A Guide to the Small Business Reorganization Act of 2019

Paul W. Bonapfel
U.S. Bankruptcy Judge, N.D. Ga.

XIV. Supplement (November 2020)
(Added as Part XIV to November version)

I. Introduction

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Amendments to the Bankruptcy Code in 1994 permitted a qualifying small business debtor to elect small business treatment. As amended, § 1121(e) provided that, in a small business case, only the debtor could file a plan for 100 days after the order for relief and that all plans had to be filed within 160 days. In addition, amended § 1125(f) permitted parties to solicit acceptances or rejections of a plan based on a conditionally approved disclosure statement and permitted a final hearing on the disclosure statement to be combined with the hearing on confirmation.

The Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (“BAPCPA”) significantly changed the small business provisions. Importantly, it eliminated the debtor’s option to choose small business treatment. As such, a business that qualifies as a small business debtor became subject to all of the provisions governing small business cases.

BAPCPA replaced both § 1121(e) and § 1125(f).

BAPCPA’s § 1121(e)(1) extended the exclusive time for the debtor to file a plan to 180 days and imposed a new 300-day deadline for the filing of a plan. BAPCPA also added § 1129(c) to require confirmation of a plan in a small business case within 45 days of its filing, unless the court extended the time.

BAPCPA’s § 1125(f) added a provision that permitted the court to determine that the plan provided adequate information such that a separate disclosure statement was not required.

BAPCPA also added § 1116 to prescribe additional filing, reporting, disclosure, and operating duties applicable only to small business debtors.

Although some of BAPCPA’s small business provisions facilitated chapter 11 reorganization for a small business debtor, others appeared to reflect skepticism about the prospects for success of a small business debtor in a chapter 11 case and specific, more intensive supervision of the administration of their cases. In practice, reporting and confirmation requirements applicable to small business debtors remained burdensome or unworkable for many small businesses. See, e.g., Am. Bankr. Inst. Comm’n to Study the Reform of Chapter 11: 2012-14 Final Report & Recommendations, 23 Am. Bankr. Inst. L. Rev. 1, 324 (2015) (For many small or medium-sized businesses, “the common result of plan confirmation extinguishing pre-petition equity interests in their entirety [are] unsatisfactory or completely unworkable.”).

Because SBRA did not repeal SBRA’s provisions relating to a “small business debtor,” a small business debtor that does not elect subchapter V is in a small business case and subject to the provisions that BAPCPA added.


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(For a summary of key features of a non-sub V case governed by the provisions for small business cases, see footnote 5).


III. Debtor’s Election of Subchapter V and
Revised Definition of “Small Business Debtor”

B. Revised Definitions of “Small Business Debtor” and “Small Business Case”

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The court in In re Parking Management, Inc., 2020 WL 61464786 (Bankr. D. Md. 2020), considered subchapter V’s eligibility debt limits, noting that courts had addressed similar language governing debt limitations in chapter 12 and 13 cases. The court observed that the standards in those cases provide useful guidance but that subchapter V cases involve more complex creditor relationships. Id. at *5. The court concluded that claims for damages arising from the rejection of unexpired leases were contingent, id. at *5-7, and that the debtor’s obligations under a note pursuant to the Paycheck Protection Funding Program of the CARES Act were both contingent and unliquidated, id. at 9-12. Because these debts were not included in the debt eligibility calculation, the court ruled that the debtor was eligible for subchapter V.

For a discussion of the debt limitation requirements for eligibility in chapter 13 cases, see generally W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure §§ 12:8, 12:9 (2020).


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In In re Thurmon, Case No. 20-41400, Doc. No. 97 (Bankr. W.D. Mo., Dec. 8, 2020), the court concluded that a debtor must be currently engaged in business to be eligible for subchapter V. The court reasoned, “The plain meaning of ‘engaged in’ means to be actively and currently involved. In § 1182(a)(1)(A) of the Bankruptcy Code, ‘engaged in’ is written not in the past or future but in the present tense.”

Although the U.S. Trustee timely raised the issue of eligibility by objecting to the sub V election, the U.S. Trustee did not request a hearing on it. Accordingly, the ruling on eligibility occurred in connection with the hearing on confirmation of the plan, which all impaired classes of creditors had accepted.

The only party objecting to the plan was the U.S. Trustee, who contended that the court could not confirm the plan of the non-sub V debtors because it was not accompanied by a disclosure statement. The Thurmon court overruled the objection and confirmed the plan in the unusual circumstances of the case. The court reasoned that (1) the U.S. Trustee had in essence waived the right to request a disclosure statement by not requesting that the court require a disclosure statement while the eligibility objection was pending; and (2) the plan substantially complied with disclosure statement requirements by containing “adequate information.”


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SBRA did not change the eligibility rule that a “small business debtor” does not include a debtor that is “a member of a group of affiliated debtors” that has aggregate debts in excess of the debt limit. § 110(51D)(B)(i). The temporary CARES Act amendment to § 1182(1) retains the exclusion in the same language.

In In re 305 Petroleum, Inc., 2020 WL 6363718 (Bankr. S.D. Miss. 2020), four affiliated debtors filed chapter 11 cases. Each of them had elected subchapter V, but one was a single asset real estate debtor that was ineligible for subchapter V. In this opinion, the court considered whether the three debtors were also ineligible because the debt of all of the affiliates exceeded $ 7.5 million. Without including the SARE debtor, the debt of all of the affiliates was less than $ 7.5 million.

The court concluded that the debts of all filing affiliates were included in the debt limit and that, therefore, none of them were eligible because their collective debts exceeded $ 7.5 million.

The court analyzed the issue under the definition of small business debtor in § 101(51D) and reached the correct result under its provisions. Paragraph (B) of § 101(51D) excludes “any member of a group of affiliated debtors” (emphasis added) if the group’s debts collectively exceed the limit. “Debtor” is defined in § 101(13) as a person “concerning which a case under [title 11] has been commenced.” Because all of entities had filed and they were affiliates, each was a member of a group of affiliated debtors with aggregate debts in excess of the limit. Therefore, none of them were eligible.

But because the case arose after the CARES Act, the applicable statute is § 1182(1), as the original text discusses. Although § 1182(1) uses the same language as § 101(51D), the outcome is potentially different.

As amended by the CARES Act, § 1182(1)(A) defines “debtor” for purposes of subchapter V and is in subchapter V. Because § 1182(1)(A) defines “debtor,” the definition of “debtor” in § 101(13) arguably does not apply. Because § 1182(1)(A) excludes an SARE debtor, it is not a member of the group of “affiliated debtors” for purposes of the exclusion in § 1182(1)(B)(i), and its debts are not included in determining eligibility. In other words, “debtors” in § 1182(1)(B)(i) means “debtors” under (1)(A), which does not include an SARE.

An argument in favor of this reading is that, if Congress had intended otherwise, it would have used “persons” in (B)(i), or more simply, “affiliates”, so that § 1182(1)(B)(i) would read as follows:

(B)(1) Debtor. — The term “debtor”—

(B) does not include –

(i) any member of a group of [affiliates or affiliated persons] that has [debts greater than $7.5 million].

Under this analysis, the non-SARE debtors in 350 Petroleum would be eligible for subchapter V because the SARE entity is excluded.

