By Michael Temin:


Section 11 of Official Bankruptcy Form 105, Involuntary Petition Against an Individual, provides:


Each petitioner is eligible to file this petition under 11 U.S.C. § 303(b).

The debtor may be the subject to an involuntary case under 11 U.S.C. § 303(a).

At least one box must be checked:

[  ] The debtor is generally not paying such debtor’s debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount.

[  ] Within 120 days before the filing of this petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.

Two recent cases have held that an involuntary petition which used Official Bankruptcy Form 105 was legally sufficient to state a claim and, thereby, defeat a  motion to dismiss. In re Hammond, 2021 Bankr. LEXIS 2651 (Bankr. S.D. Tex. Sept. 28, 2021); In re Gutierrez, 2020 Bankr. LEXIS 1304 (Bankr. S.D. Miss. May 15, 2020).

The Petitioning Creditor in Hammond used Official Form 105 by checking the applicable boxes to read as follows:

[X] Each Petitioner is eligible to file this petition under 11 USC § 303(b).

[X] The debtor may be the subject of an involuntary case under 11 USC § 303(a).

[X] The debtor is generally not paying such debtor’s debts as they become due, unless they are subject of a bona fide dispute as to liability or amount.

On the third page of the involuntary petition, where it is asked to list information about all of the petitioning creditors, the petitioning creditor listed only itself and inserted “Matured loans remain unpaid” under the heading of “Nature of petitioner’s claim” and listed $1,690,359 under the heading “Amount of value of any lien.”

The alleged debtor filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenging the sufficiency of the allegations of the involuntary petition.  To defeat a motion to dismiss, Petitioning Creditor must meet Federal Rule of Civil Procedure 8(a)(2)’s requirements of “a short and plain statement showing that the pleader is entitled to relief.”  The United States Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) stated:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for them is conduct alleged.

Both Hammond and Gutierrez courts relied on Federal Rule of Bankruptcy Procedure 9009(a), which requires parties to use, without alteration, the Official Forms prescribed by the Judicial Conference of the United States in filing a bankruptcy petition.  The Rule states:

The Official Forms prescribed by the Judicial Conference of the United Sates shall be used without alteration, except as otherwise provided in these rules, in a particular Official Form, or in the national instructions for a particular Official Form.  Official Forms may be modified to permit minor changes not affecting wording or order of presenting information, including changes that:

  1. expand the prescribed areas for responses in order to permit complete responses;
  2. delete space not needed for responses; or
  3. delete items requiring detail in a question or category if the filer indicates—either by checking “no” or “none” or by stating in words—that there is nothing to report on that question or category. (emphasis added)

Each court denied the motion to dismiss and concluded that the better approach for issues such as  those raised by the motion to dismiss was a prompt trial.

The United States Supreme Court held in BFP v. Resolution Trust, that properties sold at “force-sale” mortgage foreclosure sales properly conducted pursuant to a state’s foreclosure statute are presumed to have been sold for “reasonably equivalent value” for purposes of Section 548 of the Bankruptcy Code.  511 U.S. 531, 114 S.Ct. 1757 (1994).  Accordingly, such sales generally cannot be avoided as a fraudulent transfer so long as the state statute complies with certain factors outlined by the Supreme Court as providing sufficient notice and bid procedures to maximize value. However, bankruptcy courts are split in their application of BFP to statutory “force-sale” state tax sales.

Section 548 of the Bankruptcy Code permits trustees or debtors in possession set aside fraudulent transfers.  11 U.S.C. § 548.  Transfers of property to an insolvent debtor (or which rendered a debtor insolvent) for “less than a reasonably equivalent value in exchange for such transfer” are considered constructively fraudulent and can be set aside by a bankruptcy trustee or debtor in possession.  11 U.S.C. § 548(a)(1)(B).

In BFP, the Supreme Court, noting that state governments have an interest in enforcing and carrying out their state-created real estate laws without being under a “federally created cloud” identified the following, non-exclusive factors (the “BFP Factors”) which supported its holding that [at least most] state mortgage foreclosure statutes are designed to result in sales which bring “reasonably equivalent value”:

  • Notice Requirement – notice is required to defaulting landowners;
  • Time Requirement – a substantial amount of time prior to the commencement of the action is provided;
  • Publication of Notice of Sale – requirement that the notice of sale be published; and
  • Bidding Procedures and Rules – bidders must strictly comply to bidding procedures and rules.

Id. at 544.

The Supreme Court emphasized that state foreclosure laws typically allow foreclosure sales to be set aside “if the price is so low that it ‘shocks the conscience’ or raises a presumption of fraud or unfairness” instead of on the grounds of fraudulent transfer.  Id.  Thus, there are safeguards under state foreclosure laws – as opposed to fraudulent transfer legal theories – to set aside foreclosure sales which do not render reasonably equivalent value.

Recently, the United States District Court for the Western District of New York affirmed an order from the Bankruptcy Court avoiding an in rem tax sale.  Duvall v. County of Ontario, 2021 WL 5199639 (W.D.N.Y. Nov. 9, 2021).  After recognizing that many courts have examined the applicability of BFP to state tax sales, the District Court declined to extend BFP’s “reasonably equivalent value” holding to New York’s tax sale statutes.  Id. at *3-4.

