Some of the specific bankruptcy issues we handle regularly are Sub-Chapter V of chapter 11 (SBRA: Small Business Reorganization Act), business debt restructuring and winddowns, chapter 11 and 13 plan formulation, objections and confirmation, cash collateral motions and budgets and reconciliations, valuation and evidentiary hearings, proofs of claim and defense, dischargeability actions, preference actions, motions for relief and bankruptcy appeals.

As a firm focused on business, we are well versed in handling commercial lease disputes, entity formation, operating agreements, asset purchase and sale agreements, secured transactions under the uniform commercial code (UCC), shareholder and derivative actions, and partnership and small business litigation.

Business often intersects with real estate, whether it involves land use/variances, zoning, leases, development, sales or real estate-related litigation, and the lawyers at AMANN BURNETT have substantial experience with these issues as well.

We love working with businesses and people.  Above all, we are hardworking problem-solvers dedicated to obtaining the best results for you or your business.  We are personable and accessible.  Striking the right balance between work and life is important.   In my downtime, I sail, travel, cook, hike with my dog “Jack” and appreciate nature, music and art.  Attorney Burnett is an adjunct professor of law at the Massachusetts School of Law and is also an accomplished musician.

https://amburlaw.com/practice-areas/business-law

NHBR 8-11-23 wja and firm profile

The post In Case You Missed New Hampshire Business Review…. appeared first on Amann Burnett Law.

As a quick follow up to our June 2, 2023 post about our 1st Circuit B.A.P. case, Rowley Solar, LLC/ Berkowitz and Maven Revocable Trust vs. Invaleon Technologies Corporation.  MA Bankruptcy No. 19-12419-FJB, No. MB 22-016, here’s the written decision.

In this appeal, the Berkowitzes challenge the bankruptcy court’s factual finding that Invaleon did not agree to stay off the Property, stating there was “substantial” evidence in the record that such a promise was made. They also challenge the bankruptcy court’s finding that they did not reasonably rely on promises made by Invaleon, insisting their reliance was “reasonable” because the “main reason for the [Settlement Agreement] . . . was to be rid of” Invaleon.

Invaleon counters that, other than Bonni Berkowitz’s own testimony, the record is devoid of any evidence demonstrating that Invaleon promised or agreed to not enter the project site ever again for any reason.

While this appeal was pending, the bankruptcy court dismissed Rowley Solar’s bankruptcy case for cause under § 1112(b)(4).  Neither party has raised any mootness issues arising from the dismissal.

This appeal was filed jointly by Bonni Berkowitz, Barbara Berkowitz, and Maven Trust. The Claims Order, however, disallowed only the Berkowitzes’ claims. Because the Claims Order overruled Invaleon’s objection to Maven Trust’s claim and allowed that claim in its entirety, and as there is nothing in the record to suggest that the disallowance of the Berkowitzes’ claims caused any direct, pecuniary harm to Maven Trust, we conclude that Maven Trust was not aggrieved by the Claims Order and thus lacks standing to appeal. See In re El San Juan Hotel, 809 F.2d 151, 154 (1st Cir. 1987) (stating that standing to appeal from a final bankruptcy court order is accorded only to “‘persons aggrieved,’ i.e., to those persons whose rights or interests are ‘directly and adversely affected pecuniarily’ by the order”) (citations omitted); see also Elkin v. Metro. Prop. & Cas. Ins. Co. (In re Shkolnikov), 470 F.3d 22, 24 (1st Cir. 2006) (“It is an abecedarian rule that a party cannot prosecute an appeal from a judgment in its favor.”) (citations omitted). This appeal is, therefore, dismissed as to Maven Trust for lack of standing.

Although not raised by the parties, we also consider whether the dismissal of the underlying bankruptcy case raises any mootness concerns, as mootness also will “deprive us of jurisdiction.” See La Trinidad Elderly LP SE v. Loíza Ponce Holdings LLC (In re La Trinidad Elderly LP SE), 627 B.R. 779, 794 (B.A.P. 1st Cir. 2021) (quoting Melo v. GMAC Mortg., LLC (In re Melo), 496 B.R. 253, 256 (B.A.P. 1st Cir. 2013)).

