Chapter 11 Debtor’s Amendment to File under SBRA Would Prejudice Creditor

Posted by NCBRC - May 16, 2022

The debtor’s proposed amendment to file her chapter 11 petition under the newly enacted SBRA under which only the debtor could have a plan confirmed, would unduly prejudice the mortgage creditor who expended a great deal of time, expense, and effort to negotiate and obtain approval of its own plan. Ventura v. Gregory Funding, No. 20-1949 (E.D.N.Y. April 21, 2022).

In 2007, the debtor borrowed $1,000,000.00 to purchase property to use as a Bed and Breakfast. The loan was secured by the property and the mortgage assigned to Gregory Funding. Five years later, the debtor defaulted on the loan. She filed for chapter 7 bankruptcy and received a discharge. In February, 2015, she executed a loan modification with Gregory Funding that improved the terms of the mortgage. She defaulted on that new agreement and Gregory obtained a judgment of foreclosure. In October, 2018, the debtor filed for chapter 11 bankruptcy. At that time, the property was valued at $1,200,000.00, and the Debtor owed Gregory $1,687,664.80. The debtor missed the negotiated deadline for filing her chapter 11 plan and, upon order of the court, both parties filed plans for reorganization. The debtor’s plan provided for reducing the secured portion of the debt to $1,050,000.00 which the debtor would pay over 30 years at 4.25% interest. Because of the debtor’s previous chapter 7 discharge, the plan did not provide for repayment of the unsecured portion of the debt. Gregory’s plan entailed selling the property. Prior to the hearing, Gregory obtained the necessary votes for confirmation.

The bankruptcy court found the debtor’s plan to be unconfirmable under section 1123(b)(5) because she lived in the property. It set a hearing to confirm the plan offered by Gregory.

In the meantime, in February, 2020, Congress enacted the Small Business Reorganization Act, Subchapter V, which offers small business owners an exception to section 1123(b)(5)’s prohibition against modifying a loan secured by the debtor’s residence, and provides that only the debtor may have a plan of reorganization confirmed. Less than two weeks after the SBRA was enacted, but sixteen months after her original petition, the debtor sought to amend her chapter 11 petition to file as a Subchapter V debtor.

Gregory objected to the amendment arguing that it had a “vested right” in its plan of reorganization. Gregory also argued that the debtor did not qualify as a small business owner and, in the alternative, that she could not modify her mortgage under the terms of section 1190(3) because she used the loan to purchase the B & B property.

The trustee also objected to the debtor’s proposed amendment as being beyond the statutory time limit for filing under Subchapter V.

The bankruptcy court overruled the objections and confirmed the debtor’s plan under Subchapter V.

On Gregory’s appeal, the court began with Rule 1009(a) which permits a debtor to amend her plan in the absence of prejudicial reliance. Prejudice does not result merely from the fact that the amendment improves the terms of the plan for the debtor to the detriment of the creditor. The creditor must show detriment reliance in the form of actual economic loss or that it would have taken different actions had the debtor amended earlier.

Though the debtor sought the amendment within two weeks of Subchapter V’s coming into effect, the district court found that the bankruptcy court abused its discretion by failing to properly consider the degree of prejudice Gregory suffered by reason of what it called the debtor’s “belated amendment.” The court pointed out that during the time prior to her filing for the amendment, the parties undertook extensive negotiations, attended numerous court hearings and expended time, effort, and expense to resolve their differences. Furthermore, Gregory had obtained the necessary votes to confirm its proposed plan and was on the cusp on having the plan confirmed when the debtor sought to assert Subchapter V’s limitation under which only the debtor could have a plan confirmed.

The court concluded that any prejudice to the debtor in denying her amendment was outweighed by the prejudice to Gregory. The court observed that the debtor would continue to benefit from section 1191(c)’s requirement that Gregory’s plan be “fair and equitable.”

The district court reversed.

Ventura ED NY April 2022

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