Creditors that file motions to dismiss or convert pursuant to 11 U.S.C. § 1112 [1] to reduce delay by debtors must generally avoid continued hearings in subchapter V cases. [2] The § 1112 motion requires the debtor to show, in part, that “there is a reasonable likelihood that a plan will be confirmed ... within a reasonable period of time....” [3] On its face, the motion can be a time-saving tool, but its effectiveness to reduce delay is often negated if (1) the creditor waives the right to strict adherence to the statutory deadlines or consents to a continuance, (2) the court extends the time limits under the statute, or (3) the creditor fails to overcome any inclination for continued hearings on the motion in a subchapter V case.
Section 1112(b)(3) establishes deadlines for a motion to dismiss or convert a case. [4] The statute provides, “The court shall commence the hearing on a motion ... not later than 30 days after filing of the motion, and shall decide the motion not later than 15 days after commencement of such hearing, unless the movant expressly consents to a continuance for a specific period of time or compelling circumstances prevent the court from meeting the time limits.” [5]
The creditor seeking strict adherence to the deadlines in § 1112(b)(3) should avoid waiving the statutory right or consenting to a continuance. [6] For example, the creditor can waive the statutory timeline by failing to argue for it in the motion before the bankruptcy court. [7] The failure to brief the argument for the motion can result in such a waiver. [8] Further, the waiver can result from a failure to assert the right at a subchapter V hearing or by the creditor consenting to a continuance. [9] For example, the right can be waived at the initial hearing for the mandatory subchapter V status conference generally held within 60 days of commencement of the case, or at a continued status conference hearing. [10] Therefore, the creditor seeking adherence to the timeline in § 1112(b)(3) should continue to assert the right throughout the pendency of the motion in a subchapter V case. [11]
The creditor seeking strict adherence to the timeline in § 1112(b)(3) should respectfully object to a continued hearing on the § 1112 motion beyond the statutory timeline. [12] The court may be unable to accommodate the request [13] and can invoke the statutory exception that “compelling circumstances prevent the court from meeting the time limits established by [§ 1112(b)(3)].” [14] Such result becomes more likely where a contested evidentiary hearing on the motion will exceed the resources of the court to issue a written decision within 15 days after the conclusion of the hearing. [15] Nevertheless, a bankruptcy court may accommodate a request for adherence to the timeline under § 1112(b)(3) for various reasons, including a particular court’s philosophy for ardent conformity to the congressional statute. At the very least, the creditor preserves its objection for appeal on whether the court abused its discretion by not following the statutory deadlines for § 1112. [16]
The creditor seeking strict adherence to the deadlines in § 1112(b)(3) should attempt to overcome any inclination for a continued hearing on the motion in a subchapter V case. Section “1112(b)(3) is not self-executing and does not provide for a specific consequence for either party should a motion to dismiss or convert not be heard within 30 days or decided within 15 days thereafter.” [17] Consider as a comparison a motion for relief from the automatic stay under § 362(d) and the automatic termination language in § 362(e). [18] In particular, subdivision (e) expressly states that a final decision must be rendered in certain individual debtor cases within 60 days from the request for relief, or the automatic stay “shall terminate.” [19] While the § 362(e) deadlines can be extended by the parties by consent or by the court “for good cause,” [20] it is noteworthy that the termination from automatic stay for § 362(e) is self-executing. [21] As a result, the debtor and the court for § 362(e) have heightened statutory consequences for failing to hold the hearing on the motion within the statutory timeline. [22]
In contrast to § 362(e), under § 1112 neither a debtor nor the court have similar statutory consequences if the motion is heard and decided after the statutory deadlines. [23] In other words, the § 1112 motion is not automatically granted should the court fail to hold a hearing on the motion within the 30 days or decide the motion within 15 days thereafter. [24] As a result, there may be a greater inclination for continued hearings on § 1112 motions when compared to § 362 motions. [25] The tendency to continue § 1112 motions is likely further bolstered in subchapter V cases for various reasons, including, as one example, the lack of statutory deadlines for a confirmation hearing or to confirm a plan. [26] Therefore, creditors seeking strict adherence to the deadlines in § 1112(b)(3) generally face the likelihood of continued hearings in subchapter V cases.