“Mootness is a jurisdictional defect, rooted in Article III case or controversy considerations.” Horizon Bank & Tr. Co. v. Massachusetts, 391F.3d 48, 53 (1st Cir. 2004).

1. The Legal Framework Governing the Filing and Allowance of Claims

“Sections 501 and 502 govern the filing and allowance of creditor claims in bankruptcy proceedings.” Am. Express Bank, FSB v. Askenaizer (In re Plourde), 418 B.R. 495, 502 (B.A.P. 1st Cir. 2009) (citing Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007)). Section 501(a) allows a creditor to assert a claim in a bankruptcy case by filing a proof of claim. 11 U.S.C. § 502(a). “When a proof of claim is filed under [§] 501, the claim ‘is deemed allowed, unless a party in interest . . . objects.'” In re Russell, No. 22-10083, 2023 WL 320983, at *1 (Bankr. D. Me. Jan. 19, 2023) (quoting 11 U.S.C. § 502(a)). “But even where a party in interest objects, the court ‘shall allow’ the claim ‘except to the extent that’ the claim implicates any of the nine exceptions enumerated in § 502(b).” Travelers, 549 U.S. at 449 (quoting 11 U.S.C. § 502(b)). “The first of those nine exceptions provides that a claim is not to be allowed if it is ‘unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]'” In re Russell, 2023 WL 320983, at *1 (quoting 11 U.S.C. § 502(b)(1)). “The Supreme Court has recognized the statutory presumption that ‘claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed’ under [§] 502(b).” Id. (quoting Travelers, 549 U.S. at 452).

“Sections 501 and 502 are complemented by Fed.R.Bankr.P. 3001, which provides ‘the procedural framework for the filing and allowance of claims’ . . . .” Id. at *2 (quoting In re Plourde, 418 B.R. at 503). Bankruptcy Rule 3001(f) states that a properly executed proof of claim “shall constitute prima facie evidence of the validity and amount of the claim.” Fed.R.Bankr.P. 3001(f). “Once presumptive validity is established, the burden rests on the [objecting party] to refute the validity or the amount of the claim with ‘substantial evidence.'” In re Russell, 2023 WL 320983, at *2 (quoting Juniper Dev. Grp. v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir. 1993)). If the objecting party produces “substantial evidence” in opposing a proof of claim, “[t]he burden then shifts to the claimant to prove his or her claims by a preponderance of the evidence.” Iatrou v. Darr (In re Iatrou), No. 20-40112-DPW, 2022 WL 220323, at *7 (D. Mass. Jan. 25, 2022) (citation omitted).

In evaluating whether the bankruptcy court erred in disallowing the Berkowitzes’ claims, we must consider whether it erroneously rejected their challenges to the enforceability of the Settlement Agreement based on fraud in the inducement and breach of contract.

1. The Bankruptcy Court Did Not Err in Rejecting the Berkowitzes’ Fraud in the Inducement Defense

To determine whether the Settlement Agreement was enforceable against the Berkowitzes, we look to applicable state law principles regarding the formation and validity of contracts. See Butner v. United States, 440 U.S. 48, 54 (1979) (“Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law.”). Although the Settlement Agreement does not contain a choice of law provision, there is no dispute that Massachusetts law applies. We turn, therefore, to Massachusetts contract law.

1. Basic Principles of Massachusetts Contract Law

In Massachusetts, “[a]bsent an ambiguity, the court interprets a contract according to its plain terms, in a manner that gives reasonable effect to each of its provisions.” Weiss v. DHL Express, Inc., 718 F.3d 39, 45 (1st Cir. 2013) (citations and internal quotation marks omitted). Here, the plain terms of the Settlement Agreement included a release of the Berkowitzes’ claims against the bankruptcy estate and did not contain a provision that Invaleon would refrain from entering the project site again. Instead, the Berkowitzes argue that the Settlement Agreement was invalid because they were fraudulently induced to enter it by a verbal promise by Wu, on behalf of Invaleon, during contract negotiations.