In Duvall, the Court distinguished New York’s state tax sale laws from state mortgage foreclosure laws, concluding that New York’s tax sale statutes fail to meet the BFP Factors.  First, the BFP notice requirement was not satisfied.  The County of Ontario took title to the property prior to the tax sale without providing sufficient notice to the debtor.  Id. at *5. Second, and most importantly, because the County took title to the property prior to the tax sale, there was no way for the debtor to receive any equity or benefit from the property, rendering the other BFP Factors meaningless.  Id.

Because tax sale statutes vary greatly from state to state, courts are split on this issue.  In most cases where a tax sale is upheld, the applicable state law satisfies at least one of the BFP Factors.  For example, in upholding a Colorado tax sale, the Tenth Circuit found that “the decisive factor in determining whether a transfer pursuant to a tax sale constitutes ‘reasonably equivalent value’ is a state’s procedure for tax sales, in particular, statutes requiring that tax sales take place publicly under a competitive bidding procedure.” In re Grandote Country Club Co., Ltd., 252 F.3d 1146, 1152 (10th Cir. 2001).

However, the Tenth Circuit declined to uphold a Wyoming tax sale, concluding that unlike the Colorado tax sale law, the Wyoming tax sale law did not satisfy the BFP Factors.  In re Sherman, 223 B.R. 555 (B.A.P. 10th Cir. 1998), a debtor’s residential property was sold to “a person selected in a random lottery for the amount of the outstanding taxes; in this case, less than $500. The Wyoming tax sale statutes do not permit a public sale with competitive bidding.”  Id. at 559.  The Tenth Circuit found that such a sale that lacked competitive bidding, and therefore, did not satisfy the BFP Factors.

In determining whether a state “forced-sale” statute qualifies as “reasonably equivalent value” under BFP, courts must consider whether any of the BFP Factors have been satisfied.  Since state forced sale statutes vary from state to state (even in the same Circuit as exemplified by the Tenth Circuit’s contrary holdings in Sherman and Grandote), counsel should pay careful attention to whether the applicable state tax sale statutes satisfy the BFP Factors.

By Michael Temin

A Delaware bankruptcy court recently held that the bar date for filing proofs of claim cannot be enforced against a creditor if the notice of the bar date was not sent by mail to that creditor.  In re Cyber Litigation Inc., No. 20-12702 (CTG) (Bankr. D. Del. Oct. 21, 2021).

Relevant Bankruptcy Rules

Bankruptcy Rule 3003(c)(3) provides that the court “shall fix . . . the time within which proofs of claims or interest may be filed.”  Bankruptcy Rule 2002(a)(7) provides “the clerk, or some other person as the court may direct, shall give . . . all creditors   . . . at least 21 days’ notice by mail of . . . the time fixed for filing proofs of claims pursuant to Rule 3003(c).”

Procedural status

Hansen Networks, the largest unsecured creditor in Cyber Litigation Inc.’s bankruptcy case, missed the deadline for filing proofs of claim. It filed a late proof of claim.  The debtor filed a motion to disallow the claim on the ground that the proof of claim was filed after the bar date.

The Bar Date Notice

Notice of the bar date was mailed to parties in interest and published in the national edition of the New York Times.  It was mailed to Hansen Networks in Las Vegas and to David Hansen, the principal of Nansen Networks, at an address in Puerto Rico where Mr. Hansen no longer resided at the time the notice was sent.

The debtor’s claim agent also emailed notice to an email address that Mr. Hansen actively used.  There is nothing in the record to suggest that the email was returned to the claims agent as undeliverable.  Mr. Hansen admitted that he used this address in a subsequent exchange with the debtor.

The court concluded that an email sent to this address was reasonably calculated to reach Mr. Hansen and thus Hansen Networks and that the email notice satisfied the requirements of due process which require that notice be provided in a means such as one desirous of actually informing the party to be bound might reasonably adopt to accomplish it.  The court noted:

It is well established that to bind a creditor to a claims bar date, known creditors must receive “actual notice.”  A long line of cases establishes that the paradigmatic means for proving “actual notice” is by mail to a creditor’s last known address. Here, it is stipulated that the address to which the bar date notice was mailed was not Hansen Networks’ last known address.

Mailing a notice to a creditor’s’ last known address, however, while surely sufficient to satisfy due process, has never been found to be a necessary element of due process.  Cyber Litigation at p.11.

The court found that the notice satisfied the requirements of due process.

The Notice Did Not Satisfy Rule 2002

The court, however, noted that the analysis did not end with due process, but that the requirements of Bankruptcy Rule 2002 must also be satisfied:

In addition to satisfying the requirements of due process, a debtor is also obligated to meet the requirements of the Bankruptcy Rules. .  . When the Supreme Court does promulgate . . . a procedural rule, those rules “are binding and courts must abide by them unless there is an irreconcilable conflict with the Bankruptcy Code.” Cyber Litigation at p.15.

Bankruptcy Rule 2002(a)(7) requires 21-day notice by mail of the time fixed for filing proofs of claim.  Bankruptcy Rule 2002(g) requires that notices to creditors shall be mailed to the address shown on the list of creditors or schedule of labilities, whichever is filed later, if the creditor has not made a request for mailing to a specific address.  The notice mailed to Mr. Hansen at a residence from which he had moved did not meet the requirements of Rule 2002.

