Scott Allen Keffer
MEMORANDUM OPINION AND ORDER
Pending are two motions filed by the Debtor: (1) the Motion to Convert Case From Chapter 13 Case to Chapter 11 SubChapter V (the “Motion to Convert“) [dckt. 59]; and (2) the Motion to Extend Deadlines
The Court held a hearing on the Motions on March 11, 2021 (the “Motions Hearing“). After hearing arguments from the parties, the Court continued the hearing for thirty days and stated that it anticipated issuing a ruling either in writing prior to the continued hearing or, if it required further briefing, would issue a briefing schedule.
The Court determined that no further briefing was required, and, thus, the matter is ripe for adjudication. This matter is a statutorily core proceeding under
I.
A. Factual and Procedural History
Mr. Keffer filed his Chapter 13 Petition on September 16, 2020. The Court entered the Order for Relief on the same day. In his schedules, he listed assets of $436,462.50 and liabilities of $793,780.42. In addition to his Petition and Schedules, Mr. Keffer also submitted his Chapter 13 Plan on September 16, 2020. Mr. Keffer diligently progressed through the Chapter 13 process; he objected to proofs of claim, worked with the West Virginia State Tax Department, and filed tax returns. However, the Chapter 13 Trustee continuously recommended that his Chapter 13 Plan not be confirmed, and she reported in her last recommendation (filed on January 8, 2021) that Mr. Keffer was delinquent in his plan payments and was behind $7,621.23 [dckt. 56]. In the meantime, on November 16, 2020, the Internal Revenue Service (“IRS“) filed its Amended Proof of Claim No. 5-2, which states that the IRS‘s claim totals $681,609.92.
The above-captioned case came before the Court for a Chapter 13 Plan confirmation hearing on January 14, 2021. Mr. Keffer reported at that hearing that the IRS‘s claim had increased his total liabilities such that they exceeded the debt limits for Chapter 13 cases and that he was no longer eligible for Chapter 13 relief. At the January hearing, Mr. Keffer stated his intention to convert his case to one under Chapter 11, Subchapter V of the Bankruptcy Code (“SubChapter V“). The Motion to Convert was filed on February 1, 2021, and the Motion to Extend followed shortly thereafter on February 18, 2021.
At the Motions Hearing, Mr. Keffer largely stood on his filings and simply stated that his debts were over the Chapter 13 threshold and that he wished to convert to a SubChapter V case. The Chapter 13 Trustee confirmed that Mr. Keffer‘s debts made him ineligible for Chapter 13 relief. The UST stated that it had no objection to conversion, but noted that the situation was complicated by the very tight timelines of SubChapter V plans. Additionally, the UST explained that the situation at hand is one of first impression in the Southern District of West Virginia Bankruptcy Court.
B. The Parties’ Arguments
The parties herein are largely aligned; Mr. Keffer wishes to convert to SubChapter V, and the UST‘s concerns are linked only to the extension of the case timelines following conversion. In fact, the UST stated at the Motions Hearing that it had no objection to conversion in this particular case.
In Mr. Keffer‘s Motion to Convert, he cites no legal standard, nor does he point
In its Limited Objection, the UST describes the crux of the issue here: the deadlines for SubChapter V, established by governing law, had already passed in Mr. Keffer‘s case before he filed his Motion to Convert. The UST pointed to several courts which have considered this emerging issue and noted that there is indeed a split of authority. Regardless of the differing outcomes, an important facet of the courts’ analysis in all the cases is the debtors’ requests to extend the SubChapter V deadlines. At the time that the Limited Objection was filed, Mr. Keffer had not filed a Motion to Extend, and the UST expressed concern at that deficit It requested that the Court provide guidance not only as to Mr. Keffer‘s ability to convert, but also the necessity of separate motions to extend deadlines in situations such as these.
Mr. Keffer filed the Motion to Extend in response to the UST‘s worries. He requested that the Court extend the applicable SubChapter V deadlines so that his case could be properly converted. Mr. Keffer also noted that no creditors would be prejudiced if the Court granted his Motions.
