642 B.R. 345
Bankr. D.C.2022Background
- Debtor National Small Business Alliance, Inc. filed Chapter 11 and elected Subchapter V/small business status on Jan. 31, 2021.
- The case was highly contested and prolonged: dispossession of the Debtor, over 300 docket entries, extensive litigation between two active creditors, and the Debtor filed five plans (ending with a Fifth Amended Plan).
- A three‑day evidentiary hearing on confirmation and related motions occurred in March 2022; the Court denied confirmation of the Fifth Amended Plan.
- The Court found the proceedings neglected the interests of the Debtor’s paying members (the estate’s primary asset) and that management had acted so as to require removal from operational control.
- The Court concluded revocation of the Subchapter V and small‑business designations was appropriate, ordered the case to proceed under standard Chapter 11, and directed appointment of a Chapter 11 trustee (trustee appointed April 22, 2022).
Issues
| Issue | Debtor's Argument | Creditors/UST/Movants' Argument | Held |
|---|---|---|---|
| Whether a court may revoke a debtor’s post‑petition Subchapter V election | Election should remain unless statutory bar; debtor can proceed under Subchapter V | Court can require amendment of petition to revoke election where circumstances warrant | Court held it has authority to order revocation and require amendment of the petition to revoke Subchapter V status |
| Whether this debtor may continue under Subchapter V given delay and conduct | Debtor urged continued Subchapter V treatment to preserve streamlined process | Movants argued delay, litigation focus, and failure to propose a confirmable plan defeat Subchapter V’s objectives | Court held Debtor cannot proceed under Subchapter V due to failure to meet Subchapter V goals and deadlines |
| Whether dismissal or conversion under §1112 is appropriate | Debtor opposed dismissal/conversion, arguing members’ services would be lost | Movants sought relief under §1112 for cause given extended pendency and inability to confirm a plan | Court found neither conversion to Chapter 7 nor dismissal served creditors’ or estate’s interests and declined both |
| Whether appointment of a Chapter 11 trustee and revocation of small‑business designation are warranted | Debtor opposed trustee appointment and loss of managerial control | Movants/UST sought trustee given mismanagement, alter‑ego findings, and the need to protect the members/estate | Court appointed a Chapter 11 trustee, revoked Subchapter V and small business designations, and directed amendment of the petition |
Key Cases Cited
- In re Serendipity Labs, Inc., 620 B.R. 679 (Bankr. N.D. Ga. 2020) (addresses post‑petition election/eligibility to proceed under Subchapter V)
- In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020) (treats differences between Subchapter V and standard Chapter 11 and petition amendment issues)
- In re Peak Serum, Inc., 623 B.R. 609 (Bankr. D. Colo. 2020) (discusses mechanics of electing Subchapter V post‑petition)
- Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020) (clarifies election by amending petition rather than conversion)
- In re Ventura, 615 B.R. 1 (Bankr. E.D.N.Y. 2020) (examines Subchapter V eligibility questions)
- Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392 (1st Cir. 2002) (describes limits on §105(a) equitable authority)
- In re Red River Energy, Inc., 409 B.R. 163 (Bankr. S.D. Tex. 2009) (uses §105(a) to achieve results required by the Code)