34th Annual Northwest Bankruptcy Institute

Cosponsored by the OSB Debtor-Creditor Section and the WSBA Creditor Debtor Rights Section

Thursday, April 22, 2021 8:10 a.m.–4:15 p.m.

Friday, April 23, 2021 8:30 a.m.–4:15 p.m.

Oregon: 12.25 General CLE credits and 1 Ethics credit (MCLE Activity ID 77245)

Washington: 12.25 General CLE credits and 1 Ethics credit (applied for) (Activity ID 1166533)

34th Annual Northwest Bankruptcy Institute

ii34th Annual Northwest Bankruptcy Institute

34TH ANNUAL NORTHWEST BANKRUPTCY INSTITUTE

INSTITUTE PLANNING COMMITTEE

The Honorable David Hercher, U.S. Bankruptcy Court, District of Oregon, PortlandThe Honorable Mary Jo Heston, U.S. Bankruptcy Court, Western District of Washington, Tacoma

Oren Haker, Stoel Rives LLP, PortlandJohn Knapp, Miller Nash Graham & Dunn LLP, Seattle

Bruce Medeiros, Davidson Backman Medeiros PLLC, SpokaneRichard Parker, Parker Butte & Lane PC, Portland

OSB DEBTOR-CREDITOR SECTION EXECUTIVE COMMITTEE

Margot D. Seitz, ChairErich M. Paetsch, Chair-Elect

Laura L. Donaldson, Past ChairCassie K. Jones, TreasurerDouglas R. Ricks, Secretary

Penny Lee AustinJudson M. Carusone

Craig G. RussilloAva Lauren Schoen

Jeanne Kallage SinnottLaura R. Zaro

Rosemary E. Zook

WSBA CREDITOR DEBTOR RIGHTS SECTION EXECUTIVE COMMITTEE

William Malaier, Jr., ChairBruce Medeiros, Chair-Elect

Todd Tracy, Secretary/TreasurerKevin O’Rourke, Immediate Past Chair

Samuel DartDarren DigiacintoJennifer FaubionRussell GarrettJohn Kaplan

David KazembaJohn KnappSallye QuinnBrian Walker

The materials and forms in this manual are published by the Oregon State Bar exclusively for the use of attorneys. Neither the Oregon State Bar nor the contributors make either express or implied warranties in regard to the use of the materials and/or forms. Each attorney must depend on his or her own knowledge of the law and expertise in the use or modification of these materials.

Copyright © 2021OREGON STATE BAR

16037 SW Upper Boones Ferry RoadP.O. Box 231935

Tigard, OR 97281-1935

iii34th Annual Northwest Bankruptcy Institute

TABLE OF CONTENTS

Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vFaculty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii1. Presentation Slides: Covid Relief Under the CARES Act . . . . . . . . . . . . . . . . . 1–i

— Thomas Linde, Schweet Linde & Coulson PLLC, Seattle, Washington— Conde Cox, Law Office of Conde Cox, Portland, Oregon

2. A Guide to the Small Business Reorganization Act of 2019 . . . . . . . . . . . . . . . 2–i— The Honorable Paul Bonapfel, U.S. Bankruptcy Court, Northern District of Georgia,

Atlanta, Georgia

3. Presentation Slides: Telling the Story on Your Timesheets: A Fee Examiner’s Tips for Creditors’ Lawyers and Bankruptcy Estate Professionals . . . . . . . . . . . . . . 3–i— Professor Nancy Rapoport, William S. Boyd School of Law, University of Nevada,

Las Vegas, Nevada

4. Mediating in the Pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4–i— The Honorable David Hercher, U.S. Bankruptcy Court, District of Oregon, Portland,

Oregon— Ann Marshall, JAMS, Seattle, Washington— Judith Ross, Ross & Smith PC, Dallas, Texas

5. Presentation Slides: Planning for the Unknown: A Special Assets Approach for a Post-Lockdown Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5–i— The Honorable Mary Jo Heston, U.S. Bankruptcy Court, Western District of

Washington, Tacoma, Washington— Tina Lucas, Senior Vice President and Manager, Asset Based Lending Group,

Banner Bank, Seattle, Washington— Seth Moldoff, Senior Vice President, Director, Special Assets Department, Umpqua

Bank, Walnut Creek, California— Miles Monson, Monson Law Office, Beaverton, Oregon

6. Practical Tools to Benefit Student Loan Debtors in Bankruptcy . . . . . . . . . . . . . 6–i— Ed Boltz, Law Offices of John T. Orcutt, Durham, North Carolina— Latife Neu, Neu Law, Seattle, Washington

7. How to Take Care of Your Bankruptcy Clients and Build an FCRA Practice . . . . . . 7–i— Justin Baxter, Baxter & Baxter LLP, Portland, Oregon— Mark Leffler, Boleman Law Firm, Richmond, Virginia

8A. Presentation Slides: Washington State as a Creditor or Stakeholder in Bankruptcy, Receiverships, and Collections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8A–i— Susan Edison, Washington Attorney General’s Office, Seattle, Washington— Angie Lee, Washington Attorney General’s Office, Seattle, Washington

8B. State of Oregon as a Creditor or Stakeholder in Bankruptcy, Receiverships, and Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–i— Carolyn Wade, Oregon Department of Justice, Salem, Oregon

9. Ninth Circuit Case Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–i— The Honorable Whitman Holt, U.S. Bankruptcy Court, Eastern District of Washington,

Yakima, Washington— The Honorable Peter McKittrick, U.S. Bankruptcy Court, District of Oregon, Portland,

Oregon— Ann Chapman, Vanden Bos & Chapman, Portland, Oregon

iv34th Annual Northwest Bankruptcy Institute

Thank you to our lunch and social platform sponsor

Thank you to our Chapter 13 Recent Developments

book sponsor

v34th Annual Northwest Bankruptcy Institute

SCHEDULE

Thursday, April 22, 2021

8:10 Welcome

8:15 How COVID-19 Has Changed Debtor-Creditor and Bankruptcy Law: The CARES Act and BeyondModerator: Bruce Medeiros, Davidson Backman Medeiros PLLC, SpokaneConde Cox, Law Office of Conde Cox, PortlandThomas Linde, Schweet Linde & Coulson PLLC, Seattle

9:15 Transition

9:20 Subchapter V and Small Business ConsiderationsThe Honorable Paul Bonapfel, U.S. Bankruptcy Court, Northern District of Georgia, AtlantaOren Haker, Stoel Rives LLP, PortlandAditi Paranjpye, Cairncross & Hempelmann, SeattleAmy Mitchell, Chapter 7 Trustee, Lake Oswego

10:20 Break

10:30 Telling the Story on Your TimesheetsProfessor Nancy Rapoport, William S. Boyd School of Law, University of Nevada, Las Vegas

11:30 Transition

11:35 Mediating in the PandemicThe Honorable David Hercher, U.S. Bankruptcy Court, District of Oregon, PortlandAnn Marshall, JAMS, SeattleJudith Ross, Ross & Smith PC, Dallas, Texas

12:35 Virtual Lunch on RemoTry out the platform that will be used for the afternoon social and enjoy your home or office lunch with other institute attendees.Thank you to our lunch platform sponsor Miller Nash Graham & Dunn LLP.

1:20 Transition

1:25 Planning for the Unknown: A Special Assets Approach for a Post-Lockdown EconomyModerator: The Honorable Mary Jo Heston, U.S. Bankruptcy Court, Western District of Washington, TacomaTina Lucas, Senior Vice President and Manager, Asset Based Lending Group, Banner Bank, SeattleSeth Moldoff, Senior Vice President, Director, Special Assets Department, Umpqua Bank, Walnut Creek, CaliforniaMiles Monson, Monson Law Office, Beaverton

2:40 Break

vi34th Annual Northwest Bankruptcy Institute

2:45 Judges PanelModerator: The Honorable Frank Alley, U.S. Bankruptcy Judge (ret.), EugeneThe Honorable Trish Brown, U.S. Bankruptcy Court, District of Oregon, PortlandThe Honorable Fred Corbit, U.S. Bankruptcy Court, Eastern District of Washington, SpokaneThe Honorable Timothy Dore, U.S. Bankruptcy Court, Western District of Washington, SeattleThe Honorable Thomas Renn, U.S. Bankruptcy Court, District of Oregon, Eugene

4:15 Adjourn to Virtual Social on RemoConnect with Oregon and Washington bankruptcy colleagues and judges at the institute’s virtual social —it may have been a while since you last saw some of them!Thank you to our social platform sponsor Miller Nash Graham & Dunn LLP.

Friday, April 23, 2021

8:30 Recent Developments in Chapter 13 Case LawThe Honorable Keith Lundin, U.S. Bankruptcy Judge (ret.), Pittsburgh, PennsylvaniaHenry Hildebrand III, Chapter 13 Trustee, Middle District of Tennessee, Nashville

10:30 Break

10:45 Practical Tools to Benefit Student Loan Debtors in BankruptcyEd Boltz, Law Offices of John T. Orcutt, Durham, North CarolinaLatife Neu, Neu Law, Seattle

11:45 Lunch

12:30 How to Take Care of Your Bankruptcy Clients and Build an FCRA PracticeJustin Baxter, Baxter & Baxter LLP, PortlandMark Leffler, Boleman Law Firm, Richmond, Virginia

1:30 Transition

1:35 The State as a Creditor or Stakeholder in Bankruptcies, Receiverships, and CollectionsAngie Lee, Washington Attorney General’s Office, SeattleSusan Edison, Washington Attorney General’s Office, SeattleCarolyn Wade, Oregon Department of Justice, Salem

2:50 Break

3:00 Ninth Circuit Case ReviewThe Honorable Whitman Holt, U.S. Bankruptcy Court, Eastern District of Washington, YakimaThe Honorable Peter McKittrick, U.S. Bankruptcy Court, District of Oregon, PortlandAnn Chapman, Vanden Bos & Chapman, Portland

4:15 Adjourn

SCHEDULE (Continued)

vii34th Annual Northwest Bankruptcy Institute

FACULTY

The Honorable Frank Alley, U.S. Bankruptcy Judge (ret.), Eugene. Justin Baxter, Baxter & Baxter LLP, Portland. Mr. Baxter’s practice focuses on consumer litigation with an emphasis on credit reporting and unlawful debt collection cases. He is a founding board member of Oregon Consumer Justice, a member of the National Association of Consumer Advocates Board of Directors, a member of the Multnomah Bar Association, and a member of the Oregon Trial Lawyers Association and past chair of its Consumer Protection Section. He is admitted to practice in Oregon and Washington.Ed Boltz, Law Offices of John T. Orcutt, Durham, North Carolina. Mr. Boltz is the managing partner of his firm. He represents clients in Chapter 13 and Chapter 7 bankruptcies and develops student loan options to provide relief for debtors in bankruptcy. He serves on the National Association of Consumer Bankruptcy Attorneys Board of Directors and cochairs its Legislative Committee. He has testified before Congress on bankruptcy issues related to student loans and veterans. Mr. Boltz is a member of the North Carolina State Bar, where he has been certified as a specialist in consumer bankruptcy law.The Honorable Paul Bonapfel, U.S. Bankruptcy Court, Northern District of Georgia, Atlanta. Judge 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, representing all types of parties in 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 is a coauthor, with Judge W. Homer Drake, Jr., and Adam M. Goodman, of Chapter 13 Practice and Procedure (Thomson/West). He is a Fellow of the American College of Bankruptcy, has served as chair of the State Bar of Georgia Bankruptcy Section and the Atlanta Bar Association Bankruptcy Section, and was a director and president of the Southeastern Bankruptcy Law Institute, which presents an annual seminar on bankruptcy law and procedure. He teaches a course at Mercer Law School in Macon, Georgia, on consumer bankruptcy practice.The Honorable Trish Brown, U.S. Bankruptcy Court, District of Oregon, Portland. Ann Chapman, Vanden Bos & Chapman, Portland. Ms. Chapman has practiced bankruptcy law since 1985. She is an active member of the Oregon State Bar Debtor/Creditor Section and a member of WOMBATS (Women Bankruptcy Attorneys). She is the 2014 recipient of the OSB Debtor/Creditor Section William N. Stiles Award of Merit.The Honorable Fred Corbit, U.S. Bankruptcy Court, Eastern District of Washington, Spokane. Conde Cox, Law Office of Conde Cox, Portland. Mr. Cox is a commercial and business dispute litigator with deep experience in federal bankruptcy court procedure. He represents all parties affected by bankruptcy filings, including in Bankruptcy Court adversary proceedings. He has served for many years as a member of the Local Rules Committee for the Bankruptcy Courts for the District of Oregon, and he is a longstanding member of the Federal Bar Association–Oregon Chapter Board of Directors. He is a regular speaker at CLE events sponsored by the Oregon Bar and by the Federal Bar Association, and he has authored many published articles relating to bankruptcy courts’ jurisdiction and their unique rules of procedure, including a recent 2019 article in the national FBA Federal Lawyer magazine entitled “Bankruptcy Court Subject Matter Jurisdiction: Assessing the Limits of the Judicial Power of Article I Courts.”The Honorable Timothy Dore, U.S. Bankruptcy Court, Western District of Washington, Seattle. Susan Edison, Washington Attorney General’s Office, Seattle. Ms. Edison has been Senior Counsel in the Bankruptcy and Collections Unit since 2015. She represents the Washington State Taxing Agencies and the Department of Social and Health Services primarily in Chapter 13 bankruptcy cases. She joined the Attorney General’s Office in 1989 and spent over 22 years working in the Torts Division.

viii34th Annual Northwest Bankruptcy Institute

Oren Haker, Stoel Rives LLP, Portland. Mr. Haker focuses on the representation of a wide range of parties in workouts, debt restructurings, receiverships, and bankruptcy cases, including corporate debtors, trade and financial creditors, creditors’ committees, lessors, and strategic and financial investors acquiring assets of troubled companies. During the 2008 financial crisis, Mr. Haker was a member of the legal team advising President Obama’s Auto Task Force in the General Motors, Chrysler, and Delphi Automotive Chapter 11 cases. Mr. Haker is admitted to practice in Oregon, New York, and Washington.The Honorable David Hercher, U.S. Bankruptcy Court, District of Oregon, Portland. The Honorable Mary Jo Heston, U.S. Bankruptcy Court, Western District of Washington, Tacoma. Henry Hildebrand III, Chapter 13 Trustee, Middle District of Tennessee, Nashville. Mr. Hildebrand has served as Standing Trustee for Chapter 13 matters in the Middle District of Tennessee since 1982 and as Standing Chapter 12 Trustee for that district since 1986. He also is of counsel to the Nashville law firm of Belcher Sykes Harrington PLLC. He is a Fellow of the American College of Bankruptcy and the Nashville Bar Foundation. He is board-certified in consumer bankruptcy law by the American Board of Certification and serves on its faculty committee. He is chair of the National Association of Chapter 13 Trustees (NACTT) Legislative and Legal Affairs Committee, is on the NACTT Academy for Consumer Bankruptcy Education, Inc., Board of Directors, and is an adjunct faculty member for the Nashville School of Law and St. Johns University School of Law. In addition, he has served as a commissioner to the American Bankruptcy Institute Commission on Consumer Bankruptcy.The Honorable Whitman Holt, U.S. Bankruptcy Court, Eastern District of Washington, Yakima. Mark Leffler, Boleman Law Firm, Richmond, Virginia. Mr. Leffler has spent most of his career litigating in bankruptcy court, including bringing numerous actions against debt collectors, mortgage companies, and predatory lenders in bankruptcy. He is president of the National Association of Chapter Thirteen Trustees (NACTT) Academy for Consumer Bankruptcy Education, is a frequent author for the NACTT Academy’s webzine at http://considerchapter13.org, and has served as a panelist at numerous annual conferences of the NACTT. He is a frequent speaker and author on bankruptcy matters for Virginia CLE programs.Angie Lee, Washington Attorney General’s Office, Seattle. Ms. Lee is an Assistant Attorney General in the Bankruptcy and Collections Unit and primarily represents the Washington State taxing agencies in Chapter 7 bankruptcies, receiverships, probates, foreclosures, and contractor bond actions. She previously was a solo practitioner providing general counsel services to small businesses and representing bankruptcy debtors and personal injury claimants, and before that she was a business litigator in Los Angeles representing Chapter 7 trustees, banks, finance lenders, and businesses in state, federal, and bankruptcy courts. Ms. Lee is admitted to practice law in Washington and California.Thomas Linde, Schweet Linde & Coulson PLLC, Seattle. Mr. Linde concentrates his practice in the areas of real estate law and creditors’ rights and remedies, including real estate transactions and financing, judicial and nonjudicial real property foreclosures, real estate contract forfeitures, evictions, and the representation of creditors in bankruptcy proceedings. Mr. Linde is a member of the King County, Washington State and American Bar Associations and the American Bankruptcy Institute, past chair of the Washington State Bar Association CLE Committee, past chair of the King County Bar Association Bankruptcy Section, past cochair of the Federal Bar Association for the Western District of Washington Bankruptcy Committee, past chair of the Washington State Bar Association Creditor-Debtor Section, and past cochair of the delegation of lawyer representatives from the Western District of Washington to the Ninth Circuit Judicial Conference. He is a frequent speaker at continuing legal education seminars relating to creditors’ rights and remedies.Tina Lucas, Senior Vice President and Manager, Asset Based Lending Group, Banner Bank, Seattle. The Honorable Keith Lundin, U.S. Bankruptcy Judge (ret.), Pittsburgh, Pennsylvania.

FACULTY (Continued)

ix34th Annual Northwest Bankruptcy Institute

Ann Marshall, JAMS, Seattle. Ms. Marshall has litigation or mediation experience in bankruptcy, business/commercial, and construction and development, consumer lending, insurance, professional liability, and real property cases. She has extensive ADR experience and training. She completed mediation training at the Straus Institute for Dispute Resolution at Pepperdine University School of Law, among numerous other courses and trainings in negotiation and mediation. She is a member of the Alternative Dispute Resolution Section of both the Washington State Bar Association and King County Bar Association and a panelist and former chair of the Western Washington Bankruptcy Court’s Thomas T. Glover Mediation Program. Ms. Marshall is admitted to practice in Washington and Oregon.The Honorable Peter McKittrick, U.S. Bankruptcy Court, District of Oregon, Portland. Bruce Medeiros, Davidson Backman Medeiros PLLC, Spokane. Mr. Medeiros has 20 years of experience representing debtors in bankruptcy cases under Chapters 7, 11, 12, and 13. He has served as primary debtor’s counsel and as cocounsel in over 30 Chapter 11 and Chapter 12 bankruptcy cases filed in the Eastern District of Washington and the District of Idaho. A significant portion of Mr. Medeiros’s practice is devoted to the representation of creditors in all types of bankruptcy proceedings, including the representation of creditors’ committees in Chapter 11 bankruptcy cases. Mr. Medeiros also represents creditors in nonbankruptcy matters, including the enforcement of their rights in state court proceedings, and he has served as counsel for court-appointed receivers in a number of state court receivership proceedings. He represents numerous banks and credit unions and frequently participates in the presentation of seminars on creditors’ and debtors’ rights in bankruptcy and nonbankruptcy proceedings to the legal and financial community.Amy Mitchell, Chapter 7 Trustee, Lake Oswego. Seth Moldoff, Senior Vice President, Director, Special Assets Department, Umpqua Bank, Walnut Creek, California. Miles Monson, Monson Law Office, Beaverton. Mr. Monson’s practice focuses primarily on the representation of financial institutions in creditors’ rights, commercial and consumer secured transactions, and business litigation throughout Oregon and Washington. He has argued before the Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit Court of Appeals. He is past chair of the Oregon State Bar Debtor/Creditor Section and has served in various other leadership positions for the section. He is also a member of the American Bankruptcy Institute and the Washington State Bar Association Creditor Debtor Rights Section. He is admitted to practice in Oregon and Washington and before the United States Supreme Court.Latife Neu, Neu Law, Seattle. Since opening her solo law practice in 2009, Ms. Neu has primarily represented consumer debtors in Chapter 7 and Chapter 13 and has developed a robust student loan practice. She speaks on student loans to attorneys, various industry groups, and the public.Aditi Paranjpye, Cairncross & Hempelmann, Seattle. Ms. Paranjpye represents companies, individuals, and receivers in commercial bankruptcy, restructuring, and receiverships. She advises creditors, debtors, and receivers with respect to risk management and dispute resolution. She serves on the Consumer Education and Training Services (CENTS) Board of Directors. She is a member of the King County Bar Association Creditor-Debtor Section, the Federal Bar Association Creditor-Debtor Section, the American Bankruptcy Institute, the Turnaround Management Association TMA NOW Committee, and the South Asian Bar Association of Washington. Ms. Paranjpye regularly speaks on topics related to bankruptcy and insolvency.

FACULTY (Continued)

x34th Annual Northwest Bankruptcy Institute

Professor Nancy Rapoport, William S. Boyd School of Law, University of Nevada, Las Vegas. Professor Rapoport is the Garman Turner Gordon Professor of Law at the William S. Boyd School of Law and an Affiliate Professor of Business Law and Ethics in the Lee Business School at UNLV. Her specialties are bankruptcy ethics, ethics in governance, law firm behavior, and the depiction of lawyers in popular culture. She is a member of the American Law Institute, a Fellow of the American Bar Foundation, and a Fellow of the American College of Bankruptcy. Among her published works are Corporate Scandals and Their Implications 3d (Nancy B. Rapoport and Jeffery D. Van Niel, eds. West Academic 2018), which addresses the question of why we never seem to learn from prior corporate scandals, Law School Survival Manual: From LSAT to Bar Exam, coauthored with Jeffrey D. Van Niel (Aspen Publishers 2010), and Law Firm Job Survival Manual: From First Interview to Partnership, also coauthored with Jeffrey D. Van Niel (Wolters Kluwer 2014). In 2017, she received the Commercial Law League of America Lawrence P. King Award for Excellence in Bankruptcy, and in 2018, she was one of the recipients of the NAACP Legacy Builder Awards. She appeared in the Academy Award–nominated movie, Enron: The Smartest Guys in the Room (Magnolia Pictures 2005) (as herself). She is admitted to the bars of the states of California, Ohio, Nebraska, Texas, and Nevada and before the United States Supreme Court.The Honorable Thomas Renn, U.S. Bankruptcy Court, District of Oregon, Eugene. Judith Ross, Ross & Smith PC, Dallas, Texas. Ms. Ross has provided legal counsel to clients operating in a broad range of industries in national and international bankruptcy cases. She has substantial experience in corporate reorganization and bankruptcy, as well as fostering consensus in complex disputes. Ms. Ross is cochair of the American Bar Association Business Bankruptcy Committee Alternative Dispute Resolution Subcommittee, a member of the American Bar Association Business Law Section, and a Fellow of the Dallas Bar FoundationCarolyn Wade, Oregon Department of Justice, Salem.

FACULTY (Continued)

Chapter 1

Presentation Slides: Covid Relief Under the CARES Act

Thomas LindeSchweet Linde & Coulson PLLC

Seattle, Washington

Conde CoxLaw Office of Conde Cox

Portland, Oregon

Chapter 1—Presentation Slides: Covid Relief Under the CARES Act

1–ii34th Annual Northwest Bankruptcy Institute


1–134th Annual Northwest Bankruptcy Institute

Covid Relief Under the CARES ActA Detailed Analysis of the Temporary

Changes to the Bankruptcy Code

Northwest Bankruptcy Institute, 2021

Mr. Thomas Linde, Schweet Linde Coulson PLLC, Seattle

Mr. Conde T. Cox, Law Office of Conde Cox, Portland



WashingtonBankruptcy

Data

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Washington BK Filings2004 to 2020

WDWA Total EDWA Total



Western DistrictFilings

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

WDWA by Chapter2004 to 2020

Ch7 Ch11 Ch12 Ch13

• The Western District of Washington’s total bankruptcy filings have declined by 30.1% year-to-year from 2019 to 2020

• U.S. nationwide average is 30% decline from 2019 to 2020

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EDWA by Chapter2004 to 2020

Ch7 Ch11 Ch12 Ch13

• The Eastern District of Washington’s total bankruptcy filings have declined by 31.8% year-to-year from 2019 to 2020

• U.S. nationwide average is 30% decline from 2019 to 2020



What could be drivingthe current filing trends?

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Washington BK Filings2004 to 2020

WDWA Total EDWA Total

BAPCPA effectiveQ4 2005

U.S. Enters “Great Recession”

Q4 2007

U.S. Exits “Great Recession”Q3 2009

WHO Declares COVID-19 to be a global pandemic

Q1 2020

U.S. Economy reaches “full employment” as unemployment

rate hits 50 year lowQ4 2019

A couple of theories…• Massive Relief Programs• Coronavirus Preparedness and Response Supplemental

Appropriations Act – March 2020• Families First Coronavirus Response Act – March 2020• Coronavirus Aid, Relief, and Economic Security Act (“CARES

Act”) – March 2020• Consolidated Appropriations Act – December 2020 (“CAA”)• American Rescue Plan – March 2021 (“ARP”)• COVID-19 Bankruptcy Relief Extension Act – March 2021



A couple of theories… (cont.)• Prevention of “triggering events”

• Government Moratoriums

Foreclosures

Evictions

Garnishments

• Forbearances

Federal Student Loans

Private Forbearance Agreements

SBA PPP Forgivable LoanProgram Under CARES

• Two Rounds of Loans: mid-2020 and through May, 2021

• Administered by SBA, with 100% SBA guaranty for institutional lenders

• Maximum Loan Amount Calculated as 2.5X Average Monthly 2019 Payroll, which includes compensation for owners/partners (up to 100k per year)

• Maximum 500 Employees to Qualify (exceptions for some hotels and restaurants)

• Maximum Loan Amount $10mm in Round I; $2mm in Round II



SBA PPP Forgivable LoanProgram Under CARES (cont.)

• Second Round of Loans (early 2021, exp May 31, 2021) required showing of lower gross income for one quarter, 2020, vs same quarter, 2019

• Trend: Borrowers in Bankruptcy Disqualified From Obtaining PPP Loans (in Most Jurisdictions, including 5th & 11th Circuits and in District of Oregon, but not in District of New Mexico), Resulting in Some Ch 11 Case Dismissals to Allow for PPP Loans; Consolidated Appropriations Act (“CAA,” signed Dec 27 2020) gives SBA administrator discretion to allow or deny PPP loans to borrowers in bankruptcy

PPP Loan Forgiveness

• SBA has discretion to forgive loans owing by borrowers in bankruptcy: recent experience is that bkcy case must be dismissed or closed to obtain SBA forgiveness

• How to Qualify For Forgiveness: Available to All Borrowers Using Loan Proceeds to Pay Rent (or Commercial Mortgage), Utilities, Employee Payroll/Owner/Partner Compensation Up to $8,333 Per Month Per Individual Within 24 Weeks



PPP Loan Forgiveness (cont.)

• Forgiven Loans Not Treated as Taxable Income: Excluded from IRC Section 108 Treatment. Therefore, no loss of tax attributes (e.g., NOL carryforwards, basis in depreciable property, etc.) for SBA Forgiveness of PPP Loans

• Compare: Use of Bankruptcy Discharge to Eliminate PPP Loans, Instead of SBA Forgiveness, Will Cause Loss of Tax Attributes: forgiveness is better than discharge.

PPP Loan Forgiveness (cont.)

• SBA Application Form for Forgiveness (like the SBA form application for PPP loans) includes a form question about whether borrower is a Debtor in bankruptcy. Borrowers in bankruptcy may not (unclear) qualify for PPP loan forgiveness

• Adverse Impact for Use of Bankruptcy Discharge Instead of SBA Forgiveness will manifest on April 15 of second year after bkcy discharge for CH 11 individuals, for SUBCH V Small Business Debtors, for CH 12 Debtors, and for CH 13 Debtors---because discharge deferred until plan payments are completed and because attribute adjustment date is Jan 1 of year after discharge

• No Documentation Required for Forgiveness of PPP Loans Under $50k for Round I Loans, $150k for Round II Loans



CARES Act Changes toBankruptcy Code

• Amending 11 U.S.C. § 1182(1) to increase the debt limits for CH 11 Subch V small business debtors from $2.7 million to $7.5 million

• Amending 11 U.S.C. § 101(10)(A)(B)(ii) to specifically exempt aid received through government programs to assist with COVID-19 issues from inclusion in income for the purpose of calculating monthly gross income on the means test

CARES Act Changes to Bankruptcy Code (cont.)

• Amending 11 U.S.C. § 1325(b)(2) to allow Chapter 13 plans to be amended beyond the 60-month limit previously applicable to Chapter 13 Plans to 84 months

• Amending 11 U.S.C. § 1329(d) to add material financial hardship due to COVID-19 as a basis for amending a Chapter 13 plan



CARES Act Changes in Subchapter V Cases

• Congress enacted the Small Business Reorganization Act (“SBRA”), which became effective February 19, 2020

• Created a new Subchapter V of Chapter 11 of the Bankruptcy Code to help qualifying Small Business Debtors reorganize under bankruptcy protection while maintaining business administration and operational control

CARES Act Changes in Subchapter V Cases (cont.)

• Subchapter V has a previous debt limit of $2.7 million which CARES expanded to $7.5 million so more Small Business Debtors qualify and can access the Subchapter V vehicle as opposed to filing a conventional Chapter 11 case

• Debt limit expansion is effective until March 27, 2022 pursuant to the COVID-19 Bankruptcy Relief Extension Act of 2021



Federal Coronavirus Aid

• “Income” as defined by the Bankruptcy Code for Chapters 7 and 13 does not include federal coronavirus aid (i.e., stimulus payments and enhanced UI)

• Federal coronavirus aid is exempt from Means Test calculation which results in more Debtors having the flexibility to choose Chapter 7 if their federal coronavirus aid would have resulted in a presumption of abuse outcome from their Means Test calculations

• These changes are effective until March 27, 2022 pursuant to the COVID-19 Bankruptcy Relief Extension Act of 2021

Chapter 13 Cases

• Chapter 13 plans can be amended beyond the 60-month limit previously applicable to Chapter 13 Plans and extended to 84 months

• Allows a 7-year Chapter 13 Plan term

• This change is effective until March 27, 2022 pursuant to the COVID-19 Bankruptcy Relief Extension Act of 2021



Chapter 13 Cases (cont.)

• Chapter 13 Debtors may amend previously confirmed Chapter 13 Plans due to a “material financial hardship” caused by the COVID-19 Pandemic

• Practice Pointer = successful motions using this change to subsection 1329 have included Declarations from the Debtors explaining how the COVID-19 Pandemic has caused them to experience material financial hardship

• This change is effective until March 27, 2022 pursuant to the COVID-19 Bankruptcy Relief Extension Act of 2021

Other CARES changes to the Bankruptcy Code

• Deferral for 2 Years For Payment of 2020 Employer Share 941s (and 2020 Self-Employment Taxes), direct stimulus payments to less-than-high-earners, increased unemployment benefits, suspension of minimum IRA distributions, moratoria on federally backed mortgages, (more on that topic in next Slide)



CAA Changes to theBankruptcy Code

• The CAA was enacted by Congress in December of 2020 and included a handful of changes to the Bankruptcy Code that may have flown under the radar

• All theses changes were not extended by the COVID-19 Bankruptcy Relief Extension Act of 2021 and will expire on December 27, 2022 unless Congress acts to extend them

CAA Changes to theBankruptcy Code (cont.)

• Small Business Subchapter V Chapter 11 Debtors have an additional 60 days on top of existing 60 days to pay initial post-petition months’ rent, giving 120 days to pay ‘stub rent’ and other similar post-petition first 4 months’ post-petition rent

• All Chapters’ Debtors are given an extra 90 days on top of the existing 210 days to assume/reject commercial leases, giving a new 300 day time limit



CAA Changes to theBankruptcy Code (cont.)

• Insulating certain otherwise voidable preferences from recovery if the delay in payment was caused by the COVID-19 Pandemic

• Changes to anti-discrimination Section 525, to allow Debtor entities full benefits of moratoria on evictions and foreclosures

Forbearances

• Forbearances have played just as strong a role in preventing an increase in bankruptcy filings in the age of COVID-19

• Historically, real estate foreclosures tend to correlate with bankruptcy filings, more foreclosures = more bankruptcy filings



Federal Foreclosure Moratorium

• On the federal level, the United States Departments of Housing and Urban Development, Veterans Affairs, and Agriculture have banned foreclosures through June 30, 2021

• Take note that the federal foreclosure moratorium only applies to federally related mortgages (i.e., Fannie, Freddie, FHA, VA, and USDA mortgages)

• Borrows with federally related mortgages have until June 30, 2021 to request mortgage payment forbearance

Federal Eviction Moratorium

• On the federal level, the United States Centers for Disease Control and Prevention has extended the federal eviction moratorium through June 30, 2021

• The CDC’s eviction ban applies to individuals who earn less than $99,000 a year and couples who make under $198,000

• Practice Pointer: Qualified tenants cannot rely on the CDC’s moratorium alone; rather, they must take the affirmative step of executing and delivering a Declaration to their Landlord(s) that they cannot afford rent and an eviction could result in crowding from moving in with others in a confined space or homelessness



Washington’s Eviction Ban

• Washington Governor Jay Inslee has issued several emergency proclamations banning most residential and commercial evictions

• Current proclamation is Proclamation #20-19.6 which available at: https://www.governor.wa.gov/sites/default/files/proclamations/proc_20-19.6.pdf

• Effective through June 30, 2021, but some exceptions apply

Exceptions to Washington’sEviction Ban

• Ban does not apply to emergency shelters where length of stay is conditioned upon a resident’s participation in, and compliance with, a supportive services program

• Ban does not apply to health and safety hazards provided the landlord, property owner, or property manager attaches an affidavit to the eviction or termination of tenancy notice attesting that the action is necessary to respond to a significant and immediate risk to the health, safety, or property of others created by the resident



Exceptions to Washington’s Eviction Ban (cont.)

• Ban does not apply to a landlord, property owner, or property manager who provides at least 60 days’ written notice of the property owner’s intent to:

• Personally occupy the premises as the owner’s primary residence, or

• Sell the property

Exceptions to Washington’s Eviction Ban (cont.)

• Ban does not apply to a landlord, property owner, or property manager who demonstrates by a preponderance of the evidence to a court that the resident was offered, and refused or failed to comply with, a re-payment plan that was reasonable based on the individual financial, health, and other circumstances of that resident

• Practice Pointer: failure to provide a reasonable repayment plan is a defense to any lawsuit or other attempts to collect under the terms of the eviction ban



Oregon’s Eviction Ban &Related Materials

• Governor Brown’s Executive Order 20-37, extending House Bill 4204's mortgage foreclosure moratorium, expired on December 31, 2020, pursuant to the terms of that order

• Governor Brown’s Executive Order 20-56, which imposed a temporary moratorium on residential evictions for nonpayment, also expired on December 31, 2020, pursuant to the terms of that order, and was replaced by the temporary eviction moratorium set forth in House Bill 4401 (2020), which is explained in detail on the next slide

Oregon’s Eviction Ban &Related Materials (cont.)

• Extends to December 31, 2020 the “Emergency Period” that began on April 1, 2020 and for which terminations, evictions and associated notices for nonpayment are prohibited until end of “Grace Period” which is extended to March 31, 2021.

• Prohibits late fees, credit reporting, and actions to recover Emergency Period balance during the Grace Period.

• Requires Landlords to provide tenant, along with any other nonpayment notice, a statutorily prescribed notice and declaration form that notifies tenant of tenant’s right to declare a COVID-19 financial hardship and extends the Emergency Period and Grace Period through June 30, 2021.




• Extends Emergency and Grace Period through June 30, 2021 if tenant declares COVID-19 financial hardship OR if Landlord fails to properly provide statutory notice and declaration form.

• Extends ban on no-cause terminations, evictions and associated notices through June 30, 2021.

• Reinstates all ORS 90.427(5) Qualifying Landlord Reason terminations.

• Extends 72/144 hour notice periods for nonpayment of rent under to 10/13 day periods, respectively.


• Creates a $150M landlord compensation fund whereby Landlord (upon accepted application) can be reimbursed for 80% of the rent owed to Landlord in exchange for forgiving the remaining 20%

• Violations risk Landlord liability for three months’ rent penalty, injunction prohibiting eviction, writ of possession, and Tenant’s attorneys fees.



Changes to Bankruptcy Code Debt Limits Under CARES Act, As Amended

• For two years, from March 27, 2020, until March 27, 2022, (recently extended), debt limit for Small Business CH 11 [Subch V] DIPs increased from $2.725mm to $7.5mm. Section 1182(1).

• No Change for CH 12 Family Farmer Debt Limit of $10mm----50% of which must arise from a farming operation. Section 101(18).

• No Change for CH 12 Family Fisherman Debt Limit of $2.044mm (excluding debt on one dwelling), 80% of which must arise from a fishing operation. Section 101(19A).

• No Change for CH 13 Debt Limit of Unsecured $419K and Secured $1.257mm. Section 109(e).

WHY HAVE DEBT LIMITS?Are the Quid Pro Quos Illusory?

• Quid Pro Quos: In Chapters With Debt Limits, the Code Eliminates Absolute Priority of Debt Over Equity/Ownership [§1129(b)(2)(B)(ii) versus §§1191(c)(1)/1125/1325 ], Reduce Secured Claims to Collateral Value [§506(a)], and Eliminate Some Administrative Burdens (e.g., no Disclosure Statement)

• Compare to no-debt-limit Chapter 11, which imposes absolute priority (“AP”) rule and which gives 1111(b)(2) secured creditor election to [seemingly] blunt effect of claim bifurcation under 506(a)



WHY HAVE DEBT LIMITS?Are the Quid Pro Quos Illusory? (cont.)

• Are these Quid Pro Quos ‘illusory?’

• For AP, after 203 North LaSalle, is the right to bid for equity (or to make a take-over proposal) only of value in cases involving lots of $$$ (i.e., debt limits do not matter anyway, such that AP rule offers protection; in other words, creditor bidding for ownership is never undertaken in small dollar cases anyway.

• Does the ‘present value’ maximum payment provisions in §§1129(a)(7)(B) and in 1129(b)(2)(A)(i)(II) also make election for secured creditors under §1111(b) ‘illusory?’

WHY HAVE DEBT LIMITS?Are the Quid Pro Quos Illusory? (cont.)

• Is elimination of DS for Small Business Debtors also an illusion? See §1187(c); the option to file a ‘one-page’ DS.



Are The Bankruptcy Code Debt Limits For Some Chapters Actually Arbitrary Or Illusory? (cont.)

• Compare Ch 13 limit of $1.2mm secured debt with $10mm aggregate debt limit for family farmers and $2mm aggregate debt limit for family fisherman

• Compare Small Business CH 11 DIP filing between April 2020 and March 2022 have limit of $7.5mm, whereas Small Business CH 11 DIPs filing after March 28, 2022 have debt limit of $2.75mm!!

Are The Bankruptcy Code Debt Limits For Some Chapters Actually Arbitrary Or Illusory? (cont.)

• If the Quid Pro Quos are largely illusory and if the variable/moving- target debt limits are arbitrary, why have debt limits at all?

• Why not adjust substantive requirements of Debtors on a case-by-case basis, such as whether a DS should be required or whether a one-page DS can be allowed, or whether termination of exclusivity is enough to meet AP? Why force the answer to these inquiries to be made by imposing arbitrary debt limits? Why not let the Judges make the call based on the circumstances?



THANK YOU - ANY QUESTIONS??Presented by:

Mr. Thomas Linde

[email protected]

Schweet Linde Coulson PLLC

575 S Michigan Street

Seattle, Washington 98108

Office Phone (206) 275-1010

Mr. Conde T. Cox

[email protected]

Law Office of Conde Cox

1050 SW 6th Ave., Suite 1100

Portland, Oregon 97204

Office Phone (503) 535-0611

Chapter 2

A Guide to the Small Business Reorganization Act of 20191

The Honorable Paul BonapfelU.S. Bankruptcy Court, Northern District of Georgia

Atlanta, Georgia

1 Earlier versions of this paper were originally distributed in February 2020, May 2020, and July 2020. This version includes a Supplement as Chapter XIV. The Supplement is, effectively, a “pocket part.” The text has not materially changed since July 2020. “SUPP XIV” is inserted in the text to alert the reader to the supplemental materials in Chapter XIV. Earlier versions of the paper have been published at 93 AMER. BANKR. L. J. 571 (2019), and as an ebook by the American Bankruptcy Institute, https://store.abi.org/sbra-a-guide-to-subchapter-v-of-the-u-s-bankruptcy-code.html This paper is not copyrighted. Permission is granted to reproduce it in whole or in part.

Contents

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–3II. Overview of Subchapter V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–7

A. Changes in Confirmation Requirements . . . . . . . . . . . . . . . . . . . . . . . . 2–8B. Subchapter V Trustee and the Debtor in Possession . . . . . . . . . . . . . . . . . 2–8C. Case Administration and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 2–9D. Discharge and Property of the Estate . . . . . . . . . . . . . . . . . . . . . . . . 2–10

III. Debtor’s Election of Subchapter V and Revised Definition of “Small Business Debtor” . . 2–11A. Debtor’s Election of Subchapter V. . . . . . . . . . . . . . . . . . . . . . . . . . 2–11B. Eligibility for Subchapter V; Revised Definitions of “Small Business Debtor” and

“Small Business Case”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–15IV. The Subchapter V Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–17

A. Appointment of Subchapter V Trustee. . . . . . . . . . . . . . . . . . . . . . . . 2–17B. Role and Duties of the Subchapter V Trustee . . . . . . . . . . . . . . . . . . . . 2–18C. Trustee’s Disbursement of Payments to Creditors. . . . . . . . . . . . . . . . . . 2–24D. Termination of Service of the Trustee and Reappointment . . . . . . . . . . . . . 2–26E. Compensation of Subchapter V Trustee. . . . . . . . . . . . . . . . . . . . . . . 2–28F. Trustee’s Employment of Attorneys and Other Professionals . . . . . . . . . . . . 2–32

V. Debtor as Debtor in Possession and Duties of Debtor . . . . . . . . . . . . . . . . . . . 2–36A. Debtor as Debtor in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–36B. Duties of Debtor in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–37C. Removal of Debtor in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . 2–40

VI. Administrative and Procedural Features of Subchapter V . . . . . . . . . . . . . . . . . 2–42A. Elimination of Committee of Unsecured Creditors . . . . . . . . . . . . . . . . . . 2–42B. Elimination of Requirement of Disclosure Statement . . . . . . . . . . . . . . . . 2–43C. Required Status Conference and Debtor Report . . . . . . . . . . . . . . . . . . 2–44D. Time for Filing of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–47E. No U.S. Trustee Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–48F. Modification of Disinterestedness Requirement for Debtor’s Professionals . . . . . 2–49G. Time For Secured Creditor to Make § 1111(b) Election . . . . . . . . . . . . . . . 2–50

Chapter 2—A Guide to the Small Business Reorganization Act of 2019


H. Times For Voting on Plan, Determination of Record Date for Holders of Equity Securities, Hearing on Confirmation, Transmission of Plan, and Related Notices . 2–51

I. Bar Date for Filing of Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . 2–51VII. Contents of Subchapter V Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–52

A. Inapplicability of §§ 1123(a)(8) and 1123(c) . . . . . . . . . . . . . . . . . . . . . 2–53B. Requirements of New § 1190 for Contents of Subchapter V Plan; Modification

of Residential Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–54C. Payment of Administrative Expenses Under the Plan . . . . . . . . . . . . . . . . 2–58

VIII. Confirmation of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–59A. Consensual and Cramdown Confirmation in General . . . . . . . . . . . . . . . . 2–59B. Cramdown Confirmation Under New § 1191(b) . . . . . . . . . . . . . . . . . . . 2–61C. Postconfirmation Modification of Plan . . . . . . . . . . . . . . . . . . . . . . . . 2–72

IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation . . . . . . . . . . . 2–74A. Debtor Makes Plan Payments and Trustee’s Service Is Terminated Upon

Substantial Consummation When Confirmation of Consensual Plan Occurs Under New § 1191(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–74

B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of Plan Confirmed Under Cramdown Provisions of New § 1191(b) . . . . . . . . . . 2–75

X. Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–77A. Discharge Upon Confirmation of Consensual Plan Under New § 1191(a) . . . . . 2–77B. Discharge Upon Confirmation of a Cramdown Plan Under § 1191(b) . . . . . . . . 2–80

XI. Changes to Property of the Estate in Subchapter V Cases. . . . . . . . . . . . . . . . . 2–85A. Property Acquired Postpetition and Earnings from Services Performed

Postpetition as Property of the Estate in Chapter 11 Cases Under Current Law . . 2–85B. Postpetition Property and Earnings in Subchapter V Cases . . . . . . . . . . . . 2–87

XII. Default and Remedies After Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . 2–92A. Remedies for Default in the Confirmed Plan. . . . . . . . . . . . . . . . . . . . . 2–92B. Removal of Debtor in Possession for Default Under Confirmed Plan . . . . . . . . 2–93C. Postconfirmation Dismissal or Conversion to Chapter 7. . . . . . . . . . . . . . . 2–95

XIII. Effective Date and Retroactive Application of Subchapter V . . . . . . . . . . . . . . . 2–100XIV. Supplement (November 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2–112Appendix A—Lists of Sections of Bankruptcy Code and Title 28 Affected or Amended By The Small Business Reorganization Act of 2019 (as amended by the Coronavirus, Aid, Relief, and Economic Security Act). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–187Appendix B—Summary of SBRA Interim Amendments to The Federal Rules of Bankruptcy Procedure To Implement SBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–195Appendix C—Summary Comparison of U.S. Bankruptcy Code Chapters 11, 12, & 13 (Prepared by Bankruptcy Judge Mary Jo Heston’s Chambers) . . . . . . . . . . . . . . . . . 2–197Appendix D—Key Events in the Timeline of Subchapter V Cases (Prepared by Bankruptcy Judge Benjamin A. Kahn and Law Clerk Samantha M. Ruben) . . . . . . . . . . . . . . . . . 2–215

Contents (continued)



A GUIDE TO THE SMALL BUSINESS REORGANIZATION ACT OF 2019

Revised and Updated July 2020 Supplemented November 2020 and April 2021

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

Earlier versions of this paper were distributed in February 2020, May 2020, July 2020, and November 2020. This version includes two Supplements to the July 2020 version: Chapter XIV (November 2020) and Chapter XV (April 2021). The Supplements are, effectively, “pocket parts.” The text has not materially changed since July 2020. “SUPP XIV” and “SUPP XV” are inserted in the text to alert the reader to the supplemental materials in Chapters XIV and XV. Earlier versions of the paper have been published at 93 AMER. BANKR. L. J. 571 (2019), and as an ebook by the American Bankruptcy Institute, https://store.abi.org/sbra-a-guide-to-subchapter-v-of-the-u-s-bankruptcy-code.html

This paper is not copyrighted. Permission is granted to reproduce it in whole or in part.





1

A Guide to the Small Business Reorganization Act of 2019

Paul W. Bonapfel

U.S. Bankruptcy Judge, N.D. Ga.

I. Introduction The Small Business Reorganization Act of 2019 (the “SBRA”),1 signed by the President

on August 23, 2019, enacted a new subchapter V of chapter 11 of the Bankruptcy Code, codified

as new 11 U.S.C. §§ 1181 – 1195, and made conforming amendments to several sections of the

Bankruptcy Code and statutes dealing with appointment and compensation of trustees in title

28.2 SBRA also revised the definitions of “small business case” and “small business debtor” in

§ 101(51C) and § 101(51D), respectively.3 It took effect on February 19, 2020, 180 days after

its enactment.

Under § 101(51D), as amended, a debtor could not qualify as a small business debtor if

its debts (with some exceptions) exceeded $ 2,725,625. The Coronavirus Aid, Relief, and

Economic Security Act (the “CARES Act”),4 enacted and effective March 27, 2020, amended

1 Small Business Reorganization Act (SBRA) of 2019, Pub. L. No. 116-54, 133 Stat. 1079 (codified in 11 U.S.C. §§ 1181-1195 and scattered sections of 11 U.S.C. and 28 U.S.C.). 2 Unless otherwise noted, references to sections are to sections of the Bankruptcy Code, title 11 of the United States Code. Sections of the Bankruptcy Code added by the SBRA are referred to as “New § ___” in the text of this paper.

Section 3 of SBRA also enacts changes relating to prosecution of preference actions under 11 U.S.C. § 547 and to venue for certain proceedings brought by a trustee. These amendments apply in all bankruptcy cases. SBRA § 3(a) amends § 547(b) to require that a trustee seeking to avoid a preferential transfer must exercise “reasonable due diligence in the circumstances of the case” and must take into account a party’s “known or reasonably knowable” affirmative defenses under § 547(c). SBRA § 3(a). SBRA § 3(b) amends 28 U.S.C. § 1409(b) to provide that a trustee may sue to recover a debt of less than $ 25,000 only in the district where the defendant resides. Prior to the amendment, the amount (as adjusted under 11 U.S.C. § 104 as of April 1, 2019) was $ 13,650. 3 SBRA § 4(1)(A)-(B). 4 Coronavirus Aid, Relief, and Economic Security Act § 1113(a), Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).



2

the SBRA to increase the debt limit to $ 7.5 million for purposes of subchapter V for one year

and made certain technical corrections. SUPP XV

Appendix A is a chart that lists sections of the Bankruptcy Code that SBRA affected and

summarizes the changes, as affected by the CARES Act.

The purpose of SBRA is “to streamline the process by which small business debtors

reorganize and rehabilitate their financial affairs.”5 A sponsor of the legislation stated that it

allows 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.”6 Courts have taken the

legislative purpose of SBRA into account in their application of the new law.7

It is likely that SBRA will have a significant impact. A preliminary estimate is that

approximately 40 percent of chapter 11 debtors in chapter 11 cases filed after October 1, 2007,

would qualify as a small business debtor and that about 25 percent of individuals in chapter 11

cases would qualify as a small business.8 The economic circumstances arising from the

5 H.R. REP. NO. 116-171, at 1 (2019), available at https://www.govinfo.gov/content/pkg/CRPT-116hrpt171/pdf/CRPT-116hrpt171.pdf. For a summary of small business reorganizations under the Bankruptcy Code, see Ralph Brubaker, The Small Business Reorganization Act of 2019, 39 BANKRUPTCY LAW LETTER, no. 10, Oct. 2019, at 1-4. SUPP XIV 6 H.R. REP. NO. 116-171, at 4 (statement of Rep. Ben Cline). The court in In re Progressive Solutions, Inc., 615 B.R. 894, 896-98 (Bankr. C.D. Cal. 2020), reviewed the legislative progress of SBRA and included public statements from several cosponsors of the law, including Senators Charles Grassley, Sheldon Whitehouse, Amy Klobuchar, Joni Ernst, and Richard Blumenthal. See also Michael C. Blackmon, Revising the Debt Limit for “Small Business Debtors”: The Legislative Half-Measure of the Small Business Reorganization Act, 14 BROOK. J. CORP. FIN. & COM. L. 339, 344-45 (2020). 7 In re Ventura, 615 B.R. 1 , 6, 12-13 (Bankr. E.D.N.Y. 2020); In re Progressive Solutions, Inc, 615 B.R. 894, 896-98 (Bankr. C.D. Cal. 2020). 8 Brubaker, supra note 5, at 5-6 (discussing Bob Lawless, How Many New Small Business Chapter 11s?, CREDIT SLIPS (Sept. 14, 2019), http://www.creditslips.org/creditslips/2019/09/how-many-new-small-business-chapter-11s.html. Professor Brubaker points out that the percentage may ultimately be higher because pre-SBRA law provided incentives for a debtor to avoid qualification as a small business debtor and because debtors who might not have filed under pre-SBRA law because of its obstacles might now do so.



3

Covid-19 pandemic and the temporary increase of the debt limit under the CARES Act can only

increase the number of small business cases.9

New subchapter V applies in cases in which a qualifying debtor elects its application. In

the absence of an election, the existing provisions of chapter 11 that govern a small business

debtor apply with one change. SBRA amends § 1102(a)(3) to provide that no committee of

unsecured creditors is appointed in any case of a small business debtor unless the court orders

otherwise.10

Subchapter V resembles chapter 12 in some aspects.11 It provides for a trustee in the case

while leaving the debtor in possession of assets and control of the business. The trustee has

oversight and monitoring duties and the right to be heard on certain matters. In some cases, the

trustee may make disbursements to creditors.

But subchapter V differs from chapter 12 in significant ways. For example, whereas

chapter 12 confirmation standards (§ 1225) are similar to those in chapter 13 (§ 1325),

subchapter V confirmation requirements incorporate most of the existing confirmation

requirements in § 1129(a). Unlike chapter 12, subchapter V does not provide for a codebtor stay.

Enactment of SBRA required revisions to the Federal Rules of Bankruptcy Procedure and

the Official Forms. The Committee on Rules of Practice and Procedure of the Judicial

Conference of the United States (the “Rules Committee”) had authority to make changes in the

Official Forms prior to the effective date of the SBRA. Changes to the Bankruptcy Rules,

9 For a discussion of strategies for creditors in view of the enactment of subchapter V, see Christopher G. Bradley, The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act, 28 Am. Bankr. Inst. L. Rev. 251 (2020). 10 SBRA, § 4(a)(11), 133 Stat. at 1086. 11 As the court observed in In re Trepetin, 617 B.R. 841, 848, n. 14 (Bankr. D. Md. 2020):

Subchapter V and chapter 12 are not identical, and invoking chapter 12 standards may not be warranted in every instance. Subchapter V starts with chapter 11 as its base and then draws on the structure of chapter 12, certain elements of chapter 13, and the recommendations of the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11 and the National Bankruptcy Conference.



4

however, take three years or more under procedures that the Rules Enabling Act, 28 U.S.C.

§§ 2071-77, require.

To take account of the new law, the Rules Committee made changes to the Official

Forms and promulgated interim rules (the “Interim Rules”) that amend the Federal Rules of

Bankruptcy Procedure.12 The changes to the Official Forms became effective as of the effective

date of SBRA. The Rules Committee has recommended that each judicial district adopt the

Interim Rules as local rules or by general order. Enactment of the CARES Act required

technical revisions in Interim Rule 1020 in and the Official Forms for voluntary petitions.13

Appendix B summarizes the changes that the Interim Rules make.

SBRA does not repeal existing provisions that govern small business debtors in chapter

11. Those provisions continue to apply to small business debtors who do not elect to proceed

under subchapter V. SUPP XIV The existence of two sets of provisions in chapter 11 for small

business debtors requires terminology to distinguish them. The Rules Committee proposes to

12 On December 5, 2019, the Advisory Committee on Bankruptcy Rules proposed Interim Amendments to the Federal Rules of Bankruptcy Procedure (“Interim Rules”) to address provisions of SBRA for adoption in each judicial district by local rule or general order and new Official Forms. The proposed Interim Rules and Official Forms reflected changes in response to comments received. ADVISORY COMMITTEE ON BANKRUPTCY RULES, REPORT OF THE ADVISORY COMMITTEE ON BANKRUPTCY RULES (Dec. 5, 2019), https://www.uscourts.gov/sites/default/files/december_5_2019_bankruptcy_rules_advisory_committee_report_0.pdf On December 19, 2019, the Committee on Rules of Practice and Procedure approved the Interim Rules, recommended their local adoption, and approved the new Official Forms. The Executive Committee of the Judicial Conference, acting on an expedited basis on behalf of the Judicial Conference, approved the Interim Rules for distribution to the courts. The Interim Rules are located on the Current Rules of Practice & Procedure page of the U.S. Courts public website (USCOURTS.GOV). The new Official Forms are posted on the Forms page of the website, under the Bankruptcy Forms table. 13 On April 6, 2020, the Advisory Committee on Bankruptcy Rules proposed one-year technical amendments to Interim Rule 1020 to take account of the revised definition of “debtor” under the CARES Act, which Sections III(A) and (B) discuss. The Advisory Committee also proposed conforming technical changes to official forms, including Official Forms 101 and 202, which are the forms for the filing of a voluntary petition by an individual and a non-individual, respectively. On April 20, 2020, the Committee on Rules of Practice and Procedure approved the amendments and recommended their local adoption. It also approved the one-year technical change to the Official Forms.



5

call cases under the existing provisions “small business cases” and to call cases of electing

debtors “cases under subchapter V of chapter 11.”

This terminology is technically accurate. Under the SBRA amendments, a “small

business debtor” is not necessarily a debtor in a “small business case.” Rather, a “small business

case” is only a case under chapter 11 in which a small business debtor has not elected application

of subchapter V. In other words, a small business debtor that has elected application of

subchapter V is not in a small business case.

The distinction is important for at least one reason. Section 362(n) makes the automatic

stay inapplicable in certain circumstances when the debtor in the current case is or was a debtor

in a pending or previous small business case. Because a subchapter V debtor is not in a small

business case, § 362(n) will not apply in a later case of the subchapter V debtor. SUPP XV

Bankruptcy judges and lawyers will inevitably adopt shorthand expressions to distinguish

the three types of cases that are now possible under chapter 11: a non-small business case; a

subchapter V case for a small business debtor who elects it; and a non-subchapter V small

business case – a “small business case” – for one who does not. This paper refers to a non-small

business case as a “standard” chapter 11 case; to the case of an electing small business debtor as

a “sub V case;” and to the case of a non-electing small business debtor as a “non-sub V case.”

And, of course, debtors are either “standard,” “sub V” or “non-sub V.”

II. Overview of Subchapter V

For electing small business debtors, subchapter V: (1) modifies confirmation

requirements; (2) provides for the participation of a trustee (the “sub V trustee”) while the debtor

remains in possession of assets and operates the business as a debtor in possession; (3) changes

several administrative and procedural rules; and (4) alters the rules for the debtor’s discharge and



6

the definition of property of the estate with regard to property an individual debtor acquires

postpetition and postpetition earnings (which has implications for operation of the automatic stay

of § 362(a)). Only the sub V debtor may file a plan or a modification of it.

This Part provides an overview of these provisions. Later Parts discuss these and other

provisions in more detail. Appendix C is a chart that compares provisions of subchapter V with

those that govern non-sub V chapter 11, chapter 12, and chapter 13 cases.

A. Changes in Confirmation Requirements

The court may confirm a plan even if all classes reject it. Moreover, the “fair and

equitable” requirement for “cramdown” confirmation does not include the absolute priority rule.

Instead, the plan must comply with a new projected disposable income requirement (applicable

in cases of entities as well as those of individuals). The cramdown requirements for a secured

claim are unchanged. (Part VIII).

A plan may modify a claim secured only by a security interest in the debtor’s principal

residence if the new value received in connection with the granting of the security interest was

not used primarily to acquire the property and was used primarily in connection with the small

business of the debtor. Such modification is not permitted in standard or non-sub V chapter 11

cases or in chapter12 or 13 cases. (Section VII(B)).

B. Subchapter V Trustee and the Debtor in Possession

Subchapter V provides for the debtor to remain in possession of assets and operate the

business with the rights and powers of a trustee unless the court removes the debtor as debtor in

possession. (Part V).

The United States Trustee appoints the sub V trustee. The role of the sub V trustee is to

oversee and monitor the case, to appear and be heard on specified matters, to facilitate a



7

consensual plan, and to make distributions under a nonconsensual plan confirmed under the

cramdown provisions. (Part IV).

C. Case Administration and Procedures

Subchapter V modifies the usual procedures in chapter 11 cases in several respects.

Appendix D summarizes the key events in a subchapter V case and the timeline for them.

No committee of unsecured creditors. A committee of unsecured creditors is not

appointed unless the court orders otherwise. (SBRA also makes this the rule in a non-sub V

case.) (Section VI(A)).

Required status conference and report from debtor. The court must hold a status

conference within 60 days of the filing “to further the expeditious and economical resolution” of

the case. Not later than 14 days before the status conference, the debtor must file a report that

details the efforts the debtor has undertaken and will undertake to achieve a consensual plan of

reorganization. (Section VI(C)).

Time for filing of plan. The debtor must file a plan within 90 days of the date of entry of

the order for relief, unless the court extends the time based on circumstances for which the

debtor should not justly be held accountable. The existing requirements in a small business case

that a plan be filed within 300 days of the filing date (§ 1121(e)) and that confirmation occur

within 45 days of the filing of the plan (§ 1129(e)) do not apply in a sub V case. (Section

VI(D)).

No disclosure statement. Section 1125, which states the requirements for a disclosure

statement in connection with a plan and regulates the solicitation of acceptances of a plan, does

not apply in a sub V case, unless the court orders otherwise. Although no disclosure statement is

required, the plan must include: (1) a brief history of the business operations of the debtor; (2) a



8

liquidation analysis; and (3) projections with respect to the ability of the debtor to make

payments under the proposed plan. (Sections VI(B), VII(B)).

No U.S. Trustee fees. A sub V debtor does not pay U.S. Trustee fees. (Section VI(E)).

D. Discharge and Property of the Estate

1. Discharge – consensual plan

If the court confirms a consensual plan, a sub V debtor (including an individual debtor)

receives a discharge under § 1141(d)(1)(A) upon confirmation. The provision in § 1141(d)(5)

for delay of discharge in individual cases until completion of payments does not apply in a sub V

case. In the case of an individual, the § 1141(d)(1)(A) discharge does not discharge debts

excepted under § 523(a).14 One effect of the grant of the discharge is that the automatic stay

terminates under § 362(c)(2)(C). (Section X(A)).

2. Discharge – cramdown plan

If the court confirms a cramdown plan, § 1141(d) does not apply, and confirmation does

not result in a discharge. Instead, new § 1192 provides for a discharge, which does not occur

until the debtor completes plan payments for a period of at least three years or such longer time

not to exceed five years as the court fixes. (Section X(B)).

Under new § 1192, the discharge in a cramdown case discharges the debtor from all debts

specified in § 1141(d)(1)(A) and all other debts allowed under § 503 (administrative expenses),

with the exception of: (1) debts on which the last payment is due after the first three years of the

plan or such other time not exceeding five years as the court fixes; and (2) debts excepted under

§ 523(a). (Section X(B)). Under § 362(c)(2), the automatic stay remains in effect after

14 § 1141(d)(2).



9

confirmation of a cramdown plan until the case is closed or dismissed, or the debtor receives a

discharge.

3. Property of the estate

Section 1115 provides that, in an individual chapter 11 case, property of the estate

includes assets that the debtor acquires postpetition and earnings from postpetition services.

Section 1115 does not apply in a subchapter V case.15 If the court confirms a plan under the

cramdown provisions of new § 1191(b), however, property of the estate includes (in cases of

both individuals and entities) postpetition assets and earnings.16 (Part XI(B)).

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

A. Debtor’s Election of Subchapter V

The provisions of subchapter V apply in cases in which a small business debtor elects

them.17 If a small business debtor does not make the election, the current provisions of Chapter

11 governing small business cases apply.

The operative statutory provision is new § 103(i). As amended by the CARES Act, it

provides:

Subchapter V of chapter 11 of this title applies only in a case under chapter 11 in which a debtor (as defined in section 1182) elects that subchapter V of title 11 shall apply.18

15 New § 1181(a). 16 New § 1186(a). 17 One commentator has suggested that a creditor may want to attempt to limit the availability of subchapter V by including in the credit agreement a commitment from the debtor not to make the election or to waive it, noting that such a contractual provision may not be enforceable. Bradley, supra note 9, at 264. Professor Bradley suggests alternatively that a creditor could require a “springing” (sometimes referred to as a “bad boy”) guarantee from a debtor’s insider that would arise if the debtor elected subchapter V. Id. at 264-65. 18 SBRA inserted new subsection (i) in § 103 and renumbered existing subsections (i) through (k) as (j) through (l). SBRA § 4(a)(2). Before enactment of the CARES Act, new § 103(i) provided:



10

SBRA added new § 1182, which defined “debtor” in subsection (1) as meaning a

“small business debtor,”19 a term defined in § 101(51D). As the next Section discusses,

SBRA also revised the § 101(51D) definition of “small business debtor.” The CARES

Act amended § 1182(1) so that its definition of “debtor” is the same as the definition of

“small business debtor” in revised §101(51D), with a technical correction that it also

made,20 except that the amount of the debt limit is increased to $ 7.5 million.21 The debt

limit in revised § 101(51D) is unchanged.

The CARES Act amendment to new § 1182(1) is effective for only one year after

enactment of the statute on March 27, 2020.22 At that time, the CARES Act provides for

the amendment of § 1182(1) to return to its original language, so that “debtor” will mean

“a small business debtor.” SUPP XV

The effect of all these provisions is that, for one year SUPP XV after the

enactment of the CARES Act, new (and amended) § 1182(1) states the definition of a

debtor eligible to be a sub V debtor. After that, new § 101(51D) will state the definition.

The only difference in the language of the two statutes is the higher debt limit in the

temporary CARES Act version of § 1182(1). (Because the CARES Act does not change

the definition of “small business debtor,” a debtor with debts in excess of the § 101(51D)

limit but below $ 7.5 million that does not elect subchapter V cannot be a small business

debtor.)

Subchapter V of chapter 11 of this title applies only in a case under chapter 11 in which a small business debtor elects that subchapter V of title 11 shall apply.

19 SBRA § 2(a). 20 The technical correction involves the exclusion of public companies. See text accompanying note 39 infra. 21 CARES Act § 1113(a)(1). 22 CARES Act § 113(a)(5).



11

The statute does not state when or how the debtor makes the election. Bankruptcy Rule

1020(a) requires a debtor to state in the petition whether it is a small business debtor.23 In an

involuntary case, the Rule requires the debtor to file the statement within 14 days after the order

for relief. The case proceeds in accordance with the debtor’s statement unless and until the court

enters an order finding that the statement is incorrect.

Interim Rule 1020(a) as originally promulgated added the requirement that the debtor

state in the petition whether the debtor elects application of subchapter V and provided that the

case proceed in accordance with the election unless the court determined that it is incorrect. In

an involuntary case, the Interim Rule required the debtor to state whether it is a small business

debtor and to make the election within 14 days after the order for relief.24 In response to the

CARES Act amendment of new § 1182(1), the revised Interim Rule provides in both instances

for the debtor to state whether the debtor is a small business debtor or a debtor as defined in

§ 1182(1) and, if the latter, whether the debtor elects application of subchapter V.

Revisions to the Official Forms for voluntary chapter 11 cases require the debtor to state

whether it is a small business debtor or a § 1182(1) debtor and whether it does or does not make

the election.25 Revised Official Forms also provide for creditors to receive notice of the

debtor’s statement of its status and the election that it makes.26

23 FED. R. BANK. P. 1020(a). 24 INTERIM RULE 1020. 25 OFFICIAL FORM B101 ¶ 13 (Voluntary Petition for Individuals Filing for Bankruptcy); OFFICIAL FORM B102 ¶ 8 (Voluntary Petition for Non-Individuals Filing for Bankruptcy). 26 OFFICIAL FORM B309E2 is the form for individuals or joint debtors under subchapter V, and OFFICIAL FORM B309F2 is the form for corporations or partnerships under subchapter V. Existing OFFICIAL FORMS B309E (individuals or joint debtors) and B309F (corporations or partnerships) are renumbered as B309E1 and B309F1. Both new forms contain the same information as the existing notices but provide additional information applicable in subchapter V cases. The new forms require inclusion of the trustee and the trustee’s phone number and email address. The new notices state that the debtor will generally remain in possession of property and may continue to operate the business and advise that, in some cases, debts will not be discharged until all or a substantial portion of payments under the plan are made.



12

Parties in interest may object to a debtor’s election to proceed as a small business debtor.

Bankruptcy Rule 1020(b) requires an objection to a debtor’s statement as to whether it is a small

business debtor within 30 days after the later of the conclusion of the § 341(a) meeting or

amendment of the statement. Interim Rule 1020(b) makes the same requirement applicable to

the statement regarding the election.

Bankruptcy Rule 1009(a) gives a debtor the right to amend a voluntary petition, list,

schedule, or statement “as a matter of course at any time before the case is closed.” A question

is whether a debtor may amend the small business designation or the subchapter V election that

the voluntary petition includes. Current Bankruptcy Rule 1020 does not address whether a

debtor can amend the small business designation, and Interim Rule 1020 likewise does not

address the issue of whether a delayed election should be allowed and, if so, under what

circumstances.27 Part XIII discusses the cases that have considered whether a debtor in a case

pending before enactment of SBRA may amend the petition to elect application of Subchapter V.

One problem with permitting a debtor to change the election is that deadlines for

conducting a status conference28 and for filing a plan29 run from the date of the order for relief.

The Advisory Committee in its Report observed, “Should a court exercise authority to allow a

delayed election, it is likely that one of the court’s prime considerations in ruling on a request to

make a delayed election would be the time restriction imposed by subchapter V. . . .”30 Part XII

further discusses this issue.

27 The Advisory Committee Note to Interim Rule 1020 states, “The rule does not address whether the court, on a case-by-case basis, may allow a debtor to make an election to proceed under subchapter V after the times specified in subdivision (a) or, if it can, under what conditions.” 28 See infra Section VI(C). 29 See infra Section VI(D). 30 REPORT OF THE ADVISORY COMMITTEE ON BANKRUPTCY RULES, supra note 12, at 3.



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B. Eligibility for Subchapter V; Revised Definitions of “Small Business Debtor” and

“Small Business Case”

Under pre-SBRA law, paragraph (A) of § 101(51D) defined a “small business debtor” as

a person (1) engaged in commercial or business activities, (2) excluding a debtor whose principal

activity is the business of owning or operating real property, (3) that has aggregate noncontingent

liquidated secured and unsecured debts31 as of the date of the filing of the petition or the date of

the order for relief in an amount not more than $ 2,725,625,32 (4) in a case in which the U.S.

Trustee has not appointed a committee of unsecured creditors or the court has determined that

the committee is not sufficiently active and representative to provide effective oversight of the

debtor. Paragraph (B) of former § 101(51D) excluded any member of a group of affiliated

debtors that has aggregate debts in excess of the debt limit (excluding debts to affiliates and

insiders).

As the previous Section discusses, SBRA amended the § 101(51D) definition of “small

business debtor,” and the CARES Act made amendments that temporarily increase the debt limit

for a sub V debtor to $ 7.5 million and make a technical correction to the exclusion of certain

debtors affiliated with public companies from the definition.

The CARES Act effects the debt limit change through an amendment to new § 1182(1)

that lasts only one year. SUPP XV The language of revised § 1182(1) is identical to the

language of § 101(51D), with the technical correction that the CARES Act also makes.

Specifically, subparagraphs (A) and (B) of new § 1182(1) are exactly the same as subparagraphs

(A) and (B) of § 101(51D), as amended by both SBRA and the CARES Act. For convenience,

31 § 101(51D)(A). Debts owed to one or more affiliates or insiders are excluded from the debt limit. Id. SUPP XIV 32 The amount is revised every three years. § 104. The current amount became effective to cases filed on or after April 1, 2019.



14

this paper discusses these provisions by reference to § 101(51D) because it continues to apply to

a small business debtor that does not elect subchapter V. SUPP XIV

SUPP XV SBRA did not change the requirement in § 101(51D) that the debtor be

engaged in “commercial or business activities”33 or the aggregate debt limit, but it modified each

of the other requirements.34 First, revised subparagraph (A) of § 101(51D) requires that 50

percent or more of the debt must arise from the commercial or business activities of the debtor.35

Second, amended § 101(51D)(A) excludes a debtor engaged in owning or operating real

property from being a small business debtor only if the debtor owns or operates single asset real

estate.36

Third, the requirement that no committee exist (or that it not provide effective oversight)

is eliminated. (Recall that SBRA provides that no committee will be appointed in the case of a

small business debtor unless the court orders otherwise.)

Finally, SBRA added two additional types of debtors to those that subparagraph (B)

excludes from being a small business debtor. One exclusion (in (B)(ii), as amended) was for a

corporate debtor subject to the reporting requirements under § 13 or 15(d) of the Securities

Exchange Act of 1934.37 The second (in (B)(iii), as amended) was for a corporate debtor subject

33 In In re Wright, 2020 WL 2193240 (Bankr. D. S.C., April 27, 2020), the court held that nothing in the definition limits it to a debtor currently engaged in business and ruled that an individual who had guaranteed debts of two limited liability companies that were no longer in business could proceed in a subchapter V case. Accord, In re Bonert, 619 B.R. 248, 255 (Bankr. C.D. Cal. 2020); see In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La., 2020). SUPP XV 34 SBRA § 4(a)(1). 35 For a family farmer, 50 percent of the debts must arise from a farming operation. § 101(18)(A). In addition, 50 percent of the debtor’s income must be received from the farming operation. Id. The same percentages apply in the definition of a family fisherman who is an individual. § 101(19A)(A). For a family fisherman that is a corporation or partnership, the debt relating to the fishing operation must be 80 percent, and more than 80 percent of the value of its assets must be related to the fishing operation. § 101(19A)(B). SUPP XV 36 Section 101(51B) defines “single asset real estate” as “real property constituting a single property of project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.” § 101(51B). 37 § 101(51D)(B)(ii).



15

to the reporting requirements of those sections that is an affiliate of a debtor.38 The CARES Act

made a technical correction39 to eliminate the second provision and to insert a new (B)(iii) to

exclude “any debtor that is an affiliate of an issuer (as defined in section 3 of the Securities

Exchange Act of 1934 (15 U.S.C. 78c)).”40 Identical provisions are in § 1182(1)(B)(ii) and (iii),

as amended by the CARES Act. SUPP XIV SUPP XV

SBRA amended the definition of “small business case” in § 101(51C) to exclude a

subchapter V debtor. Thus, a “small business case” is a case in which a small business debtor

has not elected application of subchapter V. In other words, the case of a sub V debtor is not a

“small business case,” even though a sub V debtor necessarily is a “small business debtor.” And

as a result of the CARES Act amendments increasing the debt limits, a debtor may be a sub V

debtor under § 1182(1) (until its expiration) but not a “small business debtor.” SUPP XV

IV. The Subchapter V Trustee

A. Appointment of Subchapter V Trustee

Subchapter V provides for a trustee in all cases.41 The trustee is a standing trustee, if the

U.S. Trustee has appointed one, or a disinterested person that the U.S. Trustee appoints. SBRA

§ 4(b) amends 28 U.S.C. § 586 to make its provisions for the appointment of standing chapter 12

38 SBRA § 4(a)(1)(B)(i)(III), amending § 101(51D)(B)(iii). 39 For a discussion of the issues relating to this provision, see Brubaker, supra note 5, at 7. Because the issues are of limited or no interest to most practitioners and judges, they are beyond the scope of this paper. The author will address the issues if they arise and readers must do likewise. 40 CARES Act § 1113(a)(4)(A). 41 § 1183(a). SBRA § 4(a)(3) amends § 322(a) to provide for a sub V trustee to qualify by filing a bond in the same manner as other trustees.



16

and 13 trustees applicable to the appointment of standing sub V trustees. The court has no role

in the appointment of the trustee.42

The United States Trustee Program has selected a pool of persons who may be appointed

on a case-by-case basis in sub V cases rather than appointing standing trustees.43 The

appointment of a sub V trustee in each case instead of a standing trustee appears to be contrary to

the expectations of proponents of the SBRA. In his testimony in support of the legislation on

behalf of the National Bankruptcy Conference, retired bankruptcy judge A. Thomas Small stated,

“There will be a standing trustee in every subchapter V case who will perform duties similar to

those performed by a chapter 12 or chapter 13 trustee.”44

B. Role and Duties of the Subchapter V Trustee

The role of the sub V trustee is similar to that of the trustee in a chapter 12 or 13 case.

But as later text discusses, a sub V trustee has the specific duty to “facilitate the development of

a consensual plan of reorganization.” New § 1183(b)(7). Sub V trustees may, therefore,

confront issues that are quite different from those that trustees in other cases deal with.45

42 New § 1181(a). Section 1104, which governs the appointment of a trustee in a non-sub V case, does not apply in sub V cases. In a sub V case, the U.S. Trustee’s appointment of the trustee is not subject to the court’s approval as it is under § 1104(d). 43 See Adam D. Herring and Walter Theus, New Laws, New Duties; USTP’s Implementation of the HAVEN Act and the SBRA, 38 AMER. BANKR. INST. J. 12 (Oct. 2019). 44 Hearing on Oversight of Bankruptcy Law & Legislative Proposals Before the Subcomm. On Antitrust, Commercial and Admin. Law of the H. Comm. On the Judiciary, 116th Cong. 2 (Revised Testimony of A. Thomas Small on Behalf of the National Bankruptcy Conference), available at https://www.fjc.gov/sites/default/files/REVISED_TESTIMONY_OF_A_THOMAS_SMALL.pdf. 45 The United States Trustee Program has promulgated its expectations with regard to the duties of the sub V trustee and the trustee’s role in the case. U.S. DEP’T OF JUSTICE, HANDBOOK FOR SMALL BUSINESS CHAPTER 11 SUBCHAPTER V TRUSTEES (Feb. 2020), https://www.justice.gov/ust/private-trustee-handbooks-reference-materials/chapter-11-subchapter-v-handbooks-reference-materials [hereinafter SUBCHAPTER V TRUSTEE HANDBOOK]. For a discussion of the sub V trustee’s duties and role in the case, and strategic considerations for creditors, see Bradley, supra note 9, at 260-62, 267-271.



17

New § 1183 enumerates the trustee’s duties. Section 1106, which specifies the duties of

the trustee in a standard chapter 11 case, does not apply in sub V cases.46 New § 1183, however,

makes many of its provisions applicable in some circumstances. As in chapter 12 and 13 cases,

the debtor remains in possession of assets and operates the business. If the court removes the

debtor as debtor in possession under new § 1185(a), the trustee operates the business of the

debtor.47

1. Trustee’s duties to supervise and monitor the case and to facilitate confirmation of a consensual plan

In general, the role of the trustee is to supervise and monitor the case and to participate in

the development and confirmation of a plan.48 This role arises from several provisions that are

the same as those in chapter 12 cases, with some significant additions.

First, the sub V trustee has the duty to “facilitate the development of a consensual plan of

reorganization.”49 No other trustee has this duty, although a chapter 13 trustee has the duty to

“advise, other than on legal matters, and assist the debtor in performance under the plan.”50 One

practitioner has suggested that the sub V trustee should be a “financial wizard” who can work

with all parties on cash flows, interest rates, payment requirements, and “all the numbers puzzles

46 New § 1181(a). 47 New § 1183(b)(5). 48 The SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 1-1, provides an overview of the sub V trustee’s duties:

In general, among the most important subchapter V trustee duties are assessing the financial viability of the small business debtor, facilitating a consensual plan of reorganization, and helping ensure that the debtor files or submits complete and accurate financial reports. The subchapter V trustee also may be required to act as a disbursing agent for the debtor’s payments under the confirmed plan of reorganization. In certain instances, the subchapter V trustee may be required to administer property of the debtor’s bankruptcy estate for the benefit of creditors.

The Handbook notes, “The subchapter V trustee is an independent third party and a fiduciary who must be fair and impartial to all parties in the case.” Id. at 2-2. For a summary of the U.S. Trustee Program’s views of the sub V trustee’s duties, see id. at 1-5 to 1-7. 49 New § 1183(b)(7). 50 § 1302(b)(4).



18

that comprise a plan,” and that the statutory goal of a consensual plan suggests that the trustee

also fill a mediation role.51 The United States Trustee Program expects sub V trustees to be

proactive in the plan process.52

Second, the trustee must appear and be heard at the status conference that new § 1188(a)

requires.53 Although § 105(d) (which does not apply in a sub V case under new § 1181(a))

provides for a status conference in any case on the court’s own motion or on the request of a

party in interest, it does not require one. Thus, a status conference is not required in any other

type of case. Section VI(C) discusses the status conference.

Finally, the trustee must appear and be heard at any hearing concerning: (1) the value of

property subject to a lien; (2) confirmation of the plan; (3) modification of the plan after

confirmation; and (4) the sale of property of the estate.54

Although the responsibility of the sub V trustee to participate in the plan process and to

be heard on plan and other matters implies a right to obtain information about the debtor’s

property, business, and financial condition, a sub V trustee, like a chapter 12 trustee, does not

have the duty to investigate the financial affairs of the debtor. Section 704(a)(4) imposes such a

51 Donald L. Swanson, SBRA: Frequently Asked Questions and Some Answers, 38 AMER. BANKR. INST. J. 8 (Nov. 2019). See also Bradley, supra note 9, at 261 (“Trustees seem likely to play the role of mediator.”). 52 The SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-9, states:

As soon as possible, the trustee should begin discussions with the debtor and principal creditors about the plan the debtor will propose, and the trustee should encourage communication between all parties in interest as the plan is developed. The trustee should be proactive in communicating with the debtor and debtor’s counsel and with creditors, and in promoting and facilitating plan negotiations. Depending upon the circumstances, the trustee also may participate in the plan negotiations between the debtor and creditors and should carefully review the plan and any plan amendments that are filed.

When the plan is filed, the Handbook advises the sub V trustee to “review the plan and communicate any concerns to the debtor about the plan prior to the confirmation hearing.” Id. 53 New § 1183(b)(3). See SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-8 (“The trustee should review the debtor’s report carefully. . .” and “should be prepared to discuss the debtor’s report, to respond to any questions by the court, and to discuss any other related matters that may be raised at the status conference.”). 54 New § 1183(b)(3). A chapter 12 trustee must also appear at hearings on all of these matters. § 1202(b)(3). A chapter 13 trustee must appear and be heard on all of them except the sale of property of the estate. § 1302(B)(2).



19

duty on a chapter 7 trustee, and it is a duty of a chapter 13 trustee under § 1302(b)(1). A trustee

in a standard chapter 11 or a non-sub V case has a broad duty of investigation under § 1106(a)(3)

unless the court orders otherwise.

