Legal Service Bureau, Inc. v. Orange County Bail Bonds, Inc. (In re Orange County Bail Bonds, Inc.) (9th Cir. BAP)

The following is a case update written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, analyzing a recent decision of interest:

SUMMARY

In a recent published opinion, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) clarifies how bankruptcy courts may set the commitment period for payments of disposable income, or its value, under subchapter V of the Bankruptcy Code. Legal Service Bureau, Inc. v. Orange County Bail Bonds, Inc. (In re Orange County Bail Bonds, Inc.), 2022 WL 1284683, — B.R. — (9th Cir. BAP, 2022).

To view the opinion, click here. 

FACTS

Orange County Bail Bonds, Inc. (the “Debtor”) is a small bail bond company. Legal Service Bureau, Inc., dba Global Fugitive Recovery (“Global”), is a bail fugitive recovery business. Bail bond companies hire Global to capture fugitives who forfeit bail and flee.

In 2014, the Debtor issued a bond for a prisoner, which was secured by a deed of trust against his mother’s residence. The released prisoner did not appear for a hearing. In collaboration with the U.S. Marshals Service, Global captured and returned the prisoner in 2015.

Global billed the Debtor $300,000, and the Debtor billed the prisoner’s mother $326,412.29, including Global’s fee. Following a stay of foreclosure and litigation in the Superior Court of California, the court entered judgment in favor of Global and against the Debtor for $513,131.08, including prejudgment interest and attorney’s fees. Meanwhile, the court entered judgment in favor of the Debtor and against the prisoner’s mother for $326,000 and declined to permanently enjoin the foreclosure.

The Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code on June 19, 2019. The Debtor’s chief asset was its judgment secured by the deed of trust, which the Debtor estimated to be worth $550,000. The Debtor’s chief creditors were Global and unsecured insider claims of approximately $720,000.

In August of 2019, Congress passed the Small Business Reorganization Act (the “SBRA”), adding new subchapter V to chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 1181, et seq.). The Debtor filed a chapter 11 plan of reorganization and disclosure statement in December of 2019. In an amended plan, the Debtor projected that it would have disposable income of $287,047.83 for a period of three years after plan confirmation and $493,052.47 for a period of five years.

The SBRA became effective on February 19, 2020, before the final hearing on plan confirmation. Within weeks, the Debtor filed an amended petition, this time seeking relief under subchapter V.

Global objected to the amended petition, objected to plan confirmation and brought a motion to dismiss the case or convert it to a liquidation under chapter 7 of the Bankruptcy Code. All of these were heard in conjunction with the final hearing on plan confirmation.

Two major issues in the case were whether the recently-enacted SB10, which could stifle the bail-bond business, would be repealed by referendum and whether the Debtor would successfully foreclose upon its collateral. Eventually, SB10 was repealed, and the foreclosure was completed, whereby the Debtor obtained title to the real property collateral. Thereafter, the bankruptcy court approved a sale of the property for $900,000, resulting in net proceeds to the estate of $432,972.95.

The Debtor sought non-consensual confirmation of its plan under the “cramdown” provisions of Bankruptcy Code § 1191(b). Section 1191(b) provides for confirmation if all subsections of Bankruptcy Code § 1129(a) are satisfied, except for (a)(8), (10) and (15), and the plan does not discriminate unfairly and is fair and equitable with respect to classes of claims that do not accept the plan.

Among other things, the Debtor proposed to pay Global $432,972.95 (all of the net sale proceeds) on the effective date of the plan. The bankruptcy court confirmed the plan and denied Global’s motion to dismiss or convert. Global timely appealed both orders. For the reasons discussed below, the BAP affirmed the order confirming the Debtor’s plan and also affirmed the order denying Global’s motion to dismiss or convert the case.

REASONING

The BAP determined that the bankruptcy court did not abuse its discretion by confirming the plan. Among the contested issues, the key issue was whether the plan satisfied Bankruptcy Code § 1191(b)’s requirement that the plan be fair and equitable to dissenting classes of creditors. “Fair and equitable” is defined in Bankruptcy Code § 1191(c)(2), which provides for confirmation of a plan (1) if it pays out all of the debtor’s disposable income to be received during a commitment period of between three and five years or (2) if it distributes property worth at least the value of the debtor’s disposable income over such three- to five-year period. Disagreeing with Global’s analysis and even some of the Debtor’s own arguments, the BAP spelled out its rules for establishing the appropriate commitment period.