B. Fraud in the Inducement

Fraud in the inducement “concern[s] the validity of the formation of the contract . . . .” Berwind Prop. Grp. Inc. v. Env’t Mgmt. Grp., Inc., No. 04-11411-NMG, 2007 WL 4707647, at *3 (D. Mass. Feb. 5, 2007) (applying Massachusetts contract law). If the Berkowitzes were fraudulently induced to enter into the Settlement Agreement, then it was voidable, and they were not bound by its terms. See id. (stating that “contracts induced by fraudulent misrepresentations . . . are voidable at the election of the party who justifiably relied on the misrepresentations”) (citation omitted); see also Griffin v. Coghill, No. 17-cv-11619-IT, 2018 WL 1122361, at *7 (D. Mass. Mar. 1, 2018) (“A party who has been fraudulently induced by the defendant into entering a contract can rescind that contract.”) (citing Shaw’s Supermarkets, Inc. v. Delgiacco, 575 N.E.2d 1115, 1117 (Mass. 1991)).

In Massachusetts, the elements required to prove fraud in the inducement are:

(1) “misrepresentation of a material fact”; (2) “made to induce action”; and (3) “reasonable reliance on the false statement to the detriment of the person relying.” Com. Bank & Tr. Co. v. Hayeck, 709 N.E.2d 1122, 1126 (Mass. App. Ct. 1999) (citation omitted).

1. Misrepresentation of a Material Fact

As to the first element-misrepresentation of a material fact-the Berkowitzes argue that Wu made a fraudulent promise during contract negotiations that Invaleon would refrain from entering the project site again.^[2]

1. Promise of Future Conduct “Massachusetts law clearly states that statements of present intention as to future conduct may be the basis for a fraud action if . . . the statements misrepresent the actual intention of the speaker and were relied upon by the recipient to his damage.” McEvoy Travel Bureau, Inc. v. Norton Co., 563 N.E.2d 188, 192 (Mass. 1990) (citations omitted). Therefore, “for a promise [regarding future conduct] to constitute fraud in the inducement, the promisor must intend not to carry out the promise and this intent must exist at the time the promise is made.” Coastal Energy, Inc. v. R.W. Granger & Sons, Inc., No. 96-1019, 1998 WL 1184106, at *3 (Mass. Super. Ct. Jan. 28, 1998) (citing McCartin v. Westlake, 630 N.E.2d 283, 289 n.11 (Mass. App. Ct. 1994)). “Mere evidence that a promise was not performed is insufficient to prove intent.” Michelle Holdings, LLC v. Johnston, No. 19-P1444, 2021 WL 117119, at *3 (Mass. App. Ct. Jan. 13, 2021) (citations omitted).

2. Review of the Record

To demonstrate the existence of Wu’s alleged promise to stay off the project site, the Berkowitzes point to two provisions of the Settlement Agreement-one which prohibited Invaleon from bidding at the sale of Rowley Solar’s assets and another providing that, in the event Invaleon became the owner of the solar array by default, the parties would employ a third-party manager to operate the solar farm “such that neither [Invaleon] nor any of its employees shall be present . . . on the premises.” While these provisions are consistent with, and clearly reflect, the Berkowitzes’ well-documented desire that Invaleon have no future involvement in the operation of the solar project, they do not constitute an express promise or agreement by Invaleon to not enter the project site ever again for any reason. We agree with the bankruptcy court that the Settlement Agreement is, on its face, devoid of such a promise or agreement.

The Berkowitzes also highlight Bonni Berkowitz’s testimony as evidence that the parties agreed Invaleon would refrain from entering the project site. Specifically, they point to Bonni’s testimony that the Berkowitzes rejected Invaleon’s first proposal to pay the monies owed under the MIPA to continue to operate the solar project, because they “did not want [Invaleon] on [thei]r property ever again.” Bonni explained that they essentially forfeited the $656,000 they were owed under the MIPA “to get rid of Invaleon.”  The Berkowitzes also point to Bonni’stestimony that the parties “discussed” the “notrespass order, that [Invaleon] would never be involved with the project . . . or step on the property again.” Bonni’s testimony is compelling evidence of the Berkowitzes’ desire that Invaleon have no further involvement in the solar project. However, discussing a potential contract term is not the same as agreeing upon the term. There is no testimony in the record, by Bonni or anyone else, that the parties actually negotiated, or that Invaleon actually agreed to, a contract term not contained in the written Settlement Agreement that Invaleon would not enter the project site again for any reason. Noticeably absent from the witness list was Attorney Edmond Ford, who represented the Berkowitzes during the contract negotiations. Although both Bonni and Wu testified that all communications and proposals between the parties were exclusively presented through their attorneys, the Berkowitzes did not introduce testimony from Attorney Ford that the alleged term was actually negotiated by the parties and agreed upon by Invaleon.

