Subchapter V case converted to Chapter 7

Where there was evidence of bad faith conduct by the debtor, a continuing loss to or diminution of the bankruptcy estate and the absence of a reasonable likelihood of rehabilitation, a conversion from Subchapter V to Chapter 7 was in the best interests of the creditors.

Background

This matter comes before the court on the motion of the US Trustee, or UST, to convert or dismiss this Subchapter V bankruptcy case. The debtor filed an opposition to the UST’s motion. The Subchapter V trustee did not file a response, but she supports the UST’s motion. The court heard the evidence and the parties’ arguments on July 26, 2022.

Analysis

The purpose of Subchapter V was to make Chapter 11 more streamlined for the debtor and the creditors, thereby making the case less expensive and faster than a traditional Chapter 11 case. Although the voting requirements are different under Subchapter V (debtors need not have an impaired accepting class), the requirements of feasibility and good faith remain.

The court finds bad faith conduct on the part of the debtor for a number of reasons. First, the debtor has not accurately and timely disclosed all of his assets. Second, the debtor stated “none” when asked about transfers to family members when, in fact, he transferred funds to his cousin on two occasions. Third, the failure to pay post-petition domestic support obligations is an enumerated cause for dismissal or conversion in the statute. 

Alternatively, the court finds that there is a continuing loss to, or diminution of, the bankruptcy estate coupled with the absence of a reasonable likelihood of rehabilitation. There are continuing losses because the debtor is accruing legal fees, and Subchapter V trustee fees, that his monthly operating reports indicate he has no ability to pay.

Further, there is an absence of a reasonable likelihood of rehabilitation because the debtor’s amended plan cannot be confirmed on both feasibility and good faith grounds. For a plan to be considered fair and equitable, the court must find either: (a) that the debtor will be able to make all payments under the plan or (b) there is a reasonable likelihood that the debtor will be able to make all the payments, and the plan provides for appropriate remedies in the event of a default. The debtor’s amended plan in this case meets neither standard – there is no reasonable likelihood that the debtor will be able to make the payments under the amended plan.

Finally, the court turns to the good faith requirement for confirmation. The debtor’s amended plan is a liquidating plan. Other than the liquidation of the debtor’s membership interests and the potential litigation claims (all of which are of questionable value), the debtor proposes to pay his priority claims in full, and to make a distribution to his unsecured creditors of one and a half cents on the dollar over a five- year period. This is, for all intents, a meaningless distribution to the unsecured creditors. The court finds that a conversion to Chapter 7 is in the best interests of the creditors.

UST’s motion to convert bankruptcy case granted.

In re: Bin Hao, No. 22-10478, Sept. 7, 2022. EDVA Bankr. at Alexandria (Kenney). VLW No. 022-4-021. 16 pp.