Subchapter V of the Bankruptcy Code’s Chapter 11 is relatively new: it took effect as a new law on February 19, 2020. Accordingly, new questions continue to arise on how its terms and provisions should be applied.
A Trustee Fees Question
One Subchapter V question is this:
- When does a Subchapter V trustee’s administrative claim for fees and costs get paid?
A Regular Chapter 11 Answer
The answer in regular Chapter 11 has always been this:
Directors and officers should take note of a recent decision from the US Bankruptcy Court for the Southern District of New York concerning access to D&O insurance policy proceeds. In In re SVB Financial Group, Case No. 23-10367 (Bankr. S.D.N.Y.
When a federal court approves a [bankruptcy] plan allowing someone to put its hands into another person’s pockets, the person with the pockets is entitled to be fully heard and to have legitimate objections addressed.[Fn. 1]
Pop Quiz Question:
Does Insurer, in the following facts, have standing to object to Debtor’s Chapter 11 plan?
Debtor is in bankruptcy because of asbestos lawsuits.
Debtor proposes a Chapter 11 plan that is supported by all constituencies—except one:
In a highly anticipated decision issued on May 30, 2023, the Second Circuit Court of Appeals rendered its opinion in Purdue Pharma LP v. City of Grand Prairie (In re Purdue Pharma LP)1 approving a Chapter 11 plan’s inclusion of a nonconsensual release of creditors’ direct claims against non-debtor third parties.
This client alert describes the history of the case, identifies some of the key takeaways from the decision and outlines where other jurisdictions in the country stand on nonconsensual third-party releases.
In an anticipated decision, on May 30, 2023, the Second Circuit Court of Appeals issued its decision approving a Chapter 11 plan’s inclusion of a nonconsensual release of direct claims against non-debtor third parties. Purdue Pharma LP v. City of Grand Prairie (In re Purdue Pharma LP), No. 22-110 (2d Cir. May 30, 2023).
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
On May 2, 2023, the US District Court for the Southern District of Indiana reversed a bankruptcy court’s ruling that read limitations into the application of Bankruptcy Code Section 546(e)’s safe harbor to a stock purchase transaction. Specifically, the District Court relied on the plain language of Section 546 in determining that a chapter 7 trustee could not avoid the transfer of $24.9 million by the debtor to repay a bridge loan in connection with a financed acquisition of the debtor’s stock two years prior to its bankruptcy filing.