The argument in favor of including the debts of the SARE debtor is that Congress in the CARES Act amendments did not intend to change the eligibility requirements of § 101(51D) other than to increase the debt limit. Moreover, the contrary interpretation involves a circular definition of “debtor.” It requires use of the § 1182(1) definition of “debtor” to determine the meaning of “debtors” in one part of the definition. This creates an ambiguity that
leads to an interpretation that uses the general definition of debtor in § 101(13) as the proper definition of the term in (1)(B). The ineligibility of all of the debtors in 350 Petroleum then follows.


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In In re Serendipity Labs, Inc., 620 B.R. 679 (Bankr. N.D. Ga. 2020), a publicly traded company owned more than 27 percent of the voting shares of the debtor but only 6.51 percent of the voting shares of the debtor entitled to vote on the debtor’s bankruptcy filing. The debtor argued that, in determining whether the public company was an “affiliate” within the definition of § 101(2)(a), the court should count only the shares with power to vote on the matter before the court, i.e., the bankruptcy filing.

Section 101(2)(a) defines “affiliate” to include “an entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor.” The Serendipity Labs court noted that the Bankruptcy Code does not define “voting securities” but that the Securities Exchange Commission in 17 C.F.R. § 230.405 defined “voting securities” as “ securities the holders of which are presently entitled to vote for the election of directors.” The court concluded that this unambiguous definition is the appropriate one to use for purposes of § 101(2)(a). 620 B.R. at 683. All of the public company’s shares met this requirement.

Analyzing a split of authority on the issue in other contexts, the Serendipity Labs court ruled that the language of § 101(2)(a) did not limit the meaning of “voting securities” to those entitled to vote on the matter before the court. 620 B.R. at 685. The court reasoned that “power to vote” in § 101(2)(a) modifies only the holding of securities, not their ownership or control. Because the public company owned more than 20 percent of the debtor’s voting securities, it was an affiliate. Accordingly, the debtor, as an affiliate of an issuer, was ineligible for subchapter V. Id.


IV. The Subchapter V Trustee

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Some of them, however, have indicated that it is unlikely that this will occur in the foreseeable future.


E. Compensation of Subchapter V Trustee

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In In re Tri-State Roofing, Case No. 20-40188-JMM, Doc. No. 86 (Bankr. D. Idaho, Dec. 7, 2020), the court ruled that § 326(b) does not prevent an award of compensation to a sub V trustee under § 330(a)(1) and that it does not place a cap on such compensation.

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Some of the observers have indicated that it is unlikely that this will occur in the foreseeable future.

Although SBRA addresses compensation of a standing trustee upon conversion or dismissal of a sub V case prior to confirmation in its amendment of 28 U.S.C. § 586(e)(5), it does not address allowance or payment of compensation of a non-standing trustee in those circumstances.

If the case is converted, the sub V trustee may file an application for compensation, and the allowed amount will be entitled to administrative expense priority under § 503(b)(1), subject in priority to administrative expenses in the chapter 7 case. § 726(b).

Dismissal of the case raises the prospects that the sub V trustee may find the compensation disputed if the trustee seeks payment under applicable nonbankruptcy law and that the trustee will not be paid, given the debtor’s distressed financial circumstances.

A trustee may seek to avoid the former issue by filing an application for compensation in response to a motion to dismiss and requesting that the court rule on it, preferably before dismissal of the case. Allowance of an administrative expense claim in dismissed case, however, may still leave the sub V trustee without compensation. In allowing compensation to the sub V trustee after dismissal of the case, the court in In re Tri-State Roofing, Case No. 20-40188-JMM, Doc. No. 86, n. 1 (Bankr. D. Idaho, Dec. 7, 2020), observed, “[A]dministrative expense claims are not monetary judgments but rather entitle the claimant to receive a distribution from the bankruptcy estate. If there are no funds currently held by the Trustee, it is difficult to understand how this claim would be paid.” (Citation omitted).

A potential solution to all of these problems is to request that the court condition dismissal on allowance and payment of the trustee’s compensation.

In re Slidebelts, Inc., 2020 WL 3816290 (Bankr. E.D. Cal. 2020), supports this proposition. There, the debtor in a standard chapter 11 case sought its dismissal for the purpose of obtaining a loan under the Paycheck Protection Funding Program of the CARES Act of the case and then re-filing a case under subchapter V. Professionals employed by the committee of unsecured creditors requested that the court condition dismissal on allowance and payment of their fees.

The court observed that § 349(b)(3) ordinarily revests the property of the estate in the debtor, but that, as the Supreme Court recognized in Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973, 979 (2017), the court may order otherwise “for cause.” The court reasoned that committee professionals had rendered services in reliance on provisions of the Bankruptcy Code for payment of their compensation in the case. This reliance, the court concluded, constituted “cause” under § 349(b) for conditioning dismissal on allowance and payment of the committee professionals. Id. at * 3.

In standard chapter 11 cases, cash collateral or debtor in possession financing orders often provide for a so-called “carve-out” to provide money to pay professionals employed by the debtor and the committee of unsecured creditors. It seems appropriate to include the sub V trustee in any carve-out in a subchapter V case.

Even if the case does not involve cash collateral or debtor in possession financing – or if the cash collateral or financing order does not provide for a carve-out – it may be advisable for the sub V trustee, the debtor, or both to request that the court require the debtor to make regular payments to a fund dedicated to the payment of professional fees.


VI. Administrative and Procedural Features of Subchapter V

C. Required Status Conference and Debtor Report

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Section 1188(a) provides that the deadline for the status conference is 60 days after the order for relief “under this chapter.” Section 1189(b) uses the same language to define the 90-day deadline for the debtor to file a plan.

Under this language, if a debtor in a pending chapter 7 case seeks to convert to chapter 11 and elect subchapter V status, therefore, the time periods begin on the date of the conversion. Although § 348(a) provides that conversion of a case from one chapter to another “does not effect a change in the date of . . . the order for relief,” the later and more specific provisions in subchapter V would appear to control.

In In re Trepetin, 2020 WL 3833015 (Bankr. D. Md. 2020) and In re Wetter, 2020 WL 6128048 (Bankr. W.D. Va. 2020), the courts considered whether the deadline could be extended when the debtor sought to convert a pending chapter 7 case to chapter 11 and make the sub V election after these deadlines, measured from the date of the filing of the chapter 7 case, had expired. The courts did not consider whether the times properly run from the date of conversion, which would have made consideration of the extensions unnecessary.


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The court in In re Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020), concluded that the standard for an extension is higher than “for cause.” Noting that the standard is new to chapter 11 but identical to the language in chapter 12, § 1221, the court looked to chapter 12 cases on the issue to conclude that the need for an extension must arise from “circumstances beyond the debtor’s control.”


D. Time for Filing of Plan

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See supra note 142.

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See supra note 143.


G. Time for Secured Creditor to Make § 1111(b) Election

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If the court does not establish a deadline for making the § 1111(b) election, a creditor may nevertheless decide to make the election in response to the filing of the debtor’s plan. In In re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D.N.Y. 2020), the court overruled the debtor’s objection to the § 1111(b) election in this situation.

