Becoming Eligible For Subchapter V By A Retroactive Change In the New Law (In re Phenomenon)

Making adjustments?

By: Donald L Swanson

On June 21, 2022, Congress and the President (i) extend the $7.5 million debt limit for Subchapter V eligibility, and (ii) adjust other Subchapter V rules.[Fn. 1]

One of the adjustments is this:

  • formerly, an “affiliate” of any corporation did not qualify for Subchapter V; but
  • now, only an “affiliate” of a publicly-traded corporation does not qualify for Subchapter V.

The significance of such an adjustment is shown by two opinions (a recent opinion and a former opinion) from the same bankruptcy case: In re Phenomenon Mktg. & Entm’t, LLC.[Fn. 2]

Old Law Applied

On January 1, 2022, the In re Phenomenon Debtor files bankruptcy under Subchapter V.

On April 28, 2022, the Bankruptcy Court, (i) declares Debtor ineligible for Subchapter V, and (ii) orders Debtor’s case to proceed under regular Chapter 11 (see summary of the first opinion here).

The lack of eligibility, back then, is because:

  • any “affiliate” of an “issuer” is not eligible for Subchapter V relief;
  • an “issuer” is “any person who issues or proposes to issue any security”; and
  • Debtor is an “affiliate” of a corporation that issued stock.[Fn. 3]

In plain language: back then, an “affiliate” of any corporation is not eligible for Subchapter V relief.

New Law Applied

On June 21, 2022, the new law takes effect (see summary of new law here).  It:

  • limits the “affiliate” of an “issuer” exclusion from Subchapter V eligibility to “affiliates” of publicly-traded corporations; and
  • makes this new-and-limited exclusion retroactive—applying to all pending bankruptcy cases commenced “on or after March 27, 2020.”  

On July 5, 2022, Debtor files a Motion to reinstate its status as a Subchapter V debtor (Doc. 206), arguing:

  • “The Court’s [prior] decision regarding Debtor’s ineligibility was made prior to the new changes that went into effect on June 21, 2022”;
  • Under the new law, “a privately held corporation and its affiliates may file for Subchapter V bankruptcy relief”;
  • Under the new law, this new provision applies “retroactively”; and
  • “Debtor is not an affiliate of a publicly held corporation, thus it is eligible for Subchapter V status.”

A creditor objects (Doc. 209), on grounds that:

  • the Motion is an improper collateral attack on the Court’s prior, un-appealed and final order;
  • Debtor’s Motion for reconsideration is untimely under Fed.R.Bank.P. 9023 and improper under Rule 9024 (incorporating Fed.R.Civ.P. 60);
  • the new law and its retroactive application cannot affect the prior final judgment because of separation-of-powers principles; and
  • in summary, “Debtor elected to forgo an appeal” of the prior Order and “cannot now, as a matter of law, collaterally attach the [prior Order] under Rule 60(b)(6) by seeking to ‘reinstate’ its subchapter V status.”   

Bankruptcy Court Ruling

The Bankruptcy Court reinstates Debtor’s Subchapter V case.  The Court finds:

  • Debtor was not eligible for Subchapter V relief before enactment of the new law;
  • “there is no dispute that the corporations affiliated with the Debtor are not publicly-traded”;
  • Debtor “falls within” the new law’s “definition of debtors eligible” for Subchapter V; and
  • The Motion to recognize Debtor’s Subchapter V eligibility is based on retroactive changes in the new law.  

The Court declares creditor’s objection to be unfounded:

  • Objector wants Debtor in regular Chapter 11 because it is “far more difficult” to get a debtor’s plan confirmed in regular Chapter 11 than in Subchapter V;
  • The granting of Debtor’s Motion affects only future events in this ongoing case (it does not reopen a previously-concluded case) and, therefore, does not violate separation-of-powers principles; and
  • Debtor’s failure to appeal the prior Order is irrelevant because Debtor had no basis for an appeal when the prior Order was entered—its appeal deadline expired long before the new law became effective.

Conclusion

Here’s a thanks to the Central California Bankruptcy Court for clarifying what seems obvious:

  • that a debtor ineligible for Subchapter V before June 21, 2022 (as an “affiliate” of a private corporation) becomes eligible, thereafter, because of a retroactive change in the new law.

—————————-

Footnote 1.  These changes are accomplished by enactment into law of S.3823 – Bankruptcy Threshold Adjustment and Technical Corrections Act.  Details about the Act and its enactment are found here.

Footnote 2.  Both opinions are in In re Phenomenon Mktg. & Entm’t, LLC, Case No. 22-10132, Central California Bankruptcy Court: (i) the first opinion is decided on April 28, 2022, Doc. 143, and (ii) the second opinion is decided on August 1, 2022, Doc. 214.

Footnote 3.  The operative statutes are: (i) § 1182(1)(B)(iii) & § 101(2)(A) of the Bankruptcy Code, and (ii) § 78c(a)(8)&(10) of the Securities Exchange Act.

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