II.
A. Applicable Law
Conversion from Chapter 13 to Chapter 11 is governed by
willful failure of the debtor to abide by orders of the court, unreasonable delay by the debtor that is prejudicial to the creditors, inability to effectuate a plan, failure to timely file a plan, bad faith, and, in the case of debtors whose debts are primarily consumer debts, whether the granting of relief would be a substantial abuse.
Lester, 409 B.R. at 371 (quoting Anderson v. United States (In re Anderson), 165 B.R. 445, 448-49 (S.D. Ind. 1994)) (internal quotation marks omitted). Importantly, ”
Dismissal of Chapter 11 cases is governed by
These two sections are important because “[t]he right to convert a case . . . is not absolute,” and “a debtor should not be able to convert his case when conversion would result in immediate dismissal or reconversion.” In re Wetter, 620 B.R. 243, 249-50 (Bankr. W.D. Va. 2020) (citing Marrama v. Citizens Bank of Mass., 549 U.S. 364 (2007)). Thus, Chapter 13 debtors are only able to convert to cases in which they are eligible to be debtors.
SubChapter V was added to Chapter 11 of the Bankruptcy Code through enactment of the Small Business Reorganization Act of 2019 (the “SBRA“), which became effective on February 19, 2020. SubChapter V is an “elective Chapter for small business debtors for whom the existing provisions of chapter 11 were not providing relief.” In re Tibbens, No. 19-80964, 2021 WL 1087260, *1 (Bankr. M.D.N.C. Mar. 19, 2021) (Kahn, J.); see also In re Trepetin, 617 B.R. 841, 843 (Bankr. D. Md. 2020) (Harner, J.). It is, “by its very nature [] intended to be an expedited process” and “provides qualifying debtors with some powerful and cost-saving restructuring tools not otherwise available to Chapter 11 debtors.” Wetter, 620 B.R. 243, 251 (Bankr. W.D. Va. 2020) (Black, J.) (quoting In re Seven Stars on the Hudson Corp., 618 B.R. 333, 346 (Bankr. S.D. Fla. 2020)). The benefits of SubChapter V include:
- elimination of the absolute priority rule, which allows equity holders to retain their ownership interests without paying all creditors in full;
- no mandatory appointment of a creditors committee;
- no mandatory requirement to file a disclosure statement;
- appointment of a Subchapter V trustee to assist in developing a consensual plan, while leaving the debtor in possession of its assets and in control of its business;
- the exclusive right (which cannot be terminated) to file a plan;
- the ability to modify a claim secured only be a security interest in the debtor‘s principal residence, if new value received in connection with granting the security interest was used primarily in connection with the debtor‘s business and not primarily to acquire property;
- the ability to confirm a plan even if all classes reject the plan;
- the ability to pay administrative expenses over time under a plan;
- modification of the disinterested requirements of Section 327(a) for a professional that holds a prepetition claim of less than $10,000; and
- elimination of the requirement to pay quarterly U.S. Trustee fees . . . .
Seven Stars, 618 B.R. at 340. These powers and cost-saving provisions are “extraordinary,”
In furtherance of that creditor protection, SubChapter V blueprints several tight deadlines. It is crucial to remember that the deadlines run from the date of the order for relief in the bankruptcy case. Trepetin, 617 B.R. at 843. The date of the order for relief “is important in determining the rights and duties of the debtor and its creditors” because it “triggers a number of events and deadlines in a bankruptcy case.” Trepetin, 617 B.R. at 844-45. In converted cases, pursuant to
The first deadline is the status conference requirement: “not later than 60 days after the entry of the order for relief under this chapter, the court shall hold a status conference . . . .”
see also Tibbens, 2021 WL 1087260 at *5 (“The deadline to conduct the status conference, therefore, is a deadline for the court, rather than for the debtor,” and “[s]ubchapter V does not contain any consequence for the court‘s failure to timely conduct the status conference.“).