The court may impose the investigative duties that § 1106(a)(3) specifies on the sub V

trustee. Under new § 1183(b)(2), the court (for cause and on request of a party in interest, the

sub V trustee, or the U.S. Trustee) may order that the sub V trustee perform certain duties of a

chapter 11 trustee under § 1106(a). The specified duties are: (1) to investigate the acts, conduct,

assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business, the

desirability of its continuance, and any other matter relevant to the case of formulation of a plan

(§ 1106(a)(3)); (2) to file a statement of the investigation, including any fact ascertained

pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in

the management of the affairs of the debtor or to a cause of action available to the estate, and to

transmit a copy or summary of it to entities that the court directs (§ 1106(a)(4)55); and (3) to file

postconfirmation reports as the court directs (§ 1106(a)(7)).56 The same procedures apply to a

chapter 12 trustee’s duty to investigate under § 1202(b)(2).

55 Section 1106(a)(4)(B) directs a chapter 11 trustee to transmit the copy or summary to any creditors’ committee, equity security holders’ committee, and indenture trustee. Committees do not exist in a small business case unless the court orders otherwise under § 1102(a)(3) as amended, and a small business debtor is unlikely to have an indenture trustee as a creditor. 56 New § 1183(b)(2). In In re AJEM Hospitality, LLC, 2020 WL 3125276 (M.D.N.C. 2020), the court on motion of the bankruptcy administrator, and with the consent of the debtor and sub V trustee, authorized the trustee to conduct an investigation limited to the investigation of potential intercompany claims. The court noted, “The language of [§ 1106(a)(3)] specifically allows the Court to limit the scope of an investigation ‘to the extent that the court orders . . . .’” Id. at *2.



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2. Other duties of the trustee

Like chapter 12 and 13 trustees under §§ 1201(b)(1) and 1302(b)(1),57 a sub V trustee

under new § 1183(b)(1) has the duties of a trustee under § 704(a): (1) to be accountable for all

property received (§ 704(a)(2)); (2) to examine proofs of claim and object to allowance of any

claim that is improper, if a purpose would be served (§ 704(a)(5)); (3) to oppose the discharge of

the debtor, if advisable (§ 704(a)(6)); (4) to furnish information concerning the estate and the

estate’s administration that a party in interest requests, unless the court orders otherwise

(§ 704(a)(7)); and (5) to make a final report and to file it (§ 704(a)(9)).58 Under new

§ 1183(b)(4), the sub V trustee also has the same duty as chapter 12 and 13 trustees to ensure that

the debtor commences timely payments under a confirmed plan (§§ 1202(b)(4), 1302(b)(5)).59

The U.S. Trustee has the duty to monitor and supervise subchapter V cases and trustees.60

The U.S. Trustee Program has developed procedures for reporting by sub V trustees to enable

U.S. Trustees to evaluate and monitor their performance.61

57 Chapter 12 (§ 1202(b)(1)) and chapter 13 (§ 1302(b)(1)) trustees also have the duty of a chapter 7 trustee under § 704(a)(3) to ensure that the debtor performs the debtor’s intentions under § 521(a)(2)(B) to surrender, redeem, or reaffirm debts secured by property of the estate. The imposition of this duty in chapter 12 and 13 cases is curious in that § 521(b)(2)(B) applies only in chapter 7 cases. SBRA does not impose this anomalous duty on the sub V trustee. 58 New § 1183(b)(1). 59 New § 1183(b)(4). 60 28 U.S.C. § 586(a)(3). SBRA § 4(b)(1)(A) amended 28 U.S.C. § 586(a)(3) to include sub V cases within the types of cases that the U.S. Trustee supervises. 61 SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, ch. 8. See also U.S. DEP’T OF JUSTICE, 3 UNITED STATES TRUSTEE PROGRAM POLICY AND PRACTICES MANUAL: CHAPTER 11 CASE ADMINISTRATION (Feb. 2020) §§ 3-17.16, 3-17.16.1, 3.17.1.2, 3.17.16.3, 3.17.16.5, 3.17.16.6, https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/download. The SUBCHAPTER V TRUSTEE HANDBOOK, supra, directs sub V trustees to consult with the U.S. Trustee before filing an objection to confirmation (id. at 3-9, 3-10, 3-12), objecting to a claim (id. at 3-15), or filing a motion to dismiss or convert (id. at 3-17).



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3. Trustee’s duties upon removal of debtor as debtor in possession

Under new § 1185(a), the court may remove the debtor as debtor in possession. If the

court does so, the sub V trustee has the duties of a trustee specified in paragraphs (1), (2), and (6)

of § 1106.62 New § 1183(b)(5) specifically directs the sub V trustee to operate the debtor’s

business when the debtor is not in possession. Similar provisions apply in chapter 12 cases.63

Under paragraph (1) of § 1106(a), the trustee must perform the duties of a trustee under

paragraphs (2), (5), (7), (8), (9), (10), (11) and (12) of § 704(a). These duties are: (1) to be

accountable for all property received (§ 704(a)(2)); (2) to examine and object to proofs of claim

if a purpose would be served (§ 704(a)(5)); (3) to furnish information concerning the estate and

its administration as requested by a party in interest, unless the court orders otherwise

(§ 704(a)(7)); (4) to file reports (§ 704(a)(8)); (5) to make a report and file a final account of the

administration of the estate with the court and the U.S. Trustee (§ 704(a)(9)); (6) to provide

required notices with regard to domestic support obligations (§ 704(a)(10)); (7) to perform any

obligations as the administrator of an employee benefit plan (§ 704(a)(11)); and (8) to use

reasonable and best efforts to transfer patients from a health care business that is being closed

(§ 704(a)(12)).64

Paragraph (2) of § 1106(a) requires the trustee to file any list, schedule, or statement that

§ 521(a)(1) requires if the debtor has not done so. Paragraph (6) requires the trustee to file tax

returns for any year for which the debtor has not filed a tax return.

62 New § 1183(b)(5). New § 1183(b)(5) also requires the sub V trustee to perform duties specified in § 704(a)(8). The specification of the duty is duplicative because the § 704(a)(8) duty is one of the duties listed in § 1106(a)(1) that the sub V trustee must perform. 63 The court may remove a chapter 12 debtor from possession under § 1204. Under § 1202(b)(5), the chapter 12 trustee then has the duties of a trustee under § 1106(a)(1), (2), and (6). §§ 1106(a), 1202(b). 64 § 1106(a)(1).



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C. Trustee’s Disbursement of Payments to Creditors

1. Disbursement of preconfirmation payments and funds received by the trustee

Paragraphs (a) and (c) of new § 1194 contain provisions dealing with the trustee’s

disbursement of money prior to confirmation. It is not clear, however, how they can have any

operative effect. Nothing in subchapter V requires preconfirmation payments to the trustee or

authorizes the court to require them.

New § 1194(a) states that the trustee shall retain any “payments and funds” received by

the trustee until confirmation or denial of a plan.65 Although the statute by its terms is not

limited to preconfirmation payments and funds, the paragraph’s direction for their disbursement

based on whether the court confirms a plan or denies confirmation indicates that it deals only

with money the trustee receives prior to confirmation.

If a plan is confirmed, new § 1194(a) directs the trustee to disburse the funds in

accordance with the plan. If a plan is not confirmed, the trustee must return the payments to the

debtor after deducting administrative expenses allowed under § 503(b), any adequate protection

payments, and any fee owing to the trustee. The provision is effectively the same as the

provisions that govern disbursement of preconfirmation payments in chapter 12 and 13 cases.66

65 New § 1194(a). 66 New §§ 1194(a), 1226(a), 1326(a)(2). The chapter 12 provision, § 1226(a), does not specifically provide for fees of a trustee who is not a standing trustee and does not permit a deduction for adequate protection payments. The fees of a non-standing chapter 12 trustee are allowable as an administrative expense and as such are within the scope of the deduction. The chapter 13 provision, § 1326(b)(2), does not specifically provide for fees of the chapter 13 trustee. It does provide for the trustee to deduct adequate protection payments. A standing chapter 13 trustee collects a percentage fee as the debtor makes payments. 28 U.S.C. § 586(e)(2) (2018); see W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, CHAPTER 13 PRACTICE AND PROCEDURE § 17:5 (2019). Thus, the funds a standing chapter 13 trustee has upon denial of confirmation are net of the trustee’s fee that has already been paid. A non-standing chapter 13 trustee’s fee is included in the deduction because it is an administrative expense.



23

Provisions for a trustee’s disbursement of preconfirmation funds make sense in a chapter

13 case because a chapter 13 debtor must begin making preconfirmation payments to the trustee,

adequate protection payments to creditors with a purchase-money security interest in personal

property, and postpetition rent to lessors of personal property within 30 days of the filing of the

chapter 13 case.67 If the court denies confirmation in a chapter 13 case, therefore, it is possible

that the chapter 13 trustee will be holding money that the debtor paid.

No such provisions for preconfirmation payments exist in a sub V case. Subchapter V

contains no requirement for the debtor to make preconfirmation payments to the trustee, secured

creditors, or lessors, and nothing in subchapter V authorizes the court to require the debtor to

make preconfirmation payments to the trustee.

Nevertheless, paragraph (c) of new § 1194 authorizes the court, prior to confirmation and

after notice and a hearing, to authorize the trustee to make payments to provide adequate

protection payments to a holder of a secured claim.68 But a court can hardly require a sub V

trustee to make adequate protection payments as new § 1194(c) contemplates if the trustee has

no money to make them.

It is perhaps arguable that the new § 1194(a) and (c) provisions impliedly authorize the

court to require a debtor to make preconfirmation payments to the trustee, particularly if the

court orders the trustee to make adequate protection payments. But the concept of the sub V

debtor remaining in possession of its assets and operating its business includes the debtor

retaining control of its funds. It is more appropriate (and simpler) for a court to require the

debtor, not the trustee, to make whatever adequate protection or other payments the court orders.

67 § 1326(a). 68 New § 1194(c).



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2. Disbursement of plan payments by the trustee

Whether the sub V trustee makes disbursements to creditors under a confirmed plan

depends on the type of confirmation that occurs. Under new § 1194(b), the trustee makes

payments under a plan confirmed under the cramdown provisions of new § 1191(b), unless the

plan or confirmation order provides otherwise.69 If a consensual plan is confirmed under new

§ 1191(a), however, the trustee’s service terminates under new § 1183(c) upon “substantial

consummation,” and the debtor makes plan payments.70 Part IX discusses payments under the

plan.

D. Termination of Service of the Trustee and Reappointment

1. Termination of service of the trustee When termination of the trustee’s service occurs depends on whether the court confirms a

consensual plan under new §1191(a) or confirms a plan that one or more impaired classes of

creditors have not accepted under the cramdown provisions of new § 1191(b).

When the court confirms a consensual plan under new § 1191(a), the trustee’s service

terminates upon substantial consummation,71 which ordinarily occurs when distribution

commences.72 Confirmation of a plan under the cramdown provisions of new § 1191(b) does not

terminate the trustee’s service. As just discussed, the trustee continues to serve and makes

payments under the plan as new § 1194 requires.

Part IX further discusses these provisions.

69 New §1194(b). 70 New § 1191(a). 71 Section IX(A) discusses substantial consummation in the context of payments under a consensual plan. 72 New § 1183(c).



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Termination of the service of the sub V trustee also occurs, of course, upon dismissal of

the case or its conversion to another chapter.73

2. Reappointment of trustee New § 1183(c)(1) provides for the reappointment of a trustee after termination of the

trustee’s service in two circumstances.

First, new § 1183(c)(1) permits reappointment of the trustee if necessary to permit the

trustee to perform the trustee’s duty under new § 1183(b)(3)(C) to appear and be heard at a

hearing on modification of a plan after confirmation.74 The reason for this provision is unclear.

If a debtor seeks modification after cramdown confirmation, the trustee continues to serve, so

reappointment is unnecessary. When confirmation of a consensual plan has occurred, the

trustee’s service terminates upon substantial consummation, after which new § 1193(b) prohibits

modification. Perhaps the purpose of the reappointment provision is to make sure that someone

appears at the hearing to point this out to the court if a debtor attempts to modify a confirmed

consensual plan after its substantial consummation.

Second, new § 1183(c) permits reappointment of the trustee if necessary to perform the

trustee’s duties under new § 1185(a). New § 1185(a) provides for the removal of the debtor in

possession, among other things, for “failure to perform the obligations of the debtor under a plan

confirmed under this chapter.”75 Because new § 1185(a) contemplates the postconfirmation

removal of the debtor in possession, a trustee must be available to take charge of the assets and

73 Section 701(a) directs the U.S. Trustee to appoint an interim trustee promptly after entry of an order for relief under chapter 7. In a converted case, the U.S. Trustee may appoint the trustee serving in the case immediately before entry of the order for relief. Sections 1202 and 1302 provide for a standing trustee to serve in cases under those chapters, if one has been appointed, or for the U.S. Trustee to appoint a disinterested person to serve as trustee. 74 New § 1183(c)(1). 75 New § 1185(a).



26

the business. Section XII(B) further discusses the postconfirmation removal of the debtor in

possession.

E. Compensation of Subchapter V Trustee

If the trustee in a sub V case is a standing trustee, the trustee’s fees are a percentage of

payments the trustee makes to creditors under the same provisions that govern compensation of

standing chapter 12 and chapter 13 trustees.

If the sub V trustee is not a standing trustee, the trustee is entitled to fees and

reimbursement of expenses under the provisions of § 330(a), without regard to the limitation in

§ 326(a) on compensation of a chapter 11 trustee based on money the trustee disburses in the

case. As Section IV(E)(2) discusses, some observers expected that technical amendments would

impose a limit on compensation of five percent of payments under the plan, which is the rule for

a non-standing chapter 12 or 13 trustee.76 SUPP XIV

1. Compensation of standing subchapter V trustee

For a standing trustee, amendments to § 326 require compensation under 28 U.S.C.

§ 586.77 As amended, § 326(a) excludes a subchapter V trustee from its provisions governing

compensation of a chapter 11 trustee, and § 326(b) provides that the court may not allow

compensation of a standing trustee in a subchapter V case under § 330.

Under SBRA’s amendments to 28 U.S.C. § 586(e),78 the U.S. Trustee Program

establishes the compensation for a standing sub V trustee in the same manner it does for standing

chapter 12 and 13 trustees.79 Existing provisions of 28 U.S.C. § 586(e) that apply in chapter 12

76 The observers are bankruptcy judges, lawyers, and professors who have followed and supported enactment of SBRA with whom the author has discussed the issue. 77 SBRA § 4(a)(4). 78 SBRA § 4(b)(1)(D). 79 28 U.S.C. § 586(e).



27

and 13 cases are extended to cover subchapter V standing trustees. Thus, the standing

subchapter V trustee receives a percentage fee (as fixed by the U.S. Trustee Program) from all

payments the trustee disburses under the plan.

If the service of a standing trustee is terminated by dismissal or conversion of the case or

upon substantial consummation of a consensual plan under new § 1181(a) (as Section IX(A)

discusses, the trustee does not make payments under a consensual plan), new 28 U.S.C.

§ 586(e)(5) provides that the court “shall award compensation to the trustee consistent with the

services performed by the trustee and the limits on the compensation of the trustee established

pursuant to [28 U.S.C. § 586(e)(1)].”80 The limits require reference to the standing trustee’s

maximum annual compensation, 28 U.S.C. § 586(e)(1)(A), and to the maximum percentage fee,

28 U.S.C. § 586(e)(1)(B).

2. Compensation of non-standing subchapter V trustee

Questions have arisen concerning the provisions of the new statute for compensation of a

subchapter V trustee who is not a standing trustee.

Section 330(a) permits the court to award compensation to trustees. Sections 326(a) and

(b) impose limits on compensation of trustees. SBRA does not amend § 330(a), but it does

amend §§ 326(a) and (b). Under a “plain meaning” interpretation of these provisions as

amended, a non-standing sub V trustee is entitled to “reasonable compensation for actual,

necessary services rendered” and “reimbursement for actual, necessary expenses” under

§ 330(a), and §§ 326(a) and (b) do not impose any limits on compensation. SUPP XIV

80 28 U.S.C. § 586(e)(5).



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Some observers who participated in the drafting of SBRA and the legislative process

leading to its enactment attribute this result to a drafting error.81 The drafters of subchapter V

intended that provisions for compensation of non-standing sub V trustees be the same as those

for non-standing chapter 12 and 13 trustees.

Specifically, § 326(b) limits compensation of a non-standing chapter 12 or chapter 13

trustee to “five percent upon all payments under the plan.” Although it appears the drafters

intended this limitation to apply to compensation of sub V trustees, the language of the SBRA

amendments to § 326(b) do not make this limitation applicable to a non-standing sub V trustee.82

Observers close to the legislative process expected a technical amendment to resolve this issue

81 See supra note 76. 82 A full understanding of the issue requires further elaboration. Section 330(a) provides for the allowance of compensation to “trustees,” subject to § 326 (and other sections). SBRA does not amend § 330(a). SBRA did not change the provisions of subsections (a) and (b) of § 326(a) with regard to compensation of trustees other than sub V trustees. Thus, § 326(a) limits the compensation of a chapter 11 (and chapter 7) trustee to a percentage of moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor. Section 326(b) deals with compensation of trustees in chapter 12 and 13 cases in two ways. First, it provides that a standing chapter 12 or 13 trustee is not entitled to compensation under § 330(a); instead, a standing chapter 12 or 13 trustee receives compensation, and collects percentage fees, under 28 U.S.C. § 586(e). Second, § 326(b) limits the compensation of a non-standing chapter 12 or 13 trustee to “five percent upon all payments under the plan.” § 326(b). The exact language of § 326(b) is that the limitation applies to a “trustee appointed under section 1202(a) or 1302(a) of this title.” Id. Generally, then, pre-SBRA § 326(a) dealt with chapter 7 and 11 cases and § 326(b) dealt with chapter 12 and 13 trustees. Without an amendment, a sub V trustee would be a chapter 11 trustee, and § 326(a) would apply. Similarly, unamended §326(b) would not apply because it is for chapter 12 and 13 cases. SBRA § 4(a)(4)(A) amended § 326(a) by excluding sub V trustees from its application. SBRA § 4(a)(4)(B) amended § 326(b) to prohibit a standing sub V trustee from receiving compensation under § 330. SBRA’s amendments to 28 U.S.C. § 586(e) provide for compensation of a standing sub V trustee under its provisions, so the same provisions that govern compensation of standing chapter 12 and 13 trustees apply. SBRA § 4(b)(1). What the SBRA amendments did not do was add “§ 1183” (the new subchapter V section that calls for the appointment of a sub V trustee) before “§ 1202(a) and 1302(a)” (the sections under which chapter 12 and 13 trustees are appointed) in the language quoted above. Without this insertion, amended § 326(b) does not limit the compensation of a non-standing sub V trustee. As the next footnote discusses, one reading of amended § 326(b) is that nothing authorizes compensation of a non-standing sub-V trustee.



29

by making the five percent limitation also applicable to sub V trustees.83 Technical corrections

in the CARES Act, however, did not address this issue.84 SUPP XIV

3. Deferral of non-standing subchapter V trustee’s compensation

A standing sub V trustee receives compensation as a percentage of payments the trustee

makes from funds paid by the debtor under a plan. The percentage fees of a standing trustee are

necessarily deferred until payments are made.

A non-standing trustee’s compensation is allowable as an administrative expense, which

has priority under § 507(a)(2) subject only to claims for domestic support obligations. Under

§ 1129(a)(9)(A), a plan must provide for payment of administrative expenses in full on or before

the effective date of the plan.85 This requirement applies in subchapter V cases to confirmation

of a consensual plan under new § 1191(a).86

New § 1191(e) permits payment of administrative expense claims through the plan if the

court confirms it under the cramdown provisions of new § 1191(b).87 Accordingly, a non-

standing sub V trustee faces deferral of payment of compensation for services in the case.

As Section IV(E)(2) discusses, it is possible that a technical amendment to § 326(b) will

impose a limitation on a non-standing trustee’s compensation to five percent of payments under

83 Such an amendment would also clarify that a non-standing trustee is entitled to compensation. As amended, § 326(b) applies to cases under subchapter V, chapter 12, and chapter 13. Before and after the amendment, § 326(b) states that the court “may allow reasonable compensation under section 330 of this title to a trustee appointed under section 1202(a) or 1302(a) of this title,” but it does not state that the court may allow compensation under § 330 of a trustee appointed under new § 1183. § 326(b). Because § 330(a) is subject to § 326, and § 326(b) does not provide for compensation of a non-standing sub V trustee, it may be arguable that a sub V trustee is not entitled to compensation. The position of the United States Trustee Program is, “Case-by-case trustees are compensated through § 330(a)(1) which allows for ‘reasonable compensation for actual, necessary services rendered by the trustee . . . and by any paraprofessional person employed by such person.’” SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-21. 84 The technical corrections in the CARES Act involved the exclusion of public companies from the definition of a small business debtor and unclaimed funds in subchapter V cases. CARES Act § 1113(a)(4). 85 § 1129(a)(9)(A). 86 New § 1191(a). 87 New § 1191(e).



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the plan. If this occurs, a non-standing trustee’s compensation may arguably be limited to five

percent of payments as they are made.

F. Trustee’s Employment of Attorneys and Other Professionals

Section 327(a) permits a bankruptcy trustee to employ attorneys and other professionals

“to represent or assist the trustee in carrying out the trustee’s duties.” SBRA does not modify

this provision for subchapter V cases. If a standing sub V trustee is appointed, the standing

trustee presumably would follow the practice of standing trustees in chapter 12 and 13 cases and

not retain counsel or other professionals except in exceptional circumstances.

A non-standing sub V trustee’s employment of attorneys or other professionals has the

potential to substantially increase the administrative expenses of the case. In view of the intent

of SBRA to streamline and simplify chapter 11 cases for small business debtors and reduce

administrative expenses, courts may be reluctant to permit a sub V trustee to retain attorneys or

other professionals except in unusual circumstances.88 In this regard, a person serving as a sub V

trustee should have a sufficient understanding of applicable legal principles to perform the

88 See In re Penland Heating and Air Conditioning, Inc., 2020 WL 3124585 (E.D.N.C. 2020). The court declined to approve the sub V trustee’s application to approve the employment of the trustee’s law firm, stating, “[A]uthorizing a Subchapter V trustee to employ professionals, including oneself as counsel, routinely and without specific justification or purpose is contrary to the intent and purpose of the SBRA.” Id. at *2. In a footnote, the court cautioned that “overzealous and ambitious Subchapter V trustees that unnecessary or duplicative services may not be compensated, and other fees incurred outside of the scope and purpose of the SBRA may not be approved.” Id. at *2 n. 2. The SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-17 to 3-18, states:

Although the trustee may employ professionals under section 327(a), SBRA is intended to be a quick and low cost process to enable debtors to confirm consensual plans in a short period with less expense while returning appropriate dividends to creditors. Therefore, the services required of outside professionals, if any, will be limited in many cases. This is especially important in cases in which the debtor remains in possession and the debtor already has employed professionals to perform many of the duties that the trustee might seek to employ the professionals to perform. See 11 U.S.C. § 1184. The trustee should keep the statutory purpose of SBRA in mind when carefully considering whether the employment of the professional is warranted under the specific circumstances of each case.



31

trustee’s monitoring and supervisory duties, and appear and be heard on specified issues, without

the necessity of separate legal advice.

A question exists whether a trustee who is not an attorney may appear and be heard in a

bankruptcy case. Section 1654 of title 28 provides as follows:

In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.89

The statute applies only to natural persons; it does not permit a corporation or other entity to

appear in federal court except through licensed counsel.90

Courts have applied the rule to prohibit an individual who serves as the trustee for a trust

or as the personal representative of an estate from representing the trust or estate unless the trust

or estate has no creditors and the individual is the sole beneficiary.91 Because a bankruptcy

trustee acts as the representative of the estate92 and creditors have an interest in the estate, the

same rule would appear to require a non-attorney trustee to retain a lawyer in order to appear and

be heard in a bankruptcy court. SUPP XV

The nature of reorganization proceedings in bankruptcy courts and the facilitative,

advisory, and monitoring role that subchapter V specifically contemplates for the trustee suggest

that the rule applicable in a federal lawsuit between discrete parties should not be extended to

apply to a nonlawyer subchapter V trustee unless the trustee is a party to a discrete controversy

in an adversary proceeding or contested matter.

89 28 U.S.C. § 1654. 90 E.g., Rowland v. California Men’s Colony, 506 U.S. 194, 202 (1993) (“[T]he lower courts have uniformly held that 28 U.S.C. § 1654, providing that ‘parties may plead and conduct their own cases personally or by counsel,’ does not allow corporations, partnerships, or associations to appear in federal court otherwise than through a licensed attorney.”). 91 E.g., SUPP XV Guest v. Hansen, 603 F.3d 15 (2d Cir. 2010) (estate); Knoefler v. United Bank of Bismarck, 20 F.3d 347 (8th Cir. 1994) (trust); C.E. Pope Equity Trust v. United States, 818 F.2d 696 (9th Cir. 1987) (trust). 92 § 323(a).



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In this regard, 28 U.S.C. § 1654 and the case law establishing the rule have their roots in

18th and 19th century practice in federal courts93 when the availability of bankruptcy relief was

either nonexistent or short-lived.94 The statute could not have contemplated a reorganization

case involving many parties and many inter-related moving parts that involve business issues and

often require negotiations and compromise to achieve a successful outcome for all the parties. In

other words, a bankruptcy reorganization is quite different from a lawsuit that involves discrete

parties asserting claims and defenses to establish their rights and obligations.

This distinction is particularly important in a subchapter V case. Specific duties of the

sub V trustee are to facilitate the development of a consensual plan of reorganization,95 and to

appear and be heard on confirmation and other significant issues that relate to confirmation.96

The statute makes it clear that the trustee’s primary role is to work with the parties and then to

report to the court, not to engage in litigation with them.

A nonlawyer trustee does not need an attorney to work with the parties on business

issues, to investigate and obtain information about the debtor and its business, to facilitate

confirmation, and to report to the court. When the time comes to report to the court, the trustee

should be permitted to perform the reporting function without a lawyer.

Assuming that the nonlawyer trustee is knowledgeable about reorganization law and

practice (and a sub V trustee who is not knowledgeable should not be a sub V trustee), neither

93 Section 35 of the Judiciary Act of 1789 is the statutory predecessor to 28 U.S.C. § 1654 (2018) and contained substantially the same language. See United States v. Dougherty, 473 F.2d 1113, 1123 n. 10 (D.C. Cir. 1972). Section 35 of the Judiciary Act of 1789, 1 Stat. 73, 92 (1789), provided “that in all the courts of the United States, the parties may plead and manage their own causes personally or by the assistance of such counsel or attorneys at law as by the rules of the said courts respectively shall be permitted to manage and conduct causes therein.” 94 See Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 12-23 (1995). See also W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 1:2. 95 New § 1183(b)(7). 96 New § 1183(b)(3).



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the debtor, creditors, nor the court need a lawyer to present the trustee’s reports and views to the

court. In short, unless a sub V trustee needs to litigate something, the trustee does not need

counsel. The statute and case law governing federal litigation should not be extended to the

trustee’s appearance in court to report.

The subchapter V trustee’s primary role is analogous to the role of an examiner in a

standard chapter 11 case,97 or an expert witness that a court appoints.98 Such parties provide

information to the court and the parties and may do so without counsel. A sub V trustee with

similar advisory duties should similarly be permitted to provide information to the court without

the necessity of having to do so through a lawyer.99

Finally, the trustee is an officer of the court. The court need not insist that its officer hire

a lawyer to hear what the officer has to say.

If a nonlawyer is the sub V trustee, the trustee’s ability to appear in court without a

lawyer is critical to accomplishment of the objective of subchapter V of providing debtors – and

creditors – with the opportunity to accomplish an expeditious and economic reorganization,

hopefully on a consensual basis. A requirement for employment of counsel adds an additional

layer of expense that should not ordinarily be necessary and that threatens accomplishment of

97 § 1106(b). Although bankruptcy courts often authorize an examiner to employ counsel or other professionals, § 327(a) does not provide authority for an examiner to employ a professional person. See generally 5 HON. WILLIAM L. NORTON JR. & WILLIAM L. NORTON, III, NORTON BANKRUPTCY LAW AND PRACTICE § 99:29 (3d ed. 2019). See also In re W.R. Grace & Co., 285 B.R. 148, 156 (Bankr. D. Del. 2002) (“[T]he basic job of an examiner is to examine, not to act as a protagonist in the proceedings. The Bankruptcy Code does not authorize the retention by an examiner of attorneys or other professionals.” (citation omitted)). 98 FED. R. EVID. 706. 99 In some jurisdictions, some chapter 7 panel trustees are not lawyers. The author’s informal discussions with bankruptcy judges indicate that in some courts nonlawyer trustees appear without counsel when the matter does not require actual litigation.



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subchapter V’s primary objective.100 Moreover, if a nonlawyer trustee must have a lawyer, the

additional expense may as a practical matter preclude the appointment of a nonlawyer trustee.

If a court determines that the rule prohibiting a nonlawyer trustee from appearing in

federal court requires the trustee to retain counsel in order to be heard, economic considerations

may lead the court to limit the services that will be compensated to those for which a lawyer is

legally required. Non-compensable services might include, for example, work in connection

with the investigation of the debtor and its business or negotiations or development of business

information to facilitate a consensual plan. And because it is the trustee, not the lawyer, who is

to be heard, any written report concerning confirmation and other matters would seem to be the

responsibility of the trustee, not the lawyer.

V. Debtor as Debtor in Possession and Duties of Debtor

A. Debtor as Debtor in Possession

The debtor, as debtor in possession, remains in possession of assets of the estate.101 A

sub V debtor in possession has the rights, powers, and duties of a trustee that a standard chapter

11 debtor in possession has, including the operation of the debtor’s business.102 The court may

100 This consideration suggests that a court may invoke § 105(a) to permit a nonlawyer to appear without counsel as being “necessary or appropriate” to carry out the provisions of the Bankruptcy Code. 101 New § 1186(b). 102 New § 1184. Section 1107(a), which provides for the debtor to remain in possession with the rights, powers, and duties of a trustee, is inapplicable in a sub V case. New § 1181(a). New § 1184 replaces § 1107(a) in sub V cases.



35

remove the debtor as debtor in possession under new § 1185(a). The court may reinstate the

debtor in possession.103

B. Duties of Debtor in Possession

Upon the filing of a voluntary case, a small business debtor must file documents required

of a small business debtor under §§ 1116(1)(A) and (B).104 If a small business debtor elects to

proceed as a sub V debtor, §1116 is inapplicable, but new § 1187(a) requires the sub V debtor to

comply with §§ 1116(1)(A) and (B) upon making the election.105

The timing of the election does not change the time for the debtor to file the required

documents from the date of the filing of the petition. If the debtor makes the election in the

petition (as Interim Rule 1020(a) requires), § 1187(a) requires the debtor to file the documents at

that time. If the debtor does not make the election in the petition, § 1116(1) is applicable and

requires the debtor to append the documents to the petition. In an involuntary case, the debtor

must file the documents within seven days after the order for relief.106

The documents that § 1116(1) requires are: the debtor’s most recent balance sheet,

statement of operations, cash-flow statement, and federal income tax return, or a statement under

penalty of perjury that no balance sheet, statement of operations or cash-flow statement has been

prepared and no federal tax return has been filed.107

103 New § 1185(b). 104 New. § 1187(a). 105 Section 1116 does not apply in a sub V case, § 1181(a), but new § 1187 incorporates all its requirements. In view of this, it is unclear why § 1116 does not apply in subchapter V cases. Perhaps it is because § 1116 also applies to a trustee. 106 Section 1116(1) requires a small business debtor in an involuntary case to file the required documents within seven days after the order for relief. Interim Rule 1020(a) permits a debtor to make the subchapter V election within 14 days after entry of the order for relief in an involuntary case. New § 1187(a) requires compliance with the requirements of § 1116(1) upon the debtor’s election to be a subchapter V debtor. Unless and until the debtor makes the election, § 1116 applies. Accordingly, the debtor must comply with § 1116(1) and file the required documents within seven days after the order for relief, regardless of when the debtor makes the election. 107 § 1116(1).



36

SBRA does not change a small business debtor’s duty under § 308 to file periodic

reports.108 Under § 308(b), the periodic reports must contain information including: (1) the

debtor’s profitability; (2) reasonable approximations of the debtor’s projected case receipts and

cash disbursements; (3) comparisons of actual case receipts and disbursements with projections

in earlier reports; (4) whether the debtor is in compliance with postpetition requirements of the

Bankruptcy Code and the Bankruptcy Rules and whether the debtor is timely filing tax returns

and paying taxes and administrative expenses when due; and (5) if the debtor has not complied

with the foregoing duties, how, when, and at what cost the debtor intends to remedy any

failures.109

The debtor must also comply with the duties of a debtor in possession in small business

cases specified in § 1116(2) – (7).110 Thus, the debtor’s senior management personnel and

counsel must: (1) attend meetings scheduled by the court or the U.S. Trustee (including initial

debtor interviews, scheduling conferences, and § 341 meetings, unless waived for extraordinary

and compelling circumstances111); (2) timely file all schedules and statements of financial affairs

(unless the court after notice and a hearing grants an extension not to exceed 30 days after the

order for relief, absent extraordinary and compelling circumstances); (3) file all postpetition

financial and other reports required by the Bankruptcy Rules or local rule of the district court;112

(4) maintain customary and appropriate insurance; (5) timely file required tax returns and other

108 New § 1187(b). 109 § 308. 110 New § 1187(b). 111 As in non-sub V cases, the debtor and counsel must attend the initial debtor interview scheduled by the U.S. Trustee and must attend the § 341 meeting of creditors, at which the U.S. Trustee presides. See SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-3, 3-5. The U.S. Trustee expects the sub V trustee to participate in both. Id. 112 That is not a typo. The statute specifies local rule of the district court.



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government filings and pay all taxes entitled to administrative expense priority; and (6) allow the

U.S. trustee to inspect the debtor’s business premises, books, and records.113

A sub V debtor in possession has the duties of a trustee under § 1106(a), except those

specified in paragraphs (a)(2) (file required lists, schedules, and statements), (a)(3) (conduct

investigations), and (a)(4) (report on investigations).114

The duties under § 1106(a)(1) include the duties of a trustee under paragraphs (2), (5),

(7), (8), (9), (10), (11) and (12) of § 704(a).115 These provisions include duties: to be

accountable for all property received; to examine and object to proofs of claim if a purpose

would be served; to furnish information concerning the estate and its administration as requested

by a party in interest, unless the court orders otherwise; to file reports; to make a report and file a

final account of the administration of the estate with the court and the U.S. Trustee; to provide

required notices with regard to domestic support obligations; to perform any obligations as the

administrator of an employee benefit plan; and to use reasonable and best efforts to transfer

patients from a health care business that is being closed.

Other § 1106(a) duties applicable to the sub V debtor under new § 1184 are the duties

under § 1106(a)(5) through (a)(8): to file a plan;116 to file tax returns for any year for which the

113 § 1118. 114 New § 1184. 115 § 1106(a)(1). 116 The duty under § 1106(a)(5), applicable to the sub V debtor under new § 1184, is to “as soon as practicable, file a plan under section 1121 of this title, file a report of why the trustee will not file a plan, or recommend conversion of the case to a case under chapter 7, 12, or 13 of this title or dismissal of the case.” New § 1184. The § 1106(a)(5) language is somewhat problematical in a sub V case. First, § 1121 (dealing with who may file a plan) does not apply in a sub V case because only the debtor may file a plan. Second, the statutory deadline of 90 days for the debtor to file a plan, new § 1189(b), is inconsistent with the “as soon as practicable” direction in § 1106(a)(5). § 1106(a)(5). Nevertheless, the clear import of the statutory scheme is that the sub V debtor has a duty to file a plan.



38

debtor has not filed a tax return; to file postconfirmation reports as are necessary or as the court

orders; and to provide required notices with regard to any domestic support obligations. 117

C. Removal of Debtor in Possession New § 1185(a) provides for removal of a debtor in possession, for cause, on request of a

party in interest and after notice and hearing.118 “Cause” includes “fraud, dishonesty,

incompetence, or gross mismanagement of the affairs of the debtor, either before or after the date

of commencement of the case.” This language is identical to § 1104(a),119 which provides for

appointment of a trustee in a standard or non-sub V chapter 11 case, and to § 1204(a), which

provides for removal of the debtor in possession in a chapter 12 case. SUPP XV

New § 1185(a) also provides for removal of the debtor in possession “for failure to

perform the obligations of the debtor” under a confirmed plan, as Sections V(C) and XII(B)

discuss. Sections 1104(a) and 1204(a) do not contain this ground for removal of a debtor in

possession.120

117 § 1106(a)(5-8). 118 New § 1181(a). Sections 1104 and 1105, which deal with appointment of a trustee and termination of the trustee’s appointment, are inapplicable in a sub V case. Section 1104 also permits appointment of a trustee if it is “in the interests of creditors, any equity security holders, and other interests of the estate.” New § 1185(a) does not include this reason as “cause” for removing a debtor in possession. Section 1104 also permits the appointment of an examiner. Subchapter V has no provision for appointment of an examiner. As Section IV(B)(1) notes, the court may authorize a trustee to investigate for cause shown under new § 1183(b)(2). 119 Section 1104 does not apply in a sub V case. New § 1181(a). 120 New § 1185(a).



39

If the court removes the debtor in possession, the trustee has the duty to operate the

business of the debtor,121 and other duties that Section IV(B)(3) discusses. The trustee cannot,

however, file a plan.122 SUPP XV

New § 1185(b) permits the court to reinstate the debtor in possession on request of a

party in interest and after notice and a hearing.123 Section 1202(b) contains identical language in

chapter 12 cases, and § 1105 similarly permits the court to terminate the appointment of a

chapter 11 trustee and restore the debtor to possession and management of the estate and

operation of the debtor’s business.124

Like §§ 1104(a) and 1204(a), new § 1185(a) states that the court shall remove the debtor

in possession if a specified ground exists.125 A potential issue is whether removal of the debtor

for failure to perform under a confirmed plan is mandatory if the failure is not material or if the

debtor has cured or can cure defaults. If a debtor establishes that reinstatement is appropriate at

121 Id.§ 1183(b)(5). 122 Id.§ 1189(a) (stating that only the debtor may file a plan). 123 Id.§ 1185(b). 124 §§ 1105, 1202(b). If the debtor is removed from possession, a question arises whether the attorney (and other professionals employed by the debtor) is entitled to compensation for services rendered to the debtor after the removal. The Supreme Court in Lamie v. United States Trustee, 540 U.S. 526, 124 S. Ct. 1023 (2004), ruled that an attorney for a former chapter 11 debtor in possession who provides services after conversion to chapter 7 is not entitled to compensation under § 330(a) for postconversion services because § 330(a) does not authorize compensation for a debtor’s attorney. The same principle applies when a trustee is appointed in a chapter 11 case, thus removing the debtor as debtor in possession. Subchapter V does not address this issue. If the Lamie ruling precludes compensation of a sub V debtor’s attorney after removal and the debtor cannot find an attorney to provide counsel without compensation, the debtor will not have a realistic chance of obtaining reinstatement or filing a plan. 125 New § 1185(a).



40

the same time that removal is sought, a court might find sufficient reason not to remove the

debtor.

VI. Administrative and Procedural Features of Subchapter V

Subchapter V includes several features designed to facilitate the efficient and economical

administration of the case and the prompt confirmation of a plan. These features include

elimination of the committee of unsecured creditors and the requirement of a separate disclosure

statement unless the court orders otherwise; the requirement of a status conference; an expedited

timetable for the filing of a plan; elimination of U.S. Trustee fees; and a modification of the

disinterestedness requirement applicable to the retention of professionals by the debtor under

§ 327(a).

A. Elimination of Committee of Unsecured Creditors

SBRA amends § 1102(a)(3) to provide that a committee of unsecured creditors will not

be appointed in the case of a small business debtor unless the court for cause orders otherwise.126

Prior to the amendment, § 1102(a)(3) permitted the U.S. Trustee to appoint a committee unless

the court, for cause, ordered that a committee not be appointed. The other provisions of

§ 1102127 (dealing with appointment of committees) and § 1103 (dealing with powers and duties

of committees) do not apply in a sub V case unless the court orders otherwise.128

Although SBRA eliminates the appointment of a committee of unsecured creditors in

both sub V and non-sub V cases unless the court orders otherwise, the Interim Rules did not

126 SBRA § 4(a)(11). 127 The other provisions are paragraphs (1), (2), and (4) of § 1102(a) and § 1102(b). 128 New § 1181(b).



41

change the requirement of Bankruptcy Rule 1007(d) that a debtor in a voluntary chapter 11 case

file a list of its 20 largest unsecured creditors, excluding insiders.

The requirement of the list serves two purposes. First, an objection to the debtor’s

designation of itself as a small business debtor or to its election of subchapter V129 must be

served on the creditors on the Rule 1007(d) list under Interim Rule 1020(c). Second, if the court

directs the appointment of a committee, the list provides the information that the U.S. Trustee

needs to identify the largest unsecured creditors for purposes of selecting committee members

from the holders of the largest claims willing to serve under § 1102(b)(1).

B. Elimination of Requirement of Disclosure Statement

Section 1125 regulates postpetition solicitation of acceptances or rejections of a plan. It

requires that creditors receive “adequate information”130 about the debtor and the plan before

solicitation occurs in the form of a written disclosure statement that the court approves.131 The

court must hold a hearing on approval of the disclosure statement after at least 28 days’ notice

before solicitation of votes on the plan may occur.132

In a small business case, § 1125(f)(3) permits the court to conditionally approve a

disclosure statement, subject to objection after notice and hearing,133 so that solicitation may

occur without prior notice and hearing on the disclosure statement.134 The hearing on approval

of the disclosure statement may be combined with the hearing on confirmation.135 In addition,

the court in a small business case may determine that the plan itself provides adequate

129 See Section III(A). 130 Section 1125(a)(1) defines “adequate information” as information that would enable “a hypothetical investor of the relevant class to make an informed judgment about the plan.” § 1125(a)(1). 131 § 1125(b). 132 FED. R. BANKR. P. 3017(a). 133 § 1125(f)(3)(A). 134 § 1125(f)(3)(B). 135 § 1125(f)(3)(C).



42

information and that a separate disclosure statement is not necessary,136 and may approve a

disclosure statement submitted on a standard form approved by the court or on Official Form

B425B.137

In a sub V case, § 1125 is inapplicable unless the court orders otherwise.138 Thus, the

debtor need not file a disclosure statement in connection with its plan unless the court requires it.

If the court orders that § 1125 apply, the provisions of § 1125(f) apply.

A sub V debtor’s plan must contain certain information that a disclosure statement

typically contains, including: (1) a brief history of the business operations of the debtor; (2) a

liquidation analysis; and (3) projections with respect to the ability of the debtor to make

payments under the proposed plan of reorganization. New § 1181(a)(1). SUPP XV It does not

require that the plan contain “adequate information,” and it does not provide for judicial review

of the required information. Material or intentional errors or omissions might provide a basis for

denial of confirmation for the debtor’s lack of good faith in proposing the plan.139

C. Required Status Conference and Debtor Report

Section 105(d) permits, but does not require, the court to convene a status conference in a

case under any chapter, on its own motion or on request of a party in interest.140 Section 105(d)

does not apply in a sub V case.141 Instead, new § 1188(a) makes a status conference mandatory

and requires the court to hold it not later than 60 days after the entry of the order for relief in the

case.142 The court may extend the time for holding the status conference if the need for an

136 § 1125(f)(1). 137 § 1125(f)(2). 138 New § 1181(b). 139 § 1129(a)(3). See also Brubaker, supra note 5, at 10. 140 § 105(d). 141 New § 1181(a). 142 SUPP XV



43

extension is “attributable to circumstances for which the debtor should not justly be held

accountable.”143 SUPP XV The statutory purpose of the status conference is “to further the

expeditious and economical resolution” of the case.

Not later than 14 days prior to the status conference, the debtor must file, and serve on

the trustee and all parties in interest, a report that “details the efforts the debtor has undertaken

and will undertake to attain a consensual plan of reorganization.”144 The trustee has the duty to

appear and be heard at the status conference.145 SUPP XV

Neither subchapter V nor the Interim Rules specify how the court schedules the status

conference, the agenda for the status conference, or the contents of the debtor’s report. The

practitioner must consult local rules, orders, and procedures to determine how the bankruptcy

judge will address these matters and the judge’s expectations about the report and the status

conference.146

Some courts include the time for the status conference in the Notice of Chapter 11

Bankruptcy Case that the clerk sends at the outset of the case. Others schedule it in a separate

notice, or include it in a scheduling order, that the clerk or debtor’s counsel mails to parties in

interest.

New § 1188(a) states only that the purpose of the status conference is “to further the

expeditious and economical resolution” of the subchapter V case, and new § 1188(c) requires

only that the report detail “the efforts the debtor has undertaken and will undertake to attain a

143 New § 1188(b). 144 New § 1188(c). 145 New§ 1183(b)(3). 146 For example, the New Jersey bankruptcy court has promulgated a mandatory form for the debtor’s report, http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms. Bankruptcy courts in the District of Maryland, https://www.mdb.uscourts.gov/content/local-bankruptcy-forms, and in the Central District of California, http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms, have published suggested forms.



44

consensual plan of reorganization.” While some courts are scheduling the status conference

without further direction, others have provided more specific instructions.

For example, a scheduling order for the status conference may remind counsel that senior

management must attend the conference, that the report will be covered, and that the debtor

should be prepared to discuss any anticipated complications in the case (such as adversary

proceedings, discovery, or valuation disputes), the timing of the confirmation hearing and related

procedures and deadlines, and monthly operating reports.

A scheduling order may also outline specific items to be included in the report, which

may include one or more of the following: (1) the efforts the debtor has undertaken or will

undertake to obtain a consensual plan of reorganization, as new § 1188(c) requires; (2) the goals

of the reorganization plan; (3) any complications the debtor anticipates in promptly proposing

and confirming a plan, including any need for discovery, valuation, motion practice, claim

adjudication, or adversary proceeding litigation; (4) a description of the nature of the debtor’s

business or occupation, the primary place of business, the number of locations from which it

operates, and the number of employees or independent contractors it utilizes in its normal

business operations; and the goals of the reorganization plan; (5) any motions the debtor

contemplates filing or expects to file before confirmation; (6) any objections to any claims or

interests the debtor expects to file before confirmation and any potential need to estimate claims

for voting purposes; (7) the estimated time by which the debtor expects to file its plan;

(8) whether the debtor is current on all required tax returns; (9) other matters or issues that the

debtor expects the court will need to address before confirmation or that could have an effect on

the efficient administration of the case.



45

Regardless of whether the court specifies its requirements with regard to the debtor’s

report or sets an agenda for the scheduling conference, counsel for the parties should anticipate

that the court will be interested in any of these matters that the case involves and that debtor’s

counsel must ultimately address in connection with plan confirmation. Creditors may use the

status conference as an opportunity to obtain information about the financial affairs of the debtor

and to articulate their views and concerns about the debtor’s operations, prospects for a feasible

plan, and other matters.147

D. Time for Filing of Plan Only the debtor may file a plan.148 The debtor has a duty to do so.149

The deadline for the sub V debtor to file the plan is 90 days after the order for relief.150

The court may extend the deadline if the need for extension is attributable to circumstances for

which the debtor should not justly be held accountable,151 the same standard that governs

extension of the 90-day deadline to file a chapter 12 plan under § 1221.152 New § 1193(a)

permits preconfirmation modification of a plan.153 SUPP XV

Section 1121(e) requires that a debtor in a small business case file a plan within 300 days

of the filing date,154 and § 1129(e) requires that confirmation occur within 45 days of the filing

147 See Bradley, supra note 9, at 256, 272-73, 281. 148 New§ 1189(a). 149 New§ 1184. Note 116 discusses the debtor’s duty to file a plan. 150 New§ 1189(b). SUPP XV 151 Id. 152 The court in In re Trepetin, 617 B.R. 841, 848-49 (Bankr. D. Md. 2020), found guidance for determining whether to extend the deadline in a chapter 12 case that addressed the issue under § 1221, In re Gullicksrud, 2016 WL 5496569, at *2 (Bankr. W.D. Wis. 2016). 153 New § 1193(a). 154 § 1121(e).



46

of the plan.155 These requirements do not apply in a subchapter V case. 156 They continue to

apply in the case of a small business debtor who does not elect subchapter V. The schedule for

the filing of the plan in a sub V case thus differs from the schedule in a non-sub V case in two

ways. First, a sub V debtor must file a plan much more promptly than a non-sub V debtor – 90

days instead of 300.157 Second, the sub V debtor faces no deadline for obtaining confirmation

after the filing of the plan.

SUPP XV As in all chapter 11 cases, a debtor’s failure to file a plan within the time the

Bankruptcy Code requires (or the court orders) is cause for conversion or dismissal.158 Section

1112(b)(1) states that the court shall dismiss or convert a chapter 11 case for cause, whichever is

in the best interest of creditors and the estate, unless the court determines that the appointment of

a trustee or an examiner under § 1104 is in the best interests of the estate.159 Because § 1104

does not apply in a sub V case,160 the court apparently has no alternative to conversion or

dismissal.

E. No U.S. Trustee Fees

28 U.S.C. § 1930(a)(6)(A) requires the quarterly payment of U.S. Trustee fees in chapter

11 cases based on disbursements in the case. SBRA amends this subparagraph to except cases

under subchapter V from this requirement.161

155 § 1129(e). 156 New § 1181(a). 157 Because of the short time to file a plan, counsel for a sub V debtor should promptly request the court to issue a bar order establishing a deadline for the filing of proofs of claim if the court by local rule or general order has not fixed a deadline for filing proofs of claim in sub V cases. 158 § 1112(b)(4)(J). 159 1112(b)(1). 160 New § 1181(a). 161 SBRA § 4(b)(3).



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F. Modification of Disinterestedness Requirement for Debtor’s Professionals

Section 327(a) permits employment of professionals by a debtor in possession in a

chapter 11 case only if, among other things, the professional is a “disinterested person.” A

person who holds a claim against the debtor is not a disinterested person under the term’s

definition in § 101(14)(A).162 A disinterested person cannot not have an interest “materially

adverse to the interest of the estate.”163

These provisions disqualify an attorney or other professional to whom the debtor owes

money at the time of filing because the professional is a creditor. Moreover, because payment

of amounts owed to the professional prior to filing would in most instances be a voidable

preference under § 547 and result in the professional having a material adverse interest to the

estate in a preference action, the debtor’s professionals must either waive any unpaid fees or

forego representation of the debtor.

New Section 1195 addresses this issue in part. It provides that a person is not

disqualified from employment under § 327(a) solely because the professional holds a prepetition

claim of less than $ 10,000.164

Depending on what the debtor’s plan will propose to pay to unsecured creditors, the

economic impact of the new provision may be limited. An important practical implication is that

debtor’s counsel will no longer have to explain to accountants and other professionals who are

not familiar with bankruptcy practice that they must waive their fees to provide services to the

debtor in the case – something that may be contrary to their standard practice of declining to

provide services if the client fails to pay fees in a timely manner.

162 § 327(a). 163 § 101(14)(C). 164 New § 1195.



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G. Time For Secured Creditor to Make § 1111(b) Election Section 1111(b) permits a secured creditor to make an election under certain

circumstances for allowance or disallowance of its claim the same as if it had recourse against

the debtor on account of such claim, whether or not it has recourse.165 If the election is made,

the claim is allowed as secured to the extent it is allowed. The election may be made at any time

prior to the conclusion of the hearing on the disclosure statement.166 Alternatively, if the

disclosure statement is conditionally approved under Bankruptcy Rule 3017.1 and a final hearing

on the disclosure statement is not held, the election must be made within the date fixed for

objections to the disclosure statement under Bankruptcy Rule 3017.1(a)(2) or another date fixed

by the court.167

Interim Rule 3017 takes account of the fact that subchapter V does not contain a

requirement for a disclosure statement unless the court orders otherwise. It provides that, in a

subchapter V case, the § 1111(b) election may be made not later than a date the court may fix.168

Courts are taking varied approaches to scheduling the date for the § 1111(b) election.

Many have decided not to address it unless a party requests it. Others are fixing the date by

reference to the date the plan is filed (such as 14 or 30 days after the plan’s filing) in a

scheduling or other order or notice. When the court on its own does not set a date and a party

anticipates that a creditor will make the election, the party should request that the court establish

a deadline. SUPP XIV

165 § 1111(b). For a discussion of strategic considerations for creditors regarding the § 1111(b) election, see Bradley, supra note 9, at 275-76. SUPP XIV 166 FED. R. BANKR. P. 3014. 167 FED. R. BANKR. P. 3017.1. 168 INTERIM RULE 3017.



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H. Times For Voting on Plan, Determination of Record Date for Holders of Equity Securities, Hearing on Confirmation, Transmission of Plan, and Related Notices Bankruptcy Rule 3017: (1) requires the court to fix the time for holders of claims or

interests to vote to accept or reject a plan on or before approval of the disclosure statement;

(2) provides that the record date for creditors and holders of equity securities is the date that the

order approving the disclosure statement is entered or another date fixed by the court; (3) permits

the court to set the date for the hearing on confirmation in connection with approval of the

disclosure statement; and (4) requires that, upon approval of the disclosure statement, the court

must fix the date for transmission of the plan, notice of the time for filing acceptances or

rejections, and notice of the hearing on confirmation.169

New Interim Rule 3017.2 provides for the court to establish all these times in a

subchapter V case in which the disclosure statement requirements of § 1125 do not apply.170

I. Bar Date for Filing of Proof of Claim Bankruptcy Rule 3003 governs the filing of proofs of claim or interest in a chapter 11

case. The Interim Rules made no change in its provisions.

Rule 3003 does not establish a deadline for filing a proof of claim. Instead, Rule 3003(c)

provides that the court “shall fix and may extend the time within which proofs of claim or

interest may be filed.”

Many courts have adopted procedures for fixing the bar date for the filing of proofs of

claim at the outset of the case. Some are including the bar date in the Notice of Chapter 11

Bankruptcy Case that the clerk sends. Others establish the deadline in a separate document, such

as a scheduling order or other notice. A lawyer representing a creditor in a subchapter V case

169 FED. R. BANKR. P. 3017.1. 170 INTERIM RULE 3017.2.



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who is accustomed to the usual practice in chapter 11 cases – the issuance of a separate bar date

order – must check local practice to make sure that she knows the deadline.

Some courts have set the bar date as 70 days after the filing of the petition. This is the

same time that Bankruptcy Rule 3002(c) establishes in chapter 12 and 13 cases. Others have set

the date as 90 days after the § 341(a) meeting of creditors.

An advantage of fixing the bar date as 70 days after the filing date is that it expires before

the deadline under new § 1189(b) for the debtor to file a plan, which is 90 days after the order for

relief. If a debtor must know with certainty what the claims in the case are before it can file its

plan, the debtor will need to ask the court to extend the time until the bar date has expired. The

debtor will have to establish that the need for the extension is “attributable to circumstances for

which the debtor should not justly be held accountable” under new § 1189(b).

The court cannot shorten the time for a governmental unit to file a proof of claim, which

is 180 days after the order for relief under § 502(b)(9). Although it would be helpful for tax

claims to be filed before the debtor files a plan, this should rarely be an obstacle. Most taxes are

self-assessed by the debtor upon filing a return. If the debtor does not know its tax liability, it is

unlikely that the taxing authority does either. A debtor might not be able to accurately calculate

the exact amount of interest and penalties, but it should know the principal amount. SUPP XV

VII. Contents of Subchapter V Plan

The requirements for the contents of a sub V plan are contained in §§ 1122 and 1123

(with two exceptions) and in new § 1190. An important provision is that new § 1190(3) permits



51

modification of a claim secured only by a security interest in real property that is the principal

residence of the debtor if the loan arises from new value provided to the debtor’s business.171

Section 1122 states rules for classification of claims in a chapter 11 plan, and § 1123

states what provisions a plan must and may have. Two provisions in § 1123 – (a)(8) and (c) –

are not applicable in sub V cases.172

Official Form 425A, which is a permissible, but not required, form for a chapter 11 plan,

has been modified and may be used in a subchapter V case. Courts may adopt local forms for

subchapter V plans173 or make the use of Official Form 425A mandatory and provide guidance

on its preparation.174

A. Inapplicability of §§ 1123(a)(8) and 1123(c)

Section 1123(a)(8) requires the plan for an individual debtor to provide for payment to

creditors of all or such portion of earnings from postpetition services or other future income as is

necessary for the execution of the plan.175 Section 1123(c) prohibits a plan filed by an entity

other than the debtor from providing for the use, sale, or lease of exempt property, unless the

debtor consents.176

SBRA replaces § 1123(a)(8) with a similar provision applicable to all debtors in new

§ 1190, which contains additional provisions for the content of a plan. Section 1123(c) is

superfluous in a subchapter V case because only the debtor can propose a plan.177

171 New § 1190(3). 172 New § 1181(a). 173 E.g., Debtor’s Chapter 11, Subchapter V Plan (D. Md.) (suggested), available at https://www.mdb.uscourts.gov/content/local-bankruptcy-forms; Chapter 11 Subchapter V Small Business Debtor’s Plan of Reorganization [or Liquidation] (D. New Jersey) (mandatory), available at http://www.njb.uscourts.gov/forms/all-forms/mandatory_forms; Plan of Reorganization (W.D. Wisconsin) (suggested), available at https://www.wiwb.uscourts.gov/forms. 174 E.g., SBRA Plan Instructions, available at http://www.canb.uscourts.gov/forms/district. 175 § 1123(a)(8). 176 § 1123(c). 177 New § 1189(a).



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B. Requirements of New § 1190 for Contents of Subchapter V Plan; Modification of Residential Mortgage New § 1190 contains three provisions governing the content of the plan.

First, new § 1190(1)178 requires information that would otherwise be included in a

disclosure statement. The plan must include: (1) a brief history of the operations of the debtor;

(2) a liquidation analysis; and (3) projections regarding the ability of the debtor to make

payments under the proposed plan.

Second, new § 1190(2) requires the plan to provide for the submission of “all or such

portion of the future earnings or other future income of the debtor to the supervision and control

of the trustee as is necessary for the execution of the plan.” In an individual case, this provision

replaces the similar rule in the inapplicable § 1123(a)(8). In non-individual cases, it imposes a

new requirement.

Because a plan ordinarily must provide for payment of creditors from the debtor’s

income, the requirement for the submission to the trustee of income as necessary for the

execution of the plan states nothing more than a feasibility requirement.

New § 1190(2) raises interpretive issues regarding the requirement that future income be

submitted to the “supervision and control” of the trustee.

If a consensual plan is confirmed under new § 1191(a), new § 1194 does not contemplate

that the trustee make the payments. Moreover, new § 1183(c)(1) provides for termination of the

trustee’s service upon substantial consummation of a consensual plan under new § 1191(a).

Under § 1101(2), “substantial consummation” occurs upon (among other things179)

178 No apparent reason exists for using numbers for the subsections of this section instead of the customary lower-case letters. 179 Substantial consummation also requires transfer of all or substantially all of the property proposed by the plan to be transferred, § 1101(2)(A) (2018), and assumption by the debtor or by the successor to the debtor of the business or of the management of all or substantially all of the property dealt with by the plan, § 1101(2)(B).



53

“commencement of distribution under the plan.”180 An issue is whether a consensual plan must

provide for submission of future income to the trustee’s supervision and control when the

trustee’s service will terminate once the first plan payment is made.181

The third content provision in new § 1190(3) changes the rule of § 1123(b)(5) that a plan

may not modify the rights of a claim secured only by a security interest in real property that is

the debtor’s principal residence. The same antimodification rule applies in chapter 13 cases

under § 1322(b)(2).

New § 1190(3) permits modification of such a claim if the two circumstances specified in

subparagraphs (A) and (B) exist. The requirement of subparagraph (A) is that the new value

received in connection with the granting of the security interest was “not used primarily to

acquire the real property.” Subparagraph (B) requires that the new value have been “used

primarily in connection with the small business of the debtor.”182

Courts have considered whether the prohibition on modification of a residential mortgage

applies when the property in which the debtor resides has nonresidential characteristics or uses,

usually in chapter 13 cases.183 For example, the property may be a multi-family dwelling that

does or can generate rental income or a farm. The debtor may use it for business purposes, or it

may include additional tracts or acreage beyond a residential lot.

The issue in such cases is whether the claim is secured by property other than the debtor’s

residence. Some courts have ruled that antimodification protection extends to a mortgage

180 § 1101(2)(C). 181 See infra Section IX(A). 182 New § 1190(3). For a discussion of strategies for lenders to consider to preclude application of the subchapter V exception to the anti-modification rule, see Bradley, supra note 9, at 282-83. Professor Bradley suggests lenders might require more than half of the loan proceeds to be used for personal expenses or that, in the case of a proposed loan secured by a second mortgage, the lender instead pay off the first mortgage and refinance that amount so that most of the loan is not for the business. Id. 183 See W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 5:42.



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secured by any real property that the debtor uses, at least in part, as a residence. Other courts,

however, have concluded that the debtor’s use of real property as a residence does not alone

mean that the debt is secured only by the debtor’s principal residence, and that a mortgage on

property the debtor uses as a residence is subject to modification if the property has sufficient

nonresidential characteristics or uses.184

The court in In re Ventura185 concluded that application of new § 1190(3) requires a

different analysis. There, an individual operated a bread and breakfast business in her residence

through a limited liability company she owned. In her chapter 11 case filed prior to SBRA’s

enactment, the court had ruled that she could not modify the mortgage on the property, applying

the cases holding that a debtor may not modify a mortgage on property in which she resides even

if she uses it for other purposes.

After SBRA’s effective date, the debtor amended her petition to elect application of

subchapter V. In addition to permitting her to proceed under subchapter V,186 the court

addressed the lender’s contention that she could not invoke § 1190(3) because the proceeds from

the mortgage had been used to acquire the property.187

The court concluded that § 1190(3) specifically permits the modification of a residential

mortgage if the conditions of subparagraphs (A) and (B) exist. The questions, therefore, were

whether the mortgage proceeds were “not used primarily to acquire the real property” (new

§ 1190(3)(A)) and were “used primarily in connection with the small business of the debtor”

(new § 11903(3)(B)).188

184 Id. 185 In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020). 186 Id. at 7-14. Part XIII discusses the court’s ruling on the availability of subchapter V in the case. 187 The lender also argued that § 1190(3) could not be applied to a transaction arising prior to its effective date. Part XIII discusses the court’s ruling rejecting this contention. 188 In re Ventura, 615 B.R. 1, 23 (Bankr. E.D.N.Y. 2020).



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The court focused on two terms in subparagraph (A). “Primarily,” the court said, means

“for the most part,” “of first importance,” or “principally,” rather than “substantial.” The phrase

“real property,” the court continued, refers back to the real property that is the debtor’s

residence.189

Based on these definitions, the court phrased the question of subparagraph (A)’s

application in the case before it as “whether the Mortgage proceeds were used primarily to

purchase the Debtor’s Residence.”190 The inquiry thus differs from the issue under § 1123(b)(5)

(and § 1322(b)(2) in chapter 13 cases) that, under the court’s prior ruling, prohibited

modification of the mortgage because the debtor resided in the property, regardless of its other

uses. New § 1190(3), the court explained, “asks the court to determine whether the primary

purpose of the mortgage was to acquire the debtor’s residence.”191

Subparagraph (B), the court stated, required it to determine “whether the mortgage

proceeds were used primarily in connection with the debtor’s business.”

The court concluded that subparagraphs (A) and (B) directed it “to conduct a qualitative

analysis to determine whether the principal purpose of the debt was not to provide the debtor

with a place to live, and whether the mortgage proceeds were primarily for the benefit of the

debtor’s business activities.”192

The court proposed five factors to consider in this analysis: “(1) Were the mortgage

proceeds used primarily to further the debtor’s business interests; (2) Is the property an integral

part of the debtor’s business; (3) The degree to which the specific property is necessary to run

189 Id. at 24. 190 Id. 191 Id. 192 Id.



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the business; (4) Do customers need to enter the property to utilize the business; and (5) Does the

business utilize employees and other businesses in the area to run its operations.”193

The court found that the debtor bought the property to operate it as a bed and breakfast,

that its primary purpose was the offering of rooms for nightly fees, that the debtor’s LLC

provided additional services to guests for additional fees, and that the mortgage proceeds were

used to purchase the building that houses the business. The court ruled that the evidence was

sufficient to hold a full evidentiary hearing to determine whether the debtor could use § 1190(3)

to modify the mortgage.194

A business debtor may grant a security interest in a principal residence as additional

collateral without receiving new value, perhaps in connection with a workout involving

forbearance or restructuring of the debt. A potential issue is whether the new § 1190(3)

exception to the antimodification rule applies in this situation when the debtor receives no

additional loan proceeds.

C. Payment of Administrative Expenses Under the Plan If the court confirms a plan under the cramdown provisions of new § 1191(b), new

§ 1191(e) permits the plan to provide for the payment through the plan of claims specified in

§§ 507(a)(2) and (3), notwithstanding the confirmation requirement in § 1129(a)(9) that such

claims be paid in full on the plan’s effective date.195 Section 507(a)(2) includes administrative

expense claims allowable under § 503(b), and § 507(a)(3) gives priority to involuntary gap

claims allowable under § 502(f).

193 Id. at 25. 194 Id. 195 New § 1191(e).



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Administrative expenses include claims under § 503(b)(2) for fees and expenses of the

trustee and of professionals employed by the debtor and the trustee under § 330(a) and claims

under § 503(b)(9) for goods received by the debtor in the ordinary course of business within 20

days before the filing of the petition.196 SUPP XIV

VIII. Confirmation of the Plan

A. Consensual and Cramdown Confirmation in General Under pre-SBRA law, the court must confirm a chapter 11 plan if all the requirements of

§ 1129(a) are met.

When all of the requirements of § 1129(a) are met except the requirement in paragraph

(a)(8) that all impaired classes accept the plan, § 1129(b)(1) permits so-called “cramdown”

confirmation “if the plan does not discriminate unfairly, and is fair and equitable” with regard to

each impaired class that has not accepted it.197 Section 1129(b)(2) states the rules for the “fair

and equitable” requirement for classes of secured claims (§ 1129(b)(2)(A)), unsecured claims

(§ 1129(b)(2)(B)), and interests (§ 1129(b)(2)(C)).198 The effects of confirmation are the same

regardless of whether cramdown confirmation occurs under § 1129(b).

New § 1191 states the rules for confirmation in a sub V case. Section 1129(a) remains

applicable in a sub V case, except for paragraph (a)(15), which imposes a projected disposable

income requirement in the case of an individual if an unsecured creditor invokes it.199 Because

§ 1129(a)(15) no longer applies, Interim Rule 1007(b) makes the requirement that an individual

196 The permission to pay these priority claims “through the plan” without requiring payment in full raises questions of whether a plan may provide for less than full payment and whether interest is required. Presumably, Congressional intent is to change the timing requirement for payment of the claims and not to permit partial payment. See Brubaker, supra note 5, at 15-16. 197 § 1129(b)(1). 198 § 1129(b)(2). 199 New § 1181(a). SUPP XV



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debtor in a chapter 11 case file a statement of current monthly income inapplicable to an

individual in a subchapter V case.200

If all the applicable requirements in § 1129(a) are met except for the projected disposable

income rule of paragraph (a)(15), new § 1191(a) requires the court to confirm the plan. Because

§ 1129(a)(8) requires acceptance of the plan by all impaired classes, confirmation under

§ 1191(a) can occur only if all impaired classes have accepted it.201 This paper refers to it as a

“consensual plan.”

New § 1191(b) states the rules for cramdown confirmation. It replaces the cramdown

provisions of § 1129(b), which do not apply in a sub V case.202 In general, new § 1191(b)

permits confirmation even if the requirements of paragraphs (8), (10), and (15) of § 1129(a) are

not met. Thus, cramdown confirmation does not require (1) that all impaired classes accept the

plan (§ 1129(a)(8)) or (2) that at least one impaired class of creditors accept it (§ 1129(a)(10)).

The requirements in § 1129(b)(2)(A) for cramdown confirmation with regard to a class of

secured claims remain applicable in a sub V case.203 SUPP XIV

Cramdown confirmation under new § 1191(b) does not require that the plan meet the

projected disposable income requirement of § 1129(a)(15), applicable only in the case of an

individual if any unsecured creditor invokes it. Cramdown confirmation does, however, impose

a modified projected disposable income rule, expanded to include all debtors, not just

individuals, as the next Section discusses. For an individual, it is significant that the projected

disposable income rule comes into play only if one or more classes do not accept the plan.

Unless a class consists of only one creditor, a single creditor cannot invoke the projected

200 INTERIM RULE 1007(b). 201 New § 1191. 202 § 1181(a). 203 New § 1191(c)(1).



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disposable income requirement, which a single creditor can do in a standard or non-sub V case

even if all impaired classes accept the plan.204

Importantly, the effects of confirmation differ depending on whether confirmation occurs

under new § 1191(a) (where all classes have accepted it) or under new § 1191(b) (where one or

more – or even all – classes have not accepted it).205

B. Cramdown Confirmation Under New § 1191(b) 1. Changes in the cramdown rules and the “fair and equitable” test Discussion of the revised cramdown rules in a sub V case begins with a summary of the

key provisions that govern cramdown confirmation under pre-SBRA law.

Section 1129(a) contains two important requirements for confirmation with regard to

acceptances of a plan. First, paragraph (a)(8) requires that all impaired classes accept the plan.206

Second, paragraph (a)(10) requires that at least one class of impaired creditors accept the plan.207

Section 1129(b) permits cramdown confirmation if all the requirements for confirmation

in § 1129(a) are met except the requirement of paragraph (a)(8) that all impaired classes accept

it. Section 1129(b), however, does not affect the confirmation requirement of § 1129(a)(10) that

204 § 1129(a)(15). One may view the projected disposable income requirement for cramdown confirmation as protection for a dissenting class of unsecured creditors that substitutes for the inapplicable absolute priority rule. See In re Moore Properties of Person County, LLC, 2020 WL 995544, at *5 (Bankr. M.D.N.C. 2020). In absolute priority rule theoretical terms, it recognizes “sweat equity” (i.e., future income) as “new value” that permits equity owners to retain their interests. The inability of a single creditor to invoke the projected disposable income rule is consistent with the inability of a single creditor to invoke the absolute priority rule under § 1129(b); both apply only if a class does not accept. 205 Other text explains the consequences of the type of confirmation relating to: payments under the plan by the trustee and termination of the service of the trustee (Part IX); compensation of the trustee (Section IV(E)); postconfirmation modification of the plan (Section VIII(C)); discharge (Part X); contents of property of the estate (Part XI); and postconfirmation default and remedies (Part XII). 206 § 1129(a)(8). 207 § 1129(a)(10).



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at least one impaired class of creditors accept the plan. Cramdown confirmation under § 1129(b)

is not available if no impaired class of creditors has accepted the plan.

In addition, if the nonaccepting class is the class of unsecured creditors, the absolute

priority rule of § 1129(b)(2)(B) prohibits holders of equity interests from retaining their interests

unless unsecured creditors receive full payment (subject to the new value exception).208 In an

individual case, many courts conclude that the absolute priority rule prohibits the debtor from

retaining property without payment in full to unsecured creditors.209

Subchapter V changes these rules. The starting point is that § 1129(b) does not apply.210

Instead, new § 1191(b) states revised cramdown rules that (1) permit cramdown confirmation

even if all impaired classes do not accept the plan and (2) eliminate the absolute priority rule.211

New § 1191(c) states a new “rule of construction” for the requirement that a plan be “fair and

equitable.”212 It replaces the “fair and equitable” requirements of §1129(b), which do not apply

in a subchapter V case.

The debtor may invoke new § 1191(b) when all confirmation requirements of § 1129(a)

are met except those in paragraphs (8), (10), and (15). Thus, in addition to eliminating the (a)(8)

requirement that all impaired classes accept the plan, new § 1191(b) eliminates the requirement

of § 1129(a)(10) that at least one impaired class accept the plan. The projected disposable

income test of § 1129(a)(15), applicable only in the case of an individual, is replaced by a

revised projected disposable income test applicable to all debtors.213

208 § 1129(b)(2)(B). 209 See 7 COLLIER ON BANKRUPTCY ¶ 1129.04[3][d] (Richard Levin & Henry J. Sommer eds., 16th ed. 2019) 210 New § 1181(a). 211 New § 1191(b). 212 New § 1191(c). 213 New § 1191(d).



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Under the cramdown rules in new § 1191(b), if all other confirmation standards are met,

the court must confirm a plan, on request of the debtor, if, with respect to each impaired class

that has not accepted it, the plan (1) does not discriminate unfairly and (2) is fair and equitable.

These two general standards are the same as the ones that govern in a cramdown under

§ 1129(b).

It does not appear that the new statute effects any change in the unfair discrimination

requirement. SUPP XV New § 1191(c) does, however, provide a new “rule of construction” in

subchapter V cases for the condition that a plan be “fair and equitable,” to replace the detailed

definition of that term that § 1129(b) contains.

The following text explains the requirements of the “fair and equitable” test in sub V

cases.

2. Cramdown requirements for secured claims

Subchapter V does not change existing law about permissible cramdown treatment of

secured claims. With regard to a class of secured claims, a subchapter V plan is “fair and

equitable” if it meets the existing rules for secured claims stated in § 1129(b)(2)(A).

Subchapter V does limit the ability of a partially secured creditor with an unsecured

deficiency claim to block cramdown confirmation. An undersecured creditor with a large

deficiency claim often controls the vote of the unsecured class. If no other impaired class of

creditors accepts the plan, cramdown confirmation is not possible in a standard or non-sub V

case because of the absence of an accepting impaired class of claims, which § 1129(a)(10)

requires.214 This requirement is inapplicable for cramdown confirmation in a sub V case under

new § 1191(b).

214 § 1129(a)(10).



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In addition, the creditor cannot invoke the absolute priority rule with regard to the

unsecured portion of its claim. SUPP XIV

3. Components of the “fair and equitable” requirement in subchapter V cases; no absolute priority rule

New § 1191(c) does not state a “fair and equitable” rule specifically for unsecured

claims. Instead, it imposes a projected disposable income requirement (sometimes called the

“best efforts” test), requires a feasibility finding, and requires that the plan provide appropriate

remedies if payments are not made. Notably absent is the absolute priority rule.215

4. The projected disposable income (or “best efforts”) test The projected disposable income (or “best efforts”) requirement is in new

§ 1191(c)(2).216

The plan must provide that all of the projected disposable income of the debtor to be

received in the three-year period after the first payment under the plan is due, or in such longer

period not to exceed five years as the court may fix, will be applied to make payments under the

plan.217 Alternatively, the plan may provide that the value of property to be distributed under the

215 The court in In re Moore Properties of Person County, LLC, 2020 WL 995544, at *5 (Bankr. M.D.N.C. 2020), reasoned that the projected disposable income is a substitute for the absolute priority rule. See also supra note 204. 216 New § 1191(c)(2). Compliance with the projected disposable income requirement is a mandatory condition for cramdown confirmation under new § 1191(b). In chapter 11, 12, and 13 cases, it applies only if a holder of an allowed unsecured claim or, in a chapter 12 or 13 case, the trustee, invokes it. §§ 1129(a)(15), 1225(b), 1325(b). 217 New § 1191(c)(2)(A). The projected disposable income test in chapter 11 and 12 cases likewise requires the use of projected disposable income to make payments under the plan. §§ 1129(a)(15), 1225(b)(1). This was the chapter 13 rule until the enactment of Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. BAPCPA in 2005, which amended 1325(b)(1) to require the use of projected disposable income to make payments to unsecured creditors. Presumably, the amended chapter 13 provision takes account of the fact that the “means test” standards that govern the reasonably necessary expenses that an above-median debtor may deduct from current monthly income in calculating disposable income permit deductions for payments on secured and priority claims. See W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, §§ 8:29, 8:44, 8:60. Although the definition of disposable income does not specifically permit a below-median debtor to deduct payments on secured and priority claims in calculating disposable income, the statute of necessity must be interpreted to include them. See id. § 8:29.



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plan within the three-year or longer period that the court fixes is not less than the projected

disposable income of the debtor.218 SUPP XV

The language is substantially the same as the projected disposable income test applicable

in chapter 12 cases.219 Like the chapter 12 requirement (and unlike chapter 11 cases), it applies

to entities as well as individuals.

Key confirmation issues are: (1) How is projected disposable income determined? (2)

How does the court determine whether the required period should be longer than three years; and

(3) If so, how does the court determine how much longer the period must be?

i. Determination of projected disposable income The Bankruptcy Code does not define “projected disposable income,” but it defines

“disposable income” in chapters 12220 and 13.221 In chapter 11 cases, § 1129(a)(15) incorporates

the chapter 13 definition.222

New § 1191(d) defines disposable income as income that is received by the debtor and

that is not “reasonably necessary to be expended” for these specified purposes:

— the maintenance or support of the debtor or a dependent of the debtor;223 or — a domestic support obligation that first becomes payable after the date of the

filing of the petition;224 or

The difference in how the debtor must use projected disposable income may affect the timing of payments to unsecured creditors but appears to have no material effect on the amount of money that must be paid under the plan or how much of it goes to unsecured creditors. See id. § 8:68. 218 The projected disposable income tests in chapters 11 and 12 also contain this alternative, but the chapter 13 one does not. 219 See § 1225(b). Section 1225(b)(1)(A) provides that the debtor need not commit projected disposable income if the plan provides for full payment. New § 1191(c)(2) does not contain this provision, raising the possibility that a creditor could insist on commitment of disposable income to pay more than the allowed amount of the claim. See Brubaker, supra note 5, at 13. It seems unlikely that Congress could have intended such a result that is inconsistent with the common-sense principle, even if unstated, that payment of the full amount of the claim (perhaps with interest) resolves it. 220 § 1225(b)(2). 221 § 1325(b)(2). 222 § 1129(a)(15). 223 New § 1191(d)(1)(A). 224 New § 1191(d)(1)(B).



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— payment of expenditures necessary for the continuation, preservation, or

operation of the business of the debtor.225

The definition of disposable income in new § 1191(d) is substantially the same as the

definition of disposable income in § 1225(b)(2). It is also substantially the same definition as in

§ 1325(b)(2), except that § 1325(b)(2) permits a deduction for charitable contributions. The

chapter 11 provision incorporates the chapter 13 definition.226

The definition of disposable income in all cases is substantially the same. But the manner

of determining permissible deductions in calculating disposable income differs materially with

regard to expenditures for the “maintenance or support” of the debtor and the debtor’s

dependents.

In chapter 13 cases, the so-called “means test” standards govern the deductions that an

“above-median”227 debtor may take in calculating disposable income.228 The means test rules do

not apply in a chapter 12 case or in the case of a below-median chapter 13 debtor. It is not clear

whether the means test applies in chapter 11 cases.229

225 § 1191(d)(2). 226 § 1129(a)(15). 227 Generally, an “above-median” debtor is a debtor whose income is above the median income of the state in which the debtor resides, and a “below-median” debtor is one whose income is below the median. See W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 8:12. The rules for determining the debtor’s status are set forth in § 1322(d), which governs the permissible term of a plan; § 1325(b)(3), which requires an above-median debtor to use the “means test” rules for determination of disposable income; and § 1325(b)(4), which defines “applicable commitment period” for purposes of determining the period for which the debtor must commit disposable income to pay unsecured creditors. Generally, an “above-median” debtor must use the means test rules and pay projected disposable income for five years. A “below-median” debtor does not use the means test rules and must pay projected disposable income for only three years. A below-median debtor’s plan cannot provide for payments longer than three years unless the court, for cause, approves a longer period not to exceed three years. See W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, §§ 4:9, 8:12. 228 § 1325(b)(3). 229 In chapter 11 cases, § 1129(a)(15) states that projected disposable income is “as defined in [§ 1325(b)(2)].” §1129(a)(15) (2018). Section 1325(b)(2) does not refer to the means test standards. Instead, they become applicable to an above-median debtor because § 1325(b)(3) states that they govern determination of “amounts reasonably necessary to be expended” under § 1325(b)(2) for an above-median debtor. § 1325(b)(3). The argument against application of the means test standards in a chapter 11 case is that § 1129(a)(15) incorporates only the definition in



65

New § 1191(d) does not incorporate the means test in the calculation of disposable

income. The test for determining what maintenance and support expenditures are “reasonably

necessary to be expended” for “maintenance or support” in new § 1191(d)(1) in sub V cases is

the same as it is in chapter 12 and below-median chapter 13 cases, and as it was in chapter 13

cases prior to the introduction of the means test standards in BAPCPA.230 The case law on

disposable income in such cases should provide guidance in making such determinations.

With regard to expenditures for the business, income is not “disposable income” under

new § 1191(d)(2) if it is “reasonably necessary to be expended” for expenditures “necessary for

the continuation, preservation, or operation” of the business.231 The rule contemplates the

payment of items such as payroll, utilities, rent, insurance, taxes, acquisition of inventory or raw

materials, and other expenses ordinarily incurred in the course of running the business.

Questions may arise when the debtor wants to establish a reserve for various purposes,

such as capital expenditures that are anticipated (e.g., the need to repair or replace existing

equipment), or when the debtor needs to use income to grow the business (e.g., increasing

inventory levels, marketing expenses, or payroll) to improve its profitability. Creditors may

reasonably argue that the disposable income they must receive should not be depleted when the

debtor will gain the benefit of the investment of income in the business.