In summary, motions to dismiss or convert can likely reduce delay by debtors in subchapter V cases. Throughout the pendency of the motion, the creditor should respectfully request strict adherence to the statutory deadlines under § 1112(b)(3) to reduce the likelihood that the court will find that the right was waived or there was consent to a continuance, as there is likely a propensity for continued hearings in subchapter V cases.
[1] 11 U.S.C. § 1112. The statutory section is not included in the list of inapplicable sections for a subchapter V case. 11 U.S.C. § 1181.
[2] See Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079, 11 U.S.C. §§ 1181-1195; Legal Serv. Bureau Inc. v. Orange Cty. Bail Bonds Inc. (In re Orange Cty. Bail Bonds Inc.), 638 B.R. 137, 143-44 (B.A.P. 9th Cir. 2022) (continuing hearings in a subchapter V case while the § 1112 motion was pending).
[3] 11 U.S.C. § 1112(b)(2)(A).
[4] 11 U.S.C. § 1112(b)(3).
[5] Id.
[6] See id.
[7] See, e.g., Orange Cnty. Bail Bonds, 638 B.R. at 148 (holding creditor waived issue by not arguing it in bankruptcy court).
[8] See Mano-Y&M Ltd. v. Field (In re Mortg. Store Inc.), 773 F.3d 990, 998 (9th Cir. 2014) (holding litigant waived issue by failing to make argument in its memoranda to bankruptcy court).
[9] See Orange Cty. Bail Bonds, 638 B.R. at 149 n.8 (finding creditor consented to continuances during subchapter V hearings by failing to object and/or arguing for continuance). Parties may agree to continue hearing in a motion to dismiss in a subchapter V case to gain clarity on the debtor’s reorganization efforts. See, e.g., id. at 143-44. For example, in In re Orange County Bail Bonds Inc., 638 B.R. 137 (B.A.P. 9th Cir. 2022), the debtor, creditor and subchapter V trustee agreed that the debtor’s ability to organize was largely dependent on (1) a state referendum popular vote roughly nine months after the debtor elected to proceed as a small business debtor under subchapter V, and (2) the debtor’s foreclosure of real estate owned by a third party in satisfaction of a judgment.
[10] See Orange Cty. Bail Bonds, 638 B.R. at 149 n.8. The subchapter V status conference is held not later than 60 days after commencement of the case, unless the court determines that “the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” 11 U.S.C. § 1188.
[11] See id.
[12] See, e.g., Green v. Howard Family Tr. (In re Green), No. BR 14-15981-ABL, 2016 WL 6699311, at *9 (B.A.P. 9th Cir. Nov. 9, 2016) (finding movant expressly consented to evidentiary hearing set four months out).
[13] See id.
[14] 11 U.S.C. § 1112(b)(3).
[15] C.f. Green, 2016 WL 6699311, at *4–5 (receiving testimony at evidentiary hearing, taking under submission, and issuing a written decision that could include findings of fact, conclusions of law, and order).
[16] See id.; Orange Cnty. Bail Bonds Inc., 638 B.R. at 148-49.
[17] Green, 2016 WL 6699311, at *9.
[18] 11 U.S.C. § 363.
[19] 11 U.S.C. § 363(e).
[20] Id.
[21] See id.
[22] See In re Pinnacle Lab’ys Inc., No. 11-08-10239 SA, 2008 WL 5157981, at *4 n.1 (Bankr. D.N.M. June 19, 2008) (“This decision is being issued after the fifteen-day deadline required by section 1112(b)(3).... The delay occurred due to an administrative mistake by the Court (not its staff). The Court does not read section 1112(b)(3) to impose a specific consequence on either party for this failure. Compare subsections 362(e)(1) and (2) (stay is modified if certain hearings are not conducted or decisions rendered within certain periods of time). The Court apologizes to the parties for missing this deadline.”).
[23] See id.
[24] See id.
[25] See id.
[26] For subchapter V, “Only the debtor may file a plan.” 11 U.S.C. § 1189(a). Further, “[t]he debtor shall file a plan not later than 90 days after the order for relief under this chapter, except that the court may extend the period if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” Id. For chapter 12 of the Bankruptcy Code, only a debtor can file a plan, and the deadline to file the plan is not later than 90 days after the order for relief. 11 U.S.C. § 1221. For confirmation of a chapter 12 plan, 11 U.S.C. § 1224 provides, “Except for cause, the hearing shall be concluded not later than 45 days after the filing of the plan.”