Subchapter V: What Does “Fair and Equitable” Mean For Plan Confirmation? (In re Pearl & In re Ellingsworth)

By: Donald L Swanson

11 U.S.C. § 1191 is Subchapter V’s plan confirmation statute. 

One confirmation essential, from § 1191(b), is that a Subchapter V plan must be “fair and equitable” to each impaired class that does not accept the plan.

This article summarizes two bankruptcy court opinions applying the “fair and equitable” standard, as the path to confirmation.

What does “fair and equitable” mean?

“Fair and equitable” is a general term.  But § 1191(c)&(d) add substance to these words in two respects. 

First. § 1191(c) says that “fair and equitable” includes the following plan requirements:

• all of debtor’s projected disposable income, during the 3 to 5 years term of the plan, will be used for plan payments to creditors—in cash or other property;
• a reasonable likelihood exists that all proposed plan payments will be made; and
• appropriate remedies exist in the plan (e.g., liquidation of nonexempt assets) in the event payments aren’t made.

Second. § 1191(d) defines “disposable income” as debtor’s income after reasonable expenses for, (i) maintenance or support of an individual debtor and dependents, and (ii) “the continuation, preservation, or operation” of debtor’s business.”

“Fair and Equitable” applied.

What follows is a summary of two Subchapter V plan confirmation opinions on the “fair and equitable” standard under § 1191.

–In re Pearl Resources

The first plan confirmation opinion is In re Pearl Resources LLC, Case No. 20-31585 & -31586 in the Southern Texas Bankruptcy Court (decided September 30, 2020, Doc. 238).

In re Pearl says that § 1191(b) sets the rules for confirmation of a non-consensual plan under Subchapter V.  Such rules eliminate the:

• cramdown requirements of § 1129(b); and
• requirements of paragraphs (8), (10), and (15) of § 1129(a).

Such § 1191 rules also require the court to confirm debtor’s plan, if the plan:

• does not “discriminate unfairly”; and
• is “fair and equitable.”

These two standards (no unfair discrimination and “fair and equitable”) are both found in § 1129(b), and the unfair discrimination standard has the same meaning in both regular Chapter 11 and Subchapter V.

“Fair and equitable,” on the other hand, is given new substance by § 1191(c)&(d).

Under § 1191(c), “fair and equitable” imposes, (i) a projected disposable income requirement, and (ii) a feasibility finding with remedies for default.

The result, in a Subchapter V case, is that owners can retain their ownership interests under a plan, if debtor distributes all its projected disposable income (in cash or other property) to creditors over the three to five years term of the plan. 

The In re Pearl creditors object to confirmation on “fair and equitable” grounds, asserting: 

• the Plan provides no specifics on disposable income amounts or when available;
• there may not be any disposable income;
• financial projections are speculative and dependent upon up-front capital financing that is non-existent; and
• the plan is not feasible;

The Bankruptcy Court overrules such objections, by applying the “fair and equitable” standard like this:

• During the plan term, debtor must pay all projected disposable income to creditors;
• “Disposable income” is debtor’s income beyond what’s reasonably necessary to live and keep the business going;
• Here, income will be generated and will be distributed to creditors’ allowed claims under the plan;
• Allowed claims are to be paid in full—but, if that doesn’t happen from disposable income, (i) creditors will be granted a lien to secure full payment, (ii) Debtor will sell sufficient assets for full payment, (iii) asset values are adequate to do so, and (iv) evidence shows that Debtor “will be able to realistically carry out” the plan; and
• Accordingly, Debtor’s plan satisfies the “fair and equitable” test for confirmation.

–In re Ellingsworth Residential Community

The second plan confirmation opinion is In re Ellingsworth Residential Community Association, Inc., Case No. 20-bk-01346 in the Middle Florida Bankruptcy Court (decided October 16, 2020, Doc. 341).

Debtor is a homeowner’s association representing 80 homes in three developments, with a gate, common area property, and a fountain—but no other amenities, such as a pool, community center, or playground. All 80 homeowners pay the same quarterly assessment of $420.

Confirmation of non-consensual plans, under Subchapter V, is governed by § 1191, which provides that a court shall confirm such a plan, if it is (i) “fair and equitable” to each non-accepting and impaired class of claims, (ii) does not discriminate unfairly, and (iii) meets the requirements of § 1129(a) (excepting certain subparts).

“Fair and equitable” is defined by § 1191(c), which requires that:

• Debtor’s projected disposable income, during the three to five years term of the plan, is paid to creditors under the plan;
• A reasonable likelihood exists for debtor to make all plan payments; and
• Remedies are provided in the plan to protect creditors, if payments aren’t made.

“Disposable income” means Debtor’s future income that’s not reasonably necessary for “payment of expenditures necessary for the continuation, preservation or operation” of the debtor’s business in this non-individual case.

The Bankruptcy Court applies the “fair and equitable” standard like this:

• Debtor’s plan is simple—it provides for the payment of allowed administrative, priority claims and unsecured claims over three years;
• Debtor has no secured creditors;
• Plan payments to unsecured creditors will be from the following sources: (i) 25% of all aged accounts receivable, (ii) net proceeds recovered from all Debtor’s causes of action against third persons, and (iii) net disposable income for three years, including a special assessment of $300,000, to make these payments.
• Debtor’s plan projects disposable income of $16,000 over three years, not including the $300,000 special assessment;
• If a default occurs, the plan provides that claimholders may seek relief from the Bankruptcy Court to enforce the plan or seek relief under applicable laws;
• The Court finds that the plan is “fair and equitable” because Debtor is, (i) devoting more than its projected disposable income—by agreeing to the $300,000 special assessment, (ii) maximizing payments to creditors while still paying its on-going expenses, (iii) likely to make the plan payments, and, (iv) providing adequate creditor remedies in the event of default.

Conclusion

The In re Pearl and In re Ellingsworth opinions provide insight on how the “fair and equitable” standard for confirmation of a Subchapter V plan is to be applied.

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