The second deadline governs the Plan: “the debtor shall file a plan not later than 90 days after the order for relief . . . .”
The phrase “attributable to circumstances for which the debtor should not justly be held accountable” does not appear in Chapter 11, but it is used elsewhere in the Code. Seven Stars, 618 B.R. at 344. Section 1221 uses the same language.
Two Federal Rules of Bankruptcy Procedure are also important to this decision: Rule 1009 and Interim Rule 1020 (adopted by this Court on May 21, 2020, via General Order No. 20-06). Rule 1009 states that “[a] voluntary petition . . . may be amended by the debtor as a matter of course at any time before the case is closed.” Fed. R. Bank. P. 1009(a). Interim Rule 1020 requires a debtor to state whether it is a SubChapter V debtor and whether it elects to proceed under SubChapter V. Fed. R. Bank. P. 1020 (Interim). Importantly, neither rule “prevents a small business debtor from filing an amended petition to elect to have Subchapter V apply to its case . . . .” Seven Stars, 618 B.R. at 342.
Only a handful of courts have issued opinions in like circumstances. They come down on both sides of the issue: some have allowed debtors to convert to SubChapter V notwithstanding the fact that the deadlines have passed, some have allowed conversion but have declined to extend the deadlines, and still and others have not allowed conversion at all. This Court will consider the reasoning of both perspectives.
In the Bankruptcy Court for the Southern District of Florida, Judge Scott Grossman opined that a small business debtor may not elect SubChapter V status after expiration of the statutory deadlines for the status conference and plan filing contained in
Judge Grossman first explained that, by converting so far into its case, the debtor, “upon amending its petition to elect to proceed under Subchapter V more than a year into its case, [] immediately put itself in default of the requirements of both Sections 1188(a) and 1189(b).” Seven Stars, 618 B.R. at 338-39. In addition to the SubChapter V requirements,
First reviewing Congress‘s intent in enacting SubChapter V, Judge Grossman noted that normal Chapter 11 cases can be “prohibitively expensive” and that Congress approved SubChapter V to “permit qualifying small business debtors to file bankruptcy in a timely, cost-effective manner,” which would “hopefully allow[] them to remain in business . . . .” Seven Stars, 618 B.R. at 339-40. He stated that “Congress purposefully set a short deadline for a debtor to file a plan under SubChapter V, and set a very high standard for an extension of that deadline.” Seven Stars, 618 B.R. at 345.
Addressing the plain language of the statute, Judge Grossman noted that the SBRA is silent “as to whether it applies to pending cases or only to cases commenced . . . after its effective date.” Seven Stars, 618 B.R. at 341. Noting that several recent decisions indicated that “the Court ‘has the necessary lawful power and authority to allow this case to proceed under new subchapter V,‘” Judge Grossman narrowed in on the true dilemma: “to determine whether this case should be dismissed, the Court must determine whether [the debtor] should be granted an extension of the Section 1189(b) plan filing deadline (as well as the Section 1188 status conference deadline).” Seven Stars, 618 B.R. at 343-44. It followed that, if “an extension is not warranted, then ... cause exists for dismissal under Section 1112(b)(4)(J) because the debtor has failed to file a plan within the time fixed by the Bankruptcy Code.” Seven Stars, 618 B.R. at 343-44.
