SUMMARY

The Bankruptcy Court for the Southern District of New York (the “Court”) recently granted a Subchapter V debtor’s motion to extend the 90-day deadline in section 1189(b) to file a plan, expounding upon the standard for extension in the statute compared to that in general business cases. Pending litigation to determine whether debtor’s lease of a 160-bed skilled nursing facility had been terminated pre-petition was found to be a central and threshold issue and deemed, in the absence of delay by the debtor, cause to extend until after a hearing on summary judgment could be held. In re HBL SNF, LLC d/b/a Epic Rehabilitation and Nursing at White Plains, No. 21-22623, 2022 WL 291563 (Bankr. S.D.N.Y. Feb. 1, 2022).

To view the opinion, click here. 

FACTS

Debtor and debtor in possession HBL SNF, LLC d/b/a Epic Rehabilitation and Nursing at White Plains (the “Debtor”) operated a 160-bedroom skilled nursing and rehabilitation facility in White Plains, New York. In 2015, the Debtor entered into separate agreements with White Plains Healthcare Properties I, LLC (the “Landlord”) for the construction and financing of the Debtor’s care facility and an Amended and Restated Operating Lease. The Landlord entered into a number of agreements with Security Benefit Corporation in August 2017, including a Construction Loan Agreement, a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, and an Assignment of Leases and Rents. In the summer of 2017, the Debtor, the Landlord, and Security Benefit entered into a Security Agreement, Assignment of Leases and Rents and Fixture Filing.

Prior to Debtor’s bankruptcy, the Landlord filed litigation against the Debtor claiming that the Debtor’s lease with the Landlord had already been terminated. Security Benefit initiated two foreclosure proceedings in 2021 against the Landlord in New York State Supreme Court, Westchester County, both alleging the Landlord had defaulted on its loan obligations to Security Benefit Corporation. The Debtor removed the lease litigation to the Court after bankruptcy was filed.

On the day the case was filed, the Debtor filed a motion to approve debtor-in-possession (“DIP”) financing and authorize its use of cash collateral. The Court granted the motion. The Debtor filed the proposed final DIP financing order that provided that all of the Debtor’s lease obligations—i.e., the rent—would be paid going forward to Security Benefit based on the Assignment of Leases and Rents Agreement. The Landlord objected to the proposed final DIP financing order, arguing that it was still entitled to the rent. Pending a decision on the rent issue, the Debtor deposited the December rent into an escrow account.

PROCEDURE

The Debtor filed a voluntary Chapter 11 petition on November 1, 2021, identifying itself as a small business debtor and electing to proceed under Subchapter V. The reported opinion addresses two motions: first, the motion of the Debtor seeking to extend the time to file its Subchapter V plan of reorganization (the “Extension Motion”) by 90 days. The second is the motion of Security Benefit for a determination that the automatic stay does not apply to litigation it wanted to file or in the alternative, for relief from the automatic stay to pursue such litigation. This report addresses only the Extension Motion that the Court granted.

REASONING

The Debtor argued in the Extension Motion that the ongoing dispute between the Debtor and the Landlord concerning the Debtor’s lease was one of the main reasons that the Debtor filed bankruptcy. The Debtor contended that resolution of this litigation was critical to the Debtor’s ability to successfully reorganize as it intended to assume the lease in bankruptcy. The Debtor contended that it could not file a meaningful plan of reorganization until a final determination was made with regard to the termination of the lease.

The Landlord opposed the Extension Motion, arguing that (1) the Debtor delayed adjudication of the lease termination issue; (2) the Debtor failed to show under 11 U.S.C. §1189 that an extension was warranted; and (3) delay was inconsistent with Subchapter V and would harm the Landlord.

The Court based its ruling, in part, on the fact that the Landlord’s motion for summary judgment in the removed lease litigation was set for hearing before it on March 24, 2022.