Nor is there any other evidence in the record to corroborate the Berkowitzes’ claims that such a promise was made. Nothing Wu stated at trial or at his deposition could reasonably be interpreted as establishing an absolute promise or agreement to never enter the project site again for any reason. Wu was asked many times whether he “understood” that the Berkowitzes did not want Invaleon on the project site again, and he agreed that was the “overarching theme” of the negotiations. But he never stated that he promised or agreed Invaleon would not enter the site again under any circumstances. Further, even if the record demonstrated that Wu had made such a promise, the Berkowitzes still could not satisfy the misrepresentation element of their fraud in the inducement defense as there was no evidence that Wu did not intend to honor such a promise at the time it was made. See McMillen v. Kadis (In re McMillen), 390 B.R. 1, 8 (Bankr. D. Mass. 2008) (concluding there was no fraud in the inducement where evidence failed to show the promisor did not intend to honor his promise to pay at the time the promise was made). Again, mere nonperformance is insufficient to establish such an intent. See Michelle Holdings, LLC, 2021 WL 117119, at *3.

3. No Reversible Error

That the Berkowitzes wanted no further involvement with Invaleon is clear-so much so that they were willing to forego the monies owed to them in order to achieve that goal. Even if we might have weighed the evidence differently, however, the bankruptcy court’s finding that there was no binding promise or agreement by Invaleon to stay off the Property in the future was “plausible” based on the entire record before the bankruptcy court. See Devila Vicenty v. San Miguel Sandoval (In re San Miguel Sandoval), 327 B.R. 493, 505-06 (B.A.P. 1st Cir. 2005). Affording the bankruptcy court the “due deference” to which it is entitled when weighing the evidence, see Fed.R.Civ.P. 52(a)(6), we are not “left with the definite and firm conviction that a mistake has been committed.” U.S. Gypsum Co., 333 U.S. at 395. We discern no error in the bankruptcy court’s determination that an essential element of fraudulent inducement-a false statement of material fact-was lacking. Because the Berkowitzes’ fraudulent inducement claim falters on the first element, we need not address their arguments regarding reasonable reliance. See Hayeck, 709 N.E.2d at 1126 (requiring all elements to be established to prevail on fraud in the inducement defense).

III. The Bankruptcy Court Did Not Err in Rejecting the Berkowitzes’ Breach of Contract Claim

We turn now to the Berkowitzes’ alternative claim that Invaleon breached the Settlement Agreement by entering the project site after the sale and that they were entitled to damages in the amount of their claims for that breach.

To prevail on a claim for breach of contract under Massachusetts law, the plaintiff must demonstrate that: (1) “there was an agreement between the parties”; (2) “the agreement was supported by consideration”; (3) “the plaintiff was ready, willing, and able to perform his or her part of the contract”; (4) “the defendant committed a breach of the contract”; and (5) “the plaintiff suffered harm as a result.” Bulwer v. Mount Auburn Hosp., 46 N.E.3d 24, 39 (Mass. 2016). “An agreement is breached when a party to the agreement, without legal excuse, fails to comply with a material term of the agreement.” Amcel Corp. v. Int’l Exec. Sales, Inc., No. 93-11128-RCL, 1997 U.S. Dist. LEXIS 23543, at *23 (D. Mass. Sep. 26, 1997) (citing Realty Developing Co. v. Wakefield Ready-Mix Concrete Co., 100 N.E.2d 28, 30 (Mass. 1951)).

