NCBJ 2022: Five Secrets to a Magical Sub-V


Judge Catherine McEwen (Bankr. M.D. Fla.) and panelists David Mawhinney (Bowditch, Framingham, Mass.), Amy Denton Mayer (Stichter Riedel Blain Postler, PA, Tampa, Fl) and Kirk Burkley (Bernstein-Burkley, P.C., Pittsburgh, PA) donned their wizard's hats to present 5 Secrets to a Magical Sub-V. Both David and Amy serve as Subchapter V trustees and represent SubV debtors, while Kirk offered the creditors' viewpoint. Their program covered five areas of Subchapter V law and practice.

1.    Who Goes There? Eligibility.

While many of the early cases dealt with Subchapter V eligibility, few actual cases have eligibility fights. Eligibility is not the same as jurisdiction and can be waived by the parties. Kirk said that eligibility fights were just not where he wanted to spend resources. When looking at the debt owed by a debtor, the distinction between business and consumer may not always be obvious. For example, a Home Equity Line of Credit might be used to finance a business. David said that while a Single Asset Real Estate Debtor might not be eligible for Subchapter V, the parties might want to wait and see where the case was going before immediately jumping on eligibility. (However, it is important to note that eligibility must be raised within thirty days after the 341 meeting or it is waived). In order to meet the commercial or business activity test, it is necessary to show that the business is currently doing something. However, to quote the Princess Bride, they said there is a big difference between mostly dead and completely dead.

2.    The Marvelous, Mysterious Trustee.

Amy said that the Subchapter V trustee is neither friend nor foe, but is there to assist in the process. David said that the trustee can deal with the different personalities in the case and build trust. Kirk said that many cases couldn't have gotten done without the help of the Subchapter V trustee. He said that anything that the trustee digs into is work that he doesn't have to charge his client for. 

Amy stressed that the SubV trustee is not a mediator. If the court requires "meet and confer" sessions, it is good to flag those conversations as Rule 408 settlement discussions. She said that debtors will sometimes provide drafts of their plans to the trustee for input. 

3.    Don't Run Out of Time

Getting an extension of time to file a plan is tricky. The standard is whether the need for an extension "is attributable to circumstances for which the debtor should not justly be held accountable." The panelists said that "causal links" will be good for an extension while lazy, chronically late, generalized excuses will not be successful. The Seven Stars case illustrates that a debtor's decision to opt into Subchapter V after its deadlines had run was within the control of the debtor. 

The panelists recommended that debtor's always ask for an extension before the time expires. That way, if the court says no, you can still file a placeholder plan. While this is a matter of controversy, the Code says that a plan must be filed within the 90 days, not that it must be a confirmable plan.

4.    Conjuring Confirmation

David and Amy stressed the need to have good projections and to understand the numbers. David said that as trustee "to be credible, I must be informed." Amy recommended checking the projections against historical performance. They also said that if a debtor doesn't have good financial reporting, it had better get it fast. 

5.    Remedy for What Ails You

This is a quirk of SubchapterV. Section 1191(c)(3)(B) says that a plan needs to provide "appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that payments are not made." Some courts have said that a plan need not contain "appropriate remedies" if the debtor is certain to make its payments. However, the bigger practice tip, according to Kirk, is that adequate default remedies are part of the standard for cramdown. If a debtor wants to get a consensual plan, it may agree to whatever remedies the creditor requests. Kirk stressed that the goal of remedies is to avoid having to go back to court if something goes wrong. For secured creditors, remedies should include fast ways to get at at their collateral. 

The panelists discussed several creative remedies for default. One option that was suggested was having the debtor grant a lien on certain property in favor of the SubV trustee for the benefit of the creditors.  A landlord might negotiate a waiver of certain notice rights before terminating a lease. Creditors might ask for "Phoenix" claims in which the full amount of their claim springs back in the event of a default. If an equipment lender doesn't have a provision for GPS trackers in its current loan, it might get them in a negotiation. 

Creditors have an incentive to negotiate for default remedies. In the Urgent Care case, the Court said that preserving state court remedies was enough. 

The parties also discussed the Section 1111(b) election. Kirk stressed that there is nothing in Subchapter V that says the election doesn't apply. If the 1111(b) election is triggered, the plan may go for more than five years. While a Subchapter V debtor must pay disposable income for five years, the panelists suggested that the plan could go longer. They pointed to Chapter 12 as an example where payments to a secured creditor can go beyond five years. 

The written materials submitted with the program contain nine separate papers which can be found here