In re Bonert, Case No.: 2:19-bk-20836-ER

619 B.R. 248

IN RE: Michael BONERT and Vivien Bonert, Debtors.

Case No.: 2:19-bk-20836-ER

United States Bankruptcy Court, C.D. California, Los Angeles Division.

Signed June 3, 2020

Alan W. Forsley, Los Angeles, CA, for Debtors.

Scott E. Blakeley, Blakeley LLP, Irvine, CA, for Creditor Committee.

MEMORANDUM OF DECISION AUTHORIZING DEBTORS TO PROCEED UNDER SUBCHAPTER V OF CHAPTER 11

[No hearing required pursuant to Federal Rule of Civil Procedure 78(b) and Local Bankruptcy Rule 9013-1(j)(3) ]

Ernest M. Robles, United States Bankruptcy Judge

At issue is whether the Debtors should be permitted to amend their Chapter 11 petition to elect treatment under the newly-enacted Subchapter V of Chapter 11. The Official Committee of Unsecured Creditors (the "Committee") opposes the Debtors' Subchapter V election. No other opposition to the Subchapter V election is on file.¹

For the reasons set forth below, the Committee's opposition is OVERRULED , and the Debtors are authorized to proceed under Subchapter V.

I. Procedural Background

Michael Bonert ("Michael") and Vivien Bonert ("Vivien," and together with Michael, the "Debtors")² filed a voluntary Chapter 11 petition on September 12, 2019 (the "Petition Date"). Doc. No. 1 (the "Petition"). The Debtors stated that they were not "small business debtors" within the meaning of § 101(51D). Petition at ¶ 13.

On March 3, 2020, the Debtors filed an Amended Voluntary Petition [Doc. No. 136] (the "Amended Petition"), which made two changes to the Petition. First, the Debtors stated that they were "small business debtors" as defined in § 101(51D). Amended Petition at ¶ 13. Second, the Debtors elected treatment under the newly-enacted Subchapter V of Chapter 11. Id.

On March 12, 2020, the Court entered an Order Establishing Procedures Governing the Determination of Whether this Case Will Proceed Under Subchapter V of Chapter 11 of the Bankruptcy Code [Doc. No. 186] (the "Subchapter V Procedures Order"). The Subchapter V Procedures Order fixed March 26, 2020 as the deadline for interested parties to object to the Debtors' election to proceed under Subchapter V, and stated that if an objection was filed, the Court would determine whether a hearing was required and would notify the parties accordingly.

On February 20, 2020, the United States Trustee (the "UST") appointed the Committee, which is comprised of five creditors. Doc. Nos. 128 and 131. On February 28, 2020, the Committee filed an application requesting authorization to employ Blakely LLP ("Blakely") as the its counsel. Doc. No. 133 (the "Employment Application"). On March 12, 2020, the UST objected to the Employment Application, arguing among other things that Blakeley had failed to make the disclosures required under Bankruptcy Rule 2014. Doc. No. 187. On March 13, 2020, the Debtors objected to the Employment Application, arguing among other things that the Employment Application would be moot if the Court authorized the Debtors to proceed under Subchapter V, since under Subchapter V a creditor's committee may not be appointed "[u]nless the court for cause orders otherwise," § 1102(a)(3). Doc. No. 189. A hearing on the Employment Application was initially set for April 22, 2020 at 10:00 a.m. Doc. No. 241.

On March 16, 2020, the UST appointed Gregory K. Jones to serve as the Subchapter V Trustee, pursuant to § 1183(a). Doc. No. 206. On March 24, 2020, the Debtors, the UST, and the Subchapter V Trustee executed a Stipulation to Continue Deadline to Object to Case Proceeding Under Subchapter V [Doc. Nos. 234 and 238] (the "Stipulation"). The Stipulation noted that under Bankruptcy Rule 1020(b), parties in interest have thirty days from the conclusion of the § 341(a) meeting of creditors to object to a debtor's statement that it is a "small business debtor" as defined by § 101(51D). Based upon the fact that a debtor cannot elect treatment under Subchapter V unless the debtor is also a "small business debtor," the Stipulation requested that the deadline for interested parties to object to the Debtors' Subchapter V election be extended to thirty days after the conclusion of the meeting of creditors.

On April 6, 2020, the Court entered an order (1) approving the Stipulation, (2) extending the deadline for interested parties to object to the Debtors' Subchapter V election to and including May 20, 2020, and (3) adjourning the hearing on the Employment Application pending further order of the Court. Doc. No. 246. The Court explained that the Employment Application could not be adjudicated until after determination of whether the case would proceed under Subchapter V, given that Subchapter V does not contemplate the appointment of a Committee "[u]nless the court for cause orders otherwise," § 1102(a)(3). Id.

