Trinity Family Practice & Urgent Care PLLC
IT IS HEREBY ADJUDGED and DECREED that the below described is SO ORDERED.
Dated: May 24, 2024.
UNITED STATES BANKRUPTCY JUDGE
MEMORANDUM OPINION AND FINAL ORDER DENYING CONFIRMATION OF DEBTOR‘S SUBCHAPTER V PLAN AND SETTING DEADLINE FOR DEBTOR TO FILE AN AMENDED PLAN
This subchapter V bankruptcy case regarding a relatively small medical clinic in Odessa, Texas, requires the Court to decide an important issue regarding the time period for plan payments in a nonconsensual subchapter V plan under
Trinity Family Practice & Urgent Care, PLLC (the “Debtor“) seeks confirmation of its First Amended Chapter 11 Subchapter V Plan (the “Plan” or “Debtor‘s Plan” at ECF No. 73). The Plan is nonconsensual and the Debtor seeks confirmation under
American Momentum Bank (the “Bank“) voted against the Plan and also filed an objection to the proposed three-year period of plan payments. First, the Bank asserts that the three-year period of plan
The Debtor contends that the three-year period of payments set forth in the Plan is (1) proposed in good faith, (2) “fair and equitable,” and (3) consistent with the intent of Congress to create a quick, efficient reorganization process that would allow the Debtor to obtain a discharge as soon as possible. The Debtor further argues that the proposed three-year period of plan payments properly balances the interests of the Debtor as well as the Debtor‘s employees, customers, and creditors. In support of its argument, the Debtor relies primarily on the bankruptcy court‘s opinion in In re Urgent Care Physicians.5
I. ISSUES PRESENTED
The first issue is whether the Debtor‘s three-year period of plan payments is proposed in good faith and not by any means forbidden by law as required by
The second issue is whether a subchapter V plan that provides for payment of all of the Debtor‘s projected disposable income to creditors for a period of three years is fair and equitable under
II. HOLDING
After considering the evidence presented and legal arguments of the parties, and for the reasons discussed below, the Bank‘s objection that the Plan is not proposed in good faith under
Finally, the Court finds that the Debtor should be granted leave to file an amended
III. JURISDICTION AND VENUE
The Court finds that it has jurisdiction over this matter under
IV. PROCEDURAL HISTORY AND FACTUAL FINDINGS7
The Debtor is a health care related business that started operations in May 2018 and operates a small family health urgent care clinic business in Odessa, Texas.8 Jason Payne and Laura Payne own and operate the Debtor as its managing members. Jason Payne owns 51% of the Debtor, and Laura Payne owns 49% of the Debtor.9 Both Jason Payne and Laura Payne will remain managing members and retain their ownership interests post-confirmation.10
The Debtor filed its voluntary petition under chapter 11, subchapter V of the Bankruptcy Code11 in the United States Bankruptcy Court for the Western District of Texas, Midland Division on June 23, 2023 (the “Petition” at ECF No. 1).
Concurrent with the filing of the Petition, the Debtor filed several financial statements and pleadings including a Statement of Operations,12 Cash Flow Statement,13 Balance Sheet,14 Motion to Use Cash Collateral,15 and Motion for Entry of an Order Authorizing Payment of Pre-Petition Wages in the Ordinary Course of Business.16 On July 20, 2023, the Court entered orders (1) authorizing the Debtor to pay pre-petition wages,17 (2) approving the Debtor‘s budget,18 and (3) authorizing
The Debtor has several W-2 employees, as well as separate independent contractors, that provide services.20 The Debtor‘s principal, Jason Payne, is a licensed nurse practitioner and a W-2 employee of the Debtor.21 Prior to bankruptcy and during the post-petition, pre-confirmation period, Jason Payne received bi-weekly wages of approximately $1,923.00.22 Jason Payne testified at the confirmation hearing that he became a licensed nurse practitioner after the filing of the Petition.