§ 1325(b)(2) and does not incorporate § 1325(b)(3). The contrary argument is that determination of projected disposable income under § 1325(b)(2) necessarily includes reference to § 1325(b)(3) to calculate reasonably necessary expenses and that congressional intent in enacting § 1129(a)(15) was to make the chapter 13 rules applicable in chapter 11 cases. 230 Prior to the amendment of the projected disposable income test by BAPCPA in 2005, the standard in all chapter 13 cases was whether expenditures were reasonably necessary for the support of the debtor and the debtor’s dependents. No distinction between above-median and below-median debtors existed under pre-BAPCPA law. Accordingly, the pre-BAPCPA case law deals with the same standard that new § 1191(d)(1) states. For a discussion of application of the “reasonably necessary” standard for expenditures for maintenance and support in chapter 13 cases, see W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 8:28. 231 New § 1191(d)(2).



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Chapter 12 cases have indicated that a reserve is permissible in appropriate

circumstances.232 As later text discusses, an extension of the period that the debtor must make

payments of projected disposable income may be appropriate if the court permits its reduction

for a reserve or to grow the business.

Another question arises if a debtor is a “pass-through” entity for income tax purposes

(e.g., a subchapter S corporation or an entity taxed as a partnership, including a limited liability

company). Such a business does not pay tax on its income. Rather, its income is “passed

through” to its owners, who must pay tax on it regardless of whether the income is distributed to

them. Payment of profits to owners of a business does not easily fit within the concept of an

expenditure reasonably necessary for its continuation, preservation, or operation.

If the debtor’s disposable income cannot take account of distributions to owners for at

least the amount of tax that they owe based on its income, the owners will owe a tax on the

business income233 but will receive no money to pay it. When the generation of income by a

business gives rise to taxation, it seems appropriate to determine disposable income on an after-

tax basis, regardless of the tax status of the business. Moreover, in most cases the owners of the

business are also its managers, and their financial difficulties arising from inability to meet tax

obligations could adversely affect the business.

232 See, e.g., Hammrich v. Lovald (In re Hammrich), 98 F.3d 388 (8th Cir. 1996) (affirming confirmation of a plan including a reserve); In re Schmidt, 145 B.R. 983 (Bankr. D.S.D. 1991) (capital reserve permissible only if debtor demonstrates that obtaining financing is not feasible); In re Kuhlman, 118 B.R. 731 (Bankr. D.S.D. 1990) (debtor has burden of proving expenditures reasonably necessary for farming operation and living expenses); In re Janssen Charolais Ranch, Inc., 73 B.R. 125 (Bankr. D. Mont. 1987) (dicta) (reserve is allowable). But see Broken Bow Ranch, Inc. v. Farmers Home Admin. (In re Broken Bow Ranch, Inc.), 33 F.3d 1005 (8th Cir. 1994). 233 Payments to creditors under the plan are not necessarily allowable as a deduction in determining taxable income. No deduction is permissible to the extent that the debtor is repaying principal on a loan. With regard to trade debt, no deduction will be allowed if the debtor calculates taxable income on an accrual basis (as the IRS requires for many businesses) and has already deducted the amount due as an expense.



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Courts will have to decide whether distributions to owners to pay taxes the owners incur

are an appropriate expenditure that is “reasonably necessary for the continuation, preservation, or

operation of the business” when the debtor is not obligated to pay the tax. SUPP XIV

ii. Determination of period for commitment of projected disposable income for more than three years

A projected disposable income test applies in cases under chapter 12234 and 13235 and in

standard chapter 11 and non-sub V cases of individuals.236 Each section prescribes the period of

time for which the debtor must commit projected disposable income to make payments under the

plan. The required time is colloquially referred to as the “commitment period,” but only chapter

13 specifically uses the term by defining the “applicable commitment period” – the period for

which the debtor must use projected disposable income to pay unsecured creditors – as three

years for “below-median” debtors and five years for “above-median” debtors.237

For sub V cases, new § 1191(c)(2) provides for a commitment period of three years or

such longer time, not to exceed five years, that the court fixes.238 The five-year maximum

commitment period in a sub V case is the same as the longest minimum commitment period

under the chapter 11 and above-median chapter 13 tests.239

New § 1191(c)(2) contains no standards for fixing the commitment period. And because

the involvement of the court in choosing the commitment period is unique to subchapter V,

practice and precedent under the tests in other chapters may not provide guidance.

234 § 1225(b). 235 § 1325(b). 236 § 1129(a)(15). 237 § 1125(b)(4). 238 New § 1191(c)(2). 239 The maximum commitment period in a chapter 12 case is five years. § 1225(b)(1)(B). Chapter 13 sets specific commitment periods of three years for below-median debtors, § 1325(b)(4)(A), and five years for above-median debtors, § 1325(b)(4)(B). The commitment period in a chapter 11 case is the longer of five years or the period for which the plan provides for payments. § 1129(a)(15).



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In chapters 12 and 13 and in non-sub V chapter 11 cases of individuals, the court has no

role in determining the commitment period for projected disposable income. The court in a

chapter 12 case and in the case of a below-median chapter 13 debtor must approve the term of a

plan in excess of three years if the debtor proposes it, but whether to approve a longer plan term

that the debtor wants is different than whether to require the debtor to pay more than the debtor

wants.240 Case law dealing with the length of a plan under the other tests does not deal with the

issue that new § 1191(c)(2) presents.241

240 In a chapter 12 case, a plan may not provide for payments in excess of three years unless the court, for cause, approves a longer period, not to exceed five years. § 1222(c). Approval of a longer period in a chapter 12 case extends the commitment period for the period that the court approves, § 1225(b)(1)(B), but only the debtor may file a plan, § 1221, so it is the debtor who chooses the commitment period. In chapter 13 cases, the court has no choice to make. The statute fixes the “applicable commitment period” as three years for a below-median debtor and five years for an above-median debtor. The only dispute for the court is whether the debtor is below-median or above-median. In chapter 11 cases, § 1129(a)(15) specifies the commitment period as the longer of five years or the period for payments under the plan. The court neither approves nor fixes the commitment period. 241 The court in chapter 12 cases and in chapter 13 cases of below-median debtors must approve a plan that has a term exceeding three years. §§ 1222(c), 1322(d).

In chapter 13 cases, the fact that the plan of a below-median debtor extends beyond three years does not affect the applicable commitment period or how much projected disposable income the debtor must pay. In a non-sub V chapter 11 case, § 1129(a)(15) sets the commitment period as the longer of five years or the period for which the plan provides payments. Thus, the terms of the plan, not a separate determination by the court, govern the length of time that the debtor must use projected disposable income to make payments. Until enactment of BAPCPA in 2005, which increased the minimum commitment period in chapter 13 cases for above-median debtors to five years, a chapter 13 plan of any debtor could not provide for payments for more than three years unless the court, for cause, approved a longer period, up to five years. § 1322(c) (2000) (current version at § 1322(d) (2018)) (BAPCPA renumbered subsection (c) as subsection (d)); see W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 4:9. And the pre-BAPCPA projected disposable income test required use of projected disposable income for only three years, regardless of the length of the plan. 11 U.S.C. § 1325(b)(1)(B) (2000) (current version at 11 U.S.C. § 1325(b)(4) (2018)). The pre-BAPCPA rules for chapter 12 cases were different, and BAPCPA did not change them. As in pre-BAPCPA chapter 13 cases (and as in cases of below-median chapter 13 debtors under current law), the maximum duration of a plan under § 1222(c) is three years unless the court approves a longer period for cause. But unlike pre-BAPCPA chapter 13, the chapter 12 projected disposable income test in § 1225(b)(1) requires use of projected disposable income during any longer period that the court approves. Some pre-BAPCPA case law concerning the maximum period for a chapter 13 plan suggests that the pre-BAPCPA limitation to three years absent a showing of cause was to protect the debtor from being bound for a lengthy period. Under this reasoning, a three-year limitation on the plan period for a below-median chapter 13 debtor is mandatory unless a longer period is in the interest of the debtor. See W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 4:9 (citing cases). This conclusion is consistent with the facts that (1) only the debtor may file a chapter 13 plan under § 1321 (although an unsecured creditor or trustee may request modification of a confirmed plan under §1329(a)); and (2) the court must approve a period longer than three years for cause under § 1322(d)). The issue is moot for an above-median chapter 13 debtor because the BAPCPA



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Courts will have to determine what facts and circumstances justify a longer commitment

period and, if so, how much longer the period should be.

One reason to extend the period could be a debtor’s deduction from projected disposable

income of amounts required for anticipated capital needs or expenses to grow the business, as

earlier text discusses. If the court permits such deductions, existing creditors are effectively

funding the business for the future benefit of the debtor. An extension of the commitment period

could be an appropriate way for creditors to share in the debtor’s success that depends in part on

their involuntary contributions in the form of reduced projected disposable income.242

Courts will also have to decide how to proceed when a creditor or trustee asks to fix the

commitment period for a longer time than proposed in the debtor’s plan.243 The authority of the

court to fix the commitment period implies authority to order more payments than the debtor’s

plan proposes. The contrary position is that the court may only deny confirmation unless the

debtor modifies the plan to conform with the court’s determination. As a practical matter, it may

make no difference to a debtor who wants a confirmed plan.

The court’s authority to fix the commitment period implies that the court may raise the

issue sua sponte.

amendment to the projected disposable income rule makes a five-year period mandatory if the trustee or an unsecured creditor invokes the projected disposable income rule (and someone always does). Although the case law deals with the question of how long a plan should be, it does so in the context of a debtor’s proposal of a longer period. The case law does not consider the different question of whether the court should require the debtor to make payments for a longer period than the plan proposes. 242 See 8 COLLIER ON BANKRUPTCY ¶ 1225.04 (Richard Levin & Henry J. Sommer eds., 16th ed. 2019) (stating that in a chapter 12 case, if reserves for capital or other discretionary expenditures are necessary, commitment period is properly extended). 243 Subchapter V does not expressly give the trustee standing to object to confirmation. The trustee’s duty to appear and be heard at the confirmation hearing, new § 1183(b)(3)(B), at a minimum contemplates that the trustee may express the trustee’s views on any confirmation issue to the court. If the trustee is not a lawyer, a trustee’s “objection” may initiate a dispute that requires legal representation, whereas a trustee’s report bringing potential issues to the attention of the court may not. See supra Section IV(F). Unless the court concludes as a legal matter that it has no independent duty to determine compliance with confirmation requirements, it makes no practical difference, unless the trustee plans to appeal an adverse determination. Failure to object might be a waiver of it for appellate purposes.



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5. Requirements for feasibility and remedies for default New § 1191(c)(3) adds two additional factors to the “fair and equitable” analysis.

First, new § 1191(c)(3)(A) requires that the debtor will be able to make all payments

under the plan,244 or that there is a reasonable likelihood that the debtor will be able to make all

payments under the plan.245 The requirement strengthens the more relaxed feasibility test that

§ 1129(a)(11) contains. Section 1129(a)(11) requires only that confirmation is not likely to be

followed by liquidation or the need for further reorganization unless the plan proposes it.246

Second, new § 1191(c)(3)(B) requires that the plan provide appropriate remedies to

protect the holders of claims or interests if the debtor does not make the required plan

payments.247 Section XII(B) discusses remedies for default in the plan. SUPP XIV

6. Payment of administrative expenses under the plan New § 1191(e) permits confirmation of a plan under new § 1191(b) that provides for

payment through the plan of administrative expense claims and involuntary gap claims. Section

VII(C) discusses this provision.

C. Postconfirmation Modification of Plan

The rules for postconfirmation modification in new § 1193 differ depending on whether

the court has confirmed a consensual plan under new § 1191(a) or a cramdown plan under new

§ 1191(b). The provisions in § 1127 for modification of a plan do not apply in a sub V case.248

244 New § 1191(c)(3)(A)(i). 245 § 1191(c)(3)(A)(ii). 246 § 1129(a)(11). 247 New § 1191(c)(3)(B). SUPP XIV 248 New § 1181(a).



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1. Postconfirmation modification of consensual plan confirmed under new § 1191(a)

If the court has confirmed a consensual plan under new § 1191(a), new § 1193(b) does

not permit modification after substantial consummation. The modification must comply with

applicable plan content requirements.

The modified plan becomes the plan only if circumstances warrant the modification and

the court confirms it under new § 1191(a).249 The holder of any claim or interest who voted to

accept or reject the confirmed plan is deemed to have voted the same way unless, within the time

fixed by the court, the holder changes the vote.250 These are the same rules that govern

postconfirmation modification in standard and non-sub V cases under § 1127(b).

2. Postconfirmation modification of cramdown plan confirmed under new § 1191(b)

If the plan has been confirmed under new § 1191(b), new § 1193(c) permits the debtor to

modify the plan at any time within three years, or such longer time not to exceed five years as the

court fixes.251 The modified plan becomes the plan only if circumstances warrant the

modification and the court confirms it under the requirements of new § 1191(b).252

The postconfirmation modification rules for a cramdown plan are similar to the

postconfirmation modification provisions in chapters 12 and 13. In these chapters,

postconfirmation modification is permitted at any time prior to the completion of payments

under the plan, on condition that the modified plan meet confirmation requirements.253 Unlike

249 § 1193(b). 250 § 1193(d). 251 § 1193(c). 252 The provisions of new § 1192(d) with regard to acceptances or rejections of the original plan do not apply to postconfirmation modification of a cramdown plan, presumably because such a plan is confirmed without regard to acceptances. 253 §§ 1229, 1329.



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the provisions in the other chapters, new § 1193(c) does not permit modification at the request of

creditors or the trustee.254 SUPP XIV

IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation Subchapter V has different provisions for the disbursement of payments to creditors and

the role of the trustee depending on whether the court confirms a consensual plan or a cramdown

plan.

A. Debtor Makes Plan Payments and Trustee’s Service Is Terminated Upon Substantial Consummation When Confirmation of Consensual Plan Occurs Under New § 1191(a) If all impaired classes accept the plan and it meets the confirmation requirements of

§ 1129(a) other than § 1129(a)(15),255 the court must confirm the plan.256 Confirmation of a

consensual plan under new § 1191(a) leads to the termination of the trustee’s service under new

§ 1183(c)(1) when the plan has been “substantially consummated.”257 The debtor must file a

notice of substantial consummation within 14 days after it occurs and serve it on the sub V

trustee, the U.S. trustee, and all parties in interest.258

Under § 1101(2), “substantial consummation” generally occurs upon “commencement of

distribution under the plan.”259 Unless the plan implicates other requirements for substantial

consummation, the sub V trustee’s service terminates under new § 1183(c)(1) when the first

payment under the plan occurs.

254 New § 1193(c). 255 Section 1129(a)(15) states chapter 11’s projected disposable income requirement, which applies only in the case of an individual. See supra Section VIII(B)(4). 256 New § 1191(a). 257 § 1183(c)(1). 258 § 1183(c)(2). 259 § 1101(2)(C). “Substantial consummation” under § 1101(2) also requires: (1) transfer of all or substantially all of the property proposed to be transferred, § 1101(2)(A) and (2) assumption by the debtor or the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan. § 1101(2)(B).



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Arguably, a sub V trustee could make the first payment under the plan, although the

statute does not appear to require this. But it is clear that, at least after the first payment, the sub

V trustee no longer exists and cannot make payments thereafter.

B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of Plan Confirmed Under Cramdown Provisions of New § 1191(b) When the court confirms a cramdown plan, new § 1194(b) provides for the sub V trustee

to make payments to creditors under the plan unless the plan or the order confirming it provides

otherwise.260 Chapters 12 and 13 contain identical provisions for the trustee to make plan

payments.261

Because the sub V trustee must make payments under a cramdown plan, the trustee’s

service does not terminate upon its substantial consummation. The trustee’s service continues, at

a minimum, until the trustee has made the required disbursements. Subchapter V does not

specify when the trustee’s service is terminated under a cramdown plan. If the trustee makes all

payments that the trustee is to make under the plan, the debtor is entitled to receive a discharge,

as Section X(B) discusses. That seems to be the appropriate time for the trustee or the debtor to

260 New § 1194(b). Curiously, paragraph (b) of new § 1194 is titled “Other Plans,” even though it applies exclusively to plans confirmed under the cramdown provisions of new § 1191(b) and no other provisions of new § 1194 deal specifically with payments under a consensual plan confirmed under new § 1191(a). 261 § 1226(c), 1326(c).



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request that the court terminate the trustee’s service and discharge the trustee from any further

obligations in the case.262

New § 1194 provides for the trustee to make payments under the plan unless the plan or

the order confirming the plan provides otherwise.263 The statute contains no standards for the

court to determine under what circumstances a plan or confirmation order may provide that the

trustee will not make payments. For example, may a nonconsensual plan provide for the debtor

to make postpetition installment payments on a mortgage or other long-term debt that is being

cured and reinstated, or regular payments on an unexpired lease of real or personal property that

is being assumed?

Because new § 1194(b) is identical to the chapter 12 and 13 provisions for disbursements

to creditors, courts may look to the case law and practice in chapter 12 and 13 cases for guidance

in determining the extent to which a plan may provide for the debtor to make payments instead

of the trustee. In chapter 13 cases, courts universally require a plan to provide for the trustee to

make disbursements to priority and unsecured creditors and to holders of secured claims that the

plan modifies.264 Courts vary as to whether the debtor may make direct payments to other types

of creditors.

Typical exceptions to payments by the trustee in chapter 13 cases are for postpetition

installment payments on real estate or other long-term debts that are being cured and reinstated

and postpetition payments due on leases or executory contracts that are being assumed. In such

262 See SUBCHAPTER V TRUSTEE HANDBOOK, supra note 45, at 3-16 (“Upon completion of all plan payments [pursuant to a cramdown plan], trustees should submit their final report and account of their administration of the estate in accordance with § 1183(b)(1), which incorporates § 704(a)(9). . . . The trustee’s final report will certify that the trustee has completed all trustee duties in administering the case and request that the trustee be discharged from any further duties as trustee.” ). 263 New § 1194. 264 W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 4:10.



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instances, the trustee usually disburses the amounts required to cure prepetition defaults. Courts

have also permitted a debtor to make direct payments on a secured claim that the plan does not

modify.265

Some courts require that all postpetition payments, including postpetition payments on a

mortgage or other long-term debt or an assumed lease or other executory contract, be made by

the trustee during the term of the plan.266 In a sub V case, the trustee under this approach would

make those payments during the three- to five-year period during which the debtor must commit

projected disposable income to the plan, as Section VIII(B)(4) discusses. SUPP XV

X. Discharge The discharge that a debtor receives in a sub V case and its timing depend on whether

consensual or cramdown confirmation occurs.

A. Discharge Upon Confirmation of Consensual Plan Under New § 1191(a) Section 1141(d) governs discharge in a chapter 11 case. Except for paragraph (d)(5), all

of it remains applicable in a sub V case when the court confirms a consensual plan. It does not

apply when the court confirms a cramdown plan.267

Section 1141(d)(5) does not apply in a sub V case.268 The omission is material only in an

individual case because (d)(5) applies only when the chapter 11 debtor is an individual. Section

1141(d)(5) has two primary effects in an individual case.269

265 Id. 266 Id. 267 New § 1181(c). 268 New § 1181(a). 269 Subparagraph (A) of § 1141(d)(5) defers entry of the discharge in an individual case until the debtor has completed all payments under the plan unless the court orders otherwise for cause. Alternatively, subparagraph (B) of § 1141(d)(5) permits a discharge if the debtor has not completed payments if (1) creditors have received payments under the plan with a value of the amount they would have received if the debtor’s estate had been



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First, § 1141(d)(5) prohibits entry of a discharge order until the individual has completed

payments under the plan unless the court orders otherwise for cause.270

Second, it permits discharge without completion of payments if creditors have received

what they would have gotten in a chapter 7 case and modification of the plan is not

practicable.271

Because § 1141(d)(5) does not apply in a sub V case, an individual debtor receives a

discharge immediately upon confirmation of a consensual plan under new § 1191(a).272 Because

the debtor receives an immediate discharge, there is no need for a provision permitting discharge

if the debtor does not complete payments.

Under § 1141(d)(1)(A), confirmation of a plan results in the discharge, with some

exceptions, of any debt that arose before the date of confirmation and any debt specified in

§ 502(g) (claims from the rejection of an executory contract or unexpired lease lease), § 502(h)

(claims arising from the exercise of avoidance powers), and § 502(i) (claims for taxes arising

liquidated on the effective date; and (2) modification of the plan under § 1127 is not practicable. The subparagraph (B) provision is similar to the so-called “hardship” discharge that exists in chapter 12 and 13 cases, §§ 1228(b), 1328(b), except that a chapter 12 or 13 debtor must also establish that the failure to complete payments is due to circumstances for which the debtor should not justly be held accountable. Subparagraph C of § 1141(d)(5) provides the court may not grant a discharge under either subparagraph (A) or (B) if the court finds that § 522(q)(1) is applicable, certain criminal proceedings are pending, or the debtor is liable for a debt described in § 522(q)(1). The same grounds for discharge are in § 727(a)(12). Section 522(q)(1) denies a debtor an exemption of assets in excess of an aggregate amount of $ 170,350 (as of April 1, 2019; it is subject to adjustment every three years) under circumstances described in subparagraphs (A) or (B) of § 522(q)(1) unless the court finds under § 522(q)(2) that certain exempt property is reasonably necessary for the support of the debtor or any dependent. Subparagraph (A) denies the exemption if the debtor has been convicted of a felony that under the circumstances demonstrates that the filing of the case was an abuse of the Bankruptcy Code. Subparagraph (B) denies the exemption if the debtor owes a debt arising from (1) violation of state or federal securities laws; (2) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered under the federal securities laws; (3) any civil remedy under 18 U.S.C. § 1964; or (4) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years. 270 § 1141(d)(5)(A). 271 § 1141(d)(5)(B). 272 The individual debtor also does not have to deal with the § 522(q) issues discussed in footnote 258, although they rarely arise.



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after the commencement of the case entitled to priority under § 507(a)(8)). The discharge

applies whether or not a proof of claim was filed or deemed filed, the claim is allowed, or its

holder has accepted the plan.273

A debtor does not receive a § 1141(d)(1)(A) discharge, however, if the plan provides for

the liquidation of all or substantially all of the property of the estate, the debtor does not engage

in business after consummation of the plan, and the debtor would be denied a discharge under

§ 727(a) if the case were a chapter 7 case.274 Only an individual is entitled to a discharge in a

chapter 7 case.275 An individual debtor is entitled to a chapter 7 discharge unless one of the

reasons for its denial in § 727(a)(2) – (12) exists.276

The § 1141(d)(1)(A) discharge is effective except as otherwise provided in § 1141(d), the

plan, or the confirmation order. Section 1141(d) has two exceptions applicable in a sub V case.

First, in the case of an individual debtor, a § 1141(d)(1)(A) discharge does not discharge

the individual from any debt that is excepted under § 523(a).277 No such exceptions to the

§ 1141(d)(1)(A) discharge exist for a debtor that is not an individual.

Second, the § 1141(d)(1)(A) discharge does not discharge any debtor from any debt

(1) specified in § 523(a)(2)(A) or (B) that is owed to a governmental unit or to a person as the

result of an action filed under subchapter III of chapter 37 of title 31 of the United States Code;

or (2) that is for a tax or customs duty with respect to which the debtor made a fraudulent return

or willfully attempted to evade or avoid.278

273 § 1141(d)(1)(A). 274 § 1141(d)(3). 275 § 727(a)(1). 276 § 727(a). 277 § 1141(d)(1)(A). 278 § 1141(d)(6).



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B. Discharge Upon Confirmation of a Cramdown Plan Under § 1191(b) When the court confirms a cramdown plan, § 1141(d) does not apply, except as provided

in new § 1192.279 Instead, the debtor receives a discharge under new § 1192.

New § 1192 provides for discharge to occur “as soon as practicable” after the debtor

completes all payments due within the first three years of the plan, “or such longer period not to

exceed five years as the court may fix.”280 Presumably, any longer period will be the same

length as the court fixes for the commitment of projected disposable income in connection with

cramdown confirmation under new § 1191(b), but the statute does not expressly so state. Section

VIII(B)(4)(ii) discusses determination of the commitment period.

The cramdown discharge under new § 1192 discharges the debtor from all debts

discharged under § 1141(d)(1)(A), with certain exceptions discussed below, unless § 1141(d),

the plan, or the confirmation order provides otherwise.

The new § 1192 discharge also applies to “all other debts allowed under [§ 503] and

provided for in the plan.”281 Section 503 provides for the allowance of administrative expenses,

including postpetition operating expenses;282 compensation of the trustee and professionals

employed by the trustee and the debtor;283 and claims for goods the debtor received within 20

279 New § 1181(c). 280 New § 1192. Section 1141(d)(5)(A), which defers the discharge of an individual in a chapter 11 plan until the debtor completes payments, permits the court to order otherwise, for cause, after notice and a hearing. New § 1192 contains no provision for an earlier discharge. 281 New § 1192. 282 § 503(b)(1). 283 § 503(b)(2).



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days of the filing.284 The discharge provision recognizes that a plan confirmed under new

§ 1191(b) may provide for the payment of administrative expenses through the plan.285

New § 1192 excepts certain debts from discharge. First, new § 1192 does not discharge

any debt on which the last payment is due after the first three years of the plan, or such other

time not to exceed five years fixed by the court.286 Again, any longer period fixed by the court

will presumably be the same period that the court fixes for the commitment of projected

disposable income in connection with cramdown confirmation. Second, new § 1192(2) excepts

any debt “of the kind specified in [§ 523(a)].”287 The same exceptions apply to the

§ 1141(d)(1)(A) discharge of an individual under § 1141(d)(2).

It is unclear whether the § 523(a) exceptions apply when a debtor that is not an individual

receives a discharge under § 1192. In the case of a non-individual, the § 1141(d) discharge is not

subject to the exceptions in § 523(a). Section 1141(d)(2) makes the § 523(a) exceptions

applicable, but expressly limits application of § 523(a) to a debtor who is an individual.

New § 1192(2), in contrast, states, without qualification, that debts “of the kind

specified” in § 523(a) are excepted from discharge. Because § 523(a) specifies various debts, the

conclusion is that a debt listed in § 523(a) is excepted from the § 1192 discharge.288

284 § 503(b)(9). 285 New § 1191(c). Administrative expenses allowed under § 503(b) are entitled to priority under § 507(a)(2). New § 1191(e) permits the payment of a claim specified under § 507(a)(2) through a plan confirmed under new § 1191(b). See supra Section VI(C). New § 1191(e) also permits payment of claims specified in § 507(a)(3) through the plan. Section 507(a)(3) provides a priority for “involuntary gap claims” allowed under § 502(f). 286 New § 1192(1). 287 New § 1192(2). 288 Without discussing this issue, some commentators have stated this conclusion. 5 HON. WILLIAM L. NORTON JR. & WILLIAM L. NORTON, III, NORTON BANKRUPTCY LAW AND PRACTICE § 107:17 (3d ed. 2019); James B. Bailey and Andrew J. Shaver, The Small Business Reorganization Act of 2019, Norton Bankr. L. Adviser, Oct. 2019, Part IX.



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The language of § 523(a) permits a different conclusion. As amended, § 523(a) begins as

follows:

A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt – [defined in paragraphs (1) through (19) of § 523(a)].289

(The other listed sections are sections under which a discharge is granted in chapter 7, 11, 12,

and 13 cases.)

As amended, therefore, § 523(a) states that a discharge under new § 1192 does not

discharge an individual debtor from the listed types of debts. This amendment would be

superfluous if Congress did not intend to limit the § 523(a) exceptions to individuals. Without

the amendment to § 523(a), new § 1192 alone would except the types of debts listed from any

§ 1192 discharge, regardless of whether the debtor is an individual.

In other words, although new § 1192 states discharge rules for all debtors without regard

to whether they are individuals or not, its reference to § 523(a) in the case of a non-individual

has no operative effect. Section 523(a), as amended, applies only to individuals.

Legislative history supports the conclusion that Congress did not intend to make the

§ 523(a) exceptions applicable to a new § 1192 discharge of a non-individual. The Report of the

Judiciary Committee of the House of Representatives states that the new § 1192 discharge

excepts debts on which the last payment is due after the commitment period under the plan and

“any debt that is otherwise nondischargeable.”290 The use of the words “otherwise

nondischargeable” logically refers to § 523(a), which applies only to individuals.

289 § 523(a) (language inserted by amendment in italics). 290 H.R. REP. NO. 116-171, at 8.



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Moreover, if the drafters had intended to expand § 523(a) to permit exceptions to the

discharge of non-individuals – a significant change in existing chapter 11 law – one would

expect the House Judiciary Committee Report to point that out. It does not.291 To the contrary,

the Report’s explanation that the exceptions are for “any debt that is otherwise

nondischargeable” demonstrates an intent to apply existing exceptions to discharge in chapter 11

cases in subchapter V, not to expand them.

Limited case law under chapter 12 supports the conclusion that the § 523(a) exceptions

may apply to a new § 1192 discharge of a non-individual debtor. The chapter 12 discharge

provision, § 1228(a)(2),292 has the same language as new § 1192, and the prefatory language of

§ 523(a) as amended refers to § 1228 and new § 1192 in the same way.

In two corporate chapter 12 cases, the corporate debtors contended that the § 523(a)

exceptions to the chapter 12 discharge did not apply to them because § 523(a) states that it only

excepts debts of an individual.293 Both courts ruled that the § 523(a) exceptions applied to the

chapter 12 discharge of a corporation.

In In re JRB Consolidated, Inc.,294 the court reasoned that the operative language in

§ 1228(a)(2) (“debts of the kind” specified in § 523(a)) “does not naturally lend itself to also

incorporate the meaning ‘for debtors of the kind’ referenced in § 523(a).”295 Instead, the court

concluded, “debts of the kind” is limited to the types of debts that the subparagraphs of § 523(a)

291 Retired Bankruptcy Judge A. Thomas Small, Jr., submitted testimony in support of the legislation. Judge Small’s explanation of the new § 1192 discharge similarly made no reference to the § 523(a) exceptions to the discharges of non-individuals. Testimony of A. Thomas Small, supra note 44. 292 The chapter 12 discharge provision, § 1228(a)(2), excepts from discharge any debt “of a kind specified” in § 523(a). The language also appears in § 1228(c)(2), which governs the so-called “hardship” discharge that a debtor who cannot complete plan payments may receive under § 1228(b). 293 In re Breezy Ridge Farms, Inc., 2009 WL 1514671 (Bankr. M.D. Ga. May 29, 2009); In re JRB Consol., Inc., 188 B.R. 373 (Bankr. W.D. Tex. 1995). 294 In re JRB Consol., 188 B.R. at 373. 295 Id. at 374.



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identify.296 Moreover, the court explained, § 1228(a), unlike § 1141(d), does not expressly

provide a broader discharge for corporations than for individuals.297

The court in In re Breezy Ridge Farms, Inc.,298 adopted the same reasoning. In addition,

the court noted that the exceptions to discharge for a corporation in § 1141(d)(6)299 apply to

debts “of a kind specified in paragraph (2)(A) or (2)(B) of section 523(a)” that meet certain other

requirements even though corporate debtors are excluded from § 523(a) by its terms.300 The

Breezy Ridge Farms court explained that its interpretation harmonized the provisions of § 1228

and § 523(a):

Although § 523(a) applies only to individuals, Congress has used it as shorthand to define the scope of a Chapter 12 discharge for corporations as well as individuals. Thus, it is appropriate to rely on § 523(a) to determine whether a debt is included in the discharge, even when the debtor is a corporation. Even if the two provisions could not be harmonized, § 1228 would control because it is more specific, applicable only in Chapter 12, than § 523(a), which applies regardless of chapter.301

Under § 523(c)(1), a debtor is discharged from a debt excepted from discharge under

subparagraphs (2), (4), or (6) of § 523(a) unless, upon request of the creditor, the court

determines that the debt is nondischargeable.302 Bankruptcy Rule 4007(c) requires the filing of a

complaint to determine the dischargeability of such a debt no later than 60 days after the date

first set for the § 341(a) meeting.303 If the debtor does not list the creditor, § 523(a)(3) provides

for such a debt to be excepted if the creditor did not have enough notice to permit the timely

filing of a proof of claim and a timely request for the determination, unless the creditor had

296 Id. 297 Id. 298 In re Breezy Ridge Farms, 2009 WL 1514671, at *1. 299 Section 1141(d)(6) states an exception to the § 1141(d)(1)(A) discharge. See supra Section X(A). 300 In re Breezy Ridge Farms, 2009 WL 1514671, at *2. 301 Id. 302 § 523(c)(1). 303 FED. R. BANKR. P. 4007(c).



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actual notice of the deadlines in time to do so.304 The clerk’s office must give at least 30 days’

notice of the deadline.305 SUPP XV

XI. Changes to Property of the Estate in Subchapter V Cases SBRA makes two changes with regard to property that a debtor acquires postpetition and

earnings from postpetition services. First, SBRA makes § 1115(a) inapplicable in a sub V

case.306 Section 1115(a), applicable only in the case of an individual, includes postpetition

property and earnings as property of the estate. Second, new § 1186 provides that, if the court

confirms a plan under the cramdown provisions of new § 1191(b), property of the estate consists

of property of the estate under § 541(a) and postpetition property and earnings until the case is

closed, dismissed, or converted to another chapter.307 New § 1186 applies to debtors that are

entities as well as individuals.

Discussion of the effects of these changes begins with a summary of postpetition property

and earnings under pre-SBRA law.

A. Property Acquired Postpetition and Earnings from Services Performed Postpetition as Property of the Estate in Chapter 11 Cases Under Current Law

Property of the estate in a chapter 11 case (including the case of any small business

debtor) consists of the same property that is property of the estate under § 541. Under § 541,

property of the estate includes, among other things, all legal or equitable interests in property that

the debtor has in property as of the commencement of the case, § 541(a)(1), subject to certain

exceptions stated in § 541(b).308

304 § 523(a)(3). 305 The new Official Forms for the notice of the filing of a sub V case (Form B309E2 for cases of individuals and Form B309F2 for cases of corporations or partnerships) provide a space for the clerk to state the deadline. 306 New § 1181(a). 307 § 1186. 308 § 541.



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Section 541(a)(7) provides that any interest in property that the estate acquires after the

commencement of the case is property of the estate.

In the case of an entity, the debtor in possession (or trustee) controls the entity and all its

property and acts on behalf of the estate. Bankruptcy does not recognize any distinction between

the property interests of an entity debtor and those of the estate. Any interest in property that an

entity acquires after the commencement of the case (including any postpetition earnings) must be

property that the estate acquires and is property of the estate under § 541(a)(7).

In the case of an individual, a distinction exists under § 541 between property of the

debtor and property of the estate. In general, any property that a debtor acquires postpetition

belongs to the debtor, with limited exceptions,309 unless the postpetition property represents

proceeds, product, offspring, rents, or property of or from property of the estate (for example,

rental income or interest or dividends on an investment).310 Moreover, an individual’s chapter 7

estate does not include earnings from postpetition services.311 In cases under chapters 12 and 13,

property of the estate includes postpetition property and earnings.312

The rules in chapter 11 cases of individuals were the same as in chapter 7 cases before

enactment of BAPCPA. Thus, property that an individual chapter 11 debtor acquired after the

filing of the case and earnings from postpetition services were not property of the estate (with

limited exceptions as noted above).

309 Under § 541(a)(5), property that a debtor acquires, or becomes entitled to acquire, within 180 days after the petition date is property of the estate if the debtor acquires or becomes entitled to acquire it either: (A) by bequest, devise, or inheritance; (B) as the result of a property settlement agreement or divorce decree; or (C) as a beneficiary of a life insurance policy or death benefit plan. 310 § 541(a)(6). 311 Id. 312 §§ 1207(a), 1306(a).



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BAPCPA added §1115 to make property of the estate of an individual in a chapter 11

case the same as property of the estate in a chapter 12 or 13 case. In language that tracks the

chapter 12 and 13 provisions, § 1115 provides that, in a chapter 11 case in which the debtor is an

individual, property of the estate includes property that the debtor acquires after the

commencement of the case,313 and earnings from postpetition services,314 both before the case is

closed, dismissed, or converted to a case under chapter 7, 12, or 13.

B. Postpetition Property and Earnings in Subchapter V Cases Section 1115 does not apply in subchapter V cases.315 New § 1186(a), however, includes

postpetition assets and earnings as property of the estate if the court confirms a plan under the

cramdown provisions of § 1191(b).316 New § 1186(a) uses substantially the same language as

§ 1115 and the chapter 12 and 13 provisions on which § 1115 is based, §§ 1206 and 1307.

The effects of these changes differ depending on (1) whether the debtor is an individual

or an entity and (2) whether the court confirms a consensual plan (which all impaired classes of

creditors must accept) under § 1191(a) or confirms a plan under the cramdown provisions of

§ 1191(b).

1. Property of the estate in subchapter V cases of an entity Section 1115(a) does not apply to an entity, so its inapplicability in a sub V case has no

effect on the property of the estate in a sub V case of an entity.

New § 1186 deals with property of the estate when cramdown confirmation occurs under

new § 1191(b). It provides that property of the estate consists of property of the estate under

313 § 1115(a)(1). 314 § 1115(a)(2). 315 New § 1181(a). 316 New § 1186(a)



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§ 541 and postpetition property and earnings before the case is closed, dismissed, or converted to

another chapter.

Discussion of the effects of new § 1186 when it applies begins with an explanation of

what happens when it does not, i.e., when the court confirms a consensual plan under §1191(a).

Section 1141(b) provides that the confirmation of a plan vests all property of the estate in the

debtor unless the plan or confirmation order provides otherwise. The same rule governs cases

under chapters 12 and 13.317

The vesting of property of the estate in the debtor means that the automatic stay with

regard to acts against property terminates. Section 362(c)(1) provides, “[t]he stay of an act

against property of the estate under [§ 362(a)] continues until such property is no longer property

of the estate.”318 Confirmation of a consensual plan does not necessarily result in termination of

the stay under § 362(c)(1), because the plan or the confirmation order may provide for vesting to

occur at some later time.319

In the cramdown situation, new § 1186 provides that property of the estate consists of

property of the estate under § 541 (which covers all the debtor’s property at the time of

confirmation, as earlier text explains) and any postpetition assets and earnings. This means that

the automatic stay does not terminate at confirmation under § 362(c)(1) because all property of

the debtor and all its earnings remain property of the estate.

New § 1186 conflicts with the vesting provisions of § 1141(b), which SBRA does not

amend. Recall that § 1114(b) provides for vesting of property of the estate in the debtor upon

317 §§ 1227(b), 1327(b). 318 § 362(c)(1). 319 § 1141(b).



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confirmation. New § 1186, however, keeps the property in the estate when cramdown

confirmation occurs.

The purpose seems to be to maintain judicial supervision of a debtor’s assets and earnings

after cramdown confirmation. This objective is consistent with other provisions of subchapter V

that apply in the cramdown situation. For example, the trustee continues to serve after

confirmation320 and makes payments under the plan,321 and discharge does not occur until the

debtor has completed payments for the specified period.322

When statutes conflict, principles of statutory construction favor application of the newer

statute or the more specific one.323 New § 1186 is newer and more specific. Moreover, its

application carries out the purpose of the statutory scheme of which it is a part. Under these

concepts, the provisions of new § 1186 defining property of the estate appear to control over the

conflicting vesting provisions in § 1141(b).

2. Property of the estate in subchapter V cases of an individual SBRA’s new rules governing property of the estate just discussed apply in the case of an

individual sub V debtor.

Because § 1115(a) does not apply, postpetition assets and earnings of an individual are

not property of the estate. The pre-BAPCPA rule recognizing the distinction between property

of the estate and property of the debtor comes back into play.

320 See supra Sections IV(D)(1). 321 See supra Section IX(B). 322 See supra Section X(B). 323 “[S]tatutes relating to the same subject matter should be construed harmoniously if possible, and if not, the more recent or specific statues should prevail over older or more general ones.” United States v. Lara, 181 F.3d 183, 198 (1st Cir. 1999) (citing HCSC-Laundry v. United States, 450 U.S. 1, 6 (1981) and Morton v. Mancari, 417 U.S. 535, 550-51 (1974)); accord, e.g., In re Southern Scrap Material Co., LLC, 541 F.3d 584, 593 n. 14 (5th Cir. 2008); Tug Allie-B, Inc., v. United States, 273 F.3d 936, 941, 948 (11th Cir. 2001); Southern Natural Gas Co. v. Land, Cullman County, 197 F.3d 1368, 1373 (11th Cir. 1999); In re Southern Scrap Material Co., LLC, 541 F.3d 584, 593 n. 14 (5th Cir. 2008); see 2B Sutherland Statutory Construction § 51:2 (7th ed. 2019-20 Supp.).



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The change is important if the sub V case is converted prior to confirmation. Most

courts conclude that, upon conversion of the chapter 11 case of an individual to chapter 7,

property of the chapter 7 estate includes assets acquired and income earned after the filing of the

case and until it is converted.324 The result upon preconfirmation conversion will be different for

an individual who is a sub V debtor.

The exclusion of postpetition assets and income from property of the estate of an

individual in a sub V case raises questions. In a chapter 7 case, an individual is free to use

postpetition assets and earnings without restriction or judicial approval. That is the same rule

that governed pre-BAPCPA chapter 11 cases of individuals, and it now applies in a sub V case.

Does this mean, for example, that an individual who acquires assets postpetition, or has earnings

from postpetition services, may use or dispose of them without supervision by the trustee or

approval by the court?

The fact that postpetition assets and earnings of an individual in a sub V case are not

property of the estate also affects operation of the automatic stay. Because the individual’s

postpetition assets and earnings are not property of the estate, is the automatic stay applicable to

a postpetition creditor’s collection of a postpetition debt through garnishment of wages?325

324 E.g., In re Copeland, 609 B.R. 834 (D. Ariz. 2019); In re Meier, 550 B.R. 384 (N.D. Ill. 2016); In re Freeman, 527 B.R. 780 (Bankr. N.D. Ga. 2015); In re Hoyle, 2013 WL 3294273 (Bankr. D. Idaho June 28, 2013); In re Tolkin, 2011 WL 1302191 (Bankr. E.D.N.Y. Apr. 5, 2011), aff'd sub nom. Pagano v. Pergament, 2012 WL 1828854 (E.D.N.Y. May 16, 2012); accord, e.g., In re Lincoln, 2017 WL 535259 (Bankr. E.D. La. Feb. 8, 2017); In re Gorniak, 549 B.R. 721 (Bankr. W.D. Wisc. 2016); In re Vilaro Colón, 2016 WL 5819783 (Bankr. D.P.R. Oct. 5, 2016). Contra, e.g., In re Markosian, 506 B.R. 273, 275-77 (9th Cir. BAP 2014); In re Evans, 464 B.R. 429, 438-41 (Bankr. D. Colo. 2011). 325 Paragraph (1) of § 362(a) does not stay acts with regard to postpetition claims; paragraph (a)(2) precludes enforcement of a prepetition judgment; paragraphs (a)(3) and (a)(4) prevent acts against property of the estate; paragraph (a)(5) precludes enforcement of a prepetition lien; paragraphs (a)(6) and (a)(7) do not apply to postpetition claims; and paragraph (a)(8) deals with tax claims for taxable periods ending before the date of the petition. See generally W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, supra note 66, § 19:6 (discussing the automatic stay with regard to postpetition claims in a chapter 13 case when property of the estate vests in the debtor upon confirmation).



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Section 362(b)(2)(B) excepts collection of a domestic support obligation from property that is

not property of the estate. May the holder of a domestic support obligation seek to enforce the

claim against postpetition property and earnings?

The nature of postpetition assets and earnings changes if cramdown confirmation occurs.

In the cramdown situation, new § 1186 provides that property of the estate at the time of

confirmation includes both property of the estate that the debtor had at the time of the filing of

the petition under § 541 and postpetition assets and earnings.326

One consequence of the addition of postpetition assets and earnings to the estate is that, if

conversion to chapter 7 occurs after cramdown confirmation, postconfirmation property and

earnings will be property of the chapter 7 estate. If the court confirms a consensual plan, such

property may not be property of the estate because neither § 1115(a) nor new § 1186 applies.

Sections XII(C) and (D) further discuss this issue.

Issues may arise because of the retroactive nature of the operation of new § 1186:

property that was not property of the estate becomes property of the estate upon cramdown

confirmation. For example, what happens if, at the time of the confirmation hearing, an

individual debtor has disposed of postpetition assets or earnings, which the debtor had the right

to do when the property was not property of the estate? A creditor opposing confirmation could

argue that the court cannot confirm the plan because the estate will not have all the property that

new § 1186 requires it to have.

326 New § 1186.



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XII. Default and Remedies After Confirmation If a debtor defaults after confirmation of a plan, creditors must decide what remedies are

available and how to invoke them. If the court confirmed the plan under the cramdown

provisions of new § 1191(b), the sub V trustee must also decide what to do if a default occurs.

A. Remedies for Default in the Confirmed Plan

Because the provisions of a confirmed plan are binding on the debtor and creditors under

§ 1141(a), the plan’s provisions for default and remedies control. In a consensual plan, the

provisions governing default and remedies ordinarily have their source in negotiations with the

various creditors that lead to terms that result in acceptance of the plan. Secured creditors and

lessors are unlikely to accept a plan unless it includes acceptable remedies in the plan that allow

them to exercise their remedies if the debtor defaults. Unsecured creditors and tax claimants

often do not participate actively in the case of a small business debtor, but if they do, they

likewise have the opportunity to negotiate acceptable terms to deal with defaults.

When one or more classes of impaired creditors do not accept the plan, the requirements

for cramdown confirmation in new § 1191(c) provide the source of remedies for default.

Cramdown confirmation requires that the plan provide “appropriate remedies, which may

include the liquidation of nonexempt assets, to protect the holders of claims or interests in the

event that the payments are not made.”327 The only specific remedy in new § 1191(c)(3)(B) is

“the liquidation of nonexempt assets.” 328

When creditors are actively participating in the case, they will presumably advise the

court as to what remedies are appropriate to protect them. Active creditors usually include

327 New § 1191(c)(3)(B). 328 Id.



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secured creditors and landlords, but often do not include tax claimants or unsecured creditors.

The sub V trustee is the logical party to propose remedies to protect creditors who do not appear.

Whether the source of the terms governing default and remedies is negotiation between

the debtor and creditors or the requirements of new § 1191(c)(3)(B), creditors will want remedies

that will protect their rights to recover.

For secured creditors and lessors who have property rights in specific assets, the primary

objective is to recover possession of the encumbered or leased property and to exercise their

rights promptly upon the debtor’s default. Secured creditors and lessors will want provisions in

the plan that recognize their rights to proceed against the debtor’s property and that confirm that

neither the automatic stay nor the discharge injunction will apply to their efforts to do so.

An unsecured creditor can subject the debtor’s assets to its debt only through judicial

process, a somewhat cumbersome and potentially lengthy process with uncertain results and

expense that may not justify the effort. An effective remedy for unsecured creditors might

include conversion to chapter 7 to permit a trustee to liquidate the assets. Later text in Section

XII(C) discusses issues that arise upon postconfirmation conversion to chapter 7 that the plan

might appropriately address to protect unsecured creditors.

B. Removal of Debtor in Possession for Default Under Confirmed Plan

New Section 1185(a) provides that, on request of a party in interest, and after notice and a

hearing, the court shall order that the debtor not be a debtor in possession for cause or “for

failure to perform the obligations of the debtor under a plan confirmed under this subchapter.”329

If removal of the debtor in possession occurs after the trustee’s service has been terminated upon

329 New § 1185(a). Section V(C) discusses removal for cause.



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substantial consummation of a consensual plan confirmed under new § 1191(a), new

§ 1183(c)(1) provides for reappointment of the trustee.

New § 1183(c)(5) specifies the duties of a trustee when the debtor ceases to be a debtor

in possession. A specific duty is operation of the business of the debtor. The duties do not

include liquidation of the debtor’s assets. Nothing in subchapter V appears to authorize the

trustee to do so.

The trustee’s operation of the business will be difficult, if not impossible, if secured

creditors or lessors take possession of assets on account of the debtor’s defaults. Even if the

trustee can operate the business, its future is unclear. Perhaps the plan will have provisions for

the cure of defaults and the trustee can manage the business to cure defaults so that the plan can

go forward. If not, the plan will remain in default, and the trustee will do nothing more than

observe as creditors exercise their remedies under the plan unless the plan is modified or the case

is converted to chapter 7.

Property of the estate issues arise when reappointment of the trustee based on the debtor’s

default occurs after confirmation of a consensual plan under new § 1191(a). Under § 1141(b),

property of the estate vests in the debtor upon confirmation of a consensual plan unless the plan

or confirmation order provides otherwise.330 If property of the estate vested in the debtor upon

confirmation, the debtor is in possession of its own assets, not property of the estate. Arguably,

this means that there is no property of the estate that the trustee can manage and no “debtor in

possession” to be removed.

Under this view, new § 1185(a) operates only when property of the estate does not vest in

the debtor at confirmation, either because cramdown confirmation occurs (and property of the

330 See supra Section XI(B).



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estate remains property of the estate under new § 1186331) or because the plan or confirmation

order so provides.

It is arguable that Congress did not intend to limit the operation of new § 1185(a) based

on how property vests at confirmation. One possible interpretation of new § 1185(a), therefore,

is that it impliedly authorizes the trustee to take possession of property of the debtor. Another

potential interpretation is that it impliedly revests the debtor’s assets into the estate.

In many cases, postconfirmation modification may not be a realistic possibility. First,

only the debtor may modify a plan.332 Moreover, if the plan was a consensual one confirmed

under new § 1191(a), postconfirmation modification under new § 1193(b) is not permissible after

substantial consummation (which presumably occurred unless the debtor made no payments

under the plan). Finally, if cramdown confirmation occurred such that modification is

permissible, the fact that the debtor did not seek to modify it to deal with defaults does not

generate confidence that it can effectively do so once the trustee has taken over.

Given these considerations, it seems likely that the eventual effect in most cases of

postconfirmation removal of the debtor in possession will be dismissal or conversion to chapter

7. If so, a more effective remedy than removal of the debtor in possession may be dismissal or

conversion. If continuation of the debtor’s business is advisable (perhaps, for example, to

liquidate it as a going concern), the court may authorize a chapter 7 trustee to do so.333

C. Postconfirmation Dismissal or Conversion to Chapter 7 Section 1112(b)(1) provides that the court, upon request of a party in interest, shall

dismiss a chapter 11 case or convert it to a case under chapter 7 for “cause.” “Cause” includes

331 See supra Section XI(B). 332 New § 1193(b). 333 § 721.



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“material default by the debtor with respect to a confirmed plan.”334 Section 1112 remains

applicable in a subchapter V case.

If the court converts the case to chapter 7, the U.S. Trustee appoints an interim trustee

under § 701(a)(1). The interim trustee may be a panel trustee or the sub V trustee. The interim

trustee becomes the trustee in the case unless creditors elect a different trustee at the § 341(a)

meeting.335

1. Postconfirmation dismissal

The effects of postconfirmation dismissal differ depending on whether the debtor has

received a discharge. The timing of the discharge under subchapter V depends on the type of

confirmation that occurs.

The debtor receives a discharge under § 1141(d) upon confirmation of a consensual plan

under new § 1191(a).336 Courts have ruled that the postconfirmation dismissal of a chapter 11

case does not affect the discharge that the debtor has received or the binding effect of the plan.337

If cramdown confirmation occurs, the debtor does not receive a discharge until the

completion of payments.338 Courts dealing with similar provisions for the delay of discharge in

cases under chapters 11, 12, and 13 have concluded that a plan cannot have binding effect if the

334 § 1112(b)(4)(N). 335 § 702(d). 336 See supra Section X(A). 337 E.g., National City Bank v. Troutman Enterprises, Inc. (In re Troutman Enterprises, Inc.), 253 B.R. 8, 13 (B.A.P. 6th Cir. 2002) (“[C]onversion does not disturb confirmation or revoke the discharge of preconfirmation debt.”); In re T&A Holdings, LLC, 2016 WL 7105903, at *5 (Bankr. N.D. Ill. Nov. 2, 2016) (“[T]he terms of a confirmed Chapter 11 plan remain binding post-dismissal as does the discharge granted through or in connection with such plan.”); In re Potts, 188 B.R. 575, 581-82 (Bankr. N.D. Ind. 1995). 338 New § 1192.



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case is dismissed prior to the entry of discharge.339 Thus, dismissal after confirmation without a

discharge will generally restore the parties to their pre-bankruptcy status.

Section 349, which deals with the effect of dismissal of a case, remains applicable in a

subchapter V case. Unless the court orders otherwise for cause, (1) § 349(b)(1) provides for the

reinstatement of any receivership proceeding; any transfer avoided under §§ 522, 544, 545, 547,

548, 549, or 724(a); and any lien avoided under § 506(d); and (2) § 349(c) revests property of the

estate in the entity in which such property was before the filing of the case.340

2. Postconfirmation conversion

When conversion of a subchapter V case to chapter 7 after confirmation occurs, the

question is, what property is property of the estate? The answer depends on whether property of

339 Chapters 12 and 13 have always delayed discharge until the completion of plan payments or grant of a “hardship” discharge, §§ 1228, 1328. Chapter 11 has done so in the cases of individuals since the addition of § 1141(d)(5) by BAPCPA. In chapter 12 and 13 cases, courts have concluded that a confirmed plan is not binding upon dismissal of the case without a discharge. See First National Bank of Oneida, N.A. v. Brandt, 597 B.R. 663, 668-69 (M.D. Fla. 2018) (Collecting cases holding that chapter 12 or 13 confirmed plan is no longer binding upon dismissal). But see Weise v. Community Bank of Central Wisconsin (In re Weise), 552 F.3d 584 (7th Cir. 2009). The district court in First National Bank of Oneida, N.A. v. Brandt, 597 B.R. 663 (M.D. Fla. 2018) addressed the binding effect of a confirmed plan upon dismissal of an individual’s chapter 11 case on remand from the Eleventh Circuit. First National Bank of Oneida, N.A. v. Brandt, 887 F.3d 1255 (11th Cir. 2018). The Eleventh Circuit noted that case law in chapter 13 cases dealing with dismissal without a discharge “could perhaps become relevant to a determination of whether and how the dismissal of Brandt’s Chapter 11 case without a discharge affects the enforceability of his confirmed Chapter 11 plan.” Id. at 1261. The district court determined that it was, 597 B.R. at 669, and ruled that the confirmed plan was not binding upon dismissal prior to confirmation based on that case law, the provisions of § 349(b), and public policy. Id. at 671. In Community Bank of Central Wisconsin (In re Weise), 552 F.3d 584 (7th Cir. 2009), the bankruptcy court, on the debtors’ motion, dismissed their chapter 12 case after confirmation of their plan that incorporated a settlement between debtors and bank that, among other things, released lender liability claims against the bank. In connection with dismissal, the bankruptcy court determined that, under U.S.C. § 349(b), cause existed for the plan’s terms with regard to the settlement to remain binding on the parties. The Seventh Circuit ruled that the bankruptcy court did not abuse its discretion and that cause existed under § 349(b) to keep some terms of the plan binding on the parties. The Seventh Circuit stated that § 349(b) “explicitly contemplates that the court can choose to keep some terms binding on the parties where there is cause.” Weise, supra, 552 F3d at 591. The court observed, “[N]egotiation alone would not be an acceptable standard for ‘cause,’ since every confirmed plan that required the consent of the creditor would involve some degree of negotiation.” Id. at 589. The district court in Brandt, supra, 597 B.R. 663, distinguished Weise because the bankruptcy court in dismissing Brandt’s chapter 11 case made no mention of binding the parties to plan provisions and “chose not to keep specified plan terms binding.” Id. at 670. 340 § 349.



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the estate vested in the debtor upon confirmation and, if it did, the court’s view of the effect of

such vesting.

The general rule of § 1141(b) is that confirmation of a plan results in the vesting of

property of the estate in the debtor unless the plan or the confirmation order provides otherwise.

In a sub V case, the general rule applies when the court confirms a consensual plan under new

§ 1191(a), but not when cramdown confirmation occurs under new § 1191(b) because new

§ 1186 keeps property in the estate.341

Some courts have concluded that conversion of a chapter 11 case to chapter 7 does not

revest property in the estate that vested in the reorganized debtor at confirmation unless the plan

or confirmation order provides otherwise.342 Other courts have ruled that property of the estate

341 See supra Section XI(B). 342 E.g., Bell v. Bell (In re Bell), 225 F.3d 203, 216 (2d Cir. 2000); National City Bank v. Troutman Enterprises, Inc. (In re Troutman Enterprises, Inc.), 253 B.R. 8, 13 (B.A.P. 6th Cir. 2002) (“Property which revested in a reorganized debtor at confirmation remains property of that entity; conversion does not bring that property into the converted case.”); Lacy v. Stinky Love, Inc. (In re Lacy), 304 B.R. 439, 444-46 (D. Col. 2004) (discussing cases); In re Freeman, 527 B.R. 780 (Bankr. N.D. Ga. 2015) (In chapter 11 case of individual, holding that preconfirmation assets vested in debtor but income earned postconfirmation and prior to conversion did not, and discussing cases); In re L & T Machining, Inc., 2013 WL 3368984 (Bankr. D. Kan. July 3, 2013); In re Sundale, Ltd., 471 B.R. 300 (Bankr. S.D. Fla. 2012); In re Canal Street Limited Partnership, 260 B.R. 460, 462 (Bankr. D. Minn. 2001); In re K & M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz 1997); Carter v. Peoples Bank and Trust Co. (In re BNW, Inc.), 201 B.R. 838, 848-49 (Bankr. S.D. Ala. 1996); In re T.S. Note Co., 140 B.R. 812, 813-14 (Bankr. D. Kan. 1992) (The court granted a motion to convert but noted that property of the chapter 7 estate would consist only of non-administered assets remaining in the preconfirmation estate, such as possible causes of action. “[W]hat is being converted . . . are the cases and the assets, if any, whether tangible or intangible, remaining in the debtor’s pre-confirmation estate. . . .); In re TSP Indus., Inc., 117 B.R. 375 (Bankr. N.D. Ill. 1990). See also Pioneer Liquidating Corp. v. United States Trustee (In re Consol. Pioneer Mortgage Entities), 264 F.3d 803 (9th Cir. 2001) (holding that “language and purpose” of liquidating plan demonstrated that assets vested in debtor upon confirmation revested in estate upon conversion); 6 HON. WILLIAM L. NORTON JR. & WILLIAM L. NORTON, III, NORTON BANKRUPTCY LAW AND PRACTICE § 14:13 (3d ed. 2019) (discussing different approaches to revesting of assets upon conversion after confirmation). Property of the estate that vests in a chapter 11 debtor at confirmation may not include avoidance actions. See Still v. Rossville Bank (In re Wholesale Antiques, Inc.), 930 F.2d 458 (6th Cir. 1991) (Trustee in case converted to chapter 7 may recover unauthorized postpetition transfers under § 549 that occurred prior to confirmation.); In re Sundale, Ltd., 471 B.R. 300, 307 n. 15 (Bankr. S.D. Fla. 2012); In re T. S. Note Co., 140 B.R. 812, 813 (Bankr. D. Kan. 1992).



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upon conversion consists of property owned by the debtor at the time of commencement of the

case,343 on the confirmation date,344 or on the date of conversion.345

Under these principles, property of the estate in a sub V case converted to chapter 7 after

cramdown confirmation includes all the debtor’s property. The result is the same if a consensual

plan or the order confirming it provides that property of the estate not vest in the debtor until the

occurrence of some later event that has not occurred at the time of conversion.

If property of the estate vested in the debtor at the time of confirmation of a consensual

plan, however, what constitutes property of the estate at conversion is uncertain. In the first

instance, it depends on whether the court applies the vesting principles in existing case law noted

above and, if so, which view it adopts.

An alternative argument is that the provision in new § 1185(a) for removal of the debtor

in possession for postconfirmation default under a plan requires a different analysis of property

of the estate upon conversion. As the previous Section discusses, it is arguable that new

§ 1185(a) requires the revesting of property of the estate upon removal of the debtor in

possession after default under a consensual plan; otherwise, § 1185(a) has no effective operation

in that circumstance. If so, the same result follows if conversion occurs.

To avoid these potential issues and to ensure that the estate has property at the time of

conversion, creditors negotiating a consensual plan may want to insist on a provision in the plan

that will keep assets as property of the estate until the debtor completes payments or meets some

other milestone.

343 Smith v. Lee (In re Smith), 201 B.R. 267 (D. Nev. 1996), aff’d 141 F.3d 1179 (9th Cir. 1998). 344 Carey v. Flintridge Lumber Sales, Incl (In re RJW Lumber Co.), 262 B.R. 91 (Bankr. N.D. Ca. 2001). 345 In re Midway, Inc., 166 B.R. 585, 590 (Bankr. D.N.J. 1994).



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XIII. Effective Date and Retroactive Application of Subchapter V

Section 5 of SBRA provides:

This Act and the amendments made by this Act shall take effect 180 days after the date of enactment of this Act.

This language does not restrict application of subchapter V to cases filed on or after the

effective date of February 19, 2020. It thus differs from the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, which provided that most of its provisions did not apply “with

respect to cases commenced [under the Bankruptcy Code] before the effective date of this

Act.”346

Debtors in pending chapter 11 cases have sought to amend their petitions after SBRA’s

effective date to elect application of subchapter V. They argue that Bankruptcy Rule 1009(a)

permits amendment of a petition “as a matter of course at any time before the case is closed” and

that SBRA does not restrict application of subchapter V to cases filed after its enactment.

One court rejected the debtor’s argument, concluding, “Nothing in the SBRA enabling

statute indicates that the SBRA was intended to have retroactive effect.”347 The court observed

that to rule otherwise would create a “procedural quagmire” in that the debtor would be unable to

comply with the statute’s requirement for a status conference within 60 days after the order for

relief and the 90-day deadline for the filing of a plan, both of which expired before SBRA’s

effective date. The debtor’s failure to timely file a plan, the court explained, would require

dismissal under § 1112(b)(4)(J) for failure to file a plan within the time fixed by the Bankruptcy

Code.348

346 Pub. L. 109-8, 119 Stat. 23, § 1501(b) (2005). 347 In re Double H Transportation, LLC, 614 B.R. 553 (Bankr. W.D. Tex. 2020). 348 Id. at 554.



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Other courts, however, have permitted debtors in pending cases to amend their petitions

to proceed under subchapter V.349 Procedurally, they have ruled that, under Interim Rule

1020(a), a debtor’s amendment to the petition to elect subchapter V in an existing case means

that the case proceeds under subchapter V unless and until the court orders otherwise;350 the

court need not approve the election.351

As an initial matter, courts permitting the debtor to make the election when it occurs after

expiration of the timing requirements for a status conference (60 days after the order for relief)

and the filing of a plan (90 days) have concluded that the expiration of those times at the time of

the election does not bar the election. They observe that the court has the authority to extend

those times for cause, as long as the delay is due to circumstances not justly attributed to the

debtor, and that the debtor cannot comply with procedural requirements that did not exist.352

SUPP XIV

349 In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020); In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020); In re Moore Properties of Person County, LLC, 2020 WL 995544 (Bankr. M.D.N.C. 2020); In re Progressive Solutions, Inc., 615 B.R. 894 (Bankr. C.D. Cal. 2020). Accord, SUPP XIV In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La. 2020); In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020) (Permitting conversion from chapter 7 case filed 10 days before effective date of SBRA); In re Bonert, 619 B.R. 248 (Bankr. C.D. Cal. 2020); In re Bello, 613 B.R. 894 (Bankr. E.D. Mich. 2020) (Chapter 13 case filed May 3, 2019, and converted to chapter 11 on January 15, 2020; amendment to petition to elect sub V treatment filed March 2, 2020). 350 See supra Section III(A). 351 In re Body Transit, Inc., 613 B.R. 400, 407 (Bankr. E.D. Pa. 2020) (treating objection to debtor’s motion for authority to proceed under subchapter V as an objection to amendment of the petition to make the election); In re Progressive Solutions, Inc., 615 B.R. 894, 900-01 (Bankr. C.D. Cal. 2020). 352 In re Ventura, 615 B.R. 1, 15 (Bankr. E.D.N.Y. 2020) (“Given that the Debtor’s case was filed over 15 months ago, the Court finds that to argue the Debtor should have complied with the procedural requirements of a law that did not exist is the height of absurdity. The Debtor is not required to comply with deadlines that clearly expired before the Debtor could have elected to proceed as a subchapter V debtor.”); In re Progressive Solutions, Inc., 615 B.R. 894, 899-900 (Bankr. C.D. Cal. 2020) (addressing timing of status conference). Accord, SUPP XIV In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020). In In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020), the court considered whether to extend the statutory deadlines for the debtor’s report, status conference, and filing of a plan after it had granted the debtor’s motion to convert his pre-SBRA chapter 7 case to chapter 11. In permitting the debtor to proceed under subchapter V and extending the deadlines, the court reasoned, id. at *6-7:

The Debtor commenced his chapter 7 case in early February 2020, before the effective date of Subchapter V. The Debtor did not move to convert his case after the effective date and, in fact, waited over four



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Consideration of whether a debtor may amend its petition in a case filed before SBRA’s

effective date begins with the threshold issue of whether a new bankruptcy law can retroactively

apply to affect existing debtor-creditor rights, as the bankruptcy court observed in In re Moore

Properties of Person County, LLC.353 The Moore Properties court and others354 have noted two

conflicting canons of statutory construction that the Supreme Court considered in Landgraf v.

USI Film Products355 in determining whether to apply new statutory provisions to prior conduct

in the absence of statutory direction.

One canon, said the Landgraf Court, is that “a court is to apply the law in effect at the

time it renders its decision.”356 The conflicting one is that “[r]etroactivity is not favored in the

law,” and “congressional enactments and administrative rules will not be construed to have

retroactive effect unless their language requires this result.”357

The Landgraf Court explained that the presumption against retroactive application arises

from “[e]lementary considerations of fairness . . . that individuals should have an opportunity to

months to seek conversion. At the time of the requested conversion, a contested motion for relief from stay was pending and remains outstanding. The Court can envision a case in which the circumstances surrounding conversion could weigh against any extension of the deadlines under Subchapter V. For example, if the Debtor were manipulating the timing of his original bankruptcy filing and his requested conversion in a manner that unfairly prejudiced some or all of his creditors, an extension would not be warranted. Likewise, if the Debtor failed to comply with his obligations under the Code in his original bankruptcy case or commenced his case after the effective date of SBRA and had missed a plan deadline prior to requesting conversion or making a Subchapter V election, then perhaps an extension would not be warranted. Again, the analysis must be fact-intensive and focused on the Debtor's conduct and potential prejudice to creditors. Here, the Debtor has attributed his requested extension to the timing of the case conversion, and no party has disputed that justification. The Court also observes that the party who filed the relief from stay motion in the Debtor's chapter 7 case had notice of the requested deadline extensions and has not raised any opposition to the request. The Court thus concludes on balance that the Debtor should have access to Subchapter V of the Code and has established adequate grounds to extend the deadlines imposed by sections 1188 and 1189 of the Code in this case. SUPP XIV

353 In re Moore Properties of Person County, LLC, 2020 WL 995544, at *2-5 (Bankr. M.D.N.C. 2020). 354 In re Ventura, 615 B.R. 1, 15-17 (Bankr. E.D.N.Y. 2020); In re Body Transit, Inc., 613 B.R. 400, 406 (Bankr. E.D. Pa. 2020) 355 Landgraf v. USI Film Products, 511 U.S. 244, 264-71 (1994). 356 Id. at 264, quoting Bradley v. School Board of Richmond, 416 U.S. 696, 711 (1974). 357 Id. at 264, quoting Bowen v. Georgetown Univ. Hospital, 488 U.S. 204, 208 (1988).



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know what the law is and to conform their conduct accordingly,” and from the principle that

“settled expectations should not be lightly disrupted.”358 The presumption against retroactivity

particularly applies, the Court reasoned, to “new provisions affecting contractual or property

rights, matters in which predictability and stability are of prime importance.”359 The Court ruled

that amendments to Title VII of the Civil Rights Act of 1964 providing for a jury trial of claims

for certain damages, enacted while an employee’s appeal after a bench trial was pending, did not

apply to the employee’s action.

In its opinion, the Landgraf Court cited United States v. Security Industrial Bank.360 At

issue in Security Industrial Bank was a provision of the Bankruptcy Code (which

comprehensively revised bankruptcy law) that, in a change from existing law, permitted a

chapter 7 debtor to avoid a nonpossessory, non-purchase money security interest on exempt

personal property.361 The Court ruled that the provision could not apply to a security interest

arising from a transaction that occurred prior to the enactment of the new law.

The Court in Security Industrial Bank recognized that the Constitution’s bankruptcy

clause362 “has been regularly construed to authorize the retrospective impairment of contractual

obligations”363 but that the bankruptcy power could not be exercised “to defeat traditional

property interests” because the bankruptcy power is subject to the Fifth Amendment’s

prohibition against taking private property without compensation.364 The Court thus recognized

358 Id. at 265. 359 Id. at 271. Among other cases, the Court cited United States v. Security Industrial Bank, 459 U.S. 70, 79-82 (1982), which the text discusses next. 360 United States v. Security Industrial Bank, 459 U.S. 70 (1982). 361 11 U.S.C. § 522(f)(1)(B). 362 U.S. Const. Art. I, § 8, cl. 4. 363 United States v. Security Industrial Bank, 459 U.S. 70, 74 (1982), citing Hanover National Bank v. Moyses, 186 U.S. 181 (1902). 364 Id. at 75, citing Louisville Joint Stock Bank v. Radford, 295 U.S. 555 (1935).



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a distinction between the contractual right of a secured creditor to obtain repayment of its debt

and its property right in the collateral.365

The Court avoided the question of the constitutional validity of the provision, choosing

instead to construe it as being inapplicable to pre-enactment security interests under the principle

it deduced from its case law that “[n]o bankruptcy law shall be construed to eliminate property

rights which existed before the law was enacted in the absence of an explicit command from

Congress.”366

The bankruptcy court in Moore Properties concluded that the application of subchapter V

in a chapter 11 case filed by an LLC prior to its effective date created “none of the taking or

retroactivity concerns” that the Supreme Court expressed in Landgraf and Security Industrial

Bank. 367 With two exceptions inapplicable in the case before it, the court continued, the

provisions of subchapter V incorporated most of existing chapter 11 and did not “alter the rubric

under which debtors may affect pre-petition contractual rights of creditors, much less vested

property rights.”368

The Moore Properties court explained that the modification of prepetition contractual

relationships in a chapter 11 case occurs through a plan. The court then set out the changes that

subchapter V made to existing requirements for the contents of the plan and for its confirmation

and concluded that none of them amounted to an impermissible retroactive taking.

The Moore Properties court noted that subchapter V changes the requirements of § 1123

for the content of a plan in only three ways. New § 1181(a) makes inapplicable (1) the

requirement in § 1123(a)(8) that the plan of an individual provide for payment of earnings from

365 Id. 366 Id. at 81, citing Holt v. Henley, 232 U.S. 637 (1913) and Auffm’ordt v. Rasin, 102 U.S. 620 (1881). 367 In re Moore Properties of Person County, LLC, 2020 WL 995544, at *4 (Bankr. M.D. N.C. 2020). 368 Id.



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personal services as is necessary for execution of the plan and (2) the prohibition in § 1123(c), in

an individual case, of the use, sale, or exempt property when an entity other than the debtor

proposes the plan.369 The third change is that new § 1190(3) creates an exception to the

provisions in § 1123(b)(5) that prohibit the modification of a residential mortgage for a non-

purchase money mortgage when the loan proceeds were used primarily in the debtor’s small

business.370

The Moore Properties court concluded that, even if the bankruptcy power could not be

used to alter pre-existing contractual rights, the exclusion of paragraph (a)(8) and subsection (c)

from plan content requirements did not alter such rights, and the exception to the

antimodification provision in § 1123(b)(5) had no bearing in the case.371

The court next considered the changes that subchapter V makes in the requirements for

plan confirmation. When confirmation occurs under new § 1191(a) because all creditors accept

the plan, the court explained, the plan must meet all the existing requirements of § 1129(a),

except for paragraph (a)(15), which the court concluded was inapposite.372

New § 11191(b) changes the existing cramdown requirements of § 1129(b) to permit

confirmation without acceptance by any impaired class (as § 1129(a)(1) requires) if the plan does

369 See supra Section VII(A). 370 See supra Section VII(B). 371 In re Moore Properties of Person County, LLC, 2020 WL 995444, at *4 (Bankr. M.D.N.C. 2020). In a footnote, the court observed that new § 1190(2), which requires any debtor to contribute earnings as necessary for execution of the plan, rendered § 1123(a)(8) superfluous and that § 1123(c) is inapplicable because only the debtor can propose a plan. Id. at *4 n. 13. In another footnote, the court explained that the exception to the antimodification provision did not prohibit the availability of subchapter V in the case before it for two reasons. First, the exception could not apply because the debtor was an artificial entity with no principal residence. Second, even if it did apply, the question would be whether its application would constitute an impermissible taking. If it did, the court said, it would not apply the exception rather than declare the entirety of subchapter V inapplicable, citing United States v. Security Industrial Bank, 459 U.S. 70 (1982). Id. at *4, n. 14. 372 Id. at *5. The court noted that § 1129(a)(15) applies only in individual cases and that, even in individual cases confirmed without acceptance by all classes, the disposable income requirement of new § 1191(c) makes the (a)(15) requirement for commitment of disposable income superfluous.



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not discriminate unfairly and is fair and equitable to the dissenting class. Thus, except for

removal of the requirement of an accepting impaired class, subchapter V has the same standard

for confirmation as existing § 1129(b), but it alters the definition of “fair and equitable” for

classes of unsecured creditors and interests by substituting the disposable income requirement for

the absolute priority rule in §§ 1129(b)(2)(B) and (C), respectively.373

The court concluded, “The alteration of the definition of fair and equitable in an existing

case does not, standing alone, amount to an impermissible retroactive taking.”374

The court acknowledged that, if a case were pending for an extended period of time on

SBRA’s effective date, the case “could be sufficiently advanced that the substantive alterations

in the requirements for plan confirmation arise to a taking of vested property rights.”375 In the

case before it pending for only nine days before the effective date, however, the court reasoned

that it did not have to consider “the extent to which parties in interest may have so invested in

such a case or the court may have entered orders that created sufficient vested property interests

or post-petition expectations to prevent the application of subchapter V to those rights or make

its application offend ‘[e]lementary considerations of fairness’ such that the parties ‘have an

opportunity to know what the law is and to conform their conduct accordingly.’”376

Because the application of new subchapter V in the existing case did not violate the

Supreme Court’s rulings in Landgraf or Security Industrial Bank, the Moore Properties court

concluded, it had the obligation to apply the law in effect at the time of its decision.377

373 Id. See supra Section VIII(B)(3), (4). 374 Id. 375 Id. 376 Id., quoting Landgraf v. USI Film Products, 511 U.S. 244, 265 (1994), and citing In re Progressive Solutions, Inc., 615 B.R. 894 (Bankr. E.D. Cal. 2020). 377 Id.



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The bankruptcy court in In re Body Transit378 applied the Moore Properties analysis in a

small business case that had been pending for a month before SBRA’s effective date to reject the

secured creditor’s contention that the court should follow the presumption against retroactive

application of statutes. The court went on to consider the creditor’s argument that permitting the

debtor to proceed under subchapter V would infringe on its rights to obtain a chapter 11 trustee

who, in addition to taking control of the debtor’s assets and business, would also have the right

to file a plan.379

The court agreed with the Moore Properties court that, in ruling on a belated objection to

a subchapter V election, the court properly considers the extent to which parties have invested in

the case and whether the court has entered orders that create sufficient vested postpetition

expectations such that application of subchapter V would offend elementary considerations of

fairness.380 In addition, the court noted that a debtor’s ability to amend under Bankruptcy Rule

1009 is subject to objection if the amendment is made in bad faith or would unduly prejudice a

party.381 The court concluded that this Rule 1009 standard stated the same principle as the

Moore Properties formulation and is appropriate in evaluating an objection to a belated

subchapter V election.382

The Body Transit court ruled that whether a subchapter V trustee’s inability to file a plan

unduly prejudices creditors turns on the facts of each case and that the creditor had not met its

378 In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020). 379 The court had scheduled a hearing on the creditor’s motion for appointment of a trustee. The creditor asserted that debtor had failed to pay postpetition rent, has used its cash collateral without authority, and had failed to file reports and provide accurate financial information. Id. at 404. 380 Id. at 408. 381 Id. at 408-09, citing In re Cudeyo, 213 B.R. 910, 918 (Bankr. E.D. Pa. 1997); In re Brooks, 393 B.R. 80, 88 (Bankr. M.D. Pa. 2008); In re Romano, 378 B.R. 454, 467-68 (Bankr. E.D. Pa. 2007); and In re Bendi, Inc., 1994 WL 11704, at *2 (Bankr. W.D. Pa. 1994). 382 213 B,R. at 409.



106

burden of showing prejudice in the case before it.383 The court summarized, “[I]n the absence of

a particularized showing, and based on the present circumstances of this case, [the creditor] has

not met its burden of showing the level of prejudice required to override the Debtor’s right to

amend its petition under [Bankruptcy Rule] 1009.”384

In In re Ventura,385 an individual operating a bed and breakfast business in her residence

through a limited liability company filed a chapter 11 case four months before SBRA’s effective

date, the date before a scheduled foreclosure sale in a judicial foreclosure action. She had

discharged her personal liability on the mortgage in a chapter 7 bankruptcy case filed some six

years earlier.

The debtor proposed a plan to bifurcate the mortgage claim, notwithstanding the anti-

modification provision of § 1123(b)(5), on the theory that the property did not qualify as a

“residence” based on her use of it as a bed and breakfast. After the court had ruled that the

exception applied as long as the debtor used any party of the property for her residence,386 the

court scheduled a hearing on confirmation of the lender’s plan, which provided for the sale of the

property and a carve-out from the proceeds to pay all other classes in full, for February 26, 2020

– one week after SBRA’s effective date.387

The court adjourned the confirmation hearing to give the debtor the opportunity to

determine whether to amend her petition to elect application of subchapter V, which she did nine

days later. The lender objected to the amendment, asserting among other things that it had

383 Id. at 409. 384 Id. at 410. 385 In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020). 386 Other courts have accepted the debtor’s position. See generally W. HOMER DRAKE, JR., PAUL W. BONAPFEL, AND ADAM M. GOODMAN, supra note 66, § 5:42 (2d ed. 2019). 387 In re Ventura, 615 B.R. 1, 10 (Bankr. E.D.N.Y. 2020).



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vested rights at the time of the amendment in that its plan was ripe for confirmation.388 The

lender also asserted that the debtor could not modify the mortgage in a subchapter V case under

§ 1190(3) because the debtor used the mortgage proceeds to purchase the property, not to invest

in the limited liability company that operated the bed and breakfast.

The Ventura court first noted that subchapter V properly applies retroactively, agreeing

with the analysis in Moore Properties and Body Transit. In addition, the court concluded that the

revision of the definition of “small business debtor” does not appear to affect contractual or

vested property rights.389

The court then addressed whether the exception in new § 1190(3) to the anti-modification

provision of § 123(b)(5) could apply to the lender’s property rights that vested prior to SBRA’s

effective date. The court held that, because the debtor had discharged her personal liability in

388 Id. at 11. The debtor in the current case and in two previous bankruptcy cases had asserted that her debts were “primarily consumer debts.” Id. at 8. The debtor owed $ 1,678.664.80 on the mortgage, and the property was worth no more than $ 1,200,000. Id. at 9. Although the opinion does not reflect what other debts the debtor has, the context indicates that she had other unsecured debt that were relatively small. The lender asserted that, in these circumstances, the debtor did not qualify as a small business debtor, and that, even if she did, she should be judicially estopped from amending her petition to designate herself as a small business debtor based on her representations in the previous and current cases. The court acknowledged that a purchase money mortgage on a residence is generally a consumer debt, but ruled that “the fact that a debtor incurs mortgage debt to buy a residence does not automatically mean that the debt is a consumer debt.” Id. at 19. The test, the court explained, is whether a debt is incurred with an eye toward profit. “Courts must look at the substance of the transaction and the borrower’s purpose in obtaining the loan, rather than merely looking at the form of the transaction,” the court stated. Id., quoting In re Martin, 2013 WL 54233954, at *6 (S.D. Tex. 2013) and citing In re Booth, 858 F.2d 1051, 1055 (5th Cir. 1988) (debt incurred with an eye toward profit is a business debt, rather than a consumer debt). The court found that the property was the debtor’s residence but that the primary purpose of purchasing it was to own and operate a bed and breakfast. The court concluded that the mortgage was a business debt and that she qualified as a small business debtor. Id. at 20. The court declined to apply judicial estoppel to bar her amendment to designate herself as a small business debtor. The court ruled that her amendment to describe the mortgage as a business debt was not necessarily with her prior descriptions of the debt. She had referred to it as a bed and breakfast and described it on her Schedule A/B as a “B & B Inn” rather than as a “single-family” home. Moreover, the court had taken no action in any of the cases based on the description of the mortgage debt as a consumer debt, so it was not misled. Nor had the debtor taken unfair advantage of the lender by changing the description of her debt to fit within a statute that did not exist when she filed her cases. Id. at 20-22. 389 Id. at 16-17, citing Moore Properties of Person County, LLC, 2020 WL 995544, at *4, n. 10 (Bankr. M.D.N.C. 2020).



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her previous chapter 7 case, application of new § 1190(3) would not deprive the lender of its

right under state law to receive the value of the property.

