With no introduction or fanfare, here, in a single post, are short summaries of October 2023’s and November 2023’s notable Subchapter V opinions from across the country.
As in the prior Sub V case posts, I’ll provide a roadmap of the issues and then you can click the opinions if you want to dig deeper.
Happy New Year!
October 2023 Subchapter V Opinions
In Franco’s, Judge Jones held that when no votes are cast in a particular plan class, that class doesn’t count for § 1129(a)(8) purposes, such that the plan can still be a consensual plan under § 1191(a). While Franco’s reaches the same result as the result in the Tenth Circuit’s Ruti-Sweetwater opinion, it reached it by ignoring the class instead of deeming the lack of votes as a consent to the plan. In doing so, the court appears to have fun explaining the mathematical absurdity (i.e., zero divided by zero) of applying § 1126 to a no-vote situation.
I considered not covering this case but attorney misconduct cases are too interesting and scary to ignore. In Reznick, the BAP upheld the bankruptcy court’s determination that debtor’s (purported) counsel, Mr. Reznick, knowingly filed a fraudulent Sub V case and should be referred to a disciplinary panel.
In the face of an ownership/control dispute that got at the heart of authority for the filing, and despite characterizing the information he received to confirm authority as “bullsh*t” and “not pass[ing] the smell test,” he filed the case anyway. He even expressed fear that he might lose his law license, but still filed it. He’s now suspended for three years.
The lesson: Your “good faith” basis for believing that your client representative has authority to file a Chapter 11 petition better at least satisfy Rule 9011.
If you ask my junior colleagues, they’ll likely tell you that they’re sick and tired of sitting in new client meetings and hearing me tell potential Sub V debtor clients over and over that the minimum they’ll have to pay unsecured creditors in a Sub V case is the greater of (i) the net liquidation value of the estate in a hypothetical Chapter 7 liquidation and (ii) their projected disposable income over 3 to 5 years. Indeed, it’s a difficult concept to explain and is easily misunderstood. And while the liquidation analysis tends to be a perfunctory and not very determinative part of the plan confirmation process, it was central in Boteilho.
Thus, if you want to read a Collier-worthy explanation of the requirements, limitations, and practical considerations that guide the “best interests of creditors test” and learn how courts evaluate the factual assumptions for that “inherently speculative” test, then click the link.
Under Rule 1020, the deadline to object to a Sub V designation is 30 days after the conclusion of the 341 meeting. While that deadline had expired in CYMA without an objection, the court held that it could sua sponte revoke CYMA’s designation, and did so on the basis that the debtor, as a SARE debtor, didn’t qualify for Subchapter V.
The court based its decision on § 1112 (which permits a debtor to convert a Chapter 11 case to a Chapter 7 case) and its equitable power under § 105(a). In other words, if a debtor can elect to amend its petition to become a Sub V debtor or a Sub V debtor can elect to proceed as a regular Chapter 11 debtor after making its initial Sub V election, then, the rational goes, the court can sua sponte revoke a Sub V designation.
Arguably though, isn’t Rule 9006(b)(1) the simpler rationale, particularly given, as noted by the court, that the Advisory Committee Notes provide that Rule 9006(b)(1) is applicable to Rule 1020?
We’ve been covering third-party release cases for over seven years, so I’m a little embarrassed that I’m just now getting around to Judge Sigler’s Kalos opinion, a Georgia opinion no less, and, worse, that I’m not giving it its own post. It’s certainly worthy of one. Blame it on Bill Rochelle who beat me to it and whose analysis is always too good to warrant a “me too” post.
In short, Judge Sigler evaluated the propriety of third-party releases that were proposed in exchange for those parties making a $1.3 million contribution to the Sub V broker-dealer’s plan. And in line with the Second Circuit’s Purdue opinion and applying the Eleventh Circuit’s Seaside factors (click here for our Seaside coverage), Judge Sigler approved the third-party releases. If you need more detail, click the opinion link or read Bill’s write-up.
