In re Cyma Cleaning Contractors Inc.

1

IN RE: CYMA CLEANING CONTRACTORS INC. Debtor

No. 22-01377 (ESL)

United States Bankruptcy Court, D. Puerto Rico

October 27, 2023

CHAPTER 11

OPINION AND ORDER

ENRIQUE S. LAMOUTTE UNITED STATES BANKRUPTCY JUDGE

This case is before the court upon the Minute Order (Docket No. 95) whereby the court ordered the Debtor to show cause why the case should not be dismissed for being a single asset real estate (SARE), and thus ineligible for Subchapter V relief. Also pending before this court are the following related motions: Motion to Show Cause in Compliance with Court Order (Docket No. 107), and Motion to Inform Compliance with Order (Docket No. 109).

JURISDICTION

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(a) and (b). Venue of this proceeding is proper under 28 U.S.C. §§ 1408 and 1409.

FACTUAL AND PROCEDURAL BACKGROUND

1. On May 16, 2022, Innova Industrial Contractor, Inc. ("Innova"), an affiliate of the Debtor, filed a petition for relief under Subchapter V. See Case No 22-01375, Docket No. 1, p. 2, § 8.

2. On that same date, May 16, 2022, the Debtor filed the instant petition for relief under Subchapter V, self-designated itself a Subchapter V debtor. See Docket No. 1.

3. On June 13, 2022, the Section 341 meeting of creditors was held and concluded (Docket No. 21).

4. On July 27, 2022, the Debtor filed a Report to the Court in Preparation for Status Conference (Docket No. 27) disclosing that it "is in the business of managing and renting an income generating property … located at Carr 848 Km 2 Local 199 Saint Just Trujillo Alto, PR 00976." Id., p. 1, § A. 5. On August 15, 2022, the Debtor filed a Plan of Reorganization Dated August 15, 2022 (the "Plan", Docket No. 34).

6. On May 2, 2023, this court held a confirmation hearing to consider the proposed Plan and other contested matters. At the hearing, the court expressed concern as to the Debtor's eligibility to proceed as a Subchapter V debtor, stating that it appears that the Debtor "meets the definition of a single asset real estate (SARE) as the term is defined in 11 U.S.C. § 101(51B) and thus, excluded from being so pursuant to 11 U.S.C. § 1182." Docket No. 95, p. 4. Further, it ordered the Debtor to show cause why the case should not be dismissed for being ineligible to be a Subchapter V Debtor as it may be a SARE. Id.

7. On June 26, 2023, the Debtor filed a Motion to Show Cause in Compliance with Court Order (Docket No. 107), averring that it complies with the eligibility requirements of Subsection 1182(A). To wit, on the Petition Date, the Debtor was an "affiliate" of a fully qualified Subchapter V Debtor, and thus: the Debtor was eligible under Section 1182(A). See id., p. 3, ¶ 6 ("100.00% of the shares of both the Debtor and Innova are owned by the same persons, Mr. Felipe Gonzalez Bruno and his spouse); The Debtor further avers that none of the three statutory exclusions under Section 1182(B) apply to the Debtor.

8. On July 5, 2023, the Debtor filed a Motion to Inform Compliance with Order (Docket No. 109), stating that "[it] understands that the motion properly addresses and complies with this Court's Order", and, in the alternative and assuming the court determines that the Debtor is a SARE, a period of 30 days be granted to convert Debtor's case to a different classification. Id., p. 1, ¶¶ 2-3.

LEGAL ISSUES

The issues before the court are (i) whether it may sua sponte revoke Debtor's Subchapter V designation, and (ii) whether the Debtor is a SARE.

APPLICABLE LAW AND ANALYSIS

A. Sua Sponte Revocation of Subchapter V Designation

The Debtor contends that Fed.R.Bankr.P. 1020(b) limits the objection period to the Debtor's auto designation as a Subchapter V debtor to 30 days following the conclusion of the meeting or creditors (id., p. 7), that more than 30-days have passed without any party objecting to the Debtor's auto designation, and that "[w]hether the Court has authority … to, sua sponte, change the Debtor's designation is a subject of considerable commentary" (id., p. 1, n. 1).

Fed. R. Bankr. P. 1020(b) reads as follows:

(b) Objecting to Designation. The United States trustee or a party in interest may file an objection to the debtor's statement under subdivision (a) no later than 30 days after the conclusion of the meeting of creditors held under § 341(a) of the Code, or within 30 days after any amendment to the statement, whichever is later.

Id. The 30-day time limit "may be extended if there is excusable neglect, under [Fed. R. Bankr. P.] 9006(b)." 9 Collier on Bankruptcy ¶ 1020.03 (16^th ed., 2023).