The Debtor requested that the Court confirm its Plan as a nonconsensual plan under
The Debtor‘s Plan included projections of gross income, expenses, and operating income for the next three years which the Court considered in support of the Plan.24 The Plan projections show total revenue as follows:
Total Revenue in Year One of Plan Payments: $1,055,360.00
Total Revenue in Year Two of Plan Payments: $1,065,913.60
Total Revenue in Year Three of Plan Payments: $1,076,572.74
The Plan projections further show total expenses over the three-year term of payments as follows:
Total Expenses in Year One of Plan Payments: $1,020,114.84
Total Expenses in Year Two of Plan Payments: $1,030,589.59
Total Expenses in Year Three of Plan Payments: $1,041,166.0825
Based on the revenue and expenses listed above, the projected net operating income (“NOI“), annual Plan payment (including payments to both the secured and unsecured claims), and remaining cash are as follows:
| | Annual Plan Payment | Remaining Cash | |
|---|---|---|---|
| Year One of Plan | $35,245.16 | $34,435.36 | $809.80 |
| Year Two of Plan | $35,324.01 | $33,490.44 | $1,833.57 |
| Year Three of Plan | $35,406.65 | $33,490.44 | $1,916.2126 |
At the confirmation hearing on December 11, 2023, the Debtor offered no evidence of the basis or methodology that it utilized in calculating projected income and expenses during the three-year period of plan payments. The Debtor offered no evidence of the Debtor‘s historical revenue or expenses even though the Debtor has been in operation since May 2018.27 The Debtor‘s schedules, which were signed by Jason Payne under oath, show gross revenue in 2021 of $1,407,787.00, gross revenue in 2022 of $1,203,604.01, and gross revenue as of June 23, 2023 (the petition date) in the amount of $408,513.67.28 No evidence was offered to explain why gross revenue was higher in 2021 and 2022 or why gross revenue appeared to be trending down through June 2023. There was also no evidence or explanation offered to compare the historical revenues and expenses to the Plan projections.
The monthly operating reports for June 2023 through October 202329 were used as confirmation exhibits but no evidence or explanation was offered to show how the monthly operating reports support the Plan projections and the proposed three-year period of plan payments. The Debtor‘s principal, Jason Payne, testified that expenses increased in the Plan projections compared to the Debtor‘s post-petition, pre-confirmation budget largely because the Debtor has been operating on an “extremely lean budget” since the Petition date. Mr. Payne also testified that the increase in expenses in the Plan projections is attributable to (1) an increase in advertising, (2) the Debtor‘s intent to expand services, (3) marketing to the local college, and (4) providing other services for college students and younger families. Mr. Payne further testified that the Debtor intends to hire a back-up nurse practitioner for when he is unavailable which will be an additional expense. Finally, Mr. Payne testified that he became licensed as a nurse practitioner after the filing of the Petition and his new license—combined with his increased involvement—warrants his increased salary set forth in the Plan projections.
The Debtor‘s assets include cash on hand, accounts receivable, office furniture, and equipment. The liquidation analysis attached to the Plan shows that unsecured creditors would receive nothing in a liquidation.30
Class 4 of the Plan estimates total unsecured claims in the amount of $472,698.64.36 The Plan proposes to pay Class 4 unsecured claims approximately 8.2% of the estimated total claims.37 The Plan provides that payments will be made in thirty-six estimated monthly payments of $1,076.72 each, for a total of $38,761.29 paid to the unsecured class over the three-year period of the Plan.38 Under the Plan, the Bank will receive $22,970.76 (or 8.2%) of its $280,131.18 allowed claim over the three-year period. The Bank voted against the Plan in both Class 3 and 4.39
The Bank timely filed an objection to confirmation of the Plan.40 The Bank‘s objection first addressed numerous questionable expense or budget items including the following:
- Class 1 administrative expenses in the amount of $25,000 are high considering Debtor‘s counsel received a $35,000.00 retainer;41
- There is no basis or support for the values of the Bank‘s collateral or for the assets set forth in the liquidation analysis attached to the Plan;
- Salary to insiders increased from $3,235.04 per month in the budget to $7,416.00 per month in the Plan projections;
- The Plan projections call for over $10,000 per year in undefined “miscellaneous expenses“;
- The cost of accounting services increases from $1,450.00 total over the 16-week budget to $1,000.00 per month in the projections;
- Telephone and internet costs of $1,250.00 per month are in the projections, even though no such expenses were in the budget;
- Advertising expenses increase from $2,000.00 per month in the budget to
$2,500.00 per month in the Plan projections.
