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In re: HEART HEATING AND COOLING, LLC, Debtor.
No. 23-13019 TBM
United States Bankruptcy Court, D. Colorado
March 21, 2024
Chapter 11 (Subchapter V)
MEMORANDUM OPINION AND ORDER ON CHAPTER 11 (SUBCHAPTER V) ELIGIBILITY
Thomas B. McNamara, United States Bankruptcy Judge
I. Introduction.
A few years ago, Congress enacted a major addition to Chapter 11 of the Bankruptcy Code[1]: the Small Business Reorganization Act of 2019 (the "SBRA").[2] The SBRA (commonly referred to as "Subchapter V"), was designed to streamline the reorganization and rehabilitation process for small business debtors. Substantively, the SBRA lowered the Chapter 11 bar for confirmation of a plan of reorganization by permitting confirmation even if all classes of creditors reject the proposed plan and by eliminating the so-called "absolute priority rule." Procedurally, Congress simplified some of the more cumbersome aspects of standard Chapter 11 cases by eliminating unsecured creditors' committees and disclosure statements. Suffice it to say that the SBRA offers many potential advantages for qualifying Chapter 11 debtors.
But, Subchapter V is not for everybody. The eligibility requirements for debtors seeking to file bankruptcy under Subchapter V are set forth in Section 1182(1)(A) and include a debt cap: the debtor "has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the order for relief in an amount not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) . . . ." (emphasis added).
This dispute involves the eligibility of the Debtor, Heart Heating and Cooling, LLC (the "Debtor"), to utilize Subchapter V. When the Debtor sought bankruptcy protection under Chapter 11 on July 11, 2023, the Debtor elected to proceed under Subchapter V. Shortly thereafter, the Debtor filed its initial Schedule D, listing secured debt of $6,809,138.83. Of such amount, the Debtor asserted $2,523,694.61 was contingent or unliquidated, leaving a balance of $4,285,444.22 as aggregate noncontingent liquidated
secured debt. Then, on its initial Schedule E/F, the Debtor listed unsecured debt of $4,364,295.69. Of such amount, the Debtor asserted $2,115,051.60 was contingent or unliquidated, leaving a balance of $2,249,244.09 as aggregate noncontingent liquidated unsecured debt. By characterizing a very significant portion of its overall debt pool ($4,638,746.21) as contingent or unliquidated, the Debtor appeared to come in under the $7,500,000.00 statutory debt cap for Subchapter V eligibility. But the issue raised eligibility suspicions from the get-go.
On September 7, 2023, the United States Trustee (the "UST") filed an "Objection to Debtor's Designation as a Debtor Under 11 U.S.C. § 1182 and Election to Proceed Under Subchapter V" (the "Eligibility Objection"). [3] The UST contends that the Debtor is ineligible for Subchapter V relief because the Debtor's aggregate noncontingent liquidated secured and unsecured debts exceeded $7,500,000.00 when the Debtor started its bankruptcy case. After the Eligibility Objection, the Debtor made wholesale amendments to its Schedules D and E/F seemingly designed to bolster its eligibility position by eliminating, reducing, or recharacterizing its debt. Then, the Debtor filed its "Response to the United States Trustee's Objection to Debtor's Designation as a Debtor Under 11 U.S.C. § 1182 and Election to Proceed Under Subchapter V" (the "Response"), [4] opposing the Eligibility Objection. The Court conducted a trial on the Eligibility Objection and Response on January 24, 2024.
Having considered the evidence (primarily stipulations and documents) as well as the arguments presented by the UST and the Debtor, the Court determines that the Debtor is not eligible to proceed in Subchapter V because the Debtor's aggregate noncontingent liquidated debts as of the petition date exceeded $7,500,000.00. Thus, the Court strikes the Debtor's Subchapter V designation. The bankruptcy case will proceed as a standard Chapter 11 reorganization.
II. Jurisdiction and Venue.
This Court has jurisdiction to enter final judgment on the eligibility issues presented in this bankruptcy case pursuant to 28 U.S.C. § 1334. Eligibility for relief under Chapter 11 (Subchapter V) is a core matter under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate) and (b)(2)(O) (other proceedings affecting the liquidation of the assets of the estate). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Both the Debtor and the UST concur that this Court has jurisdiction to issue final judgment on the eligibility dispute and that venue is proper in the Court.[5]
III. Procedural Background.
A. The Bankruptcy Filing and Subchapter V Election.
The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on July 11, 2023 (the "Petition Date").[6] In Section 8 of its Petition, the Debtor checked the box for "Chapter 11" and stated:
The debtor is a debtor as define in 11 U.S.C. § 1182(1) its aggregate noncontingent liquidated debts (excluding debts owed to insiders or affiliates) are less than $7,500,000 and it chooses to proceed under Subchapter V of Chapter 11.[7]
The Court refers to the Debtor's decision to proceed under Chapter 11 (Subchapter V) as the "Subchapter V Election." On October 9, 2023, the Debtor filed its "Plan of Reorganization for Small Business Under Subchapter V of Chapter 11" (the "Subchapter V Plan").[8] The Subchapter V Plan has not been confirmed.
