In today’s post, we’ll shift away from the big Delaware cases and focus on a critical “small business debtor” Chapter 11 provision. Over the past 6 years, our firm hasn’t filed many small business cases, mostly because many of our debtors were real estate debtors and, thus, definitionally excluded from the small business category. However, 80% of Chapter 11 cases fall into the small business category.
It’s fitting, then, that counsel for our United States Trustee here in the Middle District of Georgia recently reminded me about the strict small business requirements. Specifically, he shared another attorney’s unfortunate experience with the expedited deadlines that apply in small business Chapter 11s under § 1129(e). Thus, we’ll cover § 1129(e) in this post.
Definition of a “Small Business Debtor”
Prior to 2005, a debtor could elect to be treated as a “small business” and be subject to its accelerated confirmation deadlines. However, with the Bankruptcy Abuse and Prevention and Consumer Act of 2005 (lovingly or not so lovingly known as “BAPCPA”), Congress made “small business” status mandatory for certain debtors by adding the “small business debtor” definition. Specifically, § 101(51D) defines a “small business debtor” as a debtor and any debtor affiliates that have in aggregate no more than $2,490,525 (excluding debts owed to one or more affiliates or insiders) of non-contingent, liquidated secured and unsecured debt, and that are not in the business of owning or operating real property.
[Periodically, the Judicial Conference of the United States will update the debt limits, along with other dollar amounts listed in the Code, in the Federal Register. Want to stay up to date? Follow Cooley, LLP’s Bob Eisenbach on Twitter or at his In the Red blog.]
Bonus Reminder: The small business debtor definition excludes cases where a creditors committee has been appointed and that committee is “sufficiently active.”
The Plan Filing/Confirmation Deadlines for Small Business Debtors
Small business debtors are subject to a number of special administrative and confirmation requirements, including strict deadlines.
- Deadline #1: File the plan and disclosure statement (if any) no later than 300 days after the petition date. See § 1121(e)(2).
- Deadline #2: Obtain confirmation no later than 45 days after filing the plan. See § 1129(e).
Those deadlines, as well as the debtor’s 180 day exclusive period under § 1121(e)(1) for filing a plan, may only be extended under § 1121(e)(3) if 3 requirements are satisfied. First, the debtor must demonstrate by a “preponderance of the evidence” that it’s “more likely than not that the court will confirm a plan within a reasonable period of time.” Second, a “new deadline” must be “imposed at the time the extension is granted.” Three, the order extending time must be “signed before the existing deadline has expired.”
The Courts Wrestle with Small Business Confirmation Deadlines
It’s fairly well understood that if a small business debtor fails to file a plan within 300 days after the petition date without obtaining an extension of that deadline on or before the 300th day, then there is “cause” for dismissal. See § 1112(b)(4)(J) (listing as “cause” for dismissal the failure to file or confirm a plan by the fixed deadline). See also In re Riviera Drilling & Expl. Co., 502 B.R. 863, 871 (B.A.P. 10th Cir. 2013) (same).
But what about the 45 day confirmation deadline? Of course, “the plan” often goes through multiple revisions cycles as debtors negotiate their plans with different creditor constituencies. Negotiations take time. Announcing consensual changes often requires renoticing to other creditors. And additional notice often begets additional negotiations, and those negotiations take time, too. Whereas debtors that fall outside of the small business debtor definition can often obtain additional time as long as progress is being made, small business debtors often collide with the 45 day deadline.
The cases (almost all at the bankruptcy court level) are kind of all over the place on the 45 day confirmation deadline. I’ll split them into 4 issues:
- When does the 45 day period begin to run?
From the original plan filing date. An amended plan does not restart the 45 day clock. See In re Star Ambulance Service, LLC, 2015 WL 5025840 (Bankr. S.D. Tex. Aug. 24, 2015). That’s a distinct issue from the issue of whether an amended small business plan filed after the 300th day can relate back to an original, timely-filed plan. That issue is beyond the scope of this post, but “relation back” in the context of bankruptcy plans adopts the general concept of “relation back” under the Federal Rules. See, e.g., In re Florida Coastal Airlines, Inc., 361 B.R. 286, 290 (Bankr. S.D. Fla. 2007) (viewing the 300 day deadline as “akin to a statute of limitations” and an amended plan like an amended complaint under Bankruptcy Rule 7015).
- Can the court confirm a plan after the 45 day period runs?
No. Although courts might disagree about whether failure to confirm within 45 days is cause for mandatory dismissal (see below), it appears well-settled that the 45 day confirmation deadline is a hard deadline for confirming a particular plan. Therefore, we won’t dwell on this point. See, e.g., In re Star Ambulance Service, LLC, 2015 WL 5025840 (Bankr. S.D. Tex. Aug. 24, 2015)(45 day limit imposed by § 1129(e) is “a bar to confirmation of the plan” when the 300 day deadline to file a plan had also passed) (collecting cases on page 5).
- Is the failure to obtain confirmation cause for a dismissal?
Courts are split on this issue.
Some courts, including the court in Star Ambulance, cited above, hold that not only is the 45 day deadline a bar to confirmation, but it also provides cause for mandatory dismissal of the case under § 1112(b). See also, e.g., In re CCT Communications, Inc., 420 B.R. 160, 168 (Bankr. S.D.N.Y. 2009) (failure to confirm within 45 days is cause under § 1112(b)(4)(J) and the court must dismiss); In re Roots Rents, Inc., 420 B.R. 28 (Bankr. D. Idaho 2009) (same); In re Save Our Springs (S.O.S.) Alliance, Inc., 393 B.R. 452, 456 (Bankr. W.D. Tex. 2008) (same); In re Caring Heart Home Health Corp., Inc., 380 B.R. 908 (Bankr. S.D. Fla. 2008) (emphasizing that excusable neglect or inadvertence for granting extensions under Bankruptcy Rule 9006(b) doesn’t apply to the deadline under § 1129(e)).