November 2023 Subchapter V Opinions
Similar to the Texas court in Franco’s (above), the Texas court in Hot’z determined that when a class does not cast any votes for or against a Sub V plan, that class doesn’t count for § 1129(a)(8) purposes. In short, the court adopted the reasoning in Franco’s and determined that the subject plan could be a consensual plan under § 1191(a), despite one class not voting at all.
To be sure, the court agreed that Rule 3018 doesn’t permit a debtor to place a notice on the face of its plan that reads, in essence, “a failure to vote shall be deemed an acceptance.” Rather, a failure to vote is not a deemed acceptance or a deemed rejection.
As debtor’s counsel, I must say I like this “trend” in the case law!
While Holiday contains nothing that is unique or specific to Subchapter V, I’m including it as an example of two Sub V cases wherein substantive consolidation was proposed, analyzed, and ultimately permitted. Otherwise, it’s a rather routine application of the Owens Corning factors for determining when sub con is appropriate.
This is another opinion involving a Sub V debtor but lacking any law that is specific or unique to Subchapter V. I’m including it because it involves confirmation issues, this blog’s chief focus. In short, the court confirmed a Sub V plan that included an integrated claim settlement. The non-debtor filed a post-confirmation lawsuit in state court. The debtor removed it to federal court and ultimately back to the bankruptcy court. The bankruptcy court denied the non-debtor’s remand request, concluding that the matter was an integral plan dispute.
Click the link for a closer look at the court’s post-confirmation jurisdiction analysis.
Hal Luftig is, like Kalos (above), another Sub V third-party release case. It’s about 47 Lexis pages long and includes an extensive application of “Purdue III” (i.e., the recent Purdue Pharma decision we covered here, which Judge Sigler considered in Kalos, and which is under consideration by the U.S. Supreme Court).
After analyzing the seven Purdue factors, the court concluded that, subject to the release’s overbreadth being cured with a plan modification and final approval by the district court of the bankruptcy court’s proposed findings/conclusions, the release was confirmable.
This is yet another opinion involving a Sub V debtor but lacking any law that is specific or unique to Subchapter V. Like with Independence (above), I’m including it because it involves confirmation issues.
In short, the bankruptcy court confirmed a Sub V liquidating plan; the objecting creditor appealed (after its motions for reconsideration failed); and the debtor moved to dismiss the appeal on the basis that it was equitably moot. And after applying the Ninth Circuit’s equitable mootness elements, the BAP dismissed the appeal.
- The appellant failed to seek a stay pending appeal, which permitted the plan to be substantially consummated so that a merits determination would jeopardize others.
- The uninterrupted substantial consummation of the plan suggested equitable mootness.
- Given what had been permitted to occur after confirmation, the BAP couldn’t conceive of effective and equitable appellate relief if the appellant were to prevail.
Zhang is another Sub V eligibility opinion which considers, like the E.D. of Virginia did in Macedon Consulting (covered here back in July), whether a debtor’s future obligations under its executory contracts should be counted toward Subchapter V’s debt limitation.
You might recall that the Macedon court determined that the lease liabilities in that case 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.”
Ultimately, the Zhang court declined to follow Macedon for reasons that are unclear to me or do not appear to be relevant to the Zhang court’s ultimate decision. Specifically, the court ruled that because the debtor didn’t move to reject the subject lease until after the petition date, its future lease liability was, as of the petition date, “contingent and unliquidated as of that date.”
That seems to be to be consistent with Macedon‘s emphasis on “future extrinsic” events. Is the Zhang court saying (in dicta?) that the pre-petition events that made certain of the liabilities in Macedon noncontingent and unliquidated never count? I guess I’ll have to read both cases again.
[To be sure, the court determined that the debtor was ineligible to proceed under Subchapter V, but not because of the lease issue. Rather, as the court analyzed in the first half of the opinion, the debtor’s noncontingent and liquidated debts, alone, substantially exceeded the $7.5 million limit on the petition date.]