A Debtor Makes an Election to Proceed under Subchapter V, and the Court Promptly Dismisses

Some debtors with a pending Chapter 11 have made a small business election later in the case; others have opted to dismiss, refile their Chapter 11, and make the election upon refiling. It's a tactical decision. Here's a case that gives the practitioner some food for thought.

The SBRA is a great resource to assist a distressed business, but it imposes deadlines to keep the case moving expeditiously.  For example, a plan must be proposed within 90 days of the order for relief.  When a debtor has a case pending and later elects to proceed under Subchapter V, we have seen courts reset the deadlines.  See, e.g., In re Twin Pines, LLC, No. 19-10295-j11, 2020 Bankr. LEXIS 1217 (Bankr. D.N.M. Apr. 30, 2020); In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020); In re Bello, 613 B.R. 894 (Bankr. E.D. Mich. Mar. 27, 2020).  However, a recent decision from the Southern District of Florida shows that this outcome is not a given—the court dismissed the case because the deadlines had already passed when the election was made.
 
In In re Seven Stars on the Hudson Corp., No. 19-17544-SMG, 2020 Bankr. LEXIS 2106 (Bankr. S.D. Fla. Aug. 7, 2020), the debtor's Chapter 11 was pending for about a year before the debtor made its Subchapter V election.  Subchapter V, however, requires a debtor to file a plan not later than 90 days after the order for relief (§1189(b)), and it requires the court to hold a status conference not later than 60 days after the order for relief (§ 1188(a)).  In Seven Stars, the order for relief was entered on June 5, 2019.  Thus, upon amending its petition to elect to proceed under Subchapter V more than a year into its case, the debtor immediately put itself in default of the requirements of §§ 1188(a) and 1189(b).
 
After making the election, the court dismissed the case because the deadlines had already passed and the debtor failed to show cause for extending them.  The court noted that, to extend the deadlines, the debtor must show “circumstances for which the debtor should not justly be held accountable.”  The court stated:
  
Where a debtor elects to proceed under Subchapter V after the statutory deadlines have passed, it cannot be said that the need for an extension of these deadlines is attributable to circumstances for which the debtor should not justly be held accountable. The debtor should justly be held accountable for these circumstances; the debtor made this election after the deadlines expired. That decision by a debtor should not foist upon creditors all of the added powers of a Subchapter V debtor without one of the most significant protections afforded to creditors under the SBRA — that the case proceed expeditiously.
 
Id. at *21-22.  Although the election was made more than a year of the bankruptcy petition and only three weeks after the court ruled that the debtor incurred a $130,000 administrative claim, the court did not find a lack of good faith on the part of the debtor.  The court found:
 
Where a debtor elects into Subchapter V after expiration of the statutory deadlines, however, the debtor should justly be held accountable for those circumstances, because the debtor created them. It was the debtor that made the decision to elect into Subchapter V after expiration of these deadlines. No circumstances beyond the debtor's control caused the debtor to make that decision.
 
Id. at *18-19.

Although the case has been dismissed, I suspect that the debtor will refile the Chapter 11 and make the Subchapter V election upon refiling.  ​

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