To prevent landlords under long-term real property leases from reaping a windfall for future rent claims at the expense of other creditors, the Bankruptcy Code caps the amount of a landlord's claim against a debtor-tenant for damages "resulting from the termination" of a real property lease.
To shield bankruptcy trustees and certain other entities from litigation arising from actions taken in their official capacity, the "Barton doctrine"—now more than a century old—provides that such litigation may be commenced only with the authority of the appointing court. The doctrine has certain exceptions, one of which—the "ultra vires exception"—was recently examined by the U.S. Court of Appeals for the Fifth Circuit as an apparent matter of first impression.
If any class of creditors under a chapter 11 plan is "impaired," the Bankruptcy Code provides that the plan can be confirmed by the bankruptcy court only if at least one impaired class of non-insider creditors votes to accept the plan. This "impaired class acceptance" requirement—stated in section 1129(a)(10) of the Bankruptcy Code—is straightforward in cases involving a single debtor, or in cases where the bankruptcy estates of several debtors are "substantively consolidated" so that the assets and liabilities of each debtor are deemed to belong to a single consolidated entity.
Corporate restructurings are not always successful for many reasons. As a consequence, the bankruptcy and restructuring laws of the United States and many other countries recognize that a failed restructuring may be followed by a liquidation or winding-up of the company, either through the commencement of a separate liquidation or winding-up proceeding, or by the conversion of the restructuring to a liquidation. Chapter 15 of the Bankruptcy Code expressly contemplates that the status of a recognized foreign proceeding may change, and that a U.S.
Section 363(m) of the Bankruptcy Code provides that the reversal or modification of an order approving a sale or lease of assets in bankruptcy does not affect the validity of the sale or lease to a good-faith purchaser or lessee unless the party challenging the sale or lease obtains a stay pending its appeal of the order.
Feasibility of a bankruptcy plan is always a tough issue.
Think about it:
- debtors are in bankruptcy because they can’t make their payments when due; and
- in bankruptcy, a debtor must propose a plan for paying creditors—that will work this time.
We now have a new plan feasibility opinion—from the Eighth Circuit BAP—that provides guidance to us all.
The Bankruptcy Code’s Subchapter V provides hope to formerly successful entrepreneurs. It’s a hope that never before existed.
I’ll try to explain.
Formerly Successful Entrepreneurs – A Historical Problem
The Bankruptcy Code became effective in October of 1979. And I’ve been practicing under the Bankruptcy Code from the beginning: licensed in 1980.
Here’s an observation that’s been true throughout my career, until enactment of Subchapter V:
Answers to these two questions can get tricky:
- When should a previously successful business engage distress-debt counsel?
- What is the role of the business’s general counsel once that happens?
Second Question: Role
Here’s the answer to the second question first:
The hits keep coming for student loans in bankruptcy.
This time the hit is this:
- student loans for attending medical school do not qualify as “commercial or business” loans for Subchapter V eligibility.
The central finding, for a medical student who worked as an employee for ten years before becoming an entrepreneur, is this:
- “the gap between incurring the debt and actually engaging in . . . commercial or business activity as an owner is simply too great.”
Background
Is a debtor “engaged in commercial or business activities” for Subchapter V eligibility?
Such question has been addressed on many occasions and by many courts.
The trend seems to be toward a conclusion that the nature and quantity of “commercial or business activities” required for Subchapter V eligibility is this:
- Nature = “easily met”; and
- Quantity = “not much.”
The latest opinion to confirm the trend is In re Robinson, Case No. 22-2414, Southern Mississippi Bankruptcy Court (issued April 17, 2023; Doc. 90).