Liquidating Substantially All Assets in a Subchapter V Chapter 11: A Recent Case Study

Since going effective on Feb. 19, 2020, much has been written regarding the restructuring benefits of a chapter 11, subchapter V case. Prior to its implementation, many small businesses were, from a practical standpoint, unable to benefit from chapter 11 due to the expense of filing and prosecuting a traditional chapter 11 case. The introduction of subchapter V has shifted that, thus giving smaller businesses a streamlined process to recognize the benefits of a chapter 11 restructuring. Indeed, the stated purpose of subchapter V is to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.

While more and more debtors are utilizing the restructuring benefits of subchapter V, we are sporadically beginning to see the subchapter V process being used to liquidate substantially all of a debtor’s assets. An example of such is the subchapter V case of In re MyCell Technologies LLC. [1]

At the time of filing, MyCell Technologies LLC’s liabilities included approximately $1 million of secured note debt and several hundred thousand dollars of general unsecured debt. After a fulsome marketing process, substantially all of MyCell’s assets sold to an entity created by secured noteholders holding a majority of the outstanding note debt. The purchase price consisted of a credit bid and a cash portion specifically earmarked to cover administrative expense claims. When the bankruptcy court approved the sale, the purchaser received the assets free and clear pursuant to Bankruptcy Code § 363(f), despite the fact that the other noteholders did not affirmatively consent to the sale nor did the sale generate sufficient funds to pay anything to such creditors. Additionally, the purchaser received a Bankruptcy Code § 363(m) finding.

Following the approval of the sale, MyCell sought to confirm a zero-distribution plan of liquidation. Since all of MyCell’s creditors were to receive no distribution under the plan, all classes of creditors were deemed to reject the plan, and in that regard, MyCell sought plan approval on a cramdown basis. With respect to the secured noteholders, MyCell sought cramdown pursuant to Bankruptcy Code § 1191(b). That section permits a cramdown if the plan is, among other things, “fair and equitable.” Whether a plan is fair and equitable is governed by Bankruptcy Code § 1129(b)(2). Ultimately, the bankruptcy court found the plan to be “fair and equitable” and approved a cramdown plan of liquidation, with no distributions to be made to the secured creditors.

With regard to its general unsecured creditors, MyCell satisfied the cramdown standard of Bankruptcy Code § 1191(c). In order to confirm a cramdown on general unsecured creditors in a subchapter V case, a debtor has to demonstrate that all of its “disposable income” for the three to five years post-confirmation would be used to fund a plan. Because MyCell would have no disposable income at all post confirmation, MyCell was permitted to cram down on the general unsecured class.

Generally, in a cramdown plan under subchapter V, the debtor does not receive a discharge until such time as it finishes its plan payments. Conversely, in a consensual plan under Bankruptcy Code § 1191(a), a debtor receives its discharge at confirmation. Because there was no disposable income at all to be distributed, MyCell requested, and the bankruptcy court granted, a discharge at confirmation pursuant to the terms of the confirmation order.

While the MyCell case had a unique set of facts and circumstances that warranted the relief it was granted, it will be interesting to see whether other bankruptcy courts will follow suit and confirm a plan calling for the complete liquidation of a debtor’s assets in a subchapter V.