By: Donald L Swanson
Congressional action on raising the debt limit for Subchapter V eligibility back to $7.5 million (see this link) puts a new focus on the details of that eligibility issue and how the debt limit is computed.
An opinion on the subject is The Reed Action Judgment Creditors v. Alecto Healthcare Services, LLC, Case No. 25-1853 (3rd Cir., decided July 28, 2026). This opinion from the U.S. Third Circuit Court of Appeals:
- affirms a ruling by the U.S. District Court of Delaware[fn. 1] that the Debtor is eligible for Subchapter V relief; and
- affirms a Delaware Bankruptcy Court ruling[fn. 2] to the same effect.
What follows is a summary of the Reed v. Alecto opinion on the debt limit issue.
Facts
Debtor is a holding company for healthcare-related entities: it forms subsidiaries to acquire acute care hospitals and to provide management services for other hospitals.
During the pandemic, reduced government funding and increased costs render Debtor’s subsidiaries insolvent.
So, Debtor files Subchapter V bankruptcy on June 16, 2023 (the “Petition Date”), at which time the debt limit for Subchapter V eligibility was $7.5 million.
Claims in Debtor’s bankruptcy total $7,890,536.14. Such total includes a $3,739,653.77 claim by LHP Creditor that is scheduled by Debtor as as both contingent and unliquidated.
Subchapter V Eligibility—$7.5 Million Debt Limit
Debtor’s Subchapter V eligibility depends on whether the claim of LHP Creditor is contingent or unliquidated:
- if such claim is either contingent or unliquidated, then Debtor is eligible for Subchapter V relief; but
- if not, then Debtor has too much debt and cannot be a Subchapter V debtor.
To proceed under Subchapter V, Debtor must have < $7.5 million in liquidated, noncontingent debts as of the Petition Date. Back in June of 2023,[fn. 3] a Subchapter V “debtor” is defined in § 1182(1)(A) a
- “a person . . . that has aggregate non-contingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . in an amount not more than $7,500,000.”
Debtor’s Debts
Debtor’s Schedule of Assets and Liabilities in the bankruptcy:
- lists liquidated, noncontingent claims totaling $3,445,535.47; and
- lists LHP Creditor’s $3,739,653.77 claim as both “unliquidated” and “contingent.”
So, if LHP Creditor’s claim is unliquidated or contingent, then Debtor meets the $7.5 million debt limit for Subchapter V eligibility. But if not, then Debtor has too much debt for Subchapter eligibility
LHP Creditor’s claim arises from a 2014 transaction in which:
- LHP Creditor sells membership interests in a Texas medical facility to Debtor and Debtor’s Affiliate;
- Affiliate agrees to pay amounts that LHP Creditor will owe to a landlord for leased space in a medical office building; and
- Debtor guarantees Affiliate’s obligation.
Under Affiliate’s lease, the amount due fluctuates monthly because non-base rent charges vary and are only estimates before the end of the year.
After Affiliate and Debtor fail to make lease payments, LHP Creditor sues Debtor and Affiliate in state court in 2021 for breach of contract.
Before Debtor files bankruptcy, Debtor and Affiliate reach a Settlement with LHP Creditor, agreeing that payments “may continue to accrue” under the lease and that:
- LHP Creditor “shall make written demand upon” Defendant and Affiliate “for a specified amount”; and
- Debtor and Affiliate “shall make payment of the specific amount within fifteen (15) days of such demand.”
But LHP Creditor fails to make any demand for payment before the Petition Date.
Bankruptcy Court Ruling
Creditors challenge Debtor’s Subchapter V eligibility, asserting that LHP Creditor’s claim is neither contingent nor unliquidated and, therefore, must be included in the $7.5 million debt limit calculation.
The Bankruptcy Court finds that LHP Creditor’s claim is both contingent and unliquidated as of the Petition Date, because Debtor did not receive a demand for payment before the Petition Date—and, thus, had no way of calculating the debt.
So, the amount of LHP Creditor’s claim cannot be included in the debt limit computation, and Debtor is eligible to proceed under Subchapter V
Third Circuit Affirms
To proceed under Subchapter V, Debtor must have less than $7.5 million in liquidated, noncontingent debt as of the Petition Date (§ 1182(1)(A), as of June 2023).
Thus, the Third Circuit must decide whether LHP Creditor’s claim is contingent or unliquidated as of the Petition Date.
According to the Third Circuit, the Bankruptcy Court:
- correctly concluded that LHP Creditor’s claim is both contingent and unliquidated, and
- properly rejected the objection to Debtor’s Subchapter V eligibility.
Here’s why.
–Contingent Claim
LHP Creditor’s claim is contingent as of the Petition Date.
A claim is contingent when the debtor’s obligation to pay does not come into being until some future event occurs, even if the parties could have predicted the event when their relationship began.
Conversely, when the duty to pay does not rest upon a future event, the claim is not contingent.
Here, the Settlement terms require LHP Creditor to “make written demand upon” Debtor before any payment is due. And LHP Creditor did not make any written demand until after Debtor filed its bankruptcy petition.
Because a future event— the written demand—had not occurred as of the Petition Date, the LHP Creditor’s claim is contingent as of the Petition Date.
–Unliquidated Claim
LHP Creditor’s Claim is unliquidated as of the Petition Date.
The term “liquidated” is not defined in the Bankruptcy Code, but courts have generally held that a debt is liquidated if its amount is readily and precisely determinable.
Here, LHP Creditor’s claim was not readily and precisely determinable because Debtor had not received any invoices, and the monthly amount due under the lease fluctuated based on several factors.
In other words, Debtor had no way of knowing how much it owed to LHP Creditor prior to receiving a written demand for payment.
Accordingly, the Bankruptcy Court correctly determined that LHP Creditor’s Claim is unliquidated as of the Petition Date.
–Debtor Eligible
Because LHP Creditor’s claim is contingent and unliquidated as of the Petition Date, such claim cannot be included in the $7.5 million debt limit computation.
Accordingly, Debtor is eligible for Subchapter V relief.
Conclusion
Very interesting.
[Note: this is the first of a series of three articles on the Reed v. Alecto opinion from the Third Circuit Court of Appeals.]
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Footnote 1. The Delaware U.S. District Court ruling is: The Reed Action Judgment Creditors v. Alecto Healthcare Services, LLC (In re Alecto Healthcare Services, LLC), Civ. No. 24-494 (Lead) & Civ. No. 23-1442 (Consolidated); decided March 31, 2025.
Footnote 2. The Delaware Bankruptcy Court ruling is, In re Alecto Healthcare Services LLC, Case No. 23-10787 (decided December 4, 2023; Doc. 243).
Footnote 3. On June 21, 2024, Congress allows the $7.5 million debt limit to expire and revert back to an inflation-adjusted amount of less than $3.5 million, which reversion continues in effect until revised by a new law.
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