Picking up where I left off last month, I’ll continue my experiment of providing short summaries of each month’s notable Subchapter V opinions. Again, these are not going to be all-encompassing summaries. Rather, we’ll provide a roadmap of the issues and then you can click the cases if you want to dig deeper. Here are the June 2023 Subchapter V opinions:
Hillman is yet another Sub V eligibility case. The debtor owned a 50% interest in two entities on the petition date and was in litigation in state court with her largest business creditor. That creditor raised the eligibility issue, arguing that the debtor was not “engaged in commercial or business activities” on the petition date because one entity was closed, her sole source of income was Social Security and an annuity payment, and the other entity was a hobby at best.
The court held that the debtor had satisfied her burden of establishing Sub V eligibility. First, it adopted what it described as the majority view that “engaged in” requires activity as of the petition date based on a totality of the circumstances, with “commercial or business activities” being read broadly in a debtor’s favor. And winding up counts even if the entity has ceased its traditional business operations. Thus, the pending litigation with the business creditor regarding the debtor and one of her entities was enough.
Second, the court addressed the difficult “Nexus Requirement” issue that we saw in some of the May 2023 opinions and it adopted the “seminal” In re Ikalowych case where the Colorado bankruptcy court determined that, under § 1182(1)(A), more than 50% of the debtor’s debts must arise from the specific activity that the debtor relies on for eligibility.
Because the debt in the state court litigation was more than 50% of her debts, the debtor also satisfied the Nexus Requirement.
I almost didn’t cover this opinion because it’s merely a procedural development in an April 2023 opinion where the Florida court held that a § 523(a)(6) dischargeability action was not available against a non-individual debtor because § 523 applies to individuals, only. I believe Bill Rochelle covered that opinion in his daily email series but click here to read it.
In the June opinion, the bankruptcy court certified the § 523 issue for direct appeal because while there was already binding Eleventh Circuit authority that § 523 is not applicable to corporate debtors, the Eleventh Circuit issued that opinion before Subchapter V existed, such that there was not, under Rule 8006, at least one question of law controlled by the Eleventh Circuit or Supreme Court.
Note: The Fourth Circuit appears to be the only court that has taken the opposite view. Click here for an inventory of the cases on the § 523 issue in Subchapter V.
Macedon Consulting is a work flow solutions IT provider whose landlords moved for dismissal on Sub V eligibility grounds and on the allegation that Macedon filed in bad faith. I’ll focus just on the former, pure Sub V issue.
While the debtor scheduled its lease obligations based on its calculation of the capped rejection damages under § 502(b)(6), the combined uncapped lease obligations were over $14 million and exceeded the $7.5 million Sub V debt limit. Hence the eligibility dispute.
Were the liabilities merely contingent so as to avoid Subchapter V’s emphasis on noncontingent liabilities for the debt limit? Alternatively, what counted for the debt limit: the uncapped or the capped calculation of the lease liability?
On the first issue, the court determined that the lease liabilities were noncontingent because all events necessary to give rise to those liabilities occurred pre-petition and they didn’t depend on “some future extrinsic event.”
On the second issue, and using a similar rationale, the court determined that the full lease liability applied rather than the capped rejection liability because the capped rejection liability depended on a future, post-petition event (i.e., the debtor deciding to reject the leases and the court approving that rejection decision).
Thus, the court revoked the debtor’s Sub V designation (but didn’t dismiss the case).
Curiel is a lengthy Sub V plan confirmation opinion that justifies a separate post. However, I doubt I’ll come back to it separately because much of it is a mind-numbingly detailed and extremely case-specific review of the trial record on plan feasibility. That said, if you’re a lawyer with young associates or a judge with law clerks, then Curiel could be required reading on how a competent and fully engaged court evaluates feasibility evidence. It’s dense!
Here are the high points:
- Feasibility findings get abuse of discretion review (but factual inferences about financial condition and future prospects get a little more deference with clearly erroneous review).
- Modifying a secured debt (that is unrelated to a debtor’s residence) under §§ 1123(a)(5)(E) and (b)(5) (e.g., extending the repayment term) is permitted and is not the same as the more limited ability to cure a default under §§ 1123(a)(5)(G) and 1124(2)(A) (e.g., reinstating a debt).
- For consensual Sub V plans, a debtor need only prove, under § 1129(a)(11), that the plan has a reasonable probability (but more than a mere possibility) of success.
- However, in non-consensual Sub V cramdown plans under § 1191(b), the plan must be “fair and equitable” as to each class. And because § 1191(c)(3) requires that the debtor prove that (i) it will be able to make the plan payments or (ii) there’s a reasonable likelihood it can make them and the plan contains appropriate remedies, a court must make a more rigorous examination of feasibility under § 1191(c)(3) than it must make if only § 1129(a)(11) applies on the feasibility issue.
- Interesting nuance that I’ve never thought of: While a debtor who owns property may opine as a lay witness to the property’s current value, it cannot opine as to future values without first establishing its expertise for such opinions.
Ultimately, the court reversed on the basis that the bankruptcy court’s feasibility findings were clearly erroneous because the budget, balloon payment, and value evidence was unrealistic, unsupported, and/or inadmissible.
Another eligibility opinion. The issue: Was the debtor a single asset real estate (SARE) debtor and, thus, ineligible for Sub V because its two real properties comprised a single property or single project? The court said “No” and permitted Sub V status.
First, the court adopted what it called the majority view that the debtor has the burden of establishing its Sub V eligibility.
Second, the court determined that Evergreen was not a SARE debtor and, thus, could proceed as a Sub V debtor. It starts by explaining that two or more properties are a “single project” and, thus, constitute SARE property when they’re “linked together in some fashion in a common plan or scheme involving their use.” The mere fact of common ownership or even a common border will not suffice. Rather, the common plan or scheme must govern the use.
For example, apartments, office buildings, shopping centers, and large resorts are usually SARE properties while two adjacent properties, with one rented and the other vacant, are not necessarily a SARE property. The determination is a factual one, with an emphasis on:
- whether the properties are presently used in a common scheme/plan
- the use of the properties
- the circumstances surrounding their acquisition (including timing and funding)
- the location and proximity of the properties
- any plans for future development, sale, or abandonment
In this case, the debtor owned two adjoining parcels, the 80 Acre Parcel and the 60 Acre Parcel. The 80 Acre Parcel consists of a small mobile home park, a residential single-family home, a mobile home used as an office, and a zipline course. The 60 Acre Parcel is, other than a dormant paintball course used by a prior tenant, vacant land.
Ultimately, the court determined that the two parcels were not part of a common scheme because the 80 Acre Parcel was used for various unrelated purposes while the 60 Acre Parcel was altogether vacant and unrelated, with it being irrelevant what the debtor might let any of the 80 Acre tenants do on the 60 Acre Parcel in the future.
Thus, the debtor was not a SARE debtor and was otherwise eligible for Subchapter V.