The BAP flagged the importance of its decision in the first paragraph: “We publish to explain the unique role of the bankruptcy court, in a case under subchapter V, to set the commitment period in which a debtor must pay its projected disposable income or its value.” The BAP compared subchapter V to chapter 12 and chapter 13 bankruptcy cases, in which the commitment period is fixed. By contrast, Bankruptcy Code § 1191 establishes a minimum of three years, and a maximum of five years, without providing any standard or guideline for determining whether to extend the period and for how long. Given the absence of statutory language, the BAP concluded that the bankruptcy court has “sole authority” with respect to the commitment period.

In this case, the bankruptcy judge did not order that the commitment period be extended beyond the default three-year period. Accordingly, the BAP looked to the Debtor’s three-year projection of disposable income of $287,047.83 and compared it to the proposed effective-date distribution to Global of $432,972.95. The BAP had no difficulty determining that the proposed distribution exceeds the present value of the projected three-years’ disposable income. As a consequence, the BAP held that the distribution satisfies Bankruptcy Code § 1191(c)’s requirement that the plan pay at least three-years of disposable income “or its value.” The bankruptcy court’s decision to confirm the plan was reviewed for abuse of discretion, and no abuse was found.

The opinion resolves several other issues that are not discussed here, including good faith, feasibility, cause for dismissal or conversion, and certain deadlines under subchapter V. This last issue deserves a comment in light of the statute’s relative newness. Specifically, Global argued that the Debtor’s plan was untimely under Bankruptcy Code § 1189(b), which requires a plan to be filed within ninety days of the order for relief (which is usually date the bankruptcy case is commenced). Here, the Debtor amended its petition to elect treatment under subchapter V shortly after the statute became effective in February of 2021, and its plan was confirmed two months later, in April of 2021. However, the case was commenced ten months earlier, in June of 2019.

Emphasizing that the Debtor amended its petition “within weeks” after subchapter V became effective, the BAP found a solution in the language of Bankruptcy Code § 1189(b), which gives bankruptcy courts the authority to extend the deadline, without apparent limit, based on “circumstances for which the debtor should not justly be held accountable.” Next, the BAP found that the bankruptcy court had implicitly extended the deadline when it set and extended deadlines for the Debtor to file a plan in its case, apparently without reference to Section 1189(b). In a footnote, the BAP noted that The BAP determined that the decision to extend the deadline should be reviewed for abuse of discretion, and the BAP found no abuse.

Accordingly, the BAP affirmed both the bankruptcy court’s order confirming the Debtor’s plan and the order denying Global’s motion to dismiss or convert. As of the time of writing, neither party has filed a notice of further appeal.

AUTHOR’S COMMENTS

The BAP does not explain why Global pursued the Debtor so aggressively, to the point of obtaining a judgment for almost twice its original invoice and apparently attempting to force the Debtor out of business. One wonders whether Global’s extreme aggression paid off: Global was paid more than $400,000, whereas the Debtor might have gotten away with paying only the present value of three-years’ disposable income, which could have saved approximately $150,000.

Two other points are of particular interest to bankruptcy practitioners: First, the BAP afforded broad deference to the bankruptcy court in setting the applicable commitment period, despite the record apparently being devoid of any findings, grounds, or discussion of the period. It appears that a judge’s confirmation of a subchapter V plan for any period between three and five years – or at least for the default period of three years – will not be disturbed unless there are affirmative grounds to show an abuse of discretion.

Second, the BAP’s determination that the plan-filing deadline under Bankruptcy Code § 1189(b) was implicitly extended is more consequential than appears at first glance. It is noteworthy that the extensions were ordered before the statute became effective and before the Debtor elected treatment under subchapter V. The opinion does not discuss how the bankruptcy court could have impliedly extended a deadline that did not yet apply and might never apply. Moreover, the opinion apparently refers to the bankruptcy judge’s procedure of setting and periodically extending the time to file a plan in chapter 11 cases, which is a common practice throughout bankruptcy courts. In other words, the BAP’s holding implies that such customary scheduling orders constitute implied extensions under Section 1189(b) without the need for any reference to the statute. The ultimate result is intuitive and equitable, but query whether some debtors – and some bankruptcy courts – will attempt to nullify Section 1189(b) by simply proceeding in accordance with the court’s typical chapter 11 scheduling order.

This review was written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, 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.