The Committee is the only party that has objected to the Debtors' Subchapter V election. In opposition to such election, the Committee argues that it would be prejudiced if the case were to proceed under Subchapter V; that the Debtors should be judicially estopped from re-designating as "small business debtors" in order to become eligible for treatment under Subchapter V; and that the Debtors may exceed the small business debt limit under § 101(51D). The Debtors dispute each of these contentions.

II. Findings and Conclusions

The Small Business Reorganization Act of 2019 (the "SBRA") became effective on February 19, 2020. The purpose of SBRA is "to streamline the reorganization process for small business debtors because small businesses have often struggled to reorganize under chapter 11." In re Ventura , 615 B.R. 1, 12 (Bankr. E.D.N.Y. 2020) (publication forthcoming). Nothing in SBRA addresses whether the act applies to pending cases or only to cases commenced after the effective date of the legislation.

The majority of courts that have addressed the issue have found that a debtor who filed a Chapter 11 petition prior to the effective date of SBRA may amend the petition to elect treatment under Subchapter V. In In re Ventura , the court allowed the debtor to proceed under Subchapter V, even though the debtor's petition had been filed fifteen months prior to the effective date of SBRA and both the debtor and a creditor had filed competing plans of reorganization. Id. at 7–10. The Ventura court held that "any practicality and scheduling issues arising from a SBRA designation in a case commenced prior to the effective date of the SBRA" could be resolved by an extension of any SBRA-specific deadlines. Id. at 14–15. The court authorized re-designation to Subchapter V over the objection of the creditor who had filed a competing plan, reasoning that "in general, the new subchapter V provisions do not impair the vested property interests of creditors and, therefore, the concerns supporting application of the canon of statutory construction disfavoring the retroactive application of new law are absent." Id. at 16.

Re-designation to Subchapter V in cases filed prior to the effective date of SBRA was also permitted in In re Body Transit, Inc. , 613 B.R. 400 (Bankr. E.D. Pa. 2020), In re Bello , 613 B.R. 894 (Bankr. E.D. Mich. 2020) (publication forthcoming), and In re Moore Properties of Pers. Cty., LLC, No. 20-80081, 2020 WL 995544 (Bankr. M.D.N.C. Feb. 28, 2020). In In re Progressive Sols., Inc., 615 B.R. 894 (Bankr. C.D. Cal. 2020) (publication forthcoming), the court found as a matter of law that there was no reason why re-designation could not be approved, but found that the request for re-designation before it was procedurally improper. The only case of which the Court is aware in which re-designation was not authorized is In Re Double H Trans. LLC , 614 B.R. 553 (Bankr. W.D. Tex. 2020) (publication forthcoming).

The Court finds re-designation to Subchapter V to be appropriate on the specific facts of this case. However, it is important for the Court to emphasize that re-designation will not necessarily be proper in all Chapter 11 petitions commenced prior to the effective date of SBRA.

Applying the standard set forth in Body Transit , the Court finds that re-designation is warranted if not sought in bad faith and provided that no party will be unduly prejudiced. Body Transit , 613 B.R. at 408. The Debtors have satisfied this standard.

A. The Committee Will Not Be Unduly Prejudiced By Re-Designation

The Court finds that the Committee will not be unduly prejudiced by re-designation. The Committee had been in existence for only a short period of time before the Debtors elected treatment under Subchapter V. The Committee was appointed on February 20, 2020; the Debtors filed their Amended Petition electing treatment under Subchapter V on March 3, 2020. The Court has not yet ruled upon the Committee's application to employ Blakely as its counsel.³

In addition, the Court will provide the Committee an opportunity to show cause why it should be permitted to continue in existence after the Debtors' Subchapter V election takes effect. See § 1102(a)(3)("Unless the Court for cause orders otherwise, a committee of creditors may not be appointed in a small business case or a case under subchapter V of this chapter"). The Committee will not be disbanded if it can demonstrate that its continued existence will improve recoveries to creditors, will assist in the prompt resolution of this case, and is necessary to provide effective oversight of the Debtors.

The Committee asserts that allowing the case to proceed under Subchapter V would be prejudicial because it has already expended significant resources opposing numerous claim objections filed by the Debtors (the "Claim Objections"). This argument suffers from two problems. First, at the time the Committee opposed the Claim Objections, the Court had already entered the Subchapter V Procedures Order, which made clear to all parties the possibility that the Court might permit the Debtors to elect treatment under Subchapter V. The Committee made its decision to oppose the Claim Objections with full awareness that its...