The Failure to Provide Proper Notice Was Not Harmless Error

If the failure to comply with the requirement of Bankruptcy Rule 2002 was harmless error, it could be disregarded pursuant to Rule 61 of the Federal Rule of Civil Procedure which is incorporated into the Bankruptcy Rules by Bankruptcy Rule 9005.

In order to show that the failure to provide proper service by mail was harmless, however, it is insufficient to demonstrate that the creditor was sent notice by some other means by which he might or should  have learned of the bar date.  In the absence of a showing that the creditor obtained actual, subjective knowledge of the bar date, the Court is unable to conclude that the failure to meet the specific of the rule may be treated as no-harm-no-foul situation.  Cyber Litigation at p. 17.

As a result, the court overruled the debtor’s objection to the late filed proof of claim.

Among the potential prolonged impacts of the COVID-19 pandemic is the interruption to supply chains throughout several critical industries.  As a result, prices have increased as various goods and materials have become difficult to obtain.  A recent Washington Post article noted that the overall consumer price index has increased by close to or above 5% each month since May 2021, reaching a high of 6.2% in October 2021.  These levels are more than double the rates seen in the months immediately prior to the start of the pandemic in March 2020.

During a presentation on November 9, 2021, Fox Rothschild attorneys Michael Sweet (Chair, Financial Restructuring and Bankruptcy), Catherine Youngman (Financial Restructuring and Bankruptcy), and Marc Tucker (Litigation and Transportation and Logistics), along with Steven Wybo, a Senior Managing Director at Riveron Consulting, LLC, discussed the implications of the supply chain disruption, the prognosis for 2022 and beyond in key industries notably impacted by supply chain problems, and ways businesses might address supply chain issues over the next year.

Using the automotive industry as a microcosm, the panel identified the following factors as contributing to supply scarcity and increased costs:

  • Continued COVID-19 flare-ups and renewed restrictions.
  • Lingering semi-conductor shortage. Notably, over 4 million units forecasted to be removed from the system between 2021 and 2023, with normalized production not likely to return until 2023.
  • Industry transformation driving investment in new technology. By 2028, nearly 25% of vehicle production will be electric or hybrid.
  • Labor scarcity and increased wages.
  • Decreased availability of materials resulting in increased costs.
  • Shipping logistics challenges resulting in increased costs.
  • Inflationary pressures.
  • Consistent downward revisions to volume forecasts.
  • Unplanned plant downtime.

Turning to the challenges facing the trucking industry, the panel noted that there is a shortage of 80,000 drivers compared to 61,500 prior to the pandemic.  This has resulted in transportation companies increasing wages and other incentives in order to attract employees, as well as industry pressure for Congress to lower the driver’s age from 21 to 18.  Additionally, there is a lack of new vehicles and maintenance parts (which is tied to the aforementioned auto industry issues), increased fuel costs, and general increased freight demand.  This confluence of increased pressures and costs ultimately reaches consumers.

The panel provided the following suggestions for businesses to help navigate supply chain issues over the next year:

  • Create a rigorous forecasting process.
  • Employ precise inventory tracking, including determining whether stockpiling will create extra revenue over next 12 months.
  • Implement labor constraints as necessary.
  • Prepare for demand uncertainty.
  • Optimize your supply network, including looking into alternative markets.
  • Read your contracts and known your covenants and obligations.
  • Explore competition to potential target.
  • Explore potential growth opportunities created by industry shortages.

Overall, while 2022 may be a continuation of 2021 in many ways, the panel was optimistic for a return to normalcy in supply chains in 2023.

The full presentation along with the slides can be viewed at this link.

By Michael Temin

The First Circuit was required to decide whether the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) or the Federal Rules of Civil Procedure (the “Civil Rules”) govern  a case that comes within the federal district court’s jurisdiction as a case “related to” a pending bankruptcy case.  If the Bankruptcy Rules applied, plaintiffs’ motion for reconsideration was too late (Fed. R. Bank. P. 9023 allows 14 days for the filing of a motion to reconsider whereas Fed. R. Civ. P. 59(e) allows 28 days).    The answer to this question was outcome determinative in In re Lac-Megantic Train Derailment Litigation, 999 F.3d 72 (1st Cir. 2021).

The case arose from a derailment of railroad cars carrying crude oil resulting in deaths and personal injuries.   Responsibility for the railroad cars was eventually assumed by Montreal, Maine and Atlantic Railway, which filed bankruptcy in Maine. Wrongful death suits were filed in various state courts, removed to federal district courts and eventually centralized in the District of Maine pursuant to 11 U.S.C. § 157(b)(5), which allows a district court having jurisdiction over a bankruptcy proceeding to order the transfer to it of any personal injury claims related to the bankruptcy proceeding.

A settlement agreement that was part of the plan of liquidation resulted in the dismissal of claims against all the defendants except Canadian Pacific, which moved to dismiss on various grounds.  Plaintiffs moved to file an amended complaint.

On September 28, 2016 the district court granted Canadian Pacific’s motion to dismiss on jurisdictional grounds and denied the plaintiffs’ motion to amend.  On October 26, 2016, twenty-eight days later, the plaintiffs moved for reconsideration of denial of their motion to file an amended complaint.  On January 19, 2017 the plaintiffs filed a notice of appeal. Canadian Pacific moved to dismiss the appeal, arguing that the plaintiffs’ untimely motion for reconsideration did not toll the time for appeal.

