A Riverside County jury has returned a $450,000 verdict against your company. Your lawyer likes the appeal, but the bond needed to stop enforcement requires collateral you lack, and the creditor has recorded an abstract of judgment. Someone suggests Subchapter V.
A D.C. bankruptcy judge kept alive a Subchapter V case built around two creditors in In re JPK Newco, LLC, No. 25-00200 (Bankr. D.D.C. June 12, 2026), using a Fourth Circuit test. California answers to the Ninth Circuit instead.
Can a California business file bankruptcy mainly to stop one creditor?
Sometimes. 11 U.S.C. § 1112(b) allows dismissal “for cause,” and the Ninth Circuit counts a bad-faith filing as cause. Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994), called the good faith label “somewhat misleading” and asked “whether a debtor is attempting to unreasonably deter and harass creditors or attempting to effect a speedy, efficient reorganization on a feasible basis.”
A dispute with one creditor is not fatal. In re Stolrow’s Inc., 84 B.R. 167 (B.A.P. 9th Cir. 1988), held that a petition arising from a two-party dispute is not “per se” bad faith. Three Los Angeles clothing retailers filed the day after a shareholder bonded a state-court receivership, and kept their cases because a receivership would have triggered termination clauses in twelve store leases and put more than 100 jobs at risk.
What does a Riverside or Los Angeles bankruptcy judge look for in a bad-faith motion?
A common starting point in the Central District is In re St. Paul Self Storage Ltd. Partnership, 185 B.R. 580 (B.A.P. 9th Cir. 1995). It weighs whether the debtor has one asset, an ongoing business, unsecured creditors and cash flow, and whether the case is “essentially a two party dispute capable of prompt adjudication in state court.” That debtor had not operated since 1991, owed its other debts mostly to insiders and professionals, and filed shortly before trial. Filing a plan did not help; the panel called that “reverence for form.”
Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989), the D.C. court’s test, requires findings of “objective futility” as well as “subjective bad faith,” so a credible early plan can end the motion. I have found no published Ninth Circuit decision adopting that two-part rule; here the factors are weighed together.
They protect debtors too. In re Sullivan, 522 B.R. 604 (B.A.P. 9th Cir. 2014), reversed a Santa Ana dismissal: stopping collection is not bad faith without intent to harass, a creditor’s vow to reject any plan does not prove futility, and the court must weigh conversion for all creditors. Typical bad-faith two-party cases, the panel said, “may involve delays on the eve of trial (litigation tactics), forum shopping, new-debtor syndrome (special purpose entities), repeat filers, and repeatedly delayed foreclosure sales.”
Facing a judgment you cannot bond? A fresh judgment lien can be challenged only if you file within 90 days, and the timing of the petition shapes how a judge reads your motives.
Is a California LLC or corporation eligible for Subchapter V in 2026?
11 U.S.C. § 1182(1) now adopts the small business debtor definition in 11 U.S.C. § 101(51D): a debtor “engaged in commercial or business activities,” not primarily owning single asset real estate, with no more than $3,424,000 of noncontingent, liquidated debt (excluding insider and affiliate debt), at least half from the business. That figure took effect April 1, 2025; the temporary $7.5 million cap lapsed in 2024.
Congress has passed H.R. 7730, the Bankruptcy Threshold Adjustment Act, restoring $7,500,000, with final Senate approval September 28, 2026. On October 9 it awaited the President’s signature, and it covers only cases commenced after enactment.
NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 638 B.R. 403 (B.A.P. 9th Cir. 2022), put the burden on the debtor and required it to be “presently” engaged in some business activity. Litigating and staying in good standing sufficed for an LLC with no employees, but a litigation-only shell can be eligible and still look like St. Paul.
Can a Subchapter V filing take the place of an appeal bond in California?
That was Marsch. The debtor filed Chapter 11 before a $2.56 million restitution judgment was entered, though she was not in business and could pay or bond it. The Ninth Circuit upheld dismissal and $27,452 in sanctions, calling the filing “a transparent attempt to use a Chapter 11 petition and the resulting stay as an inexpensive substitute for the bond required under state law.”
Under Cal. Code Civ. Proc. § 917.1, an appeal does not stay enforcement of a money judgment without an undertaking of double the judgment, or one and one-half times through an admitted surety insurer. Marsch left open whether an operating company may file when enforcement “would cause severe business disruption.”
Judgment liens add a legitimate reason. An abstract creates a real property lien under Cal. Code Civ. Proc. § 697.310; a Secretary of State filing under section 697.510 reaches business personal property. A lien created within 90 days before the petition, while the debtor was insolvent, may be avoidable under 11 U.S.C. § 547(b). Sullivan credited a filing 89 days after the lien for “leveling the playing field for other creditors.”
What can Subchapter V do that a state-court appeal cannot?
