Credit Managers Shed Light on Subchapter V Issues During Meeting with American Bankruptcy Institute

Annacaroline Caruso, NACM editor in chief

Several business-to-business (B2B) credit managers and bankruptcy attorneys from Lowenstein Sandler recently convened with the American Bankruptcy Institute (ABI) Subchapter V Task Force to exchange invaluable insights gleaned from their cumulative experiences in Subchapter V cases.

These credit managers, who are members of the esteemed National Association of Credit Management (NACM), played a pivotal role in orchestrating this collaborative dialogue, shedding light on critical matters within the Subchapter V landscape.

The debt ceiling for Subchapter V increased from $2.5M to $7.5M in total noncontingent, liquidated, secured and unsecured debt as part of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. NACM members testified that with this increased amount, which will sunset without Congressional action on June 21, 2024, Subchapter V bankruptcies have expanded to include medium-sized businesses rather than only small businesses.

A primary concern of trade creditors is the inherent imbalance created by Subchapter V of the Bankruptcy Code. For a qualifying small business debtor, Subchapter V creates several advantages over the traditional Chapter 11 process. A creditor’s committee is not appointed in a Subchapter V case absent exceptional circumstances. In lieu of a creditor’s committee, a Subchapter V trustee is automatically appointed to facilitate the development of a consensual plan of reorganization.

Subchapter V also promotes the speedy resolution of cases under the subchapter by requiring that the debtor in possession file a plan within 90 days after the bankruptcy petition is filed. The Subchapter V process also is less expensive for a debtor, as the small business debtor is not required to pay quarterly fees to the United States Trustee’s Office. Additional advantages bestowed upon a qualifying Subchapter V debtor are that the debtor maintains the exclusive right (and requirement) to file a plan throughout the case, and the debtor need not satisfy the absolute priority rule as a condition of confirmation. Instead of the absolute priority rule, a Subchapter V debtor must dedicate, at a minimum, the amount of its disposable income for a period of three to five years, providing an easier path to cramming down a plan on unsecured creditors. However, the creditors who bear the burden of those benefits are left without the most significant protections of Chapter 11 and, to protect their interests, would have to incur the same costs, and sometimes more costs because of the absence of an official unsecured creditors’ committee, as in a traditional Chapter 11 case. 

During the testimony presented in October, Mike Mandell, corporate collection manager at Ryder System, Inc. (Miami, FL), said, “We hope the information we provide today will offer a different perspective on Subchapter V and our recommendations for the commission are considered as they move forward. I have yet to see a Subchapter V plan succeed. The Subchapter V plans that Ryder has been involved in have failed where the customer stops paying.”

Credit professionals testified that debtors should not be able to use Subchapter V to prolong the life of a company that cannot successfully reorganize. A primary concern of trade creditors is the inherent imbalance created by Subchapter V of the Bankruptcy Code. Subchapter V allows small businesses to avail themselves of substantially all of the benefits of a traditional Chapter 11 case through an expedited process at a minimal cost to the debtor. 

“We do business with companies across all industries and sizes, so we have seen quite a few different types of bankruptcies, including many Subchapter V cases over the last few years,” said Jeff Weber, director of credit at Uline (Pleasant Prairie, WI). “These claims can be made over three to five years, so it creates a burden for us to collect and ensure payments are being made.”

Among the potential solutions recommended were to put mechanisms in place to ensure adequate notice to unsecured creditors such as free access to ECF/PACER for Subchapter V cases or to require the debtor to hire a claims/noticing agent to maintain a fee online docket. Another recommendation was to enhance the debtors’ disclosures and proofs for confirmation; something along the line of requiring the debtor to file a declaration under oath disclosing what financial difficulties led to the filing and what the strategy is to rehabilitate the business. “The lack of disclosures and the reduction of available information for creditors in this subchapter is a major pain point,” said Conrad Ragan, director of corporate credit risk at PepsiCo (Winston Salem, NC). Trade creditors are the lifeblood of our economy, currently providing approximately $5.6 trillion of capital to businesses in the United States, most of which is extended on an unsecured basis.

NACM members advocated to ABI’s Task Force that consideration be given to adopting provisions that would increase the likelihood of recoveries for involvement from creditors, such as requiring an impaired consenting class or an unsecured credit or class to vote in favor of a Subchapter V plan. NACM members suggesting requiring a minimum recovery or convenience class for unsecured creditors in order for equity holders to retain their interests and directing the U.S. Trustee or Bankruptcy Administrator to appoint an Official Committee of Unsecured Creditors (or similar entity) if the Subchapter V case exceeds a certain amount of debt or insider debt. NACM members also advocated that the role of the Subchapter V Trustee be enhanced by introducing mechanisms to ensure the Subchapter V trustees are conducting the necessary diligence of debtors' plan projections, projected disposable income, best interest of creditors test, and— ultimately—the feasibility of plans. Providing statutory investigative powers to the Subchapter V trustee to vet prepetition secured claims and claims against lenders and insiders, much like an Official Committee of Unsecured Creditors would, goes a long way to correcting some of the issues.

“The credit managers who participated in this opportunity gave the entire B2B credit industry a voice when it comes to Subchapter V,” said NACM President Robin Schauseil. “We are thrilled that the Subchapter V Task Force took the time to listen to our members’ concerns.”