The statutory standards for confirming a cramdown plan under Subchapter V of chapter 11 are imprecise, if not downright vague. The Bankruptcy Appellate Panel for the Ninth Circuit has written an opinion “to explain the unique role” played by the bankruptcy court “to set the commitment period in which the debtor must pay its projected disposable income or its value.”
The debtor was a bail bond company that had been foundering in chapter 11 before the advent of Subchapter V in March 2020. To gain a new lease on life and avert dismissal, the debtor amended the petition to elect treatment under Subchapter V.
The Sub V Plan
Continuing to operate and hoping to remain in business indefinitely, the debtor sold a parcel of real property that the debtor had foreclosed after a criminal defendant skipped bail. The sale generated net proceeds of some $433,000.
In the three years after confirmation, the debtor estimated its net disposable income would be about $287,000. If it were a five-year period, the estimated net disposable income would be almost $500,000, the debtor said.
Most of the debt was held by one creditor, who had been persistently imploring Bankruptcy Judge Erithe A. Smith to dismiss the case.
With guidance from the Subchapter V trustee, the debtor proposed a plan that would pay the principal creditor $433,000 on confirmation. In addition, the plan committed the debtor to pay all of its disposable income to the principal creditor, whatever it might turn out to be.
The plan did not promise to pay a specific amount of net disposable income. For the debtor to obtain a discharge, the plan did oblige the debtor to pay the principal creditor at least an additional $181,000 above the payment on confirmation.
Creditors did not approve the plan, so the debtor was obliged to invoke cramdown. Naturally, the principal creditor opposed confirmation. Using cramdown, Judge Smith confirmed the plan nonetheless.
In his April 27 opinion for the BAP, Bankruptcy Judge Scott H. Gan upheld confirmation.
Flexible Rules on the Commitment Period
The appeal from the confirmation order called on the BAP to determine whether the cramdown plan satisfied the so-called fair and equitable test under Section 1191(b). The subsection requires the court to confirm the plan “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”
Section 1191(c)(2) contains a unique definition of “fair and equitable” for the purposes of Subchapter V. Subsection (c)(2)(A) requires the plan to provide that:
all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, . . . will be applied to make payments under the plan.
The plan did not comply with subsection (c)(2)(A), Judge Gan said, because it only promised a “possible payment of an unknown amount from Debtor’s actual disposable income.”
The plan was not doomed, however, because Section 1191(c)(2) permits a debtor to satisfy either subsection (c)(2)(A) or (c)(2)(B). Subsection (c)(2)(B) permits confirmation if:
the value of the property to be distributed under the plan in the 3-year period, or such longer period not to exceed 5 years as the court may fix, . . . is not less than the projected disposable income of the debtor.
For Judge Gan, “the record is clear” that the plan satisfied subsection (c)(2)(B) “because the effective date payment [of $433,000] is greater than Debtor’s projected disposable income for the minimum three-year period required by § 1191(c)(2).”
Judge Gan said that Subchapter V “sets a baseline requirement that a debtor commit three years of projected disposable income, while it also affords the bankruptcy court discretion to require more as a condition of finding a plan fair and equitable.”
The ability of the court to set a longer commitment period “is unique to subchapter V,” Judge Gan said. The commitment periods are fixed in chapters 13 and 12, he said.
“By giving the bankruptcy court the sole authority to require a longer commitment period in appropriate cases, subchapter V ensures an efficient confirmation process for small business debtors,” Judge Gan said.
To satisfy the minimum requirement of subsection (c)(2)(B), Judge Gan said that the plan must provide for payments in three years after confirmation “having a present value of not less than [the debtor’s estimate of some $287,000].”
Judge Gan held that the bankruptcy court did not err in finding the plan to be fair and equitable and in satisfaction of Section 1191(c)(2)(B) because “the Plan provides for distribution of the [sale proceeds] on the effective date in the amount of [about $433,000].”
Although the plan satisfied cramdown confirmation requirements with the initial payment of $433,000, Judge Gan noted that the debtor will not receive a discharge unless the later payments of disposable income end up totaling at least $181,000.
If the debtors’ “projections are as fanciful” as the objecting creditor argued, Judge Gan said that the debtor “may not receive a discharge,” even though it complied with confirmation requirements.
The BAP upheld the bankruptcy court’s other findings on issues such as good faith and affirmed the bankruptcy court’s confirmation of the plan.
The statutory standards for confirming a cramdown plan under Subchapter V of chapter 11 are imprecise, if not downright vague. The Bankruptcy Appellate Panel for the Ninth Circuit has written an opinion “to explain the unique role” played by the bankruptcy court “to set the commitment period in which the debtor must pay its projected disposable income or its value.”
The debtor was a bail bond company that had been foundering in chapter 11 before the advent of Subchapter V in March 2020. To gain a new lease on life and avert dismissal, the debtor amended the petition to elect treatment under Subchapter V.