue Service filed a proof of claim that put his total debt above the cap allowed in chapter 13.
Although the debtor “must have known” he was liable for federal taxes, Judge Mignault said “he was not aware of the amount of those taxes until the IRS processed his return.”
Two months after the IRS claim hit the docket, the debtor reported to Judge Mignault that his debt was now too large for chapter 13 and that he intended to convert the case to Subchapter V of chapter 11.
Eighteen days later, the debtor filed a conversion motion along with a motion to extend the Subchapter V deadlines. The U.S. Trustee lodged a limited objection, opposing conversion because the Subchapter V deadlines had passed.
Debtor Wasn’t ‘Justly Accountable’ for the Delay
Judge Mignault began analyzing the merits by mentioning the benefits of the Small Business Reorganization Act, which became effective in February 2020 and is codified primarily in Subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. The benefits include the absence of the absolute priority rule, no mandatory creditors’ committee, no mandatory disclosure statement, no U.S. Trustee fees and the possibility of confirming a plan even if all classes reject the plan.
In return for the benefits conferred by the SBRA, Judge Mignault said that Subchapter V includes “several tight deadlines,” including a status conference within 60 days of the order for relief and a plan that must be filed within 90 days of the order for relief.
Because conversion to chapter 11 does not reset the order for relief, the two deadlines had elapsed by the time the debtor filed his conversion motion.
The debtor’s potential salvation rested in Sections 1188(b) and 1189(b), where the court may extend the deadlines under “circumstances for which the debtor should not justly be held accountable.”
So far, Judge Mignault said that only a “handful of courts” have ruled on the propriety of proceeding under the SBRA when the deadlines have already passed. The courts come down both ways, the judge said.
Among others, Judge Mignault at length discussed In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020), one of the cases not permitting conversion after the deadlines passed. To read ABI’s report, click here.
On the other side of the fence, Judge Mignault parsed several decisions permitting a switch to Subchapter V, including In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020), a scholarly opinion by former professor and now Bankruptcy Judge Michelle M. Harner of Baltimore. To read ABI’s report on Trepetin, click here.
Choosing sides, Judge Mignault followed her brother and sister judges in the Fourth Circuit by permitting a switch to Subchapter V. The judge said she “cannot endorse such a restrictive view of the applicable law as is counseled by the court in Seven Stars.”
Judge Mignault said the debtor qualified for conversion under Section 1307(d) because he had not confirmed a chapter 13 plan. He had not been dilatory and was not aware of his disqualification for chapter 13 until the IRS filed its claim.
The debtor “promptly” filed the conversion motion and “should not justly be held accountable for the circumstances necessitating an extension of the deadlines,” Judge Mignault said.
Judge Mignault granted the conversion motion and reset the deadlines.
Chief Bankruptcy Judge B. McKay Mignault of Charleston, W.Va., allowed a debtor to convert a chapter 13 case to Subchapter V of chapter 11 after the deadlines in the Subchapter V had passed.
In her April 16 opinion, Judge Mignault described Subchapter V as “a valuable tool for qualifying debtors and will facilitate reorganizations that were not possible before.” It “would have been helpful,” she said, if Congress had “provide[d] some guidance with respect to conversion from other bankruptcy chapters, but the drafters of our laws cannot be rightfully expected to think of every single esoteric possibility when undertaking their responsibilities.”
“[I]t is up to the courts to interpret those laws as best they can when confronted with unanticipated fact patterns,” Judge Mignault said.
Unexpected Ineligibility for Chapter 13
The debtor filed his chapter 13 plan alongside his chapter 13 petition. According to Judge Mignault, the debtor had “diligently progressed” until the Internal Revenue Service filed a proof of claim that put his total debt above the cap allowed in chapter 13.
Although the debtor “must have known” he was liable for federal taxes, Judge Mignault said “he was not aware of the amount of those taxes until the IRS processed his return.”
Two months after the IRS claim hit the docket, the debtor reported to Judge Mignault that his debt was now too large for chapter 13 and that he intended to convert the case to Subchapter V of chapter 11.
Eighteen days later, the debtor filed a conversion motion along with a motion to extend the Subchapter V deadlines. The U.S. Trustee lodged a limited objection, opposing conversion because the Subchapter V deadlines had passed.
Debtor Wasn’t ‘Justly Accountable’ for the Delay
Judge Mignault began analyzing the merits by mentioning the benefits of the Small Business Reorganization Act, which became effective in February 2020 and is codified primarily in Subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. The benefits include the absence of the absolute priority rule, no mandatory creditors’ committee, no mandatory disclosure statement, no U.S. Trustee fees and the possibility of confirming a plan even if all classes reject the plan.
In return for the benefits conferred by the SBRA, Judge Mignault said that Subchapter V includes “several tight deadlines,” including a status conference within 60 days of the order for relief and a plan that must be filed within 90 days of the order for relief.