The Berkowitzes’ breach of contract claim was based on an alleged agreement between the parties that Invaleon would never enter the project site again under any circumstances. As stated previously, it is undisputed that the Settlement Agreement contains no such provision. Further, the bankruptcy court found that no verbal agreement between the parties was made during contract negotiations. Having concluded that this finding was not clearly erroneous, it necessarily follows that the bankruptcy court did not err in ruling that, in the absence of such an agreement between the parties, there was no breach of a material term. Because the Berkowitzes did not establish an agreement to refrain from entering the project site, let alone any breach of a material contract term by Invaleon, they were not entitled to damages, and the bankruptcy court did not err in disallowing their claims.

In sum, because the bankruptcy court correctly rejected both the Berkowitzes’ fraud in the inducement defense and breach of contract claim, we conclude that the bankruptcy court did not commit reversible error in disallowing the Berkowitzes’ claims.

For the reasons discussed above, we DISMISS Maven Trust’s appeal for lack of standing. As to the Berkowitzes’ appeal, we conclude that they have not shown the bankruptcy court’s disallowance of their claims to be a result of a clearly erroneous factual finding or an error of law. Therefore, we AFFIRM the Claims Order to the extent that it disallowed the Berkowitzes’ claims.

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The retailer’s lawyer argued that its primary lender (Hilco Global) store-closing sales missed revenue targets by $14 million.  Hilco countered that the retailer’s management exceeded its loan budget and told employees they would receive bonuses that Hilco never agreed to fund.

“It’s clear to me that there’s been a complete breakdown,” Horan said when converting the case.  Horan convinced the two sides to reach a partial deal on employee wages, with Hilco affiliate ReStore Capital agreeing to pay $1.17 million to store-level employees who worked during the company’s going-out-of-business sales.

Hilco had initially argued it should not pay any more than it had budgeted in the bankruptcy loan, saying it did not trust Christmas Tree Shops’ calculation of employee wages. But Horan threatened to withhold fees from bankruptcy lawyers and professionals if any low-level employees went unpaid.  “This case is not going to be run on the backs of employees, that’s just unacceptable,” Horan said.  The agreement does not address wages for employees who worked at Christmas Tree Shops’ headquarters or wage claims filed by 250 workers who were laid off when the company went bankrupt.   A Chapter 7 trustee will address those claims, Horan said, adding “we’re not going to forget about the home-office employees.”

The Middleborough, Massachusetts-based company had 82 stores when it filed for bankruptcy, focused on selling home decor and seasonal decoration products.

The case is Christmas Tree Shops LLC, U.S. Bankruptcy Court for the District of Delaware, No. 23-10576.

The post How the Grinch Stole Christmas: The Liquidation of Christmas Tree Shops appeared first on Amann Burnett Law.

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Delaware Judge Explores the Theories Behind ‘Opt-In’ and ‘Opt-Out’ Chapter 11 Plans

Peculiar circumstance compelled a Delaware judge to depart from his usual approval of ‘opt-out’ plans that grant non-debtor releases.

Bankruptcy Judge Craig T. Goldblatt of Delaware wrote a 24-page opinion musing on the question of whether creditors must affirmatively opt in to grant releases to non-debtors or whether it’s ok for a chapter 11 plan to bind creditors to third-party, non-debtor releases if they don’t opt out.

For himself, Judge Goldblatt said he would generally bind creditors to releases of non-debtors unless they opt out.  But the case before him was unusual. So, the judge exercised his discretion to rule that creditors must be provided with additional protections before confirming an opt-out plan.

The March 27 opinion might also be read as a subtle suggestion for the Third Circuit to decide, definitively, whether opt-out plans are permissible in chapter 11.

The Unusual Case

The Subchapter V debtor was an administrator of health care plans for medium-sized and small companies. From premiums paid by the employers, the debtor paid health care costs up to $10,000 per employee. For larger costs, the employers purchased other policies.

The debtor fell into chapter 11 after failing to pay all claims submitted by health care providers. Were the providers not paid by the debtor, the providers could pursue claims or file suits against the employees.

