The Standard for Enlarging the Time to File a Subchapter V Plan

In the form of an opinion, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., wrote a treatise identifying the best definition of Section 1189(b), which requires a debtor in Subchapter V of chapter 11 to file a plan within 90 days of filing, but allows the court to “extend the period if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” [Emphasis added.]

The debtor was a homebuilder with most of its debt in the hands of a few unsecured creditors. Judge Jacobvitz had already extended the 90-day plan-filing deadline four times, but the debtor was seeking a fifth extension for one month.

Notably, unsecured creditors likely would recover nothing on conversion to chapter 7 because the assets were subject to lien. In a plan, Judge Jacobvitz said that the “major creditors might be substantially better off.”

Beforehand, Judge Jacobvitz had authorized mediation with four of the primary creditors. Two had agreed on settlements, and negotiations were to continue with the other two. Two different creditors objected to an extension of the plan-filing deadline.

The objectors argued, among other things, that Subchapter V was designed to be “speedy” and that negotiating with creditors was not a circumstance “for which the debtor should not justly be held accountable.”

Addressing the objections, Judge Jacobvitz noted how courts “agree that § 1189(b) imposes a stricter standard than the ‘for cause’ standard set forth in § 1121(d)(1) that governs extensions of time to file a plan in chapter 11 cases not governed by subchapter V.” However, he said that courts are split on what constitutes “circumstances for which the debtor should not justly be held accountable.”

As a guideline for statutory interpretation, Judge Jacobvitz examined Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship,
507 U.S. 380 (1993), where the Supreme Court gave definition to the excusable neglect standard in Bankruptcy Rule 9006(b)(1). He said that the Supreme Court “construed the ‘excusable neglect’ standard as an equitable inquiry after taking into account that ‘the bankruptcy courts are necessarily entrusted with broad equitable powers to balance the interests of the affected parties, guided by the overriding goal of ensuring the success of the reorganization.’” Id. at 389.

Next, Judge Jacobvitz analyzed “three approaches taken by different courts” in defining the standard in Section 1189(b).

“Several courts,” Judge Jacobvitz said, “have equated ‘circumstances for which the debtor should not justly be held accountable’ with ‘circumstances beyond the debtor’s control.’” Those courts, he said, do not weigh “equitable considerations.”

The second standard is known as the four-factor
Baker test, and the third is called the “equitable inquiry.”

Judge Jacobvitz said that Bankruptcy Judge Michelle M. Harner of Maryland wrote “the most comprehensive analysis” of the “equitable inquiry” test in In re Trepetin, 617 B.R. 841, 848-50 (Bankr. D. Md. 2020). To read ABI’s report on Trepetin, click here.

For guidance regarding the best interpretation of “circumstances for which the debtor should not justly be held accountable,” Judge Jacobvitz acknowledged the meanings ascribed to the same language in Section 1221 (governing extensions of time to file a chapter 12 plan), Sections 1228(b)(1) and 1328(b)(1) (for granting hardship discharges), and Section 1188(b) (for extensions of time to hold a Subchapter V status conference).

On hardship discharges, Judge Jacobvitz said that the courts are split on whether the debtor must show “catastrophic circumstances” or whether the court may “conduct an equitable inquiry.” For extensions of time to file chapter 12 plans, he said that courts “do not extensively analyze why ‘circumstances for which the debtor should not justly be held accountable’ means ‘circumstances beyond the debtor’s control.’”

Overall, though, Judge Jacobvitz said that he did “not find the caselaw interpreting the other Code provisions with the language ‘circumstances for which the debtor should not justly be held accountable’ to be conclusive in the context of§ 1189(b).”

Judge Jacobvitz therefore employed “the reasoning of
Pioneer to conclude that § 1189(b) requires the Court to conduct an equitable inquiry” and found “Trepetin
persuasive in its conclusion that courts may balance subchapter V goals in considering whether to grant an extension of time to file a subchapter V plan.”

Furthermore, Judge Jacobvitz said that “the term ‘justly,’ as used in § 1189(b), allows the Court to take into account all relevant circumstances surrounding the debtor’s need for an extension of time to file a plan and to balance the interests of the affected parties,” including the “overarching goals of subchapter V.” Specifically, he said that circumstances to betaken into consideration include:

whether the need for the extension is within the debtor’s reasonable control and may include such things as the danger of prejudice by granting or refusing to grant the extension, the length of the extension, the debtor’s good faith, the debtor’s progress in formulating a meaningful plan, and the views of creditors as a whole and the subchapter V trustee.

Finally, Judge Jacobvitz noted that Subchapter V’s lack of a deadline for confirming a plan “is consistent with the court having discretion elsewhere over the confirmation process.”

Taking into account “all relevant circumstances” and “balancing the best interests of affected parties,” Judge Jacobvitz granted a one-month extension for filing a plan. However, he said the court would be “disinclined to grant any further extensions.”