The Restructuring Report

The introduction of Subchapter V in 2020 created a new avenue for small business debtors to more efficiently and effectively obtain relief under Chapter 11 of the Bankruptcy Code. At the opposite end of the Chapter 11 spectrum, large-scale debtors and their professionals have used prepackaged Chapter 11 cases (Prepacks) for decades to restructure their balance sheet without the time, expense and uncertainty of a lengthy court process. For one small business in Hollywood, Florida, these worlds just collided. The result? The first known Prepack Subchapter V plan was recently confirmed by the Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division.

BPI Sports, LLC develops and markets nutrition and dietary supplement products. Like many businesses, it struggled through the disruption of the pandemic. BPI’s ownership disagreed about the path forward and were facing a stalemate. Meanwhile, BPI ran up approximately $6 million in trade debt to its largest supplier High-Tech Pharmaceuticals, Inc. (HTP), which comprised over 70% of its debt.

BPI’s counsel, Eyal Berger of Akerman, LLP, initially expected to liquidate the company using an assignment for the benefit of creditors, which is a state-law insolvency process. But first, he reached out to HTP to see if some other deal could be made. Due to internal business reasons, HTP was only able to participate if the alternative was accomplished in about a month. Faced with this deadline, BPI and HTP negotiated a bridge loan to support short-term operations and a Subchapter V plan. Given the time constraints, a Prepack was the only possible route through Chapter 11.

A Primer on Prepacks

A Prepack is a Chapter 11 reorganization where the plan is negotiated, and votes are solicited, entirely (or partially) out of court. This allows the in-court process to be greatly condensed. At the outset of the Chapter 11 case, the plan proponent presents a fully formed plan with evidence that the necessary votes were solicited in compliance with applicable federal securities law. In recent years, Prepacks have been used to obtain a confirmed plan in a matter of hours or days, at least in some jurisdictions. For a good overview of Prepacks, and particularly “1-Day Prepacks,” see here.

BPI’s Experience

BPI filed a Subchapter V Chapter 11 case on September 18, 2023. It immediately filed a plan, which was supported by HTP, which held a supermajority of the claims in the case. The plan provided for a debt-to-equity conversion whereby HTP would receive 100% of the equity of the reorganized debtor in exchange for a commitment to fund payment of all other claims through a lump sum payment of all allowed administrative expenses and a payment in the amount of $1.58 million within one year of the effective date of the plan (projected to pay remaining creditors 66% of their allowed claims). The plan had several other features. The plan included an equity buyout option and the potential for an auction; these features kept alive two alternative transactions in the fast-moving process. The plan also included an insider release in exchange for the insider’s contribution of important intellectual property and a commercial lease of real property BPI used for its operations. Given the time constraints, BPI filed with only HTP’s ballots in hand. BPI had tentative support from two other suppliers and ultimately received unanimous support from those creditors who returned ballots. The plan was confirmed on October 20, 2023, just 33 days after the case was filed.

Lessons Learned: Fitting a Prepack into Subchapter V

Several features of Subchapter V create challenges for a Prepack. First, a defining aspect of a Prepack is that the negotiations have occurred prior to filing, but the Subchapter V Trustee—a necessary party to those negotiations—is not appointed until after the case is filed. This adds an additional level of uncertainty and risk. The parties in BPI accepted this risk and worked to minimize it by proactively reaching out to the Subchapter V trustee as soon as it was appointed.

Second, several rules are structured around a longer expected timeframe. For example, Rule 1020(b) gives parties 30 days after the meeting of creditors to object to a debtor’s eligibility to be a “small business debtor.” In BPI, the Office of the United States Trustee set the meeting of creditors for the day before the confirmation hearing. Therefore, Rule 1020(b) technically afforded parties the ability to object to BPI’s status as a small business debtor, and therefore its eligibility to be in Subchapter V, after the confirmation hearing. BPI argued that the court had authority to modify the rule; ultimately, no party objected to confirmation, which essentially mooted a later Rule 1020(b) objection. Again, the parties in BPI faced somewhat elevated risk as compared to a traditional Prepack.

Third, Subchapter V requires a status conference in the first 60 days of the case, but at least 14 days after the debtor files a pre-conference report. This scheduling can be accomplished within the Prepack timeline, but requires some additional planning. In BPI, the status conference was set for the same date as the confirmation hearing.

Conclusion

 In many situations, a company can only survive a Chapter 11 case if it can exit quickly. As demonstrated by BPI, we now have evidence that Subchapter V debtors may be able to benefit from the advantages of a Prepack.

I would like to thank Eyal Berger for his helpful discussion of his experiences in the BPI case. Mr. Berger also noted the contributions of his colleague Amanda Klopp and HTP’s counsel Tom McClendon and Amy Mayer to the success of the case.