Moreover, the court observed, even if the debt had not been discharged, new § 1190(3)

might not “raise significant Constitutional doubts to warrant only prospective application.”390

Invoking the principle of Security National Bank that bankruptcy law may abrogate contractual

rights, but not vested property rights, of mortgagees, the court stated that the contractual right of

a secured creditor to obtain repayment of the debt may be quite different in legal contemplation

from property rights in the collateral. Consequently, the court concluded, application of new

§ 1190(3) to modify the mortgage would not violate the lender’s Fifth Amendment rights.391 The

court in a later part of its opinion ruled that whether the mortgage qualified for bifurcation

involved factual issues that required an evidentiary hearing.392

The Ventura court found no prejudice to the lender based on the history of the case,

including the fact that the lender’s plan was before the court for confirmation. The court saw no

Constitutional issues and declined to treat its prior rulings as creating “vested” rights. The court

reasoned, “Until a plan is confirmed no property rights can be said to have vested in either [the

debtor or the lender].”393

To summarize, under the analysis of the cases permitting an election in a pending case, a

debtor in an existing chapter 11 case who qualifies as a small subchapter V debtor under SBRA’s

revised definition may amend the petition to elect application of subchapter V, and the case will

proceed under subchapter V unless the court orders otherwise. Courts will consider, on a case-

390 Id. at 17. 391 Id. at 17. 392 Id. at 24-25. Section VII(B) discusses this aspect of the court’s ruling in connection with consideration of new § 1190(3). 393 Id. at 18.



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by-case basis, whether the amendment should not be allowed because the amendment is in bad

faith, will cause undue prejudice to other parties, or offends elementary considerations of

fairness.

Courts may also consider the timing of the amendment. One court observed that the

doctrine of laches may apply to a belated amendment to a petition to elect application of

subchapter V.394 SUPP XV

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted

March 27, 2020, raised the debt limit for a debtor to be eligible to elect subchapter V to $ 7.5

million.395 Because the statute specifically states that the amendment applies only to cases

commenced on or after the date of its enactment, a debtor in an existing case with debts over the

debt limit in § 101(51D) but less than $ 7.5 million cannot amend its petition to elect application

of subchapter V. SUPP XV

SUPP XIV

394 In re Body Transit, Inc., 613 B.R. 400, 407, n. 11 (Bankr. E.D. Pa. 2020). 395 Coronavirus Aid, Relief, and Economic Security Act § 1113(a), Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020). See supra Section III(B).



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XIV. Supplement (November 2020)

I. Introduction

***Insert text at end of note 5 on page 2 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.



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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.

*************************

***Insert text on page 4

(For a summary of key features of a non-sub V case governed by the provisions for small

business cases, see footnote 5).

*************************


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

***Insert text at end of note 31 on page 13

The court in In re Parking Management, Inc., 620 B.R. 544 (Bankr. D. Md. 2020),

considered subchapter V’s eligibility debt limits, noting that courts had addressed similar



112

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).

*************************

***Insert new paragraph in text at end of footnote 33 on page 14; see new Section III(C) in SUPP XV that replaces this text In In re Thurmon, 625 B.R. 417 (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



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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.”

*************************


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., 622 B.R. 209 (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



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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.



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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.

************************* ***Insert text on page 15

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.



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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. 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. 620 B.R. at

685.

*************************

IV. The Subchapter V Trustee


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

future.

************************* E. Compensation of Subchapter V Trustee ***Insert text on page 27

In In re Tri-State Roofing, 2020 WL 7345741 (Bankr. D. Idaho 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.


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



117

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, 2020 WL

7345741 at *1, n. 1 (Bankr. D. Idaho 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



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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. SUPP XV

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. SUPP XV

*************************



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Note: Section VI(J) in SUPP XV updates text previously in this Section.

*************************

D. Time for Filing of Plan

Note: Section VI(J) in SUPP XV updates text previously in this Section.

*************************



120

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


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.

*************************

***Insert text at end of footnote 165 on page 48

Section VIII(D) discusses the operation and effect of the § 1111(b) election and how courts have

applied it in subchapter V cases.

*************************



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VII. Contents of Subchapter V Plan

C. Payment of Administrative Expenses Under the Plan


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.

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A. Consensual and Cramdown Confirmation in General


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 SUPP XIV, 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


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, 622 B.R.

236, 267-70 (Bankr. S.D. Tex. 2020), concluded that the plan, accepted by unsecured creditors,



123

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

***Insert new text on page 67

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.396 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.

396 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).



124

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,

621 B.R. 245 (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.



125

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


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, 622 B.R. 236 (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 269 (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



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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.

*************************

***Insert text at end of note 247 on page 70

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



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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.

*************************

***Insert new Sections VIII(D) and VIII(E) beginning on page 72

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



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discusses confirmation issues under § 1129(a) that do not involve subchapter V provisions but

that are critical to achieving confirmation.397

1. Classification of claims; unfair discrimination

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).398

The classification rule in § 1122(a) is that the claims or interests in a class must be “substantially

similar.” SUPP XV

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.” SUPP XV

397 For a review and application of requirements for confirmation in a subchapter V case, see In re Pearl Resources, LLC, 622 B.R. 236 (Bankr. S.D. Tex. 2020). SUPP XV 398 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.



129

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.399

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

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



130

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. SUPP XV 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., 2020 WL 7212713 (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



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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. SUPP XV

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



132

result as the “bifurcation” of the claim into a secured claim and an unsecured claim.400 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,401 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.

400 See generally see W. HOMER DRAKE, JR., PAUL W. BONAPFEL, & ADAM M. GOODMAN, CHAPTER 13 PRACTICE AND PROCEDURE § 5:5 (2020). 401 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).



133

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).402

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

402 See Section VIII(B)(2).



134

$ 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.403

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, $ 100,000.404

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.

403 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. 404 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].



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

Amortization

Period

(a)

Payment On $30,000

(b)

Interest Paid at 6%

(c)

Total of Payments

($ 30,000 + Interest

payments) (d)

Remaining Balance

($ 100,000 – (d))

(e)

Monthly Payment on Remaining

Balance ((e)/months)

(f)

Total Monthly Payment (b) + (f)

(g)

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.



136

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



137

inconsequential value. 2020 WL 5806507 at *4.405 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.406 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

405 The court cited McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 777 (D. Ariz. 2015). 406 The court cited In re Wandler, 77 B.R. 728, 733 (Bankr. N.D. 1987).



138

§ 1129(b)(2)(A)(i), discussed above.407 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.

407 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).



139

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.



140

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



141

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, 622 B.R. 236 (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



142

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 248-49.

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. 622 B.R. at

266-67.408 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 622 B.R.

at 270.

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, 622 B.R. at 271-72

(original footnotes omitted):409

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

408 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). 262 B.R at 266. The court concluded that the plan met these requirements and that it provided adequate remedies for default. Id. at 267-70. 409 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.



143

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.410 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.411 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.412 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.413

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. 622 B.R. at 272.

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

410 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). 411 The court cited In re May, 174 B.R. 832, 838–839 (Bankr. S.D. Ga. 1994). 412 The court cited In re SCC Kyle Partners, Ltd., 2013 WL 2903453 (Bankr. W.D. Tex.2013). 413 The court cited 4 COLLIER ON BANKRUPTCY ¶ 506.03 (16th ed. 2020).



144

circumstances, concluding that § 1123(a)(5)(E) permits a plan to modify any lien as long as it

complies with § 1129(b)(2)(A).414

*************************



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.415 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.416

*************************

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

In re Easter, 623 B.R. 294 (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.

414 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. 415 In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020). 416 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.



145

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, 623 B.R. 294 (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, 620 B.R. 243 (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. SUPP XV


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. SUPP XV

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



146

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.

SUPP XV



147

XV. Supplement (April 2021)

I. Introduction


The Covid-19 Bankruptcy Relief Extension Act of 2021417 amended the CARES Act to extend

the increased debt limit for an additional year.

***Insert footnote on page 5 at end of second full paragraph . . . of the subchapter V debtor.418

*************************


A. Debtor’s Election of Subchapter V

***Insert text on page 10 at end of second paragraph


the amended provision for an additional year.

***In first line of third paragraph on page 10, change “one year” to “two years”

417 Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021). 418 In In re Abundant Life Worship Center of Hinesville, GA., Inc., 2020 WL 7635272 (Bankr. S.D. Ga. 2020), a debtor whose earlier small business case had been dismissed seven months earlier filed a new chapter 11 case and amended the petition to elect subchapter V. The debtor contended that § 362(n)(1) did not apply because, upon its subchapter V election, it ceased being a debtor in a “small business case.” Id. at *8. The court ruled that the status of the debtor in the current case made no difference: “The statute plainly requires only that the prior case was a small business case, not the subsequent case.” Id. at * 18. The debtor also contended that the exception in paragraph (n)(2) of § 362 to the operation of paragraph (n)(1) applied. Section 362(n)(2)(B) provides that paragraph (n)(1) does not apply if the debtor establishes “that the filing of the petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the case then pending was filed” (emphasis added) and that “it is more likely than not that the court will confirm a feasible plan, but not a liquidating plan, within a reasonable time.” The court rejected this argument, concluding that the language, “the case then pending” refers to a separate case pending at the time of the filing of the second case. Because the debtor’s previous case was not a “case then pending,” the court ruled, the exception did not apply. Id. at *11-12. The court thus followed Palmer v. Bank of the West, 438 B.R. 167 (E.D. Wis. 2010). 419 Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021).



148

*************************

B. Eligibility for Subchapter V; Revised Definitions of “Small Business Debtor” and “Small Business Case ***Insert text on page 13


the increased debt limit for an additional year.

***Delete first three paragraphs and footnotes 33-35 on page 14 and replace with:

SBRA did not change the requirement in § 101(51D) that the debtor be “engaged in

commercial or business activities.” Revised paragraph (A), however, adds a requirement that 50

percent or more of the debtor’s debt must arise from the debtor’s commercial or business

activities. Section III(C) discusses eligibility issues that have arisen in individual cases as to

whether the debtor is “engaged in commercial or business activities,” and Section III(D)

considers what constitutes a debt arising from commercial or business activity.

SBRA makes three other definitional changes.

First, amended paragraph (A) excludes a debtor engaged in owning or operating real

property from being a small business debtor only if the debtor owns or operates single asset real

estate.421

Second, the requirement that no committee exist (or that it not provide effective

oversight) is eliminated. (Recall that SBRA provides that no committee will be appointed in the

case of a small business debtor unless the court orders otherwise.)

*************************

420 Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021). 421 Section 101(51B) defines “single asset real estate” as “real property constituting a single property of project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.” § 101(51B).



149

***Insert text on page 15 after sixth line

An individual who does not have regular income may be a chapter 13 debtor in a joint

case with the individual’s spouse who does have regular income,422 and an individual who is not

a family farmer or fisherman may be a chapter 12 debtor in a joint case with the individual’s

spouse who is engaged in a farming operation or a commercial fishing operation.423

Subchapter V has no such provision. Although an affiliate of an eligible subchapter V

debtor may be a subchapter V debtor even if the affiliate is not otherwise eligible, a spouse is not

an affiliate as defined in § 101(2).424

************************* ***Insert new Sections III(C) and (D) on page 15 before beginning of Part IV; New Section III(C) replaces text that Supp XIV on page 112 added to text at end of footnote on page 14.

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

C. Debtor Must Be “Engaged in Commercial or Business Activities”

An individual may want to file a subchapter V case to deal with personal liabilities

arising out of guarantees or other obligations related to a failed business in a subchapter V case.

Courts have dealt with objections to an individual’s election of subchapter V on the ground that

the debtor is not “engaged in commercial or business activities” when the business giving rise to

the debts is no longer operating.

In In re Wright, 2020 WL 2193240 (Bankr. D. S.C. 2020), the court held that nothing in

the definition limits it to a debtor currently engaged in business and ruled that an individual who

422 11 U.S.C. § 109(e). 423 11 U.S.C. § 109(f) (only a family farmer or family fisherman may be a chapter 12 debtor); 11 U.S.C. § 101(18)(A) (definition of family farmer includes spouse); 11 U.S.C. § 101(19A) (definition of family fisherman includes spouse). 424 In re Johnson, 2021 WL 825156 (Bankr. N.D. Tex. 2021).



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had guaranteed debts of two limited liability companies that were no longer in business could

proceed in a subchapter V case. Accord, In re Bonert, 619 B.R. 248, 255 (Bankr. C.D. Cal.

2020); see In re Blanchard, 2020 WL 4032411 (Bankr. E.D. La., 2020).

Other courts have concluded that a debtor is not eligible for subchapter V in similar

circumstances.

In In re Thurmon, 625 B.R. 417 (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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In re Johnson, 2021 WL 825156 (N.D. Tex. 2021), similarly held that an individual with

business debts arising from the operation of several companies no longer in business was not

“engaged in commercial or business activities” and, therefore, did not qualify for subchapter V.

In Johnson, the owner and operator of several limited liability companies (the debtor) and

the debtor’s spouse filed a joint chapter 7 petition, before enactment of subchapter V, to deal

with their personal liabilities arising out of the business operations.

At the time of filing, the debtor’s companies were defunct, but the debtor, as an

employee, managed the business of a limited liability company owned by the debtor’s mother.

The mother had acquired her interest by inheritance upon the death of her husband, who had

originally organized and owned it. The debtor and spouse had no ownership interest in the

mother’s company.

After the U.S. Trustee filed a complaint objecting to their discharge, and after subchapter

V’s effective date, the debtor and the spouse filed a motion to convert their case to chapter 11,

conditioned on the court’s authorization for the case to proceed under subchapter V.

The U.S. Trustee and a number of creditors objected, asserting that a debtor must be

“actively carrying out” commercial or business activities at the time of the filing of the petition

to be “engaged in” commercial or business activities for purposes of subchapter V eligibility.

The court rejected the “actively carrying out” test as too narrow because it would

preclude subchapter V relief for debtors with businesses temporarily closed for unexpected non-

financial reasons such as weather, natural disaster, regulatory requirements, or a pandemic. But

the court concluded that the inquiry is “inherently contemporary in focus instead of retrospective,

requiring the assessment of the debtor’s current state of affairs as of the filing of the bankruptcy

petition.” Johnson, 2021 WL 825156 at *6.



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Because nothing indicated that the debtor’s companies were only temporarily out of

business or that the debtor intended to cause any of them to resume operations, the court

concluded that the debtor’s prior ownership and management of them did not qualify the debtor

for subchapter V. Id. at *7.

The Johnson court advanced three reasons for this conclusion.

First, applying the dictionary definition of “engaged” as “involved in activity: occupied,

busy” to the statutory language, the court determined that a person “engaged in business or

commercial activities” is a person “occupied with or busy in commercial or business activities –

not a person who at some point in the past had such involvement.” Id. at * 6.

Second, the Johnson court noted that the purpose of subchapter V is to facilitate

expedience and minimize cost for the reorganization of a small business. Such benefits are

essential to the successful the reorganization of a small business that is “currently occupied

with/busy in commercial or business activities” but not to a small business no longer so

occupied. Id. at *6.

Finally, the court relied on interpretations of “engaged in” in eligibility provisions

applicable to railroads under subchapter IV of chapter 11 and to chapter 12 debtors that apply a

contemporary analysis to eligibility. Id. at *7. Thus, a former railroad did not qualify for

subchapter IV,425 and a family farmer must be currently engaged in a farming operation or intend

to continue to engage in a farming operation at the time of the filing of the petition. 426

The Johnson court also rejected the debtor’s contention that the debtor was engaged in

“commercial or business activities” because of his management of the mother’s company.

425 Hileman v. Pittsburgh & Lake Erie Props., Inc. (In re Pittsburgh & Lake Erie Props., Inc.), 290 F.3d 516, 519 (3rd Cir. 2002). 426 Watford v. Federal Land Bank of Columbia (In re Watford), 898 F.2d 1525, 1528 (11th Cir. 1990). See also In re McLawchlin, 511 B.R. 422, 427-28 (Bankr. S.D. Tex. 2014).



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Applying dictionary definitions of “commerce” and “business” to the eligibility statute’s

language, the court concluded that a person engaged in “commercial or business activities” is “a

person engaged in the exchange or buying and selling of economic goods or services for profit.”

Id. at *8.

Neither the debtor nor the spouse was engaged in the exchange or buying and selling of

goods or services for their own profit. Because they had no ownership in the mother’s company,

the debtor’s management of the company could not be for their indirect profit. Accordingly, the

debtor’s management of the mother’s company as an employee and officer did not meet the

requirement that the debtor be engaged in commercial or business activities. Id. at *8.

The court in In re Ikalowych, 2021 Bankr. LEXIS 997 (Bankr. D. Colo. 2021), agreed

with the rulings in Thurmon and Johnson that whether a debtor is engaged in commercial or

business activities must be determined as of the petition date. Id. at *32-38.427 The Ikalowych

court, however, held that an individual was eligible for subchapter V when the limited liability

company that the debtor managed and in which the debtor held an indirect 30 percent ownership

interest had surrendered its assets to the secured lender immediately before filing, but the

individual was still engaged in wind down work relating to the company. Id. at *42-46.

Based on the text of the statute, dictionary definitions of “commercial,

“business”, and “activities”, and phrases analogous to “commercial or business activities” in

other federal statutes, id. at *22-31, the Ikalowych court reasoned that the phrase “commercial or

business activities” is “exceptionally broad.” Id. at *22.

427 The Ikalowych court qualified its ruling, id. at *38:

[F]ocusing only on the exact nanosecond the Petition was filed is a bit too narrow. For example, perhaps the Debtor did no work on the Petition Date itself. So, in considering whether the Debtor was engaged in “commercial or business activity” as of the Petition Date, the Court deems relevant the circumstances immediately preceding and subsequent to the Petition Date as well as the Debtor’s conduct and intent.



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Thus, the Ikalowych court interpreted “commercial or business activities” to mean, id. at *22:

[A]ny private sector actions related to buying, selling, financing, or using goods,

property, or services, undertaken for the purpose of earning income (including by

establishing, managing, or operating an incorporated or unincorporated entity to do so).

The Ikalowych court acknowledged that the facts in Thurmon and Johnson were similar

to, but not the same as, the facts in the case before it. Id. at * 43, * 46. The distinguishing factor

was the wind down work, which included interactions with the lender and a landlord, cleanup

and turnover of leased premises, assisting with payroll, dealing with tax accountants and tax

issues, and organization and storage of business records. Id. at *42. The court reasoned, “Each

category of Wind Down Work itself constitutes ‘commercial or business activities’ in the broad

sense.” Id. at *46.

The Ikalowych court also considered whether the debtor was “engaged in commercial or

business activities” based on two other activities.

First, the debtor was the sole owner of a limited liability company that he formed and

managed as a mechanism to obtain income through investments and the provision services. This

limited liability company owned 30 percent of the operating company just discussed and also

received income from the debtor’s services as a board member of a cemetery company and as a

consultant for other companies. The court concluded, “Managing or directing the operations of a

limited liability company is a ‘commercial or business activity.’” Id. at *40.

Second, the court considered the debtor’s employment by an insurance brokerage

company (in which the debtor had no ownership interest) to sell its commercial insurance

projects, which had begun shortly before filing, qualified as “commercial or business activities.”



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Under the broad scope of the definition, the court ruled, id. at *47 (citations to dictionary

definitions omitted):

[T]he Debtor’s work as a wage earner with [the insurance company] constitutes

‘commercial or business activities. After all, his role is selling a product in the private

marketplace in order to make money for himself and his employer. That is what

“commercial activity” and “business activity” means.

The court realized that its conclusion “suggests that virtually all private sector wage

earners may be considered as ‘engaged in commercial or business activities.’ So be it.” Id. at

*47. But the court continued, this does not mean that every private sector wage earner is eligible

for subchapter V because most such individuals will rarely meet the requirement that 50 percent

of the debt arise from such activity. Id. at *48.

Having determined that the debtor was engaged in commercial or business activities, the

court turned to the question of whether more than 50 percent of the debts arose from those

activities. None of the debts arose from the debtor’s work as a salaried employee, so those

activities did not make the debtor eligible for subchapter V.

The debtor was liable on personal guarantees of certain debts of the operating company

that amounted to 86 percent of the total debt. To “arise from” the debtor’s commercial or

business activities, the court reasoned, debts “must be directly and substantially connected to the

‘commercial or business activities’ of the debtor.” Id. at *51.428 The court ruled that these debts

arose from the debtor’s commercial or business activities with both the operating company and

the limited liability company that owned 30 percent of it. Id. at *52.

428 The court quoted In re Woods, 743 F.3d 689, 698 (10th Cir. 2014), which in the chapter 12 context stated, “a debt ‘for’ a principal residence ‘arises out of’ a farming operation only if the debt is directly and substantially connected to the farming operation.”



156

The issue of whether a debtor is “engaged in commercial or business activities” may also

arise in a non-individual case. In In re Two Wheels Properties, LLC, 2020 WL 7786927 (Bankr.

S.D. Tex. 2020),429 a corporation’s charter had been forfeited under state law for tax reasons,

state law did not permit its reinstatement in that circumstance, and state law permitted only the

liquidation of its assets. The court ruled that, because the corporation could not be “engaged in

commercial or business activities” under state law, it was ineligible to be a sub V debtor.

D. What Debts Arise From Debtor’s Commercial or Business Activities

Eligibility for subchapter V requires that not less than 50 percent of the debtor’s debts

must arise from the commercial or business activities of the debtor.430 Chapter 12 similarly

conditions eligibility on a specified percentage of debt arising from a farming or fishing

operation.431 The court in In re Ikalowych, 2021 Bankr. LEXIS 997 at *51 (Bankr. D. Colo.

2021), applying chapter 12 case law, concluded that qualifying business debts “must be directly

and substantially connected to the ‘commercial or business activities’ of the debtor.” Id. at

*51.432

429 Cf. In re BK Technologies, Inc., 2021 WL 1230123 (Bankr. N.D. W.Va. 2021) (Dismissing sub V case based on bad faith because, among other things, the debtor had liquidated its assets prior to filing the petition and, therefore, was not engaged in business). 430 The requirement is in paragraph (A) of New § 1182(1), which governs subchapter V eligibility under the CARES Act, which increased the debt limit for subchapter V eligibility. When the increased debt limit sunsets on March 27, 2022, § 101(51D) will govern sub V eligibility. See Section III(B). Paragraph (A) is the same in both statutes. See Section III(B). 431 For a family farmer, 50 percent of the debts must arise from a farming operation. § 101(18)(A). In addition, 50 percent of the debtor’s income must be received from the farming operation. Id. The same percentages apply in the definition of a family fisherman who is an individual. § 101(19A)(A). For a family fisherman that is a corporation or partnership, the debt relating to the fishing operation must be 80 percent, and more than 80 percent of the value of its assets must be related to the fishing operation. § 101(19A)(B). 432 The court quoted In re Woods, 743 F.3d 689, 698 (10th Cir. 2014), which in the chapter 12 context stated, “a debt ‘for’ a principal residence ‘arises out of’ a farming operation only if the debt is directly and substantially connected to the farming operation.”



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In re Sullivan, 2021 WL 1250805 (Bankr. D. Colo. 2021), examined the question of how

to determine whether debts “arose from the commercial or business activities of the debtor” in

detail.433

The debt in question was the debtor’s obligation imposed in a divorce proceeding to pay

the former spouse an “equalization payment” for the former spouse’s share of the value of the

debtor’s business that the debtor retained. Shortly after the filing of the case, the COVID-19

pandemic hit and resulted in the liquidation of the business.

Proper characterization of the equalization payment was critical because, if it were not a

business debt, the debtor’s business debts would be less than 50 percent of the total, and the

debtor would be ineligible to be a sub V debtor. Because the court concluded that the

equalization debt did not arise from a business or commercial purpose, the court ruled that the

debtor was ineligible and denied confirmation of the sub V plan. Id. at*7.434

The Sullivan court began its analysis by noting that, although the Bankruptcy Code does

not define when a debt arises from “commercial or business activities,” it defines “consumer

debts” in § 101(18) as “debts incurred by an individual primarily for a personal, family, or

household purpose.” In determining whether a debt is for a “personal, family, or household

purpose,” the court continued, courts have focused on the debtor’s purpose in incurring the

433 The definition in effect under the CARES Act is in § 1182(a)(1). See Section III(C). The Sullivan court discussed the definition in § 101(51D)(A), which has the same language, because the case was filed before enactment of the CARES Act, and the CARES Act applies only to cases filed after its enactment. 434 The situation in Sullivan suggests two questions. The first is whether the former spouse or any other party in interest timely objected to the debtor’s sub V election as Interim Bankruptcy Rule 1020(b) requires. The court did not address whether a court may consider an out-of-time objection to the subchapter V election or whether the court may raise the issue sua sponte after the time for an objection has expired. A second, more practical, question is what benefit the debtor expected to gain from a successful subchapter V case. Any debt arising from a separation agreement or divorce decree that is not a domestic support obligation is excepted from discharge under § 523(a)(15), and the sub V discharge of an individual is subject to all exceptions in § 523(a). See Part IX. A plan could not have eliminated the debtor’s liability for the equalization payment.



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debt,435 reasoning that a debt incurred with a “profit motive” or an “eye toward profit” is not a

consumer debt. Id. at 3.436 The court noted rulings that student loans,437 alimony obligations,438

and divorce-related debts are consumer debts.439

The debtor argued that the equalization debt arose from business or commercial activities

because it represented a transfer of the value of the business, akin to one partner’s buy-out of

another’s interest in a business. The court acknowledged, “[I]t is possible to characterize this

debt as a business debt and it is possible to treat many otherwise personal or family debts as

debts incurred with an eye toward profit,” but noted that the profit motive inquiry raised

difficulties: “Probably all courts would agree that the home mortgage debt is a consumer debt

and yet the family home is the asset that most families view as their greatest investment – the one

that they purchase with an eye toward appreciation in value.” Sullivan, 2021 WL at 1250805 at

*3.

Because the legislative history of the definition of “consumer debt” in § 101(8) indicated

that it was adapted from consumer protection laws and because the § 101(8) definition mirrors

the definition of consumer debt in the Truth in Lending Act (“TILA”), the court sought further

guidance from cases interpreting the TILA. Id. at *3.

Cases under the TILA, the court explained, focus on the purpose of the loan transaction.

The Sullivan court quoted a five-factor test that another court employed in Sundby v. Marquee

435 The court cited In re Garcia, 606 B.R. 9, 106 (Bankr. D. N.M. 2019). 436 The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 806 (10th Cir. 1999) and In re Booth, 858 F.2d 1051, 1055 (5th Cir. 1988). 437 The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 807 (10th Cir. 1999). 438 The court cited Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 769, 807 (10th Cir. 1999). 439 The court cited Kestell v. Kestell (In re Kestell), 99 F.3d 146, 149 (4th Cir. 1996); In re Garcia, 606 B.R. 98, 105 (Bankr. D. N. M. 2019), and In re Traub, 140 B.R. 286 (Bankr. D. N.M. 1992).



159

Funding Group, Inc., 2020 WL 5535357 at * 8-9 (S.D. Ca. 2000) (internal quotations and

citations omitted):

1. The relationship of the borrower’s primary occupation to the acquisition. The

more closely related, the more likely it is to be a business purpose.

2. The degree to which the borrower will personally manage the acquisition. The

more personal involvement there is, the more likely it is to be business purpose.

3. The ratio of income from the acquisition to the total income of the borrower.

The higher the ratio, the more likely it is to be business purpose.

4. The size of the transaction. The larger the transaction, the more likely it is to

be business purpose.

5. The borrower’s statement of purpose for the loan.

The Sullivan court concluded that the first four of these factors favored characterization

of the equalization debt as a business debt. But the court questioned whether it had a business

purpose. “While the debtor characterizes the equalization payment as payment for the [debtor’s

business], the separation agreement does not describe it in that fashion. Rather, it states that it

was a payment ‘to equalize the division of marital property . . . .’, and [the business] was only

one asset of their marital property.” Sullivan, 2021 WL 1250805 at *4.

The Sullivan court next looked to federal tax law as a source for distinguishing between

“business” and “personal” payments in that it generally permits a deduction for “ordinary and

necessary business expenses,” but not for most personal expenses. Id. at *4.

The court analyzed the Supreme Court’s decision in United States v. Gilmore, 372 U.S.

39 (1963), which held that a taxpayer could not deduct legal fees incurred in connection with the

division of business interests in a divorce proceeding as a business expense. Rejecting the



160

taxpayer’s argument that the legal fees were a business expense because they were incurred to

protect interests in various corporations, the Supreme Court held that the focus should be on “the

original character of the claim with respect to which an expense was incurred, rather than its

potential consequences on the fortunes of the taxpayer.” 372 U.S. at 49. Because the spouse’s

claims stemmed entirely from the marital relationship, and not from income-producing activity,

the Court concluded that the legal fees were not business expenses and denied the deduction. Id.

at 52. The Sullivan court noted that the Supreme Court stated, “[T]he marriage relationship can

hardly be deemed an income-producing activity.” Sullivan, 2021 WL 1250805 at *4, quoting

Gilmore, 372 U.S. at 52 n. 22.

After analyzing marriage dissolution under state law as an equitable proceeding including

the division of marital property to each spouse of what equitably belongs to each spouse, the

Sullivan court concluded, 2021 WL 1250805 at *4 (citations omitted):

[T]he equalization payment debt is rooted and grounded in the equitable

termination of their marriage. The equitable distribution of their marital property was not

a business or commercial transaction – it did not stem from a profit motive. Instead, it

was a method of ensuring that each spouse received their fair share of marital property.

This is inherently a personal and family-related purpose. The fact that the parties’ marital

property included a business does not alter the underlying purpose of the property

division.

************************* ***Footnote 35 on page 14: New Section III(D) in SUPP XV covers this point.

*************************



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IV. The Subchapter V Trustee E. Compensation of Subchapter V Trustee

2. Compensation of non-standing subchapter V trustee

***Insert text on page 118 in SUPP XIV at end of first full paragraph

In In re Hunts Point Enterprises, LLC, 2021 Bankr. LEXIS 771 (Bankr. E.D.N.Y. 2021),

a debtor requested dismissal of its case after a creditor filed a motion to disallow its sub V

election or, alternatively, to dismiss it. Because the case revolved around a two-party dispute

and the debtor’s request for dismissal demonstrated that it no longer wanted to file a plan of

reorganization, the court concluded that cause existed for dismissal of the case, conditioned on

the debtor’s payment of the sub V trustee’s compensation.

***Insert text on page 118 in SUPP XIV at end of third full paragraph

Judges in the Middle District of Florida have included a provision for interim trustee

compensation in subchapter V cases in an “Order Prescribing Procedures in Chapter 11

Subchapter V Case, Setting Deadline for Filing Plan, and Setting Status Conference.”440 The

orders require the debtor to pay $ 1,000 as interim compensation to the sub V trustee within 30

days of the petition date and monthly thereafter. The amount is subject to adjustment upon

request of any interested party and the court’s approval of the trustee’s compensation under

§ 330. The debtor must include the interim compensation in any cash collateral budget.

*************************

440 E.g., In re Nostalgia Family Medicine P.A., Case No. 6:21-bk-00274-LVV, Doc. No. 22, at ¶ 3 (Mar. 26, 2021).



162

F. Trustee’s Employment of Attorneys and Other Professionals

***Delete last paragraph on page 31 and add text

In In re McConnell, 2021 WL 203331 at * 16-18 (Bankr. N.D. Ga. 2021), however, the

court determined that 28 U.S.C. § 1654 did not apply to require a nonlawyer panel trustee in a

chapter 7 case to retain a lawyer to file an application for the retention of a real estate broker.

The McConnell court reasoned, “The nature of proceedings in bankruptcy courts for the

administration of estate assets in Chapter 7 cases suggests that the rule of 28 U.S.C. § 1654

applicable in a federal lawsuit between discrete parties should not be extended to apply to a

chapter 7 trustee’s filing of routine papers that the Bankruptcy Code and Bankruptcy Rules

require in connection with the sale of property.” Id. at 17. The court observed that, without

discussing § 1654, bankruptcy courts have recognized that a trustee may file papers in a

bankruptcy court without a lawyer in the course of performing the trustee’s duties, such as the

filing of applications to retain professionals441 and routine objections to claims.442 Id. at 18 &

nn. 59-60.

The nature of reorganization proceedings in bankruptcy courts and the facilitative,

advisory, and monitoring role that subchapter V specifically contemplates for the trustee suggest

441 The court cited: In re Garcia, 335 B.R. 717, 726 (B.A.P. 9th Cir. 2005); In re Jay, 2018 WL 2176082 at *12 (Bankr. D. Utah 2018), aff'd 2019 WL 4645385 (D. Utah 2019) (“[I]n simple cases, trustees should prepare applications to employ realtors or accountants as they are seldom contested and routinely granted.”); In re McLean Wine Co., Inc., 463 B.R. 838. 848-49 (Bankr. E.D. Mich. 2011) (application to employ other professionals is trustee work); In re Peterson, 566 B.R. 179, 195, 207-08 (Bankr. M.D. Tenn. 2017) (application for employment of professionals, including accountant and special counsel, is trustee duty). Contra, e.g., In re Yovtcheva, 590 B.R. 307 (Bankr. E.D. Pa. 2018); In re Hambrick, 2012 WL 10739279, at * 5 (Bankr. N.D. Ga. 2012); In re Holub, 129 B.R. 293, 296 (Bankr. M.D. Fla. 1991). 442 The court cited: In re King, 546 B.R. 682, 699 (Bankr. S.D. Tex. 2016) (Routine objection to claim that is unopposed and does not require legal analysis or a brief falls within trustee's duty); In re Lexington Hearth Lamp and Leisure, LLC, 402 B.R. 135 (Bankr. M.D.N.C. 2009) (Although the court concluded that compensation is allowed for services that require a law license, id. at 142, the court ruled that the filing of objections to claims that require no legal analysis is a trustee duty. Id. at 144-45.) In re Perkins, 244 B.R. 835 (Bankr. D. Montana 2000); In re Holub, 129 B.R. 293, 296 (Bankr. M.D. Fla. 1991). Contra, e.g., In re Howard Love Pipeline Supply Co., 253 B.R. 790 (Bankr. E.D. Tex. 2000) (“[T]he express duty of the trustee to object to improper claims does not authorize a non-attorney trustee to engage in the unauthorized practice of law.”).



163

that 28 U.S.C. § 1654 likewise should not apply to a nonlawyer subchapter V trustee unless the

trustee is a party to a discrete controversy in an adversary proceeding or contested matter.

***Insert in footnote 91 on page 31:

J. J. Rissell, Allentown, P.A. Trust v. Marchelos, 976 F. 3d 1233 (11th Cir. 2020) (trust);

*************************

V. Debtor as Debtor in Possession and Duties of Debtor

C. Removal of Debtor in Possession


Although § 1185(a) does not list the debtor’s bad faith as a ground for removal of the debtor

from possession, the specified grounds are not exhaustive, and a court may consider it.443


Even though a sub V trustee cannot file a plan, the court in In re Young, 2021 WL

1191621 at *7 (Bankr. D. N.M. 2021), removed the debtor from possession due to gross

mismanagement, bad faith, and dishonesty instead of converting the case on those grounds. The

court reasoned that, because the sub V trustee was familiar with the case and might be able to

liquidate the estate’s assets and make distributions to creditors for a lower fee than a chapter 7

trustee would charge, removal of the debtor in possession was a better option than conversion.

Id. at 7. The court reserved for a later day the possibility that eventual conversion to chapter 7

might be necessary.444

443 In re Young, 2021 WL 1191621 at * 6-7 (Bankr. D. N.M. 2021). 444 Another potential option after a trustee’s liquidation of a sub V estate’s assets is a so-called “structured dismissal” that would involve payment of allowed administrative expenses and distributions on allowed claims, followed by dismissal of the case. See generally, Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (2017). The Supreme Court observed in Jevic Holding Corp., id. at 979:



164

*************************


B. Elimination of Requirement of Disclosure Statement

***Delete last two sentences of second full paragraph on page 42 and replace with:

Subchapter V does not require that the plan contain “adequate information,” and it does

not provide for prior judicial review of the required information before solicitation of

acceptances of the plan. Nevertheless, confirmation of a sub V plan requires that a plan comply

with the applicable provisions of § 1129(a),445 among which are the requirements that a plan446

and its proponent447 comply with applicable provisions of chapter 11 and that the plan be

proposed in good faith.448 These provisions provide the basis for a court to consider whether a

debtor’s plan contains the information that New § 1181(a) requires. Material or intentional

errors or omissions could provide a basis for denial of confirmation.

[T]he [Bankruptcy] Code permits the bankruptcy court, “for cause,” to alter a Chapter 11 dismissal's ordinary restorative consequences. § 349(b). A dismissal that does so (or which has other special conditions attached) is often referred to as a “structured dismissal,” defined by the American Bankruptcy Institute as a

“hybrid dismissal and confirmation order ... that ... typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case.” American Bankruptcy Institute Commission To Study the Reform of Chapter 11, 2012–2014 Final Report and Recommendations 270 (2014).

Although the Code does not expressly mention structured dismissals, they “appear to be increasingly common.” Ibid., n. 973.

445 New § 1191(a), (b). See Section VIII(A). 446 § 1129(a)(1). 447 § 1129(a)(2). 448 § 1129(a)(3).



165


***Add as text of footnote 142 on page 42

Section VI(J) discusses the date of the order for relief in a subchapter V case converted from

another chapter.

***Insert text page 43 after footnote 143

Section VI(J) discusses extension of the deadline.

***Insert text on page 43 after footnote 145

Subchapter V does not specify any consequences if the status conference does not timely

occur or for the debtor’s failure to file a report. Courts have noted that the deadline for the status

conference is a deadline for the court, not the debtor, and that a debtor is not in default until the

status conference has been set and the debtor fails to file the report at least 14 days before.449

A debtor’s unexcused failure to file the report timely or to attend the status conference

could be cause for dismissal or conversion of the case under § 1112(b) or denial of confirmation.

“Cause” for dismissal includes unexcused failure to satisfy timely any filing or reporting

requirement under the Bankruptcy Code, § 1112(b)(4)(F), and the failure to comply with an

order of the court, § 1112(b)(4)(E). Confirmation of a subchapter V plan requires compliance by

the proponent with applicable provisions of the Bankruptcy Code. § 1129(a)(2). Section VI(D)

considers these issues further in the context of a debtor’s failure to file a plan within the 90-day

deadline of New § 1189(a).

*************************

449 In re Tibbens, 2021 WL 1087260 at * 8 (Bankr. M.D. N.C. 2021); In re Wetter, 620 B.R. 243, 252 (Bankr. W.D. Va. 2020).



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D. Time for Filing of Plan


Section VI(J) discusses extension of the deadline.

***Add text to footnote 150 on page 45

Section VI(J) discusses the date of the order for relief in a subchapter V case converted from

another chapter.

************************* ***Delete last paragraph of Section VI(D) on page 46 and add text

Subchapter V does not provide any consequences when a debtor does not timely file a

plan. Under other provisions of chapter 11, however, a debtor’s failure to comply with a plan

deadline subjects the debtor to the risks of dismissal of the case, its conversion to chapter 7, or

denial of confirmation of a plan.

As in all chapter 11 cases, a debtor’s failure to file a plan within the time the Bankruptcy

Code requires (or the court orders) is cause for conversion or dismissal under § 1112(b)(4)(J).

When cause exists, § 1112(b)(1) states that the court, on request of a party in interest, shall

dismiss or convert a chapter 11 case for cause, whichever is in the best interests of creditors and

the estate, unless the court determines that the appointment of a trustee or examiner under § 1104

is in the best interests of the estate. Because § 1104 does not apply in a subchapter V case,450

§ 1112(b)(1) requires the court to convert or dismiss the case if the debtor does not timely file a

plan upon request of the sub V trustee, a creditor, or other party in interest.

Section 1112(b)(2), however, provides an exception to this requirement. It prohibits

dismissal or conversion if: (1) the court “finds and specifically identifies unusual circumstances”

450 New § 1181(a).



167

establishing that conversion or dismissal is not in the best interests of creditors; and (2) the

debtor (or other party in interest) satisfies two other requirements, unless the ground for

conversion or dismissal is substantial or continuing loss to or diminution of the estate and the

absence of a reasonable likelihood of rehabilitation.

The first requirement for application of the exception is a reasonable likelihood that a

plan will be confirmed within a reasonable time. § 1112(b)(4)(A). The second is that a

reasonable justification for the act or omission constituting cause exist and that it be fixed within

a reasonable time fixed by the court. § 1112(b)(4)(B).

Under these provisions, a debtor can overcome a motion for dismissal or conversion

based on failure to timely file a plan by establishing a reasonable justification for missing the

deadline, an ability to cure the omission (preferably by pointing to a plan already filed or a well-

founded motion for an extension of the time to do so), and the likelihood of confirmation of a

plan within a reasonable time.

Confirmation of a subchapter plan requires compliance with §§ 1129(a)(1) and (a)(2).451

Paragraph (a)(1) requires that the plan comply with the applicable provisions of the Bankruptcy

Code, and paragraph (a)(2) requires that the proponent of the plan comply with the applicable

provisions of the Bankruptcy Code.

In In re Seven Stars on the Hudson Corp., 618 B.R. 333, 343-44 (Bankr. S.D. Fla. 2020),

the court concluded that the failure to comply with the § 1189(a) deadline for the filing of a plan

would preclude confirmation of a plan under §§ 1129(a)(1) and (2). The debtor had elected

application of subchapter V in a case filed before subchapter V’s effective date, and the plan

451 New § 1191(a) (confirmation of a consensual plan); New § 1191(b) (cramdown confirmation). See Section VIII(A).



168

deadline had already expired. After the court refused to extend the deadline based on the

determination that the election to proceed under subchapter V in these circumstances was within

the debtor’s control, the court dismissed the case because the debtor could not possibly confirm a

plan in view of the default.452

The court in In re Tibbens, 2021 WL 1087260 at *6 (Bankr. M.D.N.C. 2021), reached a

contrary conclusion: “Although the failure to timely file a plan constitutes cause for dismissal

under § 1112(b)(4)(J), nothing in the Bankruptcy Code suggests that this failure alone is fatal to

confirmation.”

The Tibbens court noted that the provisions of § 1112(b)(2) that prohibit dismissal or

conversion under the circumstances just discussed apply, among other things, when the debtor

can establish the likelihood of confirmation. Because Congress permitted a debtor to avoid

conversion or dismissal by establishing an ability to confirm a plan, the court reasoned, a failure

to comply with plan-filing deadlines does not prevent confirmation. Tibbens, 2021 WL 1087260

at *6. The court also concluded that legislative history and cases interpreting §§ 1129(a)(1) and

(2) focused on contents of the plan and compliance with disclosure and solicitation requirements,

not matters such as failure to comply with a deadline. Id. at 7.453

The Tibbens court permitted a debtor to convert a chapter 13 case, filed after enactment

of subchapter V but before its effective date, to chapter 11 after the plan-filing deadline had

expired but declined to extend the deadline because delays the debtor caused in the chapter 13

452 Other courts have concluded that the court may extend the deadline for filing a plan (and for the status conference) in these circumstances. See Part XIII. 453 The Tibbens court cited Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988) (§ 1129(a)(1)); In re Multiut Corp., 449 B.R. 323 (Bankr. N.D. Ill. 2011) (§ 1129(a)(1)); In re Cypresswood Land Partners, I, 409 B.R. 396, 423-24 (Bankr. S.D. Tex. 2009) (§ 1129(a)(2)) (“Bankruptcy courts limit their inquiry under § 1129(a)(2) to ensuring that the plan proponent has complied with the solicitation and disclosure requirements of § 1125.”); and 7 COLLIER ON BANKRUPTCY ¶ 1129.02[1] (§ 1129(a)(1)) (“[T]he courts have recognized that the complexity of plan confirmation permits notions of ‘harmless error,’ so that technical noncompliance with a provision that does not significantly affect creditor rights will not block confirmation.”);



169

case and failures to comply with directives of the court were within the debtor’s control and were

circumstances for which the debtor justly should be held accountable. The issue of dismissal or

conversion of the case was not before the court, and the court did not address it.

************************* I. Bar Date for Filing of Proof of Claim

***Add footnote on page 50 at end of third full paragraph and new Section VI(J)

. . . the principal amount.454

J. Extension of deadlines for status conference and debtor report and for filing of plan New § 1188 requires a status conference within 60 days after entry of the order for relief

and the filing by the debtor of a report that details the efforts the debtor has undertaken and will

undertake to attain a consensual plan of reorganization at least 14 days before the status

conference. New section 1189(b) requires the debtor to file a plan within 90 days after the order

for relief.

Both provisions state that the times run from the date of the order for relief “under this

chapter.” Under this language, if a debtor in a chapter 7 or 13 case seeks to convert the case to

chapter 11 and elect sub V status, it is arguable that the time periods begin on the date of

conversion.

Section 348(a), however, provides that conversion of a case from one chapter to another

“does not effect a change in the date of the . . . order for relief.” Courts have therefore ruled that

the deadlines are measured from the date of the order for relief in the original case.455 Part XIII

454 But see In re Baker, 625 B.R. 27, 37 (Bankr. S.D. Tex. 2020) (The expiration of the time for governmental claims is important because the amount of the claims will affect the drafting of the plan and consideration of its feasibility; this supports granting the debtor an extension of time to file the plan until the bar date has passed.). 455 In re Tibbens, 2021 WL 1087260 at * 8 (Bankr. M.D. N.C. 2021); In re Trepetin, 617 B.R. 841, 844 (Bankr. D. Md. 2020).



170

considers extensions of the deadlines in the context of the availability of subchapter V in cases

pending before enactment of subchapter V.

The court may extend the deadlines if the need for an extension is “attributable to

circumstances for which the debtor should not justly be held accountable.” New §§ 1188(b),

1189(b). Courts have noted that the requirement for an extension is more stringent that the “for

cause” standard of Bankruptcy Rule 9006(b), which governs extensions generally, and

§ 1121(d)(1), which permits extension of the exclusivity period for the debtor to file and obtain

confirmation of a plan in a non-sub V case.456

Sections 1188(b) and 1189(b) use the same language to provide for extension of their

deadlines as § 1221, which governs extension of the 90-day period for the debtor to file a plan in

a chapter 12 case. Courts have, therefore, looked to chapter 12 cases applying § 1221 for

guidance in interpreting the identical language in subchapter V.457

The court in In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020), noted that courts and

commentators had interpreted § 1221 to permit an extension if the debtor “clearly demonstrates

that the debtor’s inability to file a plan is due to circumstances beyond the debtor’s control.”458

456 E.g., In re Online King, LLC, 2021 Bankr. LEXIS 198 at *21 (Bankr. E.D.N.Y. 2021); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020). 457 E.g., In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021); In re Baker, 625 B.R. 27, 33 (Bankr. S.D. Tex. 2020); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020); In re Trepetin, 617 B.R. 841, 847-48 (Bankr. D. Md. 2020). 458 In re Trepetin, 617 B.R. 841, 848 (Bankr. D. Md. 2020) (quotations and punctuation omitted), quoting In re Gullicksrud, 2016 WL 5496569, at *2 (Bankr. W.D. Wis. 2016) (quoting 7 COLLIER ON BANKRUPTCY ¶ 221.012[2]), and also citing In re Marek, 2012 WL 2153648, at *8 (Bankr. D. Idaho 2012), and In re Raylyn AG, Inc., 72 B.R. 523, 524 (Bankr. S.D. Iowa 1987).



171

The court reasoned that it was appropriate to apply a similar standard to requests for extensions

under §§ 1188(b) and 1189(b). Id. at 848-49. Other courts have done the same.459

Courts have taken different approaches to the determination of whether circumstances are

“beyond the debtor’s control.” The Trepetin court formulated the inquiry as whether the debtor

is “fairly responsible” for the inability to comply with the deadline.460 In In re Seven Stars on

the Hudson Corp., 618 B.R. 333, 345 (Bankr. S.D. Fla. 2020), however, the court concluded that

the language asks whether the need for an extension is due to circumstances beyond the debtor’s

control, not whether the debtor was responsible for the inability to meet the deadlines.

Trepetin and Seven Stars involved a debtor’s request to proceed under subchapter V in a

case pending prior to its enactment when the deadlines had already expired. The Trepetin court

concluded that the deadlines could be extended because the debtor was not responsible for the

inability to meet the deadlines that had not previously existed. The Seven Stars court concluded

that the circumstances were entirely within the debtor’s control and that no external factors

beyond the debtor’s control contributed to the inability to meet the deadlines.

In In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021), a chapter 13 debtor, in a

case filed after enactment of subchapter V but a month before its effective date, sought to

convert it to chapter 11 and proceed under subchapter V five months after the effective date. The

court concluded that an extension of the already expired deadline for filing a plan was not

justified under either the Trepetin or Seven Stars approach because of numerous delays in the

chapter 13 case that were within the debtor’s control and for which the debtor should justly be

held accountable. Id. at *9.

459 E.g., In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021); In re Baker, 625 B.R. 27, 33 (Bankr. S.D. Tex. 2020); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at * 2 (Bankr. M.D.N.C. 2020); In re Seven Stars on the Hudson Corp., 618 B.R. 333, 344 (Bankr. S.D. Fla. 2020). 460 Accord, In re Wetter, 620 B.R. 243 (Bankr. W.D. Va. 2020).



172

In re Keffer, 2021 Bankr. LEXIS 1020 (Bankr. S.D. W.Va. 2021), also considered a

chapter 13 debtor’s request to convert to chapter 11 and elect sub V after the deadlines for the

status conference and the filing of a plan had expired. The need for chapter 11 relief arose, the

court explained, after the Internal Revenue Service filed a proof of claim for substantially more

than the debtor anticipated, increasing his liabilities above the chapter 13 debt limit and making

the debtor ineligible for chapter 13.461

The propriety of conversion, the court explained, turned on whether to extend the

deadlines. Without an extension, the debtor’s chapter 11 case would be subject to dismissal or

conversion to chapter 7 for cause for failure to file a plan timely. Id. at *26-27.

The Keffer court concluded that Trepetin provided a superior approach to the extension

issue and rejected the Seven Stars view. Id. at 25. Because the debtor had proceeded

appropriately in the chapter 13 case, and because the debtor was not aware of the large amount of

his tax liability until the IRS filed its proof of claim and therefore did not know that chapter 13

would be unavailable, the court ruled that the debtor was not justly accountable for the

circumstances necessitating an extension of the deadlines. Id. at *27-28. The court directed that

the deadlines run from the date of its order. Id at * 29.

The court in In re Baker, 625 B.R. 27 (Bankr. S.D. Tex. 2020), identified four factors to

consider in determining whether to extend the deadline for the filing of a plan: (1) whether the

circumstances raised by the debtor were within the debtor’s control; (2) whether the debtor had

made progress in drafting a plan; (3) whether the deficiencies preventing that draft from being

filed were reasonably related to the identified circumstances; and (4) whether any party-in-

461 The court did not address whether chapter 13 eligibility should be determined as of the petition date based on the debtor’s schedules, which showed that he was eligible. See W. Homer Drake, Jr., Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice and Procedure §§ 12:8 (2020).



173

interest had moved to dismiss or convert the case or otherwise objected to a deadline extension in

any way.

Regardless of the standard for extending the deadlines, the debtor must describe the

circumstances beyond its control and explain why they preclude the timely filing of a plan. For

example, although circumstances such as the Covid-19 pandemic, inclement weather, and the

Jewish holidays may constitute acceptable reasons for an extension, they do not warrant an

extension when the debtor does not demonstrate how they affected the debtor’s ability to meet

the deadline.462 Circumstances such as the amount of work required to negotiate and propose a

plan and competing demands on the debtors – common to any bankruptcy case – are insufficient

to justify an extension.463

The court may grant an extension even if the deadline has expired at the time the debtor

requests it.464 Nevertheless, the better practice is for the debtor to file a motion for an extension

in time to permit the court to schedule a hearing on it before the deadline terminates because the

failure to timely file a plan constitutes “cause” for dismissal or conversion of the case under

§ 1112(b)(4)(J).465

Because subchapter V does not contain a deadline for confirmation of a plan and New

§ 1193 permits preconfirmation modification of a plan at any time, a debtor may consider the

462 In re Online King, LLC, 2021 Bankr. Lexis 198 at *27-30 (Bankr. E.D. Tex. 2021) (pandemic and Jewish holidays); In re Northwest Child Development Centers, Inc., 2020 WL 8813586 at *2 (Bankr. M.D. N.C. 2020) (pandemic and inclement weather preventing inspection of business premises for appraisal). 463 In re Online King, LLC, 2021 Bankr. Lexis 198 at *27 (Bankr. E.D. Tex. 2021). 464 E.g., In re Tibbens, 2021 WL 1087260 at * 8 (Bankr. M.D.N.C. 2021); In re Online King LLC, 2021 Bankr. Lexis 198 at * 12-16 (Bankr. E.D.N.Y. 2021); 8 COLLIER ON BANKRUPTCY ¶ 1189.03. 465 In re Online King LLC, 2021 Bankr. Lexis 198 at * 12-16 (Bankr. E.D.N.Y. 2021); 8 COLLIER ON BANKRUPTCY ¶ 1189.03. See Section VI(D).



174

timely filing of a “placeholder” plan with the expectation of a later modification instead of

seeking an extension.466

The court in In re Baker, 625 B.R. 27, 38 (Bankr. S.D. Tex. 2020), criticized the strategy

as “a waste of time and resources for all parties-in-interest” that “does not represent Congress’s

intent” in enacting subchapter V. . . . The intentionally expedited nature of subchapter V cases

dictates an abbreviated deadline under § 1189 that is not intended to be manipulated by

placeholder plans.”

Stating that “filing a placeholder plan merely to satisfy the statutory plan deadline serves

no justiciable purpose, contributes to increased costs, and subverts the intent underlying

subchapter V, the Baker court announced, id. at 38:

[T]his Court disfavors placeholder plans and expects debtors to file substantive,

confirmable plans unless situations arise such that an extension is warranted because of

circumstances for which the debtor should not justly be held accountable.

*************************


A. Consensual and Cramdown Confirmation in General

***Add text to footnote 199 on page 57

For cases applying the applicable § 1129(a) standards, see In re Fall Line Tree Service, Inc.,

2020 WL 7082416 (Bankr. E.D. Cal. 2020); In re Pearl Resources, LLC, 622 B.R. 236 (Bankr.

S.D. Tex. 2020).

*************************

466 In In re Baker, 625 B.R. 27, 37 (Bankr. S.D. Tex. 2020), the court described a “placeholder plan” as “a skeletal document filed to satisfy a filing deadline, with the intent to file a completed, substantive document later.”



175

B. Cramdown Confirmation Under New § 1191(b)

1. Changes in the cramdown rules and the “fair and equitable” test

***Insert footnote after “requirement” on page 61

. . . requirement.467

*************************

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


The court in In re Young, 2021 WL 1191621 at *5 (Bankr. D. N.M. 2021), ruled that individuals

who claimed that they had no disposable income could not obtain confirmation of their sub V

plan.468

*************************

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

***Insert new text after first full paragraph on page 128 in SUPP XIV

An issue related to classification is that cramdown confirmation of a subchapter V plan requires,

among other things, that the plan not “discriminate unfairly.” New § 1191(b).

***Insert text at end of page 128 in SUPP XIV

In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020), involved

cramdown confirmation of a sub V plan that provided different treatment for two classes of

unsecured claims. One class consisted of disputed unsecured claims of a group of creditors that

totaled approximately $ 360,000; the other class included all other unsecured claims of

approximately $ 50,000.

467 See Section VIII(D)(1). 468 The Young court reasoned, “Debtors who elect not to make plan payments should not get the benefit of subchapter V. If making reasonable plan payments while working is unpalatable to the Debtors, they should have filed a chapter 7 case.” In re Young, 2021 WL 1191621 at *5 (Bankr. D. N.M. 2021).



176

The plan provided for creditors in each class to receive payments of 59 percent of their

claims from disposable income over five years, but the method of payments differed. The

undisputed creditors were to receive equal monthly payments. The payments for the disputed

creditors, however, were adjusted to reflect the seasonal nature of the debtor’s business, which

was the sale of retail outdoor sporting goods in South Lake Tahoe, California.469 Further, the

plan provided for the payments on the disputed claims to be made into a reserve account pending

determination of the objections to the claims. Id. at 6.

The Fall Line Tree Service court concluded that the differences in treatment were

“rationally related to the rights of the parties and to seasonal cash flow realities of the Lake

Tahoe recreation market” and ruled that the plan did not discriminate unfairly. Id. at 6.

***Add to footnote 397 on page 128 in SUPP XIV

See also In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020).

*************************

3. Classification and voting issues relating to priority tax claims

***Insert footnote on page 130 in SUPP XIV in first full paragraph

. . . is not required.470

*************************

469 Payments for the months of April through June and September through November were twice as much as payments for the months off January through March and July, August, and December. 470 See In re Mangia Pizza Investments, LP, 480 B.R. 669 (Bankr. W.D. Tex. 2012); In re Gregory Boat Co., 144 B.R. 361, 365 (Bankr. E.D. Mich. 1992); In re Perdido Motel Group, Inc., 101 B.R. 289 (Bankr. N.D. Ala. 1989); 7 COLLIER ON BANKRUPTCY ¶ 1129.02[9][c][i] (Class of unsecured tax claims receiving treatment conforming with § 1129(a)(9)(C) “need not be solicited for its vote, and also does not count as an impaired class for section 1129(a)(10).”); 6 NORTON BANKRUPTCY LAW AND PRACTICE 3d § 112:24 (“Under Code § 1123(a)(1), unsecured priority tax claims under § 507(a)(8) do not have to be separately classified. Arguably, despite a plan’s classification of such a claim and deferred payment pursuant to Code § 1129(a)(9)(C), such class should not be counted as a class under Code § 1129(a)(8) or (10).”).



177

***Insert new Sections VIII(D)(5), (6), and (7) beginning on page 131 in SUPP XIV

5. The “best interests” or “liquidation” test of § 1129(a)(7)

Section 1129(a)(7)(A)(ii) requires that a creditor who has not accepted the plan must

receive under the plan property with a value that is not less than what the creditor would receive

if the debtor were liquidated under chapter 7.

In re Young, 2021 WL 1191621 (Bankr. D. N.M. 2021), determined that a plan did not

comply with this requirement based on its finding that the fees of a chapter 7 trustee would be

less than the anticipated costs of liquidating property under a plan.

In re Fall Line Tree Service, Inc., 2020 WL 7082416 (Bankr. E.D. Cal. 2020), discusses

evidentiary issues in connection relating to the liquidation analysis.

The Fall Line Tree Service court rejected an objecting creditor’s argument that purchased

goodwill, arising from the debtor’s earlier acquisition of its business from the creditor, should be

included in the liquidation analysis under Generally Accepted Accounting Principles. The court

concluded, “[P]urchased goodwill in the original sale of the going concern that has since

devolved into this chapter 11 case is not an asset for purposes of hypothetical chapter 7

liquidation analysis.” Id. at 4.

The court also rejected the creditor’s assertion that the debtor’s monthly operating reports

showed that the value of its inventory was understated, ruling that such reports are not probative

of inventory value. The admissible evidence, the court continued, showed that the debtor had

used book value at actual wholesale cost in its liquidation analysis, which the court thought was

actually more than a chapter 7 liquidation would produce. Id. at *4.



178

6. Voting by holder of disputed claim

In re Fall Line Tree Service, Inc., 2020 WL 7082416 at *2 (Bankr. E.D. Cal. 2020),

serves as a reminder that only the holder of an allowed claim is entitled to vote on a chapter 11

plan under § 1126(a).471 Bankruptcy Rule 3018(a) permits the court, after notice and a hearing,

to allow a claim temporarily in an amount that the court deems proper for the purpose of

accepting or rejecting a plan, but the creditor had not sought that relief.472

7. Individual must be current on postpetition domestic support obligations

The confirmation requirement of § 1129(a)(14) is that an individual debtor have paid all

amounts payable on a domestic support obligation (“DSO”) “that first became payable” after the

petition date. It makes no exception when a debtor’s inability to pay a postpetition DSO is due

to circumstances beyond the debtor’s control. In re Sullivan, 2021 WL 1250805 at *5-6 (Bankr.

D. Colo, 2021).473

*************************

471 Section 1126(a) states, “The holder of a claim or interest allowed under section 502 of [the Bankruptcy Code] may accept or reject a plan.” 472 The creditor in Fall Line Tree Service was the only creditor in the class, rejected the plan, and objected to its confirmation. The fact that the court disregarded its claim for voting purposes, therefore, did not affect the result in the case. 473 The problem for the debtor in Sullivan was that his monthly obligations for alimony and child support were $ 16,835 and his gross monthly income was $ 7,600. The debtor was seeking to modify those obligations in the divorce case and proposed to modify his plan at a later time to accommodate a future ruling by the divorce court. In the meantime, he proposed to pay what he hoped the modified amounts would be. Sullivan, 2021 WL 1250805 at *5. In addition to ruling that § 1129(a)(14) prevented confirmation, the court noted, “Nor was the chapter 11 process meant to create a long-term shelter for debtors while they await the outcome of contested divorce litigation.” Id. at 6.



179

IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation

B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of Plan

Confirmed Under Cramdown Provisions of New § 1191(b)


The court in In re Spindler, 623 B.R. 543 (Bankr. W.D. Wis. 2020), permitted a chapter

12 debtor to make direct payments to a mortgage lender under a plan that provided for the re-

amortization of the debt in monthly payments over 30 years.

The court reviewed three approaches to direct payments that courts have taken in chapter

12 cases. One view is that the Bankruptcy Code prohibits direct payments on impaired or

modified claims,474 while a second allows debtors to pay secured creditors directly, regardless of

their impaired status.475 Id. at 546-47.

Most courts adopt a third approach that permits direct payments depending on the

circumstances of the case.476 Id. at 547. In deciding whether to permit direct payments, the

Spindler court explained, these courts consider some or all of the factors that In re Pianowski, 92

B.R. 225 (Bankr. W.D. Mich. 1988) identified: (1) the past history of the debtor; (2) the

business acumen of the debtor; (3) the debtor's post-filing compliance with statutory and court-

imposed duties; (4) the good faith of the debtor; (5) the ability of the debtor to achieve

meaningful reorganization absent direct payments; (6) the plan treatment of each creditor to

474 The court cited Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir. 1992) and In re Marriott, 161 B.R. 816 (Bankr. S.D. Ill. 1993). 475 The court cited Wagner v. Armstrong (In re Wagner), 36 F.3d 723 (8th Cir. 1994) and In re Crum, 85 B.R. 878 (Bankr. N.D. Fla. 1988). 476 The court cited In re Martens, 98 B.R. 530 (Bankr. D. Colo. 1989); In re Seamons, 131 B.R. 459 (Bankr. D. Idaho 1991); In re Speir, 2018 WL 3814276 (Bankr. N.D. Miss. Aug. 8, 2018); Westpfahl v. Clark (In re Westpfahl), 168 B.R. 337 (Bankr. C.D. Ill. 1994); In re Golden, 131 B.R. 201 (Bankr. N.D. Fla. 1991); In re Seamons, 131 B.R. 459 (Bankr. D. Idaho 1991); In re Martens, 98 B.R. 530 (Bankr. D. Colo. 1989); and In re Pianowski, 92 B.R. 225 (Bankr. W.D. Mich. 1988).



180

which a direct payment is proposed to be made; (7) the consent, or lack thereof, by the affected

creditor to the proposed plan treatment; (8) the legal sophistication, incentive and ability of the

affected creditor to monitor compliance; (9) the ability of the trustee and the court to monitor

future direct payments; (10) the potential burden on the chapter 12 trustee; (11) the possible

effect on the trustee's salary or funding of the U.S. Trustee system; (12) the potential for abuse of

the bankruptcy system; and (13) the existence of other unique or special circumstances.

The Spindler court noted that In re Aberegg, 961 F.2d 1307 (7th Cir. 1992), concluded

that chapter 13 debtors could make direct payments in some cases and that Aberegg took a

pragmatic approach to direct payment of mortgages that extend beyond the term of the plan,

finding that it would be counterproductive to require debtors to make payments through the

trustee until completion of plan payments and then to arrange for direct payments thereafter.

Spindler, 623 B.R. at 547.

The Spindler court adopted the majority approach and, based on the circumstances of the

case, permitted the direct mortgage payments.477 Among other things, the court noted that the

debtor had negotiated payment terms with the lender and that it did not make sense to require the

payment method to change at the end of the plan. Id. at 548-49.

*************************

X. Discharge

B. Discharge Upon Confirmation of a Cramdown Plan Under § 1191(b)


The court in Gaske v. Satellite Restaurants, Inc. Crabcake Factory USA (In re Satellite

Restaurants, Inc. Crabcake Factory USA), 2021 WL 1096627 (Bankr. D. Md. 2021), ruled that

477 The court also permitted, without objection, direct payment of a student loan.



181

the exceptions to discharge in § 523(a) do not apply to a cramdown discharge of an entity in a

subchapter V case under § 1191(b). The court noted that it had to give meaning to the reference

to § 1192 in the preamble to § 523(a) that the SBRA added in connection with enactment of

subchapter V and that “the only reasonable meaning is that Congress intended to continue to

limit application of the Section 523(a) exceptions in a Subchapter V case to individuals.” Id. at

*4. Legislative history explaining the intent of Congress in enacting subchapter V, the court

noted, supported its interpretation. Id. at *4, *6.

*************************


***Insert text on page 109 after footnote 394

Another court refused to permit a debtor to proceed under subchapter V in a case filed a month

before its effective date. The court determined that the debtor had waited too long to make the

sub V election and had amended its petition to do so only after two attempts to confirm a

traditional chapter 11 plan had failed.478

***Add footnote and additional text at end of text on page 109

…of subchapter V.479 Although the CARES Act provided for the increased debt limit to expire

on year after its enactment, the Covid-19 Bankruptcy Relief Extension Act of 2021480 amended

the CARES Act to extend the increased debt limit for an additional year.

478 In re Greater Blessed Assurance Apostolic Temple, Inc., 624 B.R. 742 (Bankr. M.D. Fla. 2020). Cf. In re Tibbens, 2021 WL 1087260 at * 9 (Bankr. M.D.N.C. 2021) (After denial of confirmation of two chapter 13 plans, the debtor sought to convert to chapter 11 and elect subchapter V after the deadline for the filing of a plan had expired; the court converted the case to chapter 11 but declined to extend the deadline because of numerous delays in the chapter 13 case that were within the debtor’s control and for which the debtor should be held accountable.). 479 See In In re Peak Serum, 623 B.R. 609 (Bankr. D. Col. 2020) (Debtors in pending chapter 11 cases may not elect application of subchapter V upon becoming eligible for subchapter V under the increase in the debt limit upon enactment of the CARES Act; increased debt limit applies only in cases filed after enactment.) 480 Covid-19 Bankruptcy Relief Extension Act of 2021§ 2(a)(1), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021).



182

***Add text to additional text of footnote 352 on page 145 in SUPP XIV

In In re Tibbens, 2021 WL 1087260 (Bankr. M.D.N.C. 2021), a chapter 13 debtor, in a

case filed after enactment of subchapter V but a month before its effective date, sought to

convert it to chapter 11 and proceed under subchapter V five months after the effective date. The

court concluded that an extension of the already expired deadline for filing a plan was not

justified under either the Trepetin or Seven Stars approach because of numerous delays in the

chapter 13 case that were within the debtor’s control and for which the debtor should be held

accountable. Id. at *9.

***Insert text on page 145 in Supp XIV (in page 109 text)

In In re Peak Serum, 623 B.R. 609 (Bankr. D. Col. 2020), a corporation and its principal,

in response to a creditor’s motion to appoint a trustee in their jointly administered cases, moved

to dismiss them to permit their re-filing as subchapter V cases after the CARES Act increased the

debt limit so that they became eligible to proceed under subchapter V. The court found cause to

appoint a trustee in the corporate case and concluded that the facts warranted appointment of a

trustee. Because the creditor failed to establish cause for appointment of a trustee in the

individual case, however, the court dismissed it, observing that subchapter V contained sufficient

protections for creditors such that a re-filed case under subchapter V would not unduly prejudice

creditors.

***Insert text on page 146 in Supp XIV

In In re Hunts Point Enterprises, LLC, 2021 Bankr. LEXIS 771 (Bankr. E.D.N.Y. 2021),

a debtor requested dismissal of its case after a creditor filed a motion to disallow its sub V

election or, alternatively, to dismiss it. The court ruled that the debtor’s debts did not exceed the

eligibility limit but concluded that allowing the case to proceed under subchapter V would be an



183

abuse of its provisions because only the debtor could file a plan, and its request for dismissal

demonstrated that it no longer wanted to do so. The court concluded that cause existed for its

dismissal and prohibited the debtor from filing another bankruptcy petition for a year unless the

debtor sought and obtained relief from that prohibition based on changed circumstances or good

cause shown.





Appendix A - 1

Lists of Sections of Bankruptcy Code and Title 28 Affected or Amended By

The Small Business Reorganization Act of 2019

Enacted August 23, 2019, Effective February 19, 2020

(As Amended By The CARES Act, Enacted and Effective March 27, 2020; The COVID-19 Bankruptcy Relief Act of 2021 § 2(a), Pub. L. No. 117-5, 135 Stat. 249 (Mar. 27, 2021) extended the sunset provisions of the CARES Act for an additional year.)

May 2020

Sections of The Small Business Reorganization Act of 2019

SBRA § 1 Short Title – “The Small Business Reorganization Act of 2019” SBRA § 2

Enacts Subchapter V of Chapter 11 of the Bankruptcy Code, new §§ 1181—1195.

SBRA § 3(a) Amends 11 U.S.C. § 547(b) to provide that trustee’s avoidance of preferential transfer must be “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses” under § 547(c). Applicable in all bankruptcy cases.

SBRA § 3(b) Amends 28 U.S.C. § 1409(b) to provide for venue only in the district of the defendant, for a proceeding brought by a trustee to recover a debt from a noninsider when the debt is less than $ 25,000. Applicable in all bankruptcy cases.

SBRA § 4(a) Conforming amendments to the Bankruptcy Code. SBRA § 4(b) Conforming amendments to Title 28. SBRA § 5 Effective date. SBRA § 6 Determination of budgetary effects. 11 U.S.C.

Amendments Relating to

Cases of All Small Business Debtors

SBRA

§ 101(51C) New definition of “small business case” as a case in which a small business debtor (defined in § 101(51D)) does not elect application of subchapter V

§ 4(a)(1)(A)

§ 101(51D) Revised definition of “small business debtor”; CARES Act makes technical correction dealing with exclusion of public companies

§ 4(a)(1)(B); CARES Act § 1113(a)(4)(A)



Appendix A - 2

§ 103(i) New subsection (i) provides that subchapter V applies only to a case in which a small business debtor elects its application CARES Act amendment provides that subchapter V applies only to a case in which a “debtor (as defined in section 1182)” elects its application.

§ 4(a)(2); CARES Act § 1113(a)(2)

§1102(a)(3) No committee of unsecured creditors will be appointed in the case of a small business debtor (regardless of election), unless the court orders otherwise

§ 4(a)(11)

11 U.S.C.

Sections of Bankruptcy Code Inapplicable

or Modified in Subchapter V Cases

New Subchapter V Section

§ 105(d) § 105(d) provisions for status conference are inapplicable. New § 1188 requires status conference and filing of report by debtor 14 days before it.

New § 1181(a)

§ 327(a) New § 1195(a) states that person is not disqualified for employment under § 327 solely because the person holds a prepetition claim of less than $ 10,000.

New § 1195(a)

§ 1101(1) § 1101(1) definition of debtor in possession is inapplicable. Replaced by new § 1182(2).

New § 1181(a)

§ 1102(a) § 1102(b) § 1103

Paragraphs (1), (2), and (4) of § 1102(a) and paragraphs (1) and (2) of § 1102(b) deal with the appointment of committees. § 1102(b)(3) governs provision of information to, and communications with, creditors. Section 1103 describes the powers and duties of committees. These provisions are not applicable unless the court orders otherwise. Under amended § 1102(a)(3), no committee is appointed in a case of a small business debtor unless the court orders otherwise.

New § 1181(b)

§ 1104 § 1105

Provisions for appointment of trustee (§ 1104) and termination of trustee’s appointment (§ 1105) are inapplicable. Replaced by § 1183 (appointment of trustee in all subchapter V cases) and § 1185 (removal of debtor in possession and reinstatement of debtor in possession)

New § 1181(a)

§ 1106 § 1106 specification of duties of trustee and examiner is inapplicable. New § 1183(b) states the trustee’s duties. The court may order the trustee to perform certain § 1106 duties (new § 1183(b)(2)), and several are applicable if the debtor in possession is removed (new § 1183(b)(5)). The subchapter V trustee has the same duties regarding domestic support obligations (new § 1183(b)(6)) that a chapter 11 trustee has under § 1106(c).

New § 1181(a)



Appendix A - 3

§ 1107 § 1107 is inapplicable. § 1107(a) gives the debtor most of the rights, powers, and duties of a trustee. It is replaced by new § 1184, which gives the subchapter V debtor the same rights, powers, and duties. § 1107(b) states that a professional is not disqualified under § 327(a) from employment by the debtor in possession solely because of the professional’s representation of the debtor prior to the case. No comparable provision exists in subchapter V, but the provision in new § 1195 that a professional is not disqualified solely because the professional holds a claim of less than § 10,000 impliedly has the same effect.

New § 1181(a)

§ 1108 § 1108 authorizes trustee (or debtor in possession) to operate the debtor’s business. It is inapplicable and replaced by new § 1184 (authorizing debtor to operate business) and new § 1183(b)(5) (trustee’s duties upon removal of debtor in possession include operating debtor’s business)

New § 1181(a)

§ 1115 § 1115 provisions for property of the estate in the chapter 11 case of an individual do not apply. If a plan is confirmed under the cramdown provisions of new § 1191(b), language similar to § 1115 provides that such property is property of the estate of any subchapter V debtor.

New § 1181(a)

§ 1116 § 1116, which states the duties of trustee or debtor in possession in a small business case, is inapplicable. New §§ 1187(a) and (b) require the debtor to perform the specified duties.

New § 1181(a)

§ 1121 Provisions governing who may file a plan are inapplicable. Only the debtor may file a plan under new § 1189(a).

New § 1181(a)

§ 1123(a)(8) Requirement that plan provide for payment of earnings or other income of debtor who is an individual as is necessary for the execution of the plan is inapplicable. New § 1191(c)(2) requires, as a condition to confirmation of a cramdown plan under new § 1191(b), that a plan provide for all disposable income for a three- to five-year period (or its value) be applied to make payments under the plan.

New § 1181(a)

§ 1123(c) Prohibition on use, sale, or lease of exempt property of individual in a plan without consent of the debtor is inapplicable. It is unnecessary because only the debtor may file a plan under new § 1189(a).

New § 1181(a)

§ 1125 Provisions in § 1125 for disclosure statement and solicitation of acceptances or rejections of plan do not apply unless the court orders otherwise. A plan must include some of the information that a disclosure statement must have. New § 1190(1). If the court requires a disclosure statement, the provisions of § 1125(f) apply under new § 1187(c).

New § 1181(b)

§ 1127 Provisions dealing with modification of plan are inapplicable and are replaced by new § 1193.

New § 1181(a)



Appendix A - 4

§ 1129(a)(9)(A) Confirmation requirement of § 1129(a)(9)(A) is that plan must provide for cash payment of priority claims specified in § 507(a)(2) (administrative expenses (including professional fees and trustee fees) and court fees) and § 507(a)(3) (involuntary gap claims), unless the claimant agrees otherwise. The court may confirm a plan that provides for payment of these claims through the plan under the cramdown provisions of new § 1191(b).

New § 1191(e)

§ 1129(a)(15) Projected disposable income requirement for confirmation in case of individual is inapplicable. New § 1191(c)(2) requires, as a condition to confirmation of a cramdown plan under new § 1191(b), that a plan provide for all disposable income for a three- to five-year period (or its value) be applied to make payments under the plan.

New § 1181(a)

§ 1129(b) “Cramdown” provisions are not applicable. New § 1191(b) states cramdown requirements when the requirements of § 1129(a)(8) (that all impaired classes accept the plan) and § 1129(a)(10) (that at least one impaired class of creditors accept the plan) have not been met. New § 1191(b) permits cramdown confirmation if the plan does not discriminate unfairly and if it is “fair and equitable with respect to” each impaired, nonaccepting class. The “fair and equitable” requirement in subchapter V does not include the absolute priority rule. For a secured creditor, the ”fair and equitable” requirements of § 1129(b)(2)(A) govern. New § 1191(c)(1). To be fair and equitable, (1) the plan must provide for all disposable income for a three to five year period (or its value) be applied to make payments under the plan, new § 1191(c)(2); and (2) there must be a reasonable likelihood that the debtor will be able to make all payments under the plan, and the plan must provide appropriate remedies to protect creditors if payments are not made, new § 1191(c)(3).

New § 1181(a)

§ 1129(c) Provisions for confirmation when more than one plan meets confirmation requirements is inapplicable. It is unnecessary because only the debtor may file a plan under new § 1189(a).

New § 1181(a)

§ 1129(e) Provision requiring confirmation of plan in small business case within 45 days of its filing is inapplicable in subchapter V case. New § 1189(b) requires filing of plan within 90 days after the order for relief (unless the court extends the time) but does not contain a deadline for confirmation.

New § 1181(a)

§ 1141(d) Provisions for chapter 11 discharge do not apply when the court confirms a cramdown plan under § 1191(b). New § 1192 states discharge provisions when cramdown confirmation occurs.

New § 1181(c)



Appendix A - 5

In the cramdown context, discharge does not occur under new § 1192 until the debtor has completed payments under the plan for three years, or such longer period not to exceed five years as the court determines. The new § 1192 discharge applies to (1) debts listed in § 1141(d)(1)(A) and (2) all other debts allowed under § 503 and provided for in the plan, except for debts (x) on which the last payment is due after the applicable three to five year period and (y) of the kind specified in § 523(a).

Conforming Amendments to Other Sections

of the Bankruptcy Code and to Title 28 to Take Account of New Subchapter V

11 U.S.C.

SBRA

§ 322(a) Amended to make its provisions for qualification of trustee in a case applicable to a subchapter V trustee appointed under new § 1183.

§ 4(a)(3)

§ 326(a) Excepts subchapter V trustee appointed under new § 1183 from percentage limitations on compensation applicable to trustees in chapter 11 (and chapter 7) cases.

§ 4(a)(4)(A)

§ 326(b) Provides that standing subchapter V trustee (like standing chapter 12 and 13 trustees) cannot receive compensation under § 330. (Standing trustees receive compensation under 28 U.S.C. § 586(e), as amended to include standing subchapter V trustees.)

§ 4(a)(4)(B)

§ 347 Current § 347(a) provides for a chapter 7, 12, or 13 trustee to pay into the court, for disposition under chapter 129 of title 28, funds that remain unclaimed 90 days after final distribution under § 726, § 1226, or § 1326. It thus does not apply in chapter 11 cases. SBRA § 4(a)(5)(a) adds subchapter V to the list of trustees and adds new § 1194 to the list of sections providing for distributions. New § 1194 provides for the subchapter V trustee to make distributions under a plan confirmed under the cramdown provisions of new § 1191(b). Current § 347(b) provides that unclaimed property in a case under chapter 9, 11, or 12 at the expiration of the time for presentation of a security or performance of any other act as a condition to participate under any plan confirmed under § 1129, § 1173, or § 1225 becomes property of the debtor or any entity acquiring the debtor’s assets under the plan. SBRA § 4(a)(5)(B) added new § 1194 to the list of plans confirmed, but the CARES Act made a technical correction to change this to § 1191. Accordingly, § 347(b) as amended and corrected provides for property that is distributed under a confirmed plan and that is unclaimed to become property of the debtor. It is unclear under these amendments what happens to funds that a trustee disburses under a confirmed plan that a creditor does not

§ 4(a)(5); CARES Act § 1113(a)(4)(B)



Appendix A - 6

claim. Amended § 347(a) directs the trustee to pay them into court, but amended § 347(b) makes them property of the debtor. Perhaps the intended result is that unclaimed disbursements that a trustee makes become unclaimed funds subject to § 347(a) whereas unclaimed disbursements that a debtor makes become the debtor’s property under § 347(b).

§ 363(c)(1) Extends provisions authorizing trustee who is authorized to conduct business to enter into transactions in the ordinary course of business without notice and hearing to subchapter V debtor and subchapter V trustee. (Other provisions in § 363 are applicable to a trustee, which includes a subchapter V debtor in possession, new § 1184.)

§ 4(a)(6)

§ 364(a) Extends provisions authorizing trustee who is authorized to conduct business to obtain unsecured credit and incur unsecured debt without notice and hearing to subchapter V debtor and subchapter V trustee. (Other provisions in § 364 are applicable to a trustee, which includes a subchapter V debtor in possession, new § 1184.)

§ 4(a)(7)

§ 523(a) Applies exceptions to discharge to discharge of individual subchapter V debtor under new § 1192 (which is the discharge that a debtor receives when a plan is confirmed under the cramdown provisions of new § 1191(b)). It is unclear whether under new § 1192 the exceptions apply to the discharge of a debtor that is not an individual. If the court confirms a consensual plan under new § 1191(a), the debtor receives a discharge under § 1141(d)(1)-(4), under which the § 523(a) discharge exceptions apply only in cases of individuals.

§ 4(a)(8)

§ 524(a)(1) Makes discharge injunction applicable to discharge granted under new § 1192.

§ 4(a)(9)(A)(i)

§ 524(a)(3)

Makes discharge provisions relating to community claims applicable to discharge under new § 1192.

§ 4(a)(9)(A)(ii)

§ 524(c)(1) § 524(d)

Extends provisions governing reaffirmation of debt and for hearing on proposed reaffirmation (which apply to a discharge under § 1141(d)) to discharge granted under new § 1192.