The court rejected the debtor’s argument that the creditor had to file the election before the filing of the plan, concluding that Bankruptcy Rule 3014 provides for the court to set the deadline. Because no one had asked the court to set a deadline, the court permitted the election, noting that the creditor had filed it before any actions to solicit votes or any steps in contemplation of confirmation had occurred. The court also rejected the debtor’s arguments that the creditor had waived its right to make the election by filing a proof of claim that did not invoke § 1111(b). Id. at 6.


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Section VIII(D) discusses the operation and effect of the § 1111(b) election and how courts have applied it in subchapter V cases.


VII. Contents of Subchapter V Plan

C. Payment of Administrative Expenses Under the Plan

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In In re Seven Stars on the Hudson Corp., 618 B.R. 333, 347 n. 82 (Bankr. S.D. Fla. 2020), the court observed that a sub V plan cannot provide for the deferred payment of postpetition rent obligations under a lease of nonresidential real property.

The court reasoned that § 1191(e) permits payment of claims of administrative expense claims allowed under § 503(b) but that § 365(d)(3), not § 503(b), governs postpetition rent obligations. The court concluded, “As such, even though new Section 1191(e) permits certain administrative expense claims to be paid out over the term of a plan, this provision undoubtedly does not apply to administrative rent.” Id. Even if the court permitted the debtor to proceed under subchapter V in its case that began prior to its enactment, the court ruled, it could not confirm a plan that did not provide for full payment of postpetition rent on the effective date of the plan in accordance with earlier orders of the court.


VIII. Confirmation of the Plan

A. Consensual and Cramdown Confirmation in General

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Importantly, both consensual confirmation and cramdown confirmation require compliance with all of the requirements of § 1129(a) except those specifically mentioned above. Sections VIII(D) and (E) (in this Supplement, infra) discuss confirmation issues that have arisen in subchapter V cases under provisions that SBRA did not change.


B. Cramdown Confirmation Under New § 1191(b)

2. Cramdown requirements for secured claims

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Section 1129(b) states different requirements for cramdown confirmation for secured and unsecured claims. Compliance with the absolute priority rule, for example, is not a requirement for confirmation of a plan over a secured creditor’s objection if the unsecured class accepts the plan. The absolute priority rule arises from cramdown requirements relating to unsecured claims in § 1129(b)(2)(B), but it is not in the requirements for cramdown of a secured claim in § 1129(b)(2)(A).

In a sub V case, paragraph (1) of § 1191(c) makes the § 1129(b)(2)(A) cramdown requirements applicable to secured claims, and paragraphs (2) and (3) impose additional requirements, the commitment of disposable income and a finding of feasibility.

It is unclear whether the additional requirements apply when only the secured creditor rejects the plan. Without discussing the issue, the court in In re Pearl Resources, LLC, 2020 WL 5823303 at *21-23 (Bankr. S.D. Tex. 2020), concluded that the plan, accepted by unsecured creditors, complied with the additional requirements in confirming the plan over the objections of secured creditors.


4. The projected disposable income (or “best efforts” test)

i. Determination of projected disposable income

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The projected disposable income test has its genesis in chapter 13, which contemplates periodic, usually monthly, payments to the trustee for disbursement to creditors in accordance with the plan. In some cases, the amount of the monthly payment may increase by a specified amount at one or more specified times.1 In any event, chapter 13 plans typically provide for the debtor to pay a regular fixed amount.

While fixed payment plans are the standard in individual cases where material variations in income are not expected, debtors in business cases may be concerned that unpredictable changes in the economy may depress earnings or increase expenses and make it difficult or impossible to pay a fixed amount. Creditors, on the other hand, may expect that, if conditions improve, the debtor should pay more.

Thus, a debtor might propose, or creditors might insist on, the payment of actual disposable income over the required period rather than a fixed monthly amount. Variations could include minimum or maximum requirements or some percentage of disposable income in excess of specified amounts.

Such provisions are clearly permissible in a consensual plan that arises from negotiations between the debtors and creditors. The statutory requirements seem flexible enough that a debtor’s plan that included them would satisfy the PDI test. Whether a court could impose such provisions is a more difficult question, in part because of difficulties in defining how to calculate projected disposable income when the payment is not fixed and in specifying how the debtor accounts for and reports it.

A debtor must also pay careful attention to the drafting of such a provision. In re Patel, 2020 WL 6110903 (Bankr. E.D. Cal. 2020), illustrates the issues that arise when a plan provides for payment other than fixed amounts.

There, the chapter 11 plan of the individual debtors, confirmed in 2011, provided for payment to creditors of all of the debtor’s “disposable income as defined in § 1129(a)(15)(B)” in quarterly payments over seven years. The plan required reports every 120 days, but the debtor stopped making them after 24 months.

The debtor never made any payments, and an unsecured creditor filed a motion to convert the case to chapter 7 based on the default. The debtor contended that no default existed because there had been no disposable income.

Construing the plan as a contract and applying state contract law, the court concluded that disposable income included income from all sources, not just income from the business, as the debtor argued, and that the debtor had fiduciary or contractual duties under the plan to account for disposable income. Accordingly, although state law ordinarily places the burden on the creditor to show a default, the court concluded that the debtor must show the completion of payments to receive a discharge.

The court concluded that the debtor had not shown that he had not had any disposable income and converted the case to chapter 7.


5. Requirements for feasibility and remedies for default

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Courts have addressed objections based on feasibility in the context of the facts in the case.

In In re Ellingsworth Residential Community Association, Inc., 2020 WL 6122645 (Bankr. M.D. Fla. 2020), the court confirmed the plan of a homeowners association over the objection of a creditor that it was not feasible because its funding depended on a proposed assessment of owners that had not yet been approved.

Based on testimony from the president of the association that the plan was feasible and that the homeowners would approve the assessment, the court found that the assessment would be approved and that the debtor would therefore be able to make payments as proposed. As part of its ruling, the court imposed a requirement that the homeowners approve the assessment within four months, in default of which the court would find the debtor in breach of the plan.

In In re Pearl Resources, LLC, 2020 WL 5823303 (Bankr. S.D. Tex. 2020), the court confirmed the plan of the jointly administered debtors over the objections of several creditors that the plan was not feasible because its projections with regard to disposable income were speculative and subject to market conditions.

The court observed, id. at *20 (footnotes omitted):

The new requirement [of § 1191(C)(3)(A)] fortifies the more relaxed feasibility test that § 1129(a)(11) contains. Section 1129(a)(11) requires only that confirmation is not likely to be follow by liquidation or the need for further reorganization unless the plan proposed it. . . .The feasibility requirement for confirmation requires a showing that the debtor can realistically carry out its plan. Though a guarantee of success is not required, the bankruptcy court should be satisfied that the reorganized debtor can stand on its own two feet.

The court found that expert testimony with regard to the plan’s feasibility was credible and confirmed the plan. In addition, the court found that the plan’s provision for the liquidation of assets in the event of default satisfied the requirement of § 1191(c)(3)(B) that the plan contain appropriate remedies.


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It is arguable that § 1191(c)(3) does not require that the plan provide appropriate remedies if the court concludes that the debtor will be able to make all plan payments.

