How Does A Court “Fix” The Term Of A Subchapter V Plan? (In re Phil Kean Designs—Part 2)

The opinion is In re Phil Kean Designs, Inc., Case No. 25-07667, Middle Florida Bankruptcy Court (decided June 29, 2026; Doc. 154).

Creditors in this Subchapter V case object to the 3-year term of Debtor’s Plan and ask the Bankruptcy Court to fix a longer term.

Creditors argue that the Plan, with its 3-year term does not fully capture Debtor’s projected disposable income and pays too little to unsecured.

The Court disagrees. Here’s why.

Fixing the Term

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

In this regard:

a bankruptcy court has broad discretion in deciding whether to “fix” a term longer than three years to make the plan fair and equitable;
most courts agree that a 3-year term is the default; but
such courts disagree on when it is appropriate to extend the three-year period.

Other Cases

In one case, the Bankruptcy Court:

holds that three years is the default plan term;
rejects an “unusual circumstances” exception test to the 3-years default term in favor of a totality of circumstances analysis utilizing five factors; and
places the burden on debtor of establishing that a plan is fair and equitable, when a party objects to the length of the plan.

In another case, the Bankruptcy Court agrees with a totality of circumstances analysis but rejects the conclusion that the burden of proof is on debtor, because such a burden adds a requirement to the statute that does not exist.

Legal Standards

The In re Phil Kean Designs, Inc., Court:

agrees that a totality of the circumstances approach is appropriate; but
disagrees that the burden is on the debtor to supply evidence in support of the default plan length.

Such Court also determines that, while a debtor has the burden to establish a plan being confirmed under § 1191(b) is fair and equitable, the language of § 1191(c)(2)(A) tasks the Court with fixing a longer period when appropriate:

Debtor’s burden is to establish its devotion of projected disposable income over the life of the plan;
the statute expressly provides that the term of the plan is three years unless the Court fixes a longer period;
by providing the Court discretion and establishing three years as the default term of the plan, the statute gives no indication that debtor bears the burden of convincing the Court not to exercise its discretion to deviate from the default term; and
this Court declines to find that debtor bears the burden to prove the three-year default term is appropriate—requiring a debtor to show that the three-year default period is appropriate is beyond the statute’s requirements.

The Bankruptcy Court concludes:

three years is the default; and
in certain circumstances and using its discretion, the Court may determine whether a longer period is required to make the plan fair and equitable.

Five Factors for Totality of Circumstances

The Court will consider the totality of circumstances in deciding whether to expand the plan term beyond three years, using the following five factors that are neither exhaustive nor dispositive:

capital reserves or capital expenditures during the period of plan payments;
reasonableness of income and expenses set forth in the plan projections during the period of plan payments as compared to historical operations and operations during the post-petition, preconfirmation time period;
salary and/or other payments to insiders during the period of plan payments;
risks and consequences of a longer period of plan payments; and
any other unique or extraordinary facts specific to the case.

Courts applying these five factors, or a “totality of circumstances” approach, have declined to extend the plan beyond a 3-years term for a variety of reasons, including:

because debtor’s principal made several concessions allowing creditors to receive more within a three year term; and
because debtor did not have a reasonable likelihood of being able to make payments longer than a three-year period.

Applying the Five Factors

Applying the five factors and considering the totality of circumstances in the present case, the Court does not find a longer plan term is warranted:

the projections show no capital reserve or capital expenditure during the proposed plan term;
Debtor provides a reasonable estimate of its income and expenses during the plan term;
salaries during the plan term are reasonable;
evidence shows that Debtor anticipates a 2% annual increase in income and a 5% annual increase in health insurance expenses, both of which are reasonable assumptions;
insiders are not receiving compensation from the reorganized Debtor during the plan term; and
Debtor’s business model and revenue cycle are not unique, but instead customary for the construction industry.

Argument: Longer Term = Better Recovery

Creditors’ argument is based on a simple supposition: that a longer term will result in more payments and hence a better recovery. This argument fails for several reasons.

First, if this supposition were true here, it would be true in every case and always justify an extended plan term. Yet, § 1191(c) is drafted to require three years as the default commitment period—hence, the simple possibility of additional payments is not sufficient for the Court to extend a plan term.

Second, based on the evidence in this case, the Court cannot find a longer plan term will necessarily result in greater recovery. Debtor has market uncertainty. Evidence shows, for example, that the bankruptcy filing has negatively impacted Debtor’s business, including causing Debtor to lose a potential $10 million contract. Extending the Plan term carries risks considering the business uncertainties.

Accordingly, the Court finds that Debtor’s three-year Plan meets the “fair and equitable” standard under § 1191(b), and that no unusual circumstances exist to justify extending the plan term.

Conclusion

Very interesting!

[Note: This is the second of two articles on the In re Phil Kean Designs, Inc., opinion.

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