The Bank first asserts that the Debtor‘s increased monthly expenses in the Plan projections are excessive when compared to the Debtor‘s post-petition, pre-confirmation budget, and that these increased expenses are to the detriment of the unsecured creditor class by lowering the payment to the unsecured creditors during the three-year period of plan payments.42
Next, the Bank contends that based on the excess expenses set forth in the Plan projections—and given that the Plan only proposes to pay an 8.2% distribution to the unsecured creditor class over a three-year payment period—the Plan is not proposed in good faith and the Debtor should be required to make plan payments for a period longer than three years.43
Neither the United States Trustee nor the Subchapter V Trustee objected to the Plan. At the confirmation hearing, the Debtor and the Bank stipulated that the Bank would have a secured claim in the amount of $63,154.30 and an unsecured claim in the amount of $271,277.84. The stipulation did not resolve the Bank‘s objections under
V. LEGAL ANALYSIS
The Court‘s legal analysis and discussion will address the following:
A. Burden of Proof on Confirmation of a Subchapter V Plan
B. Confirmation of a Subchapter V Plan Generally
C. Good Faith Under
D. Determination of the Applicable Period of Plan Payments in a Nonconsensual Plan under
A. Burden of Proof on Confirmation of a Subchapter V Plan
The Court begins its analysis by determining the burden of proof for confirmation of a subchapter V plan. The Court holds that it is the Debtor‘s burden to prove by a preponderance of the evidence that a subchapter V plan (1) includes all of the contents and information required by
The Court further holds that the Debtor always has the burden of proof regarding confirmation of a subchapter V plan. At the confirmation hearing, Debtor‘s counsel suggested that because the Bank objected to the Debtor‘s proposed period of plan payments under
Based on the foregoing, the Court holds that the Debtor has the burden to show by a preponderance of the evidence that (1) the Plan was proposed in good faith and not by any means forbidden by law, and (2) the three-year period of payments proposed under the Plan is “fair and equitable.”
B. Confirmation of a Subchapter V Plan Generally
Before turning to its discussion of the good faith and fair and equitable issues
1. A subchapter V plan must include all the information required by § 1190 .
Although a disclosure statement is not required in subchapter V,48 a subchapter V plan must include the information required by
No party objected that the Debtor‘s Plan does not include the information required by
Now that the Court has determined that the Debtor‘s Plan meets the requisite requirements of a subchapter V plan under
2. A subchapter V plan must satisfy the requirements of § 1191 .
i. Consensual Plan under § 1191(a)
A subchapter V plan confirmed pursuant to
ii. Nonconsensual Plan under § 1191(b)
A subchapter V plan confirmed pursuant to
3. A nonconsensual subchapter V plan must satisfy the requirements of 11 U.S.C. § 1191(b) and (c).61
To confirm a subchapter V plan nonconsensually under
The Debtor in this case has satisfied its burden to show that there is a reasonable likelihood that the Debtor will be able to make the plan payments, and that the Plan provides appropriate remedies to protect the holders of claims or interests if the payments are not made. Thus, the remaining issues for determination by the Court are (1) whether the Debtor‘s Plan was proposed in good faith under
C. Good Faith under 11 U.S.C. § 1129(a)(3) 69
The term “good faith” is not defined in the Code.73 The Fifth Circuit has stated, “[w]here the plan is proposed with the legitimate and honest purpose to reorganize and has a reasonable hope of success, the good faith requirement of
- whether the proposed plan promotes a result consistent with the Bankruptcy Code‘s objectives;
- whether the proposed plan has been proposed with honesty and good intentions and with a basis for expecting that reorganization can be effected; and
- whether the debtor exhibited fundamental fairness in dealing with its creditors.76
Notwithstanding the foregoing factors, a bankruptcy court‘s determination of good faith is always made after considering the totality of the circumstances.77 The good faith analysis under
The second factor—whether a plan has been proposed with honest and good intentions—is generally analyzed by considering whether (1) the debtor abused the judicial process, (2) the plan was proposed for ulterior motives, or (3) there is no realistic probability for an effective reorganization.82 A plan is not filed in good faith under
With regard to the third factor—fundamental fairness—the focus is on whether the terms of the plan, the debtor‘s dealings with its creditors, and the process followed to seek plan confirmation treated all parties fairly and comported with due process.84 Making a determination of “honest and good intentions” and “fundamental fairness” often necessitates analyzing some overlapping facts, so it‘s appropriate to analyze these factors together.
