BANKRUPTCY CORNER
BANKRUPTCY CORNER
Adventures in Sub V Eligibility
JASON S . RIGOLI
Subchapter V of Chapter 11 ( 11 U . S . C . §§ 1181-1195 ) has become a widely used and effective tool in the toolbox of debtors ’ lawyers representing small business or their principals . Currently , eligibility for a Subchapter V is :
subject to subparagraph ( B ), means a person engaged in commercial or business activities ( including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate ) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $ 7,500,000 ( excluding debts owed to 1 or more affiliates or insiders ) not less than 50 percent of which arose from the commercial or business activities of the debtor …
11 U . S . C . § 1182 ( 1 )( A ). Burden of Proof
There is no statute or rule of procedure addressing who carries the burden for eligibility , but the majority position is that a debtor bears the burden of proving its eligibility for subchapter V . See In re
Carter , Case No . 23-54816-JWC , 2023 Bankr . LEXIS 30 at * 5-6 , 2023 WL 9103614 ( Bankr . N . D . Ga . Dec . 13 , 2023 ) ( citations omitted ).
Future Rent Payments
Two recent opinions come down on opposite sides of how future lease payments are to be treated .
In In re Macedon Consulting , Inc ., 652 B . R . 480 ( Bankr . E . D . Va . 2023 ), the debtor had aggregate , uncapped lease obligations of $ 14,390,820 . Id . at 482 . The debtor filed its voluntary petition under Subchapter V , and simultaneously a motion to reject the leases , and its plan of reorganization . Id . at 484 . The landlords objected based upon eligibility . The court ruled that the debtor became obligated to repay all the future rent obligation upon the execution of the lease and , therefore , the obligation was not contingent . Id . at 485-86 ( citing In re Parking Mgmt ., 620 B . R . 544 ( Bankr . D . Md . 2020 ) ( determining whether a debt is “ contingent ” depends on whether " all of the events necessary to give rise to liability [ took ] place prior to filing the petition ," or whether " liability relies on some future extrinsic event which may never occur .")).
Rejecting the holding in Macedon , the Bankruptcy Court for the Southern District of New York concluded that “ a debtor ' s future payment obligations under its unexpired leases and executory contracts should rarely , if ever , be counted toward the subchapter V debt cap .” In re Zhang Med . P . C ., 2023 Bankr . LEXIS 2847 at * 2 , 655 B . R . 403 ( Bankr . S . D . N . Y ., Nov . 30 , 2023 ).
The Zhang court declined to extend Macedon because an unexpired lease or executory contract “ represents both an asset … and … a liability [].” Id . at * 13
( citing Mission Products Holdings , Inc . v . Tempnology , LLC , 139 S . Ct . 1652 , 1658 , 203 L . Ed . 2d 876 ( 2019 ) ( internal quotation marks omitted )). As an unexpired lease or executory contract , the debtor can assume or reject the lease or contract and such a decision by the debtor could affect whether such contract or lease could even be considered a “ debt .” Id . at * 14 . Rejection gives rise to a prepetition “ rejection damages ” claim which is capped by 11 U . S . C . § 502 ( b )( 6 ). Id . at * 14 . Assumption gives the counterparty an administrative expense claim , which the Zhang court questioned whether such a claim even constitutes a “ debt .” The Zhang court continued and discussed how such debts could be contingent and / or unliquidated . Id . at * 15-16 .
Depending on which side a Court comes down will have a major impact on eligibility for debtors in subchapter V .
Affiliates Section 1182 of the Bankruptcy Code specifically excludes as a debtor under Subchapter V “( i ) any member of a group of affiliated debtors under this title that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $ 7,500,000 ( excluding debt owed to 1 or more affiliates or insiders ).” 11 U . S . C . § 1182 ( 1 )( B )( i ).
Under 11 U . S . C . § 101 ( 2 )( B ), “ affiliate ” is defined as a “ corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned , controlled , or held with power to vote , by the debtor . . . .” ( Emphasis added ).
In In re Carter , supra , the court had to consider the eligibility of an individual whose two corporate entities were debtors in long-standing chapter 7 bankruptcies with combined aggregate debts of more than $ 7.5 million . 2023 Bankr . LEXIS 30 at * 3-4 . The individual debtor owned 65 % and 99 % of the two corporate debtors . Id . at * 4 .
The individual debtor cited the SEC regulation , 17 C . F . R . § 230.405 , for the definition of “ voting security ” and argued that the Debtor ’ s being in chapter 7 meant that his “ voting ” power was illusory because it was usurped by the chapter 7 trustee in each of the corporate cases . The Court disagreed and ignored the SEC regulation and held that the plain language required the court to consider the long defunct entities as affiliates and therefore the aggregate debt exceeded the eligibility limit . Id . at * 7-20 .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
PBCBA BAR BULLETIN 9