On a temporary basis, the parties in the case didn’t want providers pursuing employees for medical bills that the debtor didn’t pay. With universal agreement, Judge Goldblatt signed an order enjoining providers from pursuing claims against employees until late July 2023. The same order extended the employees’ claim-filing bar date until late September 2023.

Meanwhile, the debtor pursued confirmation of a chapter 11 plan that would grant non-debtor, third-party releases to the debtor’s parent corporation and to the parent’s directors and officers.

It was an opt-out plan. In other words, insured employees would have granted theoretically consensual releases to non-debtors unless they opted out of the releases a week before the plan’s confirmation in early May.

Because the debtor was proposing a Subchapter V plan, creditors would not be voting. Therefore, creditors were to be given a special form to opt out.

The U.S. Trustee objected, contending that all plans should be opt-in. Alternatively, the U.S. Trustee argued that the unusual facts of the case meant it should be an opt-in plan.

There were problems not present in typical chapter 11 cases. First, covered employees might not know they even had claims against the non-debtors because the temporary stay barred health care providers from pursuing claims against them. Second, employees would have consented to the releases if they did not opt out in early May, but they would have had no notion that they should have opted out, because the providers were enjoined from pursuing them until late July.

Thus, Judge Goldblatt was charged with deciding whether he would permit an opt-out plan.

Judge Goldblatt Surveys Cases Coming Down Both Ways

Judge Goldblatt devoted much of his opinion to analyzing the theories employed by courts that require opting in and those that permit opt-out plans. We recommend reading the opinion in full text.

Judge Goldblatt read the Third Circuit’s opinion in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), to suggest that nonconsensual releases are permissible when certain “hallmarks” are present. “The obvious implication” of the case, he said, “is that consensual third-party releases ought to be noncontroversial.” [Emphasis in original.] However, he found no Third Circuit cases defining “consensual.”

Judge Goldblatt examined cases from both ends of the “spectrum.” At one end are courts that require opt-in plans. They require affirmative consent based on notions of contract law, where silence cannot bind someone to a contract. To that point of view, he cited a bankruptcy judge in New York and one in Delaware.

At the other end of the spectrum, he found opinions by courts, like his, where nonconsensual releases are permitted. They view the opt-out provision in a plan like any other provision in a plan: Due process is supplied if the creditor is validly served and does not respond by opting out. Those courts view opt-out provisions as being waiveable, like bar dates and consents to the entry of final judgments.

Realistically, Judge Goldblatt said that everyone who fails to opt out cannot be said to have done so knowingly. They may have been “careless, inattentive, or mistaken,” he said. Rather than calling opt-out plans “consensual,” Judge Goldblatt said that creditors more accurately might be said to have “forfeited” their rights.

Telling the reader where he stands, Judge Goldblatt said that “a third-party release cannot be said to be fundamentally different from other plan provisions.” A creditor, he said, “may not safely assume that a plan relates only to its dealings with the debtor and not third parties.”

Judge Goldblatt therefore said he was “generally comfortable describing third-party releases as consensual so long as there is conspicuous disclosure and a simple mechanism for impaired creditors to exercise the opt-out right.”

The case before him was unique. Under the plan as written, creditors would opt in by inaction before they even knew they might have claims against non-debtors that they were releasing.

Exercising discretion, Judge Goldblatt gave the debtor an alternative. The plan could be opt-in, or creditors could be allowed to opt out coterminous with the bar date at the end of September, when employees will know whether health care providers will be pursuing claims against them.

Choosing between the options, the debtor decided to extend the deadline for insured employees to opt out until the end of September.

The post Ch 11–Opt In or Opt Out, Delaware’s Take appeared first on Amann Burnett Law.

Attorney’s Guide to Preparing a Bankruptcy Filing: Which chapter to file, completing forms, and a comprehensive overview of exemptions, lien stripping, reaffirmations and more

William J. Amann | Amann Burnett PLLC

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Amann Burnett, PLLC regularly represents creditors, debtors and interested parties in often complex bankruptcy and related litigation cases in Chapter 11.  Sub-V is a relatively new law with many facets.   Whether you are a creditor, debtor or interested party dealing with any bankruptcy issue, please consider contacting us.  We’ll update the progress of the case as appropriate.

