As many readers of our blog and emails, Congress passed a new bankruptcy law known as Subchapter V. Information about that law can be found at our blog shenwick.blogspot.com. https://shenwick.blogspot.com/2020/06/how-subchapter-v-could-save-your-small.html
New Subchapter V is similar to chapter 13 of the bankruptcy code but it can only be used by a business, not an individual.
Some creative uses of Subchapter V are to discharge repayment of a PPP loan, to reject a commercial lease which a tenant no longer wants to occupy, or to reject unfavorable agreements.
Subchapter V became effective on February 19, 2020 and several decisions have been announced by various bankruptcy courts which are favorable to Debtors.
First, if a company filed bankruptcy under Chapter 11 can they convert their case to a case under Subchapter V? Yes.
In re Progressive Solutions, Inc., No. 8:18-bk-14277-SC, 2020 WL 975464, at *5 (Bankr. C.D. Cal. February 21, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 15 months).
-In re Glass Contractors, Inc., No. 20-40185 (Bankr. E.D. Tex. February 25, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 1 month).
-In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. March 24, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V when the case had been pending 48 days).
Second, can a debtor file under Subchapter V, if the debtor is not currently engaged in business? Yes, if a majority of its debt was business debt.
-In re Wright, No. 20-01035-HB, 2020 WL 2193240, at *3 (Bankr. D.S.C. April 27, 2020) (debtor who was not currently engaged in business operations qualified as “small business debtor” where 56% of its debt amounted to residual business debt).
Third, does a Subchapter 5 Bankruptcy Trustee have the automatic right to retain counsel? No.
-In re Penland Heating and Air Conditioning, Inc., No. 20-01795-5-DMW, 2020 WL 3124585, at *_ (Bankr. E.D.N.C. June 11, 2020) (Bankruptcy Petition #: 20-01795-5-DMW) (denying Subchapter V trustee’s application to retain counsel, which was filed as a matter of course, because the need for legal representation had not arisen). A Subchapter V trustee may not retain legal counsel automatically like a bankruptcy trustee can do in a Chapter 7 case.
Clients, accountants or lawyers who have questions regarding Subchapter V should contact Jim Shenwick at 212 541 6224 or jshenwick@gmail.com
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