There has been no evidence presented in this case that indicates that during the plan process the Debtor engaged in misconduct, made misrepresentations, failed to disclose information to the Court, proposed a plan with inaccurate or unreasonable projections, abused or misused the bankruptcy process, proposed a plan that is unfair or inconsistent with the objectives and purposes of the bankruptcy code, did not deal or negotiate appropriately and in good faith with creditors, or engaged in any other conduct that is fundamentally unfair or casts doubt on the integrity of the plan process or the Plan. To the best of the Court‘s knowledge the Debtor filed accurate schedules and monthly operating reports, and no party has asserted otherwise. The Debtor generally adhered to the rules and requirements of the bankruptcy process, and the Debtor‘s principal testified that the Plan was filed in good faith.85 Based on these facts, the Court finds that
Furthermore, the Debtor‘s proposal of a three-year plan payment period as expressly permitted under
Based on the foregoing and having examined the totality of the circumstances surrounding the plan process, the Debtor‘s conduct in proposing the Plan, and the Plan itself, the Court finds that the Debtor has satisfied its burden to show that the Plan was proposed in good faith and not by any means forbidden by law, thereby satisfying
However, a finding that the Plan was proposed in good faith and not by any means forbidden by law under
D. Determination of the Applicable Period of Plan Payments in a Nonconsensual Plan under 11 U.S.C. § 1191(c)(2)(A)
When considering an objection to confirmation of a nonconsensual plan, a bankruptcy court‘s determination of whether a proposed plan period is “fair and equitable” requires more than a mechanical, check-the-box application of the requirements of
In this case, the Debtor‘s proposed three-year plan payment period meets the minimum requirement set forth in
Relying primarily on In re Urgent Care Physicians,93 the Debtor replies and asserts that a three-year period of plan payments is the “default” period under
In the Urgent Care case, the debtor proposed a three-year plan payment period. The issue before the Urgent Care court was whether the debtor should be required to commit to plan payments longer than the three-year statutory minimum. The United States Trustee objected to confirmation and argued that the three-year plan payment period and 3% distribution to general unsecured creditors was not fair
Given these facts, the Urgent Care court then analyzed the legislative history of the Small Business Reorganization Act of 2019 (“SBRA“) and determined that “a plan term of three years is more reasonable, generally speaking (or as a default), than a five-year term, absent unusual circumstances.”97 According to the Urgent Care court, “Congress‘s concern for not only small business owners, but small business employees, customers, and others who rely on such businesses, reflects an intent to balance the shorter life-span planning of small businesses and timely cost-effective benefits to debtors, against the benefits to creditors.”98 The Urgent Care court concluded that a three-year term was the fair and equitable balance between the creditor‘s demands and the burden upon the debtor and said in pertinent part:
In this case, a three-year term achieves that balance, by recognizing that this small business that provides outpatient health care for urgent needs, has deferred partial salary payments to its insiders, has deferred some healthcare equipment payments, and has committed to paying at least its projected disposable income. Imposing a plan term of five years would tip that balance potentially unevenly toward creditors, because it would further defer repayments and full salary restoration to key staff. Moreover, deferring [equipment payments] potentially jeopardizes availability of that equipment. It also would mean keeping a lower-than-desirable ceiling on employee rewards for an additional 24 months, potentially jeopardizing employee retention. Forcing the debtor to assume such risks is not in the interest of the debtor‘s customers/patients. While at first blush the simple math of an extended plan term might seem to generate a higher payment to unsecured creditors, the inherent risks to the small business debtor of that extension could defeat the unsecured creditors’ desire
for greater recovery. The three-year term here is fair and equitable, as it properly balances the risks and rewards for both the debtor and its creditors. In these circumstances, the Court declines to fix a longer plan period.99
After careful analysis of the statutory language
First, the Urgent Care court does not discuss that it is the debtor‘s burden to show that a three-year plan is fair and equitable (or that some other plan term between three and five years is fair and equitable). The Urgent Care court‘s statement that a three-year term is generally more reasonable than a five-year term absent “unusual circumstances” suggests that the burden is on the objecting party to show “unusual circumstances” that would justify the bankruptcy court fixing a longer period not to exceed five years. This appears to impermissibly shift the burden under
Second, the Urgent Care court does not define or discuss what it means by “unusual circumstances” and does not set forth any factors that the court considered while deciding to either approve the three-year plan payment period, or if necessary, fix a longer plan payment period not to exceed five years.