The Court started with the statutory requirement that any extension of section 1189(b)’s 90-day deadline to file a plan had to be “attributable to circumstances for which the debtor should not justly be held accountable.” The Court allocated the burden of proof to the debtor to establish a basis for the extension, citing In re Online King LLC, 629 B.R. 340, 349 (Bankr. E.D.N.Y. 2021). Citing In re Seven Stars on the Hudson Corp., 618 B.R. 333, 344, 349-50 (Bankr. S.D. Fla. 2020)), the Court added that “[t]he burden is stringent and a higher standard than the ‘for cause’ standard in Section 1121(d)(1) that governs extensions of time to file a plan in a traditional Chapter 11 case—that is, a case not under Subchapter V … [citation omitted]. The strict standard reflects the goals of Subchapter V to move a case forward expeditiously, to keep expenses down for the debtor, and to provide the debtor with an accelerated path to reorganize.” The apparent underpinning of the stricter standard enunciated was that “… unlike a traditional Chapter 11 case—only a debtor may file a plan in a Subchapter V case”.

The Court cited In re Baker, 625 B.R. 27, 35 (Bankr. S.D. Tex. 2020) with approval. In that case, the court granted a second extension of time to file a plan granted where: (1) certain government units had yet to file their proofs of claim because the Section 341 notice for government claims lacked a bar date; and (2) the debtor needed more time to determine his projected income due to the death of his brother. The key points the Court highlighted were that (1) while a plan technically could have been filed before the bar date passed, the missing claims would drastically alter the plan, and (2) while the debtor could have brought this error to the attention of the court sooner, the initial misstep was not the fault of the debtor. The Court also referred to In re Trepetin, 617 B.R. 841, 847-48 (Bankr. D. Md. 2020) (granting an extension under Section 1189 where the debtor converted the case from Chapter 7 with the court recognizing a need to balance the goals of speed and access to a realistic reorganization scheme). Later, the Court again cited In re Trepetin, this time to note that aspects of Subchapter V are based on Chapter 12 for family farmers and fisherman, which lacks the safeguards for creditors in Chapter 11, and time limitations to file a plan protect creditors from a debtor languishing in bankruptcy.

The Court contrasted these successfully justified extensions with denials attributable to “a generalized excuse applicable to any business bankruptcy case.” The Court started with the reasons offered by the debtor in In re Online King LLC: “(1) the work involved in proposing a plan; (2) competing demands upon the debtor; (3) the intervening religious holidays; and 4) the COVID-19 pandemic.” The Court further noted the unsuccessful excuse offered by the debtor in In re 5 Star Prop. Grp., Inc., 2021 Bankr. LEXIS 168, 2021 WL 247782, at *1 (Bankr. M.D. Fla. Jan. 20, 2021) (the request for an extension cited only the need for more time to complete certain calculations and finalize its plan).

The Court overruled the Landlord’s objection to the Extension Motion. The Court concluded that the Debtor could not be faulted for delays in litigation given that a discovery schedule had been ordered and summary judgment was set for hearing. Disputes in hearings on the DIP motion over whether the Debtor should pay Security Benefit or the Landlord were also not viewed as delay attributable to the Debtor. The Court therefore held that the Debtor had satisfied its burden to show that an extension is appropriate and concluded that it would not be practical, fair, or wise to require the Debtor to file a plan when the central issue of the lease, and whether reorganization was possible, remained unresolved.

AUTHOR’S COMMENT

The requirements for an extension under section 1189(b) are inarguably more stringent than for an extension of exclusivity under section 1121(d)(1) or the “for cause” standard of Bankruptcy Rule 9006(b), governing extensions generally.

Divergent lines of cases have developed, with one focusing on whether the cause of delay was circumstances beyond the debtor’s control and the other whether the debtor was itself responsible for the inability to meet the deadlines, with varying approaches within each. Cases examining the responsibility and conduct of the debtor include In re HBL SNF, LLC, In re Seven Stars on the Hudson Corp., and In re Online King LLC.

A less stringent approach appears in cases such as In re Trepetin, in which the Court, examining Chapter 12 case law, formulated an inquiry as to whether the debtor was “fairly responsible” for the inability to comply with the deadline. Cases following this approach include In 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).

Whether the judge in your case follows the strict view or allows consideration of extenuating circumstances, counsel is well-advised, once the need for an extension is identified, to seek it as early as possible and do everything possible to ensure that the debtor is without blame for any delay and act to mitigate it. Circumstances causing a delay that bear directly upon the ability of the debtor to propose a meaningful plan or confirm offer the best hope for obtaining an extension no matter which standard is applied.

This review was written by Robert G. Harris, 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.