Paragraph (3) has three parts. Subparagraph (3)(A) contains two of them, stated in the alternative. Clause (3)(A)(i) requires that the debtor will be able to make all payments under the plan, while clause (3)(A)(ii) requires only a reasonable likelihood that the debtor will be able to make the plan payments. The two alternative provisions make no sense because the first necessarily incorporates the second. (If the debtor will be able to make all payments it must be true that there is a reasonable likelihood that it will.) The first provision is superfluous as a practical matter because the court never has to make a distinction and decide that a debtor will be able to make payments; finding a reasonable likelihood is always sufficient.

The third part of paragraph (3) is subparagraph (B), which requires that the plan contain appropriate remedies. It makes sense as an independent directive. Moreover, it is connected to subparagraph (A) with “and”; such a connection between two requirements normally means that both must be satisfied.

The puzzling language in subparagraph (A), however, provides the basis for an argument that a drafting error occurred.

The three parts make more sense if the remedies requirement applies only when the court concludes there is a reasonable likelihood that the debtor will make payments, not that it will be able to. Under such an interpretation, the alternative requirements are: (1) a finding that the debtor will be able to make payments; or (2) a finding that there is a reasonable likelihood that the debtor will make payments and the plan provides appropriate remedies. This reading gives meaning to both parts of subparagraph (A).

The issue may be of immense academic and theoretical interest, but it is unlikely ever to arise. A debtor might argue that its prospects are so certain that the court should conclude that it will make payments such that it does not matter whether the plan contains appropriate remedies. But a debtor may not want to propose a plan that does not propose appropriate remedies because doing so subjects the plan to a more stringent feasibility requirement. Moreover, it seems risky to let confirmation depend on a bankruptcy judge’s willingness to make a fine distinction between the two feasibility standards and, more critically, a determination that the debtor satisfies the higher one.


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D. § 1129(a) Confirmation Issues Arising in Subchapter V Cases

As Sections VIII(A) and (B) explain, both consensual and cramdown confirmation require that the plan meet all of the requirements of § 1129(a) except those noted. This Section discusses confirmation issues under § 1129(a) that do not involve subchapter V provisions but that are critical to achieving confirmation.2

1. Classification of claims

A plan must designate classes of claims, with some exceptions such as priority tax claims, and interests, § 1123(a), and specify any class that is not impaired, § 1123(b). Classification is particularly critical if the debtor wants consensual confirmation because consensual confirmation requires that all classes of claims and interests accept the plan or not be impaired. § 1129(a)(8).3 The classification rule in § 1122(a) is that the claims or interests in a class must be “substantially similar.”

Two cases have considered the classification of secured claims in subchapter V plans.

In In re New Hope Hardware, LLC, 2020 WL 6588615 (Bankr. N.D. Ga. 2020), the debtor sought confirmation of a consensual plan that put two creditors, each secured by a separate vehicle, in the same class. Only one of them accepted the plan. The court concluded that, because each creditor had rights in different collateral, the claims were not substantially similar, and the classification therefore violated § 1122(a). Id. at * 3.

In In re Olson, 2020 Bankr. Lexis 2439 at * 3 (Bankr. D. Utah 2020), however, the court confirmed a plan that provided for a class of “miscellaneous secured claims.”

2. Acceptance by all classes and effect of failure to vote

Consensual confirmation requires acceptance by all impaired classes of claims and interests. § 1129(a)(8). This includes holders of equity interests if the plan impairs them. In re New Hope Hardware, LLC, 2020 WL 6588615 at * 3 (Bankr. N.D. Ga. 2020).

If a creditor does not vote on the plan, the question is whether the creditor is deemed to have accepted the plan.

In In re Olson, 2020 Bankr. Lexis 2439 at * 3 (Bankr. D. Utah 2020), the court concluded that holders of impaired claims that did not vote were bound by the classes that accepted the plan and confirmed it in the absence of any accepting vote in one class. The court relied on In re Ruti-Sweetwater, Inc., 836 F.2d 1263, 1267-68 (10th Cir. 1988).

The court in In re New Hope Hardware, LLC, 2020 WL 6588615 at * 3 (Bankr. N.D. Ga. 2020), reached the opposite conclusion. The court reasoned that, in the absence of acceptance by the impaired class of equity interests, the plan did not comply with the mandate of § 1129(a)(8) that the class either accept the plan or not be impaired.4

3. Classification and voting issues relating to priority tax claims

A debtor often owes taxes to the Internal Revenue Service as well as to state and local tax authorities that are entitled to priority under § 507(a)(8). Section 1129(a)(9)(C) requires that a plan pay the claims over a period ending not later than five years after the entry of the order for relief in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan (other than “convenience class” creditors paid in cash as § 1122(b) permits). A priority tax claim must be paid with interest at the rate that applicable nonbankruptcy law requires. § 511.

Holders of priority tax claims often do not vote on chapter 11 plans that comply with § 1129(a)(9)(C). It does not appear that acceptance by a priority tax claimant is an additional requirement for confirmation under § 1129(a). Section 1123(a)(1) expressly excludes priority tax claims from its requirement that the plan designate classes of claims, thus recognizing that voting by such creditors is not required. The court in In re New Hope Hardware, LLC, 2020 WL 6588615 at * 3 (Bankr. N.D. Ga. 2020), confirmed a plan that provided for treatment of a priority tax claim in compliance with § 1129(a)(9)(C) even though the tax claimant did not accept the plan.

Although § 1123(a)(1) does not require classification of a priority tax claim, chapter 11 plans often provide for them in a class. Better practice is to place each taxing authority in its own class or to state the treatment for each one separately.

4. Timely assumption of leases of nonresidential real estate

Section 365(d)(4)(A) provides for the automatic rejection of a lease of nonresidential real property unless it is assumed within 120 days after the date of the order for relief. The court may, prior to the expiration of the deadline, extend it for 90 days, for cause. § 365(d)(4)(B). If the lease is rejected, the debtor must immediately surrender the leased property to the lessor. § 365(d)(4)(A).

In In re Motif Designs, Inc., Case No. 20-40285, Doc. No. 122 (Bankr. S.D. Mich., Dec. 4, 2020), the sub V debtor obtained an extension of time to file its plan but had not sought to assume the lease. The plan, however, provided for the debtor to continue to occupy the property for about four months after the confirmation hearing. Because the plan provided for occupancy of the property in violation of § 365(d)(4), the court denied confirmation because the plan did not meet the requirement of § 1129(a)(1) that the plan comply with the applicable provisions of the Bankruptcy Code.

E. § 1129(b)(2)(A) Cramdown Confirmation and Related Issues Dealing With Secured Claims Arising in Subchapter V Cases

Although the cramdown requirements in § 1129(b) do not apply in subchapter V cases, § 1181(a), the provisions of § 1129(b)(2)(A) govern determination of what is “fair and equitable” with regard to secured claims for purposes of cramdown confirmation under § 1191(c)(1). This Section discusses issues relating to cramdown treatment of secured claims in subchapter V cases that involve § 1129(b)(2)(A) and other statutes that SBRA did not affect.

1. The § 1111(b)(2) election

The § 1111(b)(2) election comes into play when a secured creditor is undersecured in that its claim exceeds the value of the property in which it has a lien. Before discussing its operation and effects, it is useful to review the general rule for allowance of secured claims in
a bankruptcy case under § 506(a).

