Subchapter V Plan: Why Extend The Deadline And Slow The Case?!

Built for speed (photo by Marilyn Swanson)

By Donald L. Swanson

Subchapter V is supposed to be a fast process toward plan confirmation, but I don’t see that happening!

–Comment of a Bankruptcy Judge (as I recall the comment)

It’s true: (i) Subchapter V is supposed to go quickly, but (ii) it often doesn’t.

Here’s why it doesn’t: debtor attorneys often fail to push their cases forward.

Illustration

A bankruptcy court opinion, in a Subchapter V case, illustrates the problem. 

The Bankruptcy Court grants debtor’s request for a 90-days extension of the Subchapter V plan filing deadline.  Such request is based on this argument:

  • “Debtor cannot file a meaningful plan of reorganization until a final determination is made with regards to the termination of the lease.”

Say what?!

That’s simply wrong:

  • The debtor in that case could have filed a meaningful plan—at the case’s very beginning—based upon the lease termination result that debtor anticipates or hopes to achieve; and
  • That’s precisely what debtor should have done!

Seeking the delay is like driving a race car in granny gear.

A Secret?!

Here’s something that’s, apparently, a well-guarded secret:

  • The best leverage a reorganizing debtor can deploy in bankruptcy is this—filing, quickly, a plan of reorganization that has at least a fighting chance of success.

A filed plan allows debtor to move forward on offense:

  • Plan terms become the basis for negotiations;
  • The plan provides a foundation for defending against motions for relief and to dismiss; and
  • The possibility of plan confirmation, over objection, is strong leverage.

Without a filed plan, the debtor is playing defense and merely parrying attacks.

A Hard-Knocks Lesson

I learn the foregoing, many years ago, the hard way.

About a decade into my practice, I’m representing a Chapter 11 debtor—and doing what I’d seen other practitioners do:

  • File the case;
  • Defend against motions for relief and to dismiss;
  • Settle some disputes quickly; and
  • Expect to file a plan later, once additional disputes are resolved.

Meanwhile, creditor motions (for relief and to dismiss) go to trial, a couple months into the case.  We prevail at trial . . . but barely.

After announcing his decisions from the bench, the Judge turns to me and says, “When will your plan be filed?” 

I’m startled by the question because, in every Chapter 11 I’d observed, plans are filed many-months into the case: never right away.

I say, “In about 90 days.”

The Judge is obviously irritated by that and says, “You’d better get a confirmable plan on file, fast!” (emphasis was in the original).

So . . . I rack my brain (e.g., “How do we get around the absolute priority rule?”), come up with a plan, and get it written down and on file.

Then, negotiations with creditors begin in earnest . . . and are over the terms of the plan.  We concede where necessary to get the plan confirmed but dig-in on plan terms that are confirmable.

The result: plan confirmation happens quickly with a 100% favorable vote (after objections are resolved by negotiations).

I remember thinking: “Hmmm . . . that approach works!  Guess the Judge knew what he was doing in applying pressure.”

So, the hard-knocks rule is this:

  • A Chapter 11 plan (whether Subchapter V or not) should be a first-day filing, or as close to first-day as possible; and
  • Plan confirmation is to be pursued with a sense of urgency.

 Conclusion

Subchapter V is intended to be a quick process toward plan confirmation.

But a quick process can’t even begin until a plan is on file—and plan filing should occur on the first-day or as soon thereafter as possible.

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

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