The First Circuit started its analysis with the passage of the Bankruptcy Reform Act of 1978 (the “Code”), which created the modern bankruptcy system.  N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) repudiated Congress’s efforts to give Article I bankruptcy courts  broad jurisdiction over all cases loosely connected to title 11 claims.  Two years later, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 which provided that the district courts could exercise jurisdiction over bankruptcy cases arising under title 11 and bankruptcy cases “related to” title 11 cases.  A district court could refer any such case to a bankruptcy court if it elected to do so.

The new system distinguished between “core” and “non-core” cases and identified different decision makers for each. Bankruptcy courts could issue final orders with respect to core cases (that is, cases arising under title 11), but only the district court could issue final orders in “non-core cases (“related to” cases).

By its terms, the Bankruptcy Rules “govern procedure in cases under title 11 of the United States Code.”  Bankruptcy Rule 1001.  The court read the phrase broadly, reasoning that if Congress wanted to restrict applicability of the Bankruptcy Rules to core cases alone, they could have said so.

The court found further support for its broad reading of Rule 1001 in Code §157(b), which provides that “[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11.”  This language suggested to the court that Congress envisioned a difference between “cases under title 11” and core cases.  If both phrases were intended to define the same universe of cases, there would have been no point in using two phrases.

The convincing argument for the court was the practicalities attendant to the efficient operation of the modern bankruptcy system:

If the Civil Rules applied to non-core cases, a district court adjudicating both core and non-core cases in any given bankruptcy proceeding would need to apply two different set of rules simultaneously.  This anomaly would persist despite the fact that those cases would involve the same parties. . . Such a convoluted procedural scheme would be in marked tension with the bankruptcy system’s goal of resolving claims efficiently. 999 F.3d at 80.

We cannot imagine any reason why Congress would authorize jurisdiction for core and non-core cases in the same judicial district  . . , but require the district court to apply a different set of rules to each.  999 F.3d at 81.

The First Circuit held that the Bankruptcy Rules governed the procedural aspects of the case. Consequently, the plaintiffs’ motion was untimely.  Therefore, the deadline for filing notice of appeal expired 30 days after the district court entered final judgment on September 28, 2016.  The appeal was untimely and the case was dismissed for want of appellate jurisdiction.

The First Circuit’s decision is consistent with that of the courts of appeal that have considered the issue and concluded that the Bankruptcy Rules apply to a non-core, “related to” case pending in a federal forum.  In re Celotex Corp., 124 F.3d 619, 629 (4th Cir. 1997); Phar-Mor, Inc. v. Coopers & Lybrant, 22 F.3d 1228, 1238 (3d Cir. 1994); Diamond Mortg. Corp. of Ill. v. Sugar,913 F.2d 1233, 1243 (7th  Cir. 1990).

Joseph J. DiPasquale, a partner in Fox Rothschild’s Morristown, New Jersey and New York City offices, is set to co-moderate a presentation on important developments in bankruptcy law throughout 2021.  Described as a “hallmark session of the conference,” Joseph J. DiPasquale and M. Blake Cleary of Young Conaway Stargatt & Taylor will review the significant decisions of the past year, with an emphasis on cases from the Second and Third Circuit.  The panelists include: The Honorable Robert D. Drain, United States Bankruptcy Court for the Southern District of New York, The Honorable Rosemary Gambardella, United States Bankruptcy Court for the District of New Jersey, and The Honorable Brendan L. Shannon, United States Bankruptcy Court for the District of Delaware.

Topics will include, but are not limited to, discussing mass torts cases, the Nondebtor Release Prohibition Act of 2021, independent directors, Section 365 of the Bankruptcy Code and executory contract issues, good faith filing, consent rights under LLC agreements, and more.  The Conference is scheduled for Monday, November 15, 2021 at 10:00 a.m.

More information on the conference, registration, and the agenda can be found at: Association of Insolvency & Restructuring Advisors – 20th Annual Advanced Restructuring & POR Conference (


Stephanie Slater is a Law Clerk, based in the firm’s Wilmington, DE office.

Effective November 30, 3031, the Consumer Financial Protection Bureau (CFPB) will enact Regulation F to 12 C.F.R. 1006, which will be the first comprehensive federal debt collection regulations interpreting the Fair Debt Collection Practice Act (FDCPA).

The FDCPA was enacted in 1977 “to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. § 1692(e) (emphasis added). The FDCPA only applies to “debt collectors,” not creditors, mortgagors, or mortgage servicing companies.  In addition to traditional debt collectors, attorneys who collect debts on behalf of creditors are also considered “debt collectors’ under the FDCPA.  A “debt collector” is defined as:

any person who uses any instrumentality or interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

15 U.S.C. § 1692(a)(6).

Just like the FDCPA, Regulation F applies to debt collectors as defined by the FDCPA.  It adds additional consumer rights which require debt collectors (1) to provide additional requirements to the initial notice to consumers provided at the outset of debt collection to include a validation notice and disclosures; (2) to identify actions which must be taken before a debt collector can report information to a consumer reporting agency; and (3) refrain from collecting on time-barred debt.

There are two parts amending Regulation F, 12 C.F.R. 1006.  Communications to consumers are addressed in part one, 85 Federal Register 76,735 (Nov. 30, 2020) and disclosures to consumers are addressed in 86 Federal Register 5766 (Jan. 19, 2021).


