Illinois bankruptcy court ruled on Subchapter V plan case

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In a matter of first impression for jurisdiction, the Northern District of Illinois Bankruptcy Court ruled that a Subchapter V debtor “substantially consummated” his plan by paying less than $1,500 in distributions to creditors and, therefore, could no longer change the schedule. In re National Tractor Parts, Inc., Case No. 20-20833 (DDC) (ND Ill. June 6, 2022).

Sub-chapter V Context of the case

The Debtor, a seller of heavy equipment and diesel engine parts, confirmed a consensual plan of reorganization under Chapter 11, Subchapter V, with five classes of creditors entitled to receive distributions. The debtor made preliminary plan payments of $843.00 to class 1 and $585.20 to class 4. The debtor made no payments to other creditors, including the unsecured debt of Small Business Administration (“SBA”) Class 5 which was to receive a 5% distribution. under the scheme. After confirmation, the debtor found out that they might be eligible for an increased COVID-19 economic disaster loan from the SBA if they repaid their pre-petition SBA loan on their original terms. The Debtor filed a petition to modify the plan by reclassifying the SBA claim to a new class 7 in order to qualify for the new SBA loan. Only the American administrator opposed it.

Bankruptcy court decision

The Court concluded that the Plan had been “substantially consummated” pursuant to Section 1101(2) of the Bankruptcy Code and could no longer be amended. Section 1193(b) of the Bankruptcy Code permits modification of a confirmed consensual plan only prior to “substantial consummation”, which Section 1101(2) defines as “(A) the transfer of all or substantially all of the property offered by the plan to be transferred; (B) assumption by debtor […] in connection with the business plan or the management of all or substantially all of the assets subject to the plan; and (C) commencement of distribution under the Plan. »

The debtor, relying on In re Dean Hardwoods, Inc., 431 BR 387 (Bankr. EDNC 2010), argued that paragraph (C) required the commencement of distribution to all or substantially all of the creditors, and n was therefore not satisfied. The Illinois bankruptcy court disagreed, dissenting from Dean Hardwoods, and finding that the word “substantial” in the statute modified “consumption”, but not “distribution”, and did not require a substantial distribution. Thus, while the text of Sections 1101(2)(A) and (B) includes the language of “all or nearly all” numbering, the Court held that Section 1101(2)(C) does not require not distribution to all creditors or classes until the terms of the plan are locked in.

Take away food

The National Tractor Parts holding establishes that substantial consumption (even if distributions are “de minimis”) locks in a consensual plan and prevents modification of the plan after confirmation by Sub-Chapter V debtors. But this detention does not extend non-consensual plans (i.e. the debtor’s three to five year payment plan, which will generally only occur if the debtor’s projections turn out to be overly optimistic.

The challenge for creditors when evaluating a debtor’s plan is that they will not have the benefit of knowing whether the plan is consensual or non-consensual until the ballots have been tabulated. It is therefore difficult to predict the risk of seeing if a plan can be modified.

Therefore, when voting on the plan, creditors should assume that the plan is subject to modification by the debtor:

  • a) at any time during the payment plan period if the plan confirmation is not consensual; and

  • (b) if the plan is consensual, before Section 1102 “substantial consummation”, which, depending on the jurisdiction of the case, could also mean before any
    distributions made by the debtor.

In a jurisdiction following National Tractor, debtors will have to make their agreements with creditors even before making a de minimis distribution under a consensual plan.

Creditors should carefully review the plan’s projections, request additional information from the debtor regarding its business plan and underlying financials, and assess whether the plan offers sufficient value proposition. Projections are based on the future disposable income deposited by the debtor during the bankruptcy case and may not reflect the reality of the debtor’s financial situation after confirmation. Creditors must be satisfied that the debtor’s projections and distributions are acceptable. After voting on the plan, debtors have less leeway to modify the plan if the confirmation is consensual. This can be a perfectly acceptable outcome for most creditors and reassurance that the plan is locked in.

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