In re N.Y. Hand & Physical Therapy, PLLC

1

In re: New York Hand & Physical Therapy PLLC., Debtor

No. 21-35911

United States Bankruptcy Court, S.D. New York

April 14, 2023

Chapter 11 (Subchapter V)

APPEARANCE

Attorney for the Debtor, New York Hand & Physical Therapy PLLC

By: Devon Salts

Attorney for the United States Trustee, Region 2

By: Alicia M. Leonard

The Subchapter V Trustee Bederson LLP 100

By: Charles N. Persing

MEMORANDUM DECISION CONDITIONALLY GRANTING THE UNITED STATES TRUSTEE'S MOTION TO DISMISS

CECELIA G. MORRIS, BANKRUPTCY JUDGE

Pending before the Court is the motion of the United States Trustee (the "U.S. Trustee") to dismiss or convert the case of the debtor, New York Hand & Physical Therapy PLLC, ("Debtor") for cause under 11 U.S.C. § 1112(b). (Mot., ECF^[1] No. 24). The Debtor does not contest dismissal per se. The issue is whether the Court may condition dismissal of the case upon payment of fees requested by the Subchapter V Trustee. For the reasons set forth below, the motion is granted. The Case will be dismissed upon payment of the fees, or, failing that, converted to a case under Chapter 7 of the Bankruptcy Code within forty-five days of issuance of this decision.

Jurisdiction

This Court has jurisdiction over this contested matter under 28 U.S.C. §§ 157(b)(1) and 1334. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and one over which this Court has authority to enter a final judgment.

BACKGROUND

The Debtor filed a voluntary petition on December 23, 2021, under Chapter 11, Subchapter V, of the United States Bankruptcy Code. (Vol. Pet., ECF No. 1). The Small Business Reorganization Act ("Subchapter V," codified as 11 U.S.C. §§ 1181-1195) has been a remarkably successful addition to Chapter 11 of the Bankruptcy Code. Subchapter V allows small businesses^[2] to file bankruptcy in a cost-effective manner in hopes of achieving a successful restructuring. Subchapter V gives the debtor exclusive power to file a plan of reorganization, imposes a shortened timeline to file a plan, eliminates the absolute priority rule for confirmation, allows debtors to pay administrative claims over the course of the plan, and permits a Court to confirm a plan without the acceptance of a class of creditors. 11 U.S.C. §§ 1189, 1191(a).

Importantly Subchapter V provides for the appointment of a trustee to assist the debtor in possession, provide oversight, and to help facilitate negotiation of a consensual plan of reorganization. 11 U.S.C. § 1183. The Subchapter V trustee appears at status conferences and provides the Court with valuable information on the progress of the case. Id. § 1183(b)(3). The Subchapter V trustee may be called on to perform the duties of the debtor in possession and operate the business. Id. § 1183(b)(5). Bankruptcy courts rely on the Subchapter V trustee to provide candid advice concerning a debtor's efforts to comply with its duties under the Code. Id. § 1183(b)(4); In re Corinthian Commc'n, Inc., 642 B.R. 224, 225 (Bankr. S.D.N.Y. 2022) ("Subchapter V Trustees are the 'honest brokers,' who through their efforts have provided credibility in evaluating the debtor's business's prospects for a successful reorganization and facilitated negotiation of a plan of reorganization with the debtor's stakeholders, thereby enabling a small business to reorganize."). The success of an individual Subchapter V case and of the bankruptcy courts in overseeing them depends in part on "the openness and transparency of the debtor with the Subchapter V Trustee, the U.S. Trustee, creditors, and with the Court." Id.

Charles Persing was appointed as Subchapter V trustee ("Mr. Persing" or the "Subchapter V Trustee") for this case on December 27, 2021, pursuant to 11 U.S.C. § 1183(a). (Notice, ECF No. 3). Mr. Persing is a partner of the firm of Bederson LLP. (Appl. for Comp. Schedule A ¶ 1, ECF No. 122). Since his appointment, Mr. Persing has fulfilled numerous duties for the benefit of the Debtor, the Court, and all interested parties. These duties include: having numerous discussions with the Debtor's counsel to ensure compliance with the Bankruptcy Code; undertaking investigations concerning the Debtor's assets and analysis of the business debt; reviewing documents and conferring with Debtor's counsel regarding the initial debtor interview; attending the 341 meeting of creditors; monitoring and maintaining settlement discussions and agreements between the Debtor and a lender; attending status conferences held by this Court; appraising the U.S. Trustee of activities in this case; engaging with discussions with the Debtor and the U.S. Trustee regarding the latter's motion to dismiss; reviewing all case filings; following up on Debtor's monthly operating reports; and providing forthright answers to inquiries made by this Court. (Appl. of Comp. ¶¶ 3-4, ECF No. 122).

