Sales Under Subchapter V of Chapter 11: Case Law Review

In January 2021, we published an article exploring the legislative history and broad provisions of subchapter V of chapter 11 as they relate to asset sales.[1] In that article, we acknowledged that liquidation and going-concern sales are possible under subchapter V, but predicted that the majority of § 363 sales under subchapter V would be of discrete assets because subchapter V was designed to encourage traditional reorganization. The case law since then has been mostly consistent with that prediction. But we also predicted that sales in subchapter V would more likely be used to “downsize” rather than liquidate. This latter prediction has proven to be less accurate. The rest of this article will review the cases that have discussed or approved sales of substantially all assets under subchapter V.

Subchapter V May Include Liquidation Sales

While most courts have taken for granted that asset sales may occur in subchapter V, one court analyzed the statutory authority for asset sales. In In re Port Arthur Steam Energy L.P.,[2] the bankruptcy court noted that “Section 1181 of the Bankruptcy Code lists sections of the Code that do not apply in Subchapter V cases” and does not exclude § 1123(b)(4), “which provides that a chapter 11 plan may provide for the sale of all or substantially all of the property of the estate and the distribution of proceeds to creditors and equity interest holders.”[3] Admittedly, this discussion is possibly dicta because the issue in Port Arthur was whether liquidating assets qualifies as business activity for the purpose of determining eligibility to be a debtor under subchapter V. The parties were not actually disputing whether a subchapter V debtor may conduct a sale under § 363, but regardless of whether its discussion of asset sales is dicta, In re Port Arthur provides the only extensive analysis by any court so far. 

Approved Asset Sales

Courts in at least four subchapter V cases so far have approved sales of substantially all assets. None of these four were going-concern sales. ABI recently reported that at least 465 cases were filed under subchapter V of chapter 11 between Feb. 19, 2020, and Dec. 31, 2020.[4] This means that these four cases represent less than 1 percent of all subchapter V cases.

In In re Blank Acquisition, LLC,[5] the debtor, a die-cut manufacturer, sold its equipment, rejected its real estate leases, then entered into subleases with another die-cut manufacturer to utilize the other company’s excess space and manufacturing capacity. Because equipment is easily appraised, the debtor was able to file a motion for approval of a purchase agreement and obtain an order approving the sale.

In In re Jacobson Hotels Inc.,[6] the debtor in possession was removed, and the subchapter V trustee sold the hotel as a real estate transaction. Because a subchapter V debtor has the exclusive right to propose a plan, the trustee moved for a structured dismissal with the distribution of sale proceeds governed by the dismissal order.

In In re Secur O&G LLC,[7] the debtor had ceased operations pre-petition. The bankruptcy court approved a sale of the debtor’s plant and equipment for $115,000 plus the buyer’s commitment to clean up environmental contamination at an expense of more than $1 million.

In In re MyCell Technologies LLC,[8] the debtor’s only significant asset was intellectual property. In an order entered on Oct. 8, 2021, as docket number 67, the court approved the sale of that intellectual property.

Conclusion

While it is still too early to know for certain, it still seems that a liquidation sale in subchapter V is the exception rather than the rule. Blank Acquisition, LLC came up with a creative solution to allow the sale of all the physical assets while continuing to operate the business. In the other three cases, the debtors had ceased operating their businesses before they filed bankruptcy and had few assets of any value remaining. It remains to be seen whether any debtor will attempt a going-concern sale under subchapter V.

Author Bios

John R. McDonald is a partner in the Bankruptcy and Restructuring group at Taft Stettinius & Hollister LLP and has been a commercial insolvency attorney for more than 35 years. Among other publications, he is a co-author of the “Asset Sales” chapter of the Bankruptcy Practice in Minnesota Deskbook.

Karl J. Johnson is an associate in the Bankruptcy and Restructuring group at Taft Stettinius & Hollister LLP. He is the author of, among other things, the “Real Estate in Bankruptcy” chapter of the Minnesota Practice Series and a co-author of the “Asset Sales” chapter of the Bankruptcy Practice in Minnesota Deskbook. He was co-counsel representing the debtor in the very first subchapter V plan to be confirmed in any district. He is Board Certified in Business Bankruptcy Law by the American Board of Certification.