B. The Eligibility Objection and Response.
The UST objected to the Debtor's Subchapter V Election by filing the Eligibility Objection.[9] The central thrust of the Eligibility Objection is that the Debtor had "aggregate noncontingent liquidated secured and unsecured debts", exceeding $7,500,000.00 as of the Petition Date. The UST contends that the Debtor wrongfully characterized a substantial portion of its debt as "contingent" or "unliquidated" to avoid the Section 1182(1) debt cap.
The Debtor filed the Response to the Eligibility Objection, contesting the UST's position and arguing that the Debtor correctly elected to proceed under Subchapter V since the Debtor's "aggregate noncontingent liquidated secured and unsecured debts" are below $7,500,000.00.[10] The Debtor contends that it properly excluded a significant amount of debt from its Subchapter V eligibility calculation because such debts are "contingent" or "unliquidated."
C. The Hearings.
The Court conducted a preliminary non-evidentiary hearing on the Eligibility Objection and Response on November 6, 2023.[11] Both the UST and the Debtor requested an opportunity to present evidence. Accordingly, the Court set the contested issue of the Eligibility Objection and Response for a trial on January 23, 2024.
Additionally, the Court set pre-trial deadlines for the exchange of exhibits as well as filing of witness and exhibit lists, stipulations of facts and exhibits, and legal briefs.[12]
Thereafter, the parties submitted their "Stipulated Statement of Facts of the United States Trustee and the Debtor," which included an agreed statement of background and procedural history as well as a set of 58 stipulated facts (the "Stipulated Facts").[13] Subject to certain limitations, the UST and the Debtor also stipulated to the admission into evidence of Joint Exhibits 1-33.[14] Additionally, the UST and the Debtor filed legal briefs on the Subchapter V Election issues.[15]
Given the comprehensive set of evidentiary stipulations, the UST and the Debtor jointly requested that the Court vacate the trial.[16] However, the Court declined such request and conducted the trial on January 24, 2024.[17] At the trial, the Court admitted into evidence the Stipulated Facts and Joint Exhibits 1-33 (subject to certain agreed limitations). The Debtor's Chief Executive Officer, Robert Michael Townsend, also testified. After the conclusion of the evidence, the Court heard fulsome closing arguments from both the UST and the Debtor and took the dispute over the Subchapter V Election under advisement. In the interim since the trial, the Court has reviewed all the admitted evidence (the Stipulated Facts and Joint Exhibits), considered the testimony, and evaluated the legal issues. The Subchapter V eligibility issues are now ripe for decision.
IV. Factual Findings.
Based upon the Stipulated Facts, the Joint Exhibits, and the trial testimony, the Court makes the following findings of fact under Fed.R.Civ.P. 52(a)(1), as incorporated by Fed.R.Bankr.P. 7052.
A. The Debtor's Business.
The Debtor, a Colorado limited liability company, is a "heating, cooling, plumbing, and electric sales, service, and repair company founded in 2019. The Debtor offers residential and commercial services in the Front Range Area, from Fort Collins to Colorado Springs."[18] The Debtor has many dozens of employees.[19] It operates from two leased offices located in Colorado Springs and Lakewood, Colorado.[20] The Debtor earned "gross revenue" from "operating a business" in the following amounts: (1)
$5,793,536.30 in 2023 through the Petition Date; (2) $12,137,052.01 in 2022; and (3) $8,681,240.00 in 2021.[21]
B. Debts Listed in the Debtor's Initial Schedules D and E/F.
Bankruptcy debtors are obligated to list their secured liabilities on Schedule D and their unsecured liabilities on Schedule E/F. The Debtor filed its initial Schedule D on the Petition Date, identifying 73 secured claims (the "Initial Schedule D").[22] On its Initial Schedule D, the Debtor asserted that the aggregate amount of secured claims against the Debtor as of the Petition Date was $6,809,138.83.[23] Schedule D requires debtors to check a box if the listed claim is "contingent," "unliquidated," or "disputed." The Debtor checked the "contingent" and/or "unliquidated" boxes for eight...
