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vol 23, num 2 | SEPTEMBER 2024 |
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Will Your Client Get a Discharge? Surveying Recent Subchapter V Decisions on § 523(a) |
Several debts are “excepted” from the bankruptcy discharge. Corporate debtors can overcome some of these exceptions to the discharge through chapter 11. But before a corporate debtor can get its discharge, it must confirm a plan, and only 20% of regular chapter 11 plans are confirmed.
Subchapter V, on the other hand, boasts a much better success rate, with 50% of plans confirmed. Sixty-nine percent of those plans are confirmed consensually. For smaller corporate debtors, subchapter V could be a viable path to deal with debts that might otherwise not be dischargeable.
Subchapter V Plan Confirmation and Discharge
A bankruptcy court shall confirm a subchapter V debtor’s plan if the plan complies with § 1129(a). Under § 1191, the court still confirms a subchapter V plan even if the plan is “crammed down.” However, when the court confirms a plan under § 1191(b), § 1192 governs the discharge’s breadth instead of § 1141.
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District Court Reverses Bankruptcy Court’s Holding that a Chapter 11 Equityholder Committee Is “Automatically Dissolved” upon Dismissal |
District Court Judge Frank Geraci of the Western District of New York stirred the pot on what seemed like a settled chapter 11 issue by reversing the bankruptcy court and rejecting the majority view on the fate of official committees upon dismissal of a chapter 11 case.
In INT, the bankruptcy court dismissed the debtor’s chapter 11 case for failure to obtain counsel, and denied the equity committee’s application to retain counsel as moot because the committee was “automatically dissolved” upon dismissal of the bankruptcy case. The committee appealed to the district court, and the U.S. Trustee moved to dismiss the appeal, arguing that because dismissal dissolved the committee, it lacked standing to pursue the appeal. Judge Geraci disagreed and reversed the bankruptcy court, holding that a committee in a chapter 11 bankruptcy case is not automatically dissolved when the case is dismissed.
Judge Geraci reasoned that pursuant to § 1103(c), committees have broad authority to perform “services in the interest of those they represent.” In evaluating the text and structure of the Code, he reasoned that there is no rigid rule of automatic termination upon dismissal, and the fact that Congress omitted a rigid rule of automatic termination of committee appointments upon dismissal suggests that it did not intend to impose such a rule.
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Bankruptcy’s Turn to Market Value |
Many lawyers viewed chapter 11, which came into effect in 1979, as unsuccessful in the 1980s. Large firms had been mired in bankruptcy for years — three years, on average. The process was seen as expensive, inaccurate and subject to abuse. While bankruptcy today still has problems with considerable conflict, and few would say it works perfectly, the overall contrast with bankruptcy today is stark: Bankruptcies that took years in the 1980s take months in the 2020s.
Multiple changes explain bankruptcy’s success: creditor learning, statutory reform, better judging and lawyering, newly developed techniques, and stronger implementation of the useful mechanisms that the 1978 Code contained but that were not immediately implemented well. We do not challenge the relevance of those that have been brought forward, but in our analysis, one major change is missing from the current understanding of bankruptcy’s success: Bankruptcy courts and practice in the 1980s rejected market value, while today bankruptcy courts and practice generally accept and use it.
This shift is a major explanation for bankruptcy’s success. It narrows several otherwise wide opportunities for conflict in bankruptcy. It speeds up proceedings. It allows firms to be repositioned in market transactions. Deals among claimants and interests are more readily reached, and firms can often ride through bankruptcy without the bankruptcy process materially scarring the enterprises. |
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