The following is a case update written by Robert G. Harris (firstname.lastname@example.org), a partner in the Silicon Valley bankruptcy boutique, Binder & Malter, LLP, analyzing a recent decision of interest:
The Bankruptcy Court for the Southern District of Texas (the “Court”) recently denied an emergency motion by Subchapter V debtor Excellence 2000, Inc. (the “Debtor”) to extend the 90-day deadline to file its Subchapter V plan filed on the 91st day after the petition date. In re Excellence 2000, Inc., No. 21-33136, 2022 WL 163400, 2022 Bankr. LEXIS 112 (Bankr. S.D. Tex. Jan. 18, 2022).
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Before bankruptcy, the Debtor purchased school locations in Houston and Dallas, Texas (the “Properties”) that were closed by the Texas Education Agency (“TEA”) in August of 2016. Upon closure, the Properties were locked up, and the Debtor was denied access. TEA removed the furniture, equipment, inventory and all assets, including about 8 school buses at each location and vans. TEA’s position was that the State of Texas had equitable ownership of the properties because state funds had allegedly been used to purchase them. The Debtor denied this contention.
The stated purpose of bankruptcy was to allow the Debtor to gain access to the Properties, restore and repair them, and open a private school at each site. The Debtor planned to solicit new students and teachers and hoped to begin operating in the spring or summer of 2022. The Debtor claimed it intended to sue TEA for damages and Midsouth Bank/Hancock Whitney for closing its accounts and sending to TEA some $1 million that had been on deposit.
The Debtor filed its Chapter 11 case on September 27, 2021, and elected to proceed under Subchapter V. On September 29, 2021, the Court issued its order for an initial status conference and scheduled the hearing for November 1, 2021. Paragraph 4(b) of that order required Debtor to address “[a]ny complications the debtor anticipates in promptly proposing and confirming a plan, including any need for discovery, valuation, motion practice, claim adjudication, or adversary proceeding litigation.” On October 11, 2021, Debtor filed its schedules, summary of assets, and statement of financial affairs. On November 1, 2021, Debtor filed its Chapter 11 Subchapter V Status Report (“Status Report”). On the same date, the Court held a hearing and ordered Debtor to, inter alia, file its plan of reorganization not later than December 27, 2021 (“Initial Status Conference Order”).
On December 28, 2021, Debtor filed its Emergency Motion for Debtor to Extend Date to File Chapter 11 Plan of Reorganization (“Motion”). On January 6, 2022, the Court held a hearing on the Motion. The resulting Memorandum Opinion concerns two questions: (1) whether the Motion to extend the filing deadline filed one day after the expiration of the deadline prescribed by § 1189 may be considered at all, and (2) whether the need for the extension is attributable to circumstances for which the Debtor should not justly be held accountable. For the reasons set forth below, the Court denied the Motion.
On January 25, 2022, the Court issued an Order to Show Cause directing that the Debtor and its counsel appear on February 9, 2022 and be prepared to demonstrate why the case “should not be dismissed or converted to chapter 7 for failure to file a plan pursuant to 11 U.S.C. § 1189(b).” The case was dismissed without hearing on February 7, 2022.
The Court first addressed whether a motion to extend can be filed after the 90-day plan filing deadline of §1189(b) has passed. The Court compared §1121 with §1189. Section 1121(d)(1) requires a party in interest to make a request within the respective periods specified in (b) and (c). Section 1121(e)(3)(C) provides that in a small business case, a court may extend the plan filing deadline “only if . . . the order extending time is signed before the existing deadline has expired.” The requirement for entry of an order before the applicable exclusive period has expired is not present in §1189. The Court cited Duncan v. Walker, 533 U.S. 167, 173, 121 S. Ct. 2120, 150 L. Ed. 2d 251 (2001) for the proposition that “where Congress includes particular language in one section of a statute but omits it in another section of the same Act . . . Congress acts intentionally and purposely in the disparate inclusion or exclusion” and concluded, based on the significant difference in language, “… that there is no timing requirement governing an extension request under §1189(b).”
The Court buttressed its conclusion by citing Collier on Bankruptcy ¶ 1189.03 (Richard Levin & Henry J. Sommer eds., 16th ed.) and repeated for emphasis the treatise’s warning of the risk of dilatory conduct: “a motion to extend should be filed with enough time for the court to act upon such motion before the 90-day time limit expires because failure to file a plan by the deadline constitutes cause to dismiss or convert the case to a chapter 7.” Id. The Court described Debtor’s filing of the Motion as “… not statutorily prohibited…[but] unnecessarily risky” for the simple reason that “… a debtor’s failure to file a motion to extend before § 1189(b)’s prescribed deadline renders the debtor essentially defenseless when faced with a motion to convert or dismiss and § 1112(b) binds the court to order one or the other in a subchapter V case.” However, since nothing in § 1189(b) prevented the filing of the Motion to extend the deadline after its expiration, and no request to convert or dismiss had been made, the Court nevertheless found that it had discretion to consider the Motion.