§ 4(a)(9)

§ 557(d)(3) Makes provisions for expedited consideration of appointment of trustee and for retention and compensation of professionals subject to § 1183 in cases of debtors that own or operate grain storage facilities

§ 4(a)(10)

§ 1146(a) Prohibition on taxation of issuance, transfer, or exchange, or of the making or delivery of an instrument of transfer, under a plan confirmed under § 1129 is extended to a plan confirmed under § 1191.

§4(a)(12)



Appendix A - 7

Conforming Amendments to Other Sections

of the Bankruptcy Code and to Title 28 to Take Account of New Subchapter

SBRA

28 U.S.C. § 586(a)(3), (b), (d)(1), (e)

Provisions applicable to U.S. Trustees duties to supervise the administration of cases and trustees, (a)(3), appoint standing trustees (b), prescribe qualifications of trustees, (d)(1), and fix compensation of standing trustees, (e), extended to include cases and trustees under subchapter V. Adds new 28 U.S.C. § 586(e)(5), which provides for compensation of standing trustee in subchapter V case when trustee’s services are terminated due to dismissal or conversion of the case or substantial consummation of a plan under new § 1183(c)(1). In these circumstances, the standing trustee does not make disbursements on which a percentage fee would be due. The court is to award compensation “consistent with services performed by the trustee and the limits on compensation of the trustee established pursuant to [28 U.S.C. § 586(e)(1)].”

§ 4(b)(1)

28 U.S.C. § 589b

Provisions relating to reports of trustees and debtors in possession made applicable in subchapter V cases.

§ 4(b)(2)

28 U.S.C. § 1930(a)(6)(A)

Subchapter V cases excluded from requirement of payment of quarterly U.S. Trustee fees

§ 4(b)(3)

Amendments Applicable in All Cases

11 U.S.C. § 547(b)

As amended, 11 U.S.C. § 547(b) provides that a trustee may avoid a preferential transfer “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses” under § 547(c).

SBRA § 3(a)

28 U.S.C. § 1409(b)

As amended, 28 U.S.C. § 1409(b) provides for venue only in the district of the defendant of a proceeding brought by a trustee to recover a debt from a noninsider when the debt is less than $ 25,000.

SBRA § 3(b)





Appendix B - 1

Summary of SBRA Interim Amendments to The Federal Rules of Bankruptcy Procedure

To Implement SBRA Rule 1007(b)(5) – Eliminates requirement for filing statement of current monthly income for individual in a subchapter V case. Rule 1007(h) – Modifies exceptions to requirement for filing supplemental schedule of property the debtor acquires after the filing of the case, as provided in § 541(a)(5), after the closing of the case. The exception does not apply to a chapter 11 plan confirmed under § 1191(b) (cramdown) and does apply after the discharge of a debtor in a plan confirmed under § 1191(b). Rules 1015(c), (d), and (e) are renumbered as (d), (e), and (f). Rule 1020(a) – Provides for election of subchapter V to be included in voluntary petition. Rule 1020(c) – Eliminates provisions for case to proceed as small business case depending on whether committee of unsecured creditors has been appointed or whether an appointed committee has been sufficiently active. Rule 1020(d) – Renumbered as Rule 1020(c) and eliminates requirement for service of objection to debtor’s classification as a small business (or not) or election of subchapter V (unless committee has been appointed) and instead requires service on 20 largest. Rule 2009 – permits single trustee in jointly administered case under subchapter V as well as in cases under chapter 7. Rule 2011—Amends title of rule dealing with unclaimed funds to include cases under Subchapter V. Rule 2012 – makes automatic substitution of trustee in chapter 11 case for debtor in possession in any pending action, proceeding, or matter in applicable to subchapter V trustee, unless debtor is removed from possession. (Same rule as Chapter 12). Rule 2015(a)(1) – Makes requirement for chapter 11 trustee to file complete inventory of property of debtor (if court directs) inapplicable to subchapter V trustee. Rule 2015(a)(5) – Makes requirement for payment of UST fees inapplicable in subchapter V case. Rule 2015(b) – Rule 2015(b) renumbered as Rule 2015(c). New Rule 2015(b) requires debtor in possession in subchapter V case to perform duties of trustee described in Rule 2015(a)(2) through (4) and to file inventory if the court directs. Requires trustee to perform these duties if debtor is removed from possession.



Appendix B - 2

Rule 3014 – Provides for court to determine the date for making of § 1111(b) election by secured creditor in case under subchapter V in which § 1125 provisions for disclosure statement do not apply. (General rule is that election must be made before conclusion of hearing on disclosure statement.) Rule 3016(b) – Makes provisions for disclosure statement applicable only if a disclosure statement is required. Rule 3016(d) – Makes provisions for use of standard form in “small business case” also applicable to a case under subchapter V case. (Note: under SBRA, a subchapter V case is not a “small business case,” although a subchapter V debtor is a “small business debtor.”) Rule 3017.1(a) – Permits conditional approval of disclosure statement in subchapter V case in which court has ordered that disclosure statement requirements of § 1125 apply. Rule 3017.2 – New rule requires court to fix, in a subchapter case in which § 1125 does not apply: (a) the time for accepting or rejecting a plan; (b) the record date for holders of equity security interests; (c) the date for the hearing on confirmation; (d) the date for transmission of the plan and notice of the (1) the time to accept or reject and (2) the confirmation hearing. Rule 3018 – Conforming amendment to take account of new Rule 3017.2 and change in Rule 3017.1. Rule 3019(c) – New rule 3019(c) provides that request to modify plan after confirmation in subchapter V case is governed by Rule 9014 and that provisions of Rule 3019(b) (procedures for postconfirmation modification of plan in individual chapter 11 case) apply.



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date

d,

secu

red

debt

s of l

ess t

han

$1,2

57,8

50. D

eter

min

ed a

s of

the

petit

ion

date

. Exc

lude

s st

ockb

roke

rs a

nd co

mm

odity

br

oker

s. A

corp

orat

ion

or

part

ners

hip

may

not

be

a de

btor

und

er ch

. 13.

§ 1

09(e

). CA

RES

Act e

xclu

des

coro

navi

rus-

rela

ted

paym

ents

fro

m th

e de

finiti

on o

f inc

ome;

th

is pr

ovisi

on su

nset

s 3/

28/2

021.

§ 1

01(1

0A)(B

)(ii);

§



App

endi

x C

– 2

co

nduc

ting

serv

ices i

ncid

enta

l to

the

real

pro

pert

y) p

erso

n w

hose

pr

imar

y ac

tivity

is b

usin

ess o

f ow

ning

or o

pera

ting

real

pr

oper

ty).

§ 10

1(51

D). T

he C

ARES

Ac

t per

man

ently

exc

lude

s a

debt

or fr

om sm

all b

usin

ess

elig

ibili

ty if

it is

“an

affil

iate

of a

n iss

uer”

und

er §

3 o

f the

Sec

uriti

es

Exch

ange

Act

of 1

934

(15

U.S.

C. §

78

c). §

101

(51D

)(B)(i

ii); §

118

2; §

11

13, C

ARES

Act

.

Aggr

egat

e no

ncon

tinge

nt,

liqui

date

d, se

cure

d an

d un

secu

red

debt

s of $

2,72

5,62

5 or

le

ss.

No m

embe

r of a

gro

up o

f af

filia

ted

debt

ors h

as a

ggre

gate

no

ncon

tinge

nt, l

iqui

date

d se

cure

d an

d un

secu

red

debt

s ov

er $

2,72

5,62

5. §

101

(51D

). No

uns

ecur

ed cr

edito

rs

com

mitt

ee (o

r com

mitt

ee is

su

fficie

ntly

inac

tive)

. Sta

tus a

s a

“sm

all b

usin

ess d

ebto

r” h

inge

s, at

leas

t in

part

, upo

n w

heth

er a

cr

edito

r’s co

mm

ittee

is

appo

inte

d, a

nd o

n ho

w m

uch

that

cred

itor’s

com

mitt

ee

part

icipa

tes i

n th

e ba

nkru

ptcy

. A

part

y in

inte

rest

und

er §

11

02(a

)(2) m

ay co

mpe

l the

ap

poin

tmen

t of a

cred

itor’s

co

mm

ittee

ther

eby

extin

guish

ing

§ 10

1(51

D)(A

); ne

w §

103

(i);

BR 1

020(

a).

No co

mm

ittee

of c

redi

tors

un

less

the

cour

t ord

ers f

or

caus

e. §

110

2(a)

(3).

farm

ing

oper

atio

n, m

ore

than

80

% o

f ass

et v

alue

rela

tes t

o fa

rmin

g op

erat

ions

, and

ag

greg

ate

nonc

ontin

gent

, liq

uida

ted

debt

s are

bel

ow

$10,

000,

000

with

at l

east

50%

of

the

debt

aris

es fr

om

farm

ing

activ

ities

. §

101(

18)(B

). Fa

mily

farm

er m

ust b

e en

gage

d in

a fa

rmin

g op

erat

ion,

inclu

ding

“far

min

g,

tilla

ge o

f the

soil,

dai

ry

farm

ing,

ranc

hing

, pro

duct

ion

of ra

ising

of c

rops

, pou

ltry,

or

lives

tock

, and

pro

duct

ion

of

poul

try

or li

vest

ock

prod

ucts

in

an

unm

anuf

actu

red

stat

e.”

§

101(

21).

1113

, CAR

ES A

ct.



App

endi

x C

– 3

de

btor

’s sm

all b

usin

ess s

tatu

s. Th

e US

T ap

poin

ts a

ny su

ch

com

mitt

ee. I

d.

Debt

or m

ust i

ndica

te it

is a

smal

l bu

sines

s deb

tor b

y ch

ecki

ng

appr

opria

te b

ox in

Item

13

of

volu

ntar

y pe

titio

n. F

RBP

1020

.

Fi

ling

Fees

U

ST Q

uart

erly

Fee

s R

epor

ts

$1,7

17 p

aid

whe

n pe

titio

n is

filed

. 28

U.S

.C. §

193

0.

UST

quar

terly

fees

are

bas

ed o

n a

slidi

ng sc

ale

form

ula

in 2

8 U.

S.C.

§

1930

(a)(6

). M

inim

um a

mou

nt is

$3

25 fo

r disb

urse

men

ts u

p to

$1

5,00

0.

Code

doe

s not

def

ine

“disb

urse

men

ts.”

Fa

ilure

to p

ay U

ST q

uart

erly

fees

is

“cau

se” f

or d

ismiss

al. §

111

2(b)

(4)(K

). M

ust f

ile m

onth

ly/q

uart

erly

oper

atin

g re

port

s. M

ust f

ile a

ll rep

orts

and

su

mm

arie

s req

uire

d of

a tr

uste

e un

der §

704

(a)(8

). Du

ty e

nds w

hen

duty

to p

ay fe

es e

nds,

usua

lly w

hen

Ch. 1

1 fil

ing

fee

is pa

id w

hen

petit

ion

is fil

ed. N

o se

para

te

fee

is du

e fo

r ele

ctin

g su

bcha

pter

V.

None

. Sub

chap

ter V

deb

tors

ar

e ex

empt

from

pay

ing

UST

quar

terly

fees

. 28

U.S

.C. §

193

0(a)

(6)(A

). No

sepa

rate

rule

.

$275

. Ind

ivid

ual f

ilers

may

pay

th

e fe

e in

inst

allm

ents

. Fee

m

ust b

e pa

id in

full

no la

ter

than

120

day

s afte

r the

pe

titio

n is

filed

. US

T Fe

es fo

r ch.

12

debt

ors

shal

l not

exc

eed

10%

of t

he

first

$45

0,00

0 pa

id u

nder

the

plan

, and

3%

of a

ny p

aym

ents

in

exc

ess o

f $45

0,00

0.

28 U

.S.C

. § 5

86(e

)(1)(B

). 28

U.S

.C. §

586

(e)(2

) fur

ther

cu

rtai

ls th

e st

andi

ng tr

uste

e’s

sala

ry a

nd e

stim

ated

ex

pens

es. E

xces

s fun

ds a

re to

be

dep

osite

d in

the

U.S.

Tr

uste

e Sy

stem

Fun

d.

Mus

t file

mon

thly

/qua

rter

ly

oper

atin

g re

port

s. Du

ty e

nds

only

whe

n ca

se is

com

plet

ed.

BR 2

015(

b).

$310

. Fee

may

be

paid

in

inst

allm

ents

with

in 1

20 d

ays

afte

r the

pet

ition

is fi

led.

No

UST

fees

. No

mon

thly

ope

ratin

g re

port

s re

quire

d by

ch. 1

3 de

btor

s not

en

gage

d in

bus

ines

s.



App

endi

x C

– 4

fin

al d

ecre

e is

ente

red.

BR

2015

(a).

Smal

l Bus

ines

s Deb

tors

: M

ust f

ile re

port

s dea

ling

with

pr

ofita

bilit

y, p

roje

ctio

ns, r

ecei

pts,

disb

urse

men

ts, e

tc. §

308

, BR

2015

(a)(6

). Du

ty e

nds o

n ef

fect

ive

date

of c

onfir

med

pla

n. A

dditi

onal

re

port

ing

requ

irem

ent u

nder

§

1116

.

Aut

omat

ic S

tay

&

Co-

Deb

tors

Unlik

e ch

s. 12

and

13,

ch. 1

1 do

es n

ot

prov

ide

an e

xplic

it co

-deb

tor s

tay

and

guar

anto

rs a

re o

nly

prot

ecte

d if

the

cour

t gra

nts §

105

relie

f.

No se

para

te ru

le.

Sam

e co

-deb

tor s

tay

as in

ch.

13. U

pon

filin

g, th

e au

tom

atic

stay

ext

ends

onl

y to

co-

debt

ors o

n co

nsum

er d

ebts

an

d no

t to

debt

s inc

urre

d in

th

e or

dina

ry co

urse

of

busin

ess.

§ 12

01.

Sect

ion

1201

is id

entic

al to

the

co-d

ebto

r pro

visio

n ap

plica

ble

to ch

. 13.

See

§ 1

301.

Cas

es

from

eith

er ch

apte

r are

thus

in

stru

ctiv

e. C

ourt

s hav

e he

ld

that

cert

ain

debt

s fro

m

farm

ing

oper

atio

ns a

re n

ot

cons

umer

deb

t. Se

e In

re S

FW,

Inc.

83

B.R.

27

(Ban

kr. S

.D. C

al.

1988

) (gu

aran

tees

giv

en b

y ch

. 12

deb

tor’s

shar

ehol

ders

for

com

mer

cial l

oans

for f

amily

fa

rm w

ere

not r

elat

ed to

co

nsum

er d

ebt s

o co

-deb

tor

stay

did

not

app

ly).

Upon

filin

g, th

e au

tom

atic

stay

ex

tend

s onl

y to

co-d

ebto

rs o

n co

nsum

er d

ebts

and

not

to

debt

s inc

urre

d in

the

ordi

nary

co

urse

of b

usin

ess.

§ 13

01.

The

term

“con

sum

er d

ebt”

is

defin

ed in

§ 1

01(8

).

Tru

stee

s

Gene

rally

, a tr

uste

e is

only

app

oint

ed

unde

r § 1

104(

a) fo

r cau

se o

r if t

he

appo

intm

ent i

s in

the

best

inte

rest

of

cred

itors

; thi

s is d

one

if th

e De

btor

in

A di

sinte

rest

ed tr

uste

e is

appo

inte

d in

eve

ry su

bcha

pter

V

case

. § 1

183(

a). T

he tr

uste

e ha

s a ro

le si

mila

r to

a ch

. 13

A di

sinte

rest

ed tr

uste

e is

appo

inte

d in

eve

ry ch

. 12

case

. § 1

202.

Ch.

12

case

s are

m

ore

supe

rvise

d th

an ch

. 11

A di

sinte

rest

ed tr

uste

e is

appo

inte

d in

eve

ry ch

. 13

case

. § 1

302.



App

endi

x C

– 5

Poss

essio

n (D

IP) f

alte

rs.

Cred

itors

may

seek

to e

lect

a tr

uste

e by

requ

estin

g an

ele

ctio

n be

co

nven

ed w

ithin

30

days

afte

r the

co

urt o

rder

s the

app

oint

men

t of a

tr

uste

e.

§ 11

04(b

)(1).

Unle

ss a

cour

t app

oint

s a tr

uste

e,

ther

e is

no d

isbur

sem

ent a

gent

for a

ch

. 11

case

. DI

P: u

nder

§ 1

107,

the

DIP

reta

ins

man

y of

the

pow

ers o

f the

trus

tee;

un

der §

110

8, th

e DI

P re

tain

s the

po

wer

to o

pera

te th

e bu

sines

s.

trus

tee.

The

trus

tee

is al

so

auth

orize

d to

ope

rate

the

debt

or’s

busin

ess i

f the

deb

tor

is re

mov

ed a

s a D

IP.

§ 11

83(b

)(5).

Th

e tr

uste

e m

akes

all

paym

ents

to cr

edito

rs u

nder

th

e co

nfirm

ed p

lan.

Tru

stee

m

ay m

ake

adeq

uate

pr

otec

tion

paym

ents

to

secu

red

cred

itors

prio

r to

conf

irmat

ion.

§ 1

194.

Th

e tr

uste

e m

ust a

ppea

r at

man

dato

ry st

atus

conf

eren

ce;

facil

itate

dev

elop

men

t of a

co

nsen

sual

pla

n; a

nd p

erfo

rm

dutie

s gen

eral

ly co

nsist

ent

with

§ 1

302.

§ 1

183(

b).

If co

nfirm

atio

n is

cons

ensu

al,

the

trus

tee'

s rol

e is

term

inat

ed u

pon

“sub

stan

tial

cons

umm

atio

n” o

f the

co

nfirm

ed p

lan.

§ 1

183(

c). I

f co

nfirm

atio

n is

cont

este

d, th

e tr

uste

e se

rves

unt

il co

mpl

etio

n of

pay

men

ts

unde

r the

pla

n co

nfirm

ed

unde

r § 1

191(

b), u

nles

s pla

n or

conf

irmat

ion

orde

r pro

vide

ot

herw

ise.

case

s. Th

is pr

ovid

es a

dditi

onal

ov

ersig

ht o

f the

deb

tor b

ut it

co

mes

at a

cost

of u

sual

ly 1

0%

in m

ost j

urisd

ictio

ns.

A ch

. 12

trus

tee

has a

ll th

e re

port

ing

and

supe

rviso

ry

dutie

s of a

ch. 7

trus

tee

set

out b

y §

704(

a). T

he tr

uste

e al

so sh

all a

ppea

r and

be

hear

d on

conf

irmat

ion

of th

e pl

an,

mat

ters

affe

ctin

g es

tate

pr

oper

ty, a

nd sa

les.

If th

e co

urt d

irect

s for

caus

e, th

e tr

uste

e sh

all a

lso e

xerc

ise

som

e ch

. 11

trus

tee

pow

ers,

like

inve

stig

atin

g th

e ac

ts a

nd

asse

ts o

f the

deb

tor.

§ 12

02(b

)(1)-(

3).

The

trus

tee

cond

ucts

any

as

set s

ales

of f

arm

land

and

fa

rm e

quip

men

t. §

1206

. If

the

debt

or is

rem

oved

as

DIP,

the

trus

tee

assu

mes

op

erat

ion

of th

e bu

sines

s and

su

ccee

ds to

oth

er ch

. 11

trus

tee

pow

ers.

§ 12

02(b

)(5).

Po

st-c

onfir

mat

ion,

the

trus

tee

mus

t ens

ure

plan

pay

men

ts

are

mad

e tim

ely.

§ 1

202(

b)(4

). De

btor

mus

t sub

mit

all f

utur

e in

com

e to

the

supe

rvisi

on a

nd

cont

rol o

f the

trus

tee,

§

1222

(a)(1

), gu

aran

teei

ng th

e tr

uste

e is

in th

e ga

me

until

the

A ch

. 13

trus

tee

has a

ll th

e re

port

ing

and

supe

rviso

ry

dutie

s of a

ch. 7

trus

tee

set

out b

y §

704(

a). T

he tr

uste

e sh

all a

ppea

r and

be

hear

d on

pl

an co

nfirm

atio

n an

d m

odifi

catio

n, a

nd p

rope

rty

valu

es. T

he tr

uste

e m

ust

ensu

re p

lan

paym

ents

are

m

ade

timel

y.

§ 1

302(

b).

If th

e de

btor

is e

ngag

ed in

bu

sines

s, th

e tr

uste

e al

so sh

all

perfo

rm th

e ch

. 11

trus

tee

dutie

s in

§ 11

06(a

)(3) a

nd (4

). §

1302

(c).

The

ch. 1

3 tr

uste

e m

ay se

ek

dism

issal

und

er §

130

7(c)

for

“cau

se.”



App

endi

x C

– 6

T

rust

ee F

ees

No ru

le.

Stan

ding

trus

tee

is pa

id li

ke

curr

ent c

h. 1

2/13

trus

tees

un

der 2

8 U.

S.C.

§ 5

86(e

)(1);

if no

stan

ding

trus

tee,

then

the

trus

tee

is pa

id u

nder

11

U.S.

C.

§ 33

0.

plan

is co

mpl

eted

. Th

e ch

. 12

trus

tee

may

seek

di

smiss

al u

nder

§ 1

208(

c) fo

r “c

ause

.” Pl

an p

aym

ents

bea

r a

trus

tee’

s fee

; nom

inal

ly 1

0%

in m

ost j

urisd

ictio

ns. §

12

26(a

)(2),

28 U

.S.C

. §

586(

e)(1

). Th

is m

ay b

e a

larg

e fe

e lo

ad in

farm

case

s.

Plan

pay

men

ts b

ear a

tr

uste

e’s f

ee. F

ee ca

nnot

ex

ceed

10%

of a

ll pa

ymen

ts

unde

r the

pla

n. 2

8 U.

S.C.

§

586(

e)(1

).

Est

ate

Prop

erty

E

stat

e Pr

oper

ty P

ost-

conf

irm

atio

n

Sect

ion

541

defin

es e

stat

e pr

oper

ty

exce

pt a

s to

indi

vidu

als.

For i

ndiv

idua

ls, §

111

5 au

gmen

ts

§

541

to a

dd a

ll pr

oper

ty h

eld

by

debt

or o

n th

e fil

ing

date

, all

prop

erty

ac

quire

d af

ter c

omm

ence

men

t and

be

fore

clos

ing

of th

e ca

se, a

nd a

ll ea

rnin

gs fo

r ser

vice

s per

form

ed p

ost-

petit

ion

and

prio

r to

closin

g. S

ectio

n 11

15 p

aral

lels

prop

erty

of e

stat

e de

fined

in ch

. 13

case

s, §

1306

. Po

st-c

onfir

mat

ion,

exc

ept a

s pr

ovid

ed in

the

plan

or c

onfir

mat

ion

orde

r, al

l the

est

ate’

s pro

pert

y re

vest

s in

the

debt

or fr

ee a

nd cl

ear o

f al

l lie

ns.

§ 11

41(b

) & (c

).

Sect

ion

1186

aug

men

ts §

541

an

d pa

ralle

ls §

1115

in ch

. 11.

No

sepa

rate

rule

.

Sect

ion

1207

aug

men

ts §

541

an

d pa

ralle

ls §

1115

in ch

. 11.

Po

st-c

onfir

mat

ion,

exc

ept a

s pr

ovid

ed in

the

plan

or

conf

irmat

ion

orde

r, al

l the

es

tate

’s pr

oper

ty re

vest

s in

the

debt

or fr

ee a

nd cl

ear o

f all

liens

. § 1

227

(b) &

(c).

Sect

ion

1306

aug

men

ts §

541

, an

d pa

ralle

ls §

1115

in ch

. 11.

Po

st-c

onfir

mat

ion,

exc

ept a

s pr

ovid

ed in

the

plan

or

conf

irmat

ion

orde

r, al

l the

es

tate

’s pr

oper

ty re

vest

s in

the

debt

or fr

ee a

nd cl

ear o

f all

liens

. § 1

327(

b) &

(c).



App

endi

x C

– 7

A

dequ

ate

Prot

ectio

n Se

ctio

n 36

1 ap

plie

s. Ad

equa

te p

rote

ctio

n m

ay b

e pr

ovid

ed b

y 1)

cash

or p

erio

dic c

ash

paym

ents

for d

imin

utio

n in

the

valu

e of

the

entit

y's i

nter

est i

n th

e pr

oper

ty; 2

) rep

lace

men

t lie

ns; o

r 3)

“suc

h ot

her r

elie

f” a

s will

resu

lt in

the

real

izatio

n of

the

indu

bita

ble

equi

vale

nt o

f the

ent

ity's

inte

rest

in

the

prop

erty

. § 3

61.

Sect

ion

361

appl

ies.

Afte

r not

ice a

nd a

hea

ring,

the

cour

t may

aut

horiz

e th

e tr

uste

e to

mak

e pr

econ

firm

atio

n ad

equa

te

paym

ents

to th

e ho

lder

of a

se

cure

d cla

im.

§ 11

94(c

).

Sect

ion

361'

s gen

eral

de

finiti

on o

f ade

quat

e pr

otec

tion

does

NO

T ap

ply

to

a ch

. 12

case

. § 1

205(

a).

Adeq

uate

pro

tect

ion

may

be

prov

ided

by

1) ca

sh o

r pe

riodi

c cas

h pa

ymen

ts fo

r di

min

utio

n of

the

valu

e of

the

colla

tera

l; 2)

repl

acem

ent

liens

; 3) r

easo

nabl

e re

ntal

va

lue

for t

he u

se o

f far

mla

nd;

4) “s

uch

othe

r rel

ief”

to

adeq

uate

ly p

rote

ct th

e va

lue

of p

rope

rty

secu

ring

the

claim

(li

ke th

e in

dubi

tabl

e eq

uiva

lent

test

). §

1205

(b).

Sect

ion

361

appl

ies.

The

debt

or is

requ

ired

to

mak

e pr

econ

firm

atio

n ad

equa

te p

rote

ctio

n pa

ymen

ts to

hol

ders

of c

laim

s se

cure

d by

a p

urch

ase

mon

ey

secu

rity

inte

rest

in p

erso

nal

prop

erty

. §

1326

(a)(1

)(C).

The

amou

nt

of p

erio

dic p

aym

ents

on

a se

cure

d cla

im u

nder

a p

lan

mus

t also

pro

vide

ade

quat

e pr

otec

tion

paym

ents

to th

e ho

lder

of a

clai

m se

cure

d by

pe

rson

al p

rope

rty.

§

1325

(a)(5

)(B)(i

ii)(II

).

Avo

idan

ce P

ower

s Pu

rsua

nt to

§ 1

107,

the

ch. 1

1 DI

P is

the

prop

er p

arty

to a

sser

t ch.

5

avoi

danc

e ac

tions

unl

ess r

emov

ed a

s DI

P, a

nd a

trus

tee

is ap

poin

ted

purs

uant

to §

110

4. T

here

is so

me

disa

gree

men

t as t

o w

heth

er

exam

iner

s app

oint

ed u

nder

§ 1

104

also

hav

e th

e au

thor

ity to

pur

sue

avoi

danc

e ac

tions

und

er §

110

6.

Man

y co

urts

hav

e al

so ru

led

that

ba

nkru

ptcy

cour

ts h

ave

the

pow

er to

au

thor

ize a

cred

itors

com

mitt

ee to

br

ing

an a

void

ance

act

ion

on b

ehal

f of

the

esta

te.

A ch

. 11

plan

may

also

pro

vide

for t

he

tran

sfer

of a

void

ance

pow

ers t

o a

repr

esen

tativ

e of

the

esta

te

appo

inte

d in

the

conf

irmat

ion

orde

r.

Subj

ect t

o ce

rtai

n lim

itatio

ns,

the

debt

or h

as a

ll rig

hts o

f a

trus

tee

unde

r § 1

184,

and

th

eref

ore

pres

umab

ly h

as

stan

ding

to b

ring

ch. 5

av

oida

nce

actio

ns u

nles

s re

mov

ed a

s a D

IP p

ursu

ant t

o §

1185

.

The

ch. 1

2 DI

P ha

s exc

lusiv

e st

andi

ng to

brin

g ch

. 5

avoi

danc

e ac

tions

unl

ess

rem

oved

as a

DIP

pur

suan

t to

§ 12

04. §

120

3.

The

ch. 1

3 st

andi

ng tr

uste

e is

auth

orize

d to

pur

sue

avoi

danc

e ac

tions

. § 5

54(a

). Co

urts

are

div

ided

ove

r w

heth

er a

ch. 1

3 de

btor

also

ha

s sta

ndin

g to

ass

ert t

he

esta

te’s

avoi

ding

pow

ers.

Unlik

e ch

s. 11

and

12,

ther

e is

no p

rovi

sion

in ch

. 13

expr

essly

conf

errin

g on

de

btor

s the

pow

ers o

f a

trus

tee.



App

endi

x C

– 8

§

1123

(b)(3

)(B).

Plan

Exc

lusi

vity

Pl

an D

eadl

ines

D

iscl

osur

e St

atem

ent

Regu

lar c

h. 1

1 de

btor

s and

Sm

all

Busin

ess D

ebto

rs h

ave

a 12

0-da

y ex

clusiv

ity p

erio

d to

file

a p

lan.

Ch

. 11:

No

dea

dlin

e fo

r fili

ng th

e pl

an p

er

se, b

ut ch

. 11

debt

ors h

ave

120

days

to e

xclu

sivel

y fil

e a

plan

. Th

is pe

riod

may

be

exte

nded

up

to 1

8 m

onth

s fro

m th

e da

te th

e or

der f

or re

lief i

s ent

ered

.

§

1121

(b) &

(d).

Sm

all B

usin

ess D

ebto

rs:

Debt

ors h

ave

180

days

to

exclu

sivel

y fil

e a

plan

. Thi

s per

iod

may

be

exte

nded

up

to 2

0 m

onth

s fro

m th

e da

te th

e or

der

for r

elie

f is e

nter

ed. §

11

21(d

)(2)(B

) & (e

). Th

e pl

an

mus

t be

conf

irmed

45

days

afte

r fil

ed u

nles

s the

tim

e pe

riod

has

been

ext

ende

d. §

§ 11

21(e

)(3),

1129

(e).

Ch

. 11:

Th

e de

btor

mus

t file

a d

isclo

sure

st

atem

ent t

hat p

rovi

des

adeq

uate

info

rmat

ion

to

cred

itors

. § 1

125.

The

cour

t mus

t ap

prov

e th

e di

sclo

sure

stat

emen

t pr

ior t

o th

e de

btor

’s ab

ility

to

solic

it vo

tes.

Only

the

debt

or ca

n fil

e a

plan

. § 1

189(

a).

Sim

ilar t

o ch

. 12,

the

plan

m

ust b

e fil

ed w

ithin

90

days

of

the

orde

r for

relie

f, bu

t thi

s pe

riod

may

be

exte

nded

if it

is

show

n th

at th

e ne

ed fo

r the

ex

tens

ion

is du

e to

cir

cum

stan

ces f

or w

hich

the

debt

or sh

ould

not

just

ly b

e he

ld a

ccou

ntab

le. §

118

9(b)

. No

ne re

quire

d un

less

ot

herw

ise o

rder

ed b

y th

e co

urt.

§ 11

81(b

).

Only

the

debt

or ca

n fil

e a

plan

. § 1

221.

Th

e de

btor

mus

t file

a p

lan

with

in 9

0 da

ys o

f the

ord

er fo

r re

lief.

To e

xten

d th

e 90

-day

pe

riod,

deb

tor m

ust c

lear

ly

dem

onst

rate

that

the

inab

ility

to

file

a p

lan

was

due

to

circu

mst

ance

s bey

ond

the

debt

or’s

cont

rol.

§ 12

21.

None

requ

ired.

Only

the

debt

or ca

n fil

e a

plan

. § 1

321.

Th

e de

btor

mus

t file

a p

lan

with

in 1

4 da

ys a

fter t

he

petit

ion

is fil

ed, a

nd su

ch ti

me

can

only

ext

end

for c

ause

sh

own

and

on n

otice

as t

he

cour

t may

dire

ct. B

R 30

15(b

). No

ne re

quire

d.



App

endi

x C

– 9

St

atus

Con

fere

nce

Com

men

cem

ent o

f Pl

an P

aym

ents

Pl

an C

onte

nt

Smal

l Bus

ines

s Deb

tors

: A

Smal

l Bus

ines

s Deb

tor d

oes n

ot

need

to fi

le a

sepa

rate

disc

losu

re

stat

emen

t if t

he co

urt d

eem

s the

pl

an to

cont

ain

adeq

uate

in

form

atio

n. §

112

5(f).

Ac

cept

ance

s/re

ject

ions

of a

pla

n m

ay b

e so

licite

d ba

sed

on

cond

ition

ally

app

rove

d di

sclo

sure

st

atem

ents

. § 1

125(

f).

None

requ

ired.

Ch

. 11

debt

or co

mm

ence

s mak

ing

plan

pay

men

ts o

n th

e da

te th

e fir

st

paym

ent i

s due

und

er th

e co

nfirm

ed

plan

. Pl

ans m

ust:

1) d

esig

nate

clas

ses o

f

Subc

hapt

er V

add

s a n

ew

requ

irem

ent u

niqu

e to

this

subc

hapt

er re

quiri

ng th

e co

urt

to h

old

a st

atus

conf

eren

ce n

o la

ter t

han

60 d

ays a

fter t

he

orde

r for

relie

f. §

1188

(a).

This

perio

d m

ay b

e ex

tend

ed fo

r cir

cum

stan

ces f

or w

hich

the

debt

or sh

ould

not

just

ly b

e he

ld a

ccou

ntab

le. §

118

8(b)

. No

late

r tha

n 14

day

s prio

r to

such

conf

eren

ce th

e de

btor

is

to fi

le a

repo

rt d

etai

ling

its

effo

rts t

o at

tain

a co

nsen

sual

pl

an. §

118

8(c)

. Pl

ans m

ust:

1) p

rovi

de a

brie

f hi

stor

y of

the

busin

ess

oper

atio

ns o

f the

deb

tor;

2)

None

requ

ired.

Ch

. 12

debt

or h

as n

o ob

ligat

ion

to m

ake

paym

ents

to

the

trus

tee

befo

re

conf

irmat

ion.

§

1226

; 8 C

ollie

r on

Bank

rupt

cy P

122

6.01

(16t

h 20

19).

Mirr

ors t

hose

of c

h. 1

3. ch

. 12

plan

s must:

1) p

rovi

de fu

ture

ea

rnin

gs o

r fut

ure

inco

me

to

None

requ

ired.

Ch

. 13

debt

or m

ust

com

men

ce m

akin

g pa

ymen

ts

no la

ter t

han

30 d

ays a

fter t

he

date

of f

iling

the

plan

or o

rder

fo

r rel

ief,

whi

chev

er is

ear

lier.

§

1326

(a)(1

).

Plan

s must:

1) p

rovi

de fu

ture

ea

rnin

gs o

r fut

ure

inco

me

to

the

trus

tee;

2) p

rovi

de a

ll



App

endi

x C

– 1

0

cla

ims/

inte

rest

s; 2)

spec

ify

impa

ired/

unim

paire

d cla

ims;

3)

spec

ify tr

eatm

ent f

or e

ach

unim

paire

d cla

im; 4

) pro

vide

the

sam

e tr

eatm

ent f

or e

ach

claim

/inte

rest

; 5) p

rovi

de su

fficie

nt

mea

ns o

f im

plem

entin

g th

e pl

an; 6

) if

appl

icabl

e, in

clude

pro

visio

n ba

rrin

g th

e iss

uanc

e of

non

votin

g eq

uity

se

curit

ies;

7) co

ntai

n pr

ovisi

ons

cons

isten

t with

the

publ

ic in

tere

st;

and

8) in

an

indi

vidu

al ca

se, p

rovi

de

for d

ebto

r’s fu

ture

inco

me

to fu

nd

plan

pay

men

ts. §

112

3.

Plan

s may

: 1) i

mpa

ir or

leav

e un

impa

ired

secu

red/

unse

cure

d cla

ims;

2) a

ssum

e/re

ject

leas

es &

ex

ecut

ory

cont

ract

s; 3

) set

tle/a

djus

t an

y cla

im/in

tere

st o

f deb

tor o

r the

es

tate

; 4) d

esig

nate

a co

nven

ienc

e cla

ss o

f cla

ims;

5) se

ll es

tate

pr

oper

ty; 6

) mod

ify se

cure

d cla

ims

exce

pt se

cure

d in

tere

sts i

n a

prin

cipal

re

siden

ce; a

nd, 7

) “in

clude

any

oth

er

prov

ision

cons

isten

t with

§ 1

123.

” Ca

nnot

mod

ify co

nsen

sual

lien

s on

a pr

incip

al re

siden

ce.

prov

ide

a liq

uida

tion

anal

ysis;

3)

pro

vide

pro

ject

ions

with

re

spec

t to

the

abili

ty o

f the

de

btor

to m

ake

paym

ents

un

der t

he p

ropo

sed

plan

; and

4)

pro

vide

for t

he su

bmiss

ion

of a

ll or

such

por

tion

of th

e fu

ture

ear

ning

s of o

ther

futu

re

inco

me

of th

e de

btor

as i

s ne

cess

ary

for t

he e

xecu

tion

of

the

plan

. § 1

190(

1) &

(2).

Plan

s may

: 1) m

odify

the

right

s of t

he h

olde

r of a

clai

m

secu

red

only

by

a se

curit

y in

tere

st in

real

pro

pert

y th

at is

th

e pr

incip

al re

siden

ce o

f the

de

btor

if th

e ne

w v

alue

re

ceiv

ed in

conn

ectio

n w

ith

gran

ting

the

secu

rity

was

i)

not u

sed

prim

arily

to a

cqui

re

real

pro

pert

y; a

nd (i

i) us

ed

prim

arily

in co

nnec

tion

with

th

e sm

all b

usin

ess o

f the

de

btor

. § 1

190(

3).

the

trus

tee;

2) p

rovi

de a

ll pr

iorit

y cla

ims u

nder

§ 5

07 a

re

paid

in fu

ll; 3

) pro

vide

the

sam

e tr

eatm

ent o

f all

claim

s if

the

plan

clas

sifie

s cla

ims a

nd

inte

rest

s; an

d, 4

) if a

ll th

e de

btor

’s pr

ojec

ted

disp

osab

le

inco

me

for a

5-y

ear p

erio

d is

com

mitt

ed to

the

plan

, the

n th

e pl

an m

ay p

rovi

de fo

r les

s th

an fu

ll pa

ymen

t of a

mou

nts

owed

und

er §

507

(a)(1

)(B).

§ 12

22.

Unde

r § 1

222(

b)(1

)-(12

), th

e pl

an m

ay d

esig

nate

clas

ses,

mod

ify ri

ghts

of s

ecur

ed

claim

s, cu

re d

efau

lts, p

ay

unse

cure

d cr

edito

rs, a

ssum

e le

ases

and

exe

cuto

ry

cont

ract

s, an

d pr

ovid

e fo

r the

sa

le o

r dist

ribut

ion

of

prop

erty

. Ch

. 12

allo

ws m

odifi

catio

n of

ho

me

mor

tgag

es, §

12

22(b

)(2),

and

disc

harg

e of

ta

xes a

risin

g fro

m sa

le o

f fa

rmin

g as

sets

, §

1232

.

prio

rity

claim

s und

er §

507

are

pa

id in

full;

3) p

rovi

de th

e sa

me

trea

tmen

t for

eac

h cla

im

with

in a

par

ticul

ar cl

ass;

and

4) if

all

the

debt

or’s

proj

ecte

d di

spos

able

inco

me

for a

5-y

ear

perio

d is

com

mitt

ed to

the

plan

, the

n th

e pl

an m

ay

prov

ide

for l

ess t

han

full

paym

ent o

f am

ount

s ow

ed

unde

r § 5

07(a

)(1)(B

). §

1322

. Un

der §

132

2(b)

(1)-(

11),

the

plan

may

des

igna

te cl

asse

s, m

odify

righ

ts o

f sec

ured

cla

ims,

cure

def

aults

, pay

un

secu

red

cred

itors

, and

as

sum

e le

ases

and

exe

cuto

ry

cont

ract

s.

Unlik

e ch

. 12,

§ 1

322

does

not

co

ntai

n a

prov

ision

au

thor

izing

the

sale

of

prop

erty

in th

e pl

an.

Cann

ot m

odify

cons

ensu

al

liens

on

a pr

incip

al re

siden

ce.

Sale

s Fre

e an

d C

lear

of

Lie

ns

Ch. 1

1 de

btor

s in

poss

essio

n m

ay se

ll as

sets

, oth

er th

an in

the

ordi

nary

co

urse

of b

usin

ess,

free

and

clear

of

liens

und

er §

363

(f) a

fter n

otice

and

a

hear

ing.

§ 1

107(

a). S

ales

free

and

cle

ar o

f lie

ns re

quire

satis

fyin

g on

e of

th

e fo

llow

ing

grou

nds:

1) a

pplic

able

Ch

. 12

debt

ors i

n po

sses

sion

and

trus

tees

reta

in th

e rig

ht

to se

ll pr

oper

ty fr

ee a

nd cl

ear

of li

ens u

nder

§ 3

63(f)

. §§

1203

, 120

6.

In a

dditi

on, §

120

6, w

hich

Ch. 1

3 de

btor

s may

sell

asse

ts,

othe

r tha

n in

the

ordi

nary

co

urse

of b

usin

ess,

free

and

clear

of l

iens

und

er §

363

(f)

afte

r not

ice a

nd h

earin

g.

§

1303

. Sal

es fr

ee a

nd cl

ear o

f lie

ns re

quire

satis

fyin

g on

e of



App

endi

x C

– 1

1

no

nban

krup

tcy

law

per

mits

sale

of

such

pro

pert

y fre

e an

d cle

ar o

f suc

h in

tere

st; 2

) the

inte

rest

hol

der

cons

ents

; 3) t

he p

rope

rty’

s sal

e pr

ice

is gr

eate

r tha

n th

e ag

greg

ate

valu

e of

al

l lie

ns o

n th

e pr

oper

ty; 4

) the

in

tere

st is

in b

ona

fide

disp

ute;

or 5

) th

e in

tere

st h

olde

r cou

ld b

e co

mpe

lled

in a

lega

l or e

quita

ble

proc

eedi

ng to

acc

ept a

mon

ey

satis

fact

ion

for t

he cl

aim

. § 3

63(f)

(1)-

(5).

appl

ies o

nly

in ch

. 12,

allo

ws

trus

tees

und

er §

363

(b) a

nd

(c) a

fter n

otice

and

hea

ring

to

sell

farm

land

, far

m

equi

pmen

t, or

any

pro

pert

y us

ed to

carr

y ou

t a

com

mer

cial f

ishin

g op

erat

ion

(inclu

ding

a co

mm

ercia

l fis

hing

ves

sel)

free

and

clear

of

third

-par

ty in

tere

sts e

ven

if no

ne o

f the

gro

unds

in §

36

3(f)

are

satis

fied.

Sec

tion

1206

“mod

ifies

[§] 3

63(f)

to

allo

w fa

mily

farm

ers o

r fis

herm

en to

sell

asse

ts n

ot

need

ed fo

r the

reor

gani

zatio

n pr

ior t

o co

nfirm

atio

n w

ithou

t th

e co

nsen

t of t

he se

cure

d cr

edito

rs, s

ubje

ct to

app

rova

l of

the

cour

t.” 8

Col

lier o

n Ba

nkru

ptcy

P 1

206.

01 (1

6th

2019

). Bu

t pro

ceed

s of s

uch

sale

s are

still

subj

ect t

o th

ose

third

-par

ty in

tere

sts.

§ 12

06.

the

follo

win

g gr

ound

s: 1

) ap

plica

ble

nonb

ankr

uptc

y la

w

perm

its sa

le o

f suc

h pr

oper

ty

free

and

clear

of s

uch

inte

rest

; 2)

the

inte

rest

hol

der

cons

ents

; 3) t

he p

rope

rty’

s sa

le p

rice

is gr

eate

r tha

n th

e ag

greg

ate

valu

e of

all

liens

on

the

prop

erty

; 4) t

he in

tere

st is

in

bon

a fid

e di

sput

e; o

r 5) t

he

inte

rest

hol

der c

ould

be

com

pelle

d in

a le

gal o

r eq

uita

ble

proc

eedi

ng to

ac

cept

a m

oney

satis

fact

ion

for t

he cl

aim

. § 3

63(f)

(1)-(

5).

Spec

ial T

ax

Prov

isio

ns fo

r C

hapt

er 1

2

Beca

use

ch. 1

2 pl

ans t

ypica

lly

sell

prop

erty

to re

orga

nize

, to

avoi

d ha

rd ta

x con

sequ

ence

s, §

1232

(a) “

recla

ssifi

es” t

hese

go

vern

men

t cla

ims a

s un

secu

red

claim

s aris

ing

befo

re th

e pe

titio

n da

te th

at

shal

l not

be

entit

led

to §

507

pr

iorit

y st

atus

and

disc

harg

ed

unde

r § 1

228.

Se

ctio

n 12

32 w

as si

gned

into

la

w o

n O

ctob

er 2

6, 2

017.



App

endi

x C

– 1

2

Pu

blic

Law

115

-72

prov

ides

th

at th

e am

endm

ents

app

ly to

an

y ba

nkru

ptcy

case

pen

ding

, bu

t not

conf

irmed

, on

the

effe

ctiv

e da

te o

f the

act

. Ch

. 12

debt

ors m

ust i

nclu

de

§ 12

32(a

) uns

ecur

ed cl

aim

s in

thei

r pla

ns. I

f the

re is

a p

ost-

conf

irmat

ion

sale

, tra

nsfe

r, ex

chan

ge, o

r oth

er d

ispos

ition

on

farm

pro

pert

y, a

nd a

su

bseq

uent

gov

ernm

ent u

nit

claim

aris

es, t

hen

it w

ill b

e ne

cess

ary

for t

he tr

uste

e to

ad

just

pay

men

ts a

ccor

ding

ly.

Poss

ible

pla

n la

ngua

ge: T

he

ch. 1

2 pl

an sh

ould

inclu

de

lang

uage

to th

e ef

fect

that

an

y po

tent

ial c

laim

with

in th

e sc

ope

of §

123

2(a)

aris

ing

post

-pet

ition

, but

bef

ore

disc

harg

e, sh

all b

e in

clude

d in

th

e cla

ss o

f gen

eral

uns

ecur

ed

claim

s. 8

Colli

er 1

232.

03. T

he

plan

lang

uage

shou

ld a

ccou

nt

for t

he tr

uste

e’s n

eed

to

inclu

de ta

x cla

ims i

n th

e un

secu

red

cred

itor p

ool a

nd

shou

ld ti

me

any

disb

urse

men

ts to

the

unse

cure

d cr

edito

rs o

nly

afte

r th

e ta

x cla

ims h

ave

been

file

d to

avo

id a

pot

entia

lly u

nequ

al

(i.e.

, not

pro

rata

) dist

ribut

ion

amon

gst u

nsec

ured

clai

man

ts.



App

endi

x C

– 1

3

Pl

an C

onfir

mat

ion

Req

uire

men

ts

Ch. 1

1:

Afte

r not

ice, t

he co

urt s

hall

hold

a

hear

ing

on co

nfirm

atio

n. 2

8-da

ys’

notic

e re

quire

d. B

R 20

02(b

). To

be

conf

irmed

, pla

ns m

ust

satis

fy 1

6 re

quire

men

ts o

f §

1129

(a).

Chie

f am

ong

the

requ

irem

ents

are

feas

ibili

ty a

nd

the

best

inte

rest

of t

he cr

edito

rs

test

s. If

all o

ther

requ

irem

ents

un

der

§

112

9(a)

are

met

but

fo

r (a)

(8),

the

debt

or m

ay se

ek to

“c

ram

dow

n” th

e pl

an o

ver t

he

obje

ctio

ns o

f its

cred

itors

. §

1129

(b).

Ab

solu

te p

riorit

y ru

le a

pplie

s. As

a

com

pone

nt o

f a §

112

9(b)

cram

do

wn,

pla

ns m

ust s

atisf

y th

e ab

solu

te p

riorit

y ru

le. A

t lea

st o

ne

cour

t has

foun

d th

e ab

solu

te

prio

rity

rule

app

lies i

n in

divi

dual

ch

. 11s

. In

re R

oger

s, 20

16 W

L 35

8329

9 (B

ankr

. S.D

. Ga.

June

24,

20

16).

Cr

edito

rs m

ust o

bjec

t to

the

plan

or

risk

forfe

iting

thei

r obj

ectio

n.

BR 3

015(

f).

Smal

l Bus

ines

s Deb

tors

: Se

ctio

n 11

29(e

) dire

cts t

he co

urt

to co

nfirm

a p

lan

not l

ater

than

45

days

afte

r the

dat

e it

was

file

d.

Smal

l bus

ines

s pla

ns fo

llow

the

sam

e co

nfirm

atio

n re

quire

men

ts

To b

e co

nfirm

ed, p

lan

mus

t sa

tisfy

the

requ

irem

ents

of §

11

29(a

). §

1191

. No

cons

entin

g im

paire

d cla

ss

need

ed fo

r con

firm

atio

n if

1)

plan

satis

fies §

112

9(a)

[oth

er

than

(a)(8

), (a

)(10)

, and

(a

)(15)

]; 2)

pla

n do

es n

ot

disc

rimin

ate

unfa

irly;

and

3)

plan

is fa

ir an

d eq

uita

ble,

as t

o ea

ch im

paire

d, n

onco

nsen

ting

class

. §§

1181

(a),

1191

(b).

A

plan

is “f

air a

nd e

quita

ble”

if

1) §

112

9(b)

(2)(A

) is s

atisf

ied;

2)

it p

rovi

des f

or a

pplic

atio

n of

all

debt

or’s

proj

ecte

d di

spos

able

inco

me

for 3

yea

rs

begi

nnin

g on

dat

e fir

st

paym

ent i

s due

(or u

p to

5

year

s, as

ord

ered

) to

plan

pa

ymen

ts; a

nd 3

) deb

tor w

ill

be a

ble

to m

ake

all p

lan

paym

ents

or t

here

is a

re

ason

able

like

lihoo

d de

btor

w

ill b

e ab

le to

mak

e al

l pla

n pa

ymen

ts. §

119

1(c)

. Th

e ab

solu

te p

riorit

y ru

le d

oes

not a

pply

. § 1

181(

a).

Exce

pt fo

r cau

se, c

onfir

mat

ion

hear

ing

shal

l be

conc

lude

d no

t la

ter t

han

45 d

ays a

fter t

he

filin

g of

the

plan

. 21-

days

’ no

tice

requ

ired.

BR

2002

(a)(8

). Pl

ans m

ust s

atisf

y al

l Cod

e re

quire

men

ts, b

e pr

opos

ed in

go

od fa

ith, a

nd p

ay a

ll ad

min

fe

es. I

n ad

ditio

n, th

e co

urt

mus

t fin

d th

at th

e de

btor

’s pl

an is

feas

ible

and

in th

e be

st

inte

rest

of c

redi

tors

. W

ith re

spec

t to

secu

red

claim

s, §

1225

(a)(5

) pro

vide

s th

ree

aven

ues o

f tre

atm

ent:

1) th

e cr

edito

r has

acc

epte

d th

e pl

an; 2

) the

secu

red

cred

itor r

etai

ns it

s lie

n an

d re

ceiv

es p

rope

rty

havi

ng a

va

lue,

as o

f the

effe

ctiv

e da

te,

not l

ess t

han

the

allo

wed

am

ount

of t

he se

cure

d cla

im,

i.e.,

“cra

mdo

wn;

” and

3)

debt

or su

rren

ders

the

prop

erty

. Cr

amdo

wn

for c

h. 1

2 pu

rpos

es

depe

nds o

n th

e am

ount

of t

he

claim

. § 5

06(a

) and

(b).

Pe

rmiss

ible

pla

n du

ratio

n is

up

to 5

yea

rs. N

o “m

eans

test

” fo

r disp

osab

le in

com

e.

Conf

irmat

ion

hear

ing

mus

t be

sche

dule

d no

t ear

lier t

han

21

days

but

not

late

r tha

n 45

da

ys a

fter t

he 3

41 m

eetin

g of

cr

edito

rs. 2

8-da

ys’ n

otice

re

quire

d. B

R 20

02(b

). Pl

ans m

ust s

atisf

y al

l Cod

e re

quire

men

ts, b

e pr

opos

ed in

go

od fa

ith, a

nd p

ay a

ll ad

min

fe

es. I

n ad

ditio

n, th

e co

urt

mus

t fin

d th

at th

e de

btor

’s pl

an is

feas

ible

and

in th

e be

st

inte

rest

of c

redi

tors

. W

ith re

spec

t to

secu

red

claim

s, §

1325

(a)(5

) pro

vide

s th

ree

aven

ues o

f tre

atm

ent:

1) th

e cr

edito

r has

acc

epte

d th

e pl

an; 2

) the

secu

red

cred

itor r

etai

ns it

s lie

n an

d re

ceiv

es p

rope

rty

havi

ng a

va

lue,

as o

f the

effe

ctiv

e da

te,

not l

ess t

han

the

allo

wed

am

ount

of t

he se

cure

d cla

im,

i.e.,

“cra

mdo

wn;

” and

3)

debt

or su

rren

ders

the

prop

erty

. Cr

edito

rs d

o no

t hav

e an

op

port

unity

to v

ote

on ch

. 13

plan

s but

may

obj

ect t

o th

e pl

an o

r risk

forfe

iting

thei

r ob

ject

ion.

BR

3015

(f).



App

endi

x C

– 1

4

as

thei

r lar

ger c

h. 1

1 co

unte

rpar

ts.

Cred

itors

do

not h

ave

an

oppo

rtun

ity to

vot

e on

ch. 1

2 pl

ans b

ut m

ay o

bjec

t to

the

plan

or r

isk fo

rfeiti

ng th

eir

obje

ctio

n. B

R 30

15(f)

.

Plan

Mod

ifica

tions

Th

e pl

an p

ropo

nent

may

mod

ify a

pl

an a

ny ti

me

befo

re co

nfirm

atio

n.

§

1127

(a),

(c).

Afte

r con

firm

atio

n, th

e pl

an

prop

onen

t or r

eorg

anize

d de

btor

m

ay m

odify

the

plan

prio

r to

subs

tant

ial c

onsu

mm

atio

n of

the

plan

. Pla

n m

odifi

catio

ns m

ust c

ompl

y w

ith

§ 11

25. §

112

7(b)

, (c)

.

The

debt

or m

ay m

odify

the

plan

at a

ny ti

me

prio

r to

conf

irmat

ion.

§11

93(a

).

Afte

r con

firm

atio

n an

d be

fore

su

bsta

ntia

l con

sum

mat

ion,

th

e de

btor

may

mod

ify th

e pl

an a

s lon

g as

it co

mpl

ies

with

§§

1122

and

112

3,

conf

irms t

he m

odifi

ed p

lan,

an

d fin

ds th

at ci

rcum

stan

ces

war

rant

the

mod

ifica

tion.

§

1193

(b).

Af

ter c

onfir

mat

ion

and

subs

tant

ial c

onsu

mm

atio

n,

the

debt

or m

ay m

odify

the

plan

at a

ny ti

me

with

in 3

ye

ars,

or u

p to

5 y

ears

as f

ixed

by th

e co

urt,

but t

he m

odifi

ed

plan

mus

t com

ply

with

§

1121

(b), an

d th

e co

urt m

ust

find

that

circ

umst

ance

s w

arra

nt th

e m

odifi

catio

n. §

11

93(c

). A

cons

ensu

ally

conf

irmed

pla

n m

ay o

nly

be m

odifi

ed b

y co

nsen

t. §

1193

(b).

Debt

or m

ay m

odify

the

plan

at

any

time

befo

re co

nfirm

atio

n.

§ 12

23.

Plan

s may

be

mod

ified

afte

r co

nfirm

atio

n bu

t onl

y be

fore

de

btor

has

com

plet

ed

paym

ents

und

er su

ch p

lan.

Pl

ans m

ay b

e m

odifi

ed b

y th

e de

btor

, tru

stee

, or h

olde

r of

an a

llow

ed u

nsec

ured

clai

m.

§ 12

29.

Plan

s may

be

mod

ified

onl

y to

: 1) i

ncre

ase/

decr

ease

pa

ymen

ts; 2

) ext

end/

redu

ce

the

time

for p

aym

ents

; 3) a

lter

the

amou

nt o

f dist

ribut

ion;

or

4) p

rovi

de p

aym

ent o

n a

§

1232

(a) c

laim

. § 1

229.

Pl

an m

ay N

OT

be m

odifi

ed b

y an

yone

exc

ept t

he d

ebto

r in

the

last

yea

r of t

he p

lan

to

requ

ire p

aym

ents

leav

ing

the

debt

or w

ith in

suffi

cient

fund

s to

ope

rate

the

farm

.

§ 12

29(d

)(3).

Debt

or m

ay m

odify

the

plan

at

any

time

befo

re co

nfirm

atio

n.

§ 13

23.

Plan

s may

be

mod

ified

afte

r co

nfirm

atio

n bu

t onl

y be

fore

de

btor

has

com

plet

ed

paym

ents

und

er su

ch p

lan.

Pl

ans m

ay b

e m

odifi

ed b

y th

e de

btor

, tru

stee

, or h

olde

r of

an a

llow

ed u

nsec

ured

clai

m.

§ 13

29.

Plan

s may

be

mod

ified

onl

y to

: 1) i

ncre

ase/

decr

ease

pa

ymen

ts; 2

) ext

end/

redu

ce

the

time

for p

aym

ents

; 3) a

lter

the

amou

nt o

f dist

ribut

ion;

or

4) re

duce

am

ount

s pai

d un

der

plan

by

the

actu

al a

mou

nt

expe

nded

by

debt

or to

pu

rcha

se h

ealth

care

. § 1

329.

Th

e CA

RES

Act a

llow

s a d

ebto

r to

mod

ify a

pla

n co

nfirm

ed

prio

r to

3/27

/202

0 an

d ex

tend

pa

ymen

ts u

p to

seve

n ye

ars

from

the

time

of th

e fir

st

paym

ent i

f a d

ebto

r is

expe

rienc

ing

or h

as



App

endi

x C

– 1

5

ex

perie

nced

a m

ater

ial

finan

cial h

ards

hip

dire

ctly

or

indi

rect

ly re

late

d to

CO

VID-

19.

§ 13

29(d

)(1);

§ 11

13, C

ARES

Ac

t. Th

is pr

ovisi

on su

nset

s 3/

28/2

021.

§ 1

113,

CAR

ES A

ct.

C

onve

rsio

n A

ch. 7

deb

tor m

ay co

nver

t to

ch. 1

1 if

the

case

has

not

bee

n co

nver

ted

unde

r §§

1112

, 120

8, o

r 130

7.

§

706(

a). A

par

ty ca

nnot

wai

ve th

e rig

ht to

conv

ert.

Id.

A ch

. 11

debt

or m

ay co

nver

t a ca

se to

ch

. 7 u

nles

s: 1)

the

debt

or is

not

a

DIP;

2) t

he ca

se w

as co

mm

ence

d as

an

invo

lunt

ary

case

; or 3

) the

case

w

as co

nver

ted

to a

ch. 1

1 ca

se o

ther

th

an o

n th

e de

btor

’s re

ques

t.

§ 11

12(a

). Th

e co

urt m

ay o

nly

conv

ert t

o ch

. 7

on th

e re

ques

t of a

par

ty in

inte

rest

, af

ter n

otice

and

a h

earin

g, a

nd fo

r ca

use.

The

cour

t will

conv

ert o

r di

smiss

, whi

chev

er is

in th

e be

st

inte

rest

of c

redi

tors

. § 1

112(

b).

The

cour

t may

not

conv

ert t

o ch

. 7 if

th

e de

btor

is a

farm

er o

r a

corp

orat

ion

that

is n

ot a

mon

eyed

, bu

sines

s or c

omm

ercia

l ope

ratio

n un

less

the

debt

or re

ques

ts th

e co

nver

sion.

§

1112

(c).

A ch

. 11

case

may

be

conv

erte

d to

ch.

12 o

r ch.

13

only

if: 1

) the

deb

tor

No se

para

te ru

le.

A ch

. 7 d

ebto

r may

conv

ert t

o ch

. 12

if th

e ca

se h

as n

ot b

een

conv

erte

d un

der §

§ 11

12,

1208

, or 1

307.

§ 7

06(a

). A

part

y ca

nnot

wai

ve th

e rig

ht

to co

nver

t. Id

. A

ch. 1

2 de

btor

may

conv

ert a

ca

se to

ch. 7

any

tim

e.

§ 12

08(a

). Th

e co

urt m

ay o

nly

conv

ert t

o ch

. 7 o

n th

e re

ques

t of a

par

ty

in in

tere

st, a

fter n

otice

and

a

hear

ing,

upo

n a

show

ing

the

debt

or co

mm

itted

frau

d.

§

1208

(d).

The

appl

icabl

e la

w a

nd

debt

or’s

elig

ibili

ty fo

r ch.

12

on th

e pe

titio

n da

te, n

ot th

e co

nver

sion

date

, gov

erns

co

nver

sion

to ch

. 12.

See

In re

Ca

mpb

ell,

313

B.R.

871

(B.A

.P.

10th

Cir.

200

4), a

nd se

e In

Re

Ridg

ely,

93

B.R.

683

(Ban

kr.

E.D.

Mo.

198

8); b

ut cf

. In

re

Feel

y, 9

3 B.

R. 7

44 (B

ankr

. S.D

. Al

a. 1

988)

(det

erm

inin

g el

igib

ility

for c

onve

rsio

n to

ch.

A ch

. 7 d

ebto

r may

conv

ert t

o ch

. 13

if th

e ca

se h

as n

ot b

een

conv

erte

d un

der §

§ 11

12,

1208

, or 1

307.

§ 7

06(a

). A

part

y ca

nnot

wai

ve th

e rig

ht

to co

nver

t. Id

. A

ch. 1

3 de

btor

may

conv

ert a

ca

se to

ch. 7

at a

ny ti

me.

§

1307

(a).

The

cour

t may

onl

y co

nver

t to

ch. 7

on

the

requ

est o

f a p

arty

in

inte

rest

, afte

r not

ice a

nd a

he

arin

g, a

nd fo

r cau

se. T

he

cour

t will

conv

ert o

r dism

iss,

whi

chev

er is

in th

e be

st

inte

rest

of c

redi

tors

. §

1307

(c).

At a

ny ti

me

befo

re

conf

irmat

ion,

the

cour

t may

co

nver

t a ca

se to

ch. 1

1 or

ch.

12, o

n th

e re

ques

t of a

par

ty

in in

tere

st o

r the

U.S

. Tru

stee

. §

1307

(d).

The

cour

t may

not

conv

ert a

ch

. 13

case

to ch

. 7, 1

1 or

12

if th

e de

btor

is a

fam

ily fa

rmer

un

less

the

debt

or re

ques

ts th

e



App

endi

x C

– 1

6

re

ques

ts it

; 2) t

he d

ebto

r has

not

be

en d

ischa

rged

und

er §

114

1(d)

; an

d 3)

conv

ersio

n is

equi

tabl

e. §

11

12(d

).

12 b

ased

on

the

mot

ion

date

, no

t the

pet

ition

dat

e).

Ther

e is

no sp

ecifi

c pro

visio

n pe

rmitt

ing

or p

rohi

bitin

g th

e co

nver

sion

of a

ch. 1

2 ca

se to

ch

. 11

or ch

. 13.

conv

ersio

n. §

130

7(f).

Deb

tor

Dis

char

ge

A co

nfirm

ed p

lan

bind

s: 1)

the

debt

or; 2

) any

ent

ity a

cqui

ring

prop

erty

und

er th

e pl

an; a

nd 3

) any

cr

edito

rs, a

mon

g ot

hers

, whe

ther

or

not t

he e

ntiti

es h

ave

acce

pted

the

plan

. § 1

141(

a).

For a

non

-indi

vidu

al ch

. 11

debt

or,

disc

harg

e oc

curs

at c

onfir

mat

ion,

ex

cept

as o

ther

wise

pro

vide

d in

the

plan

or c

onfir

mat

ion

orde

r. Th

is di

scha

rges

the

debt

or fr

om a

ny d

ebt

that

aro

se p

rior t

o th

e da

te o

f co

nfirm

atio

n an

d el

imin

ates

all

equi

ty in

tere

sts i

n th

e de

btor

that

are

pr

ovid

ed fo

r in

the

plan

. Deb

ts se

t fo

rth

in §

114

1(d)

(6) a

re n

ot

disc

harg

ed (c

erta

in d

ebts

ow

ed to

go

vern

men

t uni

ts).

For a

n in

divi

dual

ch. 1

1 de

btor

, un

less

ord

ered

oth

erw

ise,

conf

irmat

ion

does

not

disc

harg

e an

y de

bt p

rovi

ded

for i

n th

e pl

an u

ntil

the

cour

t gra

nts a

disc

harg

e up

on

com

plet

ion

of a

ll pa

ymen

ts u

nder

the

plan

. An

indi

vidu

al d

ebto

r is n

ot

disc

harg

ed fr

om a

ny d

ebt e

xcep

ted

unde

r § 5

23.

If a

plan

is co

nsen

sual

ly

conf

irmed

, the

n th

e ge

nera

l di

scha

rge

prov

ision

s und

er

§114

1(d)

(1) –

(4) s

hall

appl

y.

Thus

, in

a no

n-liq

uida

ting

subc

hapt

er V

case

, disc

harg

e w

ill o

ccur

on

conf

irmat

ion.

If

a pl

an is

non

-con

sens

ually

co

nfirm

ed, t

hen

the

timin

g pr

ovisi

on fo

r disc

harg

e un

der

§ 11

41(d

) sha

ll no

t app

ly.

Rath

er, d

ischa

rge

will

be

ente

red

afte

r com

plet

ion

of a

ll pa

ymen

ts d

ue w

ithin

the

first

3

year

s of t

he p

lan,

or s

uch

long

er p

erio

d no

t to

exce

ed 5

ye

ars a

s the

cour

t may

fix.

§ 11

92.

Beca

use

§ 11

41(d

)(5) d

oes n

ot

appl

y to

a ca

se u

nder

su

bcha

pter

V, t

here

is n

o pr

ovisi

on fo

r a h

ards

hip

disc

harg

e in

an

indi

vidu

al

case

.

Two

type

s of d

ischa

rge

avai

labl

e: 1

) deb

tor c

ompl

etes

al

l pla

n pa

ymen

ts, o

ther

than

pa

ymen

ts to

long

-term

se

cure

d cr

edito

rs; a

nd 2

) de

btor

qua

lifie

s for

a

“har

dshi

p di

scha

rge”

whe

ther

or

not

deb

tor h

as co

mpl

eted

al

l pay

men

ts. §

122

8.

To re

ceiv

e a

hard

ship

di

scha

rge,

the

debt

or’s

failu

re

to co

mpl

ete

plan

pay

men

ts

mus

t be

due

to ci

rcum

stan

ces

beyo

nd th

e de

btor

’s co

ntro

l, cr

edito

rs m

ust h

ave

rece

ived

at

leas

t as m

uch

unde

r the

pl

an a

s the

y w

ould

in a

ch. 7

liq

uida

tion,

and

mod

ifica

tion

of th

e pl

an u

nder

§ 1

229

is no

t pr

actic

able

. § 1

228(

b).

Ch. 1

2 al

low

s disc

harg

e of

ta

xes a

risin

g fro

m th

e sa

le o

f fa

rmin

g as

sets

. § 1

232.

Two

type

s of d

ischa

rge

avai

labl

e: 1

) ful

l com

plia

nce

disc

harg

e; a

nd 2

) har

dshi

p di

scha

rge.

§ 1

328.

To

rece

ive

a ha

rdsh

ip

disc

harg

e, th

e de

btor

’s fa

ilure

to

com

plet

e pl

an p

aym

ents

m

ust b

e du

e to

circ

umst

ance

s be

yond

the

debt

or’s

cont

rol,

cred

itors

mus

t hav

e re

ceiv

ed

at le

ast a

s muc

h un

der t

he

plan

as t

hey

wou

ld in

a ch

. 7

liqui

datio

n, a

nd m

odifi

catio

n of

the

plan

und

er §

132

9 is

not

prac

ticab

le. §

132

8(b)

. W

ith so

me

exce

ptio

ns, t

he

“ful

l com

plia

nce”

disc

harg

e un

der §

132

8(a)

disc

harg

es a

w

ider

swat

h of

deb

ts th

an it

s sis

ter c

hapt

ers.

For e

xam

ple:

1)

som

e w

illfu

l and

mal

iciou

s to

rts;

2) fi

nes a

nd p

enal

ties;

3)

mar

ital p

rope

rty

sett

lem

ent

debt

s; 4

) deb

ts th

at w

ere

deni

ed d

ischa

rge

in a

n ea

rlier

ba

nkru

ptcy

. De

bts e

xcep

ted

from



App

endi

x C

– 1

7

Sect

ion

1141

(d)(3

) app

lies t

o no

n-in

divi

dual

and

indi

vidu

al d

ebto

rs,

barr

ing

a di

scha

rge

if th

e pl

an

liqui

date

s all

of d

ebto

r’s a

sset

s, th

e de

btor

susp

ends

bus

ines

s, an

d th

e de

btor

wou

ld b

e de

nied

a d

ischa

rge

unde

r § 7

27(a

).

A cla

im is

disc

harg

ed re

gard

less

of

whe

ther

the

cred

itor f

iled

a pr

oof o

f cla

im. §

114

1(d)

(1)(A

). Bu

t the

pla

n m

ay su

pers

ede

§ 11

41(d

) and

pay

cr

edito

rs th

at h

ave

not f

iled

a pr

oof

of cl

aim

. § 1

141(

d)(1

). An

indi

vidu

al d

ebto

r who

has

not

co

mpl

eted

pay

men

ts u

nder

the

plan

m

ay re

ceiv

e a

hard

ship

disc

harg

e if

the

requ

irem

ents

of §

114

1(5)

(B) a

re

met

.

disc

harg

e in

clude

: deb

ts

prov

ided

for u

nder

§

1322

(b)(5

); ta

x cla

ims u

nder

§

507(

a)(8

)(C);

tax

claim

s und

er

§ 52

3(a)

(1)(B

); de

bts i

ncur

red

unde

r fal

se p

rete

nses

or

misr

epre

sent

atio

n;

unsc

hedu

led

debt

s; de

bts f

or

fraud

or d

efal

catio

n w

hile

in a

fid

ucia

ry ca

pacit

y,

embe

zzle

men

t or l

arce

ny;

dom

estic

supp

ort o

blig

atio

ns;

stud

ent l

oans

unl

ess u

ndue

ha

rdsh

ip; o

r deb

ts in

curr

ed b

y de

btor

’s op

erat

ion

of a

mot

or

vehi

cle w

hile

und

er th

e in

fluen

ce. §

132

8.





Appendix D - 1

Key Events in the Timeline of Subchapter V Cases1

Benjamin A. Kahn2 Samantha M. Ruben3

Election to Have Subchapter V Apply

o Petition date. In a voluntary case, the debtor must indicate on its petition whether it is a small business debtor, and if so, whether it elects to have subchapter V apply. Rule 1020(a).4

o 14 days after the order for relief in an involuntary case. Within 14 days after entry of the order for relief in an involuntary case, the debtor shall file a statement indicating whether it is a small business debtor or a debtor as defined under § 1182(1), and if so, whether it elects to have subchapter V apply. Interim Rule 1020(a).5

1 A chart containing more detailed subchapter V deadlines follows.

2 United States Bankruptcy Judge, Middle District of North Carolina. No copyright is claimed in these materials by the authors, who give permission to reproduce in whole or in part.

3 Law Clerk to Judge Benjamin A. Kahn. B.A., University of Miami, Departmental Honors in International Studies; J.D., Chicago-Kent College of Law, magna cum laude, Order of the Coif.

4 All references to rules herein are to the Federal Rules of Bankruptcy Procedure, unless otherwise indicated. On December 5, 2019, Advisory Committee on Bankruptcy Rules of the United States Judicial Conference (“Rules Committee”) distributed Interim Amendments to the Rules of Federal Bankruptcy Procedure interim rules applicable for subchapter V for adoption locally to facilitate uniform implementation of the changes mandated by the Small Business Reorganization Act of 2019 (“SBRA”). Rule-based deadlines and citations to specific rules set forth herein presume adoption of the interim rules, and therefore are consistent with the provisions therein.

5 There is no deadline in the rules for a debtor to amend its statement or election, and Rule 1009 permits a debtor to amend any statement as a matter of course at any time before the case is closed. Nevertheless, § 1188 of subchapter V requires the court to hold a status conference no later than 60 days after the order for relief, and requires the debtor to serve and file a report detailing efforts to attain a consensual plan no later than 14 days prior to the status conference. The court may extend the period of time for holding the status conference only "if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” Similarly, § 1189(b) requires a debtor under subchapter V to file a plan no later than 90 days after the order for relief, and permits the court to extend this period only "if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” If the debtor does not elect subchapter V, but seeks to amend its statement to elect subchapter V more than 30 days after the order for relief, the court and the debtor will not be able to comply with the time requirements under §§ 1188 and 1189, unless the court extends these periods, and the court only may do so if the need to do so is attributable to circumstances for which the debtor should not justly be held accountable.



Appendix D - 2

Status Conference

o Not later than 60 days after the order for relief the court shall hold a status conference “to further the expeditious and economical resolution of a case under this subchapter.” 11 U.S.C. § 1188(a).

o 14 days BEFORE the status conference under 11 U.S.C. § 1188(a), the debtor shall file and serve on all parties in interest “a report that details the efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization.” 11 U.S.C. § 1188(c).

Filing Plan of Reorganization

o Not later than 90 days after the order for relief, the debtor shall file a plan. The court may extend this period if the need for an extension “is attributable to circumstances for which the debtor should not justly be held accountable.” 11 U.S.C. § 1189(b).

Confirmation Hearing6

o 28 days’ notice must be given for the deadline to accept or reject and file objections to a proposed plan, and for the hearing to consider confirmation of the proposed plan.7 Rule 2002(b). The court fixes the date for the confirmation hearing. Rule 3017.2(c).

Appointment and Termination of Service of Trustee

o The United States Trustee shall appoint a standing trustee for subchapter V cases, appoint one disinterested person to serve as trustee, or may serve as trustee. 11 U.S.C. § 1183(a).

o If the plan is consensually confirmed under 11 U.S.C. § 1191(a), the service of the trustee is terminated when the plan is substantially consummated. However, the United

6 No disclosure statement will be required unless otherwise ordered by the court. 11 U.S.C. § 1181(b) (providing that § 1125 does not apply in subchapter V cases unless the court orders otherwise for cause). Section 1190 contemplates that a plan shall include a brief history of the business operations of the debtor, a liquidation analysis, and feasibility projections. If the court orders that § 1125 applies, then § 1125(f), which permits conditional approval of the disclosure statement similarly will apply to the case. 11 U.S.C. § 1187(c). In the proposed rules, Rule 3016 has been revised to provide that, if a disclosure statement is required under § 1125, the debtor must file with the plan or within a time fixed by the court either the disclosure statement or evidence of pre-petition acceptance in compliance with § 1126. The rule further provides an exception to this requirement if the plan is intended to provide adequate information under § 1125(f)(1). If so, the plan must so designate and the Rule 3017.1, which governs the procedure for conditional approval of the disclosure statement shall apply. Rule 3017.1 similarly has been made applicable to cases under subchapter V in which the court has ordered that § 1125 applies.

7 Section 1129(e), which requires that the court confirm a plan in a small business case within 45 days after the plan is filed, does not apply to cases under subchapter V. See 11 U.S.C. § 1181(a); see also 11 U.S.C. 101(51C) (excluding any case in which a debtor elects to have subchapter V apply from the definition of “small business case”).



Appendix D - 3

States Trustee may reappoint the trustee for modification of the plan or if the debtor is removed from possession. 11 U.S.C. § 1183(c)(1).

o If the plan is non-consensually confirmed, the trustee will make all payments under the plan, unless the plan or the order confirming the plan provides otherwise. 11 U.S.C. § 1194(b).

Discharge

o Consensually Confirmed Plans Under 11 U.S.C. § 1191(a). If a plan is consensually confirmed under 11 U.S.C. § 1191(a), then the general discharge provisions under 11 U.S.C. § 1141(d)(1)-(4) shall apply. See 11 U.S.C. § 1181(a), (c). Therefore, in a non-liquidating subchapter V case, discharge will occur on confirmation of a consensual plan. See 11 U.S.C. § 1141(d)(1).8

o Non-consensually Confirmed Plans Under 11 U.S.C. § 1191(b). If a plan is confirmed under 11 U.S.C. § 1191(b), then the timing provisions for entry of discharge under 11 U.S.C. § 1141(d) shall not apply. See 11 U.S.C. § 1181(c). In such a case, discharge will be entered after completion of all payments due “within the first 3 years of the plan, or such longer period not to exceed 5 years as the court may fix . . . .” 11 U.S.C. § 1192.9

Modification of a Plan

o The debtor may modify a plan at any time prior to confirmation. 11 U.S.C. § 1193(a).

o After confirmation, the debtor may modify a plan consensually confirmed under § 1191(a) prior to substantial consummation of the plan. 11 U.S.C. § 1193(b).10

o After confirmation, the debtor may modify a plan confirmed under § 1191(b) at any time within 3 years, or such longer period not to exceed 5 years, as fixed by the court. 11 U.S.C. § 1193(c).

Plan Term

o Several sections of subchapter V affect plan timeframes. Section 1191(c) provides that, in order for a plan to be fair and equitable for purposes of non-consensual confirmation under § 1191(b), the debtor must contribute its projected disposable income (or the value thereof) to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix. In addition, the discharge generally will be entered in a

8 Section 1141(d)(5), which delays discharge until the completion of payments under a plan in an individual case unless otherwise ordered by the court, does not apply in subchapter V cases. 11 U.S.C. 1181(a).

9 Because § 1141(d)(5) does not apply to a case under subchapter V, there is no provision for a hardship discharge in an individual case.

10 A consensually confirmed plan only may be modified by consent. 11 U.S.C. § 1193(b).



Appendix D - 4

non-consensual plan after the same time period; however, section 1192 excepts from the discharge any debt on which the last payment is due after such period. See 11 U.S.C. § 1192. Nevertheless, unlike in a case under chapter 13, there is no express prohibition against a plan providing for payments beyond this period. See 11 U.S.C. 1322(d).

Timing of Payments

o The court may authorize the trustee to make payments to the holder of a secured claim prior to confirmation for purposes of providing adequate protection. 11 U.S.C. § 1194(c).



Appendix D - 5

Subchapter V Deadlines11

DEADLINES IN CONNECTION WITH COMMENCEMENT OF THE CASE Entity Deadline Act to Be Performed Code or Rule12 Voluntary debtor

Petition Date State whether the debtor is a small business debtor or a debtor as defined under § 1182(1) and, if so, whether the debtor elects to have subchapter V apply

Interim Federal Rule of Bankruptcy Procedure 1020(a)

Subchapter V DIP, or Trustee if debtor removed from possession

As soon as possible after the commencement of the case

Give notice of the case to every entity known to be holding money or property subject to withdrawal or order of the debtor

Federal Rule of Bankruptcy Procedure (“Rule”) 2015(a)(4)

Subchapter V debtor

Upon electing to proceed under subchapter V

Append to its petition its most recent balance sheet, statement of operations, cash-flow statement, and federal income tax return; or a statement made under penalty of perjury that no balance sheet, statement of operations, or cash-flow statement has been prepared and no federal tax return has been filed

11 U.S.C.A § 1187(a); 11 U.S.C. § 1116(1)(A), (B)13

Involuntary debtor

14 days after the entry of the order for relief

File a statement indicating whether the debtor is a small business debtor and, if so,

Rule 1020(a)

11 On December 5, 2019, Advisory Committee on Bankruptcy Rules of the United States Judicial Conference (“Rules Committee”) distributed Interim Amendments to the Rules of Federal Bankruptcy Procedure interim rules applicable for subchapter V for adoption locally to facilitate uniform implementation of the changes mandated by the Small Business Reorganization Act of 2019 (“SBRA”). Rule-based deadlines and citations to specific rules set forth herein presume adoption of the interim rules, and therefore are consistent with the provisions therein. Deadlines and notations set forth herein that existed under the Federal Rules of Bankruptcy Procedure prior to enactment of subchapter V and that have not been modified by the proposed interim rules have been excerpted from COLLIER PAMPHLET EDITION 2018 Supplement, Time Periods Prescribed by the Bankruptcy Rules (Richard Levin & Henry Sommer eds., Matthew Bender) (the “Collier Supplement”).

12 With respect to deadlines under title 11, only those time periods and deadlines arising under subchapter V of title 11 are included herein. Time periods relating to adversary proceedings, appeals, and claims are not included. For comprehensive deadlines generally applicable to all cases, including subchapter V, see the Collier Supplement.

13 Section 1181(a) provides that 1116 is inapplicable to cases under subchapter V. These sections apply by specific reference under § 1187(a).



