Wage claims and claims of “critical vendors” paid under authority from a “first day order” are nonetheless counted toward the Subchapter V debt cap, for reasons explained in a March 17 opinion by Chief Bankruptcy Judge Eduardo V. Rodriguez of the Southern District of Texas.

Five affiliated debtors filed petitions for reorganization under Subchapter V of chapter 11. They did not file schedules alongside the petitions.

Three days after filing, the debtors filed a motion for authority to pay prepetition wages. Judge Rodriguez granted the motion.

Three weeks after filing and after Judge Rodriguez granted the first-day motion, the debtors filed their schedules. Wages having been paid, the schedules did not show wages owing to employees. As it turned out, the wages totaled almost $500,000.

Believing the U.S. Trustee would challenge eligibility for Subchapter V, the debtors filed a motion asking Judge Rodriguez to rule that priority wage claims paid after filing are not counted toward the Subchapter V debt cap. The debtor also contended that the meaning of “unsecured debts” under Section 101(51D) does not include priority wage claims.

The U.S. Trustee objected and prevailed.

Judge Rodriguez was being called upon to extract the outcome from several statutes. In Section 101(51D)(A), a “small business debtor” is defined to mean:

a person engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than [$3,024757] . . . not less than 50 percent of which arose from the commercial or business activities of the debtor. [Note: The Sub V cap jumps to about $3.4 million on April 1.] 

Because the five debtors were affiliated, 101(51D)(B) meant that the cap for the entire group was about $3 million. Without the wage claims paid after filing, the group’s total debt was some $2.9 million. In other words, the debtor would be ineligible for Subchapter V if the wage claims were counted.

On the merits, Judge Rodriguez said that the language of the statute “makes clear that the relevant inquiry is whether the amount of certain debts held by a debtor, as of the date of the filing of the petition, exceed[s] the debt limit, not whether such debts were actually listed on the schedules or paid post-petition.” [Emphasis in original.]

“Accordingly,” Judge Rodriguez said, “the fact that the Priority Wage Claims were paid post-petition and that they were not listed in Debtors’ Original Schedules does not affect whether they are counted as part of the debt limit in § 101(51D).”

Next, Judge Rodriguez turned to deciding “whether ‘unsecured debts’ as used in § 101(51D) includes priority wage claims for purposes of subchapter V eligibility.”

Since priority wage claims are treated differently from secured and unsecured debts, the debtors contended that the wage claims should not be counted toward the cap. In response, Judge Rodriguez said that “the language of § 101(51D) includes ‘unsecured debts’ as part of the subchapter V debt limit.”

Since “§ 101(51D) does not differentiate between different types of unsecured debt,” Judge Rodriguez concluded “that ‘unsecured debts,’ as used in 101(51D), means all types of unsecured debt unless explicitly excluded, which includes priority wage claims that are not secured by collateral.” [Emphasis in original.] He went on to say,

The fact that different categories of unsecured claims are sometimes treated differently does not show that “unsecured debts,” as used in § 101(51D), only includes some categories of unsecured debts in the subchapter V debt limit while excluding others.

“Thus,” Judge Rodriguez said, “the plain language of §§ 1182(1) and 101(51D), as read in the context of the entire Bankruptcy Code, unambiguously requires priority unsecured wage claims to be included when calculating the subchapter V debt limit.” Given that the debtors’ total debt was $3.4 million, or more than the $3 million cap, he struck the small business designation and told the debtors to proceed under “regular” chapter 11.