It can bind the creditor to a plan. Under 11 U.S.C. § 1191(b), the court may confirm a plan no impaired class accepts if it is “fair and equitable,” which for unsecured claims mainly means three to five years of projected disposable income. Section 1181(a) removes the absolute priority rule, so owners can keep the company. Because no class must accept, a creditor’s no vote rarely proves futility. The plan is due within 90 days under section 1189(b).
The creditor may seek relief under 11 U.S.C. § 362(d)(1) to finish the state case, judged by the Curtis factors in In re Kronemyer, 405 B.R. 915 (B.A.P. 9th Cir. 2009). Removed claims can be remanded “on any equitable ground” under 28 U.S.C. § 1452(b), and 11 U.S.C. § 305(a)(1) permits dismissal when that better serves creditors and the debtor. For the creditor’s side, see my post on California judgment creditors facing a Chapter 11 debtor.
Section 1112(b)(2) bars dismissal only for “unusual circumstances” plus a likely plan and a justified, curable act or omission. A bad motive is hard to cure, so I would not rely on it.
What does a Subchapter V filing do to the company’s taxes and costs?
26 U.S.C. § 1399 creates no new taxable entity for an LLC or corporation; section 1398 applies only to individuals. Taxes stay due under 28 U.S.C. § 960, missed postpetition taxes are cause under section 1112(b)(4)(I), and the $800 tax under Cal. Rev. & Tax. Code § 17941 continues.
As a CPA, I ask how the company is taxed. Discharged debt is excluded under 26 U.S.C. § 108(a)(1)(A), and California generally conforms (Rev. & Tax. Code §§ 17131, 24307). For an LLC taxed as a partnership, section 108(d)(6) applies it member by member, so members outside bankruptcy may need the insolvency exclusion. S corporations apply it at the entity level.
Subchapter V skips quarterly U.S. Trustee fees under 28 U.S.C. § 1930(a)(6)(A), but the trustee is paid under 11 U.S.C. § 330(a), plus counsel. Against a $450,000 judgment, that can pencil out.
How would a Murrieta contractor’s filing fare?
Illustration: a Murrieta grading LLC has 18 employees, a $600,000 bank line, $280,000 of vendor debt and $190,000 of equipment loans. In August 2026 a customer wins $450,000 in Riverside County Superior Court and records an abstract. A surety undertaking would be $675,000. Total debt of about $1.52 million is under the limit.
Version one files in October, inside 90 days, keeps payroll running and pays the judgment pro rata with vendors over three years while challenging the lien. That resembles Stolrow’s and should survive a section 1112(b) motion.
Version two closed in 2025, owns a counterclaim and a pickup, owes $40,000 to the owner’s brother and its lawyers, and files the morning of trial holding enough sale proceeds to bond. That is St. Paul with a Marsch twist.
| Factor | Points to bad faith | Points to good faith | Source |
|---|---|---|---|
| Business | No operations; lawsuit is the main asset | Operating company, employees | St. Paul; Stolrow’s |
| Creditors | Litigant, insiders, professionals | Lender, vendors, taxes | St. Paul; Sullivan |
| Timing | Eve of trial | After liens or levies threaten operations | St. Paul; Sullivan |
| Appeal bond | Could pay or bond from nonbusiness assets | Enforcement would cripple operations (left open) | Marsch |
| Forum | Relitigating lost state claims | Willing to finish in state court | St. Paul; Kronemyer |
| History | Repeat filings against one judgment | First filing | Leavitt v. Soto (Chapter 13); Sullivan |
Frequently Asked Questions
Is it bad faith to file Subchapter V to stop a judgment creditor in California?
Not by itself. An operating business with other creditors usually passes; a shell filing to delay trial or avoid an affordable bond does not.
Does a creditor’s refusal to vote for my plan doom a Subchapter V case?
No. Section 1191(b) allows confirmation without any impaired class accepting, if the plan is fair and equitable. Sullivan also refused to treat a creditor’s early threat as proof of futility.
What is the Subchapter V debt limit right now?
As of October 9, 2026, $3,424,000 in noncontingent, liquidated debts. H.R. 7730 would raise it to $7,500,000 for later cases but awaited the President’s signature. Confirm before filing.
Can my LLC qualify for Subchapter V if it has stopped operating?
Possibly. Under RS Air the debtor must be presently engaged in some business activity, and litigating can count. A dormant company still faces a tougher bad-faith fight.
Will the bankruptcy court decide my lawsuit instead of the state court?
Often not. The creditor can seek stay relief to finish it there. Moving a losing case to a friendlier forum is a classic bad-faith marker under St. Paul.
How North Star Law Firm Can Help
North Star Law Firm tests whether a Subchapter V filing will hold up and represents small business debtors through its bankruptcy practice; when the fight began with a contract, it reviews the agreement through contract drafting and review. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.
If a judgment or an appeal bond is forcing the question, contact North Star Law Firm or schedule a consultation before you file.