In an effort to address concerns regarding communication methods under the FDCPA and to also address communication methods by newer technology, Regulation F provides consumers with the ability to stop collection calls and/or text messages.

After speaking to a debtor, a debt collector will now have to wait a week before contacting a consumer about the same debt.  However, the debt collector can make up to seven (7) attempted calls to the consumer, and can contact the consumer’s family or friends to obtain contact information.  Debt collectors may also contact consumers through emails and text messages.

85 Fed. Reg. 76,735 (Nov. 30, 2020).

Validation Notice and Disclosures

Under the current language of the FDCPA, within five (5) days of the initial contact with a consumer in which a debt is being collected, debt collectors must send written notice to consumers which contain the following information:

  • the amount of the debt;
  • the name of the creditor to whom the debt is owed;
  • a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector – this notice of dispute does NOT have to be in writing;
  • a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
  • a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

15 U.S.C. § 1692g(a)(1)-(5).

Then, pursuant to section 1692g(b), if a consumer “notifies the debt collector in writing” that the debt is disputed, the debt collector must “cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt … and a copy of such verification … is mailed to the consumer by the debt collector.” 15 U.S.C. § 1692g(b).  Currently, the verification of the debt requires little additional information from the initial notice, and may not be enough information for the consumer to recognize the debt.

Under new Regulation F, debt collectors are required to provide consumers with a Validation Notice at the initial communication, or within five (5) days of the initial communication, delivered in writing or electronically.  In addition to the FDCPA requirements, the following additional information must be provided:

  • Debt collector communication disclosure;
  • Name and mailing information of debt collector;
  • Name of creditor as of the itemization date, if debt is related to a consumer financial product or service (i.e., credit card debt, mortgage debt);
  • Account Number
  • Itemization of current amount of debt, including interest, fees, payments, and credits since itemization date:
  • “Itemization date” can be one of the following five (5) reference dates:
    1. Last statement date;
    2. Charge-off date;
    3. Last payment date;
    4. Transaction date; or
    5. Judgment date
  • Current amount of debt;
  • Information about consumer protections:
  • Consumer’s right to dispute debt
  • Consumer’s right to request original creditor information
  • Date validation period expires
  • Information regarding Consumer Protection Bureau’s website for more information, for consumer financial product or service debts
  • Consumer-response information:
  • Prepared statement, such as a tear-off form, that consumer may detach and return to the debt collector to dispute the debt; or
  • Information on how to dispute debt electronically
  • Safe-Harbor/Optional Content:
  • Debt collector’s telephone contact information;
  • Reference code used by debt collector to identify consumer or debt;
  • Payment disclosures;
  • Electronic communication information;
  • Spanish-language disclosures;
  • Merchant brand, affinity brand, or facility name associated with the debt; and
  • Disclosures specifically required under any other applicable law

86 Fed. Reg. 5766 (Jan. 19, 2021).

However, while disclosures were previously required to be made in writing and by mail under the FDCPA, disclosures may now be sent by electronic means or may be made orally to the consumer. Validation Notices also do not need to be made in the first language of consumers.

Actions Which Must be taken Prior to Credit Reporting

Prior to reporting a consumer debt to a credit reporting agency, the debt collector must now actually speak with the consumer about the debt, either on phone or in person, mail the consumer a letter about the debt and wait a reasonable period of time to receive a notice of undeliverability, or send the consumer a message by electronic communication and wait a reasonable period of time to receive a notice of undeliverability.  The purpose of this amendment is to avoid the practice of debt collectors from reporting debts to collection agencies and then waiting for the consumer to contact them after the negative credit reporting is discovered by the consumer.

86 Fed. Reg. 5766 (Jan. 19, 2021).

Time-Barred Debt

Under Regulation F, debt collectors are barred from bringing or threatening to bring legal actions against consumers for debts in which the statute of limitations has expired.  It is important to note that debt collector can still pressure the consumer to making a payment on a time-barred debt, at which time the debt will be revived.

Proofs of claims filed in connection with bankruptcy proceedings are not included in this prohibition.

86 Fed. Reg. 5766 (Jan. 19, 2021).

As set forth above, while the new Regulation F provides many new rights to consumers and clarifies many of the provisions of the FDCPA, it also creates opportunity for abuse by consumers, and there is still much room for continued abuse by debt collectors.

“Just enough” is an undeniable—if informal—legal precept.  The concept finds its way into canon from adequacy of pleading to application of equity.  See, e.g., K-Tech Telecommunications, Inc. v. Time Warner Cable, Inc., 714 F.3d 1277, 1284 (Fed. Cir. 2013) (A complaint “must give just enough factual detail to provide ‘fair notice of what the . . . claim is and the grounds upon which it rests.’”) (emphasis added); Highway Cruisers of Cal., Inc. v. Sec. Indus., Inc., 374 F.2d 875, 876 (9th Cir. 1967) (“Equity has many reeds. A characteristic of it is that one may not get all of the reeds. One may get just enough relief to stop the evil where it is apparent no great damage was done[.]”) (emphasis added).