Section 506(a) provides that an allowed claim of a creditor secured by a lien on property in which the estate has an interest is secured “to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Simply put, § 506(a) gives the secured creditor a secured claim equal to the value of the encumbered property and an unsecured claim for the deficiency. Bankruptcy professionals colloquially refer to this result as the “bifurcation” of the claim into a secured claim and an unsecured claim.5 If the secured obligation is “nonrecourse” – i.e., the debtor is not personally liable and the creditor can collect its debt only from the encumbered property – the creditor does not have an unsecured claim in the case.

Assume, for example,6 that a secured creditor has a claim of $ 100,000 secured by property worth $ 30,000. Under § 506(a), bifurcation results in the creditor having two claims: a secured one for $ 30,000 and an unsecured one for $ 70,000. If the claim is non-recourse, the creditor has no unsecured claim.

Section 1111(b) modifies the treatment of secured claims in chapter 11 cases in two ways.

First, § 1111(b)(1) provides that a secured claim will be allowed or disallowed under § 506(a) regardless of whether the creditor has recourse against the debtor. The effect is that a nonrecourse secured creditor has an allowed unsecured claim against the debtor.

Second, § 1111(b)(2) permits a secured creditor to elect to have its entire claim treated as a secured claim, with two exceptions discussed later. In the example, therefore, the electing secured creditor has a secured claim of $ 100,000 and no unsecured claim.

Whether the undersecured creditor makes the election may make a significant difference in how much it must receive for the plan to comply with cramdown requirements.

Section 1129(b)(2)(A) states three alternative ways to satisfy the “fair and equitable” requirement for cramdown confirmation with regard to a secured claim. They apply in a sub V case under § 1191(c)(1).7

The most common alternative, in clause (i) of § 1129(b)(2)(A), is for the secured creditor to retain its liens and receive deferred cash payments. Alternatively, a plan is “fair and equitable” if it provides for sale of the encumbered property and attachment of liens to the proceeds, § 1129(b)(2)(A)(ii), or for the realization by the creditor of the “indubitable equivalent” of the claim, § 1129(b)(2)(A)(iii).

The specific statutory language with regard to permissible cramdown treatment of a secured claim through deferred cash payments is that the creditor must receive “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of [the creditor’s] interest in the estate’s interest in such property.” § 1129(b)(2)(A)(i)(II).

The somewhat complicated language effectively states two requirements. First, the deferred cash payments must total at least the amount of the allowed secured claim. Second, the value of the stream of payments must be equal of the value of the encumbered property. The second requirement requires application of an appropriate present value interest or discount rate. For purposes of the example, we assume it is six percent.

If the creditor in the example does not make the § 1111(b)(2) election, application of the cramdown rules is straightforward: the plan must propose to pay the entire amount of the secured claim, $ 30,000, with interest at six percent. Payment of the claim in full satisfies the first part of the test, and the provision for interest satisfies the second one. Thus, a plan could amortize $ 30,000 over, say, five years at six percent interest, in monthly payments of $ 580, a total of $ 34,800. The plan must treat the deficiency claim of $ 70,000 as an unsecured claim, usually included in the class of general unsecured claims.8

Such a provision would not, however, satisfy the first cramdown requirement if the creditor elected § 1111(b)(2). The total of payments is only $ 34,800, $ 65,200 short of the amount of the allowed secured claim, $ 100,000.9

Payment of the claim over five years would require an additional $ 1,087 per month, a total monthly payment of $ 1,667.

A longer amortization period would lower the monthly payment because there is more time to pay the claim and because more interest is paid. The following chart shows payment schedules that would satisfy both § 1129(b)(2)(A)(II) requirements (amounts rounded except monthly payment on last line). Whether a court would conclude that the longer lengths of time are “fair and equitable” is, of course, another question.

Payment Schedules Providing for Payments
Totaling $ 100,000 With a Value of $ 30,000


On $30,000


Paid at 6%


Total of Payments
($ 30,000 +
Interest payments)
Remaining Balance
($ 100,000 –


Payment on
Remaining Balance
(b) + (f)


5 years $ 580 $ 4,800 $ 34,800 $ 65,200 $ 1,067 $ 1,667
10 years $ 333 $ 9,968 $ 39,968 $ 60,032 $ 500 $ 883
15 years $ 253 $ 15,568 $ 45,568 $ 54,432 $ 302 $ 555
20 years $ 215 $ 21,583 $ 51,583 $ 48,417 $ 202 $ 417
25 years $ 193 $ 27,987 $ 57,987 $ 42,013 $ 140 $ 333
30 years $ 180 $ 34,751 $ 64,751 $ 35,249 $ 98 $ 278
53 yrs,
4 mos
$ 156.43 $ 70,113 $ 100,113 $ 0.00 $ 0.00 $ 156.43

Section 1111(b)(1)(B) states two exceptions to the availability of the § 1111(b)(2) election.

One of the exceptions applies when the encumbered property is sold under § 363 or is to be sold under the plan. If the creditor has recourse against the debtor, the § 1111(b)(2) election is not available when the property is being sold. § 1111(b)(1)(B)(ii).

The other exception applies when the undersecured creditor’s interest in the encumbered property is of “inconsequential value.” § 1111(b)(1)(B)(ii). Two courts have considered whether a creditor’s interest was “inconsequential” in the context of a subchapter V case. They are required reading for judges and practitioners dealing with § 1111(b) elections in subchapter V cases.

In re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D. N.Y. 2020), involved a taxi business that owned a single taxi medallion in which its only creditor held a security interest to secure a debt of $ 576,927. The debtor contended that the value of the medallion was $ 90,000; the creditor claimed it was worth $ 200,000.

The court noted that courts have taken different approaches to determining whether property is of inconsequential value, but concluded that, under any approach, it was impossible to conclude that the medallion’s value was inconsequential, whether it was worth $ 90,000 or $ 200,000. Id. at * 3. The court then reviewed the different approaches.

The “most obvious approach,” the court said, it to determine and apply the plain meaning of the word “inconsequential.” Nothing that various dictionaries defined the word as “irrelevant,” “of no significance,” “unimportant”, and “able to be ignored,” the court concluded as “an abstract matter” that neither value was inconsequential. 2020 WL 5806507 at *3.

The court acknowledged that “some context is required,” and that “[a]n item of a certain value might be relatively ‘inconsequential’ to a multi-billion dollar company.” 2020 WL 5806507 at *3. But the court could not conclude that the value of the medallion was “irrelevant,” “of no significance,” or something that is “able to be ignored” when it was the debtor’s most important and valuable asset, essential to its reorganization, regardless of its value. Id.

The court noted that, if the debtor owned the medallion outright and proposed to abandon it under § 554 (which permits abandonment of an asset that is “of inconsequential value or benefit to the estate”), it could not conceivably be treated as having inconsequential value. The court found no justification for giving the term a different meaning in § 1111(b) than it has in § 554. 2020 WL 5806507 at *3.

The VP Williams Trans court then considered the view that the value of the asserted security interest should be compared to the value of the collateralized asset. Under this approach, a junior security interest that is “almost completely out-of-the-money” has inconsequential value. 2020 WL 5806507 at *4.10 The court saw no difference between this view and valuation in the abstract, but concluded that it did not matter in the current case because the creditor held the only security interest in the collateral and, therefore, the value of its lien equaled the value of the collateral.

