Our February 26 post [1] reported on the first case dealing with the question whether a debtor in a pending Chapter 11 case may redesignate it as a case under Subchapter V, [2] the new subchapter of Chapter 11 adopted by the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19. [3]  Our May 15 post [4] reported on three more cases, two of which permitted such an amendment [5] and one that did not. [6]

There have been three more decisions permitting redesignation, [7] but two of them said something like “yes, but . . .”  The most interesting of the three is In re Gregory Trepetin. [8]  The debtor filed a Chapter 7 petition on February 10, nine days before SBRA became effective, and moved on June 11 to convert the case to Subchapter V and for extensions of deadlines imposed on the debtor by Subchapter V.  Those deadlines have been an issue in several of the redesignation cases because, as we previously noted, compliance with them can be practically or literally impossible in a redesignated Subchapter V case if it has been pending for anything more than the briefest time prior to its redesignation and they are not extended. [9]  The Bankruptcy Court granted the motion to convert and then wrestled with the deadlines.

Bankruptcy Judge Harner, using principles developed in dealing with deadlines under Chapter 12 to shed light on the new Subchapter V, granted the necessary extensions.  (To point out the obvious, failure to have done so would have doomed the converted Subchapter V case, and therefore extensions were a practical necessity for granting the motion to convert which otherwise would have been futile.)  She added, however, that she would not have granted the extensions if she had found that the debtor had “manipulated the timing of his original bankruptcy filing and his requested conversion in a manner that unfairly prejudiced some or all of his creditors” or “if the Debtor failed to comply with his obligations under the [Bankruptcy] 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 . . . .” [10]

In re Slidebelts, Inc. [11] had originally been filed under regular Chapter 11.  The debtor wished to dismiss the case to make itself eligible to participate in the Payroll Protection Program under the CARES Act and planned to refile under Subchapter V.  Fees had accrued for both the debtor’s counsel and counsel for the creditors’ committee during the Chapter 11 case, and the debtor announced in its dismissal motion that it proposed to pay its counsel but not committee counsel before refiling.  Bankruptcy Judge Clement approved the dismissal of the pending case but delayed it by 40 days to permit all professionals to file fee applications and get paid.  He would not tolerate a redesignation process that prejudiced professionals who had worked on the case. [12]  Judge Clement thus joined other bankruptcy judges in seeking to protect other parties from undue prejudice that might result from a redesignation. [13]

Finally, Bankruptcy Judge Robles permitted redesignation in Bonert over the vigorous opposition of the creditors’ committee, finding an absence of bad faith and undue prejudice.

And so it appears that, absent the contrary intervention of an appellate court, the bankruptcy courts are, by a large majority, permitting redesignations where there has been no procedural manipulation and likely will not be undue prejudice to other parties.

[1]  https://www.pbwt.com/bankruptcy-update-blog/sbra-springs-to-life/ (“SBRA Springs”). 

[2]  In re Progressive Solutions, Inc., 615 B.R. 894 (Bankr. C.D. Cal. Feb. 21, 2020).

[3]  https://www.pbwt.com/bankruptcy-update-blog/small-business-reorganization-act-of-2019/

[4]  https://www.pbwt.com/bankruptcy-update-blog/controversy-over-sbras-retroactivity/

[5]  In re Twin Pines, LLC, No. 19-10295-jll (Bankr. D.N.M. Apr. 30, 2020); In re Deirdre Ventura, 2020 WL 1867898 (Bankr. E.D.N.Y. Apr. 10, 2020).

[6]  In re Double H Transportation LLC, No. 19-31839-hcm (Bankr. W.D. Tex. March 5, 2020).  Double H Transportation remains the only decision of which this blogger is aware holding that redesignation is impermissible as a matter of law.

[7]  By “redesignation,” I mean a process for converting a bankruptcy case that is not under Subchapter V of Chapter 11 into a case that is under Subchapter V.  It can be effected by amending a pending non-Subchapter V petition or dismissing a pending non-Subchapter V case and refiling under Subchapter V.

[8]  2020 WL 3833015 (Bankr. D. Md. July 7, 2020).

[9]  SBRA Springs, at note 5.

[10]  The Court appears not to have considered that the original petition was filed only nine days before SBRA became effective, of which bankruptcy practitioners had long had notice.  Why could the debtor not have waited nine days to file his petition and, having not waited, why did he wait four months to move for redesignation?  Compare In re Progressive Solutions, Inc., supra (original petition filed months before SBRA was enacted).

[11]  2020 WL 3816290 (Bankr. E.D. Cal. July 6, 2020).

[12]  Committee counsel’s entitlement to payment would have had a lower priority in the refiled Subchapter V case, with respect to which it would have been pre-petition, than in the original Chapter 11 case.

[13]  E.g., In re Michael and Vivien Bonert, 2020 WL 3635869 (Bankr. C.D. Cal. June 3, 2020)(“re-designation is warranted if not sought in bad faith and provided that no party will be unduly prejudiced.”).