Recent rulings from bankruptcy courts throughout the United States confirm that “just enough” has now found a home in the nascent jurisprudence of Subchapter V eligibility.  Among Subchapter V’s eligibility requirements, a debtor must be engaged in, and have more than 50% of its debts from, commercial or business activity.  In the case of a liquidating or non-operating debtor, courts find that minimal activity may be sufficient to meet the “just enough” test for commercial or business activity.

The Statutory Requirements for Subchapter V Eligibility

In 2019, Congress passed the Small Business Reorganization Act of 2019 (“SBRA”). Pub. L. No. 116-54, § 5, 133 Stat. 1079 (2019).  The addition of Subchapter V to the Bankruptcy Code is one of the principal features of the SBRA.  Generally, Subchapter V affords small business debtors a new avenue of chapter 11 relief with truncated procedures intended to decrease the time and expense of bankruptcy.

A debtor is eligible for relief under Subchapter V of the Bankruptcy Code if it satisfies the eligibility requirements under Section 1182(1)(A) of the Bankruptcy Code.  As temporarily modified by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 134 Stat. 281, 310-12 (2020), Subchapter V debtors must:

  1. must be a person, which includes a corporation;
  2. must be engaged in commercial or business activity;
  3. may not have more than $7.5 million in debt on the petition date; and
  4. must have more than 50% of its debt from commercial or business activities.

Section 1182(1)(B) of the Bankruptcy Code excludes a debtor that otherwise meets these requirements if the debtor is (i) one of a group of affiliated debtors that exceed the $7.5 million debt cap on the aggregate, (ii) subject to certain reporting requirements under the Securities Exchange Act of 1934, or (iii) considered an “issuer” under Section 3 of the same Act.

At least two of the eligibility requirements are as straightforward as drafters can hope of for a legal standard. “Person” and “corporation” are defined terms in Section 101 of the Bankruptcy Code and the aggregate cap for petition date noncontingent liquidated secured and unsecured debts presents a simple calculation.  By contrast, the terms “commercial or business activities” featured in the remaining two requirements afford greater room for interpretation.

“Commercial or Business Activity” Is Broad and Can Include Maintaining Bank Accounts, Administering Claims, and Selling Assets.

The debtor has the burden to establish eligibility to file under a particular chapter—or subchapter in this case—of the Bankruptcy Code if a party challenges the debtor’s election.  The debtor must establish eligibility as of the date it filed its bankruptcy case.

In In re Vertical Mac Construction, LLC, the United States Bankruptcy Court for the Middle District of Florida recently address the United States Trustee’s (the “UST”) objection to a non-operating debtor’s Subchapter V election.  See In re Vertical Mac Construction, LLC, Case No. 6:21-bk-01520-LVV, 2021 WL 3668037 (Bankr. M.D. Fla. July 23, 2021).  The debtor was a stucco installation contractor for residential property.  In 2017, homeowners began filing construction defect claims against the debtor for improper stucco installation.  Ultimately, in October 2020, the debtor ceased operations after being unable to obtain either renewal or replacement insurance coverage.

The debtor filed its Subchapter V case after it ceased operations and filed a motion to sell substantially all of its assets under section 363 of the Bankruptcy Code.  The UST objected to the sale and argued that the debtor was impermissibly using the case to liquidate its assets rather than reorganize—the debtor had no operations, did not pursue accounts receivables or litigation, and had no intention to resume operations.  The debtor focused on its prepetition activities and argued its former business operations satisfied the statute.

The court charted its own course and approved the sale after conducting a plain reading analysis of the terms “engaged” and “commercial or business activity” in section 1182(1)(B) of the Bankruptcy Code.  The court adopted the following definitions:

Engaged.  involved in activity: occupied, busy.

Commercial.  occupied with or engaged in commerce or work intended for commerce; of or relating to commerce; viewed with regard to profit.

Commerce.  the exchange or buying and selling of commodities on a large scale involving transportation from place to place.

Business.  a usually commercial or mercantile activity engaged in as a means of livelihood; dealings or transactions especially of an economic nature.

Activity.  the quality or state of being active: behavior or actions of a particular kind.

The court concluded that the phrase “commercial of business activity” is broad and not limited to “operations.”  As the Court explained, “‘[o]perations’ insinuates a fully functioning business, but ‘activities’ encompasses acts that are business or commercial in nature but fall short of an actual operating business.”

With this broad definition in mind, the court held that the debtor satisfied the “commercial or business activity” standard.  Although it was no longer operating, the debtor was still maintaining bank accounts, working with insurance adjusters and insurance defense counsel to resolve the construction defect claims, and preparing for the sale of its assets.  Each of these constituted “activities” that were commercial or business in nature.

Additional Cases Interpreting “Commercial or Business Activities” to Liquidating or Non-Operating Subchapter V Debtors

The Vertical Mac Construction, LLC case joins a growing chorus of bankruptcy court decisions interpreting “commercial or business activities.”  Other cases with similar holdings include:

  • In re Ikalowych, Case No. 20-17547 TMB, 2021 WL 1433241 (Bankr. D. Colo. Apr. 15, 2021) (individual debtor met eligibility requirements because he (i) was an insurance salesperson earning wages from his sales, (ii) personally guaranteed the debt of a repair business of which he was a part equity owner, (iii) was the direct or indirect owner of two active LLCs and the manager of both, (iv) continued to have corporate responsibility, and (v) performed limited services to wind down one business).
  • In re Offer Space, Case No. 20-27480, 2021 WL 1582625 (Bankr. D. Utah Apr. 22, 2021) (maintaining a bank account, holding accounts receivable, exploring claims against a third party, managing the stock of the seller, and “winding down its business and taking reasonable steps to pay its creditors and realize value for its assets” sufficient engagement in commercial or business activities).