Other courts hold that the 45 day deadline does not necessarily mandate a dismissal when it is not satisfied. Those courts focus primarily on how § 1129(e) is phrased: “the court shall confirm a plan. . . not later than 45 days after the plan if filed.” As one court stated, “[t]hat language does not appear to be a deadline for the debtor, but rather appears to be a mandate on the court.” In re Crossroads Ford, Inc., 453 B.R. 764 (Bankr. D. Neb. 2011). Furthermore, there is “no penalty imposed on the debtor if the deadline is not met, in contrast to the result under § 362(e)(1), terminating the automatic stay unless the court rules in 30 days or the movant consents to an extension or the court finds a compelling reason for extension of the deadline for ruling.” Id. at 768. See also In re Maxx Towing, Inc., No. 09-70719, 2011 WL 3267937, at *3-4 (Bankr. E.D. Mich. Jul. 27, 2011) (adopting Crossroads).
And recently in In re Simbaki, Ltd., 522 B.R. 917 (Bankr. S.D. Tex. 2014), the court held that the debtor’s failure to confirm a plan within 45 days does not constitute cause for several reasons. First, as stated above, the directive of § 1129(e) appears to be towards the court, not the debtor. The language of § 1129(e) does not indicate that dismissal or conversion is mandatory once the deadline has passed. Second, the court refused to interpret a debtor’s failure to confirm a plan within 45 days as required by § 1129(e) as failure to file and confirm a plan within the time fixed by this title or by order of the court as “cause” under § 1112(b)(4)(J), which it found would produce absurd results. The court gave an example of a debtor who filed a plan on the petition date but failed to confirm it within 45 days. This debtor could withdraw the plan and would have another 255 days to file a new plan. However, if the debtor’s failure to confirm is cause under § 1112(b)(4)(J), the court would be required to dismiss or convert upon request. The Simbaki court rejected this interpretation.
- Does the 45 day deadline apply to non-debtor plan proponents?
Arguably, the 300 day and 45 day deadlines do not apply to non-debtor plan proponents. See In re Riviera Drilling & Expl. Co., 502 B.R. 863, 873-874 (10th Cir. B.A.P. 2013); In re Angel Fire Water Co., LLC, No. 13-10868, 2015 WL 251570, at *6 (Bankr. D.N.M. Jan. 20, 2015); In re Simbaki, Ltd., 522 B.R. 917, 920-22 (Bankr. S.D. Tex. 2014); In re Florida Coastal Airlines, Inc., 361 B.R. 286, 292 (Bankr. S.D. Fla. 2007). But see In re Randi’s, Inc., 474 B.R. 783, 786 (Bankr. S.D. Ga. 2012).
At first, we found compelling the extensive justifications for applying the deadlines to debtors only. However, § 1121(e) seems pretty straightforward: In a “small business case,” the “plan and a disclosure statement (if any) shall be filed not later than 300 days after” the petition date and only the debtor can extend the deadline under § 1121(e)(3). To overcome that language in favor of the excluding non-debtors, one either has to (i) agree that it’s absurd not to let creditors also extend the deadlines or (ii) analyze pre- and post-2005 statutory language.
As the Caring Heart court put it, BAPCPA’s small business debtor provisions include a “number of traps for the unwary.”
A starting trap that we didn’t discuss is the impact of a debtor’s statement on its Chapter 11 petition that it is or is not a small business debtor. If it stated that it is a small business debtor, then it will likely be judicially estopped from stating otherwise. If it stated that it is not a small business debtor but it turns out that it is a small business debtor, then the small business debtor deadlines will likely apply to that debtor, even if those deadlines ran before the debtor realized or a court determined that it’s a small business debtor. Yikes!
The traps that we did discuss are equally dangerous. The 300 day deadline is a hard deadline, certainly for debtors. Same for the 45 day confirmation deadline. We aren’t big fans of Code deadlines that condition enlargements of time on the debtor obtaining an order from the court before the deadline expires. It places a debtor in that impossible situation of either short-circuiting its deadlines to play it safe or dictating action by a court that is not subject to a debtor’s dictates. Therefore, we tend to agree with those courts who view the 45 day deadline as a mandate on the court, not the debtor. Filing a timely motion to extend should be all that’s required of a diligent, good faith debtor.
However, that’s not the law–it’s certainly not a statement of the law that debtors can rely on.
The only close-to-surefire approach:
- File the small business plan well within the 300 day period;
- File with the plan a § 1121(e)(3) motion to extend the 300 day and 45 day periods;
- File a § 1125(f)(1) motion for a determination that a disclosure statement isn’t necessary;
- Or file a § 1125(f)(3) motion for conditional approval of the disclosure statement;
- Diligently pursue confirmation, maximize consent from creditors, and minimize objections/continuances.
In short, a debtor should, in light of the uncertainties and potentially fatal results, maximize its use of its filing period and minimize the notice and steps necessary for confirmation. Similar to the “vote early and vote often” adage, small business debtors should file plans early and, if necessary, file them often until there’s a confirmation order.
On a related note, the ABI Commission Report addressed some of the problems with the small business debtor provisions and deadlines in its recommendations regarding “Small and Medium-Sized Debtor Enterprises.” We covered those recommendations here.