Moving to the debtor‘s eligibility for an extension, Judge Grossman evaluated whether the need for the extension was “attributable to circumstances for which the debtor should not justly be held accountable.” Seven Stars, 618 B.R. at 344. In doing so, he looked to the Trepetin decision and contrasted that with his own reading. Seven Stars, 618 B.R. at 345. The Trepetin court asked “whether the debtor was responsible for his inability to meet the[] deadlines,” whereas “[t]he statute asks if the need for an extension is due to circumstances beyond the debtor‘s control.” Seven Stars, 618 B.R. at 344. Judge Grossman found himself aligned with the latter interpretation of the language. Seven Stars, 618 B.R. at 345. In Trepetin, discussed infra, the court found that the debtor was not responsible for missing the deadlines, as his Chapter 7 case and subsequent conversion caused him to violate the SubChapter V deadlines. Seven Stars, 618 B.R. at 345. Judge Grossman disagreed with that conclusion: he felt that “[t]he circumstances . . . were entirely within the debtor‘s control: he filed for Chapter 7 and he elected to convert to Chapter 11 and proceed under Subchapter V. . . . No external factors – beyond his control – contributed to his inability to comply with these deadlines.” Seven Stars, 618 B.R. at 345. Judge Grossman stated plainly that
Ultimately, Judge Grossman ruled that, although the debtor and its efforts at reorganization were severely hampered by the COVID-19 Pandemic, the debtor could not proceed under SubChapter V. Seven Stars, 618 B.R. at 347. He stated that the debtor‘s inability to meet the deadlines was not due to COVID-19, but was instead due to its own decision to proceed under SubChapter V, which does not meet the requirement that the extension be fairly attributable to circumstances for which it should not justly be held accountable. Seven Stars, 618 B.R. at 346-47. In doing so, Judge Grossman disagreed with Trepetin (and others), which had “liberally” read
The Trepetin case was decided by Judge Michelle Harner of the Bankruptcy Court for the District of Maryland on July 7, 2020. Trepetin, 617 B.R. at 841. Judge Harner framed the question before her: “[i]s the SBRA available to a debtor who first files a bankruptcy case under a chapter other than chapter 11 of the Code, but then determines that it is eligible for, and could benefit from, Subchapter V?” Trepetin, 617 B.R. at 843. In contrast to Seven Stars, she held in the affirmative and accordingly set extended deadlines for the debtor under
The debtor in Trepetin was an individual operating a small business. Trepetin, 617 B.R. at 843. He filed a Chapter 7 case in February 2020, and thereafter complied with the applicable provisions of the Code. Trepetin, 617 B.R. at 843. Although it appeared that he was on track for a Chapter 7 discharge, the debtor filed a motion to convert his case to SubChapter V on June 11, 2020, which was more than 90 days after the order for relief was entered. Trepetin, 617 B.R. at 843. He simultaneously requested that the court extend the deadlines imposed in
Judge Harner noted that the date of the order for relief is highly important in bankruptcy cases, and, is particularly so in SubChapter V cases “as the debtor is the only party who may file a plan and has only a limited amount of time to do so.” Trepetin, 617 B.R. at 845. It follows that “in a conversion situation as that before the Court, the Subchapter V case may be over before it even begins if certain deadlines cannot be extended.” Trepetin, 617 B.R. at 845.
After a discussion of
Trepetin, 617 B.R. at 846-47. In ultimately making her decision, Judge Harner stated that she would “strive to balance the[] goals of speed and access to a realistic organization scheme in applying the language of the Code to the facts of [her] case.” Trepetin, 617 B.R. at 847.
Moving to the language permitting extensions for the deadlines in
At that point, no party had accused the debtor of being dilatory or acting in bad faith in any way. Trepetin, 617 B.R. at 849. He had complied with all provisions of Chapter 7. Trepetin, 617 B.R. at 849. He was not “manipulating the timing of his original bankruptcy filing and his requested conversion in a manner that unfairly prejudiced some or all of his creditors . . . .” Trepetin, 617 B.R. at 849. Judge Harner stated that his “need for an extension appear[ed] fairly attributable to factors outside of his control, namely the conversion process and requirements of chapter 7 versus chapter 11 of the Code.” Trepetin, 617 B.R. at 850. Importantly, she noted that the analysis of whether a debtor meets the threshold for extensions of the timelines is “fact- intensive and focused on the Debtor‘s conduct and potential prejudice to creditors.” Trepetin, 617 B.R. at 850.