Appendix D - 6

whether the debtor elects to have subchapter V apply

Chapter 11 parties in interest

30 days after the conclusion of the meeting of creditors or 30 days after any amendment to the debtor’s statement under Rule 1020(a), whichever is later

File objection to the chapter 11 debtor’s designation as a small business debtor

Rule 1020(b)14

Involuntary debtor

7 days after entry of the order for relief

File a list containing the name and address of each entity included or to be included on Schedules D, E/F, G, and H

Rule 1007(a)(2)

Chapter 11 debtor


File a list of the debtor’s equity security holders, with the number and kind of interests, and the last known address or place of business of each holder

Rule 1007(a)(3)

Voluntary debtor

14 days after filing petition

File the schedules, statements and other documents required by 1007(b)(1)

Rule 1007(c)

Individual chapter 11 debtor

14 days after filing the petition

File a statement of current monthly income

Rule 1007(c)

Voluntary individual debtor


File a certificate of credit counseling if debtor filed a statement that debtor received counseling but did not have the certificate on the filing date

Rule 1007(c)

Petitioning creditor(s) in an involuntary case

7 days after issuance of the summons

Serve the summons and a copy of the petition on the debtor

Rule 1010(a); Rule 7004(e)

Involuntary debtor


File the schedules, statements, and other documents required by Rule 1007(b)(1)

1007(c)

Involuntary chapter 11 reorganization on debtor


File a list of creditors holding the 20 largest unsecured claims

Rule 1007(d)

14 Any objection is governed by Rule 9014. See F.R.B.P 1020(c).



Appendix D - 7

Involuntary debtor

21 days after service of the summons, unless made by publication on a party not residing or found within the state in which the court sits

File and serve defenses and objections to an involuntary petition

Rule 1011(b)

U.S. Trustee in a chapter 11 health care business case

21 days after the commencement of the case

File motion to appoint a patient care ombudsman

Rule 2007.2(a)

Debtor’s attorney

14 days after the order for relief

File statement whether the attorney has shared or agreed to share the compensation with any other entity

Rule 2016(b)

The court 60 days after entry of the order for relief

Hold a status conference to further the expeditious and economical resolution of a case under subchapter V15

11 U.S.C. § 1188(a)

Subchapter V debtor

14 days before the date of the § 1888(a) status conference

Debtor file and serve on the trustee and all parties in interest a report that details the efforts debtor has undertaken and will undertake to attain a consensual plan of reorganization

11 U.S.C. § 1188(c)

TIME PERIODS RELATED TO PLANS

Entity Deadline Act to Be Performed Code or Rule Subchapter V debtor

90 days after the order for relief

File a chapter 11 plan16 11 U.S.C. § 1189

Chapter 11 plan proponent

With the plan or within a time fixed by the court

File a disclosure statement or evidence of prepetition acceptance of a plan if the court has ordered that 11 U.S.C. 1125 will apply17

Rule 3016(b)

15 Under §1188(b), the court may extend the time for holding a status conference if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.

16 The court may extend the 90-day period if the need for extension is attributable to circumstances for which the debtor should not justly be held accountable.

17 No disclosure statement will be required unless otherwise ordered by the court. 11 U.S.C. § 1181(b) (providing that § 1125 does not apply in subchapter V cases unless the court orders otherwise for cause). Section 1190 contemplates that a plan shall include a brief history of the business operations of the debtor, a liquidation analysis, and feasibility



Appendix D - 8

Class Including Secured Creditor

Date fixed by the court

Make the election under § 1111(b)

Rule 3014

Clerk, or some other person as the court may direct

28 days Provide notice by mail of time fixed for filing objections and the hearing to consider approval of a disclosure statement, if applicable. See note 17, infra.

Rule 2002(b)


28 days Provide notice of hearing on disclosure statement and objections in a chapter 11 case, if applicable. See note 17, infra.

Rule 3017(a)


28 days Provide notice by mail of time for filing objections and the hearing to consider confirmation of a chapter 11 plan

Rule 2002(b)


28 days Provide notice of time for filing objections to an injunction provided in a chapter 11 plan

Rule 3017(f)(1)

The court No deadline Fix a date for the hearing on confirmation.

Rule 3017.2(c)

Holders of claims or interests

Time fixed by the court

Accept or reject the plan Rule 3017.2(a)

Equity security holder

Time fixed by the court

Record date for eligibility to accept or reject the plan

Rule 3017.2(b)

projections. If the court orders that § 1125 applies, then § 1125(f), which permits conditional approval of the disclosure statement similarly will apply to the case. 11 U.S.C. § 1187(c). In the proposed rules, Rule 3016 has been revised to provide that, if a disclosure statement is required under § 1125, the debtor must file with the plan or within a time fixed by the court either the disclosure statement or evidence of pre-petition acceptance in compliance with § 1126. The rule further provides an exception to this requirement if the plan is intended to provide adequate information under § 1125(f)(1). If so, the plan must so designate and the Rule 3017.1, which governs the procedure for conditional approval of the disclosure statement shall apply. Rule 3017.1 similarly has been made applicable to cases under subchapter V in which the court has ordered that § 1125 applies.



Appendix D - 9

Subchapter V debtor in possession, trustee, or clerk, as directed by the court

Times fixed by the court

Transmit the plan, provide notice of the time to accept or reject the plan, and provide notice of hearing on confirmation18

Rule 3017.2(d)

Chapter 11 parties in interest

14 days after entry of the order

Stay of order confirming a chapter 11 plan

Rule 3020(e)

Subchapter V debtor

Any time prior to confirmation

Modify the plan. After the modification is filed with the court, the plan as modified becomes the plan.

11 U.S.C. § 1193(a)

Subchapter V debtor

Any time after confirmation of the plan and before substantial consummation of the plan

May seek to modify a plan that was consensually confirmed under section 1191(a). The plan, as modified under this subsection, becomes the plan only if the court confirms the plan as modified by consent under section 1191(a) of this title.19

11 U.S.C. § 1193(b)

Subchapter V debtor

Any time within 3 years, or such longer time not to exceed 5 years, as fixed by the court

May seek to modify the plan if the plan was confirmed under section 1191(b).

11 U.S.C. § 1193(c)


21 days Provide notice by mail of time for filing objections to modification of an individual’s chapter 11 plan and of hearing on objections

Rule 3019(b), (c)

18 In non-subchapter V cases under chapter 11, Rule 3017(c) requires that, on or before approval of the disclosure statement, the court shall fix a time within which holders of claims and interests may accept or reject a plan and may fix the date for notice of the confirmation hearing. Rule 3017(d) requires transmission of the plan and the notice of the times so fixed in non-subchapter V cases “in accordance with Rule 2002(b).” Despite the lack of any similar reference to Rule 2002(b) in Rule 3017.2(d), nothing in the interim rule purports to affect the minimum 28 days’ notice required of the time fixed for acceptance or rejection of the plan and the hearing to consider confirmation under Rule 2002(b).

19 Subchapter V does not provide for a contested modification of a consensually confirmed plan.



Appendix D - 10

Any holder of a claim or interest that has accepted or rejected the plan

Within a time fixed by the court

Change the previous acceptance or rejection of the plan if the plan is later modified

11 U.S.C. § 1193(d)

The subchapter V trustee

Until confirmation or denial of confirmation of a plan

Retain payments and funds received pending confirmation or denial of confirmation of a plan. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan. If a plan is not confirmed, the trustee shall return any such payments to the debtor after deductions under 11 U.S.C. § 1194(a)(1)-(3).

11 U.S.C. § 1194(a)

The court After notice and a hearing, and prior to confirmation of a plan

May authorize the trustee to make payments to the holder of a secured claim to provide adequate protection of an interest in property

11 U.S.C. § 1194(c)

DEADLINES THROUGHOUT THE CASE

Entity Deadline Act to Be Performed Code or Rule Subchapter V debtor

Periodically throughout the case

Comply with the requirements of 11 U.S.C. §§ 308 and 1116(2), (3), (4), (5), (6), and (7)

11 U.S.C. § 1187(b)20

20 Section 1181(a) provides that § 1116 is inapplicable to cases under subchapter V. These sections apply by specific reference under § 1187(b).



Appendix D - 11

Subchapter V debtor

14 days after the information comes to the debtor’s knowledge

File supplemental schedule disclosing acquisition of property by bequest, devise, inheritance, property settlement agreement, or as a beneficiary of a life insurance policy or death benefit plan.21

Rule 1007(h)

Subchapter V debtor

At any time before the case is closed

File an amendment of any voluntary petition, list, schedule, or statement

Rule 1009(a)

Chapter 11 DIP or trustee in case converted from chapter 7

14 days after conversion of the case

File a schedule of unpaid debts incurred after the filing of the petition and before conversion of the case, including the name and address of each holder of a claim

Rule 1019(5)(A)(i)

Chapter 11 DIP or trustee in case converted to chapter 7

30 days after conversion of the case

File and transmit to the U.S. Trustee a final report and account

Rule 1019(5)(A)(ii)


21 days Provide notice by mail of meeting of creditors under § 341

Rule 2002(a)(1)


21 days Provide notice by mail of proposed use, sale, or lease of property of the estate other than in the ordinary course of business

Rule 2002(a)(2)


21 days Provide notice by mail of hearing on approval of a compromise or controversy other than pursuant to Rule 4001(d)

Rule 2002(a)(3)


21 days Provide notice by mail of hearing on any entity’s request for compensation or reimbursement of expenses in excess of $1000

Rule 2002(a)(6)

21 The obligation to supplement continues post-confirmation for plans confirmed under 11 U.S.C. § 1191(b).



Appendix D - 12

U.S. Trustee in a chapter 11 reorganization case

Between 21 and 40 days after the order for relief

Call a meeting of creditors, except where a prepetition plan has been accepted

Rule 2003(a)

U.S. Trustee 2 years after the conclusion of the meeting of creditors

Preserve recording of § 341 meeting for public access

Rule 2003(c)

Subchapter V debtor

14 days after the plan is substantially consummated

File notice of substantial consummation with the court and serve on the trustee, the U.S. Trustee, and all parties in interest

11 U.S.C. § 1183(c)(2)

Subchapter V trustee

Periodically File reports and summaries of the operation of the debtor’s business, including a statement of receipts and disbursements, if the debtor ceases to be a DIP

11 U.S.C. § 1183(b)(5); 11 U.S.C. §§ 1106(a)(1), (2), (6); 11 U.S.C. § 704(a)(8)

The court On request and after notice and a hearing

Order that the debtor not be a DIP for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the date of commencement of the case, or for failure to perform the obligations of the debtor under a plan confirmed under this subchapter

11 U.S.C. § 1185(a)

The court On request and after notice and a hearing

Reinstate the DIP. 11 U.S.C. § 1185(b)

Subchapter V debtor

Periodically File periodic financial and other reports as required by 11 U.S.C. § 308(b)

11 U.S.C. § 1187(b); 11 U.S.C. § 308(b)

Subchapter V debtor

25 days before the date of the hearing on confirmation of the plan

Mail a conditionally approved disclosure statement if the court directs application of 11 U.S.C. § 1125

11 U.S.C. § 1187(c); 11 U.S.C. § 1125(f)

Subchapter V DIP, or trustee if debtor removed from possession

Periodically Keep records of receipts and dispositions of money, file reports required by 11 U.S.C. § 704(a)(8)

Rule 2015(b)



Appendix D - 13

Subchapter V DIP, or trustee if debtor removed from possession

Within the time fixed by the court, if so directed

File and transmit to the United States trustee a complete inventory of the property of the debtor

Rule 2015(b)

Subchapter V debtor

No later than 21 days after the last day of each calendar month

File monthly reports as contemplated by 11 U.S.C. § 308

Rule 2015(b)22

Chapter 11 trustee or DIP

7 days before the first date set for the § 341 meeting of creditors

File first periodic report of the value, operations, and profitability of each entity that is not a publicly traded corporation or chapter 11 debtor and in which the estate holds a substantial or controlling interest

Rule 2015.3(b)


No less frequently than every six months thereafter, until the effective date of a plan or the case is dismissed or converted

File subsequent periodic reports of the value, operations, and profitability of each entity that is not a publicly traded corporation or a chapter 11 debtor in which the estate holds a substantial or controlling interest

Rule 2015.3(b)


14 days before filing the first periodic financial report required by this rule

Send notice to each entity in which the estate has a substantial or controlling interest, and to all holders of an interest in that entity, that it expects to file and serve financial information relating to that entity

Rule 2015.3(e)

22 The proposed interim rule contemplates that the debtor shall be required to file monthly reports under § 308 and Rule 2015(a)(6) even if removed from possession.



Appendix D - 14

TIME PERIODS IN CONNECTION WITH DISMISSAL OR DISCHARGE Entity Deadline Act to Be Performed Rule Clerk of court, or some other person as the court may direct

21 days Provide notice by mail of time for hearing on the dismissal or conversion of a chapter 7, 11, or 12 case, unless the hearing is under § 707(a)(3) or (b) or is on dismissal of the case for failure to pay the filing fee

Rule 2002(a)(4)

The court As soon as practicable after completion by the debtor of all payments due within the first three years of the plan, or such longer period not to exceed five years as the court may fix

Grant the debtor a discharge23 11 U.S.C. § 1192

Chapter 11 party in interest

No later than the first date set for the hearing on confirmation

File complaint objecting to discharge24

Rule 4004(a)

Creditor Any time File complaint under § 523(a)(2), (4), or (6)

Rule 4007(b)

Creditor in a chapter 11 case

No later than 60 days after the first date set for the § 341 meeting of creditors, with 30 days’ notice

File complaint under § 523(a)(2) or (4)

Rule 4007(c)

23 Such discharge pertains to debts as provided under the plan except any debt (1) on which the last payment is due after the first 3 years of the plan, or such other time not to exceed 5 years fixed by the court; or (2) of the kind specified in section 523(a).

24 A complaint seeking revocation of a chapter 11 discharge as procured by fraud may be filed any time before 180 days after the date of the entry of the order of confirmation. 11 U.S.C. § 1144.

Chapter 3

Presentation Slides: Telling the Story on Your Timesheets: A Fee Examiner’s

Tips for Creditors’ Lawyers and Bankruptcy Estate Professionals

Professor Nancy RapoportWilliam S. Boyd School of Law

University of NevadaLas Vegas, Nevada

Chapter 3—Presentation Slides: Telling the Story on Your Timesheets




Telling the Story on Your Timesheets:A Fee Examiner’s Tips for Creditors’

Lawyers and Bankruptcy Estate Professionals

© Nancy B. Rapoport 2021. All rights reserved.

How do we convey to new lawyers how to bill?

(And some pointers for more seasoned professionals….)



The dynamic for estate-paid professionals:

1. Application / court approval.2. Interim fee apps (sometimes, monthlies) / final fee apps.3. Objections? Fee examiners?4. Court review and approval.

The rest of the known universe:

1. Client hires the lawyer.2. Lawyer does the work.3. Lawyer sends client the bill for the work (possibly including some N/C

entries).4. Client reviews the bill / asks Qs / sometimes pushes back.5. Lawyer adjusts the bill.6. Client pays the bill.



The “bankruptcy fees disconnect”:

• Other than the court and UST (and maybe a fee examiner or fee committee), no one else seems to care.• The fees will be paid from either a secured creditor’s carveout or

from the pool of unsecured funds. See, e.g., In re Frontier Comm. Corp., 2020 WL 6390675, *4 (Bankr. S.D.N.Y. 2020) (shameless reference to the court having cited one of my articles).

• “There but for the grace of God….”

Who’s minding the store?

• The nerds who comb through the bills (the chambers / the fee examiners).

• And all of the nerds remember what impressions they formed about the professionals’ behavior and motivations.

• Often, the people not minding the store are the clients who have asked the court for permission to have their professionals’ retention applications approved.• Non-“chapter 22” or “chapter 33” debtors (the inexperienced client).• The unsecured creditors (or the secured creditor whose carveout is

paying for the professionals).



One of my favorite quotes:*

“Debtors may not care who gets what money remains (if the attorney gets more, other creditors get less), and, when clients do not haggle over price, some attorneys will be tempted to divert the funds to themselves by charging excessive fees.”

—Bethea v. Robert J. Adams & Assoc., 352 F.3d 1125, 1127 (7th Cir. 2003) (ch. 7 case) (cited in SE Property Holdings, LLC v. Stewart (In re Stewart), 970 F.3d 1255, 1259 (10th Cir. 2020)).

* Not my favorite quote of all time, though. What’s my favorite? “The problem with this argument is that it is wrong.” U.S. v. Kiewit Construction Co., 2005 WL 1277953, *5 (D. Alaska 2005).

What do we tend to see?

• No budget, or mere lip service to a budget that is overbroad and under-specific.

• “All hands on deck” overstaffing / overworking.• Misallocation of professional to task.• Occasionally hefty (or surreal) expenses.

• $140 shirt.• Liquor and movies from hotel minibar.• Luxe hotels and luxe meals (often with liquor).*

* Occasionally, we also see overly high hourly rates (see, e.g., Market Center East Retail Property, Inc. v. Lurie (In re Market Center East Retail Property, Inc., 730 F.3d 1239, 1250-52 (10th Cir. 2013) (reversing a hybrid fee award that would have provided the equivalent of an $8,500+/hour rate for about 40 hours of work) or rate increases that occur within a few weeks of the order authorizing employment.



Then you get headlines like these from the New York Times:

Which leads to stories like this in the Wall Street Journal:

https://www.nytimes.com/2010/05/02/business/02workout.html

https://www.wsj.com/articles/SB10001424127887324031404578479250357752788



From the same article:

And, ultimately, to this (at least in big Ch 11s):

https://www.wsj.com/articles/SB10001424127887324031404578479250357752788

https://www.justice.gov/sites/default/files/ust/legacy/2013/06/28/Fee_Guidelines.pdf



The psychological cost of not combing through fee applications before filing them:• First impressions matter.

• Good billing hygiene? Halo effect.• Bad billing hygiene? The professional is, perhaps:

• Sloppy.• Greedy.• Inept.

• And I’ll comb through every single line item of folks who have formed a bad impression.

It’s not just debtors’ counsel that need to pay attention:• E.g., UCC counsel.• Other types of professionals who are getting paid from estate funds.

https://www.psychologytoday.com/us/basics/halo-effect



Categories of billing mistakes:

1. Goldilocks errors.2. Pervasive sloppiness.3. Reckless overworking.4. The indulgence of quirky preferences (the professional’s or the

client’s).

Goldilocks errors:

Correspond with multiple parties re restructuring strategy and tactics 8.2 hours



Goldilocks errors:*

* Graphic courtesy of Legal Decoder, Inc. and the garrulous lawyer who authored the non-anonymized, original version.

Pervasive sloppiness:

• “Attention to file” and other vague entries.• Massive block-billing.• Round-hour phenomenon:

Research caselaw on X 3.5

Draft memo on X 4.5

Telephone call with client on Y 1.0

Meet with [colleagues] about X 1.0

Attending hearing on Z 4.0

Travel to hearing on Z .5

Travel back to office after hearing on Z .5



Reckless overworking:

• The 32-hour, 8-page stay relief motion.• The “who’s left standing” search for available (and often high-

billing) professionals.• How law schools contribute to this phenomenon.• How the professional’s fiduciary status contributes (best

illustrated by this image from this article):

The indulgence of quirky preferences (the professional’s or the client’s):• Clients are supposed to dictate the objectives; we choose the means (after

appropriate consultation).• When clients control the means, fees spiral out of control.• How can one convey, in statements to courts (or fee examiners), that

opposing party/counsel was obstinate and substantially increased the costs and fees for filing and responding to motions, etc.?• To a fee examiner.• To a court.

https://www.acfe.com/article.aspx?id=4294978525

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2412496



Lest you think that I don’t care about consumer-side fees:• Beware the inappropriate limitation of services covered by a flat fee.

• See, e.g., In re Roberts, Case No. 17-11846-gs, United States Bankruptcy Court for the District of Nevada, Docket No. 152:

In this regard, all of the fees [the law firm has] billed under “Chapter 13 Services” appear to be basic services covered by the flat fee as stated in the Disclosure and Amended Disclosure. Therefore, the court shall disallow the billings set forth in the Chapter 13 Services category in excess of the disclosed fee of $6,796.00.

The client can do more, if it chooses:

• Think hard about which professionals to hire.• Create the ground rules for billing.• Pay attention to staffing and workflow issues.• Monitor the budget.• Set the ground rules about which expenses are reasonable and which

ones aren’t.




The client can do more, if it chooses:

• Consider suggesting that counsel use artificial intelligence for those tasks that don’t need a human touch (not just in discovery, but also, perhaps, in automating some of the easier drafting tasks).

• And use legal analytics to create a dashboard that helps you see where you’re efficient and where you need to buff up your efficiencies.

Why do we care about how and what we bill?

• Rule 1.5(a) (“A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses….”) and

• 11 U.S.C. § 330(a)(1) (“After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award … [to, among others] a professional person employed under section 327 or 1103—(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person; and (B) reimbursement for actual, necessary expenses.”)




Billing can also tell us about potential malpractice risk.• In a recent article published at 6 U. PA. J. L. & PUB. AFF. 267 (2020), Joe Tiano and I

interviewed a cross-section of legal professional liability (LPL) insurers to get a better feel for how insurers viewed different types of risk.

• We’re drilling down on:• Staffing efficiency (who’s doing what and for how long);• Billing hygiene (eliminating vague or block-billed entries; eliminating rounded

hour entries);• Workflow efficiency (efficiency of performing a particular task);• Matter management (how to choose who’s doing what for which matters);• Institutional governance (how does a firm manage ethics compliance and

workflow); and• Fiduciary risk (not dropping the ball on duties owed to the client).

Three types of errors:

Substantive legal errors

Intentional wrongdoing

Administrative legal errors

https://scholarship.law.upenn.edu/jlpa/vol6/iss2/2/



Substantive legal errors:

• Giving incorrect legal advice;• Doing exceptionally sloppy work (like missing a statute of limitations or

other important deadline); and • Engaging in other actions that fall below the standard of care.

• Substantive legal errors are reflected in bills when people redo work that was done poorly or do work that wouldn’t have been necessary if things had been done correctly the first time.

Administrative legal errors:

• Not because they’re less important than substantive legal errors but because they’re process errors.

• Failing to identify and resolve conflicts of interest;• Faulty withdrawal from representation;• Failure to transfer client files; and • Improper commingling of funds.

• Again, in bills, I look for that undercurrent of work that deals with fixing mistakes that a good process should have prevented ahead of time.



Intentional wrongdoing:

• Billing fraud;• Misappropriation of client funds;• Frivolous litigation; and • Outright dishonesty.

• Often, time entries won’t reveal these directly, but sometimes they can give cues (e.g., delayed billing; rounded-hour billing).

Managers and supervisors have a duty to make sure that the organization is behaving ethically.• Rule 5.1: Responsibilities of a Partner or Supervisory Lawyer (the main

rule).• Rule 5.2: Responsibilities of a Subordinate Lawyer (what happens when a

subordinate lawyer thinks that she should be doing things differently from an ethics point of view).

• Rule 5.3: Responsibilities Regarding Nonlawyer Assistance (even though they’re not bound by the ethics rules, we still are).

• LPL insurers actually would prefer to help you set up systems to avoid problems – and they have some great advice to give.



Never forget that it’s not just what you say but how you say it (even with fee applications).• And it’s also what you do (who’s doing it, whether “it” is the right thing

to be doing, and whether “it” is being done efficiently)• Questions/comments?

Chapter 4

Mediating in the PandemicThe Honorable David Hercher

U.S. Bankruptcy Court, District of OregonPortland, Oregon

Ann MarshallJAMS

Seattle, Washington

Judith RossRoss & Smith PC

Dallas, Texas

Contents

Mediation in the Oregon Bankruptcy Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4–1District of Oregon Local Bankruptcy Rule 9019-1, Settlement & Compromise . . . . . . . . . . . 4–3“A Pot Committed (No, No That Kind) Mindset and Why You Should Bet on Early Mediation” . . . 4–7A Zoom Mediation User’s Guide for Lawyers and Clients . . . . . . . . . . . . . . . . . . . . . . 4–9U.S. Bankruptcy Court Eastern District of Washington Mediation Program Overview . . . . . . . 4–19U.S. Bankruptcy Court Western District of Washington Thomas T. Glover Mediation Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4–20Tips on a Successful Bankruptcy Mediation: Pandemic or Not . . . . . . . . . . . . . . . . . . 4–21

Chapter 4—Mediating in the Pandemic



4–134th Annual Northwest Bankruptcy Institute 1 4/19/2021 10:03:00 AM

35th Annual Northwest Bankruptcy Institute

Mediating in the Pandemic April 22, 2021, 11:35 a.m.-12:35 p.m.

Mediation in the Oregon Bankruptcy Court David W. Hercher

Bankruptcy Judge, Oregon

In the District of Oregon Bankruptcy Court, Local Bankruptcy Rule 9019-1 regulates the practice of mediation. A copy of the rule is attached.

The rule governs all forms of mediation of disputes between or among parties to contested matters or adversary proceedings before the court, whether voluntary or court-ordered and whether conducted by a judge other than the case judge (a judicial settlement conferences) or by a private mediator.1 Although judge mediators are usually other sitting Oregon bankruptcy judges, the rule also permits mediation by any “sitting or retired federal judicial officer,”2 and mediators have included Oregon district and magistrate judges.

Most mediations are judicial settlement conferences and are voluntarily initiated by the parties’ joint request that the case judge ask another judge to mediate. The parties usually make that request at a hearing on the dispute, but sometimes a party will file a written request on behalf of all parties to a dispute. The case judge usually agrees to the request and then arranges for another judge to mediate. After the mediator judge is selected, further communication about the mediation usually occurs only between and among the parties and the mediator judge.

The rule prohibits the mediator, whether a judge or private mediator, from entering any order regarding the mediation, but the mediator can ask the case judge to enter any order.3 Because the initiation of a mediation does not stay any deadlines or events in the litigation,4 the parties must address with the case judge any requests for adjustment of the case schedule to accommodate the mediation, but those requests are usually granted where appropriate to facilitate the mediation.

The mediator may require the parties and their lawyers to provide information to the mediator and to attend a preliminary conference.5 Topics a mediator could raise at the preliminary conference include whether any party needs information from another party in order for the mediation to be productive. The mediator usually asks each party to make a confidential written submission to the mediator before the mediation.

1 LBR 9019-1(a). 2 LBR 9019-1(b). 3 LBR 9019-1(d)(3). 4 LBR 9019-1(d)(1). 5 LBR 9019-1(d)(5).



Each individual party and an appropriate representative of each entity party must “attend any mediation proceeding in person, including any additional sessions.”6 But during COVID, mediations have been by Zoom video conference, as have most hearings.

6 LBR 9019-1(d)(6).



District of Oregon Local Bankruptcy Rules

Rule 9019-1. Settlement & Compromise.

(a) Mediation Options. This LBR applies to any court-ordered or voluntary mediation among parties to a contested matter or adversary proceeding. “Mediation” means judicial settlement conference, court-sponsored mediation, or private mediation.

(b) Judicial Settlement Conference. The assigned judge may, at the request of a party or on the court’s motion, order parties to participate in a settlement conference with another sitting or retired federal judicial officer at any time. Under this LBR, a judicial officer serving in that capacity is a mediator.

(c) Private Mediation. The parties may agree to mediation with a private mediator. The parties may seek an order from the court permitting private mediation and must select and compensate the mediator and, in conjunction with the mediator, agree to the time, place, and duration of the mediation.

(d) Procedure Applicable to All Forms of Mediation. This subsection applies to all mediation proceedings and to each person serving as a mediator.

(1) No Stay of Action. Unless ordered by the assigned judge, mediation will neither stay nor change any deadlines or event dates, including trial, in a matter or proceeding.

(2) Judicial Immunity. From entry of the order appointing the mediator through conclusion of the mediation, the mediator acts as an officer of this court and has derived judicial immunity.

(3) Orders. The mediator has no authority to enter any order regarding the mediation. If the mediator desires entry of an order with respect to the mediation, the mediator must apply to the assigned judge with notice to the parties.

(4) Disqualification. No person may serve as a mediator if the person would be disqualified (a) under 28 U.S.C. § 144 if the person were a district judge presiding over the matter or proceeding or (b) under 28 U.S.C. § 455 if the person were a justice, judge, or other judicial officer presiding over the matter or proceeding, unless the parties consent in writing after disclosure.

(5) Information; Scheduling. After entry of an order referring a case to mediation, the parties must provide any information requested by the mediator. The mediator may schedule a preliminary conference before the mediation and may also require the parties to participate in the preliminary conference along with their attorneys.

(6) Participation by Counsel and Parties.



(A) Unless otherwise approved by the court, the responsible attorney for each party must attend any mediation proceeding in person, including any additional sessions, and must be prepared to discuss in good faith—

(i) all liability issues,

(ii) all damage issues, and

(iii) the position and interests of the attorney’s client regarding settlement.

(B) Unless excused by the mediator, a person with complete settlement authority for each party must attend the mediation proceeding in person. But the United States may be represented by the trial attorney.

(C) Where a party’s defense is provided by a liability insurer, a representative of the insurer, unless excused by the mediator, must attend the mediation proceeding and have full authority to bind the insurer to a settlement.

(D) Unless excused from attendance by the mediator, an attorney’s or party’s willful failure to attend the mediation when required must be reported to the court by the mediator and may result in the imposition of sanctions.

(7) Privilege. Unless otherwise agreed by all parties and the mediator in writing—

(A) Mediation proceedings (including all statements made by a party, attorney, or other participant, and any memorandum or written submission provided to the mediator) are privileged and, unless otherwise authorized by the Federal Rules of Evidence, will not be reported, recorded, or otherwise placed in evidence, made known to the assigned judge, or construed for any purpose as an admission against interest.

(B) No party will be bound by anything done or said in any mediation proceeding unless a settlement is reached, in which event the agreement will be recited orally and recorded or reduced to writing and will be binding on all parties. In any dispute regarding the terms of the settlement, the terms of the settlement as communicated by the mediator and accepted by the parties are not privileged.

(8) Postmediation Notification to Court by Mediator. As soon as reasonably practicable, and in no event later than the earlier of 14 days after the mediation has concluded or 7 days before any hearing or trial date, the mediator must notify the court in writing (which notice must not be filed, but must be mailed or e-mailed as requested by the assigned judge) whether the mediation proceeding was held and whether the matter has been settled or additional time is needed to reach or implement a settlement. The mediator must also disclose any willful failure to attend or participate in the mediation proceeding by any party or their counsel.



The mediator shall provide copies of the communication to the court to all participants or, if represented, to their counsel.

(9) Termination of Mediation or Withdrawal of Mediator. A court may withdraw any matter from mediation on its own order or upon request of any party, the United States trustee, or the mediator. Unless the parties and mediator agree otherwise in writing, any and all duties and responsibilities of the mediator terminate upon the filing of the report by the mediator required in (8) above.

(e) Notice of Settlement. If a settlement or compromise is subject to FRBP 2002, the party requesting approval of a settlement must give notice under LBR 2002-1(b) of its intent to submit a proposed order approving the settlement, except that if a trustee is a party to the settlement, the trustee must use the appropriate LBF if one is available.





A Pot Committed (No, Not That Kind) Mindset and Why You Should

Bet on Early Mediation

In mediation, we often come across parties who have invested so much into litigation, in terms of either time or money, that they are driven to con-tinue with a case even in the face of likely loss. The world of gambling calls this "pot committed.”[1]

A poker player is pot committed when there is no better option than continued play of a losing hand.[2] The term is often used to justify continued play where the player has bet significantly into the pot (the sunk costs philosophy).[3] I have experience with this from years of playing high-stakes, profes-sional Texas hold ’em poker. And, by that I mean, all the movies I've watched about gambling.

Sage poker players know, however, that it is unwise to keep playing a losing hand based on the amount bet.[4] In fact, truly being pot committed has little to do with the amount bet and everything to do with the remaining chip stack and the play-er’s ultimate goal.[5] If, for instance, the goal is to stay alive in tournament play, one may actually be pot committed if losing the hand will eliminate the player from the tournament. The amount already bet, however, should not drive continued betting.

In litigation, if a party has spent a significant amount of money or has devoted a vast amount of

time and energy to a case, they are prone to being pot committed. Even in the face of near-certain loss, the pot-committed mindset can drive a party to not settle and proceed to put even more at risk. It can be difficult to con-vince someone that it is smart to end a case with a net loss outcome. After all, when faced with unappealing options, it is easy to be distracted by the prospect of a low-chance win. Identifying and discussing the mindset behind pot commitment can help. This discussion can include:● big picture/goals (there is no tournament!);● the initial “bet” may have been justified, but it

is smart to reevaluate;● lawsuits (like gambling) are not business

investments; and● benefits of settlement (protect the remaining

chip stack; i.e., time/money/energy/resources that can be used better elsewhere).

Smart players avoid being pot committed.[6] And they are also keenly aware of others who may be

By Ann T. MarshallNovember 1, 2020



suffering from it—playing with a pot-committed player brings its own problems.[7] In current times, it may be easy to let delay creep into cases. But with more time, parties may increase their litiga-tion spend. Early mediation is a fantastic way to avoid the pot-commitment problem altogether.

While it may be easy to identify when not to mediate, when is the right time to mediate? As with all things legal, “it depends!” There are, though, a few guidelines that can help decide the right timing for a particular case.

First, parties need enough information to be able to have a dialogue about settlement, and to do that, everyone needs key information. Consider what is critical to the analysis of a case. The parties should exchange key evidence, such as eye-witness testimony, central documents or property surveys, so they can understand their case’s strengths and challenges. “Key information” may translate to one round of written discovery exchange and possibly some depositions.

Second, fees and costs should be kept low, while getting enough information to mediate, so as to avoid the pot-commitment problem. Keep in mind that erring on the side of “too early” is typically more efficient than erring on the side of “too late.” If, dur-ing a mediation, it emerges that parties’ settlement ranges are nowhere close due to a distinct issue or two, the mediation can pause so that the parties can complete a negotiated and discrete proceeding, with an agreement to return to mediation afterwards. This may be seen in a case with competing expert opinions, for instance, where their depositions may be needed to make progress in negotiation.

Third, a common decision is whether to mediate before, or after, a dispositive motion. In making

this decision, keep in mind that leverage a party may have with a strong, pending motion, will be lost or significantly diminished if the motion is denied.

Timing, as they say, is everything. Every case has unique needs that present different windows for negotiation. And just as a mediator can assist with reaching an ultimate resolution in a case, so too can she help with negotiating the timing of the mediation. This can include a negotiation of dis-covery phases, discrete discovery needed to resume mediation, and other time-related issues.

Ann T. Marshall, Esq., is a JAMS mediator and arbitrator with more 25 years of experience as a trial lawyer. She is available to handle real estate, bank-ing, construction, insurance, professional liability and bankruptcy matters. She can be reached at [email protected].

1. Gibson, Neil, “Understanding What It Means to Be Pot Committed,” Decem-

ber 10, 2014, https://www.pokernews.com, https://www.pokernews.com/strat-

egy/understanding-what-it-means-to-be-pot-committed-20050.htm2. Id.3. Walker, Greg, “Pot Committed,” https://www.thepokerbank.com/strategy/con-

cepts/pot-committed/4. https://www.pokerlistings.com/strategy/odd-talk5. Id.6. Little, Jonathan, “Feeling Pot Committed,” https://jonathanlittlepoker.com/

potcommitted/7. http://dictionary.pokerzone.com/Pot+Committed (bluffing is not advised when

playing against a pot-committed player)

Reprinted and slightly modified with permission from Sponsored Content in the November 1, 2020 online edition of AMLAW DAILy © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected]. # AMLAW-11042020-465314



A Zoom Mediation User’s Guide for Lawyers and Clients

By: Ann T. Marshall

Ann T. Marshall, Esq. Mediator/Arbitrator JAMS - Local Solutions. Global Reach.TM 1420 Fifth Ave. | #1650 | Seattle, WA 98101 Direct Dial/Text: 206.619.8043 Office: 206.292.0441 E-mail: [email protected] www.jamsadr.com



Dated 10-09-2020 Copyright 2020 Ann T. Marshall. All Rights Reserved. 2

QUICK START GUIDE If you are new to the Zoom platform, then this Quick Start Guide contains what you need to participate in a Zoom Mediation. Getting Started Participants can join a Zoom Mediation from their computer, mobile device, landline telephone or cell phone. Using video is great, but not required, and it is fine to use audio only on any of these devices. 1 or 2 days prior to the Zoom Mediation, counsel will receive e-mail from JAMS that you can forward to your clients. It will contain the key information to log in to the Zoom Mediation. A password may be sent to you by separate e-mail. Clicking on an e-mail “invitation link” on a computer prompts installation of the Zoom software and for most first-time users, you will enter your name, Meeting ID and Password. Mobile device users do need to pre-install the Zoom mobile app before clicking on the invitation link. The Zoom invitation link looks like this: https://zoom.us/j/4145774?pwd=NEoyUDVUL0ovS0GFzZGZzOGp3QT09 If you prefer to call-in by landline or cell phone, you will receive the following dial-in information: Local Phone Numbers: Meeting ID: 416 518 87XX Password: 989XXX Ask JAMS for additional dial-in numbers if needed. IMPORTANT NOTE: YOU SHOULD TREAT THIS INFORMATION AS PRIVATE AND CONFIDENTIAL. YOU SHOULD NOT SHARE YOUR UNIQUE ZOOM LINK AND IDENTIFIER WITH ANYONE. YOU SHOULD NOT POST YOUR ZOOM MEETING INFORMATION ON ANY PUBLIC FACING PLATFORM OR SOCIAL MEDIA.

http://zoom.us/




Software and App Connections By Computer - To join a Zoom Mediation by computer, you may wish to manually download the software “Zoom Client for Meetings” in advance from: zoom.us/download If you prefer not to pre-install the Zoom software, then when you click on the link in the invitation e-mail, you will be prompted to allow the software to download on to your computer. This takes seconds and you can then immediately connect to the session. You may be asked to type in your name, Meeting ID and Password. By Mobile Device - If you plan to join a Zoom Mediation on a mobile device, like smart phone or tablet, you must download the Zoom Cloud Meetings mobile app ahead of time. Clicking the link zoom.us/download from your mobile device will automatically redirect you to the Google Play or Apple App Store to install the correct app. Easy Link Connection - Please note that after pre-installation of the computer software or mobile app, when you click on the e-mail invitation link, you may not be asked to enter the Meeting ID and Password. They may be embedded in the link. If you are able to skip this step, you may be asked to “Join by Zoom Video” in the app, unless you opt to choose for Audio only. Please “Join.” By Telephone - If you dial the call-in numbers from a landline or cell phone, you will need to enter the Meeting ID and Password and state your name. Skip past the request for a Participant ID, it is not needed. Please note that your telephone number will be partially blocked (xxx) for confidentiality and will not be displayed to Zoom Mediation participants. After you call-in, I will replace your phone number with your name, so other participants can more easily know who is speaking during the session. Note: It is possible, but not advisable, to join a session using only video on your computer/tablet and to get the audio separately by telephone dial-in. Please do not join in this manner, and always use “Internet Audio” from your computer or mobile device for sound. Otherwise, Zoom will treat you as two separate people, which will be confusing. As a back-up, should you be unable to join the mediation from your computer or mobile device, call the phone number provided in the Zoom link. It is basically the same as any other multi-party telephone conference. You can also call or text me at any time before or during the session for help at 206.619.8043. I am also available by text the evening before your Mediation for technical questions or assistance.

http://zoom.us/download

http://zoom.us/download




At the Zoom Mediation No more than two people should share a screen/device. If it can be done safely, do not wear a mask on camera. If people will be together at one location, such as an attorney’s office, see if you can be in separate offices/conference rooms on different devices so that you are a safe distance to avoid wearing a mask. Join Zoom on a secure, private, internet connection. Be mindful of what is shown on camera. Zoom has “virtual background” settings that can provide a background and give you privacy as far as what other participants can see of your location. Also, find a location that is private where communications cannot be seen or heard by others. All Zoom recording options are disabled, and the parties shall not record any visual or audio in any other manner pursuant to confidentiality requirements—this includes screen shots. Be sure to turn off any nearby “Alexa” type recording devices! Also, avoid having a light source behind you, such as a window, as it makes it difficult for others to see you. You can log in at least 20 minutes prior to the start of the Mediation and I or a JAMS moderator will greet you and be available to assist you with any questions or difficulties. A JAMS moderator will be present at the start of the session. The JAMS moderator can further help participants with technical support and can also return throughout the session should issues arise. When you arrive, you will enter the Waiting Room. No one can see/interact/communicate with others in any manner in the Waiting Room. I (or a JAMS moderator) will admit parties to the meeting. When you enter the session, you will enter the Main Room. Typically, you and your lawyer will then be assigned to a Breakout Room to meet with me. Depending on the case, all parties may meet in the Main Room together. The Main Room is for joint communications only—not private meetings. Therefore, please be mindful of confidentiality at all times in the Main Room. You can enable your microphone and camera in “Settings.” Check to ensure you are not on mute and your video is turned on, if desired. Note that you can turn either one of these off during the session as needed. When you join the Mediation, I will give you detailed instructions on what is to take place and will explain the process.




I will set up Breakout Rooms for each party. Each party and lawyer’s name will be associated with an assigned private Breakout Room. I will invite each lawyer and client to move into a Breakout Room and you will be prompted to accept the invitation to do so. Please accept the invitation to join a Breakout Room by clicking on “Join Breakout Room” or “Join.” This may vary slightly according to the device.

Computer

Mobile Phone

If you have joined the Zoom mediation by phone and I move you to a Breakout Room, you will hear “you are now in a breakout session.” You will not need to do anything to join. Please note, if you are moved out of a Breakout Room and then return to a Breakout Room, you must “Join” each time you do so, when prompted. When in a Breakout Room, the lawyer and client may have private and confidential discussions in my absence. It is important to know that the other parties cannot see or hear your discussions in your Breakout Room—it is like having a virtual wall up between the Breakout Rooms. Also, from your computer or mobile app, you can see who is listed as present in a room at any time. To do so, click on the Participants icon.




When I enter your Breakout Room, you may be notified visually on your computer screen or you will see my video feed on your screen. I will also verbally announce my entry into your Breakout Room and will intentionally interrupt your discussion, so you are aware I am now in the room. This is also very important for those users who are on a telephone connection in a Breakout Room, since they cannot see when I enter. When I enter your Breakout Room, please immediately stop your discussions in order to protect any private and confidential information you may not wish to share with me at that moment. You may also see a “Chat” icon in the bottom Menu.

The Chat feature allows for instant messaging and discussions directly from your keyboard with another participant in the same room as you. Please be very careful using Chat, as there are both public and private chat options. You do not want to share confidential information in a public chat sent to everyone. Choose the intended recipient in the Chat drop-down menu. Again, you can only chat privately with someone who is in the same room as you (i.e. either in the Main Room or a Breakout Room with you).




If you have any issues while you are in your Breakout Room, you can click on the “Help” icon at the bottom of your screen (computer) or on your screen (mobile device). This will summon me to your room.

Help Icon on a Computer Screen

Mobile Device When you tap Ask for Help, it will notify me that you need assistance. I will be asked to join your breakout room.




For all devices, confirm that you would like assistance by tapping “Invite Host.” Please note that if I am tied up in another room or do not notice your help request, you may see the message: “The host is currently helping others. Please try again later.” Wait 5 minutes then send me a text message at 206.619.8043.




SECURITY

JAMS uses the Zoom HIPAA (Health Insurance Portability and Accountability Act) compliant platform for scheduled virtual proceedings, including mediations and arbitrations. As such, cases set to use this platform incorporate the necessary security to satisfy HIPAA. Ways that the Zoom platform provides HIPAA compliance:

Increased session security requires that all devices accessing the Zoom platform connect via strong encryption.

Session recording cannot be saved to the Zoom cloud. Instead, session recording may only be saved to a local machine. As such, personal information will not make its way to the cloud.

Personal health information (PHI) or personal identifiable information (PII) will not be collected or reported. This includes personal identification numbers (driver’s license, social security number, passport number, etc.), medical records, or IP addresses, to name a few.

The chat feature is secured with the strongest available encryption. This means that no message will be read by anyone outside of the meeting. Messages saved outside of the meeting will only be made available with explicit permission by all parties.

We all play a critical role in ensuring that virtual sessions are secure and satisfy HIPAA. In order to maintain HIPAA compliance, parties must refrain from capturing any images or screen shots of the sessions, and sharing of information. For specific information regarding Zoom’s HIPAA compliant platform and its related security features, please go to https://zoom.us/docs/doc/Zoom-hipaa.pdf.




4. Contact Information

Ann T. Marshall, Esq. Mediator/Arbitrator JAMS - Local Solutions. Global Reach.TM 1420 Fifth Ave. | #1650 | Seattle, WA 98101 Direct Dial/Text: 206.619.8043 Office: 206.292.0441 E-mail: [email protected] www.jamsadr.com



U.S. Bankruptcy Court Eastern District of Washington Mediation Program Overview

The Court has established procedures for mediation to facilitate the voluntary resolution of

adversary proceedings and contested matters.

The parties in adversary proceedings shall consider alternative dispute resolution and be

prepared to discuss it at the time of the first scheduling conference. The Court has established and maintains a register of qualified attorneys who have

volunteered to serve, without compensation, as mediators. The panel members and a biographical sketch of each are available here: https://www.waeb.uscourts.gov/mediation

Under appropriate circumstances, it may be necessary for the parties to provide

payment at usual and customary rates as determined by the Court. The parties may choose a judge or other non-panel mediator with subject matter

expertise. The selection of a particular mediator, and an alternate, is based on the preference of

the parties. The local rules governing alternative dispute resolution are located at the link below:

Local Bankruptcy Rule 9019-2

https://www.waeb.uscourts.gov/local-bankruptcy-rules



U.S. Bankruptcy Court Western District of Washington Thomas T. Glover Mediation Program Overview

The Court’s Mediation Program provides voluntary mediation services in bankruptcy cases and

adversary cases.

A panel of more than twenty trained mediators available for mediation includes

lawyers and nonlawyers with a broad range of expertise. The panel mediators and biographies are located here: https://www.wawb.uscourts.gov/Mediator%20List

Mediators are available in all geographical areas, from Bellingham to Vancouver.

Mediation is available to all parties whether or not represented by an attorney.

Pro bono mediation, provided for no fee to those unable to pay the mediation fee,

may be available. Mediation is available in the main bankruptcy case and in adversary proceedings on

a variety of issues including chapter 11 plan issues, student loan discharge, preferences, lien validity and real estate issues.

The mediation rates are established by court rules: each party pays $500 for the first

6 hours of mediation services (including 2 hours of prep work), and hourly for services thereafter at a rate of no more than $450/hour.

The local rules governing the program and other program information are located here:

https://www.wawb.uscourts.gov/content/mediation-program-overview



Tips on a Successful Bankruptcy Mediation: Pandemic or Not By: Judith W. Ross and Jessica Voyce Lewis, Ross & Smith, PC, Dallas, TX

About the Authors:

Judith W. Ross has over 35 years of experience handling corporate bankruptcy and restructuring matters and over 9 years of experience as a mediator. After years of practicing at the firms of Thompson & Knight LLP and then Baker Botts L.L.P., Ms. Ross opened her own firm, the Law Offices of Judith W. Ross, in 2013 where she and her team of associates and counsel handle complex Chapter 11 bankruptcy related matters through their representation of corporate debtors, major creditors, banks, hedge funds, committees, and trustees. In 2019, the firm changed its name to Ross & Smith, PC. Ms. Ross also currently serves as Co-Chair of the Alternative Dispute Resolution Subcommittee of the Business Bankruptcy Committee of the American Bar Association. More information about Ms. Ross and her firm’s bankruptcy and mediation practices can be found at www.judithwross.com.

Jessica Voyce Lewis practices primarily in the area of bankruptcy and insolvency-related matters, representing debtors, creditors, and purchasers in corporate reorganizations and adversary proceedings. Mrs. Lewis began her career at Baker Botts L.L.P., where she worked on complex bankruptcy and litigation matters for a wide range of clients in varied businesses and industries. Just prior to joining the Law Offices of Judith W. Ross in 2016, Mrs. Lewis sharpened her skills in negotiation and out-of-court resolutions during her two years working for a Dallas-based non-profit focused on bettering Dallas communities by representing residents of high-crime neighborhoods against the owners of problem properties in civil litigation and probate-related matters.

In Brief:

• Debtors and other parties can look to mediation to avoid substantial litigation fees and to mediators for help in crafting solutions to complex bankruptcy-related disputes.

• Consider whether a bankruptcy judge or practitioner is the better fit for your particular situation.

• Walk into the mediation well prepared and aware of the strengths and weaknesses of your case—lack of preparation will hurt your client.

• Examples of successful complex mediations in bankruptcy are extensive.

Article:

The use of mediation in the bankruptcy context continues to grow, particularly in complex cases. Across the United States, a wide range of bankruptcy-related disputes have been addressed effectively through mediation, including disputes such as avoidance actions, valuation disputes, claim issues, disputes over lien priorities, confirmation issues, post-confirmation litigation, etc. Some bankruptcy courts have required mediation of such matters (such as the U.S. Bankruptcy Court for the District of Delaware), whereas other courts suggest and encourage, but do not require, mediation as a means of resolving particular disputes before a trial is necessary.

As long as the dispute is ripe for mediation (i.e., any necessary discovery or other preparations have been completed) and the practical likelihood of reaching resolution warrants any



associated delays or costs, parties to a bankruptcy-related dispute may benefit from taking the time to seek resolution at mediation before extended litigation takes place. However, parties taking the time to think through certain aspects of the mediation and to adequately prepare will be better positioned for success in the process.

Choosing a Mediator

In bankruptcy-related mediation, one of the first significant decisions to be made is the determination of whether to choose a current or former bankruptcy judge or a practitioner as the mediator. While parties may find it harder to reveal weaknesses in their case to a sitting judge, the chance of later appearing before the judge may encourage admirable behavior. A practitioner may feel more leeway to voice opinions on a party’s position, which may be what a party needs to hear to understand the weaknesses of their position and facilitate resolution. However, a judge’s opinion in mediation, when given, may be significantly compelling to a party stuck in its own mindset. Regardless of whether a judge or practitioner mediator is chosen, it is helpful to have a mediator with experience in bankruptcy-related matters when such matters are at issue, given some of the unique factors present in the bankruptcy context. Finally, when appropriate, allowing the opposing party to choose the mediator can show strength of position and avoid any concerns such party may have about mediator bias.

The Importance of Preparation

Parties participating in mediation can help or hinder their chances of a successful mediation through their preparation efforts. Each party should walk into a mediation knowing its case, goals, and capacity to compromise and prepared to present its case to the mediator thoroughly yet succinctly. This latter goal may be aided by mediation or settlement conference statements presented pre-mediation and/or with PowerPoint or other presentation materials. Walking in with a realistic view of the time it may take to reach a deal can help parties avoid discouragement when resolution is not met earlier in the day(s) of mediation.

Evaluate Strengths and Weaknesses

One of the most important areas of preparation (for both clients and their lawyers) is for a party to develop an understanding or the strengths and weaknesses of its own case. The better a party understands the strengths and weaknesses of its side of the case, the better it will understand its capacity to compromise. Before mediation day, consider what biases, emotions, or unrealistic expectations exist and how to address them. One way to get a fresh perspective during this process is to consult with someone not involved in the case prior to mediation. Once the mediation starts, mediators may further facilitate this understanding by asking questions to uncover strengths and weaknesses. Having one or more open mediation sessions can ensure that the other party (not just their attorney) has heard any key points another party wants to communicate. If the mediation is taking longer than anticipated, consider what may have been missed in evaluating the other party’s case.

Harm Caused by Lack of Preparation

An advocate will accomplish more for her client by being completely prepared for the mediation. It is startling how many attorneys walk into a mediation without any preparation whatsoever. The failure to prepare adequately for the mediation will drive down the value of the unprepared party’s case, leaving the mediator little to work with in attempting to forge a settlement. An



advocate who is well prepared will almost always succeed in settling the matter in a favorable manner for her client.

Clients should be advised in advance of a mediation that the one chance (before trial) for the client to tell his side of the story in the case will be at the mediation and that he should prepare in every way possible. A mediation is often the only place (other than in the courtroom) where a client has the opportunity to 1) vent; 2) tell his story; and 3) attempt to reach a result that the client can live with.

Building Consensus

Like any other mediation, in a bankruptcy-related mediation parties should consider discussing larger concepts before getting into details and finding points of agreement (even if on smaller and/or side issues) early in the process to encourage progress and facilitate movement on the larger issues.

Avoiding unrealistic initial demands and offers can discourage the other party from starting in that fashion and can disarm parties walking in with a “dig in your heels” approach. Instead, consider giving the other party an offer they are tempted to “think about” under the circumstances of the case. Identify reasons that parties may be motivated to settle, even if those are not related to the key issues in the case.

Each mediation scenario is different and requires attention to the particular circumstances of the case and the temperaments and priorities of the parties. Ask questions to uncover underlying motivations and help parties identify different views of their bargaining position, and consider providing opportunities for “venting” and airing grievances where emotions are involved. While each party is of course concerned with the presentation of its own case, listening to the other party’s case is also key to determining areas of possible compromise and underlying motivations and issues hindering resolution. An attorney should beware of taking on a client’s impatience or stubbornness or projecting his own personal impatience or stubbornness into the process.

When parties are not moving from their position, consider seeking a mediator proposal from the mediator to flush out a party’s willingness to adjust its position and consider options without the risks of a formal offer/counteroffer. Where overall resolution is not possible, consider reaching consensus on damages tied to a court ruling (i.e. if the court rules X, then we agree to pay Y). Taking steps towards resolution, even if merely fulfilling the minimum involvement requirements of a court-ordered mediation, can help avoid possible sanctions for lack of “good faith” participation. See In re A.T. Reynolds & Sons, Inc., 424 B.R. 76 (Bankr. S.D.N.Y. 2010), rev’d, 452 B.R. 374,383 (S.D.N.Y. 2011) (imposing sanctions and holding that creditor and its counsel were in contempt of mediation order for lack of “good faith” participation); Spradlin v. Richard, 572 F. App’x 420 (6th Cir. 2014) (affirming a bankruptcy court’s award and district court’s affirmance of sanctions for participants failing to have full settlement authority and participate in good faith); Corp. for Character v. FTC, 2016 U.S. Dist. LEXIS 194752, at *18-33 (D. Utah Apr. 22, 2016) (providing discussion of “good faith” mediation cases and imposing sanctions for party’s failure to have all key parties at mediation, to provide opening statement, and to be prepared with respect to financial aspects of the matter).



Illustrative Cases

Mediation has been used successfully in many complex bankruptcy cases involving numerous parties and significant disputes. See, e.g., Lehman Brothers Holdings, Inc., No 08-13555 (Bankr. S.D.N.Y.) (debtors engaged in hundreds of mediations under court-ordered ADR procedures in place to avoid litigation in every individual case, recovering over $2 billion in proceeds for distribution to creditors); In re Tribune Co., No. 08-13141 (Bankr. D. Del.) (several-month mediation resulted in a plan with broad support that was ultimately confirmed); Cengage Learning, Inc., No. 13-44106 (Bankr. E.D.N.Y.) (mediation resulted in global settlement with main stakeholders and led to confirmed plan); In re City of Detroit, Michigan, No. 13-53846 (Bankr. E.D. Mich.) (thousands of hours of negotiations with the main parties to the case, including the state, city, and related counties, resulted in agreements to address virtually all of the claims involving the city). A mediation team was appointed to resolve disputes in the Commonwealth of Puerto Rico’s bankruptcy (D.P.R., Case No. 17-BK-3283), and numerous cases have moved forward to confirmation through the mediation of disputes impeding key chapter 11 transactions. See, e.g., In re The Rockport Company, LLC, No. 18-50636 (Bankr. D. Del.) (successful mediation of dispute with former owners of debtor over outstanding liabilities resulted in plan support).

Not all bankruptcy mediation efforts have resulted in success, however, highlighting how the initial assessment of the case and parties involved is essential in determining whether mediation is the appropriate next step. See, e.g., Nortel Networks Inc., No. 09-10138 (Bankr. D. Del.) (debtors engaged in numerous rounds of mediation but ultimately the court had to resolve dispute); Old HB, Inc. (fka Hostess Brands, Inc.), No. 12-22052 (Bankr. S.D.N.Y.) (debtors’ issues with labor unions remained unresolved after mediation and case resulted in liquidation).

Chapter 5

Presentation Slides: Planning for the Unknown: A Special Assets Approach

for a Post-Lockdown EconomyThe Honorable Mary Jo Heston

U.S. Bankruptcy Court, Western District of WashingtonTacoma, Washington

Tina LucasSenior Vice President and Manager, Asset Based Lending Group

Banner BankSeattle, Washington

Seth MoldoffSenior Vice President, Director, Special Assets Department

Umpqua BankWalnut Creek, California

Miles MonsonMonson Law OfficeBeaverton, Oregon

Chapter 5—Slides: Planning for the Unknown: A Special Assets Approach for a Post-Lockdown Economy




34th Annual NW Bankruptcy Institute

Planning for the Unknown:A Special Assets Approach for a Post-Lockdown Economy

Speakers

• Hon. Mary Jo Heston, Esq. U.S. Bankruptcy Court Judge, Western District of Washington (Moderator)

• Tina Lucas, Banner Bank, ABL Group Manager• Seth Moldoff, Umpqua Bank, Special Assets Director• Miles D. Monson, Esq., Monson Law Office P.C.



Topic Outline

• Current Issues. • What Makes This Downturn Unique? • Regulatory Issues and Their Impact.• To Forbear or Not to Forbear?• Capital Markets and New Lending?• Predictions.

Economic Update

2020 2021 2022

Real GDP -3.5% 6.4% 5.7%

CPI 1.2% 2.4% 2.0%

Unemployment 8.1% 5.5% 4.3%Source: Wells Fargo Securities (3/19/2021)



Financial Institutions

Bank Lending: $ Bil ChangeCommercial & Industrial $2,613 10.28%Home Equity $273 -13.32%Residential Mortgage $1,958 -1.23%Commercial Real Estate $2,419 2.90%Consumer $1,528 -5.04%

Source: Wells Fargo Securities (3/19/2021)

Refinancing

• $152.7b in home equity cashed out in 2020

• 42% increase and most since 2007 • $2.8t in refinancing in 2020• Prices usually fall in a downturn, they

jumped during the Covid-19 downturn• 90% who refinanced extracted cash in

financial crisis vs. 30% in PandemicSource: WSJ March 12, 2021



Cash Reserves

• 2020 saw a build up to cover projected losses

• Total reserves at end of 2020 - $236.6b double the level before Pandemic

• There’s optimism that defaults won’t occur and reserves will increase profits allowing for more growth and more lending

Source: WSJ March 16, 2021

Chapter 6

Practical Tools to Benefit Student Loan Debtors in Bankruptcy

Ed BoltzLaw Offices of John T. Orcutt

Durham, North Carolina

Latife NeuNeu Law

Seattle, Washington

Contents

Presentation Slides: Practical Tools to Benefit Student Loan Debtors in Bankruptcy . . . . . . . . 6–1Student Loan Adversaries: Hows and Whys—Cases and Resources . . . . . . . . . . . . . . . 6–25

Chapter 6—Practical Tools to Benefit Student Loan Debtors in Bankruptcy




Practical toolsto benefit student loan debtors in bankruptcy

Northwest Bankruptcy Institute / OSB

Featuring Ed Boltz and Latife Neu

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Edward Boltz received his B.A. from Washington University in St. Louis in 1993 and his J.D. from George Washington University in 1996. He is a member of the North Carolina State Bar, where he has been certified as a specialist in consumer bankruptcy law.

He is the managing partner at the Law Offices of John T. Orcutt, P.C.,,representing clients in not only Chapter 13 and Chapter 7 bankruptcies, aswell as developing student loan options to provide relief for debtors inbankruptcy.

Ed serves on the Board of Directors for NACBA, as the co-chair of itsLegislative Committee and has testified before Congress on bankruptcyissues related to student loans and also veterans.



Ms. Neu earned B.A. degrees in Economics and Environmental Studies (Phi Beta Kappa) from the University of California, Santa Cruz, in 1993, and a Masters of International Business from the Norwegian School of Economics (Norges Handelshøskole) in 1996. She earned her J.D., magna cum laude, from Seattle University School of Law in 2002.

Since opening her solo law practice in 2009, she has primarily represented consumer debtors in Chapter 7 and Chapter 13, and has developed a robust student loan practice. She speaks on student loans to attorneys, various industry groups, and to the public.

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Today’s Roadmap

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Using Chapter 13 Plan provisions to benefit the Student Loan debtor.

1Navigating the Adversary Proceeding process.

2



NON-BANKRUPTCY DISCHARGE CHAPTER 13 SOLUTIONS

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Non-bankruptcy Discharge Solutions:Income Driven Repayment Plans in Chapter 13• Income Driven Repayment Plans in Chapter 13• Why?• Previously the Department of Education, its Guaranty Agencies and Student Loan

Servicers would place all student loans for Chapter 13 Debtors in administrative forbearance.

• This meant that no collection actions were taken, but interest continued to accrue.• Accordingly, $100,000 of student loans at 8% interest will grow to $148,984.57 at the

end of a 60-month Chapter 13 Plan.• The “fresh start” becomes a “false start.”

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Non-bankruptcy Discharge Solutions:Income Driven

Repayment Plans in

Chapter 13

• IDR plans require separate classification for these student loans:• See In re Engen, 561 B.R. 523, 533 (Bankr. D. Kan.

2016) (citing Daniel A. Austin & Susan E. Hauser, Graduating with Debt: Student Loans under the Bankruptcy Code 69-70 (ABI, 2013).

• See also In re Potgieter, 436 B.R. 739, 743 (Bankr. M.D. Fla. 2010) (“[T]he separate classification of the debtor's student loan obligations does not violate Section 1122.”);

• In re Coonce, 213 B.R. 344, 345 (Bankr. S.D. Ill. 1997) (separate classification of student loan debt is permissible).

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Repayment Plans in

Chapter 13

• Bases to allow separate classification for student loans. • Co-Signer Protection

• Above-median debtor pays student loan from discretionary income, i.e. Social Security or belt-tightening, earned in excess of PDI

• Below-median debtor extends plan to five years

• Pro Rated Distribution to Other General Unsecured Claims

• Chapter 20

• Assumption of Executory Contract

• Cure and Maintain pursuant to § 1322(b)(5)

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Repayment Plans in

Chapter 13

• Other reasons to allow separate classification for student loans.

• Make progress towards 20/25 year cancellation or 10 year PSLF.

• Maximize payment toward non-dischargeable debt.

• Avoid accrual of post-petition interest: In re Kielisch, 258 F.3d 315 (4th Cir. 2001).

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Repayment Plans in

Chapter 13

Buchanan Provisions:• MDNC 14-51161 Docket #44• Additional Language for use in IDR chapter 13 plans:

• The Debtor shall be allowed to seek enrollment in any applicable income-driven repayment (“IDR”) plan with the U. S. Education Department and/or other student loan servicers, guarantors, etc. (Collectively referred to hereafter as “USED”), without disqualification due to her bankruptcy.

• USED shall not be required to allow enrollment in any IDR unless the Debtor otherwise qualifies for such plan.

• NOTE: This is meant to prevent the debtor from asserting the confirmation of the plan on its own enrolled the Debtor in an IDR or that the Debtor was given any special preference.

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https://ecf.ncmb.uscourts.gov/cgi-bin/DktRpt.pl?607494740117886-L_1_0-1




Repayment Plans in

Chapter 13

Buchanan Provisions:• Additional Language for use in IDR chapter 13 plans:

• The Debtor may, if necessary and desired, seek a consolidation of her student loans by separate motion and subject to subsequent court order.

• Consolidation of several student loans may be necessary for enrollment in a specific IDR or if the debtor was in default on her student loans. The plan provides that this will be approved by separate motion.

• NOTE: 11 USC 362(b)(16) provides that it is not a stay violation to determine the eligibility of a debtor to participate in student loan programs, including repayment plans.

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Repayment Plans in

Chapter 13


• Upon determination by USED of her qualification for enrollment in an IDR and calculation of any payment required under such by the Debtor, the Debtor shall, within 30 days, notify the Chapter 13 Trustee of the amount of such payment. At such time, the Trustee or the Debtor may, if necessary, file a Motion to Modify the Chapter 13 Plan to allow such direct payment of the student loan(s) and adjust the payment to other general unsecured claims as necessary to avoid any unfair discrimination.

• NOTE: This provides that once the monthly payment under an IDR is determined, the debtor will notify the Chapter 13 Trustee, who would then have an opportunity to decide whether that requires a higher dividend to unsecured creditors and if the IDR should be made directly or by “conduit.”

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Repayment Plans in

Chapter 13


• The Debtor shall re-enroll in the applicable IDR annually or as otherwise required and shall, within 30 days following a determination of her updated payment, notify the Chapter 13 Trustee of such payment. At such time, the Trustee or the Debtor may, if necessary, file a Motion to Modify the Chapter 13 plan to allow such direct payment of the student loan(s) and adjust the payment to other general unsecured claims as necessary to avoid any unfair discrimination.

• NOTE: This provides a bit of a “carrot” for the Chapter 13 Trustee in consenting to the plan, in that the debtor will annually notify the Trustee of changes in the monthly IDR, which could result in a higher dividend to other unsecured creditors.

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Repayment Plans in

Chapter 13


• During the pendency of any application by the Debtor to consolidate her student loans, to enroll in an IDR, direct payment of her student loans under an IDR, or during the pendency of any default in payments of the student loans under an IDR, it shall not be a violation of the stay or other State or Federal Laws for USED to send the Debtor normal monthly statements regarding payments due and any other communications including, without limitation, notices of late payments or delinquency. These communications may expressly include telephone calls and e-mails.

• NOTE: The second greatest concern by USED appears to be that this plan is a devious attempt to trick student loan servicers into violating the automatic stay. The communications allowed are patterned on those with mortgage servicers, but stop short of allowing non-bankruptcy garnishment or other involuntary collection.

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Repayment Plans in

Chapter 13

Buchanan Provisions:• Additional Language for use in IDR chapter 13 plans

• In the event of any direct payments that are more than 30 days delinquent, the Debtor shall notify her attorney, who will in turn notify the Chapter 13 Trustee, and such parties will take appropriate action to rectify the delinquency.

• NOTE: This is to allow for monitoring of the IDR payments if made directly by the debtor.

• NOTE: It is important to remember that in regards to student loans, “delinquent” may not be the same as “default, which requires that not payments have been made for more than 270 days. See 34 C.F.R. § 685.102

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Repayment Plans in

Chapter 13

Buchanan Provisions:• Additional Language for use in IDR chapter

13 plans:• The Debtor’s attorney may seek additional

compensation by separate applications and court order for services provided in connection with the enrollment and performance under an IDR.

• NOTE: This clearly is an important provision, allowing separate and additional compensation for services above and beyond standard representation of a debtor in a chapter 13 plan.

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Non-bankruptcy Discharge Solutions:Income Driven Repayment Plans in Chapter 13

• The Executive Office of the U.S. Trustee has issued template language for IDRs in Chapter 13 Cases.

• See Anderson, Amanda L. and Redmiles, Mark A., Bankruptcy: Recent Movement Toward Income-Driven Repayment Plans in Chapter 13, 66 U.S. Attorneys’ Bulletin, March 2018, pp. 53-71. Available at https://www.justice.gov/usao/page/file/1046201/download.

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• The main features of the DOJ template: • Provide the debtor may not use the Chapter 13 plan to discharge all or part of

the debtor’s unpaid student loan (which is nondischargeable absent an undue hardship finding by the court);

• Identify the student loan(s); • Confirm the debtor is not in default on Federal student loan debts; • Provide the debtor may continue in or apply to enroll in IDR; • Provide the amount of the debtor’s monthly IDR plan payment and the day

each payment is due;

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• The main features of the DOJ template: (continued)• Indicate the student loan(s) creditor class;

• Indicate if IDR plan payment will be made through the Chapter 13 trustee’s office or outside of the Chapter 13 plan by the debtor;

• Explicitly provide that the debtor waives 362(a) stay violation and 362(d) causes of action against ED for its communication, administrative processing, and recertification of the debtor’s IDR plan; and

• Provide a process for debtor to exit the IDR plan voluntarily, and the consequences of a debtor’s failure to pay the monthly IDR plan payment.

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Non-bankruptcy Discharge Solutions:Cure Defaults on Student Loan Through Bankrupty Plan

Resolving Student Loan Defaults through Chapter 13 Bankruptcy:

• 11 U.S.C. § 1322(b)(3) provides that “the plan may … provide for the curing or waiving of any default.” (Emphasis added.)

• “Any default” should include student loan or even a default under a rehabilitation.

• “Curing”, which generally means catching up on missed payments, must mean something different from “waiving”, which implies forgiving of missed payments.

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• 11 U.S.C. § 1322(b)(5), which routinely is used to allow the cure and maintenance of mortgage payments, specifically allows the same treatment for “any unsecured claim … on which the last payment is due after the date on which the final payment under the plan is due”, which would include non-dischargeable student loans.

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• Such a cure or waiver could avoid the assessment of collection costs of up to 18.5% of the outstanding principal and interest.

• Such a cure or waiver of a default could keep a debtor from losing the progress she had made towards forgiveness under an IDR prior to the default.

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Bringing a student loan adversary: HOWs and WHYs

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Dischargeability Standard

Standard set forth in Sec. 523(a)(8): Not discharged, … “unless excepting from discharge … would impose an undue hardship on the debtor and the debtor’s dependent…” • Current inability to maintain minimal standard of living if forced to repay. • State of affairs likely to persist w/r/t inability to repay.• Past good faith efforts to deal with the loans.• In re Brunner, 831 F.2d 395 (1987); adopted 9th Cir thru In re Rifino, (2001).

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BEFORE ADVISING THE CLIENT ABOUT DISCHARGEABILITY UNDER SECTION 523(a)(8)

Consider the following information (1/2) –• Type of Loan: Federal (FFEL or Direct), Private,

Other?

• Amount disbursed and approximate current balance?

• Rough payment history?

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BEFORE ADVISING THE CLIENT ABOUT DISCHARGEABILITY UNDER SECTION 523(a)(8)

Consider the following information (1/2) –• Status of the loan (defaulted, in forbearance, past SOL if

private)? • Whether any collection proceedings have been initiated (i.e.,

administrative wage garnishment, judgment, etc.); and• Client circumstances: age, disability, school/degree, employment

history, number and age of dependents, etc., etc.

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CONSIDERATIONS WHEN FEDERAL STUDENT LOANS ARE INVOLVED

• Where to get federal student loan information:• www.studentaid.gov or 1-800-4-FED-AID

• information on federal loans & grant (e.g, Stafford Subsidized, Federal Perkins),

• loan amounts, disbursement dates,

• outstanding principal balance & interest accrued,

• the loan status (e.g., defaulted, in repayment)

• lender / servicer / debt collector information.

• Loans that don’t show up can be assumed to be private loans. NWBI 2021

CONSIDERATIONS WHEN FEDERAL LOANS ARE INVOLVED

• Evaluate Client for Administrative Options on Federal Student Loans• Income Driven Repayment, possible Public Service Loan Forgiveness• Total & Permanent Disability Discharge• Options for getting out of default to stop garnishment, tax refund offset,

SSA offset• Have a referral on hand if you are not familiar with options– i.e. state gov’t

student loan ombudsman, student loan lawyer, or Studentloanify report• Settlement options in an AP will be limited.NWBI 2021



BEFORE ADVISING THE CLIENT ABOUT DISCHARGEABILITY

UNDER SECTION 523(a)(8)

Understand the Features of Private Loans• Not eligible for DOE administrative discharge or

IDR plans.

• Subject to state statutes of limitation.

• Frequently co-signed by parents, grandparents, friends.

• Frequently have high interest and origination fees.

• Private lenders are often more willing to negotiate or even stipulate to dischargeability

• Evaluate under 523(a)(8)(B)– may be dischargeable!

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BEFORE ADVISING THE CLIENT ABOUT DISCHARGEABILITY

UNDER SECTION 523(a)(8)

• Apply Debtor’s Situation to the Standards Described Above

• Which provision of Section 523(a)(8) applies to each loan?

• A(i): federal loans, non-profit associated loans

• A(ii): NOT loans, per most recent decisions (e.g. McDonald 5th Circ.)

• B: private loans IF they meet IRS definition in IRC 221(d)

• If the loan is included in Section 523(a)(8) can the debtor prove Undue Hardship?

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Soft Considerations 1/2

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THE COSTS TO THE CLIENT: FINANCIAL, TIME, PERSONAL/

EMOTIONAL.

DO YOU HAVE THE BANDWIDTH FOR THIS? WILL IT END UP INVOLUNTARY PRO-BONO?

ARE THE FACTS HIGHLY SENSITIVE? WHAT IF THERE IS A

PUBLISHED DECISION?

Soft Considerations 2/2

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DO THESE FACTS PASS THE SMELL TEST?

WHO ARE THE CREDITORS?. WHAT WOULD A WIN LOOK LIKE TO YOUR CLIENT?



PROCEDURE: Naming Defendants in the Complaint

• Federal loans– usually the proper defendant is US Department of Education or Education Credit Management Corporation (ECMC).

• Private loans

• Check state lawsuits, loan documents, demands

• Many are held by National Collegiate Student Loan Trust or Navient Solutions LLC.

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PROCEDURE: What is in a Complaint

• Parties

• State the Claim and facts supporting the claim.• That repaying the loans will pose Undue Hardship to the debtor

• Declaration that certain loans are NOT student loans, if appropriate

• State what relief is sought.

• Don’t reinvent the wheel.

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PROCEDURE: initiating the AP

• File the Complaint to initiate the Adversary Proceeding; no filing fee is due.• See Fed.R.Bankr.P. 7001(6).

• Can be filed at any time. Is this the right time? Has client laid the groundwork?• See 11 U.S.C. § 350(b); Fed. R. Bankr. P. 4007(b); In re Smith, 442 B.R. 550, 557 (Bankr. S.D.

Tex. 2010)(there is no deadline for seeking a determination of dischargeability under §523(a)(8)), aff ’d, 2011 WL 4625397 (S.D. Tex. Sept. 30, 2011); Thurman v. United Student Aid Funds, Inc., 2012 WL 993412 (W.D. Wash. Mar. 21, 2012) (same); McCafferty v. US Department of Education (EDWA 2014, unpublished).

• After Complaint is filed, a Summons is issued by the Court.

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Rule 7004: Service of Process

7004(b), Service by First Class Mail

• (3) Upon a domestic or foreign corporation or upon a partnership or other unincorporated association, by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant.

See also, 7004(h), Service on Insured Depository InstitutionsNWBI 2021



Serving the US Department of Education

Bankruptcy Rule 7004(b)(5) calls for by mailing the summons and complaint to:

Attorney General of the United StatesU.S. Department Of Education

US Department of Justice Education Dept. Office of General Counsel

950 Pennsylvania Ave NW 400 Maryland Ave SW, Room 6E353

Washington, DC 20530-0001 Washington DC 20202-2110

It is also advisable to mail a copy to the office of the United States Attorney for the district in which the action is brought.NWBI 2021

Serving Common Private Loan Creditors

National Collegiate Student Loan Trust 20XX-X800 Boylston Street, 34th FloorBoston MA 02199

National Collegiate Student Loan Trust 20XX-XGSS Data Services402 West Broadway, Ste 2000San Diego, CA 92101

Navient Solutions

John Remondi, President & CEO

123 Justison Street, Suite 300

Wilmington, DE 19801

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PROCEDURE / Protective order

• Protect your client’s privacy• Debtor may fear information disclosed will affect future employment or credit.

• Bankruptcy Rule 9037 incorporates basic protections.

• 9037(d) a party can request a protective order; stipulation may be possible.

• Section 107(b)(2) provides that a party in interest may request that the bankruptcy court protect a person with respect to a scandalous or defamatory matter contained in a paper filed in a case.

• Motion for protective order is a manageable standard; MT Seal requires a much higher showing– may impact your case strategy & objectives.

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DISCOVERY (plaintiff)

• Request discovery from Defendants as needed to prove your elements• Terms of loan

• Balance currently due, contractual payment obligation

• Payment history

• Communications showing effort to work out a payment plan

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DISCOVERY (defendant)

• Interrogatories, Requests for Production, and Requests for Admission may be daunting; prepare your client for a slog• Be aware of disclosure duties on you and your client

• Be wary of RFAs deemed admitted if timely responses are not made

• Negotiate or seek a Protective Order governing distribution of sensitive information

• Deposition of debtor is likely; counsel for Debtor-Plaintiff defends deposition. Be aware of cost of transcript, in addition to attorney time.

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Dispositive Motions

• 12(b)(6)– Pre-Answer Motion for failure to state a claim on which relief can be granted

• Motion for Summary Judgment• Unlikely as to Undue Hardship issues, which are heavily fact intensive

• Possible if AP features Declaratory Action regarding a debt’s dischargeability

• Creditor bears the burden of proving non-dischargeability

• Does the record have evidence that a private loan does / doesn’t fit 523(a)(8)(B)?

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Settlement discussions

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For clients with tenuous facts or limited appetite for litigation,

an Adversary Proceeding may bring the parties to the table to discuss a workout

Private lenders are often willing to

negotiate a payment plan on acceptable

terms.

DOE and ECMC are more intractable but may agree to slightly

more favorable arrangements than

standard IDR.

Is Mediation an Option?

• Bankruptcy Court mediation programs • Thomas T. Minor mediation program in WDWA

• OSB mediation

• Informal mediation by one of the bankruptcy judges

• Greater utility where client can pay something and 2+ creditors are involved

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Pre-trial

• Refer carefully to Local Rules, Chambers Procedure, and Case Schedule

• Prepare your case --• Trial Brief,

• Evidence Notebooks,

• Joint Pre-trial Orders,

• Proposed Findings of Fact and Conclusions of Law

• Motions in Limine

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Trial: you’ve got this.

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Likely one dayTrial Brief is a

road mapThink through

evidentiary issues

Prepare Opening and Closing arguments



QUESTIONS?

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Student Loan Adversaries: HOWs and WHYsCases and Resources

Dischargeability Standards: • Brunner v. New York State Higher Education Services Corporation, 831

F.2d 395 (2nd Cir. 1987).• Adopted in 9th Circ. by In re Rifino, 245 F.3d 1083 (9th Cir. 2001).• Whether in light of current income, the debtor could make the loan

payments without undue hardship resulting, if forced to do so. In re Mason,464 F.3d 878, 882 n. 3 (9th Cir., 2006).

• In re Nys, 446 F.3d 938 (9th Cir. 2006), provides twelve factors that thecourt can weigh in considering future inability to repay the loans, the secondBrunner factor.

• Failure to make payments is not indicative of bad faith. In re Roth, 490 B.R.908, 918(B.A.P. 9th Cir. 2013); In re Williams, Cause no. 16-01114-CMA(WDWA 2017).

Determining Type of Loan, Navigating Options: • If federal, it will appear in information available at www.studentaid.gov OR

1-800-4-FED-AID. • Navigating IDR, Disability Discharge, etc: see “Student Loan Survival

Guide” prepared by Washington State Attorney General;www.atg.wa.gov/studentloanresources

Whether to Name Loan Servicer as a Party: • Is a student loan servicer an intersted party? To satisfy due process there

must be “notice reasonably calculated, under all the circumstances, toapprise interested parties of the pendency of the action and afford them anopportunity to present their objections.” Mullane v. Centr. Hanover Bank &Tr. Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950).

• Courts have dismissed cases against student loan servicers on the basis thatDebtor has no contractual relationship with or liability to the servicer, so nodebt is owed to the servicer to find dischargeable. e.g., Bennett v. U.S.Department of Education and Pennsylvania Higher Educ. AssistanceAgency (In re: Bennett), No. 14–51218, Adv. No. 15–06051, 2015 WL5602881 (Bankr. M.D.N.C. 2015).

• But see In re Lorenzen, (NDOH, 2021), holding that the AP was defectivesince entity holding servicing rights to mortgage were not afforded notice



and opportunity to be heard.

Recent Cases & Articles Interpreting 523(a)(8): • (A)(i): TERI non-profit guarantor qualifies for 523(a)(8)(A)(I) non-

dischargeability, e.g. Richelle Page v. NCSLT, 18-6011 (8th Cir. 2018); Inre Loper, AP no. 6:19-ap-361-KSJ, (MD FL, 2021).

• (A)(ii): In re McDaniel, 10th Circ. (2020), (A)(ii); In re Kashikar, 9th Cir.BAP (2017), the term “educational benefit” does not include loans.

• (B): Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908, 916(B.A.P. 9th Cir. 2013): “Under § 523(a)(8), the lender has the initial burdento establish the existence of the debt and that the debt is an educational loanwithin the statute’s parameters.”; In re Nunez, AP no. 14-3177-RLD (OR,2015), loans taken to attend non-qualifying institution and thereforedischarged; In re Wiley, AP no. 16-1026, 579 BR 1, (ME, 2017), creditorfailed to establish borrowing was for Cost of Attendance at qualifyinginstitution; In re Palmer, AP 15-05073, (NDOH 2021).

• Article, “Student Loan Bankruptcy and the Meaning of EducationalBenefit,” 93 American Bankruptcy Law Journal 277 (2019)http://jasoniuliano.com/publications/.

11 U.S.C. §523(a)(8)(a) A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b)of this title does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph wouldimpose an undue hardship on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured, orguaranteed by a governmental unit, or made under any program funded inwhole or in part by a governmental unit or nonprofit institution; or(A)(ii) an obligation to repay funds received as an educational benefit,scholarship, or stipend; or(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurredby a debtor who is an individual;

Internal Revenue Code Provisions related to §523(a)(8)(B): • IRC 221(d)(1)

(1)Qualified education loan: The term “qualified education loan” means anyindebtedness incurred by the taxpayer solely to pay qualified highereducation expenses—



(A)which are incurred on behalf of the taxpayer, the taxpayer’sspouse, or any dependent of the taxpayer as of the time theindebtedness was incurred,(B)which are paid or incurred within a reasonable period oftime before or after the indebtedness is incurred, and(C)which are attributable to education furnished during aperiod during which the recipient was an eligible student....

• IRC 221(d)(2).(2)Qualified higher education expenses: The term “qualified highereducation expenses” means the cost of attendance (as defined in section 472of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on theday before the date of the enactment of the Taxpayer Relief Act of 1997) atan eligible educational institution, reduced by [certain sums]......