Here is a basic overview of  the SBRA and Small Business Bankruptcy Under Subchapter V of Chapter 11, The Small Business Reorganization Act of 2019

Effective Date and Purpose

 Became effective on February 19, 2020

 Provides new tools for the Practitioner

 Tighter timelines

 Reduce cost to debtors

 Quicker return to creditors

 Assistance of a Subchapter V Trustee

 Intended to Promote Consensual Plans

 Greater Possibility of Confirmation of Non-Consensual Plans

 Benefits for Individual Small Business Debtor

Subchapter V is comprised of:

•  1181. Inapplicability of other sections
•  1182. Definitions
•  1183. Trustee
•  1184. Rights and powers of a debtor in possession
•  1185. Removal of debtor in possession
•  1186. Property of the estate
•  1187. Duties and reporting requirements of debtors
•  1188. Status conference
•  1189. Filing of the plan
•  1190. Contents of plan
•  1191. Confirmation of plan
•  1192. Discharge
•  1193. Modification of plan
•  1194. Payments
•  1195. Transactions with professionals

Who May Elect Subchapter V?

Must fit the “Small Business Debtor” definition of 11 U.S.C. § 101(51D):

 “Person engaged in commercial or business activities.”

 Total noncontingent liquidated debt less than $2,725,625.  Revised up to $7,500,000, see 11 USC § 1182 above.

 At least 50% of the debt must have arisen “from the commercial or business activities of the debtor.”

 May be an affiliate of a small business debtor so long as aggregated debt remains below $2.7M.

Not a single asset real estate debtor.

How to Elect Subchapter V?

 Debtors that fit within the “small business debtor” definition of §101(51D), must affirmatively elect Subchapter V treatment within 14 days or their case will proceed under the general small business provisions of Chapter 11.

 Official Form 101, Voluntary Petition for Individuals, contains a new checkbox under Part 3, Question 13 to indicate if debtor is a small business and whether proceeding under Subchapter V or not.

 Official Form 201, Voluntary Petition for Nonindividuals, contains a new checkbox under Question 8 for a small business debtor to indicate whether proceeding under Subchapter V or not.

 Debtor remains in possession and operates the business.

 A Subchapter V Trustee is appointed with specific responsibilities.

 Provisions regarding use of cash collateral and sale of assets apply.

 No creditor committee unless the court orders otherwise for cause.

 No disclosure statement required but the plan must include:

A brief history of the business operations of the debtor;

A liquidation analysis; and

 Projections with respect to the ability of the debtor to make payments

under the proposed plan of reorganization.

 Only the Debtor may file and modify a Subchapter V plan.

 Postpetition earnings and acquired property is property of the estate if a non-consensual plan is confirmed. §1186(a) See also §1115 for individual debtors.

 Acceptance of one accepting impaired class is not required to confirm a nonconsensual plan. The absolute priority rule does not apply.

 Individual debtors may cramdown a mortgage on their principal residence if the loan proceeds were used “primarily in connection with the small business of the debtor” and not to purchase the residence.

 Debtors do not pay quarterly fees to the UST.

 The debtor may hire a professional even if that professional is a creditor.

Professional is “not disqualified for employment . . . solely because [the professional] holds a [prepetition] claim of less than $10,000 . . ..”

 Administrative expenses (including trustee fees) may be paid over time through the plan.

Timing of Discharge

 Debtors who confirm consensual plans effectuate a discharge upon substantial consummation of the plan, unless the plan or order provides otherwise. See §1141(d)

 Debtors who confirm cramdown plans receive a discharge after 3 to 5 years of payments.

 These streamlined procedures are balanced by tighter deadlines, involvement by a trustee, and information requirements.

Filing a skeletal petition:  Not a Good Idea.  Need–Most recent Balance Sheet, Stmt. of Operations, Cash Flow Stmt., and Fed. Income Tax Return must be filed with Petition or not later than 7 days, or a  statement that those have not been prepared. § 1116(1);

Schedules to be filed within 14 days of Petition, which may not be extended to more than 30 days “absent extraordinary and compelling circumstances”.

