Become eligible for sub-chapter V by a retroactive modification of the new law (In re Phenomenon)

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On June 21, 2022, Congress and the President (i) extend the $7.5 million debt limit for Subchapter V eligibility, and (ii) adjust the other Subchapter V rules.[Fn. 1]

One of the adjustments is this:

  • formerly a “subsidiary” of any society did not to qualify for sub-chapter V; but
  • now, only a “subsidiary” of a listed on the stock exchange society Is do not qualify for sub-chapter V.

The importance of such an adjustment is illustrated by two notices (a recent notice and an old notice) from the same bankruptcy file: In re Phenomenon Mktg. & Entm’t, LLC.[Fn. 2]

Old law applied

On January 1, 2022, the In re Phenomenon The debtor declares bankruptcy under sub-chapter V.

On April 28, 2022, the bankruptcy court, (i) declares the debtor ineligible for subchapter V, and (ii) orders that the debtor’s case be continued under ordinary chapter 11 (see summary of the first opinion here).

The lack of eligibility, at the time, is due to the fact that:

  • any “affiliate” of an “issuer” is not eligible for the relief of sub-chapter V;
  • an “issuer” is “any person who issues or proposes to issue a security”; and
  • The debtor is an “affiliate” of a company that issued shares.[Fn. 3]

In short: at the time, an “affiliate” of any the company is not eligible for Sub-Chapter V relief.

New law applied

On June 21, 2022, the new law comes into force (see summary of the new law here). This:

  • limits the “affiliate” of an “issuer” exclusion from eligibility of sub-chapter V to “affiliates” of listed companies; and
  • makes this new and limited exclusion retroactive – applying to all pending bankruptcy cases opened “on or after March 27, 2020”.

On July 5, 2022, the debtor filed a motion to restore its status as a sub-chapter V debtor (Doc. 206), arguing:

  • “Courts [prior] the decision concerning the ineligibility of the debtor was taken before the new amendments entered into force on June 21, 2022”;
  • Under the new law, “a private company and its affiliates may file for judicial relief under sub-chapter V”;
  • Under the new law, this new provision applies “retroactively”; and
  • “The debtor is not affiliated with a public company, so it is eligible for Subchapter V status.”

A creditor opposes it (Doc. 209), on the grounds that:

  • the motion is an inappropriate collateral attack on the court’s prior, final and final order;
  • The debtor’s motion for reconsideration is late under Fed.R.Bank.P. 9023 and inappropriate under Rule 9024 (incorporating Fed.R.Civ.P. 60);
  • the new law and its retroactive application cannot affect the previous final judgment due to the principles of separation of powers; and
  • in summary, “the debtor has elected to waive an appeal” of the prior order and “cannot now, as a matter of law, attach as security the [prior Order] under Rule 60(b)(6) by seeking to ‘restore’ its Subchapter V status.”

Bankruptcy court decision

The bankruptcy court reinstates the debtor’s Subchapter V case. The Court finds:

  • The debtor was not eligible for Subchapter V relief prior to the enactment of the new law;
  • “it is undisputed that the companies affiliated with the Debtor are not listed on the stock exchange”;
  • The debtor “falls within” the “definition of eligible debtors” of the new law for sub-chapter V; and
  • The request to recognize the debtor’s eligibility for subchapter V is based on retroactive modifications of the new law.

The Court declares the opposition of the creditor unfounded:

  • The objector wants the debtor in normal Chapter 11 because it is “much more difficult” to have a debtor’s plan confirmed in normal Chapter 11 than in subchapter V;
  • The granting of the debtor’s motion only affects future events in this pending matter (it does not reopen a previously concluded matter) and, therefore, does not violate the principles of separation of powers; and
  • The debtor’s failure to appeal the previous order is irrelevant because the debtor had no basis to appeal when the previous order was issued – its time for appeal expired long before the entry into force. entry into force of the new law.

Conclusion

Here is a thank you to the Central California Bankruptcy Court for clarifying what seems obvious:

  • that a debtor ineligible for sub-chapter V before June 21, 2022 (as an “affiliate” of a private company) becomes eligible, thereafter, due to a retroactive modification of the new law.
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