This Court will pick up where the Urgent Care court left off and (1) briefly discuss the statutory language of the SBRA, (2) look to other sections of the Code for possible guidance in fixing the payment period in a subchapter V plan, and (3) summarize the factors that this Court considered in analyzing whether the three year period of plan payments in this case is fair and equitable, or if the court should fix a longer period of plan payments not exceeding five years.
1. The context of the Small Business Reorganization Act and the unique language of § 1191(c) suggests that the bankruptcy court must determine on a case-by-case basis whether a three-year plan is “fair and equitable.”
i. Brief Context of the SBRA and Subchapter V
Effective February 19, 2020, the SBRA added new subchapter V provisions101 designed to streamline the reorganization process for small business debtors and provide a fast track for small businesses
- A subchapter V trustee is appointed in every case to assist with facilitating a consensual plan.
- The court conducts a mandatory status conference within the first 60 days of the case to ascertain status including progress toward filing a consensual plan.
- A status report must be filed by the debtor prior to the status conference.
- There is no required disclosure statement or mandatory unsecured creditors’ committee (unless otherwise ordered by the court).
- Only the debtor may file a plan and it must generally do so within 90 days of the petition date.
- The absolute priority rule does not apply.
- With regard to impaired classes other than the secured class, a nonconsensual plan must provide that all of the debtor‘s projected disposable income for a three-to-five-year period will be applied to make payments under the plan.
With regard to the requirement that a subchapter V debtor must pay all of its projected disposable income to creditors over a three-to-five-year plan period in a nonconsensual plan, Congress provided no guidance or standards on how the bankruptcy court should fix the duration of a plan under
Section 1191(c)(2)(A) simply provides in pertinent part that, before a plan may be considered “fair and equitable,” the plan must “provide[] that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.”104 Based on the plain and ordinary reading of the statute, this Court agrees with the Urgent Care court that the language of
ii. Comparative Analysis of § 1191(c)(2) to other Similar Sections in the Code
The Court has reviewed and analyzed the statutory language regarding plan duration in chapter 12, chapter 13, and traditional individual chapter 11 cases under the Code, but the bankruptcy court‘s discretion to choose the period of plan payments is unique to subchapter V; thus, the statutory language and case law regarding plan payments under other chapters of the Code provides no guidance.
For example, in a chapter 12 case, a plan may not provide for payments in excess of three years unless the court, for cause, approves a longer period up to five years.107 However,
In chapter 13 cases, the bankruptcy court does not determine the plan period. Section 1325(b)(4) establishes the “applicable commitment period” as three years for a below-median debtor and five years for an above-median debtor.108 The bankruptcy court has no discretion in chapter 13, so chapter 13 and cases thereunder do not provide any help in the Court‘s interpretation of “as the court may fix” under
Finally, in a traditional chapter 11 case of an individual,
In sum, subchapter V is unique in that it gives the bankruptcy court the sole authority and discretion to fix a plan payment period longer than the baseline three-year period set by
2. The Court should consider multiple factors when evaluating whether the term of a proposed plan is “fair and equitable” under 11 U.S.C. § 1191(b) and (c) .