Judge Harner held that “the Debtor should have access to Subchapter V of the Code and has established adequate grounds to extend the deadlines . . . .” and that he “should not be held justly accountable for his inability to meet those deadlines.” Trepetin, 617 B.R. at 850. She went on to set extended deadlines for the debtor.
Another case very recently decided within the Fourth Circuit is the Tibbens case out of the Bankruptcy Court for the Middle District of North Carolina. Tibbens, 2021 WL 1087260. Judge Benjamin Kahn ruled in that case, regarding the
The Tibbens debtor filed a Chapter 13 Petition two months prior to the effective date of the SBRA. Tibbens, 2021 WL 1087260 at *2. He progressed through Chapter 13 and eventually filed a motion to sell real property free and clear. Tibbens, 2021 WL 1087260 at *2. Several parties objected, and it came out at a hearing
Tibbens, 2021 WL 1087260 at *4. The debtor withdrew his amended sale motion and filed a motion to convert his case to one under SubChapter V. Tibbens, 2021 WL 1087260 at *4. At a joint hearing on the motion to dismiss and the motion to convert, the debtor admitted inaccuracies in his schedules, testified inconsistently, and was accused of acting with a lack of good faith. Tibbens, 2021 WL 1087260 at *4. Furthermore, it was alleged that conversion would be futile because the debtor could not meet the deadlines under
The court first looked at whether conversion alone was proper and considered whether it would be futile because the debtor would immediately run afoul of
Judge Kahn then explored the ramifications of conversion after expiration of the
Regarding the
Judge Kahn then moved to the issue of actually extending the deadlines under SubChapter V. Tibbens, 2021 WL 1087260 at *8. He noted that it was indeed necessary to extend the deadlines because the
B. Analysis
This Court, having reviewed both approaches to late SubChapter V conversions, believes that her sister bankruptcy courts in the Fourth Circuit (namely, the Middle District of North Carolina and the District of Maryland) provide the superior analysis of the present situation. This Court, frankly, cannot endorse such a restrictive view of the applicable law as is counseled by the court in Seven Stars. However, inasmuch as none of the cases studied have followed exactly the same analytic pattern, and none have articulated any kind of step-by-step basis upon which to evaluate motions to convert filed after the deadlines in
Initially, the Court will inquire as to whether conversion is appropriate under
In the instant case, Mr. Keffer qualifies for conversion under
willfully failed to abide by Court orders, there are no allegations that he has engaged in dilatory tactics, he has not been accused of acting in bad faith, and there is no contention that granting conversion would be a substantial abuse of the Bankruptcy Code.
This Court also sees no impediment to conversion following the application of
With regards to
III.
It is a brave new world for bankruptcy courts following enactment of the SBRA. SubChapter V is a valuable tool for qualifying debtors and will facilitate reorganizations that were not possible before. Yes, it would have been helpful for Congress to provide some guidance with respect to conversion from other bankruptcy chapters, but the drafters of our laws cannot be rightfully expected to think of every single esoteric possibility when undertaking their responsibilities. So, it is up to the courts to interpret those laws as best they can when confronted with unanticipated fact patterns.
Here, Mr. Keffer filed a Chapter 13 case because he needed bankruptcy protection. His debts ended up crossing the threshold from Chapter 13 to Chapter 11 eligibility mere months after his petition was filed because the IRS submitted a larger-than-anticipated proof of claim. Mr. Keffer promptly moved to convert his case to one under SubChapter V, and the only concerning issue was the timeliness of his motion because the SubChapter V deadlines had already passed. Having analyzed decisions from the few courts faced with this specific issue, this Court has chosen to take the same course of action as her sister courts and allow conversion. Accordingly,
IT IS ORDERED that Mr. Keffer‘s Motion to Convert be, and is hereby, GRANTED.
IT IS FURTHER ORDERED that Mr. Keffer‘s Motion to Extend be, and is hereby, GRANTED.
IT IS FURTHER ORDERED that the Clerk of Court shall issue the customary Operating Order for Debtors Electing SubChapter V. The deadlines in