...

Considerations• In re Rosenberg, 610 B.R. 454 (Bankr. S.D. N.Y. 2020).• In re Gulliford, AP no. 13-01376, (WDWA 2014).



Chapter 7

How to Take Care of Your Bankruptcy Clients and Build an FCRA Practice

Justin BaxterBaxter & Baxter LLP

Portland, Oregon

Mark LefflerBoleman Law FirmRichmond, Virginia

Contents

I. Fair Credit Reporting Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–1A. Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–1B. Key Violations Against Credit Reporting Agencies. . . . . . . . . . . . . . . . . . . 7–1C. Claims Against Creditors (i.e., “Furnishers”) . . . . . . . . . . . . . . . . . . . . . . 7–7D. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–8

II. Representing Plaintiffs Who Are Debtors in Bankruptcy . . . . . . . . . . . . . . . . . . . 7–9A. Causes of Action are Property of the Bankruptcy Estate . . . . . . . . . . . . . . . 7–9B. Jurisdiction and Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–13C. Issues for Attorneys Representing Chapter 13 Debtors as Plaintiffs . . . . . . . . 7–16

Sample Motion for Approval of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–19Sample Order Approving Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–29

Chapter 7—How to Take Care of Your Bankruptcy Clients and Build an FCRA Practice




I. Fair Credit Reporting Act

A. Key Terms

1. Consumer Report.—

In general.—The term “consumer report” means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for— (A) credit or insurance to be used primarily for personal, family, or household

purposes; (B) employment purposes; or (C) any other purpose authorized under section 1681b of this title. 15 U.S.C. §

1681a(d). 2. The term “consumer reporting agency” means any person which, for monetary

fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports. 15 U.S.C. § 1681a(f).

3. The term “file”, when used in connection with information on any consumer,

means all of the information on that consumer recorded and retained by a consumer reporting agency regardless of how the information is stored. 15 U.S.C. § 1681a(g).

B. Key Violations against Credit Reporting Agencies

1. Permissible purposes.

(a) In general. Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other: (1) In response to the order of a court having jurisdiction to issue such an order, or a subpoena issued in connection with proceedings before a Federal grand jury. (2) In accordance with the written instructions of the consumer to whom it relates. (3) To a person which it has reason to believe— (A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving



the extension of credit to, or review or collection of an account of, the consumer; or (B) intends to use the information for employment purposes; or (C) intends to use the information in connection with the underwriting of insurance involving the consumer; or (D) intends to use the information in connection with a determination of the consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status; or (E) intends to use the information, as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; or (F) otherwise has a legitimate business need for the information— (i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account. (G) executive departments and agencies in connection with the issuance of government-sponsored individually-billed travel charge cards. (4) In response to a request by the head of a State or local child support enforcement agency (or a State or local government official authorized by the head of such an agency), if the person making the request certifies to the consumer reporting agency that— (A) the consumer report is needed for the purpose of establishing an individual’s capacity to make child support payments, determining the appropriate level of such payments, or enforcing a child support order, award, agreement, or judgment; (B) the parentage of the consumer for the child to which the obligation relates has been established or acknowledged by the consumer in accordance with State laws under which the obligation arises (if required by those laws); and (C) the consumer report will be kept confidential, will be used solely for a purpose described in subparagraph (A), and will not be used in connection with any other civil, administrative, or criminal proceeding, or for any other purpose. (5) To an agency administering a State plan under section 654 of title 42 for use to set an initial or modified child support award. (6) To the Federal Deposit Insurance Corporation or the National Credit Union Administration as part of its preparation for its appointment or as part of its exercise of powers, as conservator, receiver, or liquidating agent for an insured depository institution or insured credit union under the Federal Deposit Insurance Act [12 U.S.C. 1811 et seq.] or the Federal Credit Union Act [12 U.S.C. 1751 et seq.], or other applicable Federal or State law, or in connection with the resolution



or liquidation of a failed or failing insured depository institution or insured credit union, as applicable. 15 U.S.C. § 1681b.

2. Obsolescence.

Information excluded from consumer reports. Except as authorized under subsection (b), no consumer reporting agency may make any consumer report containing any of the following items of information: (1) Cases under title 11 or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years. (2) Civil suits, civil judgments, and records of arrest that, from date of entry, antedate the report by more than seven years or until the governing statute of limitations has expired, whichever is the longer period. (3) Paid tax liens which, from date of payment, antedate the report by more than seven years. (4) Accounts placed for collection or charged to profit and loss which antedate the report by more than seven years. (5) Any other adverse item of information, other than records of convictions of crimes which antedates the report by more than seven years. (6) The name, address, and telephone number of any medical information furnisher that has notified the agency of its status, unless— (A) such name, address, and telephone number are restricted or reported using codes that do not identify, or provide information sufficient to infer, the specific provider or the nature of such services, products, or devices to a person other than the consumer; or (B) the report is being provided to an insurance company for a purpose relating to engaging in the business of insurance other than property and casualty insurance. 15 U.S.C. § 1681c(a).

3. Identity theft.

Upon the direct request of a consumer, or an individual acting on behalf of or as a personal representative of a consumer, who asserts in good faith a suspicion that the consumer has been or is about to become a victim of fraud or related crime, including identity theft, a consumer reporting agency described in section 1681a(p) of this title that maintains a file on the consumer and has received appropriate proof of the identity of the requester shall—(A) include a fraud alert in the file of that consumer, and also provide that alert along with any credit score generated in using that file, for a period of not less than 1 year, beginning on the date of such request, unless the consumer or such representative requests that such fraud alert be removed before the end of such period, and the agency has received appropriate proof of the identity of the requester for such purpose . . . . 15 U.S.C. § 1681c-1(a)(1).



Upon the direct request of a consumer, or an individual acting on behalf of or as a personal representative of a consumer, who submits an identity theft report to a consumer reporting agency described in section 1681a(p) of this title that maintains a file on the consumer, if the agency has received appropriate proof of the identity of the requester, the agency shall—(A) include a fraud alert in the file of that consumer, and also provide that alert along with any credit score generated in using that file, during the 7-year period beginning on the date of such request, unless the consumer or such representative requests that such fraud alert be removed before the end of such period and the agency has received appropriate proof of the identity of the requester for such purpose . . . . 15 U.S.C. § 1681c-1(b)(1). Block. Except as otherwise provided in this section, a consumer reporting agency shall block the reporting of any information in the file of a consumer that the consumer identifies as information that resulted from an alleged identity theft, not later than 4 business days after the date of receipt by such agency of— (1) appropriate proof of the identity of the consumer; (2) a copy of an identity theft report; (3) the identification of such information by the consumer; and (4) a statement by the consumer that the information is not information relating to any transaction by the consumer. (b) Notification. A consumer reporting agency shall promptly notify the furnisher of information identified by the consumer under subsection (a)— (1) that the information may be a result of identity theft; (2) that an identity theft report has been filed; (3) that a block has been requested under this section; and (4) of the effective dates of the block. 15 U.S.C. § 1681c-2(a) & (b).

4. Maximum possible accuracy.

Accuracy of report. Whenever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates. 15 U.S.C. § 1681e(b).

5. Credit file disclosures.

Every consumer reporting agency shall, upon request, and subject to section 1681h(a)(1) of this title, clearly and accurately disclose to the consumer: (1) All information in the consumer’s file at the time of the request, except that— (A) if the consumer to whom the file relates requests that the first 5 digits of the social security number (or similar identification number) of the consumer not be included in the disclosure and the consumer reporting agency has received



appropriate proof of the identity of the requester, the consumer reporting agency shall so truncate such number in such disclosure; and (B) nothing in this paragraph shall be construed to require a consumer reporting agency to disclose to a consumer any information concerning credit scores or any other risk scores or predictors relating to the consumer. (2) The sources of the information; except that the sources of information acquired solely for use in preparing an investigative consumer report and actually used for no other purpose need not be disclosed: Provided, That in the event an action is brought under this subchapter, such sources shall be available to the plaintiff under appropriate discovery procedures in the court in which the action is brought. (3)(A) Identification of each person (including each end-user identified under section 1681e(e)(1) of this title) that procured a consumer report— (i) for employment purposes, during the 2-year period preceding the date on which the request is made; or (ii) for any other purpose, during the 1-year period preceding the date on which the request is made. (B) An identification of a person under subparagraph (A) shall include— (i) the name of the person or, if applicable, the trade name (written in full) under which such person conducts business; and (ii) upon request of the consumer, the address and telephone number of the person. (C) Subparagraph (A) does not apply if— (i) the end user is an agency or department of the United States Government that procures the report from the person for purposes of determining the eligibility of the consumer to whom the report relates to receive access or continued access to classified information (as defined in section 1681b(b)(4)(E)(i) [1] of this title); and (ii) the head of the agency or department makes a written finding as prescribed under section 1681b(b)(4)(A) of this title. (4) The dates, original payees, and amounts of any checks upon which is based any adverse characterization of the consumer, included in the file at the time of the disclosure.



(5) A record of all inquiries received by the agency during the 1-year period preceding the request that identified the consumer in connection with a credit or insurance transaction that was not initiated by the consumer. (6) If the consumer requests the credit file and not the credit score, a statement that the consumer may request and obtain a credit score. 15 U.S.C. § 1681g(a).

6. Reinvestigations.

(1) [I]f the completeness or accuracy of any item of information contained in a consumer’s file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly, or indirectly through a reseller, of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5), before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer or reseller. * * * (2) Prompt notice of dispute to furnisher of information (A) In general Before the expiration of the 5-business-day period beginning on the date on which a consumer reporting agency receives notice of a dispute from any consumer or a reseller in accordance with paragraph (1), the agency shall provide notification of the dispute to any person who provided any item of information in dispute, at the address and in the manner established with the person. The notice shall include all relevant information regarding the dispute that the agency has received from the consumer or reseller. (B) Provision of other information The consumer reporting agency shall promptly provide to the person who provided the information in dispute all relevant information regarding the dispute that is received by the agency from the consumer or the reseller after the period referred to in subparagraph (A) and before the end of the period referred to in paragraph (1)(A). * * * (4) Consideration of consumer information In conducting any reinvestigation under paragraph (1) with respect to disputed information in the file of any consumer, the consumer reporting agency shall review and consider all relevant information submitted by the consumer in the period described in paragraph (1)(A) with respect to such disputed information. (5) Treatment of inaccurate or unverifiable information (A) In generalIy, after any reinvestigation under paragraph (1) of any information disputed by a consumer, an item of the information is found to be inaccurate or incomplete or cannot be verified, the consumer reporting agency shall—



(i) promptly delete that item of information from the file of the consumer, or modify that item of information, as appropriate, based on the results of the reinvestigation; and (ii) promptly notify the furnisher of that information that the information has been modified or deleted from the file of the consumer. * * * (6) Notice of results of reinvestigation (A) In general A consumer reporting agency shall provide written notice to a consumer of the results of a reinvestigation under this subsection not later than 5 business days after the completion of the reinvestigation, by mail or, if authorized by the consumer for that purpose, by other means available to the agency. * * * 15 U.S.C. 1681i(a).

C. Claims against Creditors (i.e., Furnishers)

1. Section 1681s-2(a) (NO CIVIL LIABILITY!)

(A) Reporting information with actual knowledge of errors A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.

(B) Reporting information after notice and confirmation of errors A person shall not furnish information relating to a consumer to any consumer reporting agency if— (i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and (ii) the information is, in fact, inaccurate.

2. Section 1681s-2(b)

Duties of furnishers of information upon notice of dispute (1) In general. After receiving notice pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall— (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the consumer reporting agency pursuant to section 1681i(a)(2) of this title; (C) report the results of the investigation to the consumer reporting agency; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person



furnished the information and that compile and maintain files on consumers on a nationwide basis; and (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly— (i) modify that item of information; (ii) delete that item of information; or (iii) permanently block the reporting of that item of information.

D. Remedies

1. Limitation of liability.

Except as provided in sections 1681n and 1681o of this title, no consumer may bring any action or proceeding in the nature of defamation, invasion of privacy, or negligence with respect to the reporting of information against any consumer reporting agency, any user of information, or any person who furnishes information to a consumer reporting agency, based on information disclosed pursuant to section 1681g, 1681h, or 1681m of this title, or based on information disclosed by a user of a consumer report to or for a consumer against whom the user has taken adverse action, based in whole or in part on the report [2] except as to false information furnished with malice or willful intent to injure such consumer. 15 U.S.C. 1681h(e).

2. Civil liability for negligent noncompliance

(a) In general. Any person who is negligent in failing to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of— (1) any actual damages sustained by the consumer as a result of the failure; and (2) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court. (b) Attorney’s fees On a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney’s fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper. 15 U.S.C. 1681o.



3. Civil liability for willful noncompliance

(a) In general. Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of— (1)(A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or (B) in the case of liability of a natural person for obtaining a consumer report under false pretenses or knowingly without a permissible purpose, actual damages sustained by the consumer as a result of the failure or $1,000, whichever is greater; (2) such amount of punitive damages as the court may allow; and (3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court. 15 U.S.C. 1681n.

II. Representing Plaintiffs Who Are Debtors in Bankruptcy

A. Causes of Action are Property of the Bankruptcy Estate

1. It is property of the estate

(a) Section 541 “creates an estate” which is “comprised of all the following

property, wherever located and by whomever held … all legal or equitable interests of the debtor in property as of the commencement of the case …”

(b) For Chapter 13 cases, Section 1306 expands Section 541 by including all property listed in Section 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted … whichever occurs first”

(1) In Carroll v. Logan,735 F.3d 147 (4th Cir. 2013), the Fourth Circuit Court of Appeals held that an interest in an inheritance acquired by Chapter 13 debtors more than 180 days after the petition date is property of the Chapter 13 estate. This follows a growing trend in case law that interprets the Bankruptcy Code in keeping with BAPCPA’s intent to maximize debtor payments to creditors. See, e.g., Ransom v. FIA Card Servs., N.A., 131 S.Ct. 716 (2011) (interpreting the Bankruptcy Code to reflect congressional intent that debtors should “repay creditors the maximum they can afford”).

(2) 9th Circuit BAP followed Carroll v. Logan in holding “the bankruptcy court did not err in determining that an inheritance received by chapter 13 debtors more than 180 days following the petition date but before confirmation of a chapter 13 plan and before the case is closed, dismissed or converted is property of the debtors' bankruptcy estate.” Dale v. Maney (In re Dale), 505 B.R. 8, 13 (B.A.P. 9th Cir. 2014)



(3) In Carroll, the 4th Circuit included a straightforward formula for determining whether property acquired during a Chapter 13 case becomes property of the estate pursuant to § 1306:

A Chapter 13 Bankruptcy Estate = Property described in Section 541 + The kind of property (e.g., inheritances) described in Section 541 and acquired before the Chapter 13 case is closed, dismissed, or converted

(c) Not only is tangible property included in property of the estate, but

intangible and inchoate interests such as causes of action, are also property of the estate. See, Wilson v. Dollar Gen. Corp. 717 F.3d 337, 342 (4th Cir., 2013); Kocher v. Campbell, 282 Va. 113, 115 712 S.E.2d 477, 479 (Va. 2011). “More specifically, property of the estate under § 541(a) has uniformly been interpreted to include causes of action.” Canterbury v. J.P. Morgan Acquisition Corp., 958 F.Supp 2d 637 (W.D. Va. 2013) (quoting Logan v. JKV Real Estate Servs., 414 F.3d 507, 512 (4th Cir. 2005) (internal citations omitted).

(d) The issues were detailed in Vanderheyden v. Peninsula Airport

Comm'n, 2013 WL 30065 (E.D. Va., 2013)(most citations omitted).

The Fourth Circuit has observed that ‘[t]he meaning of 'property of the estate' under the Code has been construed 'broadly to encompass all kinds of property, including intangibles.'" Logan v. JKV Real Estate Servs. (In re Bogdan), 414 F.3d 507, 512 (4th Cir. 2005) … And, "[m]ore specifically, 'property of the estate' under § 541(a) has 'uniformly been interpreted to include causes of action.'" … Such causes of action are not limited to active lawsuits; "[T]he debtor need not know all the facts or even the legal basis for the cause of action; rather, if the debtor has enough information . . . prior to confirmation to suggest that it may have a possible cause of action, then that is a 'known' cause of action such that it must be disclosed … This duty does not end when the debtor files her bankruptcy petition; it continues through the pendency of the debtor’s bankruptcy proceedings, requiring the debtor to update the bankruptcy court as her financial situation changes …”

(e) A cause of action which is “sufficiently rooted in the prebankruptcy past” may be considered property of the estate even if the prosecution and recovery are all postpetition. Segal v. Rochelle, 382 U.S. 375, 380 (1966).



(f) If the cause of action did not accrue, under non-bankruptcy law, until after the filing of the petition, it is not property of the estate in a chapter 7 case. In re Rivera, 2014 WL 287517 (Bankr. E.D. Va., 2014). “The timing of the events is critical in this case because the Debtor lacks standing only as to causes of action that had accrued as of the filing date of her prior Chapter 7 petition. To determine whether a cause of action has accrued for standing purposes, the Court looks to applicable non-bankruptcy law.”

2. Disclose it up front - Statute requires disclosure

(a) The Debtor is required to file schedules listing all of the Debtor's assets

and all of the Debtor's liabilities. Section 521(a)(1)(B)(i).

(b) If the Debtor “acquires or becomes entitled to acquire any interest in property, the debtor shall within 14 days after the information comes to the debtor’s knowledge … file a supplemental schedule …” Rule 1007(h).

(c) “Debtor has the affirmative duty to disclose all causes of action in her

Schedules.” Rivera v. JP Morgan Chase Bank (In re Rivera) 2014 WL 287517 (Bankr. E.D. Va., 2014).

3. Duty to Disclose Postpetition Causes of Action

(a) Postpetition Causes of Action are property of chapter 13 estate

Carroll v. Logan, 735 F.3d 147, 151-152 (4th Cir. 2013)(“The repayment plan remains subject to modification for reasons including a debtor's decreased ability to pay according to plan, as well as the debtor's increased ability to pay. See 11 U.S.C. § 1329. [ ]. The plain language of Section 1306(a) blocks the Carrolls from depriving their creditors a part of their windfall acquired before their Chapter 13 case was closed, dismissed, or converted.”)

(b) Debtors have a duty to disclose such postpetition causes of action or income

(1) If the Debtor “acquires or becomes entitled to acquire any interest in property, the debtor shall within 14 days after the information comes to the debtor’s knowledge … file a supplemental schedule …” Rule 1007(h).

(2) Virginia Cases:

Robertson v. Flowers Baking Co. of Lynchburg, 2012 WL 830097 (W.D. Va., 2012) (noting that the duty to disclose “continues through



the pendency of the bankruptcy proceeding and requires the Plaintiff to amend his financial statements if his situation changes.”) “Debtor has the affirmative duty to disclose all causes of action in her Schedules.” In re Rivera, 2014 WL 287517 (Bankr. E.D. Va., 2014). In re Criscuolo, 2014 WL 1910078 (Bankr. E.D. Va. 2014)(Debtor’s failure to honestly report substantial increases in postpetition income resulted in dismissal with prejudice with a one year bar to refiling).

4. Failure to disclose may result in judicial estoppel barring the claim (a) If a cause of action or potential claim is not scheduled, the Debtor may be

precluded from any recovery.

(b) Kimberlin v. Dollar General Corp, 2013 WL 1136563 (6th Cir 2013)

(1) Kimberlin worked for Dollar General for 9 years in a distribution center until her termination. She was terminated by Dollar General on June 9, 2010.

(2) Nearly five years before her termination, Kimberlin and her husband had filed Chapter 13. Her Plan paid secured creditors in full and unsecured creditors a dividend of 3 percent. On July 20, 2010, Kimberlin and her husband made the final payment to the Trustee under their 5-year Chapter 13 plan. She received her discharge on September 7, 2010, and the case was closed on November 24, 2010. About one year later, she filed suit against Dollar General alleging unlawful termination.

(3) During the 41 days between her termination from Dollar General and the

final payment to the Trustee, Kimberlin did not amend her Schedules to disclose her post-petition cause of action for unlawful termination.

(4) Kimberlin argued that she lacked any motive to fail to disclose the cause

of action because it would have been impractical to modify the Chapter 13 plan during the remaining 41 days before her plan was complete.

(5) The court held judicial estoppel barred Kimberlin from pursuing the

lawsuit because “the bankruptcy court still had options for protecting the estate’s and creditors’ potential interest in the retaliation claim” and “[h]ad Kimberlin notified the court of her potential claim within the 41–day period, it could have modified her Chapter 13 plan to grant creditors some percentage of any future recovery.”



(c) The 4th Circuit’s 4-part test to determine whether judicial estoppel applies:

(1) the party to be estopped must be advancing an assertion that is inconsistent with a position taken during previous litigation;

(2) the position must be one of fact instead of law; (3) the prior position must have been accepted by the court in the first

proceeding; and (4) the party to be estopped must have acted intentionally, not inadvertently.

Folio v. City of Clarksburg, 134 F.3d 1211, 1217 (4th Cir.1998) (citing Lowery v. Stovall, 92 F.3d 219, 224 (4th Cir.1996), cert. denied, 519 U .S. 1113, 117 S.Ct. 954 (1997)).

(d) A bankruptcy court does not accept a party’s inconsistent position until it enters a discharge of the debts. Collucci v. Tyson Farms, 2014 WL 6879927 (E.D.Va. 2010)

(e) The 4th Circuit has held that a debtor’s failure to include a cause of action in her Schedules does not create a presumption that she acted intentionally or in bad faith. Martineau v. Wier, 934 F.3d 385, 394 (4th Cir. 2019) (“[T]he ‘equitable principles that undergird’ judicial estoppel require that it be invoked only after a court has considered ‘all the facts and circumstances of the particular case’ – an inquiry that is incompatible with a ‘one-size-fits-all’ presumption.”). Among the courts the 4th Circuit indicated it was following in reaching this decision was Ah Quin v. Cty. of Kauai Dep’t of Transp., 733 F.3d 267 (9th Cir. 2013), which likewise rejected a presumption of bad faith where a debtor reopened a bankruptcy case to amend his Schedules to include a cause of action.

B. Jurisdiction and Standing

1. Jurisdiction

(a) Under 28 U.S.C. § 157(a), there are three categories of bankruptcy

proceedings: (1) Those arising “under” Title 11; (2) Those arising “in” Title 11; and (3) Those that are “related to” a case under Title 11.

(b) Under 28 U.S.C. § 157(b), bankruptcy judges may hear and enter final

judgments in “all core proceedings arising under title 11, or arising in a case under title 11”.



(c) Among the 16 types of core proceedings mentioned in 28 U.S.C. § 157(b)(2)(C) is “counterclaims by [a debtor’s] estate against persons filing claims against the estate.”

(d) In Stern v. Marshall, 131 S.Ct. 2594 (2011), the U.S. Supreme Court held

that Article III of the Constitution limits the jurisdiction of bankruptcy judges such that they may not enter final judgment where the counterclaim is rooted in state law and where a claim seeks only to “augment” the bankruptcy estate and would otherwise “exis[t] without regard to any bankruptcy proceeding.”

(e) In Executive Benefits Insurance Agency v. Arkinson, 134 S.Ct. 2165

(2014), the Supreme Court later held that bankruptcy courts may enter proposed findings of fact and conclusions of law on Stern claims and submit them to the U.S. District Court for a final ruling.

(f) In Wellness International Network, Ltd. V. Sharif, 135 S.Ct. 1932 (2015),

held that bankruptcy courts may issue final adjudications on Stern claims with the knowing consent of all parties.

2. Who has standing? Is it the Trustee’s cause of action now? How does the debtor

get it back? (a) Chapter 7

(1) Causes of action that belong to the debtor's bankruptcy estate may only

be pursued by the chapter 7 trustee, as representative of the bankruptcy estate. Wilson v. Dollar Gen. Corp., 717 F.3d 337, 342 (4th Cir. 2013); Robertson v. Flowers Baking Co. of Lynchburg (W.D. Va., 2012).

(2) Debtor must have standing when the lawsuit is filed, or it may be a “legal nullity” and the statute of limitations may continue to run. Kocher v. Campbell, 282 Va. 113, 712 S.E.2d 477, 480 (Va., 2011)(although leave was granted to reopen the bankruptcy case and amend to assert the cause of action and exempt it without objection, the lawsuits filed before such relief was granted were “void” and therefore they did not toll the statute of limitations.)

(3) Debtor may pursue the cause of action if the Trustee abandons it.

(4) Section 554(c) – The Trustee abandons property after notice and hearing, or, if “properly scheduled” and “not otherwise administered at the time of the closing” it is abandoned back to the Debtor at closing.

(5) Section 554(d) – If not abandoned or administered, the asset remains

property of the estate.



(6) The Debtor can pursue the claim only if “the trustee abandons it” per Section 554(a) or the “court exempts it.” Vanderheyden v. Peninsula Airport Comm'n, 2013 WL 30065 (E.D. Va., 2013)(citations omitted):

(b) Chapter 13

(1) Wilson v. Dollar General Corp., 717 F.3d 337, 339 (4th Cir. 2013)

(citing to Sections 1303 and 1306 and Rule 6009) – “We align ourselves with our sister circuits and conclude that because of the powers vested in the Chapter 13 debtor and trustee, a Chapter 13 debtor may retain standing to bring his pre-bankruptcy petition claims.”

(2) “Chapter 13 debtors have standing to sue on their own, even though

their pre-petition causes of action belong to the bankruptcy estate.” Royal v. R&L Carriers Shared Servs., L.L.C. (E.D. Va., 2013), page 5 (citations omitted) (denying a Rule 12(b)(1) motion as to standing). In re Henneghan, 2005 WL 2267185, at *6 (Bankr. E.D. Va. June 22, 2005) (emphasis in original)(“In a chapter 13 case … the debtor has, "exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(1)." § 1303, Bankruptcy Code (emphasis added). These include the power in § 363(b) to "use, sell, or lease" property of the estate. The only way to "use" a cause of action is to bring suit upon it or settle it. It therefore follows that a chapter 13 debtor has standing to bring suit on his or her own causes of action.”)

(3) Rule 6009 provides that: “With or without court approval, the trustee

or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal." The court in Royal noted that although technically a chapter 11 term this section may also apply to chapter 13 debtors. Royal v. R&L Carriers Shared Servs., L.L.C. (E.D. Va., 2013) page 7.

(c) Beware of Statute of Limitations

Bankruptcy Code Section 108(a) - If the time to bring an action by Debtor has not expired when the bankruptcy case is filed, the Trustee has the right to bring the action within the later of “such period” or “two years after the order for relief.” See, In re Wilmoth, 412 B.R. 791, 799 (Bankr. E.D. Va. 2009).



C. Issues for Attorneys Representing Chapter 13 Debtors as Plaintiffs

1. Employment of Counsel (a) § 327(e) says, “The trustee, with the court’s approval, may employ, for a

specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.”

(b) Federal Rule of Bankruptcy Procedure 2014(a) lays out the specifics of what must be included in the Application for Employment and the Order approving the Application.

(c) For Chapter 13 debtors, there is a split as to whether the Court must first

grant the debtor permission to hire counsel for a special purpose (i.e., outside the scope of the bankruptcy representation). For example, In re Goines, 465 B.R. 704 (Bankr. N.D. Ga. 2012) and Wright v. Csabi (In re Wright ), 578 B.R. 570 (Bankr. S.D. Tex. 2017) hold that § 327(e) applies to Chapter 13 debtors, who must obtain the Court’s permission to hire counsel for a special purpose. However, In re Jones, 505 B.R. 229 (Bankr. E.D. Wis. 2014), In re Scott, 531 B.R. 640 (Bankr. N.D. Miss. 2015), In re Gilliam, 582 B.R. 459 (Bankr. N.D. Ill. 2018), and In re Maldonado, 483 B.R. 326 (Bankr. N.D. Ill. 2012) hold that Chapter 13 debtors are not required to seek prior permission to hire counsel for a special purpose.

2. Authority to Use Property of the Estate

(a) § 363(b)(1) allows the “trustee, after notice and a hearing” to “use, sell, or

lease, other than in the ordinary course of business, property of the estate”. In Chapter 13, § 1303 then gives debtors “exclusive of the trustee, the rights and powers of a trustee” under § 363(b).

(b) As explained by one judge in the Eastern District of Virginia,

In chapter 13 . . . [e]ven though a trustee is appointed, he or she functions primarily, although not exclusively, as a paying agent, and the debtor retains many of the powers that a trustee would have in chapter 7. In particular, § 1303, Bankruptcy Code, gives the debtor, “exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363 (l) [.]” Section 363(b) in turn gives a trustee the power to “use, sell or lease ... property of the estate.” Property of the estate includes causes of action owned by the debtor on the filing date. Tignor v. Parkinson,



729 F.2d 977, 981 (4th Cir.1984). The only way to “use” a cause of action is to bring suit on it (or to settle it).

In re Spence, No. 97-19586-SSM, 1999 WL 35108963, at *5 (Bankr. E.D. Va. May 24, 1999).

3. Compensation

(a) Section 329(a) of the Bankruptcy Code provides that “[a]ny attorney

representing a debtor in a case under this title, or in connection with such a case ... shall file with the court a statement of the compensation paid or agreed to be paid ....”

(b) Bankruptcy Rule 2016(b) requires that the statement be filed and transmitted to the U.S. Trustee within 14 days after the order for relief or, where a supplemental statement is required, within 14 days after any payment or agreement not previously disclosed. The phrase “in connection with” has been broadly interpreted to include any services that affect the bankruptcy estate. See In re Frye, No. 15-10242, 2017 WL 1364973, at *6 (Bankr. D. Vt. Apr. 12, 2017); In re Gorski, 519 B.R. 67, 72 (Bankr. S.D.N.Y. 2014) (“[I]f it can be objectively determined that the services rendered or to be rendered by the attorney have or will have an impact on the bankruptcy estate,” then those services are considered to be “in connection with” the bankruptcy case).

(c) In Perdue v. Kenny, 559 U.S. 542, 130 S.Ct. 1662 (2010), the United States

Supreme Court decided that the lodestar method for determining reasonable fees should be used instead of the “Johnson factors” and it explained why the lodestar calculation is objective.

One possible method was set out in Johnson v. Georgia Highway Express, Inc., which listed 12 factors that a court should consider in determining a reasonable fee.4 This method, however, “gave very little actual guidance to district courts. Setting attorney's fees by reference to a series of sometimes subjective factors placed unlimited discretion in trial judges and produced disparate results.” An alternative, the lodestar approach, was pioneered by the Third Circuit in Lindy Bros. Builders, Inc. of Philadelphia v. American Radiator & Standard Sanitary Corp., and “achieved dominance in the federal courts” after our decision in Hensley Gisbrecht v. Barnhart. “Since that time, ‘[t]he “lodestar” figure has, as its name suggests, become the guiding light of our fee-shifting jurisprudence.’” Although the lodestar method is not perfect, it has several important virtues. First, in accordance with our understanding of



the aim of fee-shifting statutes, the lodestar looks to “the prevailing market rates in the relevant community.” Developed after the practice of hourly billing had become widespread, the lodestar method produces an award that roughly approximates the fee that the prevailing attorney would have received if he or she had been representing a paying client who was billed by the hour in a comparable case. Second, the lodestar method is readily administrable; and unlike the Johnson approach, the lodestar calculation is “objective,” and thus cabins the discretion of trial judges, permits meaningful judicial review, and produces reasonably predictable results.

559 U.S. at 550-52 (citations omitted).



Mark C. Leffler (VSB #40712) Dale W. Pittman (VSB #15673)Boleman Law Firm, P.C. THE LAW OFFICE OF DALE W. PITTMAN, P.C.P.O. Box 11588 The Eliza Spotswood HouseRichmond, VA 23230 112-A West Tabb StreetTelephone (804) 358-9900 Petersburg, VA 23803Counsel for Debtors/ Telephone (804) 861-6000Proposed Special Counsel for Debtor Proposed Special Counsel for Debtor

IN THE UNITED STATES BANKRUPTCY COURTEASTERN DISTRICT OF VIRGINIA

Richmond Division

In re: Clarence Milton Staton, Jr.Salina Ann WillisAKA Clarence M. Staton, Jr.

Debtors

Case No. 18-32776-KRHChapter 13

Address: 1615 Bickerstaff RoadHenrico, VA 23231

Last four digits of Social Security No(s): xxx-xx-2454 (Debtor)xxx-xx-4763 (Joint Debtor)

NOTICE OF HEARING AND NOTICE OF APPLICATION TO EMPLOY COUNSEL FOR SPECIAL PURPOSE AND TO APPROVE USE OF PROPERTY OF THE ESTATE

The above named Debtors, by counsel, have filed an Application to Employ Counsel for Special Purpose pursuant to 11 U.S.C. § 327(e) and Federal Rule of Bankruptcy Procedure 2014and to Approve Use of Property of the Estate pursuant to 11 U.S.C. §§ 363 and 1303 (the “Application”).

Your rights may be affected. You should read these papers carefully and discuss them with your attorney, if you have one in this bankruptcy case. (If you do not have an attorney, you may wish to consult one.)

If you do not want the court to grant the relief sought in the Application, or if you want the court to consider your views on the Application, then no later than one (1) day before the date of the hearing set forth below, you or your attorney must:

• File with the court, at the address shown below, a written response pursuant to Local Bankruptcy Rules 9013-1(H). If you mail your response to the court for filing, you must mail it early enough so the court will receive it on or before the date stated above.

Clerk of CourtUnited States Bankruptcy Court701 E. Broad Street, Suite 4000Richmond, VA 23219-3515

Case 18-32776-KRH Doc 28 Filed 03/12/19 Entered 03/12/19 09:12:27 Desc Main Document Page 1 of 13



You must also send a copy to:

Boleman Law Firm, P.C.P.O. Box 11588Richmond, VA 23230-1588

By separate Motion filed contemporaneously with this Notice, the Debtors will request that the Court grant an expedited hearing on the Application. If the Court grants an expedited hearing, you must also attend the hearing on the Application scheduled to be held on March 27, 2019 at 12:00 p.m. before the Honorable Kevin R. Huennekens, United States Bankruptcy Court, 701E. Broad Street, Courtroom 5000, Richmond, VA 23219.

If you or your attorney do not take these steps, the court may decide that you do not oppose the relief sought in the application and may enter an order granting that relief.

Dated: March 12, 2019 Respectfully submitted,

CLARENCE MILTON STATON, JR.SALINA ANN WILLIS

By Counsel:

/s/ Mark C. LefflerMark C. Leffler (VSB #40712)Boleman Law Firm, P.C.P.O. Box 11588Richmond, VA 23230Telephone (804) 358-9900Counsel for Debtors/Proposed Special Counsel for Debtor

/s/ Dale W. PittmanDale W. Pittman (VSB #15673)THE LAW OFFICE OF DALE W. PITTMAN, P.C.The Eliza Spotswood House112-A West Tabb StreetPetersburg, VA 23803Telephone (804) 861-6000Proposed Special Counsel for Debtor




CERTIFICATE OF SERVICE

I certify that on March 12, 2019, I have transmitted a true copy of the foregoing document electronically through the Court’s CM/ECF system or by first-class U.S. mail to the Debtor, Chapter 13 trustee, the United States trustee if other than by the electronic means provided for at Local Bankruptcy Rule 2002-1, and to all creditors and parties in interest on the mailing matrix attached hereto.

/s/ Mark C. LefflerCounsel for Debtor/Proposed Special Counsel for Debtor




Mark C. Leffler (VSB #40712) Dale W. Pittman (VSB #15673)Boleman Law Firm, P.C. THE LAW OFFICE OF DALE W. PITTMAN, P.C.P.O. Box 11588 The Eliza Spotswood HouseRichmond, VA 23230 112-A West Tabb StreetTelephone (804) 358-9900 Petersburg, VA 23803Counsel for Debtors/ Telephone (804) 861-6000Proposed Special Counsel for Debtor Proposed Special Counsel for Debtor

IN THE UNITED STATES BANKRUPTCY COURTFOR THE EASTERN DISTRICT OF VIRGINIA

Richmond Division

In re: Clarence Milton Staton, Jr.Salina Ann WillisAKA Clarence M. Staton, Jr.

Debtors

Case No. 18-32776-KRHChapter 13

DEBTORS’ APPLICATION TO APPROVE EMPLOYMENT OF COUNSEL FOR SPECIAL PURPOSE AND TO USE PROPERTY OF THE ESTATE

Clarence M. Staton, Jr. and Salina Ann Willis (the “Debtors”), by counsel, request that

the Court enter an order, pursuant to 11 U.S.C. § 327(e) and Federal Rule of Bankruptcy

Procedure 2014, approving employment of Boleman Law Firm, P.C. (“Boleman”) and the Law

Office of Dale W. Pittman, P.C. (“Pittman”), and enter an order, pursuant to 11 U.S.C. §§ 363

and 1303, approving the use of property of the estate. In support of their Application, Debtors

state as follows:

Jurisdiction

1. Jurisdiction of this Court over the instant matter is based upon 28 U.S.C. §§ 1334

and 157 in that this action arises in and relates to the Debtors’ bankruptcy.

2. This proceeding is a core proceeding under 28 U.S.C. §157(b)(2)(A), (B), (K),

and (O).

3. Venue is proper pursuant to 28 U.S.C. § 1409.




Parties

4. Salina Ann Willis (“Ms. Willis”), having filed a voluntary petition under chapter

13 of the U.S. Bankruptcy Code in this Court on May 25, 2018, is a debtor in this case.

5. Suzanne E. Wade (the “Chapter 13 Trustee”) was appointed the Chapter 13

Standing Trustee.

Facts

6. On or about April 2, 2018, a debt collector named BCC Financial Management

Services, Inc., (“BCC”) mailed a dunning letter to Ms. Willis that violates the Fair Debt

Collection Practices Act (the “FDCPA”), and specifically 15 U.S.C. §§ 1692e and 1692g.

7. The Debtor asserted in her Amended Schedules dated March 11, 2019 that she has

a cause of action against BCC, arising from the dunning letter, for violation of the FDCPA, 15

USC § 1692 et seq. Ms. Willis asserts a claim for actual and statutory damages, plus attorney

fees. She asserted that the value of the cause of action is “unknown” and, on her Amended

Official Form 106C (Schedule C), she asserted an exemption in the cause of action that she

valued at $1.00 pursuant to Va. Code § 34-4. She intends to amend her Schedules in the future if

any different information is established regarding the nature or value of the cause of action.

8. On December 7, 2018, the Court entered an Order Confirming the Debtors’

Chapter 13 Plan.

9. Ms. Willis wishes to retain Boleman and Pittman to pursue her remedies against

BCC for its violations of the FDCPA.

10. Boleman and Pittman have agreed to represent Ms. Willis in her cause of action

against BCC, including by initiating a lawsuit in the United States District Court. Boleman and

Pittman have agreed to receive compensation for their legal services pursuant to the terms set




forth in their respective Supplemental Disclosures of Compensation of Attorney for Debtor in a

Chapter 13 Case, which Boleman and Pittman are filing contemporaneously with this

Application.

11. Boleman and Pittman are competent to represent Ms. Willis in this matter.

Boleman and Pittman both have extensive experience in representing consumers in bankruptcy

and in FDCPA matters, and have worked together extensively to obtain affirmative relief for

consumers in bankruptcy.

12. Boleman represents the Debtors in their Chapter 13 case. Neither Boleman nor

Pittman have any other connections with the Debtors, any creditors, any other party in interest,

their respective attorneys and accountants, the United States trustee, or any person employed in

the office of the United States trustee.

Discussion

13. Pursuant to 11 U.S.C. § 327(e),

The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.

14. Courts are split regarding whether a Chapter 13 debtor must first obtain

permission from the Court before hiring counsel for a special purpose. For example, In re

Goines, 465 B.R. 704 (Bankr. N.D. Ga. 2012) and Wright v. Csabi (In re Wright ), 578 B.R. 570

(Bankr. S.D. Tex. 2017) hold that § 327(e) applies to Chapter 13 debtors, who must obtain the

Court’s permission to hire counsel for a special purpose. However, In re Jones, 505 B.R. 229

(Bankr. E.D. Wis. 2014), In re Scott, 531 B.R. 640 (Bankr. N.D. Miss. 2015), In re Gilliam, 582

B.R. 459 (Bankr. N.D. Ill. 2018), and In re Maldonado, 483 B.R. 326 (Bankr. N.D. Ill. 2012)




hold that Chapter 13 debtors are not required to seek prior permission to hire counsel for a

special purpose.

15. In the Eastern District of Virginia, there is no controlling case authority on

whether a Chapter 13 debtor must seek prior permission from the Court before hiring counsel for

a special purpose.

16. Pursuant to 11 U.S.C. § 541(a)(1), the bankruptcy estate includes, among other

things, “all legal or equitable interests of the debtor in property as of the commencement of the

case.”

17. Pursuant to 11 U.S.C. § 363(b)(1), “the trustee, after notice and a hearing, may

use, sell, or lease, other than in the ordinary course of business, property of the estate . . . ”

except in circumstances not applicable to this case.

18. 11 U.S.C. § 1303 provides, “[s]ubject to any limitations on a trustee under this

chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under

sections 363(b), 363(d), 363(e), 363(f), and 363(l), of this title.

19. Chapter 13 debtors have the right to pursue causes of action that are property of

the estate, as Judge Mitchell explained in In re Spence:

In chapter 13 . . . [e]ven though a trustee is appointed, he or she functions primarily, although not exclusively, as a paying agent, and the debtor retains many of the powers that a trustee would have in chapter 7. In particular, § 1303, Bankruptcy Code, gives the debtor, “exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363 (l) [.]” Section 363(b) in turn gives a trustee the power to “use, sell or lease ... property of the estate.” Property of the estate includes causes of action owned by the debtor on the filing date. Tignor v. Parkinson, 729 F.2d 977, 981 (4th Cir.1984). The only way to “use” a cause of action is to bring suit on it (or to settle it).

In re Spence, No. 97-19586-SSM, 1999 WL 35108963, at *5 (Bankr. E.D. Va. May 24, 1999).




20. Similar to the issue of hiring counsel under § 327(e), there is also no controlling

case authority in the Eastern District of Virginia as to whether a Chapter 13 debtor must obtain

prior permission from the Court before pursuing a cause of action that is property of the estate

under §§ 363(b) and 1303. See, however, In re Lucash, 370 B.R. 664, 669 FN 3 (Bankr. E.D.

Va. 2007) (“No permission is required for a chapter 13 debtor to bring suit on his or her own

causes of action, since a chapter 13 debtor has, ‘exclusive of the trustee,’ the right to ‘use’

property of the estate, which for a cause of action necessarily includes bringing suit on it. §

363(b) and § 1303, Bankruptcy Code.”).

21. Pursuant to 15 U.S.C. § 1692k(a), violations of the FDCPA by a debt collector

subject the debt collector to liability for actual damages and, in individual cases, statutory

damages of up to $1,000.00. Additionally, pursuant to § 1692k(a)(3), a successful action under

the FDCPA by the plaintiff requires the defendant to pay “the costs of the action, together with a

reasonable attorney’s fee as determined by the court.”

22. Any action to enforce BCC’s liability for Ms. Willis’ damages must be brought

within one (1) year of the violation, which occurred on April 2, 2018. 15 U.S.C. § 1692k(d).

Argument

23. The Debtors properly and promptly amended their Schedules to disclose and

claim an exemption in Ms. Willis’ FDCPA cause of action against BCC.

24. The cause of action is property of the estate, but its value is unknown, and Ms.

Willis has claimed an exemption of $1.00 pursuant to Va. Code § 34-4.

25. Ms. Willis has the right to “use” the cause of action by pursuing remedies for the

FDCPA violation against BCC, including by bringing litigation. 11 U.S.C. §§ 363(b) and 1303.




26. Ms. Willis wishes to retain Boleman and Pittman to represent her in her cause of

action against BCC.

27. Boleman and Pittman are willing to accept the representation of Ms. Willis and,

subject to either this Court’s or the United States District Court’s authority to decide reasonable

compensation, to accept compensation pursuant to 15 U.S.C. § 1692k(a)(3) and pursuant to the

terms set forth in their respective Supplemental Disclosures of Compensation of Attorney for

Debtor in a Chapter 13 Case.

28. Lacking definitive case authority in the Eastern District of Virginia and, out of an

abundance of caution, the Debtors seek a Court Order appointing Boleman and Pittman as

counsel for a special purpose and authorizing Ms. Willis to pursue the cause of action against

BCC through litigation, negotiation, or both.

WHEREFORE, the Debtors request this Court to enter an Order appointing Boleman and

Pittman as counsel for a special purpose and authorizing Ms. Willis to pursue the cause of action

against BCC through litigation, negotiation, or both, and for such other and further relief as the

Court deems appropriate.




Respectfully submitted,

CLARENCE MILTON STATON, JR.SALINA ANN WILLIS

By Counsel:

/s/ Mark C. LefflerMark C. Leffler (VSB #40712)Boleman Law Firm, P.C.P.O. Box 11588Richmond, VA 23230Telephone (804) 358-9900Counsel for Debtors/Proposed Special Counsel for Debtor

/s/ Dale W. PittmanDale W. Pittman (VSB #15673)THE LAW OFFICE OF DALE W. PITTMAN, P.C.The Eliza Spotswood House112-A West Tabb StreetPetersburg, VA 23803Telephone (804) 861-6000Proposed Special Counsel for Debtor

CERTIFICATE OF SERVICE

I certify that on March 12, 2019, I have transmitted a true copy of the foregoing document electronically through the Court’s CM/ECF system or by first-class U.S. mail to the Debtor, Chapter 13 trustee, the United States trustee if other than by the electronic means provided for at Local Bankruptcy Rule 2002-1, and to all creditors and parties in interest on the mailing matrix attached hereto.

/s/ Mark C. LefflerCounsel for Debtors/Proposed Special Counsel for Debtor







Mar 28 2019 /s/ Kevin R Huennekens

Mar 29 2019







Chapter 8A

Presentation Slides: Washington State as a Creditor or Stakeholder in Bankruptcy,

Receiverships, and CollectionsSusan Edison

Washington Attorney General’s OfficeSeattle, Washington

Angie LeeWashington Attorney General’s Office

Seattle, Washington

Chapter 8A—Presentation Slides: Washington State as a Creditor or Stakeholder in Bankruptcy . . .

8A–ii34th Annual Northwest Bankruptcy Institute


8A–134th Annual Northwest Bankruptcy Institute

Washington State as a Creditor or Stakeholder in Bankruptcy,

Receiverships, and Collections By: Susan Edison and Angie Lee

Bankruptcy & Collections Unit, Washington State Attorney General’s Office

April 23, 2021

Disclaimer

This material does not constitute the official position of the authors, the Attorney General’s Office, or the State of Washington.



The Bankruptcy & Collections Unit

Three attorneys and four staffRepresentation of state agencies inBankruptcyReceivershipForeclosures/surplus fundsProbateContractor bond actions

The State of Washington

Naming “State of Washington” on a notice or pleading is not specific enough; specify the agency so there is proper notice and it can be routed correctly



Service Addresses

Both bankruptcy court websites have a register of mailing addresses of governmental units for bankruptcy service. You can find many of the agencies’ mailing addresses there. https://www.wawb.uscourts.gov/RegisterOfMailin

gAddressesOfGovernmental https://www.waeb.uscourts.gov/register-mailing-

addresses

You can use these same addresses for receiverships too

Tip: When serving a state agency, also serve the AGO (for expediency and some RCWs require)

The Agencies: Department of Revenue (the “DOR”)

Sales tax Failure to remit is a crime

RCW 82.080.050(2): “The tax required by this chapter, to be collected by the seller, is deemed to be held in trust by the seller until paid to the department. Any seller who appropriates or converts that tax collected to the seller’s own use or to any use other than the payment of the tax to the extent that the money required to be collected is not available for payment on the due date as prescribed in this chapter is guilty of a gross misdemeanor.”

https://www.wawb.uscourts.gov/RegisterOfMailingAddressesOfGovernmental

https://www.waeb.uscourts.gov/register-mailing-addresses

https://www.waeb.uscourts.gov/register-mailing-addresses

https://www.wawb.uscourts.gov/RegisterOfMailingAddressesOfGovernmental




Sales tax Personal Liability for failure to collect or remit

RCW 82.050.050(3): “Except as otherwise provided in this section, if any seller fails to collect the tax imposed I this chapter or, having collected the tax, fails to pay it to the department in the manner prescribed by this chapter, whether such failure is the result of the seller’s own acts or the result of acts or conditions beyond the seller’s control, the seller is, nevertheless, personally liable to the state for the amount of the tax.”


Excise tax (percentage of income)Real estate excise tax (“REET”)

(percentage of sales price)Deferred property taxDOR pays property tax for qualified

senior citizens and disabled persons and is paid from the sale of the property



The Agencies: Labor & Industries (“LNI”)

Unpaid workers compensation premiums

Penalties for failing to register as a contractor

Penalties for violations of Washington Industrial Safety and Health act

Wage Payment Act violations The Department has de jure authority to file wage claims on

behalf of workers who are not paid for all hours worked. See, Dep 't of Labor & Indus. v. Overnite Transp., 67 Wn. App. 24 (1992). The Department "stands in the shoes of the aggrieved employees and acts in a representative capacity on their behalf." Id at 37.

Benefit overpayments

The Agencies: Others

Attorney General’s Office—judgments obtained by the AGO Ex: campaign finance or consumer protection

Employment Security DepartmentDepartment of Social and Health ServicesDepartment of LicensingDepartment of EcologyState colleges and universitiesHealth Care Authority, Department of

Health



Tax warrants

The filing of a tax warrant is similar to the filing of a civil judgment RCW 51.48.140 – LNI premiums RCW 82.32.210(4) – DOR excise taxes RCW 50.24.115 – ESD unemployment

insurance premiumsOthers

The liens arise by operation of statute and are not subject to avoidance under 11 USC §522(f). The lien has a 10 year lifespan, can be extended

once by the filing of a warrant extension, extending the lifespan to 20 years

Discharged tax debts and tax warrants on real property

Pre vs. Post-Petition Property Secured debt remains enforceable against the

secured property despite the debtor’s discharge. See, Dewsnuup v. Timm (1992) 502 U.S. 410, 418.Warrant for discharged debt is enforceable

against property that was owned on the petition date.Warrant for discharged debt is not enforceable

against property that was purchased post-petition. If this issue arises, contact our office and we will request that the agency give a partial release as to that post-petition property, if appropriate.



Receiverships

The state agency will file the proof of claim and post-petition administrative claim.

AGO typically appears when Significant debt owed Post-receivership tax liabilities remain unpaid despite

demands Receiver seeks to disburse funds to agency’s detriment

Receiverships

Sales tax: Receiver personally liable for sales tax he or she collected after appointed—RCW 7.60.170(1)(b)

Notice to AGO required: any request for relief against a state agency must be mailed or otherwise served on the agency and the Office of the Attorney General—RCW 7.60.190(3)



Priorities in receivershipsRCW 7.60.230

1. Secured creditors—includes debt secured by tax warrants, unless undersecured

2. Administrative claims—post-petition tax debt

3. Creditors with liens not duly perfected

4. Wages earned within 180 day period pre-receivership or cessation of business—Wage Payment Act claims if within the 180 day period

5. Deposits

6. Child support

7. Unsecured pre-receivership tax debt

8. All other unsecured claims

Real Estate Excise Tax from Sale of Receivership Property

Receivership sales of real property are not exempt from real estate excise tax

Generally, real estate excise tax applies to all sales of real property RCW 82.45.06

There are exemptions but they are narrowly construed. Washington State Dept. of Revenue v. FDIC, 359 P.3d 913, 917 (2015).

RCW 82.45.010(3)(j) lists the following exemptions to REET “[a]ny transfer or conveyance made pursuant to a deed of trust or an

order of sale by the court in any mortgage, deed of trust, or lien foreclosure proceeding or upon execution of a judgment or deed in lieu of foreclosure to satisfy a mortgage or deed of trust”

In DOR v. FDIC, the receiver sought to exempt the sale of real property by analogizing the sale to a court ordered sale to execute on a judgment. The Court of Appeals held that the sale by the receiver was not a sale under execution—there was no writ of execution. It was a privately negotiated sale by a receiver.



Real Estate Excise Tax from Sale of Receivership Property

Any receiver’s sale motions to be deem the sale exempt from REET under RCW 82.45.010(3)(j) are going to be opposed.

Exemptions from tax cannot be judicially constructed and must be expressly designated by law. See, Belas v. Kiga, 135 Wash.3d 913, 933 (2015).

Surrender of property in bankruptcy does not affect REET liability for post-petition sale of redemption rights

Example: Debtor’s home was in foreclosure. He surrendered the home in his bankruptcy, which discharged him of the personal liability for the mortgage. A judgment debtor has 8 months to redeem the property. Post-petition and after the foreclosure, an entity related to the purchaser of the property bought the redemption rights from the debtor for $3,000. The debtor contested his REET liability to the DOR.

The surrender of the property did discharge the debtor of his personal liability for the mortgage. However, the surrender did not discharge the post-petition tax liability arising from the sale of the redemption rights.

Possible solution would have been for the debtor to negotiate for the redemption right purchaser to pay the associated REET.



Contractor Bond Actions

Contractors are required to purchase surety bonds to be licensed in the state.

Amounts of the bonds are small--$4,000 for electrical, $6,000 for specialty, and $12,000 for general. The max recovery for the state is $4,000, $4,000 and $6,000, respectively.

(1) Labor claims; (2) breach of contract; (3) subcontractors/material & equipment; and (4) taxes and contributions due to the state—RCW 18.27.040(4)


Small but powerful.The state agencies recover millions of

dollars annually.Motivates contractors to pay.




Motivation for contractors who wish to continue operating Surety will cancel the bondMore difficult to get another bond is impaired

one before

Motivation for contractors who are out of business Surety will seek subrogation for amount paid

plus costs and fees

Fraudulent benefit overpayment nondischargeabilityadversary actions

Most common adversary action initiated by our unit

Fraudulent benefit overpayments Most common example, the debtor collected

unemployment benefits or workers’ compensation benefits while reporting that he/she was not working. But records show that the Debtor was employed during that same period.

Almost always based on a final tax warrant that was issued after a notice and opportunity for the individual to contest the liability or after final appeal found in the State’s favor.

The summons and complaint will usually be accompanied by a stipulation and proposed stipulated order served on the debtor and the debtor’s attorney.



Recoupment not affected by discharge or stay

Right to recoupment not affected by discharge or automatic stay A creditor has a right to recoup overpayments

made to the debtor before or after commencement of bankruptcy notwithstanding the bankruptcy discharge. See, In re Harmon (9th

Cir. BAP 1995) 188 BR 421, 424-425 (workers compensation insurer could assert overpayment of temporary disability benefits against any permanent disability award made after debtor’s discharge) If a debtor is later entitled to payments from LNI,

LNI may withhold the amount owed for past overpayments, even if the overpayment debt was discharged in bankruptcy

Applicability of Automatic Stay to Government Actions

Under 11 USC § 362 the Automatic Stay goes into effect immediately when a bankruptcy is filed.Stay bars the commencement or

continuation of any action to recover claims that arose before bankruptcy filing.Stay bars actions against debtor,

property of debtor and estate and bars collection activities, lawsuits, garnishments, filing liens and foreclosures.



Automatic Stay Exemptions that apply to the Government

Prosecute a criminal action §362(b)(1)Collection of domestic support obligations

§362(b)(2)(B)Assess taxes §362(b)(9)(C) – but you cannot

file a tax warrantThird party collections and payments in

public works and contractor bonds

Police and Regulatory Power Exemption

The Government can exercise its police & regulatory powers to protect the public. 11 U.S.C. § 362(b)(4). If the action will promote public safety and welfare or effectuate public policy, then the automatic stay does not apply. In re First Alliance Mortg. Co., 263 B.R. 99 (B.A.P. 9th Cir. 2001) and In re Universal Life Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997)

There is no exemption if the primary purpose behind the government action is to protect the government’s economic interest in the debtor’s property or to create an economic advantage for the government. The Supreme Court recently ruled that the City of Chicago did not violate the stay by refusing to return vehicles impounded to pay traffic tickets when bankruptcies were filed, but focused only on the meaning of § 362(a)(3), and did not address the § 362(b)(4) pecuniary purpose issue. City of Chicago v. Fulton, 141 S.Ct. 585 (2021).



Examples of Police and Regulatory powers

Environmental actions – Actions tied to remediation of sites.Consumer fraud protection – Assisting

consumers in gaining relief.Campaign Finance –Lawsuits for

campaign finance violations allowed to continue during bankruptcy.Civil Rights – Sexual harassment action

filed against debtor in state court allowed to proceed after debtor filed bankruptcy.

Representation in Chapter 13 Bankruptcies

Represent taxing agencies in Chapter 13 bankruptcies including Departments of Revenue, Labor and Industries and Employment Security on taxes owed and Department of Social and Health Services for domestic support obligations.

All agencies file claims for debts owed at time of filing.

Priority debt is paid over the course of the plan which includes taxes less than 3 years old, all sales tax and domestic support obligations.

Taxes and interest on taxes are collected but penalties are discharged.

Discharge of debts occurs on completion of the plan.

Sales tax and domestic support obligations cannot be discharged.



Approach to Chapter 13 Bankruptcies

Review plan for feasibility and non-standard provisions. Remember the confirmed plan governs the case!

Object to confirmation if note problems after review or if pre-petition tax returns are not filed. 11 USC 1308

Bring motion to dismiss if post-petition tax returns and domestic support obligations are not current. 11 USC 1307

In response to claim objections will submit documentary evidence from client substantiating claim

What is Domestic Support?

Under 11 USC 362, DSHS collects domestic support obligations such as: Current and child support arrears. Interest on past-due support but only when there is

a support order or judgment that states the total amount of accrued interest. However, private counsel can request interest and fees. Child care costs, spousal maintenance and medical

support but only if required in your support order. Post-secondary education support after

completing high school but only if in support order.



BE AWARE

DSHS can withhold a license, intercept tax refunds and suspend a passport for non-payment of domestic support.Child support and spousal

maintenance pierces homestead so a debtor must pay child support owing before the debtor can be awarded homestead on the sale of property. RCW 6.13.080

Listing Domestic support in Bankruptcy Plans

Debtors can pay domestic support obligations in a Chapter 13 several ways: (1) to be distributed by the Trustee; (2) directly by the Debtor; or (3) a combination of these methods. How support is paid is generally determined by agreement with Debtor’s counsel.

1. If domestic support is to be distributed by the Trustee, make sure domestic support is listed in the plan where the plan states Domestic support obligations paid by Trustee and file a claim for this amount.

2. If domestic support is to be paid directly by the debtor make sure domestic support is listed in the plan where the plan states Domestic support obligations paid directly by debtor.

3. In my practice, it is typical that there is a combined approach where current support is paid directly by the debtor but the arrears are paid by the Trustee. In these cases, the direct payments should be included in the plan and a claim filed for the arrears.



Taxes that are nondischargeableas a matter of law

The taxes on the next slide are nondischargeable by an individual debtor whether or not a claim is filed or allowed. In an asset case, if the state taxing agency does not file a proof of claim, contact the AGO. You want a claim to be filed to increase the likelihood that debt be paid from estate assets and to reduce the debtor’s personal liability on the nondischargeable debt.--11 U.S.C. § §523(a)(1), 507(a)(3), (a)(8)

Taxes that are nondischargeableas a matter of law, whether or not a claim is filed

Gap taxes: incurred in the ordinary course of business after filing of involuntary case, but before appointment of trustee – 11 U.S.C. §502(f) made applicable by § 507(a)(3).

Prepetition priority income taxes— 11 U.S.C. § 507(a)(8)(A) For which a return was due after three years before the petition

date; Assessed within 240 days before the petition date; Assessed or assessable postpetition

Property taxes incurred prepetition and payable without penalty less than one year before the petition date-- 11 U.S.C. § 507(a)(8)(B)

“Trust fund”/withholding taxes that the debtor was required to withhold or collect -- 11 U.S.C. § 507(a)(8)(C)

Excise taxes for which a return is last due (including extensions) within the three year period before the petition date -- 11 U.S.C. §507(a)(8)(E).

Compensatory penalties on priority tax claims, actual pecuniary loss required-- 11 U.S.C. § 507(a)(8)(G)



Taxes that are nondischargeableas a matter of law

Taxes due under untimely tax return or equivalent report- - 11 U.S.C. §523(a)(1)(B)(i)-(ii) Not filed; orUntimely filed within the 2 years

before the petition date (including extensions)

Taxes related to fraudulent return or tax evasion- - 11 U.S.C. § 523(a)(1)(C)

Interest on NondischargeableTaxes

Interest on nondischargeabletaxes is also nondischargeable. See, Miller v. United States (9th Cir. 2004) 363 F.3d 999, 1006.



Governmental fines, penalties, forefeitures—11 U.S.C. § 523(a)(7)

Generally, any fine, penalty or forfeiture payable to and for the benefit of a governmental unit is not dischargeable.

Here are the exceptions: Compensation for actual pecuniary loss; or Relating to a dischargeable tax (i.e. one not

specified in 11 U.S.C. § 523(a)(1)) A tax penalty imposed with respect to a transaction

that occurred before the three year period preceding the petition date.

Approach to Chapter 11 cases

Turnover of Trust Funds Cash Collateral Going out of Business Sales Post-Petition tax debt

Cause for conversion or dismissal under 11 USC 1112(b)(4)(I) Disclosure Statement analysis

Given the debtor’s current circumstances, is the proposed repayment scheme feasible (possible to accomplish), as well as viable (not simply possible to accomplish, but also whether accomplishing it is a wise idea).

Plan analysis Priority tax claims receive regular cash installments of a total

value equal to the allowed amount of such claim over a period not to exceed 5 years.

Taxes are not discharged until paid in full. Upon default, the State may pursue state collection remedies

without further bankruptcy court approval

Defending claims objections



Who to contact?

Susan Edison: Chapter 13, Receiverships and DSHS [email protected] 206-587-5100

Dina Yunker Frank: Chapter 11, Healthcare filings, DOR [email protected] 206-389-2187

Angie Lee: Chapter 7, Receiverships, Probate, LNI and ESD [email protected] 206-287-4183

Any Questions?

Chapter 8B

State of Oregon as a Creditor or Stakeholder in Bankruptcy, Receiverships, and Collections

Carolyn WadeOregon Department of Justice

Salem, Oregon

Contents

Presentation Slides: State of Oregon as a Creditor or Stakeholder in Bankruptcy, Receiverships, and Collections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–1Oregon State Liens Your Client Should Know About. . . . . . . . . . . . . . . . . . . . . . . 8B–21

1. Families . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–212. Crimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–233. Victims’ Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–234. Cost of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–245. Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–246. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–247. Historic Preservation Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–298. Overpayment of Public Assistance . . . . . . . . . . . . . . . . . . . . . . . . 8B–309. Lien on Building Used for Manufacture or Sale of Alcoholic Beverages Contrary

to Liquor Control Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3110. Privilege Tax on Manufacturer of Wine, Beer, Cider . . . . . . . . . . . . . . . . 8B–3211. Fires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3212. Fish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3413. Farm Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3414. Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3515. Department of Environmental Quality Liens . . . . . . . . . . . . . . . . . . . . 8B–3616. Care Facility Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–3717. Employment Department Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–37

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–39Oregon Department of Revenue Bankruptcy Alpha Split . . . . . . . . . . . . . . . . . 8B–39Service Addresses for the Employment Department . . . . . . . . . . . . . . . . . . . 8B–40Provisional Good Standing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8B–41

Chapter 8B—State of Oregon as a Creditor or Stakeholder in Bankruptcy, Receiverships, and Collections

8B–ii34th Annual Northwest Bankruptcy Institute


8B–134th Annual Northwest Bankruptcy Institute

State of Oregon as a Creditor or Stakeholder in

Bankruptcy, Receiverships, and Collections

Carolyn Wade*Civil Recovery Section

Civil Enforcement DivisionOregon Department of Justice

April 23, 2021

*With thanks to Susan Edison and Angie Lee

DisclaimerThis material does not constitute the official

position of the author, the Department of Justice, or the State of Oregon.



Civil Recovery Section of the Oregon Department of Justice’s Civil Enforcement Division

Representation of state agencies inBankruptciesReceivershipsForeclosures/surplus fundsProbatesGeneral collections and recovery

The State of Oregon

Naming “State of Oregon” on a notice or pleading is not specific enough; specify the agency to provide proper notice and so it can be routed correctly



Service Addresses

The bankruptcy court website has a register of mailing addresses of governmental units for bankruptcy service. You can find many of the agencies’ mailing addresses there. https://www.orb.uscourts.gov/government-

agency-addresses

When service is actually necessary on a state agency, ORCP 7.D(3)(g) requires service on the Attorney General

The Agencies: Oregon Department of Revenue (ODR)

Tax returns File tax returns before filing bankruptcy Verify missing tax returns through Revenue Online https://revenueonline.dor.oregon.gov/ If ODR determines a return is missing, it will issue a Notice

and Demand to File; 45 days later, if the return has not been filed, a Notice of Assessment will follow.

Before objecting to ODR proof of claim or filing an adversary proceeding against ODR, contact ODR to resolve

ODR forms Use Business Change in Status form to notify ODR, DCBS,

and OED about changes in business or employment status (e.g., closing business)

Types of taxes commonly owed in bankruptcies Personal income tax Excise tax (percentage of corporate income) Deferred property tax

ODR pays property tax for qualified senior citizens and disabled persons and is paid from the sale of the property



The Agencies: Oregon Department of Revenue, Other Agency Accounts

Collects delinquent debt for state agencies, boards, and commissionsPursues all collection options availableProvides oversight of private collection

firms (includes enforcing standards and expectations and monitoring of private collection firms’ performance)

The Agencies: Department of Consumer & Business Services (DCBS)

Determines that employers who have not provided their workers with workers compensation insurance are “Non-Complying Employers” and imposes civil penalties; can enjoin operations until insurance obtained;

Claims costs for those uninsured workers for an injury occurring within the three years immediately before bankruptcy are an excise tax under § 523(a)(8)(E), a priority claim, and not dischargeable except in a chapter 13 superdischarge;

The civil penalties are not dischargeable under § 523(a)(7), except in a chapter 13 superdischarge.




Division of Financial Regulation, Insurance

Director of DCBS acts as receiver in insurance company liquidations

Investigates non-licensed insurance “agents” and “agencies”


Division of Financial Regulation, Finance and Corporate Securities

Enforcement of maintenance contracts

Enforcement of cemetery endowment fund regulations



The Agencies: Real Estate Agency

Enforces property manager regulations;

Imposes receiverships

The Agencies: Oregon Employment Department (OED)

Employment tax collection

Unemployment benefit overpayment collectionPursues adversary proceedings against

debtors with fraudulent unemployment benefit overpayments



The Agencies: Department of Human Services (DHS)

Pursues adversary proceedings against debtors with fraudulent public assistance overpayments (ERDC, medical, SNAP, and TANF)

The Agencies: Who Makes the Call?

Every agency is autonomous and makes its own determinations about trial and settlement strategy after receiving input from DOJ (which, like all clients, can accept it or not!)

Some clients have actual restrictions, like OAR 461-195-0561, which does not allow DHS to compromise: a fraud overpayment claim any overpayment within 36 mo. of discovery any overpayment for less than 75% (and more . . . .)



The Agencies: Bureau of Labor and Industries (BOLI)

Pursues wage claims in bankruptcy and injunctive relief Enforces ORS Chapter 652 regarding payment of

wages: Timing;Method; Lack of discrimination; and Paystubs

Files wage claims on behalf of workers who are not paid for all hours worked. Pursues employment sexual harassment claims

against employers with occasional bankruptcy connections

The Agencies: Division of Child Support (DCS)

Division of Department of Justice

Collects support for high percentage of Oregon families with support obligations

Collects support assigned to State of Oregon as condition of receipt of public assistance benefits.



Other Agencies

Oregon Department of Justice, Consumer Protection

Oregon Department of Transportation

Department of Environmental Quality

Higher Education Coordinating Commission

Oregon Health Authority

SAIF

Oregon Health Licensing

Oregon Public Utility Commission

Oregon Department of Corrections

Construction Contractor Board

Civil penalties, distraint warrants, and final orders

The filing of a distraint warrant in the county lien records has the effect of the filing of a civil judgment

Many state agencies can file distraint warrants ORS 314.430 – ODR warrants for unpaid estate taxes,

personal income taxes, corporate taxes ORS 657.396 – OED warrants for fraudulently obtained

unemployment benefits ORS 657.540 – OED warrants for unpaid payroll taxes

Any state agency can issue a final order which has the effect of a final judgment

Many state agencies can issue civil penalties which, once they become final, have the effect of judgments when they are recorded in county lien records

ORS 657.735(2) – DCBS civil penalties for unpaid workers’ compensation insurance

The liens arise by operation of statute and are not subject to avoidance under 11 USC § 522(f).

The lien has a 10-year lifespan and can be extended once by the filing of a warrant extension, which extends the lien’s lifespan to 20 years



Planning to Avoid a Bankruptcy

How to protect a professional license without filing bankruptcy: Contractor license?

File a bigger bond Offer to take some classes

Enter into a provisional agreement with ODR: Debtor agrees to file all missing returns with certain period

(60 days) Debtor agrees to make a settlement offer with in certain

period (60 days) Debtor agrees to make small temporary payment plan in

interim Assume payment plan is ½ down and payments over next

12 months If plan will be longer, financials will be reviewed annually Payments could be a percentage from jobs ODR will then issue a Provisional Certificate of Good

Standing to the agency that suspended the license. See sample in materials.

NOTE: It is always easier to negotiate before Final Orders of Suspension have been entered!

Interest rates?

Employment taxes: 18% ORS 657.515(2)

Real property taxes: 16%ORS 311.505

Employment benefit overpayments: 12% ORS 657.310(5)

Highway Use Tax: 12%ORS 825.494(2)

ODR: changes every yearORS 305.220OAR 150-305-0140(1) for Tier OneTier Two is 4% more than Tier One2021 Tier One rate is 4%



Discharged debts and liens on real property

Pre vs. Post-Petition Property Secured debt remains enforceable against the

real property despite the debtor’s discharge. See, Dewsnup v. Timm ,502 U.S. 410, 418 (1992) . Warrant for discharged debt is enforceable

against property that was owned on the petition date. Warrant for discharged debt is not enforceable

against property that was purchased post-petition. If this issue arises, contact our office and we will request that the agency give a partial release as to that post-petition property, if appropriate.

Receiverships

The state agency will file the proof of claim and post-petition administrative claim.DOJ typically appears whenSignificant debt owedPost-receivership tax liabilities

remain unpaid despite demandsReceiver seeks to disburse funds to

agency’s detriment



Priorities in receivershipsORS 37.370

1. Costs and expenses related to secured property2. Creditors with duly perfected liens according to their priority3. Administrative claims4. Federal government claims (31 U.S.C. § 3713)5. Creditors with liens not required to be perfected6. Creditors with unperfected liens7. Wages earned within 180-day period pre-receivership or

cessation of business8. Deposits9. Spousal or child support10. Unsecured pre-receivership state tax debt11. All other unsecured claims12. Interests of owner

Fraudulent benefit overpayment nondischargeability adversary proceedings

Most common type of adversary proceeding we initiate

Fraudulent benefit overpayments Most common example, the debtor collected unemployment

benefits or workers’ compensation benefits while reporting that he was not working. But records show that the debtor was employed during that same period.

Also, public assistance like food stamps or TANF received based on applications that omitted facts like debtor owned a hair salon or was married or the child care provider was her husband.

Almost always based on a final administrative order that was issued after a notice and opportunity for the individual to contest the liability or after final appeal found in the State’s favor.



Applicability of Automatic Stay to Government Actions

Under 11 USC § 362 the automatic stay goes into effect immediately when a bankruptcy is filed.Stay bars the commencement or

continuation of any action to recover claims that arose before bankruptcy filing.Stay bars actions against debtor,

property of debtor and estate, and bars collection activities, lawsuits, garnishments, filing liens, and foreclosures.

Automatic Stay Exemptions that Apply to the Government

Prosecute a criminal action § 362(b)(1)Collection of domestic support

obligations § 362(b)(2)(B)Assess taxes § 362(b)(9)(C) – but cannot

file a tax warrantThird party collections and payments in

public works and contractor bonds



Police and Regulatory Power Exemption

The Government can exercise its police & regulatory powers to protect the public. 11 U.S.C. § 362(b)(4). If the action will promote public safety and welfare or effectuate public policy, then the automatic stay does not apply. In re First Alliance Mortg. Co., 263 B.R. 99 (B.A.P. 9th Cir. 2001) and In re Universal Life Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997)

There is no exemption if the primary purpose behind the government action is to protect the government’s economic interest in the debtor’s property or to create an economic advantage for the government. The Supreme Court recently ruled that the City of Chicago did not violate the stay by refusing to return vehicles impounded to pay traffic tickets when bankruptcies were filed, but focused only on the meaning of § 362(a)(3), and did not address the § 362(b)(4) pecuniary purpose issue. City of Chicago v. Fulton, 141 S.Ct. 585 (2021).

Examples of Police and Regulatory Powers

Environmental actions – Actions tied to remediation of sites.

Consumer fraud protection – Assisting consumers in gaining relief.

Campaign Finance –Lawsuits for campaign finance violations allowed to continue during bankruptcy.

Civil Rights – Sexual harassment action filed against debtor in state court allowed to proceed after debtor filed bankruptcy.



Representation in Chapter 13 Bankruptcies

Represent taxing agencies in Chapter 13 bankruptcies including Departments of Revenue, Employment, and DCBS on taxes owed and Division of Child Support for domestic support obligations.

All agencies file claims for debts owed at time of filing.

Priority debt is paid over the course of the plan which includes taxes less than 3 years old, recent workers’ comp claims costs, and domestic support obligations.

Taxes and accrued interest on taxes are collected but penalties are discharged.

Discharge of debts occurs on completion of the plan.

Domestic support obligations cannot be discharged.

Non-Dischargeable Taxes in Chapter 13 Bankruptcies

In the olden days, before BAPCPA, a chapter 13 superdischarge included taxes related to an unfiled return (or a late return filed within two years of the petition date) or a fraudulent return.

BAPCPA made those nondischargeable, as well as taxes required to be collected or withheld for which debtor is liable, pursuant to § 507(a)(8)(c).

Interest on nondischargeable taxes is also nondischargeable. Miller v. United States 363 F.3d 999, 1006 (9th Cir. 2004).

So now debtors pay those taxes through the plan, but interest accrues during the plan, sometimes resulting in tax debt exceeding the prepetition amount.



Non-Dischargeable Taxes in Chapter 13 Bankruptcies

How could interest exceed the original tax? Payments on priority debt don’t begin until AAAF; Payments on priority debt don’t begin until AAAF and

secured debt; and Some taxes incur interest at 18%.

What can you do? Pay the interest during the plan? Not unless you are

paying all unsecured debt in full. § 1322(b)(10); Pay priority debt before attorney fees (?!); SECURE THE TAXES VOLUNTARILY BEFORE FILING

and pay them as secured claims with interest during the plan.

Approach in Chapter 13 Bankruptcies

Review plan for feasibility and non-standard provisions. Remember the confirmed plan governs the case!

Object to confirmation if note problems after review or if pre-petition tax returns are not filed. § 1308

Bring motion to dismiss if post-petition tax returns and domestic support obligations are not current. § 1307

Respond to claim objections with documentary evidence from client substantiating claim



What is Domestic Support?

DCS collects domestic support obligations such as:Current child support and arrears;Spousal support and cash medical

support but only if required in the support order. Child support continues for children over

18 and under 21 so long as they qualify as a child attending school under ORS 107.108. Support assigned automatically to the

State when an obligee receives public assistance.

BE AWARE

DCS can withhold a license, intercept tax refunds, and certify to the Secretary of State, asking it to suspend a passport for non-payment of domestic support. § 362(b(2)(D) and (F). In re Diaz, 647 F.3d 1073 (11th Cir. 2011).

Child support can trump homestead so a debtor must pay child support owing before the debtor can be awarded homestead on the sale of property. ORS 18.398



Governmental fines, penalties, forfeitures—§ 523(a)(7)

Generally, any fine, penalty or forfeiture payable to and for the benefit of a governmental unit is not dischargeable.

Here are the exceptions: Compensation for actual pecuniary loss; or Relating to a dischargeable tax (i.e., one not

specified in § 523(a)(1)) A tax penalty imposed with respect to a

transaction that occurred before the three-year period preceding the petition date.

Approach to Chapter 11 cases

Cash Collateral

Workers’ Compensation Insurance in place?

Post-Petition tax debt Cause for conversion or dismissal under § 1112(b)(4)(I)

Disclosure Statement analysis Given the debtor’s current circumstances, is the proposed

repayment scheme feasible (possible to accomplish), as well as viable (not simply possible to accomplish, but also whether accomplishing it is a wise idea).

Plan analysis Priority tax claims receive regular cash installments of a total

value equal to the allowed amount of such claim over a period ending not later than five years after the petition date.

Taxes are not discharged until paid in full. Upon default, the State may pursue state collection remedies

without further bankruptcy court approval Interest rate is non-bankruptcy rate.



Who you gonna call?

Assistant Attorney in Charge

•• Michael Grant

•• Michael.W.

• Grant@

• doj.state.or.us

•• 503.934.4400

Senior Assistant Attorney General

• Carolyn Wade

• Carolyn.G.Wade

@ doj.state.or.us

• 541.686.7846

Assistant Attorney General

• Belle Na

• Belle.Na@

doj.state.or.us

• 503.934.4400

Assistant Attorney General

•• Marc Hull

•• Marcus.Hull@

• doj.state.or.us

•• 503.934.4400

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Oregon State Liens Your Clients Should Know About Page 1

Oregon State Liens Your Clients Should Know About Carolyn G. Wade Oregon Department of Justice 1. FAMILIES: ORS 18.180(5) Except as provided in ORS 18.192, judgment remedies for the child support award portion of a judgment, and any lump sum support award for child support, expire 35 years after the entry of the judgment that first establishes the support obligation. ORS 25.670 (1) Whenever there is a judgment for unpaid child or spousal support, a lien arises by operation of law on any personal property owned by the obligor, and the lien continues until the liability for the unpaid support is satisfied or the judgment or renewal thereof has expired. For purposes of this section and ORS 25.680 and 25.690, liability for the unpaid support includes the amount of unpaid support, with interest, and any costs that may be associated with lawful execution on the lien including, but not limited to, attorney fees, costs of notice and sale, storage and handling. (2)(a) A lien arising under subsection (1) of this section may be recorded by filing a written notice of claim of lien with the county clerk of the county in which the obligor resides or the property is located. The notice of claim of lien required under this subsection shall be a written statement and must include: (A) A statement of the total amount due, as of the date of the filing of the notice of claim of lien; (B) The name and address of the obligor and obligee; (C) The name and address of the office of the district attorney, Division of Child Support or other person or entity filing the notice;




(D) A statement identifying the county where the underlying support order was entered and its case number; (E) A description of the personal property to be charged with the lien sufficient for identification; and (F) A statement of the date the lien expires under the laws of the issuing state. If no expiration date is provided, the lien expires in Oregon five years from the date of recording. (b) The county clerk shall record the notice of claim of lien filed under paragraph (a) of this subsection in the County Clerk Lien Record. (3)(a) When a notice of claim of lien is recorded pursuant to subsection (2) of this section, the person or entity filing the notice of claim of lien shall send forthwith a copy of the notice to the owner of the personal property to be charged with the lien by registered or certified mail sent to the owner's last-known address. (b) A copy of the notice shall also be sent to the obligee by regular mail. (4) Liens described in subsection (1) of this section that arise by operation of law in another state shall be accorded full faith and credit if the state agency, party or other entity seeking to enforce the lien follows the applicable procedures for recording and service of notice of claim of lien set forth in this section. A state agency, party or other entity may not file an action to enforce a lien described in this section until the underlying judgment has been filed in Oregon as provided in ORS chapter 110. ORS 25.680 (1) Whenever a notice of claim of lien has been recorded under ORS 25.670 (2), the owner of the personal property may not release, sell, transfer, pay over, encumber or convey the personal property that is the subject of the lien until the Department of Justice or person to whom the support is or was owed or, if services are being provided under ORS 25.080, the enforcing agency of this or any other state releases the lien, the lien has been satisfied or a court has ordered release of the lien on the basis that no debt exists or that the debt has been satisfied. The limitations of this subsection do not apply to transfers or conveyances of the property by the owner to the holder




of a security interest that was in existence at the time the notice of claim of lien was filed. (2) The rights of bona fide purchasers for value or persons with a security interest in the personal property are not affected by the creation or the existence of the lien. (3) Liens filed under ORS 25.670 do not have priority over previously perfected security interests. ORS 25.690 A lien arising pursuant to ORS 25.670 may be foreclosed in the manner set out in ORS 87.262 or ORS chapter 18 or in any other manner permitted under law. 2. CRIMES: ORS 18.180(4) Except as provided in this subsection, judgment remedies for a judgment in a criminal action expire 20 years after the entry of the judgment. Judgment remedies for a judgment in a criminal action that includes a money award for restitution expire 50 years after the entry of the judgment. 3. VICTIMS’ ASSISTANCE: ORS 147.285 The Department of Justice has a lien upon the amount of any judgment in favor of the applicant or recipient and upon any amount payable to the applicant or recipient under a settlement or compromise for all assistance from the date of the injury that forms the basis of the assistance to the date of the satisfaction of the judgment or final payment under the settlement or compromise.




