Earlier this year, I wrote about various bankruptcy courts that have allowed debtors to redesignate or convert previously filed “traditional” Chapter 11 and 7 cases to Subchapter V /Small Business Reorganization Act (“SBRA”) cases. Again, the SBRA came into effect this year and added Subchapter V to the Bankruptcy Code’s existing Chapter 11.

The SBRA was passed with the goals of expediting the restructuring process and allowing an easier path out of bankruptcy to qualifying debtors. Cases designated as Subchapter V have no mandatory creditors’ committee or disclosure statement, there is no absolute priority rule, and plans can sometimes be confirmed without a vote of creditors. To proceed under Subchapter V, the debtor must meet certain debt limitations[1] and must make an election at the time of the bankruptcy filing designating the case as one under Sub V.

Quickly, the question arose, “Can an otherwise qualified Subchapter V debtor take advantage of Subchapter V by redesignating a case retroactively?” Thus far, the answer had largely been “Yes.” However, in a recent case, Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, disagreed with three decisions by judges in other states[2] and refused to allow a Chapter 11 debtor to redesignate its case under Subchapter V.

No Conversion/Redesignation Allowed After The Deadlines Imposed By Subchapter V Have Already Passed

As part of the expedited process envisioned by the SBRA, Subchapter V has short deadlines. Specifically, there must be a status conference within 60 days of the order for relief and a plan must be filed within 90 days of the order for relief. Although, extensions of these deadlines are allowed under circumstances “for which the debtor should not justly be held accountable.”[3]

In re Seven Stars on the Hudson Corp., 19-17544 (Bankr. S.D. Fla. Aug. 7, 2020), Judge Grossman split with other circuits by refusing to allow the debtor to redesignate its Chapter 11 case under Subchapter V because the tight deadlines laid out in Sub. V had already passed.

The debtor in In re Seven Stars on the Hudson Corp., filed a Chapter 11 petition in June 2019 and designated itself as a small business debtor under the statute as in effective as of the petition date. On June 19, 2020 (four months after the SBRA became effective and without having been able to consummate a plan in during the prior year), the debtor amended its petition to redesignate its case under Subchapter V.

Although redesignation under Subchapter V does not require court approval, Judge Grossman entered an order requiring the debtor to show cause as to why the case should not be dismissed because the deadlines under the SBRA had already passed. Notably, while the Subchapter V trustee opposed dismissal, Judge Grossman dismissed the case in based on the “plain text” of the statute.

Specifically, Judge Grossman disagreed with cases allowing debtors to pursue subchapter V reorganization even though the deadlines had already passed based on the plain language in Sections 1188(b) and 1189(b) calling for the 60 day status conference and 90 day plan filing. He noted the debtor had “immediately put itself in default” of the deadlines by making the election for SBRA treatment after the deadlines had passed and which deadlines had not been extended under circumstances “for which the debtor should not justly be held accountable.”

Judge Grossman found the “justly accountable” standard to be higher than the “for cause” standard in Rule 9006(b). He also looked to similar deadlines in Chapter 12 noting Chapter 12 imposes a “stringent burden” with regarding to deadlines:

“[T]he 90-day limitation was probably included in chapter 12 for the benefit of creditors rather than for the benefit of the debtor. Because chapter 12 lacks the safeguards for creditors that are provided in chapter 11, the 90–day limitation . . . is [one of] the primary protection[s] for creditors against a debtor’s languishing in chapter 12 without confirming a plan. Thus, it is appropriate that the debtor should be required to meet a stringent burden if the debtor seeks an extension of the 90-day period.”[4]

Accordingly, Judge Grossman held that that a debtor who elects treatment under Subchapter V once the deadlines imposed by the same have lapsed should justly be held accountable for those circumstances, because the debtor had created those circumstances by making the decision to elect into Subchapter V after expiration of the deadlines. “No circumstances beyond the debtor’s control caused the debtor to make that decision.” Further, he found a debtor cannot attempt to reorganize in a traditional Chapter 11 case and then give it “another try under Subchapter V after expiration of the statutory deadlines.”

Judge Grossman then dismissed the debtor’s Chapter 11 case based on the debtor’s missing the Subchapter V deadlines via its filing the redesignation after the SBRA’s deadlines had already passed.

Bankruptcy can be complicated. If you need help navigating your rights in the bankruptcy process as a potential debtor-in-possession or as a secured or unsecured creditor, contact the experienced bankruptcy attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

[1] The debt limitation of a qualifying “small business debtor” was increased from $2,725,625.00 to $7,500,000.00 as part of the Coronavirus Aid, Relief, and Economic Security Act for a one-year period, although “not less than 50 percent of [the debt must have arisen] from the commercial or business activities of the debtor.” See Section 101(51D).

[2] See In re Trepetin, 20-11718, 2020 WL 3833015 (Bankr. D. Md. July 7, 2020); In re Ventura, 18-77193, 2020 BL 134496, 2020 WL 1867898 (Bankr. E.D.N.Y. April 10, 2020); and In re Twin Pines LLC, 19-10295, 2020 Bankr. Lexis 1217 (Bankr. D.N.M. April 30, 2020).

[3] Section 1189(b).

[4] In re Seven Stars on the Hudson Corp., 19-17544 (Bankr. S.D. Fla. Aug. 7, 2020), quoting, 8 COLLIER ON BANKRUPTCY ¶ 1221.01[2] (16th ed. 2020).