United States: A Cogent Opposing View On SBRA Flexibility

I don't know if Congress foresaw, when it enacted new Subchapter V of Chapter 11 of the Code¹ in the Small Business Reorganization Act of 2019 ("SBRA"), that debtors in pending cases would seek to convert or redesignate their cases as Subchapter V cases when SBRA became effective on February 19, 2020, but it was foreseeable. The benefits and advantages of Subchapter V to the debtors entitled to use it² were certain to attract not just new filings but pending cases, especially cases commenced during SBRA's long "180-day runway to effectiveness." ³

Congress sought to balance those benefits and advantages with the interests of creditors by, among other things, imposing deadlines for benchmarks within the case. For example, the Code as amended by SBRA requires the Bankruptcy Court to hold a status conference within 60 days of the petition date⁴ and the debtor to file a reorganization plan within 90 days.⁵ These deadlines have been a major issue addressed by the courts deciding whether and on what terms a pending case may become a Subchapter V case.⁶ By hypothesis, the 60- and 90-day periods (and others measured from the petition date) have been running prior to the debtor's action to convert its case to a Subchapter V case, but, during those running periods, the obligations associated with them (e.g., filing a plan within 90 days) did not apply to the debtor or were not present in the debtor's non-Subchapter V case at all (e.g., holding a status conference within 60 days). Assuming the court permits the conversion or redesignation, what happens to the deadlines?

Section 1189(b) provides that "the court may extend the period for filing a plan if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable," a test that was copied from Chapter 12⁷ and is more difficult to satisfy than "for cause."⁸ Most of the cases deciding how to deal with the deadlines have been somewhat indulgent, not wishing to deny a small-business debtor the benefit of the faster, less expensive reorganization that Congress intended based on vagaries of the calendar. As we concluded in On a Roll, "the bankruptcy courts are, by a large majority, permitting redesignations and granting the necessary deadline extensions where there has been no procedural manipulation and likely will not be undue prejudice to other parties." To justify doing so, the courts are implicitly, or explicitly as in In re Gregory Trepetin,⁹ concluding that the "not justly . . . accountable" test is satisfied if the debtor is not "fairly responsible for his inability to timely" comply with the deadlines.¹⁰

Now a dissenting view based upon a close reading of the Code has appeared, with a surprising result. In Seven Stars, the debtor had filed its Chapter 11 petition in June 2019, so, by the time the debtor moved in June 2020 to convert its case to Subchapter V, all the time periods had already expired. Bankruptcy Judge Scott Grossman, finding no impediment in the Code or applicable rules to an amendment of the petition to elect Subchapter V,¹¹ then addressed the time periods.

Examining the origin of the "not justly accountable" test in Chapter 12 (as also did Bankruptcy Judge Michelle Harner in Trepetin), Judge Grossman rejected the Trepetin formulation (which he paraphrased as "whether the debtor was responsible for his inability to meet these deadlines"¹²), concluding that the right question is whether "the need for an extension is due to circumstances beyond the debtor's control."¹³

And with that difference, perhaps subtle, this debtor was denied any extension of the deadlines:

Where a debtor elects into Subchapter V after expiration of the statutory deadlines . . ., the debtor should justly be held accountable for those circumstances, because the debtor created them. It was the debtor that made the decision to elect into Subchapter V after expiration of these deadlines. No circumstances beyond the debtor's control caused the debtor to make that decision.

* * *

Where a debtor elects to proceed under Subchapter V after the statutory deadlines have passed, it cannot be said that the need for an extension of these deadlines is attributable to circumstances for which the debtor should not justly be held accountable. The debtor should justly be held accountable for these circumstances; the debtor made this election after the deadlines expired. That decision by a debtor should not foist upon creditors all of the added powers of a Subchapter V debtor without one of the most significant protections afforded to creditors under the SBRA - that the case proceed expeditiously.¹⁴

The debtor therefore found itself with an amended petition under Subchapter V and deadlines long expired and not extended. With what consequences, according to Judge Grossman? Section 1112(b)(1) of the Code authorizes the court to "dismiss a case under this chapter . . . for cause," and, under subsection (b)(4)(J), "'cause' includes" "failure . . . to file . . . a plan within the time fixed by the Code . . . ." The debtor had succeeded in amending its petition to elect Subchapter V, and the time fixed by Subchapter V for the filing of a plan was 90 days after the petition date, which the debtor failed to do. Case dismissed.

Undoubtedly we will begin to see appellate decisions on these issues shortly.

Footnotes