How To “Fix” A Subchapter V Plan’s Term (In re Urgent Care)

By: Donald L Swanson

• “The three-year term here is fair and equitable, as it properly balances the risks and rewards for both the debtor and its creditors”; and
• “the Court declines to fix a longer plan period.”

–From a Bankruptcy Court opinion confirming Debtor’s Subchapter V plan—In re Urgent Care Physicians, Ltd, Case No. 21-24000, Eastern Wisconsin Bankruptcy Court (decided December 20, 2021, Doc. 107).

The opinion, by Hon. Beth E. Hanan, is one of the first to analyze and explain, in detail, how to “fix” the term of a Subchapter V plan. 

What follows is an attempt to summarize such analysis and explanation.

Statutory Standard

The term of a Subchapter V plan is to be a “3-year period, or such longer period not to exceed 5 years as the court may fix” (§ 1191(c)(2)).

Dispute

Subchapter V Debtor proposes a 3-year plan.

U.S. Trustee objects, saying that the “fair and equitable” plan confirmation standard requires a 5-year plan in this case.

But here’s the problem: legal authorities are scant on whether a plan term should be 3-years or 5-years, or something in between.  For example:

• There is no case law on the subject; and
• The Bankruptcy Code provides only that a bankruptcy court “may fix” the length of a plan’s term, from 3-years to 5-years.  Id.

Grounds for Objection

–Creditor Preference

One ground for objection offered by a creditor at oral arguments is this: unsecured creditors prefer a 5-year plan. But no legal authority is cited to support it.

–Capital Expenditures

Another creditor suggests the following basis for requiring a 5-year plan in this case, based on analogy to a similar issue in Chapter 12:

• When future capital expenditures for growing the business are deducted from projected disposable income, the plan should be extended beyond 3-years;
• This argument applies to the present case because Debtor’s primary shareholder / physician does pro bono work—such work is akin to a capital expense (the physician’s pro bono time could be used to provide billable services that make Debtor more profitable); and
• pro bono work translates into an income reduction for Debtor, so extending the plan term to 5-years would be more equitable.

The Bankruptcy Court rejects such suggestion like this:

• The analogy is inapt;
• The purpose of extending a plan term in exchange for allowing a deduction for capital expenditures is to allow creditors, who are funding the business for debtor’s benefit, to partake in debtor’s future success;
• Pro bono services by Debtor’s physician are not akin to capital expenditures that increase the value of Debtor’s business;
• This objection challenges Debtor’s business judgment—the argument is that Debtor should utilize more physician hours to increase profits; but
• No evidence  supports such a change in operational structure, and the Court is confident that Debtor is able to allocate its resources, including its 11 medical professionals, to maximize Debtor’s revenues.

–Operating Reserve

Another argument for extending Debtor’s plan beyond 3-years is this: Debtor’s plan retains a $20,000 operating reserve, which could be used to make plan payments. 

The Bankruptcy Court rejects this argument because:

• Evidence shows why such a reserve is necessary—to protect against cash shortfalls caused by, (i) the cyclical nature of insurance reimbursements, and (ii) the constant need of cash for payroll and other expenses; and
• Payments of insider administrative claims, well in excess of $20,000, are deferred until after the plan term ends—such amounts could have been deducted in the disposable income projection . . . but aren’t.

Legislative Purpose

The Bankruptcy Court adds this: absent express guidance in the Bankruptcy Code on length of a plan term, legislative history is instructive. 

Such history includes the following:

• The purpose of Subchapter V is to “streamline the bankruptcy process by which small businesses debtors reorganize and rehabilitate their financial affairs”;
• Prior efforts in Congress to help small business reorganize (e.g., BAPCPA in 2005) are insufficient—though small businesses “form the backbone of the American economy,” they have limited longevity and difficulty reorganizing;
• Congress enacted Subchapter V to help small business debtors reorganize in a timely, cost-effective manner—as a benefit to many stakeholders, including owners, employees, suppliers, customers, and others who rely on that business; and
• Such history suggests that a plan term of 3-years is more reasonable than a 5-year term, absent unusual circumstances.

Resolution

Applying the foregoing to the facts of this case, Judge Hanan resolves the dispute with these conclusions:

• The 3-year plan term, in this case, achieves an appropriate balance among competing interests by (i) providing outpatient health care for urgent needs, while (ii) deferring payment of administrative claims to insiders, and (iii) committing to pay at least its projected disposable income;
• Imposing a 5-year plan term would tip the balance unevenly toward creditors, by further deferring repayments and full salary restoration to key staff;
• A 5-year plan would also mean keeping a lower-than-desirable ceiling on employee rewards for an additional 24 months, potentially jeopardizing employee retention;  
• Forcing Debtor to assume the risks of a 5-year plan is not in the interest of Debtor’s patients;
• A longer term might seem to generate higher payments to unsecured creditors, but risks inherent in a longer term could defeat the creditors’ desire for a greater recovery;
• Debtor’s 3-year term is fair and equitable, as it properly balances the risks and rewards for all stakeholders; and
• In these circumstances, the Court declines to fix a longer plan period—as drafted, the plan complies with the disposable-income requirement of § 1191(c)(2)(A).

Conclusion

Here’s a “thank you” to Judge Hanan for the Urgent Care opinion on how to “fix” the term of a Subchapter V plan, under § 1191(c)(2)

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.