4. COST OF CARE: ORS 179.655 (1) If any amount due the Department of Corrections, the Department of Human Services or the Oregon Health Authority for the cost of care of a person is not paid within 30 days after it becomes due, and no provision is made to secure the payment by bond, deposit or otherwise, pursuant to rules adopted by the appropriate agency, the agency may issue a distraint warrant directed to any county of the state. 5. ROYALTIES: ORS 274.790 (1) The Department of State Lands shall specify in the notice described by ORS 274.765 and in the lease the rate of royalty paid under such lease which royalty shall not be less than 12-1/2 percent of gross production, or the value thereof, produced and saved from the leased lands and not used by lessee for operations thereon or for injection therein. Such royalty shall, at the department's option, be paid in kind or in value, and be computed after an allowance for the actual cost of oil treatment or dehydration of not to exceed five cents per barrel of royalty oil so treated or dehydrated. (2) The royalty for sulfur produced under ORS 274.705 to 274.860 shall not be less than $1 per long ton. (3) The State of Oregon shall have a lien upon all production for unpaid royalties. 6. TAXES: A. Senior tax deferral for real property taxes

ORS 311.676 County tax collector to receive taxes equivalent to deferred taxes from state (1) Upon determining the amount of deferred taxes on tax-deferred property for the tax year, the Department of Revenue shall pay to the respective county tax collectors an amount equivalent to the deferred taxes less three




percent thereof. Payment shall be made from the revolving account established under ORS 311.701. (2) The department shall maintain accounts for each deferred property and shall accrue interest only on the actual amount of taxes advanced to the county. (3)(a) If only a portion of taxes are deferred under ORS 311.689, the department shall pay the portion that is eligible for deferral to the tax collector and shall provide a separate notice to the county assessor stating the amount of property taxes that the department is paying. (b) The notice stating the amount of property taxes paid by the department and any other county records indicating those amounts are not subject to the prohibitions against disclosure set forth in ORS 314.835. B. Unpaid income tax or unpaid withholding tax ORS 314.417 If any person neglects or refuses to pay an income tax at the time of assessment, or fails to pay to the Department of Revenue any amount required to be withheld under ORS 316.167 and 316.172, the amount of the unpaid tax including interest and penalty thereon shall be a lien in favor of the State of Oregon upon all property and rights to property, whether real or personal, belonging to the person. The lien shall arise at the time of assessment or the time the amount withheld is to be paid to the department and the lien shall continue until the liability for the taxes, with interest and penalty, is satisfied. C. Warrant to collect taxes ORS 314.430 (1) If any tax imposed under ORS chapter 118, 316, 317 or 318 or any portion of the tax is not paid within 30 days after the date that the written notice and demand for payment required under ORS 305.895 is mailed (or within five days after the tax becomes due, in the case of the termination of the tax year by the Department of Revenue under the provisions of ORS 314.440) and no provision is made to secure the payment thereof by bond, deposit or otherwise, pursuant to regulations promulgated by the department, the department may issue a warrant directed to the sheriff of any county of




the state commanding the sheriff to levy upon and sell the real and personal property of the taxpayer found within that county, for the payment of the amount of the tax, with the added penalties, interest, collection charge and the sheriff's cost of executing the warrant, and to return such warrant to the department and pay to it the money collected by virtue thereof by a time to be therein specified, not less than 60 days from the date of the warrant. A copy of the warrant shall be mailed or delivered to the taxpayer by the department at the taxpayer's last-known address. (2) The sheriff shall, within five days after the receipt of the warrant, record with the clerk of the county a copy thereof, and thereupon the clerk shall enter in the County Clerk Lien Record the name of the taxpayer mentioned in the warrant, and the amount of the tax or portion thereof and penalties for which the warrant is issued and the date when such copy is recorded. Thereupon the amount of the warrant so recorded shall become a lien upon the title to and interest in property of the taxpayer against whom it is issued in the same manner as a judgment duly recorded. The sheriff thereupon shall proceed upon the same in all respects, with like effect and in the same manner prescribed by law in respect to executions issued against property upon judgment of a court of record, and shall be entitled to the same fees for services in executing the warrant, to be added to and collected as a part of the warrant liability. (3) In the discretion of the department a warrant of like terms, force and effect may be issued and directed to any agent authorized to collect taxes, and in the execution thereof the agent shall have all the powers conferred by law upon sheriffs, but is entitled to no fee or compensation in excess of actual expenses paid in the performance of such duty. (4) If a warrant is returned not satisfied in full, the department shall have the same remedies to enforce the claim for taxes against the taxpayer as if the people of the state had recovered judgment against the taxpayer for the amount of the tax, and shall balance the assessment record of the taxpayer by transferring the unpaid deficiency to the taxpayer's delinquent record. D. Taxes owed by mutual & cooperative electric distribution systems ORS 308.820 (1) All taxes levied under ORS 308.805 shall be a debt due and owing from the association and shall be a lien on all the property, real and personal, of




the association from March 1 of each year. The taxes shall be delinquent if not paid within 30 days of the due date thereof. Interest shall be charged on the delinquent taxes in the manner prescribed in ORS 305.220. E. Trust fund taxes ORS 316.207 (1) Every employer who deducts and retains any amount under ORS 316.162 to 316.221 shall hold the same in trust for the State of Oregon and for the payment thereof to the Department of Revenue in the manner and at the time provided in ORS 316.162 to 316.221. (2) At any time the employer fails to remit any amount withheld, the department may enforce collection by the issuance of a distraint warrant for the collection of the delinquent amount and all penalties, interest and collection charges accrued thereon. Such warrant shall be issued, recorded and proceeded upon in the same manner and shall have the same force and effect as is prescribed with respect to warrants for the collection of delinquent income taxes. (3)(a) In the case of an employer that is assessed pursuant to the provisions of ORS 305.265 (12) and 314.407 (1), the department may issue a notice of liability to any officer, employee or member described in ORS 316.162 (3)(b) of such employer within three years from the time of assessment. Within 30 days from the date the notice of liability is mailed to the officer, employee or member, such officer, employee or member shall pay the assessment, plus penalties and interest, or advise the department in writing of objections to the liability and, if desired, request a conference. Any conference shall be governed by the provisions of ORS 305.265 pertaining to a conference requested from a notice of deficiency. F. ODOT warrant for unpaid motor vehicle or aircraft fuel taxes ORS 319.182 (1) If a person fails to pay in full any tax, interest or penalty due under ORS 319.010 to 319.430, the Department of Transportation may issue a warrant under the department's official seal directed to the sheriff of any county of the state commanding the sheriff to levy upon and sell the real and personal property of the person found within that county, for payment of the amount




due, with the added penalties or charges, interest and the cost of executing the warrant, and to return the warrant to the department and pay to the department the money collected from the sale by the time specified in the warrant, not less than 60 days from the date of the warrant. (2) The sheriff shall, within five days after the receipt of the warrant, record with the clerk of the county a copy of the warrant. The clerk shall enter in the County Clerk Lien Record the name of the person mentioned in the warrant, the amount of the tax or portion of the tax and penalties or charges for which the warrant is issued and the date when the copy is recorded. The amount of the warrant shall become a lien upon the title to and interest in property of the person against whom it is issued in the same manner as a judgment that creates a judgment lien under ORS chapter 18. (3) The sheriff shall proceed upon the warrant in all respects, with like effect and in the same manner prescribed by law in respect to executions issued against property upon judgment of a court of record, and shall be entitled to the same fees for services in executing the warrant, to be added to and collected as a part of the warrant liability. (4) In the discretion of the Department of Transportation, a warrant of like terms, force and effect to levy upon funds of the person in possession of the Department of Revenue may be issued and directed to any agent authorized by the Department of Transportation to collect taxes payable under ORS 319.010 to 319.430, and in the execution thereof the agent shall have all of the powers conferred by law upon sheriffs but is entitled to no fee or compensation in excess of actual expenses paid in the performance of such duty. G. Warrant for unpaid timber taxes

ORS 321.570 (1) If any tax imposed by ORS 321.005 to 321.185, 321.560 to 321.600 or 321.700 to 321.754, or any portion of the tax, is not paid within 30 days after the date that the written notice and demand for payment required under ORS 305.895 is mailed, the Department of Revenue may issue a warrant, directed to the sheriff of any county of the state, commanding the sheriff to levy upon and sell the real and personal property of the taxpayer owning the same, found within that county, for the payment of the amount of the tax, with the




added penalties, interest and cost of executing the warrant, and to return the warrant to the department and to pay to it the money collected from the sale, within 60 days after receipt of the warrant. A copy of the warrant shall be mailed or delivered to the taxpayer by the department at the taxpayer's last-known address. H. ODR Inheritance tax lien ORS 118.230 (1) Every tax imposed by ORS 118.005 to 118.840 is a lien upon the property embraced in any inheritance, devise, bequest, legacy or gift until paid, and the person to whom such property is transferred, and the personal representatives and trustees of every estate embracing such property are personally liable for such tax until its payment, to the extent of the value of such property. 7. HISTORIC PRESERVATION LOAN ORS 358.672 (1) The State Historic Preservation Officer has a lien upon any historic property that is the subject of a rehabilitation funded in whole or part from a loan from the Historic Preservation Revolving Loan Fund for the entire amount of principal and interest on the loan. (2) The lien created under this section shall attach as of the day the loan contract is entered into under ORS 358.670. (3) The State Historic Preservation Officer shall file a written notice of claim of lien not later than 120 days after the lien attaches with the recording officer of the county in which the historic property is located. (4) The notice of claim of lien required under subsection (3) of this section must be a statement in writing verified by the oath of the State Historic Preservation Officer or by the oath of an authorized agent, and must contain: (a) A statement of the amount of principal and interest of the loan from the Historic Preservation Revolving Loan Fund;




(b) The name of the owner of the historic property to be charged with the lien; and (c) A description of the property to be charged with the lien sufficient for identification. (5) The recording officer of the county shall record a notice of claim of lien filed under this section in the county clerk lien records. (6) A lien described in this section shall be foreclosed in the manner provided in ORS chapter 88. (7)(a) If a suit to foreclose a lien created under this section is not brought within five years from the date the notice of claim of lien is recorded, the lien shall cease to exist. (b) Notwithstanding paragraph (a) of this subsection, a lien created under this section may be continued in force for a period longer than described in paragraph (a) of this subsection pursuant to an agreement to extend the period of time for which repayment of the loan is to occur, but may not be continued for a period longer than six months following the period for which the repayment is to occur. 8. OVERPAYMENT OF PUBLIC ASSISTANCE ORS 411.703 (1) If an overpayment of public assistance, including supplemental nutrition assistance, is not repaid within 30 days of the payment due date, after an individual has been afforded an opportunity for a contested case hearing under ORS chapter 183 relating to the overpayment of public assistance, including supplemental nutrition assistance issued under ORS 411.806 to 411.845, the Department of Human Services may: (a) Issue a warrant that meets the requirements of ORS 205.125 for the overpayment; and (b) Present a warrant issued under this section for recordation in the County Clerk Lien Record of the county clerk of any county in the state.




(2) The warrant must include the principal amount of the overpayment, interest accumulated pursuant to ORS 82.010 or other applicable law, costs associated with recording, indexing and serving the warrant and costs associated with an instrument evidencing satisfaction or release of the warrant. (3) The department shall mail a copy of the warrant to the debtor at the last known address of the debtor. (4) Upon receipt of the warrant for recordation, the county clerk shall record the warrant in the manner provided in ORS 205.125. (5) Upon issuance of the warrant, the department may issue a notice of garnishment in accordance with ORS 18.854. (6) Upon recording, the warrant: (a) Has the effect described in ORS 205.125 and 205.126; and (b) May be enforced as provided in ORS 18.854 and 205.126. 9. LIEN ON BUILDING USED FOR MANUFACTURE OR SALE OF ALCOHOLIC BEVERAGES CONTRARY TO LIQUOR CONTROL ACT ORS 471.625 If it is proved that the owner of any building or premises knowingly has suffered the same to be used or occupied for the manufacture, sale or possession of alcoholic beverages, contrary to the provisions of the Liquor Control Act, such building or premises are subject to a lien for, and may be sold to pay all fines and costs assessed against their occupants for any violation of that statute. The lien shall be enforced immediately by civil action in any court having jurisdiction, by the district attorney of the county wherein the building or premises are located.




10. PRIVILEGE TAX ON MANUFACTURER OF WINE, BEER, CIDER ORS 473.090 The privilege tax required to be paid by ORS 473.030 and 473.035 constitutes a lien upon, and has the effect of an execution duly levied against, any and all property of the manufacturer, attaching at the time the beverages subject to the tax were produced, purchased or received, as the case may be, and remaining until the tax is paid or the property sold in payment thereof. The lien created by this section is paramount to all private liens or encumbrances. 11. FIRES

A. Fire Suppression Costs

ORS 477.068 (1) In case an owner or operator fails to perform the duty required by ORS 477.066, or is willful, malicious or negligent in the origin or subsequent spread of the fire, the actual cost incurred by the forester or a forest protective association or agency in controlling or extinguishing the fire shall be paid by the owner or operator within 90 days after the date on which the first written demand for payment of the actual cost is mailed by the State Forester to the owner or operator. If the actual cost is not paid within such 90-day period, such amount shall bear interest at 10 percent per year from the date on which the first written demand for the payment of the actual costs was mailed by the State Forester and the actual cost together with such interest may be recovered from such owner or operator by an action prosecuted in the name of the State of Oregon, or such forest protective association or agency, or both.

(2) An itemized statement of the actual cost incurred by the forester or association or agency, or both, certified to by the forester, shall be accepted as prima facie evidence of the actual cost in any proceeding authorized by this section. (3) The actual cost in cases covered by ORS 477.066 shall constitute a general lien upon the real and personal property of such owner or operator. A written notice of the lien, containing a description of the property and a statement of the actual cost, shall be certified under oath by the forester or




any warden and filed in the office of the county clerk of the county in which the lands and personal property are situated within 12 months after the calendar year within which the fire originated, and may be foreclosed in the manner provided by law for foreclosure of liens for labor and material. In any proceeding to foreclose a lien created under this subsection, recovery for the plaintiff shall include, in addition to the amount of the actual cost, interest on such amount at the rate of 10 percent per year from the date of the filing of the written notice of the lien. (4) Upon request of the forester, the district attorney for the district in which the lands and personal property are situated or the Attorney General shall prosecute such action or foreclose the lien in the name of the State of Oregon or such forest protective association or agency, or both. Liens provided for in this section shall cease to exist unless suit for foreclosure is instituted within 12 months from the date of filing under subsection (3) of this section. (5) In any action under subsection (1) of this section to recover actual cost and in any proceeding to foreclose any lien created by subsection (3) of this section, the court shall award, in addition to costs and disbursements, reasonable attorney fees at trial and on appeal to the prevailing party. B. Other Forest Damage ORS 527.690 (4) The expenditures in cases covered by this section, including cases where the amount collected on a bond, deposit or other security was not sufficient to cover authorized expenditures, shall constitute a general lien upon the real and personal property of the operator, timber owner and landowner within the county in which the damage occurred. A written notice of the lien, containing a statement of the demand, the description of the property upon which the expenditures were made and the name of the parties against whom the lien attaches, shall be certified under oath by the State Forester and filed in the office of the county clerk of the county or counties in which the expenditures were made within six months after the date of delivery of the itemized statement referred to in subsection (3) of this section, and may be foreclosed in the manner provided in ORS chapter 88.




12. FISH: ORS 508.525 The fee required by ORS 508.505 constitutes a first lien upon the cannery, packing plant, scow, boat and its equipment used in the canning, receiving or transporting of the fish. This lien may be foreclosed by the State Fish and Wildlife Commission in the name of the state by a suit in equity in the circuit court of the county in which the property upon which a lien is given by this section is situated. If situated in two or more counties the court first acquiring jurisdiction of a part of the property shall have jurisdiction of all the property described in such foreclosure suit. 13. FARM LIEN ORS 561.450 (1) A lien hereby is created in favor of the State Department of Agriculture upon all real and personal property belonging to any person who fails to pay the department for services or materials furnished within 60 days after the due date in a sum equal to the amount due. (2) The lien, which shall be valid until paid in full, attaches upon the filing of a Notice of Claim of Lien with the county clerk of the county in which the property is located. The notice of lien claim shall contain a true statement of the amount due. The county clerk shall record the claim of lien and shall receive the same fees as are allowed by law for recording other lien instruments. (3) The lien created by this section may be foreclosed in the circuit court in the same manner provided by law for the foreclosure of other liens on real or personal property. (4) The lien created by this section is prior to all liens and encumbrances recorded subsequent to the filing of claim of lien, except taxes and labor liens.




14. WORKERS’ COMPENSATION

A. SAIF Premiums

ORS 656.566 (1) If any employer liable for the payment of premiums, fees and assessments to the Industrial Accident Fund is placed in default as provided by ORS 656.560, the amount due the fund, including interest and penalty, is a lien in favor of the State Accident Insurance Fund Corporation upon all property, whether real or personal, belonging to such employer. (2) The lien attaches upon the filing of a notice of claim of lien with the county clerk of the county in which the property is located. The notice of lien claim shall contain a true statement of the demand, after deducting all just credits and offsets, and the default of such employer. The county clerk shall record the claim of lien in the County Clerk Lien Record and shall receive the fee provided in ORS 205.320. (3) The employer against whose property the lien has been filed may cause the property to be released by filing with the county clerk of the county wherein the lien is recorded a bond in a sum double the amount claimed in the lien, executed by a surety company licensed to do business in Oregon or by two freeholders of this state, having the qualifications of bail upon arrest, to be approved by the circuit judge of the district in which the lien is filed, or in the event of absence from the county in which the lien is filed, then by the county judge of said county, running to the State Accident Insurance Fund Corporation and conditioned for the payment of all damages, costs, charges and disbursements that may be recovered by the State Accident Insurance Fund Corporation against the employer or that may be found to be a lien upon or against the property of such employer. The clerk shall record evidence that the bond is substituted in lieu of the property of the employer and that the lien on the property is forever released and discharged. If the State Accident Insurance Fund Corporation establishes the validity of its lien by a suit to foreclose the lien, it shall be entitled to judgment against the sureties upon the bond.




B. Lien on worker’s cause of action

ORS 656.580 (1) The worker or beneficiaries of the worker, as the case may be, shall bepaid the benefits provided by this chapter in the same manner and to thesame extent as if no right of action existed against the employer or thirdparty, until damages are recovered from such employer or third party.

(2) The paying agency has a lien against the cause of action as provided byORS 656.591 or 656.593, which lien shall be preferred to all claims exceptthe cost of recovering such damages.

15. DEPARTMENT OF ENVIRONMENTAL QUALITY LIENS

ORS 466.205 (1) Any person owning a facility which generates, treats, stores or disposesof hazardous waste and any person having the care, custody, or control ofsuch substance that would be hazardous waste except for not having beendiscarded, who causes or permits any disposal of such waste in violation oflaw or otherwise than reasonably intended shall be liable for the damagescaused by such disposition.

(2) It is the obligation of such person to immediately collect, remove, ortreat such substance, subject to DEQ’s direction.

(3) If such person doesn’t, DEQ is authorized to take necessary action.

(4) The Director of DEQ shall keep a record of the necessary expensesincurred in cleaning up, removing, or treating the waste or substance.

(5) Any person who didn’t do as required under (2) is responsible for theexpenses incurred by the state under (3) and (4).

(6) If such person doesn’t pay within 15 days of receiving notice that theexpenses are due and owing, the Attorney General can bring an action torecover the money as specified in a final order not previously mentioned inthe statute.

(7) All expenditures covered by this section and all penalties and damagesfor which a person is liable to the state under this chapter and ORS chapter




465 shall constitute a lien upon any real and personal property owned by such person.

(8) Claim of lien must be filed with the recording officer of the county where real property is located and with the Secretary of State for personal property. Lien attaches and is enforceable on date of filing.

16. CARE FACILITY LIENS ORS 441.318 If a trustee has been appointed under ORS 441.281 because the health and welfare of patients was in jeopardy due to continued noncompliance of a long term or residential care facility, and the funds the trustee collects are insufficient to cover the reasonable expenses of the trust, the licensee can be liable for the deficiency. DHS shall have a lien for such deficiency upon any real property and other beneficial interest of any licensee, any fixtures, equipment, or goods used in the operation of the facility, and the proceeds from a conveyance of any such property made in the 12 months before the filing of the petition for the appointment of a trustee. 17. EMPLOYMENT DEPARTMENT LIENS A. Overpaid benefits ORS 657.392 (1) If an individual is liable to repay benefits under ORS 657.310, the amount liable to be repaid, interest and penalties due shall be a lien in favor of the Director of the Employment Department upon all property, whether real or personal, belonging to such individual. (2) The lien shall be perfected and attach: (a) To real and personal property located within the county, upon the recording of a warrant, as provided in ORS 657.396, with the clerk of the county in which the property is located. (b) To personal property wherever located within the state, upon:




(A) The recording of a warrant, as provided in ORS 657.396, with the clerk of any county; and (B) The filing of a copy of the warrant with the Secretary of State as provided in ORS 657.394. (3) The lien created by this section may be foreclosed by a suit in the circuit court in the manner provided by law for the foreclosure of other liens on real or personal property. B. Unpaid employment taxes—lien on real property and other articles on which employees worked, regardless of who owns ORS 657.525 A lien is created in favor of the Director of the Employment Department upon all real property within this state and any structure or improvement thereon and upon any mine, lode, deposit, mining claim, road, tramway, trail, flume, ditch, pipeline, building or other structure or equipment on or pertaining thereto, and upon all lumber, sawlogs, spars, piles, ties or other timber, and upon all other manufactured articles of whatsoever kind or nature upon which labor is performed by the workers of any employer subject to this chapter, in a sum equal to the amount at any time due from such employer to the director on account of labor performed thereon by the workers of such employer, together with interest and penalties. C. Unpaid employment taxes—lien on employer’s property

ORS 657.540 (1) If an employer liable for the payment of contributions to the Unemployment Compensation Trust Fund is in default, as provided in ORS 657.515 (3), the amount of contributions, interest and penalties due shall be a lien in favor of the Director of the Employment Department upon all property, whether real or personal, belonging to such employer.



Oregon Department of Revenue Bankruptcy Alpha Split

FAX 503-945-8735

A - C Vacant [email protected]

D - G Cindy Test 971-345-1538 cell [email protected]

H - L Bev RatheLeGurche 971-701-5953 [email protected] M - Q Wendy Brokaw 503-779-3334 [email protected]

R - V Richard Hennessey 503-779-3012 [email protected]

W – Z Kim Lively Leadworker 503-798-1994 [email protected]

Revised 01/05/21 KL



SERVICE ADDRESSES FOR THE EMPLOYMENT DEPARTMENT It’s the debtor’s obligation to use current addresses when filling out schedules. Over a

decade ago, the payment addresses for the Employment Department changed, but the notice addresses did not.

The payment addresses should not be used for notice purposes; documents sent there may eventually make their way to the appropriate offices, but that is not a certainty. Documents sent to the old payment addresses, though, are definitely not being forwarded to Employment.

Current notice addresses are:

Unemployment TAXES owed by employers:

Oregon Employment Department 875 Union Street NE Salem, OR 97311

Overpayment Recovery (fraud):

Oregon Employment Department Overpayment Recovery 875 Union Street NE Salem, OR 97311

Current payment addresses are:

Unemployment TAXES owed by employers:

Oregon Employment Department Unit 2 P O Box 4395 Portland, OR 97208-4395

Overpayment Recovery (fraud):

Employment/Benefits Unit 21 P O Box 4395 Portland, OR 97208-4395

Please check your bankruptcy software to be sure that you are not inadvertently using an incorrect address in your schedules.



Provisional Good Standing Agreement

On ______________, Oregon State Board of Examiners for Engineering and Land Surveying issued a final order suspending your license in accordance with ORS 305.385(4). To facilitate your compliance with the tax laws of the state, you and the Department of Revenue mutually agree to enter into this installment payment agreement under ORS 305.385(5):

The department will issue to the Oregon State Board of Examiners for Engineering and Land Surveying a Provisional Certificate of Good Standing, which shall remain in effect as long as you fully comply with the terms of this agreement.

You will not incur new tax debts with the department.

You must file all required tax returns by the due date of the return or extension.

Thereafter, you must pay $____ on or before the __ day of each month. There is no grace period. Any adjustments to your payment agreement must be in writing, signed by you and the department.

Your failure to fully comply with the terms of this agreement will render the agreement and the Provisional Certificate of Good Standing null and void, unless the department determines that the failure was due to reasonable cause. If the failure was not due to reasonable cause, the total amount of the tax, penalty, and interest under ORS 305.220 shall be immediately due and payable, and the department will notify the Oregon State Board of Examiners for Engineering and Land Surveying that you are not in good standing. You acknowledge that, upon receipt of that notice, Oregon State Board of Examiners for Engineering and Land Surveying will take appropriate action to reinstate the suspension and to refuse to reissue, renew, or extend your license until it receives a new certificate from the department that you are in good standing with respect to any returns due and taxes payable to the department as of the date of the new certificate.

By entering into this agreement, you waive any remaining rights to petition for reconsideration or rehearing of the final order or to appeal it.

This agreement will terminate on the date the department determines that you have fully paid all taxes, interest, and penalties due and filed all returns due as of the date of the determination. This agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same original. Signatures exchanged via facsimile or email shall have the same force and effect as the original signatures.

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Chapter 9

Ninth Circuit Case ReviewThe Honorable Whitman Holt

U.S. Bankruptcy Court, Eastern District of WashingtonYakima, Washington

The Honorable Peter McKittrickU.S. Bankruptcy Court, District of Oregon

Portland, Oregon

Ann ChapmanVanden Bos & Chapman

Portland, Oregon

Contents

Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . 9–1City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (2021). . . . . . . . . . . . . . . . . 9–2In re Taggart, 980 F.3d 1340 (9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–4In re Pena, 974 F.3d 934 (9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–5Bobka v. Toyota Motor Credit Corp., 968 F.3d 946 (9th Cir. 2020). . . . . . . . . . . . . . . . . . 9–5Roman Catholic Archdiocese of San Juan, Puerto Rico v. Yali Acevedo Feliciano, et al., 140 S.Ct. 696 (2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–7Klein v. Anderson (In re Anderson), --- F.3d ---, 2021 WL 775987 (9th Cir. Mar. 1, 2021) . . . . . . 9–8Fountain v. Deutsche Bank Nat’l Trust Co. (In re Fountain), 612 B.R. 743 (B.A.P. 9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9–9In re Nichols, 618 B.R. 1 (B.A.P. 9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . 9–11Elliott v. Pacific Western Bank (In re Elliott), 969 F.3d 1006 (9th Cir. 2020) . . . . . . . . . . . . 9–12Berkley v. Burchard (In re Berkley), 613 B.R. 547 (B.A.P. 9th Cir. 2020) . . . . . . . . . . . . . 9–13In re Stevens, 617 B.R. 328 (B.A.P. 9th Cir. 2020). . . . . . . . . . . . . . . . . . . . . . . . . 9–14Gardens Regional Hospital & Medical Center Liquidating Trust v. California (In re Gardens Regional Hospital & Medical Center, Inc.), 975 F.3d 926 (9th Cir. 2020) . . . . . . . . . . . . . 9–15Brown v. Barclay (In re Brown), 953 F.3d 617 (9th Cir. 2020) . . . . . . . . . . . . . . . . . . . 9–16In re Moser, 613 B.R. 721 (B.A.P. 9th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . 9–18

Chapter 9—Ninth Circuit Case Review




Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020)

This case arose as one of many disputes stemming from the 2008 bankruptcy of the Yellowstone Mountain Club. During the bankruptcy case, the bankruptcy court confirmed a chapter 11 plan containing a relatively typical “exculpation” clause protecting various parties (including non-estate fiduciaries) supporting the plan from liability “for any act or omission in connection with, relating to or arising out of the Chapter 11 Cases, the formulation, negotiation, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document entered into during the Chapter 11 Cases or otherwise created in connection with this Plan,” subject to standard exclusions for willful misconduct or gross negligence.

Blixseth, the former owner of the debtor, objected to the plan on various grounds, including arguing that the exculpation clause violated Bankruptcy Code section 524(e) as previously interpreted by the Ninth Circuit Court of Appeals in Resorts Int’l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995), In re American Hardwoods, 885 F.2d 621 (9th Cir. 1989), and Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985). Those decisions arguably established a categorical restriction on the release of liability of any nondebtor party under a chapter 11 plan. The bankruptcy court overruled Blixseth’s confirmation objection and the district court dismissed his appeal as equitably moot. The court of appeals disagreed that the appeal was moot and proceeded to consider the legality of the exculpation clause on the merits.

The court ultimately holds that the exculpation clause was valid and properly included in the plan. In the process, the court endorses and joins the Third Circuit Court of Appeals decision regarding this issue in In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000). The court distinguished its prior precedent on the grounds that those cases “all involved sweeping nondebtor releases from creditors’ claims on the debts discharged in the bankruptcy, not releases of participants in the plan development and approval process for actions taken during those processes” and that nothing in section 524(e) precludes an exculpation clause limited to events occurring during the bankruptcy case itself.

Although the appellate court repeatedly notes how its decision was based on the narrowness of an “exculpation clause of the kind here at issue—that is, one focused on actions of various participants in the Plan approval process and relating only to that process,” the reasoning used by the court yields a broader clarification of prior Ninth Circuit precedent. More specifically, the court adopts a focused interpretation of section 524(e) under which “[a] bankruptcy discharge thus protects the debtor from efforts to collect the debtor’s discharged debt indirectly and outside of the bankruptcy proceedings; it does not, however, absolve a non-debtor’s liabilities for that same ‘such’ debt.” Based on this reading, there is a “distinction between claims for the underlying debt and other claims, such as those relating specifically to the bankruptcy proceedings.” This distinction between the “underlying debt” (i.e., a claim for which both a debtor and nondebtor party are co-liable) and “other claims” logically extends beyond the claims encompassed by the Yellowstone Mountain Club exculpation clause. Under this reasoning, a plan could potentially release third-party claims against nondebtors that arose prepetition so long as those claims are distinct from an underlying debt also owed by the debtor.



For a further examination and application of the Blixseth decision regarding chapter 11 plan releases and exculpation provisions, see In re Astria Health, 623 B.R. 793 (Bankr. E.D. Wash. 2021).

City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (2021)

This case arises from the City of Chicago’s refusal to return the vehicles of various chapter 13 debtors that had been impounded for failure to pay fines for motor vehicle infractions and required the Court to determine whether an entity violates the automatic stay provided by 11 U.S.C. § 362(a) by retaining possession of a debtor’s property after a bankruptcy petition is filed.

After the chapter 13 debtors filed their bankruptcy petitions, the debtors requested that the City of Chicago (the “City”) return the vehicles it had impounded due to the debtors’ failure to pay fines for motor vehicle infractions. The City refused to return the vehicles, causing the debtors to file for sanctions, asserting a violation of the automatic stay. The bankruptcy court agreed with the debtors and held that the City had violated the automatic stay provided by 11 U.S.C. § 362(a)(3). The Seventh Circuit affirmed this decision and concluded that by retaining possession of the vehicles the City had acted “to exercise control over” the debtors’ property in violation of the automatic stay. The City then appealed to the Supreme Court, which granted certiorari to resolve the circuit split that existed on the issue, with the Second, Eighth, and Ninth Circuits having previously issued decisions in line with the Seventh Circuit’s decision and the Third and Tenth Circuits having issued decisions to the contrary.1

In ultimately finding that such a retention of a debtor’s property does not violate the automatic stay provided by 11 U.S.C. § 362(a)(3), the Court primarily examined the interplay between 11 U.S.C. §§ 362(a)(3) and 542(a), which provides that an entity in possession of property of the bankruptcy estate “shall deliver to the trustee, and account for” that property.

After a brief discussion of the immediate consequences of filing a bankruptcy petition, including the creation of the bankruptcy estate under 11 U.S.C. § 541 and the imposition of the automatic stay under 11 U.S.C. § 362(a), the Court focused on § 362(a)(3)’s prohibition against exercising control over property of the estate which the Seventh Circuit had relied upon in finding a violation of the automatic stay. The Court found that the “most natural reading” of § 362(a)(3) is that it “prohibits affirmative acts that would disturb the status quo of estate property as of the time the bankruptcy petition was filed.” The Court further expanded upon this acknowledging that omissions can qualify as “acts,” as used by § 362(a), but stating that “the language of § 362(a)(3) implies that something more than merely retaining power is required to violate” the provision. Exercising control is to put into practice or carry out an action. Reading the provision and words “stay”, “act” and “exercise control” together leads to the conclusion that 362(a)(3) halts any affirmative act that would alter the status quo at the time the bankruptcy is filed. Merely ‘having’ that power is not the same as exercising it.

1 Compare In re Fulton, 926 F. 3d 916, 924 (7th Cir. 2019), In re Weber, 719 F. 3d 72, 81 (2d Cir. 2013), In re Del Mission

Ltd., 98 F. 3d 1147, 1151-1152 (9th Cir. 1996), and In re Knaus, 889 F. 2d 773, 774-775 (8th Cir. 1989), with In re Denby-Peterson, 941 F. 3d 115, 132 (3d Cir. 2019), and In re Cowen, 849 F. 3d 943, 950 (10th Cir. 2017).



The Court then resolved the “ambiguity in the text of § 362(a)(3)” by pointing to the existence of 11 U.S.C. § 542, a provision which expressly governs the turnover of estate property and which shields transfers of estate property made from one entity to another in good faith without notice or knowledge of the bankruptcy petition as well as good-faith transfers to satisfy certain life insurance obligations. As a result the Court states that reading § 362(a)(3) to cover “mere retention of property” would cause two serious problems.

First, reading § 362(a)(3) to cover mere retention of property by an entity would “render the central command” of § 542, that an entity in possession of certain estate property “shall deliver to the trustee . . . such property,” superfluous. According to the Court, the better way to reconcile the two provisions that are seemingly at-odds is that “§ 362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while § 542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.”

Second, finding mere retention to be a violation of the automatic stay would render the commands and purposes of § 362(a)(3) and § 542 contradictory. The Court stated that “[s]ection 542 carves out exceptions to the turnover command. Under respondents’ reading, an entity would be required to turn over property under §362(a)(3) even if that property were exempt from turnover under § 542.”

The Court then went on to discuss how the Bankruptcy Code originally included both § 362(a)(3) and § 542(a), but § 362(a)(3) lacked the phrase “or to exercise control over property of the estate” until that phrase was added in 1984. The Court found it unlikely that Congress would have made such an important change simply by adding the phrase “exercise control,” rather than by “adding a cross-reference to § 542(a) or some other indication that it was so transforming § 362(a)(3).”

Justice Sotomayor concurred with the 7-0 decision (with Justice Barrett taking no part in the consideration or decision of the case) and agreed that the phrase “exercise control over” as used in § 362(a)(3) does not cover the passive retention of property which a creditor lawfully seized prior to the debtor filing bankruptcy. She wrote separately to point out that the Court did not decide whether and when the other provisions of § 362(a) require a creditor to return such property being held. She also pointed out that the opinion did not address, nor was there a requirement it address, how bankruptcy courts should go about enforcing creditors’ separate obligation to “deliver” estate property to the trustee or debtor under § 542. She pointed out this kind of impounding approach has a strong negative impact on the inner city debtor due to the slow pace of the turnover process and urged Congress and policymakers to address the issue by pointing out that the court’s opinion did not foreclose the possibility of a statutory fix by Congress or the consideration of amendments to the Rules by the Advisory Committee on Rules of Bankruptcy Procedure which could ensure prompt resolution of debtors’ request for turnover under §542, particularly in the case where a debtor is seeking return of their vehicle.



In re Taggart, 980 F.3d 1340 (9th Cir. 2020) This case arose from a dispute between three business partners. Two of the partners resorted to the state court system, seeking to expel Bradley Taggart, the third partner, from the partnership for misconduct. Taggart responded by filing bankruptcy. Taggart’s bankruptcy resulted in a discharge injunction barring creditors, including Taggart’s partners, from collecting discharged debts and voiding any monetary judgments for discharged debts. Accordingly, the state court dismissed monetary claims against Taggart, but still expelled him from the partnership following a trial. The prevailing partners then filed a motion in state court for attorney fees they accrued after Taggart filed his bankruptcy petition. The state court awarded attorney fees on the theory that Taggart had “returned to the fray” by litigating pre-petition matters post-petition. Taggart then sought civil contempt sanctions in the bankruptcy court. The bankruptcy court awarded those sanctions.

A series of appeals followed, and the matter wound its way up to the Supreme Court to decide whether there is an exception to the discharge injunction when a debtor, after filing for bankruptcy, “returns to the fray” to litigate a pre-petition matter. The Supreme Court announced a new standard—namely, whether Taggart’s business partners had an “objectively reasonable basis” to conclude Taggart had “returned to the fray.” If so, the discharge injunction did not apply, making sanctions inappropriate. The Supreme Court remanded the matter to the Ninth Circuit Court of Appeals to apply this new standard.

On remand, the Ninth Circuit framed the issue before them as whether Taggart’s partners

“had any objectively reasonable basis for concluding that Taggart might have ‘returned to the fray’ and that their motion for post-petition attorney’s fees might have been lawful.” The Ninth Circuit noted that Taggart’s motion to dismiss the state court action could suggest that he sought to avoid the fray rather than return to it. However, Taggart also litigated his pre-petition counterclaim, a favorable ruling on which would inure to Taggart’s personal benefit, rather than to his attorney or the bankruptcy estate. Not only did Taggart’s counsel litigate the counterclaim, but Taggart himself returned to state court and advocated for himself, echoing many of his attorney’s arguments, and imposing additional legal costs on his former partners.

The Ninth Circuit found Taggart’s conduct provided an objectively reasonable basis for

his former partners to believe he might have “returned to the fray.” Quoting In re Ybarra, 424 F.3d 1018, 1024 (9th Cir. 2005), the Ninth Circuit noted that “[i]f the debtor chooses to enjoy his fresh start [after bankruptcy discharge] by pursuing pre-petition claims which have been exempted, he must do so at the risk of incurring the post-petition costs involved in his acts.” The court thus concluded that the civil contempt sanctions against Taggart’s former partners were inappropriate, reversed the bankruptcy court’s finding of civil contempt, and vacated its sanctions award.



In re Pena, 974 F.3d 934 (9th Cir. 2020)

This case arose from an individual debtor’s effort to recover certain unclaimed funds from his chapter 7 estate.

The debtor owned approximately 30 parcels of real estate. His initial chapter 11 filing was converted to a chapter 7 case. The chapter 7 trustee collected rents from some of the properties and attempted to pass the rents onto parties holding deeds of trust on the properties. For somewhat unclear reasons, the secured parties rejected the funds. The chapter 7 trustee ultimately abandoned the rental properties to the debtor, deposited approximately $52,000 in unclaimed funds with the bankruptcy court, and sought to close the bankruptcy case.

After the case was closed, the debtor applied to recover the unclaimed rental funds. The bankruptcy court denied this application on the ground that the funds belonged to the applicable secured counterparties, or potentially to the estate (there were more than $411,000 in remaining unpaid claims from the bankruptcy case). The BAP affirmed, see In re Pena, 600 B.R. 415 (B.A.P. 9th Cir. 2019), and the debtor appealed again.

The Ninth Circuit panel first considered some jurisdictional issues – “[a]s Pena’s bankruptcy did not result in a surplus and no appellee appears before us, this case raises standing and adversity questions.” The court concluded that the debtor had standing as a “person aggrieved” because the bankruptcy court had effectively rejected his central claim that he was entitled to the unclaimed funds. The court also recited an important principle of jurisdiction that allows “federal courts regularly exercise jurisdiction over non-contentious cases in a variety of contexts,” including bankruptcy cases. “Given this long tradition of exercising jurisdiction over unopposed matters in bankruptcy law and analogous contexts, we do not see the lack of adverseness as an obstacle to our jurisdiction here.”

On the merits, the appellate court affirmed. First, the court explained that “rental properties and rents collected from those properties are separate, discrete classes of estate property,” citing Bankruptcy Code section 541(a)(6) as authority for the distinction. Second, the court concluded that “nothing in the record indicates any intent on the trustee’s part to abandon the rent payments,” which was problematic for the debtor since abandonment requires some affirmative act and cannot be done “by accident.” Finally, the court noted that the debtor’s prior conduct was inconsistent with his current position and rejected his suggestion “in essence, that he is entitled to the unclaimed rents because no one else is,” explaining how the debtor’s contention “that the funds will remain in limbo indefinitely is incorrect—under 28 U.S.C. § 2042, the funds will escheat to the U.S. Treasury if left unclaimed for five years.”

Bobka v. Toyota Motor Credit Corp., 968 F.3d 946 (9th Cir. 2020)

This case arises from a signed lease assumption agreement which a chapter 7 debtor sent a creditor prior to receiving her bankruptcy discharge and a dispute as to whether the obligations under the assumed lease survived discharge even if they are not reaffirmed under 11 U.S.C. § 524(c). The debtor had initially contacted the creditor after filing her bankruptcy petition as she wanted to retain possession of her leased vehicle and was informed by the creditor that she would need to assume the lease. Two months after this, the debtor sent the creditor a signed



assumption agreement and received her bankruptcy discharge shortly thereafter. At the time the debtor sent the creditor the signed assumption agreement, the debtor had stopped making lease payments and, accordingly, the creditor sought to collect on the past-due balance after the debtor had received her discharge. The debtor refused to pay and asserted that her obligations under the lease did not survive the discharge as the agreement had not been reaffirmed under 11 U.S.C. § 524(c). In response to the creditor’s collection efforts, the debtor filed for sanctions, alleging that the creditor’s collection attempts violated the discharge injunction provided by § 524 and also arguing that the agreement was invalid because she and the creditor had not followed the required procedures for a lease assumption under 11 U.S.C. § 365(p). The bankruptcy court and the district court both rejected the debtor’s arguments, finding that the lease assumption survived discharge even if not reaffirmed and that the parties had waived the procedural requirements of § 365(p). The debtor thereafter appealed to the Ninth Circuit.

The debtor’s arguments were similarly unavailing on appeal and the Ninth Circuit affirmed the lower courts’ decisions. The Ninth Circuit first began by addressing whether a lease assumption can survive discharge even though it is not reaffirmed. While a debtor is discharged from all debts that arose before the date of the order of relief under 11 U.S.C. § 727(b), § 524(c) provides for a limited exception to that rule by allowing an agreement “based on debt that is dischargeable” to be reaffirmed, allowing it to remain enforceable after discharge. In order to reaffirm, a debtor must receive certain procedural protections which include the involvement of the bankruptcy court. On the other hand, as the court states, 11 U.S.C. § 365(p) provides that when a lease is assumed, “the liability under the lease will be assumed by the debtor and not by the estate.” In reconciling this apparent conflict between §§ 524(c) and 365(p), the Ninth Circuit pointed to three indications in the text and overall structure of the Bankruptcy Code to conclude that a lease assumption need not be reaffirmed in order to survive discharge.

First, the Ninth Circuit pointed out that requiring debtors to reaffirm lease assumptions would render the safe-harbor provision found in 11 U.S.C. § 365(p) superfluous. 11 U.S.C. § 365(p)(2)(C) provides that if the parties contact each other to negotiate an assumption agreement, their communications will not violate either the automatic stay provided by11 U.S.C. § 362 or the discharge injunction under 11 U.S.C. § 524(a)(2). The discharge injunction only exists after the discharge has been granted. If a lease assumption must be reaffirmed to survive discharge, as the debtor argued, then lease assumption negotiations would never violate the discharge injunction as the reaffirmation process must be completed before receiving the discharge. As such, this result would render § 365(p)’s safe harbor provision that refers to the discharge injunction superfluous.

Second, the appellate court found that the principle that the “specific governs the general” supported the conclusion that § 365(p)’s procedures which are specifically applicable to individual debtors’ assumptions of leases of personal property should control over the more general reaffirmation procedures set out in § 524(c).

Third, 11 U.S.C. § 362(h) requires a debtor to either redeem personal property or enter into a reaffirmation agreement under § 524(c) or assume an unexpired lease under § 365(p) if the trustee does not do so, providing distinct options. This distinction undermines the suggestion that a debtor opting for assumption must also pursue reaffirmation. The court also pointed out



that the disclosures required to be provided for reaffirmation under the § 524(c), such as the “amount reaffirmed” and interest rates, are not well tailored to lease assumptions.

The Ninth Circuit concluded by affirming the lower courts’ decisions as to the parties’ waiver of the requirements provided for under 11 U.S.C. § 365(p). The court found that the debtor’s failure to follow the three requirements of the lease assumption statute did not excuse her from the lease assumption which she agreed upon given that statutory provisions are subject to waiver by voluntary agreement of the parties unless the waiver would affect the statutory rights or interests of a third-party. Given that a lease assumption under § 365(p) affects no other creditors’ recovery, the parties were free to mutually waive the writing and timing requirements of the lease assumption statute.

In the case at hand, the debtor had initiated contact and waited until after the time allowed by § 365(p) to provide the creditor with the signed lease agreement. Despite this failure to follow the letter of § 365 (p), the court found a mutual waiver where Toyota accepted the lease assumption provided outside the thirty day time period. Thus, the debtor could not be excused from her obligations under that agreement.

Roman Catholic Archdiocese of San Juan, Puerto Rico v. Yali Acevedo Feliciano, et al., 140 S.Ct. 696 (2020) This case arose after several active and retired employees of Catholic schools lost their pension benefits following the termination of a Trust’s plan. The Trust had been established in 1979 by the Office of the Superintendent of Catholic Schools of the Archdiocese of San Juan, and multiple schools participated in its pension plan. Upon the plan’s alleged termination, several employees brought suit in the Puerto Rico Court of First Instance. The named defendants included the Roman Catholic and Apostolic Church of Puerto Rico, the Archdiocese of San Juan, the Superintendent, three of the academies participating in the plan, and the Trust. The Court of First Instance denied the plaintiffs’ request for a preliminary injunction requiring the payment of benefits, and the Puerto Rico Court of Appeals affirmed. The Puerto Rico Supreme Court, however, reversed, concluding that if the Trust could not afford to make the payments, the participating employers should shoulder the obligation. But noting that a dispute remained about which named defendants had legal personalities, the Puerto Rico Supreme Court remanded the matter to the Court of First Instance to make that determination on February 6, 2018. On remand, the Court of First Instance determined the Roman Catholic and Apostolic Church in Puerto Rico was the only defendant with separate legal personhood, by virtue of the Treaty of Paris of 1898, wherein Spain ceded Puerto Rico to the U.S. In a series of escalating orders, the court first ordered the Church to pay the employees per the terms of the pension plan, then ordered the Church to deposit $4.7 million in a court account, and finally ordered the sheriff to seize the Church’s money and assets. Those rulings were also appealed to the Puerto Rico Supreme Court, which ultimately affirmed the Court of the First Instance after Puerto Rico’s Court of Appeals had reversed. The Archdiocese then petitioned the U.S. Supreme Court for review.



Rather than address the underlying issue of which defendants possessed separate legal personhood, the Supreme Court remanded the matter to resolve a jurisdictional problem. When Puerto Rico’s Supreme Court remanded the matter to the Court of First Instance on February 6, 2018, the Trust had already filed a chapter 11 bankruptcy petition and the Archdiocese had removed the Court of First Instance litigation to the federal district court. Thus the Court of First Instance’s payment and seizure orders were issued while that court lacked jurisdiction. The matter was not remanded to the Court of First Instance until August 20, 2018—five months after the payment and seizure orders were issued. The Supreme Court further rejected the arguments that the Archdiocese had consented to jurisdiction in the Court of First Instance, because jurisdiction becomes fixed with the federal courts upon filing a notice of removal. Further, the District Court’s nunc pro tunc order which sought to make the remand effective as of March 13, 2018, the bankruptcy case’s dismissal date, could not rewrite history and change the fact that the litigation remained with the federal district court until August 20, 2018. The Supreme Court’s second holding, regarding a district court’s inability to retroactively confer jurisdiction via a nunc pro tunc order, has created some disagreement in the courts. For example, the Eastern District of New York’s Bankruptcy Court has interpreted Acevedo to bar nunc pro tunc relief from the automatic stay. See In re Telles, 2020 WL 2121254 (Bankr. E.D.N.Y., Apr. 30, 2020). In the Telles case, a bank moved for relief from the automatic stay after discovering its purchase of the debtor’s property in a foreclosure sale was void because the debtor filed bankruptcy two days prior to the sale. The court denied the creditor’s motion, noting that while prior caselaw supported the creditor’s argument, “[t]he landscape of the law is different post-Acevedo . . . .” Instead, to grant the relief sought, the bankruptcy court concluded that it would have needed to vacate the stay prior to the foreclosure sale. Meanwhile, the Ninth Circuit B.A.P. has interpreted Acevedo differently. See In re Merriman, 616 B.R. 381 (B.A.P. 9th Cir. 2020). In Merriman, Ferdinand and Deann Fattorini filed a state court wrongful death action against Shawne Merriman, unaware that Merriman had a pending bankruptcy case. The Fattorinis moved for relief from the stay, which the bankruptcy court granted for cause. Merriman appealed, and the Supreme Court decided Acevedo while the appeal was pending. In affirming the bankruptcy court’s decision, the Ninth Circuit B.A.P. observed that the Eastern District of New York’s In re Telles decision reads too much into the Acevedo opinion. Instead, “Acevedo’s prohibition of using nunc pro tunc orders to create jurisdiction in a state court” has nothing to do with a bankruptcy court’s ability to grant relief from stay. The B.A.P. noted that § 362(d) explicitly empowers bankruptcy courts to annul the stay, thus while Acevedo prohibits use of nunc pro tunc orders to retroactively confer jurisdiction, it does not limit a court’s ability to grant relief from the stay, even where such relief has the effect of retroactively conferring jurisdiction. In the B.A.P.’s view, concluding otherwise “would render § 362(d) meaningless.” Klein v. Anderson (In re Anderson), --- F.3d ---, 2021 WL 775987 (9th Cir. Mar. 1, 2021)

This case arose from a dispute between an individual debtor and the chapter 7 trustee regarding the debtor’s asserted homestead exemption under Washington law.

The debtor co-owned a property in Ferndale, Washington, and resided in that property on her chapter 7 petition date. The debtor claimed a homestead exemption of $125,000 under



Washington state law (which encompassed the debtor’s full asserted value of $90,000). Shortly after her bankruptcy filing, the debtor got married and moved to a different home with her new spouse.

The chapter 7 trustee objected to the asserted exemption, arguing that “(1) as of the petition date, she did not have a present intent to use the Property as her homestead; and (2) under Washington law, she had abandoned the Property post-petition by failing to reside there for six months or to file a declaration of homestead.” The debtor responded that the “snapshot rule” fixes exemptions as of the petition date and that her residency in the property on the petition date was sufficient to permit the exemption under RCW 6.13.040(1). Chief Bankruptcy Judge Marc Barreca agreed with the debtor and permitted the exemption despite the debtor’s subsequent relocation elsewhere. The chapter 7 trustee appealed.

The BAP affirmed Judge Barreca. The BAP detailed two primary ways in which a debtor may be entitled to a homestead exemption under Washington state law – either (1) actually occupy the property or (2) establish an intent to reside in the property (such as by recording a declaration of homestead and declaration of abandonment of any alternative homestead). Here, the debtor was actually occupying the property on her petition date, so the BAP concluded that her intent was irrelevant: “the plain language of Washington’s homestead statute reflects that Debtor was entitled to an automatic homestead exemption on the petition date, so long as she was occupying the Property as her principal residence, regardless of her future plans . . . intent comes into play only if the owner does not occupy the property.”

The BAP also rejected the trustee’s argument that the exemption was conditional on the debtor remaining in the property or filing a declaration of nonabandonment within six months after moving. Although the BAP agreed with the trustee “that the right to a homestead exemption is subject to whatever rights and limitations are provided by the particular state’s exemption statutes,” the BAP disagreed that Washington law imposes a requirement or condition, in contrast to the law in California and elsewhere. The BAP somewhat cryptically cited Federal Rule of Evidence 301 for the proposition that Washington law “simply creates an evidentiary presumption, which may be rebutted.” Given the lack of an express requirement or condition, “the principle that Washington exemption statutes are to be interpreted liberally in favor of protecting family homes,” and the absence of “policy that would be served by denying Debtor her exemption under these facts,” the BAP affirmed the claimed homestead exemption.

On further appeal, the Ninth Circuit Court of Appeals affirmed the BAP and adopted the BAP’s opinion (In re Anderson, 613 B.R. 279 (B.A.P. 9th Cir. 2020) in full and as an attached appendix. As such, binding Ninth Circuit authority now permits Washington debtors to claim a homestead exception as long as they in fact reside in the subject property on the petition date and without regard to their intent or postpetition acts.

Fountain v. Deutsche Bank Nat’l Trust Co. (In re Fountain), 612 B.R. 743 (B.A.P. 9th Cir. 2020)

This case arose from a debtor’s appeal of a bankruptcy court order dismissing her chapter 13 case on the basis that her unsecured claims exceeded the limit imposed by 11 U.S.C. § 109(e) which limits those who may be a debtor under chapter 13 to individuals with regular income that



owe noncontingent, liquidated, unsecured debts of less than $394,725.00 at the date of filing their petition. In 2006, the debtor had signed a promissory note and received a loan of $1,092,000.00 from a lender to refinance her home mortgage. The lender eventually sold the mortgage to American Home Mortgage Assets, LLC (“AHMA”) who packaged the loan into a mortgage assets trust with Deutsche Bank as trustee. Despite this, it was not clear if the debtor’s loan was included in the trust as Deutsche Bank asserted that it was in possession of the promissory note signed by the debtor but that the mortgage was lost and never recorded. After the debtor sold the property without paying off the loan in 2015, the title insurance company filed a quiet title action in state court to which Deutsche Bank cross-claimed against the debtor for payment of the note and moved for summary judgment. In opposition to summary judgment, the debtor argued that the bank had failed to establish that it was able to enforce the note and that such enforcement was barred by the statute of limitations. The debtor filed her bankruptcy petition before the state court was able to hear oral arguments on the motion for summary judgment.

The debtor scheduled her total unsecured claims in the amount of $30,443.00 and listed the bank’s unsecured claim as only $1,000.00 and marked the claim as contingent, unliquidated, and disputed. Deutsche Bank, meanwhile, filed a proof of claim evidencing an unsecured claim of $1,751,326.06 and attached the promissory note signed by the debtor in support. The bank then filed an objection to the plan and motion to dismiss based upon the debtor exceeding the unsecured debt limit of § 109(e). The debtor responded by arguing that the bank’s claim was both contingent and unliquidated and that the bankruptcy court had no reason to look beyond the schedules to determine eligibility under § 109(e). The bankruptcy court granted the motion to dismiss and determined that the debt was not contingent as there was “no external real world event that has to happen before liability is incurred.” The claim was also not unliquidated as the issues litigated in the state court action were not about determining the amount of the debt and that such determination could be drawn directly from the note. The debtor appealed this decision to the BAP based upon the same arguments made to the lower court as well as asserting that the bank did not have an enforceable claim against her.

Siding with the bankruptcy court on all fronts, the BAP held that the bank did have an unsecured claim for eligibility purposes under § 109(e) because the statute does not exclude disputed debts from the eligibility calculation but only unliquidated and contingent unsecured debts. Additionally, the BAP pointed out that eligibility under § 109(e) is determined as of the petition date and not based upon post-petition events. Because there had been no judicial determination by the state court that the bank could not enforce the note at the time of the filing of the bankruptcy, the bank’s right to payment was evidenced by the note attached to its proof of claim and the claim has been scheduled by the debtor, (albeit at a significantly reduced amount) resulted in the court’s conclusion that the claim was disputed - which is irrelevant for purposes of determining eligibility.

In finding that the bankruptcy court had properly considered the bank’s proof of claim in its eligibility analysis under § 109(e), the panel stated that while eligibility under § 109(e) should normally be determined by the debtor’s originally filed schedules, “where a good faith objection to eligibility has been filed by a party in interest, the bankruptcy court can make a limited inquiry



outside of the schedules to determine if the debtor estimated her debts in good faith, and if not, whether she was eligible for chapter 13 relief. “ See In re Scovis, 249 F.3d 975, 982 (9th Cir. 2001); In re Guestella, 341 B.R. 908, 918 (B.A.P. 9th Cir. 2006. As the debtor never disputed that she signed the original promissory note for $1,092,000.00, the panel found that it appeared to a legal certainty that the bank’s claim was not $1,000.00 as stated in the debtor’s schedules and pointed out that the nature of the dispute in the state court litigation only related to the bank’s ability to enforce the note, not the amounts due under the note. Therefore, looking past the schedules and to the note itself as evidence was justified.

The panel went on to reject the debtor’s argument that the debt owed to the bank was contingent because all events giving rise to the liability occurred prior to the filing of the bankruptcy petition, i.e. specifically the signing of the promissory note in 2006. Thus, the contractual obligation that gave rise to the debt was not contingent despite the debtor disputing liability on the basis that the debt may no longer be enforceable because of the statute of limitations.

Finally, the panel rejected the debtor’s arguments that the debt was unliquidated. In order for a debt to be liquidated it needs to be capable of “ready determination and precision in computation of the amount due.” The test for this in the Ninth Circuit, the panel explained, is whether the amount due is fixed or certain or otherwise ascertainable by reference to an agreement or by a simple computation and that, under this test, disputed contractual claims are generally liquidated. The panel found that the amount of the debt was readily determinable by reference to the promissory note. Therefore, the bank’s debt was liquidated and properly included in the bankruptcy court’s § 109(e) eligibility calculation.

In re Nichols, 618 B.R. 1 (B.A.P. 9th Cir. 2020) This case arose from a plea agreement dispute. The debtors in this case are Donald Nichols and Jane Nichols (Debtors), and prior to filing their chapter 13 bankruptcy petition, their son, Seth Nichols, pled guilty to bank fraud under 18 U.S.C. § 1344. As part of Seth’s plea agreement, Debtors agreed to pay partial restitution on behalf of their son through transfer or liquidation of their home and other real property. They went as far as to transfer title to the properties to the creditors almost six months before Seth signed his plea agreement. Debtors did not actually sign the plea agreement, however, and later had a change of heart, alleging the counter-parties fraudulently induced them to transfer their properties. Meanwhile, the counter-parties alleged that Seth’s parents took part in his criminal activity, and further litigation ensued. The counter-parties brought suit in state court against Debtors for fraud, conversion, and aiding and abetting tortious acts related to the bank fraud cause. In turn, Debtors sought to undo the transfer of their properties, lodging a complaint against the counter-parties and recording a notice of pending legal action against the properties. The counter-parties demanded the immediate expungement of the notice. Rather than comply with the counter-parties’ request, Debtors filed a chapter 13 bankruptcy petition. After seventeen months of delay, Debtors still had not taken steps toward plan confirmation. When challenged on their inaction, Debtors pointed to a federal criminal



proceeding for bank fraud and conspiracy to commit bank fraud that had been brought against Donald Nichols as justification for their inactivity. Eventually, creditors and the trustee moved to convert Debtors’ case to a chapter 7 under § 1307. Debtors opposed the Motion for Conversion by filing a Motion for Stay. The bankruptcy court denied the Motion for Stay, which Debtors appealed, and conditionally granted the Motion for Conversion. While their appeal was pending, Debtors moved to dismiss their chapter 13 case, but they did not request a hearing until after the district court denied their motion for a stay pending appeal. The bankruptcy court subsequently granted the Motion for Conversion and denied the Motion to Dismiss, finding that “Debtors ha[d] essentially used Chapter 13 to hide from creditors during the pendency of the criminal proceedings.” Debtors appealed. On appeal, the Ninth Circuit BAP addressed whether “the bankruptcy court abused its discretion when it granted Creditors’ Conversion Motion and denied Debtors’ Dismissal Motion?” Debtors argued for the first time on appeal that the bankruptcy court lacked authority to order conversion to chapter 7 under § 1307(c) and (e) in light of the Debtors’ § 1307(b) dismissal motion. In assessing the issue, the BAP noted § 1307(b)’s mandatory language that the court shall dismiss a case on the debtor’s request, as well as § 1307(c)’s permissive language that the court may convert a chapter 13 case on request of a party in interest. To reconcile the two provisions, the BAP looked to Supreme Court and Ninth Circuit caselaw, ultimately holding that § 1307(b)’s language gives debtors an absolute right to exit chapter 13, but it does not confer an unqualified right to choose the means by which they exit. The BAP further noted that § 1307(e) also uses mandatory language that, upon a debtor’s failure to file tax returns, the court shall dismiss a case or convert a case to chapter 7, whichever is in the best interest of the creditors and the estate. Noting that Debtors failed to file tax returns in their chapter 13 case and that the delay had harmed creditors to the extent that conversion rather than dismissal was justified, the BAP affirmed the bankruptcy court’s decision. Elliott v. Pacific Western Bank (In re Elliott), 969 F.3d 1006 (9th Cir. 2020)

This case arose from an individual chapter 7 debtor’s efforts to recover funds that had been transferred from his IRA under either or both of Bankruptcy Code section 522(f) & (h).

Before the bankruptcy filing, the lender had obtained a state-court judgment against the debtor and had the sheriff levy on his IRA (the California state court concluded the account was not exempt under state law). During the bankruptcy case, the debtor maintained that the whole IRA was exempt under the Bankruptcy Code and a different provision of California state law and argued that the prepetition transfer of the levied IRA funds could be avoided. The bankruptcy court dismissed the litigation on the ground that the debtor failed to state a claim under sections 522(h) or 522(f); the district court summarily affirmed the dismissal. The Ninth Circuit Court of Appeals ultimately affirmed as well.

The appellate court concluded the debtor could not succeed under section 522(f) because the prepetition sheriff’s levy had the effect of terminating the lien prior to the bankruptcy filing and eliminating the debtor’s state-law property interest in the IRA. “Because the judicial lien was satisfied prior to the petition date, it is not voidable under section 522(f)” insofar as there was no lien impairing the debtor’s exempt property interests on the petition date.



The appellate court also concluded that the debtor could not succeed under section 522(h) because there was no colorable preference claim. Here, the court noted that section 547(b)(5) requires an analysis of what the lender would have received in a hypothetical chapter 7 case. The court ultimately concludes that because the lien was not avoidable under section 522(f), the debtor would likewise be unable to “establish that the transfer of his IRA funds was a preferential transfer under section 547 of the Bankruptcy Code.”

Note that there is a serious question whether the court of appeals got the preference analysis right. The decision correctly notes that section 547(b)(5) “requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7 without the alleged preferential transfer” (cleaned up). But the subsequent analysis ultimately concludes there was no preference because there is no section 522(f) right because the levy eliminated the debtor’s property interest before the bankruptcy. The problem with this analysis is that the preference approach should assume a hypothetical world in which the levy did not happen (because that is the challenged transfer); without the levy occurring, there would now be a viable section 522(f) action in the counterfactual chapter 7 case and thus section 547(b)(5) would be met. It is unclear if the Ninth Circuit Court of Appeals was repeating a potential error made below insofar as the bankruptcy court appears to have rejected the debtor’s preference theory for some additional reasons beyond those addressed by the circuit-level opinion.

Berkley v. Burchard (In re Berkley), 613 B.R. 547 (B.A.P. 9th Cir. 2020)

This case arose from an unexpected windfall of $3,800,000.00 stemming from a buyout of stock options which a chapter 13 debtor had earned for post-confirmation services. The chapter 13 trustee submitted a modified plan after learning of the potential windfall and argued that the debtor should use $202,000.00 of that windfall to pay creditors in full. The trustee asserted that, under 11 U.S.C. § 1329(a), the debtor’s stock options acquired post-petition and his increased income are “changed circumstances” warranting modification of the debtor’s plan. The debtor, on the other hand, argued that the court could not force him to commit any of the stock proceeds to the plan because the bankruptcy estate terminated at confirmation and the property therein had revested to the debtor at that time resulting in the windfall funds not being property of the estate. The bankruptcy court sided with the chapter 13 trustee and ordered the modification of the debtor’s plan while observing that the debtor’s argument would effectively nullify §§ 1306 and 1329 and that, if the debtor did not want to contribute the extra funds to the plan, he was free to dismiss his case. The debtor then appealed the bankruptcy court’s decision to the Bankruptcy Appellate Panel.

The BAP found that the lower court had not abused its discretion in modifying the debtor’s plan to increase payments based upon the unexpected windfall. The BAP stated that it had repeatedly held that bankruptcy courts may consider a change in circumstances in deciding whether or not to modify confirmed chapter 13 plan under § 1329(a) and that an unexpected increase in income was one such change that would warrant plan modification. In confirming an unsecured creditor’s ability to seek increased payments from debtors whose income increased during the term of their plan, the panel cited the Ninth Circuit’s decision in In re Flores, 735 F.3d 855 (9th Cir. 2013), in which the appellate court explicitly stated that § 1329 is meant to



allow creditors to receive increased payments from debtors whose earnings happen to increase and that Congress had “intended § 1325(b)(1)(B) to ensure a plan duration that gives meaning to § 1329’s modification procedure as a mechanism for post-confirmation adjustments for unforeseen increases in a debtor’s income.”

The panel also pointed to their decision in In re Escarcega, 573 B.R. 219 (B.A.P. 9th Cir. 2017), and stated that their reasoning in that case, in which they had rejected a chapter 13 plan with an indefinite duration, was instructive: unless the debtor successfully modifies the plan to shorten its duration, the debtor is exposed to the possibility of continuing to commit his income and property to plan payments, even in excess of the original amount provided for under the plan. In other words, as the panel stated, confirmation does not shield increases in the debtor’s post-confirmation income from the reach of the chapter 13 trustee or unsecured creditors.

Likewise, the panel found the debtor’s arguments concerning revesting and the termination of the estate to be unavailing. The panel found that previous cases in the Ninth Circuit in which courts had taken the view that postconfirmation windfalls become property of the estate upon receipt, even if the plan provides for revesting, had reached the correct result for an incorrect reason. The previous cases, and the debtor’s arguments, all rested on the unstated assumption that, unless the postconfirmation income is property of the estate, the debtor cannot be compelled to devote it to the plan. This assumption, as the panel stated, was incorrect as nothing in the Bankruptcy Code provides that plan payments can only be funded by estate property, pointing to the fact that many debtors are compelled to fund their plans from non-estate sources, such as family contributions, loans or withdrawals from pension plans, or sale of exempt assets.

The panel further distinguished the case at hand by pointing out that the revesting provision was a crucial element in the previous cases because those cases dealt with property that the debtor owned on the petition date and not wages that the debtor earned post-confirmation. Thus, because the windfall was post-confirmation income, the bankruptcy court was correct in committing the proceeds to the debtor’s plan.

Finally, the court rejected the debtor’s revesting argument and pointed out that such an argument would nullify § 1329 since, under the debtor’s theory, once the property revests in the debtor at confirmation, the trustee would never be able to modify the plan to increase payments due to a post-confirmation income increase, something both § 1329 and Ninth Circuit caselaw explicitly allows.

In re Stevens, 617 B.R. 328 (B.A.P. 9th Cir. 2020) This case involves a chapter 7 proceeding in which the Debtors listed a pending lawsuit against a loan servicing company in their statement of financial affairs, but failed to disclose and value the lawsuit in their schedule of assets and liabilities. The Trustee knew of the pending lawsuit because Debtors informed him and provided copies of filings, but he did not administer it through sale or compromise. Instead, the Trustee issued a no asset report, certifying the estate had been fully administered and reported $0.00 of abandoned assets. The bankruptcy court then discharged the Trustee and closed the case.



Meanwhile, Debtors continued to prosecute the lawsuit. The loan servicing company proposed a settlement to the Trustee, who then had the case reopened, withdrew the no asset report, and filed a settlement approval motion. Debtors opposed, arguing the Trustee lacked settlement authority because, under § 554(c), he had abandoned the lawsuit on case closure. The bankruptcy court determined the lawsuit had not been abandoned and approved the settlement. Debtors timely appealed. On appeal, the Ninth Circuit BAP first asked whether the bankruptcy court erred in its determination that the claims had not been abandoned under § 554(c). Debtors did not dispute that the claims were property of the estate—only that the bankruptcy court abused its discretion in approving the compromise because the claims were technically abandoned before the Trustee filed his motion. The BAP disagreed, noting abandonment of an asset can occur in two ways: (1) under § 554(a) and (b), a trustee may voluntarily abandon or be compelled to abandon “burdensome” or “inconsequential” property of the estate after notice and a hearing, and (2) under § 554(c), “any property scheduled under section 521(a)(1) of [the Code and] not otherwise administered at the time of the closing of a case is abandoned to the debtor . . . .” The second method of abandonment is commonly referred to as “technical abandonment.” Because Debtors relied on § 554(c), the BAP next asked whether the lawsuit was “properly scheduled” as that Code section requires. Debtors argued the term “property scheduled under section 521(a)(1),” as used in § 554(c), refers to property disclosed in the schedule of assets and liabilities or the statement of financial affairs. The BAP again disagreed, noting a split in caselaw, with the majority reading § 554(c) to require that an asset be listed in the schedule of assets and liabilities. The BAP adopted the majority view, noting that § 523(a)(3) uses the language “neither listed nor scheduled under section 521(a)(1),” and if Congress intended “scheduled” to be “synonymous” with listed, then “listed” in § 523(a)(3) becomes impermissibly superfluous. The BAP concluded that its reading of the statute is consistent with the canon of statutory interpretation that where Congress uses certain language in one part of a statute and omits the same language elsewhere, then it presumably intended to do so. Further, a narrow reading of § 554(c) is consistent with bankruptcy policies and reasonable expectations that debtors provide detailed disclosures and valuations on their schedules. The BAP therefore affirmed the bankruptcy court’s decision. Gardens Regional Hospital & Medical Center Liquidating Trust v. California (In re Gardens Regional Hospital & Medical Center, Inc.), 975 F.3d 926 (9th Cir. 2020)

This case arose from a dispute between a hospital debtor and the State of California about whether California’s deductions of certain “fees” from Medicaid payments owed to the debtor were in the nature of setoff or recoupment.

By way of background, although the concept of “recoupment” does not appear in the Bankruptcy Code, the Ninth Circuit Court of Appeals and other courts have recognized the continuing vitality of recoupment and held that it is not subject to the same limitations (including based on the automatic stay and section 553) as setoff. As the opinion explains, “the conceptual foundation of equitable recoupment is not the adjustment of separate mutual debts but the



process of defining the amount owed under a single claim.” To differentiate the two doctrines, it is necessary to determine whether the mutual claims “arise from the same transaction or occurrence.” In the Ninth Circuit, the crucial factor in this analysis is the “logical relationship” test, which is derived “from the Supreme Court’s analysis of pleading standards governing compulsory counterclaims in the era prior to the Federal Rules of Civil Procedure.” When applying this framework, “[t]he test remains whether the relevant rights being asserted against the debtor are sufficiently logically connected to the debtor’s countervailing obligations such that they may be fairly said to constitute part of the same transaction.” As a general matter, recoupment principles are narrowly applied to avoid running afoul of bankruptcy policies, including debtor protection and creditor equality.

On the facts before it, the Ninth Circuit panel examined California’s deductions of “unpaid HQAF assessments from two separate payment streams: (1) the supplemental payments that the State pays to hospitals out of the fund created by HQAF assessments and (2) the fee-for-service payments that Gardens Regional earned by treating Medi-Cal patients.” The bankruptcy court and the BAP had concluded that both deduction (1) and deduction (2) involved recoupment. The Ninth Circuit panel agreed regarding deduction (1), explaining “that, in light of the legal and factual connections between Gardens Regional’s unpaid HQAF assessments and California’s supplemental payments to the hospital, these countervailing obligations have the necessary logical relationship to justify characterizing them as arising from the same transaction for purposes of equitable recoupment.” The court disagreed, however, regarding deduction (2) because those payments did not have the same “sorts of legal and factual connections” with the state assessments. As the court wrote, “[t]he mere fact that both payment streams arise within the overarching context of the larger Medi-Cal program is not enough, and acceptance of such a view would expand the concept of recoupment in a way that would undermine the fundamental purposes of the Bankruptcy Code’s express limitations on setoffs” (internal quotation marks omitted). The appellate court therefore reversed and remanded for further proceedings.

Although this case involves a relatively detailed and technical analysis of California state law relating to its Medi-Cal program, the opinion nevertheless provides a helpful reminder of the important distinction between setoff and recoupment and outlines the analytical framework that should be used to draw that distinction in bankruptcy cases pending throughout the Ninth Circuit.

Brown v. Barclay (In re Brown), 953 F.3d 617 (9th Cir. 2020)

This case arises from the unauthorized and unapproved transfer of a chapter 13 debtor’s inheritance to his family members, which resulted in the debtor’s case being converted to chapter 7 for bad faith, and answers the question of whether the fraudulently transferred funds were included in the bankruptcy estate following conversion to chapter 7. Prior to the debtor filing his chapter 13 petition, the debtor’s siblings abandoned their interests in the estate of their recently deceased father to the debtor. Following this, the debtor filed his chapter 13 petition and scheduled an anticipated inheritance of only $2,500.00. The inheritance was demonstrated to be massively undervalued as the debtor received a distribution of the net proceeds of his father’s estate in the amount of $55,487.97 only a few months after filing the petition. Almost immediately after receiving this distribution, the debtor transferred $12,372.00 to each of his brothers without approval from the chapter 13 trustee. The trustee then sought conversion to



chapter 7 as a sanction urging conversion pursuant to 11 U.S.C. § 1307(c) upon learning of the unauthorized transfers. The trustee alleged that the debtor had abused the bankruptcy system by both failing to disclose the value of the anticipated inheritance in his initial schedules and then transferring most of that inheritance to his siblings who had previously relinquished their claim to it. The bankruptcy court ordered the conversion to chapter 7 for cause and made an express finding that the debtor’s conduct had been in bad faith based upon the uncontradicted evidence that the debtor had concealed the transfers and failed to adequately explain his actions.

Following this, the newly appointed chapter 7 trustee moved to recover the funds transferred to the siblings. One of the siblings objected to this recovery, stating that the funds transferred to him were not part of the bankruptcy estate after the conversion because they were no longer in the debtor’s possession or control at the time of conversion as required by 11 U.S.C. § 348(f)(1)(A). The bankruptcy court disagreed with the sibling and found that the funds remained part of the bankruptcy estate because the transfers were made in bad faith to avoid payment to the trustee or creditors and were not used to fund ordinary living expenses permitted by statute. The bankruptcy court also reasoned that the funds could be said to have remained within the debtor’s possession or control because his bankruptcy estate had a claim to recover said funds. The BAP agreed with the bankruptcy court’s bad faith rationale and affirmed its decision. The sibling then appealed the BAP’s decision to the Ninth Circuit and argued only that funds transferred to him were no longer in the literal possession or control of the debtor at the time of conversion and hence were not recoverable as part of the chapter 7 estate. The trustee argued that the property defined by § 348 must include fraudulently transferred funds to prevent abuse of the system.

In determining how to define the contents of the estate where there is a conversion from Chapter 13 to Chapter 7, the Ninth Circuit discussed that Congress effectively adopted the “chapter 7 approach,” i.e. that all assets acquired after the filing of the initial petition are retained by the debtor and do not become part of the bankruptcy estate, when it implemented 11 U.S.C. § 348(f)(1)(A). The most important way in which this provision limits the converted estate, at least as it relates to the Ninth’s analysis in this case, was that it limited the property of the converted estate to include only property that “remains in the possession of or is under the control of the debtor on the date of conversion.” As the court stated, this was necessary in order to take into account the debtor’s ability to spend funds on ordinary living expenses during the chapter 13 proceeding and that this limitation prevented creditors from seeking to recover funds that were lawfully spent during the chapter 13 proceeding and therefore no longer property of the estate. (Emphasis added).

The Ninth Circuit went on to analyze a number of previous cases dealing with 11 U.S.C. § 348(f)(1)(A), which notably held that § 348(f)(1)(A) barred creditors from recovering funds from the converted estate that were spent on ordinary living expenses even if those expenses were unauthorized citing the example where a debtor is required to turn over a tax refund to a chapter 13 trustee but instead spends it on living expenses. It also examined cases that held that creditors could recover funds which the debtor fraudulently transferred out of the bankruptcy estate to avoid creditors. Such a result, the court stated, was even more compelling where the conversion to chapter 7 had been imposed as a sanction for fraudulent transfers as a literal



application of the statute would lead to an absurd result which rewarded bad faith. Citing Wyss v. Fobber, 256 B.R. 268, 276 (Bankr. E.D. Tenn. 2000, the court pointed out that the exclusion of the fraudulently transferred funds from the converted estate would mean that “the very act which generally would form the basis for the denial or revocation of discharge… would insulate the debtor from liability.”

Despite this clearly absurd result if the statute was applied literally, the court acknowledged that they were restricted from applying an equitable remedy not found in the statute by Law v. Siegel. Finding the text of § 348(f)(1)(A) ambiguous, the court was forced to resolve the ambiguous text by looking to the structure, object, and policies of the Bankruptcy Code. Most important of these policies was the Code’s firm policy of not rewarding fraudulent conduct of bad-faith debtors. This policy is realized or reflected in numerous provisions of the Code, including the structural relationship between chapters 13 and 7. This structural relationship is, for example, illustrated by the ability of the trustee to recover unauthorized transfers of estate property by a debtor in both chapter 13 and chapter 7, the ability to obtain a delay of a chapter 7 or 13 discharge where a debtor fraudulently transfers funds, and that the Code permits the bankruptcy court to order conversion to chapter 7 when the debtor fraudulently transfers funds during a voluntary bankruptcy proceeding. Thus, the Ninth Circuit found no basis in structure, policy, or purpose of the Bankruptcy Code for treating the fraudulent transfers as beyond the reach of creditors merely because the estate was converted, which the appellant argued for.

The Ninth Circuit then turned to the world of criminal law to resolve the issue of Congress using language in § 348(f)(1)(A) that seemingly required actual possession or control despite the injustice of the result of a literal application of that provision. The court noted that courts have adopted a broader interpretation of “possession” in criminal contexts, utilizing the concept of “constructive” control or possession, whereby an individual is deemed to possess items even when the individual does not actually have immediate physical possession of the item. Most analogous with the case at hand, the court examined money-laundering cases in which proceeds from money laundering may be within the defendant’s constructive control or possession, even though the funds were never placed in the defendant’s account. The court then applied the same approach and found that the fraudulently transferred funds remain within the constructive possession or control of the debtor and should, therefore, be considered property of the converted estate under § 348(f)(1)(A).

In re Moser, 613 B.R. 721 (B.A.P. 9th Cir. 2020)

This case arose from a dispute between the debtor, Dr. Moser, and Sterling-Pacific Lending, a creditor who provided secured loans for Dr. Moser’s real estate ventures. Prior to his bankruptcy, Dr. Moser and another individual formed four limited liability companies in California for the purpose of owning and developing real estate. In 2008, Dr. Moser and the LLCs each filed lawsuits in state court against Sterling, alleging misrepresentation regarding the loans. In 2009, Dr. Moser filed for chapter 7 relief, and included his interests in the LLCs on his schedules. He received a discharge later that year. During the pendency of the chapter 7 case, Sterling sought to remove the state court lawsuits to the bankruptcy court, but the chapter 7



trustee abandoned the estate’s interests in the LLCs, causing the bankruptcy court to remand the lawsuits back to state court. In January 2010, the trustee settled Dr. Moser’s lawsuit against Sterling for $20,000, and the bankruptcy case was closed in September 2011. Following those events, the LLCs amended their state court complaints to add new claims, which Sterling suspected were actually Dr. Moser’s individual claims that had been released in the settlement agreement with the chapter 7 trustee. The bankruptcy court reopened Dr. Moser’s bankruptcy case in 2013 at Sterling’s request, and Sterling filed an adversary complaint, seeking a determination whether the new claims belonged to the LLCs or Dr. Moser. The bankruptcy court dismissed the adversary proceeding, leaving that determination to the state court. Meanwhile, between 2011 and 2015, Sterling prevailed in the LLCs’ four state court actions. The LLCs were liable to Sterling for roughly $1 million, including $164,000 in attorney fees and over $844,000 in damages. In 2016, Sterling filed a complaint in state court to recover the fees and costs from Dr. Moser on the theory that Dr. Moser was an alter ego of the LLCs (the Alter Ego Complaint). Dr. Moser reopened his bankruptcy case and sought sanctions against Sterling, alleging the filing of the Alter Ego Complaint violated the discharge injunction. In response, Sterling filed another adversary proceeding for declaratory relief, and it proposed a Second Amended Alter Ego Complaint that excluded the $844,000 in damages because Sterling agreed the discharge injunction protected Dr. Moser from repayment of that award. Sterling made two requests for declaratory relief: (1) that its Second Amended Alter Ego Complaint did not include any liabilities that had been discharged, and (2) that prosecution of its Second Amended Alter Ego Complaint would not violate the discharge injunction. In his answer and later-filed documents, Dr. Moser conceded Sterling’s claim for attorney fees was not covered by the discharge injunction, instead arguing that the LLCs were not his alter egos, and even if they were, the releases included in the settlement agreement protected him. Dr. Moser moved for summary judgment, and Sterling moved for judgment on the pleadings. The bankruptcy court granted Moser’s motion for summary judgment and denied Sterling’s motion, stating that there was no way it could grant declaratory relief, because doing so would require it to speculate on how the state court might rule. The court cautioned Sterling that it would proceed in state court at its own peril. On appeal, the BAP reversed the bankruptcy court, noting that bankruptcy courts always have discretion to clarify the scope of discharge injunctions. Leaving the matter unresolved put Sterling in an impossible position: blindly proceed in state court and risk sanctions in the bankruptcy court, or “play it safe and walk away from the potential recovery of large state court judgments.” The BAP remanded the matter to the bankruptcy court with directions to enter judgment in favor of Sterling on its adversary complaint since Dr. Moser had made judicial admissions conceding that the discharge injunction did not apply to the Second Amended Alter Ego Complaint.

