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MONTH-IN-BRIEF (Sep 2020)

Bankruptcy Law

The Deadline For Section 1111(b) Elections Under Subchapter V

By Michael Enright

An undersecured creditor with an interest in property of the estate has until the conclusion of the hearing on approval of the disclosure statement to make an election under Section 1111(b), or the creditor will lose that right. The election has important consequences for treatment of the claim under a plan, assuming the value of the estate property subject to the interest is not inconsequential.  However, Bankruptcy Rule 3014, which sets that deadline, does not provide any guidance on the deadline specific to Subchapter V cases, which are new to the Bankruptcy Code this year. Subchapter V, intended to provide an efficient and accelerated reorganization process for small business debtors, was expanded under the CARES Act by increasing the debt cap to $7,500,000 in aggregate secured and unsecured non-contingent and liquidated debt. One result may be more Subchapter V case filings, and more opportunity for Section 1111(b) elections, so determining the deadline is important.  Notably, Subchapter V cases do not contemplate that the debtor will file a disclosure statement at all, so application of the deadline under Rule 3014 is problematic. The court in In re VP Williams Trans, LLC, No. 20-10521, (Bankr. S.D.N.Y. Sept. 29, 2020) was faced with this issue of first impression in regard to the claim of a lien on a New York City taxi medallion.  After determining that the medallion had more than inconsequential value, the court turned to the question of the appropriate deadline in a Subchapter V case for making the election.  The court noted that  the language of Rule 3014 was not conclusive, in light of the absence of a disclosure statement. Although the debtor argued that the election should have been made prior to its filing of a plan, the court disagreed, noting that a creditor needs to know how the debtor intends to treat its claim prior to determining whether to make the election.  Because the court was never asked to set a deadline, and had not done so, Rule 3014 did not bar the subsequent election by the creditor under Section 1111(b). As the court noted, if “the election had to be made before the plan was even filed in a subchapter V case, then as a practical matter the election could not be made.” Undoubtedly, this issue will continue to crop up around the country as debtors turn to Subchapter V in the wake of the pandemic, and deserves some attention by practitioners, and of course by those who update the Rules.

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