Based on the foregoing, this Court concludes that it has broad discretion in deciding whether the proposed term of the Plan in this case is fair and equitable under
The Court starts its analysis with the language of subchapter V. Section 1189 provides that only the debtor may file a subchapter V plan. Section
Assuming there is no objection to the proposed period of plan payments, it would likely be uncommon for the bankruptcy court to sua sponte raise the issue of the proposed period of plan payments. However, per the language used in
Since the Bank filed an objection to the Debtor‘s Plan asserting that the three-year period of payments is not fair and equitable under
- Capital reserves or capital expenditures during the period of plan payments;113
- Reasonableness of income and expenses set forth in the plan projections during the period of plan payments as compared to historical operations and operations during the post-petition, pre-confirmation time period;
- Salary and/or other payments to insiders during the period of plan payments;
- Risks and consequences of a longer period of plan payments; and
- Any other unique or extraordinary facts specific to the case.
Before analyzing each of the above factors in the context of this case, the Court wants
i. Capital Reserves or Capital Expenditures during the Period of Plan Payments
In this case, the Debtor‘s Plan projections include a “miscellaneous expense” line item in the total amount of $31,816.05 over the three-year period of the Plan. The Court construed this as a capital reserve. The Debtor stated generally that the reserve would address expense items that might arise during the term of the Plan. The Debtor offered no evidence of (1) the basis for such reserve and how it was calculated, (2) whether it historically had a capital reserve, (3) planned future equipment purchases or other planned future purchases, (4) any cyclical nature of its revenue, (5) future debt financing, or (6) specific costs and expenses in the operation of a medical clinic that are not accounted for in the Plan projections, but may arise during the period of payments under the Plan. The capital reserve amount of $31,816.05 over three years is closely scrutinized when the total distribution to unsecured creditors over the same three-year period is only $38,761.29. It may be that such capital reserve amount is reasonable in this case, but the Court does not have sufficient evidence to make that determination. Without such evidence, it appears that the Debtor is gaining the benefit of a capital reserve and potential future growth of the business at the expense of the unsecured creditor class. Accordingly, the Court is unable to find that the capital reserve is reasonable in the context of the Debtor‘s proposed three-year plan period under
Based on the foregoing, there is insufficient evidence of this factor for the Court to determine whether the three-year plan payment period is fair and equitable under
ii. Reasonableness of Income and Expenses set forth in the Plan Projections during the Period of Plan Payments as Compared to Historical Operations and Operations during the Post-petition, Pre-confirmation Time Period
The Debtor has been in business since 2018, yet offered no evidence of historical income and expenses compared to the Plan‘s projected income and expenses. The Debtor offered no evidence of the basis or methodology that it utilized in calculating projected income and expenses during the three-year period of plan payments. Mr. Payne generally testified that the Debtor operated on a lean budget in the post-petition, pre-confirmation period, but offered no specific testimony regarding the differences between the Plan projections and the actual income and expenses during the post-petition, pre-confirmation period. Mr. Payne further testified generally that
Based on the foregoing, there is insufficient evidence of this factor for the Court to determine whether the three-year plan payment period is fair and equitable under
iii. Salary and/or other Payments to Insiders during the Period of Plan Payments
The Debtor offered no evidence of historical income, payments, and/or distributions to insiders since the Debtor began operations in 2018. According to the Debtor‘s schedules, Jason Payne—the Debtor‘s principal—received approximately $3,376.22 per month in the year leading up to the Debtor‘s bankruptcy filing.117 In the post-petition, pre-confirmation period, Mr. Payne received approximately $3,235.04 a month.118 Over the three-year life of the Plan, the “Insider Payroll” expense increases to an average of $7,491.08 per month.119 In other words, Mr. Payne‘s compensation will increase by more than 100% compared to the pre-petition period if the Court approves the Plan. Mr. Payne testified that he became licensed as a nurse practitioner after the filing of the Petition and his new license—combined with his increased involvement—warrants his elevated salary in the Plan projections. However, Mr. Payne offered no evidence to establish that this is a fair market rate salary for a person of Mr. Payne‘s experience and qualifications.120
In the case before the Court, no evidence of this sort of “belt-tightening” behavior has been presented.124 In fact, the evidence before the Court is that Mr. Payne is increasing his salary as part of the Plan. A significant increase in insider pay under these circumstances suggests that this factor should weigh against a determination that the proposed three-year Plan is “fair and equitable” under
