Subchapter V and the story of Lisa’s Pizza

We need to take a break from Lisa’s Pizza for a moment and learn about proofs of claim, and the different types of claims that get asserted in a bankruptcy case. A proof of claim is a very simple form that creditors are required to file with the bankruptcy court to have their debt recognized. Among other things, it requires the creditors to identify their name, the amount of the debt, the nature of the debt and whether the debt is secured or unsecured.

A secured creditor is the most powerful type of creditor in a bankruptcy case. Repayment of their debt is secured by property known as collateral. Importantly, the value of a secured creditor’s debt is limited to the value of the collateral. For example, Mr. Smith owns a home worth $300,000 with a mortgage of $250,000. The mortgage lender is, therefore, fully secured. If the housing market crashes, however, and the value of Mr. Smith’s home drops to $225,000, then the mortgage is “upside down” and the mortgage lender’s secured debt is only $225,000 (i.e., the value of its collateral). The $25,000 deficiency is unsecured.

Further, there are two types of unsecured debt:

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In May 2023, the Fort Myers area’s labor force in May 2023 was up 4.0% (+15,080) over the year. The industries gaining the most jobs over the year were: education and health services (+3,900 jobs); professional and business services (+2,800 jobs); leisure and hospitality (+2,000 jobs) and construction (+1,900 jobs). May 2023 unemployment rate was 2.8%, up 0.1 percentage point from the year ago rate of 2.7 percent.

In May 2023, Florida’s unemployment rate remains at a low 2.6% for the fifth consecutive month as long-term growth continues. In May 2023, Florida’s labor force grew by 246,000 (+2.3%) over the year since May 2022, faster than the national labor force growth rate of 1.5% during the same time period.

Over the month in May 2023, Florida’s labor force grew by 38,000 (+0.3%), which is faster than the nation’s labor force growth rate of 0.1% during the same time period. As of May 2023, with the exception of October 2022, Florida employers have added jobs for 36 months since May 2020.

Florida’s over-the-year private sector job growth rate has exceeded the nation’s for 26 consecutive months. In May 2023, total private sector employment increased by 17,200 over the month, an increase of 0.2% from the previous month.

priority and general unsecured. A good example of a priority debt is taxes or wages. Similarly, a good example of unsecured debt is rent, or money owed to vendors.

Therefore, Mean Bank’s claim gets bifurcated. It will have a secured claim in the amount $25,000 (the remaining value of the collateral after accounting for Nice Bank) and a general unsecured claim in the amount of $125,000.

BY MIKE DAL LAGO Guest Columnist

Back to Lisa’s Pizza. Both Mean Bank and Nice Bank timely file their proofs of claim (as does Mean Landlord). Mean Bank asserts that it is a secured creditor in the amount of its $150,000 loan. Nice Bank, meanwhile, asserts that it is a secured creditor in the amount of its $250,000 loan. For Mean Bank and Nice Bank to both be fully secured, the collateral (just like Mr. Smith’s house) must be worth $400,000 or more. Lisa knows that her assets can’t be worth much, so she files a motion asking the Court to determine the secured status of Mean Bank. The Court determines Lisa’s Pizza’s assets are only worth $275,000. Thus, Nice Bank’s $250,000 debt is fully secured, and Mean Bank’s debt is only partially secured up to the remaining value of the assets (i.e., $25,000).

What about Mean Landlord’s claim? It filed a claim for the entire balance owed under the five-year lease. Assume that the rent was $20,000 per month and—at the time of the filing—there was 4½ years’ worth of rent still owing. Mean Landlord, therefore, files a claim in the amount of $1,080,000 ($20,000 multiplied by 54 months). Lisa’s Pizza objects to this claim because she knows that Section 502(b)(6) of the Bankruptcy Code limits damages sustained under leases to one year’s worth of rent, generally. The Court, therefore, reduces Mean Landlord’s claim to $240,000. Ouch!

Now Lisa’s Pizza must file its plan.

Mike Dal Lago is the founder and managing partner of Dal Lago Law, a leading Business Law and Business Bankruptcy law firm in Naples, with 22 years of experience in insolvency matters. Contact Mike@dallagolaw.com.