Courts are less likely to find sufficient “commercial or business activities” where the debtor is an individual who owns a non-operating business, particularly where the business has been dissolved under applicable state law:

  • In re Thurmon, Case No. 20-41400-can11, 2020 WL 7249555 (Bankr. W.D. Mo. Dec. 8, 2020) (individual debtors who were retired and did not intend to return to business were not engaged in commercial or business activity where they merely owned the majority equity interest in the “empty shell of” a pharmacy business that sold its assets prepetition).
  • In re Johnson, Case No. 19-42063-ELM, 2021 WL 825156 (Bankr. N.D. Tex. Mar. 1, 2021) (individual debtor was not engaged in commercial or business activity where he was the president of an oil and gas company owned by his mother because he was “nothing more than an employee” and was not conducting his mother’s business for his own profit).
Key Takeaways for Liquidating and Non-Operating Subchapter V Debtors

Potential debtors should consider the evolving state of play as courts continue to delineate the boundary of “just enough” commercial or business activity to satisfy Subchapter V eligibility.  The considerations include whether the potential debtor is an individual or a corporation, whether the entity is active or dissolved under state law, whether the entity has sold substantially all of its assets prepetition, and the remaining activities in which a non-operating entity is involved.  The calculus becomes more complex for individual debtors, where courts have expressed a particularly divergent view of sufficient commercial or business activity that ranges from narrow interpretations to “virtually all private sector wage earners” with capital at risk or debts arising from their work.

By Michael L. Temin and Martha B. Chovanes


The relationship for  which counsel for a committee could be disqualified was addressed in the recent case of Bingham Greenbaum Doll, LLP v. Glenview Health Care Facility, Inc., 620 B.R. 582 (6th Cir. B.A.P. 2020) (“Glenview”).  In Glenview, the debtor corporation was owned by two shareholders.  The Official Committee of Unsecured Creditors in the case filed an application to employ an attorney who previously had represented one of the debtor’s 50% shareholders in estate planning matters.   The representation concluded two years before the debtor filed for bankruptcy.  On objection by the Debtor, the bankruptcy court denied the application.  On appeal, the Sixth Circuit BAP vacated the disqualification order.

Employment of Attorney for Creditors Committee

The only restriction placed by the Bankruptcy Code on employment of an attorney for a creditors committee is that “an attorney . . . employed to represent a [creditors] committee . . . may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case  11 U.S.C. § 1103(b).

In denying the employment application for the Committee, the Bankruptcy Court improperly relied, in part,  on § 328(c), which permits a court to deny compensation to a creditors committee attorney “if, at any time during the professional person’s employment under section  . . .1103  .  ., such professional person is not a disinterested person, . . .”

The BAP noted, however, that the Bankruptcy Court’s analysis was conflating § 1103 with § 327 and proceeding as if § 1103 contained the same “disinterested” requirement.

Disinterested As Applied to Attorneys for a Creditors Committee

A professional person is “disinterested” if the person is

  • not a creditor, an equity security holder, or an insider;
  • not and was not within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and
  • does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.

11 U.S.C. § 101(14).

In denying retention of the Committee’s requested counsel, the Bankruptcy Court relied on Section 328(c) which track the language of § 327(a) limiting the professional that a trustee may employ to professionals “that do not hold or represent an interest adverse to the estate, and that are disinterested persons.  By contrast, an attorney for a committee is not required to be “disinterested,” and the prohibition on other employment is limited to concurrent representation of adverse interests in connection with the case.

The inclusion in § 328(c) of the same prohibitions on compensation of debtor counsel and of committee counsel, a requirement of disinterestedness, is inconsistent with the different constituents being represented and the particular roles they play in a bankruptcy case.  Committee counsel is intended to be adverse to the debtor or to other classes of creditors and shareholders (other than those creditors represented by the committee).  Because the application of § 328(c) by a bankruptcy court to deny compensation is discretionary, it is very unlikely that a court would deny compensation to committee counsel for doing its job.

Rules of Professional Conduct

The BAP found that, in assessing whether counsel to the Committee could be retained under § 1103(b), the Bankruptcy Court properly reviewed the Kentucky Rules of Professional Conduct for guidance in exercising its discretion to approve the employment of proposed counsel for the committee after the debtor challenged its qualifications.  The Bankruptcy Court relied on the Sixth Circuit’s articulation of the test for disqualification when counsel’s employment is challenged because of its representation of a former client, which is covered by Rule of Professional Conduct 1.9.

  • a past attorney-client relationship existed between the party seeking disqualification and the attorney it seeks to disqualify,
  • the subject matter of those relationships was/is substantially related; and
  • the attorney acquired confidential information from the party seeking disqualification.

Analyzing the facts, the BAP held there also was no basis on which to disqualify counsel under the state ethics rules.

The Glenview decision should serve as an important reminder for bankruptcy attorneys that in addition to complying with the eligibility criteria for retention under the Bankruptcy Code, attorneys must also be mindful of state ethics rules.