Fed. R. Bankr. P. 1020(a) provides that "[t]he status of … a case under subchapter V of chapter 11 shall be in accordance with the debtor's statement … unless and until the court enters an order finding that the debtor's statement is incorrect." Id. The use of the term "until" in Fed.R.Bankr.P. 1020(a) "means that the designation controls up to the point that a court determines the correct status of the debtor, at which point the court's determination controls, both prospectively and retroactively." In re Diamonds & Diamonds Inc., 2019 WL 1752695, at *5, 2019 Bankr. LEXIS 1237, at *13 (Bankr. D.P.R. 2019) (Caban, B.J.), citing In re Swartville, LLC, 483 B.R. 453, 457 (Bankr. E.D. N.C. 2012) (noting that "[w]hile the rules do not preclude a debtor from changing its designation, the original designation still controls 'unless and until the court enters an order finding that the debtor's statement is incorrect.' Fed.R.Bankr.P. 1020(a).").

On that vein, the Advisory Committee Note to Fed.R.Bankr.P. 1020 states as follows:

Because it is important to resolve such disputes early in the case, a time limit for objecting to the debtor's self-designation is imposed. Rule 9006(b)(1), which governs enlargement of time, is applicable to the time limits set forth in this rule.

Id.

In turn, Fed.R.Bankr.P. 9006(b)(1) states that, except as provided in subsections (b)(2) and (3), "the court for cause shown may at any time in its discretion (1) with or without motion … order the period enlarged if the request … is made before the expiration of the period … or (2) on motion made after the expiration of the specified period … where the failure to act was the result of excusable neglect." Id.

Here, the Debtor self-designated itself a Subchapter V debtor on May 16, 2021 (Docket No. 1, p. 2, § 8), and the meeting of creditors was concluded on June 13, 2022 (Docket No. 21).

The 30-day deadline lapsed on July 13, 2022, and no party-in-interest filed an objection to such designation on or before such date, requested an extension to do so, or belatedly filed an objection. See In re Angel Fire Water Co., LLC, 2015 Bankr. LEXIS 170 (Bankr. D.N.M. Jan. 20, 2015) (although debtor appeared to be small business, it had not designated itself as such and no party had objected, so case would proceed as a non-small business case); In re Maxx Towing, Inc., 2011 WL 3267937, 2011 Bankr. LEXIS 2826 (Bankr. E.D. Mich. 2011) (although debtor argued its designation in petition was incorrect, it had not amended its petition and no party had sought to change designation, so case proceeded in accordance with designation).

The court accepts that an objection to Debtor's Subchapter V designation may be untimely under Fed.R.Bankr.P. 1020(a). Nevertheless, the court finds that it may sua sponte revoke the Subchapter V designation made by a debtor in its petition under the Bankruptcy Code. See e.g., In re National Small Business Alliances, 642 B.R. 345 (Bankr. D.D.C. 2022).

In National Small, when the debtor filed for bankruptcy, it elected to file under Subchapter V and designate itself as a small business debtor by checking the "small business debtor" box on Official Form 101. Due to a multitude of factors, the debtor did not file its first plan of reorganization until July 25, 2021, that is, after the May 1, 2021, deadline imposed by the court. The debtor subsequently filed four more amended plans. Debtor's fifth and final plan was denied. Thereafter, the Bankruptcy Court for the District of Columbia, sua sponte, revoked the debtor's Subchapter V designation under Sections 105(a) and 1112 of the Bankruptcy Code, 11 U.S.C. §§ 105(a), 1112. Specifically, the court noted that "[t]he question in this case appears to be one of first impression under Subchapter V - whether a court may revoke the Subchapter V designation made by a debtor in its petition", and found as follows:

The question in this case appears to be one of first impression under Subchapter V - whether a court may revoke the Subchapter V designation made by a debtor in its petition…

… the Court must look to chapter 11 and the Bankruptcy Code as a whole to determine the election by a debtor to proceed under Subchapter V may be revoked post-petition.

While revocation of a Subchapter V election is not specifically set out in the Bankruptcy Code, if a petition may be amended to elect to proceed under Subchapter V post-petition, logically it follows that the opposite must also be an option for debtors and courts. Various sections of the Bankruptcy Code allow for a debtor to seek conversion from one chapter to another if the debtor is an eligible debtor under such chapter. 11 U.S.C. §§ 706, 1112, 1208, 1307. While revocation of the Subchapter V election is not conversion, the treatment and requirements under chapter 11 and Subchapter V are materially different, much like the differences in chapters under the Bankruptcy Code. See, e.g., In re Trepetin, 617 B.R. at 843 ("Subchapter V ... offers small business debtors ... a streamlined process and tailored tools for confirming a plan."). Therefore, the Court finds that the

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