The U.S. Court of Appeals for the Seventh Circuit recently rejected a bankruptcy trustee’s avoidance and fraudulent transfer claims, holding that a debt purchase and sale agreement between a bankrupt debtor, its original creditor, and its new creditor was not avoidable because it did not qualify as a transfer of “an interest of the debtor in property.”

Specifically, the Seventh Circuit determined that the transaction had no effect on the bankruptcy estate and the Bankruptcy Code’s avoidance provisions played no role.

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:

The U.S. Court of Appeals for the Ninth Circuit recently reversed a contrary trial court ruling and joined with the U.S. Court of Appeals for the Tenth Circuit in holding that a Chapter 13 trustee is not entitled to a percentage fee of plan payments as compensation for her work in a Chapter 13 case when the case is dismissed prior to confirmation.

A copy of the opinion in Evans v. McCallister (In re Evans) is available at: Link to Opinion.

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:

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 U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently held that, at a minimum, a substantial change in circumstances is required to justify modification of a bankruptcy plan under Section 1229.

The Eighth Circuit BAP also determined that the bankruptcy court’s ruling that the debtors met their burden of showing an unanticipated, substantial change in circumstances was not clearly erroneous, despite multiple changes by the debtor, nor was the bankruptcy court’s finding that the fourth modified plan was feasible and confirmable.

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:

1. When should a previously successful business engage distress-debt counsel?
2. 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

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a consumer’s lawsuit against a debt collector, holding that the consumer lacked Article III standing to sue because his allegations of ʺconfusion” and “alarm” were not sufficiently concrete to result in an injury in fact.