In a recent post, our own Harriet Wallace observed a truism in a recent ruling by the United States Bankruptcy Court for the District of Delaware in the chapter 7 iteration of the infamous Jevic case—the wording of an order matters.  The Court saw fit to bold and underline that maxim in yet another recent holding in Insys Liquidation Trust v. MeKesson Corporation (In re Insys Therapeutics, Inc.), No. 21-50176 (JTD), 2021 WL 3083325 (Bankr. D. Del. July 21, 2021).  To the near certain chagrin of critical vendors everywhere, the Court held that the language of the relevant critical vendor order was insufficient to insulate certain critical vendors from preference claims.

The Insys Therapeutics Critical Vendor Order

Insys Therapeutics, Inc. and its affiliates (the “Debtors”) developed and commercialized drugs and novel drug delivery systems for targeted therapies.  After filing their bankruptcy cases in 2019, the Debtors filed certain typical “first day” motions, including the Motion Pursuant to 11 U.S.C. §§ 105(a) and 363(b) for Authority to (I) Maintain and Administer Prepetition Customer Programs, Promotions, and Practices and (II) Pay and Honor Related Prepetition Obligations (the “Critical Vendor Motion”).  The Critical Vendor Motion requested, among other things, authority to pay all prepetition amounts owed to certain customers to continue to receive necessary services postpetition.

The Court granted the Critical Vendor Motion.  The order (the “Critical Vendor Order”) granting the Critical Vendor Motion included the following common language authorizing payments to critical vendors: “The Debtors are authorized, but not directed . . . to maintain and administer the Customer Programs[.]”

On January 16, 2020, the Court entered an order confirming the Debtors’ chapter 11 plan of liquidation.  The plan provided for the establishment of a liquidating trust (the “Liquidating Trust”) and assigned certain causes of action, including avoidance claims, to the Liquidating Trust.

On February 23, 2021, the trustee of the Liquidating Trust (the “Trustee”) filed a complaint for avoidance and recovery of certain prepetition transfers to certain prepetition critical vendors (the “Defendants”) and objected to all claims filed by the Defendants in the bankruptcy case.  The Defendants moved to dismiss the preference claim asserted in the complaint, in part, based on the provisions of the Critical Vendor Order.  The Defendants argued that the prepetition transfers would have been authorized under the Critical Vendor Order had they not been made prepetition, and that the Critical Vendor Order that would have authorized such transfers was law of the case.

The Trustee countered with three arguments—each of which was adopted by the Court.  First, the Court held that preferential payments that occur before the entry of a critical vendor order cannot be protected by a subsequent authorization to pay outstanding prepetition claims.  The language of the Critical Vendor Order did not preclude recovery of preferential payments that were made prepetition.  The Court concluded that the plain language of the Critical Vendor Order did not specifically bring prepetition transfers within the ambit of critical vendor relief.

Second, the language of the Critical Vendor Order was permissive rather than mandatory.  The language authorizing, but not directing, the Debtors to make critical vendor payments undercut the Defendants’ argument that prepetition transfers would necessarily have been authorized by the Critical Vendor Order had they not been made prepetition.

Third, the Critical Vendor Order included express language making clear that avoidance claims were not waived.  The Critical Vendor Order specifically provided that “[n]othing contained . . . in this Final Order is intended to be or shall be construed as . . . (c) a waiver of any claims or causes of action that may exist against any creditor or interest holder.”

The Court further distinguished the facts of the case from the limited circumstances in which courts in the Third Circuit recognize a “critical vendor defense.”  The Court explained that a critical vendor defense only exists where: (i) the debtor is required to pay the prepetition claims, either by order, stipulation, agreement, or statute; or (ii) the creditor against whom the preference action is asserted holds a priority claim and would therefore have unquestionably been paid in full in a liquidation scenario.

Based on its review of the Critical Vendor Order, the Court concluded that the first prong was not satisfied.  The Court distinguished other instances in which the first prong was satisfied by: (i) an order authorizing assumption of the underlying agreement (and, thus, requiring a cure of outstanding amounts) under 11 U.S.C. § 365, (ii) a postpetition agreement specifically obligating payment of any prepetition claim; or (iii) a prepetition priority wage claim that was otherwise required to be paid under an employee wage and benefits order.

Further, whether the Defendants would have “unquestionably” received payment in a full liquidation scenario was a factual question not appropriate on a motion to dismiss.  The Court could not conclude at the pleading stage that the Defendants would have unquestionably been paid in full in a liquidation—the transfers were on account of general unsecured claims rather than priority claims.

The “Something More” Critical Vendors Should Request

The Court concluded that “the fact that a creditor was named in a court order as a ‘critical’ or otherwise important customer of a debtor is not in and of itself enough to bar a preference claim; something more is required.”  The most obvious among the potential cures is specific language in the critical vendor order requiring payment of prepetition claims, which would require debtors to abandon the ubiquitous “authorized, but not directed” language common to first day orders.  Mandatory prepetition claim payment may draw heavier scrutiny, particularly early in a case before the appointment of a committee; however, specific language in the order mandating payment of prepetition claims would clearly bring non-priority claims within the ambit of the “critical vendor defense.”  Additionally, depending on the vendor’s leverage and preference risk, negotiating an alternative postpetition agreement may prove effective.  One thing is certain: the “something more” will certainly be of importance to critical vendors hoping to avoid an unwelcomed preference battle.