 UST appoints subchapter V trustee and sets 341 meeting within 24 to 48 hours

of filing.

 341 meeting held as close as possible to 21 days after filing, depending on the location of the meeting.

The court is required to hold a status conference not later than 60 days after the case is filed “to further the expeditious and economical resolution of a case under this subchapter.” §1188.

Report on plan efforts due 14 days prior (Valuation/Best Interest Analysis).  The court may extend the 60-day period only “if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.”

308 Small Business reporting remains applicable.

Subchapter V trustee is appointed at the beginning of the case.

 Primary pre-confirmation task is to “facilitate the development of a consensual

plan of reorganization.”

Services generally terminate upon substantial consummation of a consensual plan.

Trustee remains in place to distribute plan payments if a cramdown plan is confirmed.

 DIP may be removed for cause.

 If DIP is removed, the trustee will operate the business.

SBRA allows for either standing or case-by-case trustees.

 Both standing and case-by-case trustees have the same duties.

 Standing and case-by-case trustees are compensated under different statutes.

 Initially, the UST will appoint case-by-case trustees to administer cases rather than standing trustees.

Subchapter V case-by-case trustees will be paid under 11 U.S.C. §330.

 Unlike compensation for chapter 7 trustees, Subchapter V case-by-case trustees’  compensation is not based on disbursements.

 SBRA conforming amendments specifically make section §326(a) inapplicable to

subchapter V cases, which precludes determining compensation based on

disbursements.

 Instead, case-by-case trustees must apply for fees and expenses under section 330

and establish that fees are reasonable (likely based on time spent and a reasonable

hourly rate) and expenses are actual and necessary.

In general, the Subchapter V trustee will evaluate the viability of the business

and prospects for reorganization.

 Upon appointment under §1183(b)(1), the trustee shall perform the duties specified in §704(a)(2), (5)-(7), and (9):

 Be accountable for all property received;

 Examine proofs of claim and object as needed; oppose the debtor’s discharge, if

advisable;

 Furnish information concerning the estate requested by a party in interest, unless

the court orders otherwise;

 Make a final report; and

 File an account of the administration of the estate with the court and the UST.

The trustee will take part in the status conference and other hearings scheduled

by the court.

 The UST generally will preside at the creditors’ meeting, but the trustee will be

expected to attend and participate.

 The trustee is charged with facilitating the development of a consensual plan of

reorganization and ensuring that the debtor commences making timely payments

under any confirmed plan.

 If there is a claim for a domestic support obligation with respect to the debtor,

the trustee must furnish the required notices.

For cause, and upon request of a party in interest, the court may require the

trustee to also perform the duties specified in section 1106(a)(3), (4), and (7):

 Investigate the conduct and financial condition of debtor, and any other matter

relevant to the case;

 File a report of any investigation conducted; and,

 After confirmation, file any such reports that are necessary or as the court orders.

If the court orders pursuant to §1185 that the debtor shall no longer be a debtor in possession, the Subchapter V trustee shall operate the debtor’s business.

 Section 1183(b)(5) requires the trustee to:

 File any required schedules and statements;

 File periodic operating reports;

 Serve as the administrator of any employee benefit plan;

Make reasonable efforts to transfer patients from a closing health care

business to a new provider offering similar services; and;

 For any year in which a tax return has not been filed, furnish such

information as may be required by the applicable governmental entity.

The subchapter V trustee might (or might not) handle funds and make

distributions.

 Section 1194 permits, but does not require, a debtor to make adequate protection

payments through the subchapter V trustee, with the permission of the bankruptcy

court.

 If the subchapter V trustee holds funds pre-confirmation, then upon confirmation,

• 1194 directs that the trustee either distribute those funds in accordance with a

confirmed plan or return those funds to the debtor after deducting any:

(1) unpaid administrative expenses,

(2) adequate protection payments due to a secured lender, and

(3) fees owing to the trustee.

If a consensual plan is confirmed, the trustee’s services will terminate upon substantial consummation of the plan. §1183(c)(1)

If a cramdown plan is confirmed, the trustee shall make payments to creditors under the plan, except as otherwise provided in the plan or confirmation order. § 1194(b).

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