Based on the foregoing, there is insufficient evidence of this factor for the Court to determine whether the three-year plan payment period is fair and equitable under
iv. Risks and Consequences of a Longer Period of Plan Payments
Congress intended for subchapter V to make small business reorganizations easier.125 The bankruptcy courts should be conscious of this intention, but do so without unfair prejudice to the creditors. The Court should weigh the potential risks and consequences of a longer period of plan payments and in doing so properly balance the interests of the debtor as well as the debtor‘s employees, customers, and creditors. For example, if a debtor‘s management or key employees have agreed to take pay cuts for three years, the bankruptcy court should carefully evaluate whether extending the plan, and the corresponding pay cuts, would likely result in the loss of critical staff and substantially impact operations. The bankruptcy court should also consider any other facts that
For example, the debtor in the Urgent Care case was able to show the bankruptcy court that (1) a secured debt was going to mature during the three-year plan payment period, (2) the debtor‘s principal was voluntarily deferring some portion of wages during the three-year plan payment period, and (3) a related entity owned by the debtor‘s principal agreed to defer the collection of post-petition charges owed by the debtor until after the three-year plan payment period.126 These were actual, substantiated facts shown by the Debtor that weighed against a longer period of plan payments. The Urgent Care court acknowledged that the “simple math of an extended plan term might seem to generate a higher payment to unsecured creditors” but determined based on the facts of that case that a longer plan payment period would increase the risk of business failure.127
The facts in this case are distinguishable from Urgent Care. The Debtor‘s principal in this case has proposed a significant raise for himself, and the Plan‘s payroll projections for W-2 employees and 1099 contractors in months 1-12 amount to $34,965.76 per month.128 In the post-petition, pre-confirmation period, the Debtor‘s payroll for W-2 employees and 1099 contractors was approximately $28,786.92 per month.129 In other words, the Debtor‘s principal will receive a greater than 100% raise, and the Debtor will increase payments to employees and contractors by roughly 21%. While it is possible that these increases are reasonable and justified, the Debtor did not provide the Court with the necessary evidence to support that conclusion. The Court did not receive any evidence about reasonable explanations for the increases, such as inflation or increased competition in the local job market. The Court declines to assume facts not presented in evidence, and these increases were not sufficiently justified to the Court on the record at the confirmation hearing. Furthermore, unlike the Urgent Care debtor, the Debtor in this case offered no evidence of actual, substantiated risks and consequences that make business failure more likely if a three-year plan payment period is not approved.
Under this factor, the Court also considered the Bank‘s argument that the Court should fix a five-year plan payment period in this case simply because it would
Based on the foregoing, there is insufficient evidence of this factor for the Court to determine whether the three-year plan payment period is fair and equitable under
v. Any other Unique or Extraordinary Facts Specific to the Case
The last factor the Court will consider is a catch-all factor to address any unique or extraordinary facts or circumstances specific to a particular case that are not considered under one of the other factors. There has been no evidence or argument offered by the Debtor or the Bank of any unique or extraordinary facts or circumstances present in this case. Accordingly, this factor is not applicable to the Court‘s determination of whether the proposed three-year plan payment period is fair and equitable, or it should “fix” a longer plan payment period not to exceed five years under
3. The factors do not support finding that the Debtor‘s Plan is “fair and equitable” in this case.
It may very well be that the Debtor‘s proposed three-year period for plan payments in this case is fair and equitable under
VI. CONCLUSION
In conclusion, confirmation of the Debtor‘s Plan is DENIED. Based on the evidence presented and an analysis of the factors set forth above, the Court finds that the Debtor has not satisfied its burden to show that the proposed three-year duration of the Plan is “fair and equitable”
FOR THE REASONS SET FORTH HEREIN, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED AS FOLLOWS:
- The Bank‘s objection to the Plan based on a lack of good faith pursuant to
11 U.S.C. § 1129(a)(3) is OVERRULED. - The Bank‘s objection to the Plan pursuant to
11 U.S.C. § 1191(b) and(c) is SUSTAINED. - Confirmation of the Debtor‘s Plan is DENIED without prejudice.
- The Debtor is granted leave to file an amended plan on or before June 10, 2024, along with a redline comparing the amended plan to the original Plan filed at ECF No. 73.
