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Subchapter V of the Bankruptcy Code allows a debtor to confirm a “consensual” Subchapter V plan if the requirements of Section 1129(a), other than subparagraph 15, are met.  However, the debtor may seek a “non-consensual” cramdown of a Subchapter V plan under Section 1191(b) so long as the requirements of 1129(a), other than subparagraphs 8, 10 and 15, are met and the plan “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 

Whether a plan is “fair and equitable” is a factual determination which is reviewed for clear error.  See, First S. Nat’l Bank v. Sunnyslope Hous. Ltd. P’ship (In re Sunnyslope Hous. Ltd. P’ship), 859 F.3d 637, 646 (9th Cir. 2017).  The Bankruptcy Code defines the fair and equitable requirement under Subchapter V in Section 1191(c)(2) to include:

(2) As of the effective date of the plan—

(A) the plan provides that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date that the first payment is due under the plan will be applied to make payments under the plan; or

(B) the value of the property to be distributed under the plan in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date on which the first distribution is due under the plan is not less than the projected disposable income of the debtor.

Therefore, the debtor must commit to paying its disposable income over a three- to five-year period or pledge other payments having a present value of at least that amount. 

The recent decision In re Orange County Bail Bonds, Inc., 638 B.R. 137 (9th Cir. B.A.P. 2022) provides guidance as to the interaction between subsections (A) and (B), and whether a plan satisfies the requirements of Section 1191(c)(2).  In Orange County, the plan at issue provided for an effective date payment of $432,972.95 plus the possible future payment of an unknown amount.  The court initially recognizes these terms, in and of themselves, do not meet the requirements of either Subsection 1191(c)(2)(A) or (B) because the plan does not commit the debtor to pay any specific amount. 

Unlike commitment periods under chapters 12 and 13, subchapter V gives the bankruptcy court the sole authority to require a commitment period longer than the three-year minimum set by 1191(c).  Id. at 146.  In Orange County, the record before the BAP did not include provisions for a commitment period longer than three years, and absent such provisions the proffered plan had to only provide a disbursement greater than the debtor’s projected three-year disposable income.  The bankruptcy court found that the debtor’s projected three-year disposable income was $287,047.83 and, therefore, the effective date payment of $432,972.95 which was in excess of the projected disposable income satisfied the requirements of 1191(c)(2)(B). 

The case In re Urgent Care Physicians, Ltd., 2021 WL 6090985 (Bankr. E.D. Wi. December 20, 2021), addressed whether the debtor should be held to a commitment period longer than the three-year statutory minimum.  In Urgent Care, the United States Trustee argued that commitment period, and the resulting 3% distribution to general unsecured creditors, did not meet the fair and equitable requirements.  Id. at *8.  Creditors were split as to whether a three- or five-year commitment period should be imposed by the court.  Two unsecured creditors argued that the five-year period would benefit the unsecured creditors while the debtor’s secured lender argued that an intervening maturity event during the five-year plan period may allow the debtor to restructure the secured loan on less favorable terms.  Id. at *9. 

In resolving the commitment period issue, the court looked to the purpose underling the subchapter V legislation.  “[T]he SBRA created a new Subchapter V of Chapter 11 of the Bankruptcy Code, which allows certain small business debtors ‘to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business’ which ‘not only benefits the owners, but employees, suppliers, customers, and others who rely on that business.’”  Id. at 10 (quoting H.R. Rep. No. 116-171, at 4 (2019)).  Because Congress recognizes that small businesses, described as “the backbone of the American economy,” tend to have shorter lifespans than large business, the court reasoned that the three-year commitment period should be seen as a “default period” to satisfy the fair and equitable plan requirement under Section 1191(c)(2).  Id.  Moreover, Congress recognized that other interested parties, such as employees, customers, and those who rely upon the debtor, are interests which should be taken into account when balancing a shorter life span against the benefit to creditors.  Id

The Urgent Care court decided that a three-year term was the fair and equitable balance between the creditor’s demands and the burden upon the debtor.  Id. at 11.  The court viewed the debtor as a holistic entity and found that an extended term would negatively impact the debtor’s ability to reorganize because it would force the debtor to further defer salary payments to its insiders, delay full salary restoration to key staff, delay repayment of debts related to key equipment, and maintain a ceiling on employee rewards.  Id

 

Matthew T. Gensburg
mgensburg@gcklegal.com