By: Donald L Swanson
Here is a Hard-Knocks Rule (i.e., a lesson I’ve learned the hard way):
- A plan of reorganization needs to be a first-day filing—or as close to that as possible.
This lesson first imposed itself upon me three decades ago. I’m representing a Chapter 11 debtor, back then, in a hearing on a motion to convert. The case is highly contentious, but we survive the motion to convert (barely). In ruling from the bench, the Judge turns to me and says:
- “You’d better get a confirmable plan on file . . . fast!”
This comment comes as a surprise—I’d been thinking there is plenty of time to get a strategy in place, to negotiate with creditors, and to eventually get a plan on file. But, no! That’s clearly not an option, here.
So, I’m on a crash effort to get a strategy figured out (complete with an absolute priority rule work-around) and the plan drafted and filed.
Then what happens, to my further surprise, is that creditors start negotiating on the terms of the plan. Turns out, the plan has a fighting chance of being confirmed as drafted, so creditor negotiations are at the margins of the plan—with feasibility as the big issue.
And get this: creditors end up consenting to the plan—all votes are to accept the plan with minor modifications!
The moral of the story is this:
- Without that Judge lighting a fire, the case would have languished for a long time—and then probably have cratered in the end.
The foregoing Hard-Knocks Rule is particularly applicable in Subchapter V cases because, (i) the possibility of confirming a non-consensual plan is baked into Subchapter V statutes, and (ii) Subchapter V is designed to be an expedited process, including a 90-days plan filing deadline.
Accordingly, the optimum plan-filing strategy for a Subchapter V debtor is to:
- Develop a plan of reorganization that has a fighting chance at achieving a non-consensual confirmation;
- Get that plan on file at the outset of the case—on the first day or as soon thereafter as possible; and
- Then, negotiate with creditors toward a consensual confirmation based on, (i) the terms of the proposed plan, and (ii) requirements for achieving a non-consensual confirmation.
A recent Subchapter V opinion illustrates how a contrary, wait-and-see strategy can backfire.
The opinion is In re Online King LLC, Case No. 20-42591, in the E.D.N.Y. Bankruptcy Court (issued January 19, 2021, Doc. 91).
The result of the opinion is that the Bankruptcy Court dismisses (Doc. 92) Debtor’s Subchapter V case because Debtor failed to file a timely plan or properly request an extension of the plan-filing deadline.
What follows is an attempt at summarizing the Bankruptcy Court’s rationale.
On July 10, 2020, Debtor files a Subchapter V case. Under Subchapter V, Debtor must file a plan within 90 days thereafter or request an extension of the deadline based on a “circumstances for which the debtor should not justly be held accountable” (§ 1189(b)).
In Debtor’s case, the 90-day period expires on October 8, 2020. The Debtor neither files a plan nor requests an extension of the deadline prior to October 8, 2020.
On October 21, 2020, Debtor files a Motion to extend the 90-day plan-filing deadline. The Motion fails to mention that the 90-day period had already expired. Instead, it alleges that an extension is justified because of:
- “the amount of work entailed in negotiating and proposing a plan”;
- the intervening religious holidays “during which the Debtor and its Counsel could not work”;
- “the competing demands upon Debtors [sic] advisors and personnel”; and
- “the inherent issues faced by all parties because of the current pandemic.”
No explanation is provided in the Motion on, (i) how the holidays and pandemic affected the Debtor, (ii) what steps Debtor has taken to propose a plan, or (iii) when a plan might be filed.
The Bankruptcy Court denies the Motion on its own initiative—without anyone filing an objection. The Court reasons that it cannot grant a “rubber stamp” approval.
Under § 1189(b), a Subchapter V debtor “shall file a plan not later than 90 days after the order for relief under this chapter, except that the court may extend the period if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable” (emphasis added by the Court).
Debtor did not satisfy this plan deadline requirement: “In short, the Debtor is asking this Court to extend its time to file a plan effective as of October 8, 2020.”
–Chapter 11 Comparison
Although § 1189(b) authorizes a request for extension of the plan filing deadline, it is silent on the timing of the request. Similar authorizations of extension requests in other contexts specify when the request must be made. For example:
- § 1121(d)(1) provides, “[O]n request of a party in interest made within the respective periods specified in subsections (b) and (c) of this section . . . the court may for cause reduce or increase the 120-day period or 180-day period referred to in this section.” (emphasis added)); and
- § 1121(e)(3)(C) provides that the time period in which the debtor may file a plan may be extended only if, inter alia, “the order extending time is signed before the existing deadline has expired.” Emphasis added by the Court.
Such a difference “leads this Court to conclude that no timing requirement exists for a motion to extend brought under § 1189(b).”
–Chapter 12 Comparison
Section 1221 controls the filing of a plan in a chapter 12 case. The text of § 1221 is identical to that of § 1189(b), including: “[t]he debtor shall file a plan not later than 90 days after the order for relief under this chapter, except that the court may extend such period if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” 11 U.S.C. § 1221.
A Bankruptcy Court construing this § 1221 language (in In re Lundberg, 621 B.R. 561, 562 (Bankr. W.D.N.Y. 2020)) stated that “nothing in the text of section 1221 prohibits relief nunc pro tunc,” noting “the striking difference between § 1112 and § 1121.” The In re Lundberg Court concludes that “retroactive relief may be granted upon proper showing by a debtor.
“Accordingly, there is no requirement in subchapter V that the debtor request the extension before the 90-day limit has expired.”
–“Cause” for Conversion or Dismissal
Nevertheless, a failure to file a plan by the statutory deadline constitutes “cause” to convert the chapter 11 case to a case under chapter 7 or to dismiss the chapter 11 case. This is based on:
- § 1112(b)(4)(J)—“cause” to convert or dismiss a chapter 11 case includes failure “to file . . . a plan, within the time fixed by this title”); and
- 8 Collier ¶ 1189.03—“[B]ecause failure to file a plan within the 90-day deadline constitutes cause for dismissal of the case or conversion of the case to chapter 7, the debtor should, if possible, file the motion for extension in enough time for the motion to be acted on by the court before the time expires.”
Accordingly, “it defies logic for a debtor to delay moving to extend its time to file a plan for it runs the risk of facing a motion to convert or dismiss its chapter 11 case.”
Since § 1189(b) implies, by its terms, that the Court may, in its discretion, grant retroactive relief under a late-filed extension motion, the question becomes this:
- Has Debtor made a proper showing to warrant a grant of the requested extension?
To receive an extension, a Debtor must meet its burden to show that the “the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.”
This burden “is a stringent one” because:
- the 90-day plan filing deadline is one of the primary protections for creditors against a debtor’s languishing in chapter 12 without confirming a plan;
- Subchapter V cases are designed to move expeditiously—it is a fast-tracked process aimed at a less expensive and accelerated path to reorganize a debtor’s business affairs; and
- To balance the new powers for debtors, Congress granted creditors the requirement that a Subchapter V case proceed expeditiously.
Debtor’s Motion fails to meet Debtor’s burden: Debtor simply requests an extension without any supporting explanation or evidence and without any explanation of when a plan will be filed. Instead, Debtor apparently wants the benefits of Subchapter V but does not want “to be saddled with” expedited process requirements.
“In sum, the Motion consists of factually unsupported and conclusory labels, and on that basis the Court cannot find that the Debtor meets the stringent burden of showing that it was unable to timely file a plan due to circumstances for which it should not justly be held accountable.”
“Some may say a harsh result, but words matter, as does evidence.”
The In re Online King opinion illustrates the wisdom of this Hard-Knocks Rule:
- A plan of reorganization needs to be a first-day filing—or as close to that as possible.
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