- If the Debtor does not file an amended plan on or before June 10, 2024, then the case will be sua sponte dismissed without prejudice.
# # #
VII. APPENDIX 1 – Debtor‘s Three-Year Projected Budget
| Ordinary Income/Expense | Months 1-12 | Months 13-24 | Months 25-36 |
|---|---|---|---|
| Revenue | |||
| Total Revenue | $1,055,360.00 | $1,065,913.60 | $1,076,572.74 |
| Expenses | |||
| Employee Payroll(W-2) | $150,629.00 | $152,135.29 | $153,656.64 |
| Contractor Services(1099) | $268,960.12 | $271,649.72 | $274,366.22 |
| W2 Insider Payroll | $89,000.00 | $89,890.00 | $90,788.90 |
| Payroll Taxes | $28,000.00 | $28,280.00 | $28,562.80 |
| Medical Disposal/ Shredding | $5,000.00 | $5,050.00 | $5,100.50 |
| Office Rent/Lease | $86,625.24 | $87,491.49 | $88,366.41 |
| Utilities (Electricity and Water) | $23,140.00 | $23,371.40 | $23,605.11 |
| Inventory Purchases | $165,815.00 | $167,473.15 | $169,147.88 |
| Equipment (Maintenance) | $2,640.00 | $2,940.00 | $3,240.00 |
| Scrubs | $2,500.00 | $2,525.00 | $2,550.25 |
| Training | $2,200.00 | $2,222.00 | $2,244.22 |
| Insurance (Auto, Gen Liability & Workers Comp) | $30,523.48 | $30,828.71 | $31,137.00 |
| Telephone and Internest | $15,000.00 | $15,150.00 | $15,301.50 |
| Permits/Taxes/Licensing | $2,782.00 | $2,809.82 | $2,837.92 |
| CPA | $12,000.00 | $12,120.00 | $12,241.20 |
| Staff Meals | $4,800.00 | $4,848.00 | $4,896.48 |
| Office Supplies | $13,000.00 | $13,130.00 | $13,261.30 |
| Website/Software | $65,000.00 | $65,650.00 | $66,306.50 |
| Advertising | $30,000.00 | $30,300.00 | $30,603.00 |
| Medical Director | $12,000.00 | $12,120.00 | $12,241.20 |
| Misc Expenses | $10,500.00 | $10,605.00 | $10,711.05 |
| Total Expense | ($1,020,114.84) | ($1,030,589.59) | ($1,041,166.08) |
| Net Operating Income | $35,245.16 | $35,324.01 | $35,406.65 |
| PLAN PAYMENTS | |||
|---|---|---|---|
| Claim | Months 1-12 | Months 13-24 | Months 25-36 |
| Priority Claims | |||
| Ector CAD | $944.92 | ||
| Secured Claims | |||
| American Momentum Bank | $20,569.80 | $20,569.80 | $20,569.80 |
| Allowed General Unsecured Claims | |||
| Allegran Inc | $454.08 | $454.08 | $454.08 |
| American Momentum Bank fka Security Bank | $7,657.20 | $7,657.20 | $7,657.20 |
| McKesson Specialty Care Distribution | $258.48 | $258.48 | $258.48 |
| Merz North America | $197.64 | $197.64 | $197.64 |
| SBA | $4,353.24 | $4,353.24 | $4,353.24 |
| Annual Plan Payment | $34,435.36 | $33,490.44 | $33,490.44 |
| Total Remaining After Plan Payments | $809.80 | $1,833.57 | $1,916.21 |
Notes
See In re Orange Cnty. Bail Bonds, Inc., 638 B.R. 137, 146 (B.A.P. 9th Cir. 2022) (“As part of the streamlined, flexible process under subchapter V, the Bankruptcy Code sets a baseline requirement that a debtor commit three years of projected disposable income, while it also affords the bankruptcy court discretion to require more as a condition of finding a plan fair and equitable.“). Furthermore, Judge Paul W. Bonapfel in his excellent and detailed summary of the SBRA provides: “[t]he court‘s authority to fix the commitment period [under