The following is a case update written by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, analyzing a recent decision of interest:

SUMMARY

A Texas bankruptcy court has held that a debtor may not amend its chapter 11 petition to proceed under subchapter V of the Small Business Reorganization Act of 2019 in a case pending prior to the effective date of the SBRA. [In re Double H Transportation LLC, 2020 WL 2549850, Case No. 19-31830 (Bankr. W.D. Tex. Mar. 5, 2020).] A copy of this order is also accessible on the court’s docket.

FACTS

Debtor Double H Transportation LLC filed a voluntary petition under chapter 11 in November of 2019 and the court entered an order for relief. Debtor did not designate itself as a “small business debtor” in the petition. On February 28, 2020, approximately one week after the Small Business Reorganization Act of 2019 (SBRA) took effect, Debtor filed an amended petition electing subchapter V treatment as a small business debtor. Pursuant to 11 U.S.C. § 1183(a), the U.S. Trustee promptly appointed a subchapter V trustee. On March 5, 2020, the court sua sponte entered its order striking the Debtor’s amended petition and election of subchapter V status.

REASONING

The court began its analysis by noting that subchapter V was added to the Bankruptcy Code by the SBRA, which became effective on February 19, 2020 – 107 days after the original petition date. Citing to Pub. L. No. 116-54, § 5, 133 Stat. 1079 (2019), the court observed that “[n]othing in the SBRA enabling statute indicates that the SBRA was intended to have retroactive effect—i.e., that the SBRA should apply to pending bankruptcy cases.”

The court reasoned that permitting the Debtor to amend its petition to proceed under new subchapter V “would create a procedural quagmire” which could constitute “cause” to dismiss or convert the case. In making this determination, the court pointed out that certain SBRA deadlines had already expired. For instance, under the SBRA, a debtor must file its plan of reorganization within 90 days of filing the petition. The court noted that the Debtor could not meet this deadline because it expired prior to the SBRA taking effect. Likewise, the court reasoned that it was “too late” to hold the mandatory status conference within 60 days from entry of the order for relief, as required by 11 U.S.C. § 1188(a), because that deadline also had expired. Finally, the court noted that Debtor failed to file its most recent balance sheet and other financial information when electing to proceed under subchapter V, in violation of Bankruptcy Code section 1187(a). For all of these reasons, the court ruled that the amended petition should be stricken and the subchapter V trustee discharged from the case.

AUTHOR’S COMMENT

The SBRA was signed into law on August 23, 2019 and became effective on February 19, 2020, creating a new subchapter V under chapter 11 of the Code. The SBRA imposes several requirements in subchapter V cases, including those noted by the court in Double H: (i) the court must hold a status conference with the subchapter V (or standing) trustee within 60 days of entry of the order for relief; (ii) the subchapter V debtor must submit a status report 14 days prior to the status conference detailing efforts to reach a consensual plan; and (iii) the subchapter V debtor must file a plan within 90 days of entry of the order for relief. See, e.g., 11 U.S.C. §§ 1188(a), (c), 1189(b). However, the Code also affords bankruptcy courts the discretion to extend subchapter V deadlines “if the need for the extension is attributable to circumstances for which the debtor should not be justly held accountable.” 11 U.S.C. §§ 1188(b), 1189(b).

In what appears to be the first published decision addressing the applicability of the SBRA in a pending case, the bankruptcy court for the Central District of California rejected objections to the debtor’s amendment of its petition to proceed under subchapter V which were based on timing and scheduling issues. See In re Progressive Solutions, Inc., No. 8:18-bk-14277-SC, 2020 WL 975464 (Bankr. C.D. Cal. Feb. 21, 2020). In doing so, the court in Progressive Solutions pointed out that such timing requirements “could be reset in order to provide due process to all parties involved, unless vested rights of parties would be abridged or otherwise prejudiced.” The bankruptcy court for the Eastern District of New York reached a similar conclusion where the debtor amended her petition in a pending case to elect to proceed under subchapter V: “to argue the [d]ebtor should have complied with the procedural requirements of a law that did not exist [when the bankruptcy case was filed] is the height of absurdity.” In re Ventura, Case No. 8-18-77193-reg, 2020 WL 1867898 (Bankr. E.D.NY. Apr. 10, 2020)

The court in Double H never discussed whether the SBRA deadlines could be extended where “the need for the extension is attributable to circumstances for which the debtor should not be justly held accountable.” 11 U.S.C. §§ 1188(b), 1189(b). This is a noteworthy minority view given that other courts have permitted a debtor to amend its petition to elect to proceed under subchapter V more than a year after the original petition was filed—notwithstanding the SBRA’s time sensitive deadlines. The SBRA was enacted after a substantial study and comment period and was intended to provide a streamlined, fast and efficient procedure. If Congress intended, as demonstrated by the SBRA, that a subchapter V case would proceed in a streamlined manner, one cannot help but question whether permitting a debtor to elect to proceed under subchapter V in a pending case—especially where a debtor cannot meet the deadlines established in the SBRA—is truly in line with Congressional intent.

For discussion on related issues, see:

• 2020-17 Comm. Fin. News. NL 33, New York Bankruptcy Court Holds Debtor May Amend Chapter 11 Petition to Proceed Under Small Business Reorganization Act of 2019. [In re Ventura, 2020 WL 1867898 (Bankr. E.D. N.Y. 2020)].

These materials were authored by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Editorial contributions were made by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.