Next, the VP Williams Trans court discussed the view that the court should compare the value of the security interest to the amount of the debt.11 Under this approach, the court explained, a secured claim might have inconsequential value if the collateral is worth only a small fraction of the total claim. The court questioned application of this view when the value of the collateral is not small by itself but is significantly less than the debt. 2020 WL 5806507 at *4.

To illustrate, the court assumed that only one secured creditor with a $ 200,000 debt holds a security interest in collateral worth $ 100,000, which would not be “inconsequential.” The result should not be different, the court reasoned, when the claim is $ 2,000,000 because the value of the collateral, and therefore the value of the secured claim, is the same. The court observed that denying the § 1111(b)(2) election to the $ 2 million claimant would result in a debtor having greater rights to retain and use collateral “against the secured creditor’s will” when the debtor’s economic interests are actually far more out-of-the-money. 2020 WL 5806507 at *4.

Under yet another approach, the VP Williams Trans court continued, a secured claim may be deemed inconsequential if the § 1111(b)(2) election would give rise to a claim that could not as a practical matter be amortized fully under the cramdown confirmation standards in § 1129(b)(2)(A)(i), discussed above.12 The court reasoned that this view conditioned a creditor’s right to the § 1111(b)(2) election on the debtor having a feasible way to deal with it. The court found nothing in the statute to suggest that “‘feasibility’ from the debtor’s perspective was intended to be a limit on a creditor’s right to invoke section 1111(b).” 2020 WL 5806507 at *4.

Finally, the VP Williams Trans court considered and rejected the analysis of the Body Transit court, discussed below, that took policy considerations into account in making the “inconsequential value” determination. Later text discusses the court’s reasoning, following discussion of Body Transit.

After its discussion of the various approaches to the determination of “inconsequential value,” the VP Williams Trans court concluded that the case before it was not difficult because the creditor’s interest was not inconsequential under any of them. 2020 WL 5806507 at *6.

In In re Body Transit, Inc., 619 B.R.816, 835 (Bankr. E.D. Pa. 2020), the court ruled that the correct methodology is to compare the value of the lien position to the total amount of the claim.

The court reasoned that the statutory text of § 1111(b)(1)(B)(ii) “explains how to value [the creditor’s interest in the collateral] and then directs the court to determine whether the value is inconsequential. The statutory text does not state how to make that second determination of ‘inconsequentiality.’” 619 B.R. at 835. To make the second determination, the court continued, the court must “compare the value of the collateral to something else, and the statutory text offers no guidance there.” Id.

The court concluded that the proper comparison is between the value of the collateral to the total amount of the claim. The court stated, id. at 835, quoting 7 COLLIER ON BANKRUPTCY ¶ 1111.03[3][a] (Levin & Sommers, eds., 16th ed. 2020) (footnotes omitted):

Section 1111(b) is intended to preserve creditors’ nonbankruptcy rights, not enhance them…. Since “inconsequential” is not synonymous with “zero,” plain meaning would suggest that “inconsequential value” has to include something more than zero value. This leads to the view that a creditor whose lien is almost, but not quite, out-of-the-money should be treated as if [it] were wholly unsecured, which is for practical purposes the status the creditor would likely ascribe to itself outside of bankruptcy with collateral of little or inconsequential value. Put another way, it [sic] if the collateral’s value is inconsequential when compared to the total debt owed to the creditor, the creditor should be treated as unsecured, not secured [for purposes of § 1111(b)(1)(B)].

The court then turned to consideration of whether the creditor’s interest was of “inconsequential value” when the value of the collateral was $ 80,000, 8.2 percent of the amount of the secured debt, $ 970,233. The court stated, 619 B.R. at 836:

[T]he “inconsequential value” determination is not a bean counting exercise; the determination cannot be based solely on a mechanical, numerical calculation. Some consideration must be given to the policies underlying both the right to make the § 1111(b) election and the exception to that statutory right. In other words, while “the numbers” provide an important starting point in deciding how much value is “inconsequential,” the court also must consider other relevant circumstances presented in the case and make a holistic determination that takes into account the purpose and policy of the statutory provisions that govern the reorganization case.

Under this analysis, the court concluded that the value of the creditor’s interest was inconsequential and that it could not make the § 1111(b)(2) election.

In the court’s view, the purpose of the § 1111(b)(2) election is to protect the creditor from determination of its secured claim at a time when the value of its collateral is temporarily depressed, which could permit the debtor to realize a considerable gain upon its sale when the market rebounds. 619 B.R. at 833. The court reasoned that the case before it involving a fitness club and exercise equipment as collateral “does not resemble the classic fact pattern that Congress designed § 1111(b) to prevent. [The creditor] is not a secured creditor being cashed out during a temporary decline in the value of its collateral, with the Debtor seeking to retain such collateral and obtain the windfall benefit of a market correction in the foreseeable appreciation that restores value to the collateral.” Id. at 619 B.R. at 836.

Rather, the court found, any increase in the value of the debtor’s enterprise would most likely be “attributable to some combination of market forces, the entrepreneurial efforts and acumen of the Debtor’s principal and, perhaps, the investment of additional capital.” 619 B.R. at 836.

These circumstances, the court reasoned, supported the conclusion that the collateral was of “inconsequential value” within the meaning of § 1111(b)(1)(B)(i). The court also found support for its conclusion in the purposes and policies underlying subchapter V. Id. at 837.

In re VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D. N.Y. 2020), discussed earlier, rejected consideration of the policies that Body Transit invokes.

With regard to the intended purpose of the § 1111(b)(2) election, the court reasoned, “Section 1111(b) is not conditioned on a temporary decline in collateral value; it is available to secured creditors who are not happy with a value that a debtor has proposed, and who are not happy with the prospect of having to live with a judge’s decision as to what the value of the collateral is.” Id. at 5.

The VP Williams Trans court reasoned that the desire of Congress to foster small business reorganization had no bearing on the interpretation of § 1111(b). “Congress also desire to foster other forms of chapter 11 reorganizations,” the court said, “but section 1111(b) applies in all chapter 11 cases, including subchapter V. If Section 1111(b) was supposed to give way in a subchapter V case, or to have a different application in such a case, that was for Congress to say, and Congress did not do so.” 2020 WL 5806507 at *6.

2. Realization of the “indubitable equivalent” of a secured claim — § 1129(b)(2)(A)(iii)

One of the ways for a plan to meet the “fair and equitable” requirement for cramdown treatment of a secured claim under § 1129(b)(2)(A) (applicable in subchapter V under § 1191(c)(1)) is to provide for the creditor to realize the “indubitable equivalent” of its claim. The court in In re Pearl Resources, LLC, 2020 WL 5823303 (Bankr. S.D. Tex. 2020), examined and applied this provision in confirming a subchapter V plan of jointly administered debtors over the objection of creditors holding statutory mineral property liens under Texas law.

