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Bankruptcy Courts Interpreting New Subchapter V Issues Appear “Debtor Friendly”

Pursuant to the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020, the United States Bankruptcy Code was amended to include new Subchapter V to Chapter 11. Through newly added Bankruptcy Code sections 1181-1195, “small business debtors” should be able to reorganize their financial affairs in a more efficient and cost-effective manner while also maintaining control over their businesses and, ultimately, ownership interests. 

Since SBRA’s effective date, U.S. bankruptcy courts have determined a number of novel issues by interpreting what are, essentially, brand new statutes. To date, at least 13 bankruptcy courts have ruled on SBRA related issues, including the following:

  • Whether a debtor, whose bankruptcy case was pending as of SBRA’s effective date, may elect to retroactively proceed under Subchapter V and what standard should courts apply in making this determination?

  • Whether a debtor is eligible to proceed under Subchapter V?

  • Whether the automatic stay should be extended beyond the 30-day period that applies when a debtor files a case, electing to proceed under Subchapter V, subsequent to dismissal of a prior case?

  • Whether a Subchapter V trustee should be permitted to retain counsel as a matter of course before the need for legal representation has arisen?

  • Whether a Subchapter V debtor should be permitted to modify the vested rights of a mortgagee?

Overall, bankruptcy courts appear to be taking a “debtor friendly” approach to these issues, which is in line with Congress’s intentions underlying SBRA and is generally reflected in the holdings listed below. Only two of the below SBRA related decisions denied the respective debtor’s requested relief. The cases are listed in chronological order.

  • In re Progressive Solutions, Inc., No. 8:18-bk-14277-SC, 2020 WL 975464, at *5 (Bankr. C.D. Cal. February 21, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 15 months).

  • In re Glass Contractors, Inc., No. 20-40185 (Bankr. E.D. Tex. February 25, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 1 month).

  • In re Moore Props. of Person Cty., LLC, No. 20-80081, 2020 WL 995544, at *7 (Bankr. M.D.N.C. February 28, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V when it was not a small business debtor as defined by the Bankruptcy Code when the case was originally filed and the case had been pending just over 1 week).

  • In re Double H Transp. LLC, No. 19-31830-HCM, 2020 WL 2549850 (Bankr. W.D. Tex. March 5, 2020) (Chapter 11 debtor could notretroactively proceed under Subchapter V when the case had been pending more than 3 months).

  • In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. March 24, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V when the case had been pending 48 days).

  • In re Bello, 613 B.R. 894 (Bankr. E.D. Mich. March 27, 2020) (Chapter 13 debtor in converted case could retroactively proceed under Subchapter V when the converted case had been pending approximately 2 months).

  • In re Ventura, No. 8-18-77193-REG, 2020 WL 1867898 (Bankr. E.D.N.Y. April 10, 2020) (Chapter 11 debtor could: (i) retroactively proceed under Subchapter V even though creditor’s plan of reorganization was scheduled for hearing on confirmation and case had been pending approximately 15 months; and (ii) modify mortgage encumbering the property where she both resides and operates a bed and breakfast).

  • In re Wright, No. 20-01035-HB, 2020 WL 2193240, at *3 (Bankr. D.S.C. April 27, 2020) (debtor who was not currently engaged in business operations qualified as “small business debtor” where 56% of its debt amounted to residual business debt).

  • In re Bonert, No. 2:19-bk-20836-ER, 2020 WL 3635869, at *5 (Bankr. C.D. Cal. June 3, 2020) (Chapter 11 debtor could retroactively proceed under Subchapter V when case had been pending approximately 5 months).

  • In re Penland Heating and Air Conditioning, Inc., No. 20-01795-5-DMW, 2020 WL 3124585, at *_ (Bankr. E.D.N.C. June 11, 2020) (denying Subchapter V trustee’s application to retain counsel, which was filed as a matter of course, because the need for legal representation had not arisen).

  • In re Crilly, No. 20-11637-SAH, 2020 WL 3549848 (Bank. W.D. Okla. June 30, 2020) (automatic stay could not be extended for Subchapter V debtor that: (i) experienced no change in financial circumstances following dismissal of traditional Chapter 11 case; and (ii) failed to demonstrate that it could propose a confirmable Subchapter V plan).

  • In re Trepetin, No. 20-11718-MMH, 2020 WL 383315 (Bankr. D. Md. July 7, 2020) (Chapter 7 debtor could retroactively proceed under Subchapter V when case had been pending just over 1 week). 

  • In re Blanchard, No. 19-12440, 2020 WL 4032411 (Bankr. E.D. La. July 16, 2020) (Chapter 11 debtor could retroactively proceed under Subchapter V after trustee filed motion to dismiss or convert case that had been pending approximately 1 month and debtor did not need to be currently engaged in business operations to constitute a “small business debtor”).

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About this Author

Liz Boydston Bankruptcy Lawyer Polsinelli Law Firm
Shareholder

Liz Boydston focuses her practice on complex Chapter 11 bankruptcy cases, adversary proceedings, fraudulent transfers, preference litigation, 363 sales, receiverships, and workouts throughout the United States. Liz represents for-profit and non-profit hospitals, municipalities, senior housing centers, health care providers, public oil and gas development companies, refining and fuel-marketing corporations, offshore drilling and exploration companies, financial institutions, independent contractors, and large multinational and multi-subsidiary corporations in complex restructuring and...

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Trinitee G. Green Bankruptcy and Restructuring Attorney Polsinelli Chicago, IL
Associate

Trinitee Green focuses her practice on complex bankruptcy matters.  Her restructuring experience includes representation of debtors, creditors, committees, post-confirmation trustees and bankruptcy trustees in bankruptcy cases and adversary proceedings throughout the United States.  Further, she has experience representing lenders and special servicers in the enforcement and foreclosure of commercial mortgage loans. As a member of Polsinelli’s bankruptcy and restructuring team, she works closely with Polsinelli attorneys to protect and advance clients’ interests.

Trinitee has significant experience prosecuting and defending avoidance actions, as well as pursuing D&O claims.  Through this experience, Trinitee has developed strong negotiating skills, which she leverages during settlement discussions and mediations to obtain the best result for each client.  Not only does Trinitee regularly bring parties to agreement even when a successful resolution appears unlikely, she is often able to negotiate results that exceed clients' expectations.

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