In a mass-tort bankruptcy, when 95% of 120,000 creditors vote to accept a mediated plan paying over $7 billion to creditors, shouldn’t the plan be confirmed?

Subchapter V eligibility requires a debtor to be “engaged in” commercial/business activities.

Case Law Consensus

Case law consensus is that such activities must exist on the petition filing date. That means a debtor cannot utilize Subchapter V when:

• business assets are fully-liquidated;
• unpaid debts are the only remnant of the failed business; and
• prospects for resuming such activities are nil.

So . . . here’s the question: Is that the right eligibility standard?

I say, “No.”

A Hypothetical

Contrasting opinions from any court, issued a month apart, are always instructive.

And we have a new such thing—from the U.S. Supreme Court, no less, and from May and June of this year. The contrast is on this subject: whether sovereign immunities of Puerto Rico and of a federally recognized tribe are abrogated in bankruptcy.

“Were Congress to . . . intervene and expand § 524(g) beyond asbestos cases, bankruptcy would become a more suitable alternative for resolving mass tort cases. Until then, such cases will likely remain problematic under the Code in the face of creditor opposition.”

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:

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 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