The total of the creditors’ claims was $ 1,151,287 million. Their statutory liens extended to all of the debtors’ gas and oil properties, valued at approximately $ 35 million. The plan provided that the creditors: (1) would retain their liens on one property, valued at $ 7,440,000; (2) would release their liens on all other properties; and (3) would receive pro rata payments from disposable income on a quarterly basis for two years. The plan further provided that, if the claims were not paid in full, with interest, in two years, the debtors would sell portions of the retained collateral to pay the claims in full. In addition, the plan provided that, if the debtors did not pay the claims in full within 34 months, the creditors would receive a lien in the debtor’s interest at that time in another property. Id. at *8-9.

The creditors rejected the plan and objected to its confirmation. Among other things, they argued that the plan was not fair and equitable because it did not provide for them to retain their existing liens and did not provide the indubitable equivalent of their claims. 2020 WL 5823303 at *20.13 The court overruled their objections and confirmed the plan.

The court explained that the indubitable equivalent requirement is tied to a “claim,” not to the property securing the claim. Thus, the court rejected the argument that the plan could not modify their lien rights in any fashion and still meet the indubitable equivalent standard. 2020 WL 5823303 at *23.

The court then addressed the creditors’ argument that the plan did not meet the indubitable equivalent requirement because it reduced their 29 to 1 value-to-debt equity cushion to a 6 to 1 cushion. The court provided the following review of case law, 2020 WL 5823303 at *24 (original footnotes omitted)14:

The Fifth Circuit has expressly recognized that one accepted method of providing indubitable equivalence is the exchange of collateral. Whether the indubitable equivalent offered is equivalent is a matter left to the discretion of the bankruptcy court in its careful reliance upon sufficient facts. Courts should not accept offers of indubitable equivalence lightly and should insist on a high degree of certainty. Moreover, indubitable equivalence is a flexible standard. The indubitable equivalent standard requires a showing that the objecting secured creditor will receive the payments to which it is entitled, and that the changes forced upon the objecting creditor are completely compensatory, meaning that the objecting creditor is fully compensated for the rights it is giving up. For example, the Fifth Circuit has stated that the “[a]bandonment of the collateral to the class would satisfy indubitable equivalent, as would a replacement lien on similar collateral.”

In Investment Company of The Southwest, [341 B.R. 298, 325 (B.A.P. 10th Cir. 2006),]the court recognized that a debtor may be permitted to use some portion of the equity cushion in collateral to help implement a plan without violating the indubitable equivalent standard, as long as the secured creditor remains over-secured beyond a reasonable doubt and has sufficient protection. Courts have approved plans that did not pay a secured lienholder all of its collateral sale proceeds, as long as the court is satisfied that there will always be more value in the remaining collateral than the lender’s lien amount.15 Courts also have routinely held that a partial surrender of collateral to an over-secured creditor provides such creditor with the indubitable equivalent of its claim.16 A sister Court approved a plan over the objection of a secured creditor finding the debtor had provided the indubitable equivalent because the secured creditor remained over-secured beyond a reasonable doubt and had sufficient payment protection over the life of the plan.17 In essence, in the bankruptcy context, the indubitable equivalent means that the treatment afforded the secured creditor must be adequate to both compensate the secured creditor for the value of its secured claim, and also insure the integrity of the creditor’s collateral position.18

Applying these standards, the court concluded that the plan provided “virtual certainty” that the claims would be paid in full and that the 6 to 1 value-to-debt ratio provided an equity cushion that was sufficient adequate protection. 2020 WL 5823303 at *25.

The court rejected the creditors’ arguments that a plan could not modify a Texas statutory mineral lien under any circumstances and that lien-stripping may not be accomplished under any circumstances, concluding that § 1123(a)(5)(E) permits a plan to modify any lien as long as it complies with § 1129(b)(2)(A).19


XIII. Effective Date and Retroactive Application of Subchapter V

***Insert text on page 99

The opposite view is that the inability of a debtor to meet the statutory deadlines when it elects subchapter V after they have expired is not due to a circumstance beyond its control. Because the debtor makes the election after the deadlines expired, the circumstances are within the debtor’s control.20 If the debtor makes the election after expiration of the deadlines and the court does not extend them, the election is nevertheless effective, and the debtor is in default of the deadlines. Thus, the court may dismiss the case under § 1112(b)(4)(J) for failure to file a plan within the time fixed by the Bankruptcy Code.21


***Add to footnote 349, after “accord” on page 99

In re Easter, 2020 WL 6009201 (Bankr. N.D. Miss. 2020) (subchapter V election made after denial of confirmation in pending chapter 11 case); In re Twin Pines, LLC, 2020 WL 5576957 (Bankr. D. N.M. 2020) (subchapter V election made in existing small business case after failure to obtain confirmation within 45 days of filing of plan);

***Add to footnote 352, after “accord” on page 99

In re Easter, 2020 WL 6009201 (Bankr. N.D. Miss. 2020) (subchapter V election made after denial of confirmation in pending chapter 11 case); In re Twin Pines, LLC, 2020 WL 5576957 (Bankr. D. N.M. 2020) (subchapter V election made in existing small business case after failure to obtain confirmation within 45 days of filing of plan);

***Add to end of footnote 352, on page 100:

The court in In re Wetter, 2020 WL 6128048 (Bankr. W.D. Va. 2020), concluded that the Trepetin approach to extension of the deadlines in a case converted from chapter 7 to chapter 11 was the proper one. The court denied the debtor’s motion to convert to chapter 11, however, because under that approach the court would decline to extend the time to file a plan.

Neither Trepetin nor Wetter discussed the language in both § 1188(a) and § 1189(b) that states that the deadlines are 60 and 90 days, respectively, from the date of the order for relief “under this chapter.” Under this language, the time periods would begin to run upon conversion of the case, thus making an extension unnecessary. See supra note 142.

***Insert text on page 109

A possible alternative for a debtor in a pre-subchapter V case who wants to be in a subchapter V case is to obtain dismissal of the pending case and then file a new one in which it elects subchapter V. In In re Slidebelts, Inc., 2020 WL 3816290 (Bankr. E.D. Cal. 2020), the court permitted dismissal of a chapter 11 case for this purpose. The court in In re Twin Pines, LLC, 2020 WL 5576957 at * 6 (Bankr. D. N.M. 2020), noted that a debtor could, upon dismissal of the pending case, file a new one and elect subchapter V in exercising its discretion to extend the deadlines for the status conference and filing of a plan so that the debtor could proceed under subchapter V.

The strategy did not work well for the individual debtors in In re Crilly, 2020 WL 3549848 (Bankr. W.D. Okla. 2020). A few hours after dismissal of their chapter 11 case filed in 2018 for cause, the individual debtors filed a new case and elected subchapter V. The debtors filed a motion to extend the automatic stay, which under § 362(c)(3) would expire 30 days after filing the second case unless extended based on a showing that the second case was filed in good faith. Under § 362(c)(3)(C)(i)(III), a filing is presumptively not in good faith if there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the previous case.

The court concluded that no change of circumstances had occurred between the filing of their two cases that would permit them to avoid the presumption. The availability of subchapter V in the new case, the court explained, could not supply such a change because it was in effect at the time of the dismissal and filing of the cases. The court for a variety of reasons refused to extend the automatic stay beyond 30 days.


[1] Such plans are commonly referred to as “step” plans. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure § 8:23 (2020).

[2] For a review and application of requirements for confirmation in a subchapter V case, see In re Pearl Resources, LLC, 2020 WL 5823303 (Bankr. S.D. Tex. 2020).