Mr. Persing is a certified public accountant, a certified valuation analyst, a certified fraud examiner, and a certified insolvency and restructuring advisor. (See Recording of Apr. 11, 2023 Hr'g^[3], 1:30-1:34). He serves as a member of the board and as treasurer of National Association of Bankruptcy Trustees, and he is on the Subchapter V committee. (Id.). Mr. Persing has spoken at multiple conferences about Subchapter V. (Id.). He has served as a Subchapter V trustee in multiple cases and has experience working in bankruptcy across Delaware, New Jersey, Pennsylvania, Connecticut, South Carolina, and New York. (Id.). He has represented Chapter 7 Trustees and advised Chapter 7 Trustees on strategic issues involving the liquidation of assets and preferences. (Id.).

Mr. Persing filed an application for professional compensation as Subchapter V trustee on March 9, 2023. (Appl., ECF No. 122). On April 11, 2023, the Court granted his compensation in the amount of $12,631.00, pursuant to 11 U.S.C. § 330. No opposition was filed, and no objection was made to the reasonableness of the fee award.

On February 1, 2022, the United States Trustee filed a motion to dismiss or convert the debtor's case. (Mot. ECF No. 24). The Trustee filed a supplemental memorandum in support of the motion on March 18, 2022. (Suppl. Mem., ECF No. 44). The Trustee argued that cause exists to dismiss the case or convert it to one under Chapter 7, pursuant to 11 U.S.C. § 1112(b)(4)(F) for failure to file monthly operating reports and pursuant to § 1112(b)(4)(J) for failure to confirm a plan. The Debtor stated no opposition to the U.S. Trustee's motion at the March 7, 2023, hearing. The Court adjourned all matters to April 11, 2023.

On April 7, 2023, the U.S. Trustee filed a memorandum in support of the Subchapter V Trustee's fee application. (Mem., ECF No. 124). The U.S. Trustee urges this Court to award the full amount of compensation sought and asks the Court to defer the order dismissing the Debtor's case until the Debtor pays the compensation awarded. (Id. 5-7). Specifically, the U.S. Trustee seeks an order dismissing the case conditioned upon payment of Mr. Persing's fees. (Id.)

The Debtor filed opposition to the proposed conditional dismissal. (Opp'n, ECF No. 125). Debtor argues that a conditional dismissal is unprecedented and "would have serious implications for all subchapter V cases." (Id. ¶¶ 4-7).

Summary of the Law

Motion to Dismiss

11 U.S.C. § 1112(b)(4)(D) states that cause exists to dismiss or convert a case where unauthorized use of cash collateral substantially harms one or more creditors. Upon notice and hearing, the Court shall convert or dismiss the debtor's case for cause. 11 U.S.C. § 1112(b)(1). The Court may not dismiss or convert the case where unusual circumstances are specifically identified that make conversion or dismissal not in the best interests of the creditors and the estate. 11 U.S.C. § 1112(b)(2). The moving party bears the burden of showing cause to dismiss or convert. In re Citi-Toledo Partners, 170 B.R. 602 606 (Bankr.N.D.Ohio 1994) (citing Grogan v. Garner, 498 U.S. 279, 286 (1991)).

The Trustee argues that cause exists to dismiss the case for failure to file any monthly operating reports. Under § 1112(b)(4), cause exists to dismiss or convert the case where there is a "failure timely to provide information or attend meetings reasonably requested by the United States trustee (or the bankruptcy administrator, if any)." 11 U.S.C. §§ 1112(b)(4)(A), 1112(b)(4)(H). Section 1188(c) requires debtors proceeding under Subchapter V to file a "report that details the efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization" at least 14 days before the status conference. The Court may find an unexcused failure to timely file monthly operating reports is cause for dismissal. In re Sillerman, 605 B.R. 631, 657 (Bankr. S.D.N.Y. 2019); In re Butt, 598 B.R. 724, 726 (Bankr. W.D.N.Y. 2019).

The Debtor has repeatedly failed to submit operating reports on time. The January 2022 and February 2022 reports were filed on March 19, and later corrected with amended reports on May 14, 2022. (Operating Reps., ECF Nos. 45 - 46; Am. Operating Reps., ECF Nos. 62-63). The March, April, June, and August 2022 reports were each filed one month late. (Operating Reps., ECF Nos. 64-65, 81, 86). The September, October, and November reports were filed on December 9, after the Court reprimanded Counsel file reports on time. (Operating Reps., ECF Nos. 96-98). Debtor has not filed an operating report has since the January 2023 report.

The absence of the monthly operating reports has not been explained by the Debtor in any way. The motion to dismiss put the debtor on notice of this issue in March 2022, over one year ago. The persistent unexcused failure to file the reports and the Debtor's inability to confirm a plan demonstrate cause to...