The Court then considered the merits of the Motion. Citing its prior opinion from In re Baker, 625 B.R. 27, 2020 WL 7501941, 2020 Bankr. LEXIS 3548 (Bankr. S.D. Texas, Houston Div. 2020), the Court started from the proposition the phrase “attributable to circumstances for which the debtor should not justly be held accountable” evinces a higher standard than the “for cause” standard set forth in Federal Rule of Bankruptcy Procedure 9006(b) and Bankruptcy Code § 1121(d)(1). The Court then applied the four-factor test this same judge had enunciated in In re Baker: (1) whether the circumstances raised by the debtor were within its control, (2) whether the debtor has made progress in drafting a plan, (3) whether the deficiencies preventing that draft from being filed are reasonably related to the identified circumstances, and (4) whether any party-in-interest has moved to dismiss or convert the debtor’s case or otherwise objected to a deadline extension in any way.
The Court found that the Debtor had not met its burden on three of the four factors from Baker.
First, the Court found that, while ownership of the Properties was not within Debtor’s control, the circumstances of the ownership dispute were known dating as far back as the 2016 lock-out. The Debtor claimed to have sent discovery requests to the State of Texas and multiple banks yet filed no evidence of those requests, when those requests were made, or, most importantly, “why th[e] matter was unresolvable prior to the December 27, 2021 plan filing deadline.” The Court focused on Debtor’s failure to take action on the ownership issue and seek prompt relief from the plan filing deadline: “… by agreeing to continue the hearing to February 9, 2022, Debtor was aware at the December 8, 2021 hearing that the ownership dispute would not be resolved before the plan filing deadline. Nevertheless, Debtor waited until one day past the deadline to file its Motion on an emergency basis, providing no explanation for its failure to file the Motion before § 1189(b)’s deadline.”
Second, the Debtor failed to offer a draft plan at the evidentiary hearing on the Motion. Absent any evidence of a draft plan, the Court could make no finding whether and to what extent progress was made in drafting a plan.
Third, because the Debtor had stated that “if the Court want[ed him] to file a plan, [he] could file a plan” but had not done so, the Court could not find that it was the ownership dispute over the Properties that had prevented a plan from being timely filed.
Fourth, no party had moved to dismiss of convert. In fact, TEA, the Subchapter V Trustee and the U.S. Trustee all appeared at the hearing on the Motion and expressed support for the requested extension. The Court nevertheless found that, because the Debtor had not met the other Baker factors, it had failed to meet its burden to demonstrate that the need for the extension was attributable to circumstances for which it should not justly be held accountable.
In re Excellence 2000, Inc. is another in the line of cases applying a more stringent standard to requests to extend the time to file a Subchapter V plan under §1189(b) than to requests for an extension of exclusivity under section 1121(d)(1). Cases applying this standard are discussed in the recent CFN review of In re HBL SNF, LLC d/b/a Epic Rehabilitation and Nursing at White Plains, 2022 WL 291563 (Bankr. S.D.N.Y. Feb. 1, 2022). Cf. In re HBL SNF, LLC, In re Seven Stars on the Hudson Corp., and In re Online King LLC (“stringent” standard) and In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021) and In re Keffer, 2021 WL 1523167 (Bankr. S.D. W.Va. 2021) (“fairly responsible” standard).
In re Excellence 2000, Inc. provides authority that (1) a bankruptcy court can grant a request for extension of the deadline to file a plan after the deadline has expired, and (2) the debtor has an evidentiary burden to show that the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable. The case is a cautionary tale for counsel who might seek a delay in the 90-day deadline while a large, unresolved contingency exists: a debtor must do everything possible once a case is filed to make progress toward the resolution of the contingency. Counsel must be creative in drafting a confirmable plan if the dispute cannot be resolved before the plan-filing deadline, and it is essential to keep the court and the Subchapter V trustee fully informed about nature of the dispute, what is being done to resolve or prosecute it, and the impact on efforts to reorganize.
This review was written by Robert G. Harris (email@example.com), a partner in the Silicon Valley bankruptcy boutique, Binder & Malter, LLP, and 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.