[3] It is also important in the cramdown context because cramdown confirmation still requires that the plan comply with the provisions of the Bankruptcy Code. § 1329(a)(1). But a court in the cramdown situation might overlook the issue if the treatment of all members of the class complies with the cramdown requirements anyway.

[4] The court nevertheless confirmed the plan based on acceptances by all of the holders of equity interests that occurred at the confirmation hearing.


[6] The example is taken from the excellent explanation of § 1111(b) in In re Body Transit, Inc., 619 B.R. 816, 831-33 (Bankr. E.D. Pa. 2020).

[7] See Section VIII(B)(2).

[8] When a debtor’s only debts are the undersecured claim and those of unsecured creditors and the deficiency claim of the undersecured creditor is large enough to prevent acceptance by the unsecured class, a debtor in a non-sub V case cannot confirm a plan because no impaired class of creditors has accepted it. § 1129(a)(10). If an undersecured creditor makes the § 1111(b)(2) election, it loses the ability to block confirmation in this way.

Debtors have attempted to classify the deficiency claim in a separate class so that it is possible that the class of general unsecured creditors accepts it. Debtors usually do not succeed in such “gerrymandering.” See generally NORTON BANKRUPTCY LAW & PRACTICE § 113:8.

Because confirmation in a sub V case does not require any accepting class, an undersecured creditor’s loss of the ability to prevent acceptance by the unsecured class does not matter for confirmation purposes. Unless the plan provides for a significant payment on the unsecured portion of the claim, therefore, an undersecured creditor may have little if anything to lose by making the § 1111(b)(2) election.

[9] This assumes that the interest payments of $ 4,800 count in satisfying the total of payments requirements. It is not clear that they do. See In re Body Transit, Inc., 619 B.R. 816, 833, n. 25 (Bankr. E.D. Pa. 2020), citing 7 COLLIER ON BANKRUPTCY ¶ 1111.03[5][b] (Levin & Sommers, eds., 16th ed. 2020).

[10] The court cited McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 777 (D. Ariz. 2015).

[11] The court cited In re Wandler, 77 B.R. 728, 733 (Bankr. N.D. 1987).

[12] The court cited In re Wandler, 77 B.R. 728, 733 (Bankr. N.D. 1987) (Holding that collateral worth $ 15,000 was “inconsequential” in context of claim of $ 390,000 and reasoning that payments having a nominal amount of $ 390,000 but an actual current value $ 15,000 would not be realistic).

[13] The creditors also objected on the grounds that the plan did not meet the disposable income requirement of § 1191(c)(2) and the feasibility requirements of § 1191(c)(3). 2020 WL 5823303 at *20. The court concluded that the plan met these requirements and that it provided adequate remedies for default. Id. at 21-23.

[14] In footnotes to the first paragraph of the quoted text, the court cited: In re Sun Country Dev, Inc., 764 F.2d 406, 408 (5th Cir. 1985); In re Walat Farms, Inc., 70 B.R. 330, 336 (Bankr. E.D. Mich. 1987) (“a bankruptcy court is permitted, indeed required, to make these determinations on a case by case basis and to order confirmation of a plan which indubitably protects and pays the claim of an objecting creditor”); In re Swiftco, Inc., 1988 WL 143714 (Bankr. S.D. Tex. 1988); and In re Philadelphia Newspapers, LLC, 418 B.R. 548, 568 (E.D. Pa. 2009), aff’d 599 F.3d 298 (3d Cir. 2009).

In re Philadelphia Newspapers ruled that a plan providing for the sale of the creditor’s collateral without permitting the creditor to credit bid satisfied the indubitable equivalent requirement. The Supreme Court later ruled to the contrary in Radlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 132 S.Ct. 2065 (2012). The Supreme Court concluded that the specific requirement for credit bidding in § 1129(b)(2)(A)(ii), which permits cramdown when a plan provides for the sale of collateral, precluded an interpretation of the indubitable equivalent standard that permitted sale without credit bidding.

[15] The court cited: In re Pine Mountain, Ltd., 80 B.R. 171 (B.A.P. 9th Cir. 1987) (Concluding that it was unlikely that creditor’s claim would ever become even partially unsecured and that plan provided secured creditor with variety of safeguards and fair interest rates); and Affiliated Nat’l Bank-Englewood v. TMA Assocs., Ltd. (In re TMA Associates, Ltd.), 160 B.R. 172, 174 (D. Colo. 1993).

[16] The court cited In re May, 174 B.R. 832, 838–839 (Bankr. S.D. Ga. 1994).

[17] The court cited In re SCC Kyle Partners, Ltd., 2013 WL 2903453 (Bankr. W.D. Tex.2013).

[18] The court cited 4 COLLIER ON BANKRUPTCY ¶ 506.03 (16th ed. 2020).

[19] The court cited In re Bates Land & Timber, LLC, 877 F.3d 188 (4th Cir. 2017), which permitted cramdown confirmation of a plan providing for a secured creditor to receive property valued at $ 13.7 million and cash of $ 1 million on its $ 14.6 million claim in exchange for the release of prepetition collateral.

The Pearl Resources court distinguished two cases on which the creditors relied, In re CRB Partners, LLC, 2013 WL 796566 (Bankr. W.D. Tex. 2013), and In re Swiftco, Inc., 1988 WL 143714 (Bankr. S.D. Tex. 1988). The court noted that these cases ruled that the plans did not provide the indubitable equivalent of the creditors’ claims because of an insufficient equity cushion or reasonable doubt as to payment but recognized that liens could be modified.

[20] In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020).

[21] In re Seven Stars on the Hudson Corp., 618 B.R. 333, 343-44 (Bankr. S.D. Fla. 2020). Query whether a debtor may amend the petition to withdraw the election in this situation.


bonafelPaul W. Bonapfel has been a United States Bankruptcy Judge for the Northern District of Georgia since 2002. Prior to his appointment, he practiced law in Atlanta, Georgia, with the law firm of Lamberth, Bonapfel, Cifelli & Stokes, P.A., now known as Lamberth, Cifelli, Stokes, Ellis & Nason, P.A. As an attorney, Judge Bonapfel represented all types of parties in both business and consumer bankruptcy cases, including consumer and business debtors in liquidation cases, business debtors in reorganization cases, chapter 7 and 11 bankruptcy trustees, creditors’ committees, and creditors in both consumer and business cases.

Judge Bonapfel received his B.A. cum laude in government from Florida State University in 1972 and his J.D. magna cum laude from the University of Georgia School of Law in 1975, where he was Notes Editor of the Georgia Law Review. He was a judicial law clerk for United States District Judge Wilbur D. Owens, Jr., in Macon, Georgia.

A fellow of the American College of Bankruptcy, Judge Bonapfel has served as chairperson of the Bankruptcy Sections of the State Bar of Georgia and the Atlanta Bar Association. He was also a director, and is a former president, of the Southeastern Bankruptcy Law Institute, a non-profit organization which presents an annual seminar on bankruptcy law and procedure.

Judge Bonapfel has lectured at numerous continuing legal education seminars. He is a co- author, with Judge W. Homer Drake, Jr., and Adam Goodman, of Chapter 13 Practice and Procedure (Thomson/West).

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