The Bankruptcy Court found that the LHP debt was contingent and unliquidated, concluding that Alecto had not received a demand for payment before the petition date, and thus, had no way of calculating the amount owed.

In a recent decision, the U.S. Court of Appeals for the Third Circuit, in the case of In re Alecto Healthcare Services LLC, No. 25-1853 (3d Cir. July 28, 2026), issued a precedential opinion affirming a debtor’s eligibility to proceed under Subchapter V of Chapter 11 and the ability of a debtor to confirm a reorganization plan that settled potential fraudulent transfer claims against the debtor’s insiders.

The decision is notable for its treatment of (i) when a debt is “contingent” and “unliquidated” for purposes of the Subchapter V debt limit and (ii) the deferential standard governing bankruptcy court approval of insider settlements over creditor objections.

Background

Prior to the bankruptcy case, Alecto Healthcare Services LLC was a holding company for healthcare-related entities that formed subsidiaries to acquire acute care hospitals and provide management services. When the COVID-19 pandemic hit, Alecto’s subsidiaries became insolvent. A group of former employees of a West Virginia hospital, the “Reed creditors,” obtained a judgment against Alecto for unpaid wages following the shutdown of the West Virginia hospital and layoff of hundreds of workers.

Shortly after the Reed judgment was entered, Alecto filed a bankruptcy petition under Subchapter V. In order to proceed under Subchapter V, Alecto was statutorily required to have less than $7.5 million in liquidated, noncontingent debt as of the petition date. By Alecto’s own schedules, its qualifying debt was approximately $3.4 million, well under the statutory cap.

Separately, Alecto listed LHP Hospital Group Inc. as an unsecured creditor with an unliquidated, contingent claim from a 2014 transaction. This claim arose from a pre-petition transaction with LHP, pursuant to which Alecto agreed to pay amounts due and owing by LHP to its landlord for certain leased space in a medical office building. Pursuant to a prepetition settlement agreement between Alecto and LHP, since these lease amounts would continue to accrue (and thus, Alecto would not know the precise amount due and owing LHP), LHP was required to “make written demand” upon Alecto before any payment became due under the settlement agreement. Since LHP did not make any such demand before Alecto filed for bankruptcy, Alecto treated the claim as a contingent claim. Subsequent to the bankruptcy case, LHP filed a proof of claim for approximately $3.7 million (the “LHP debt”).

Subchapter V Eligibility: The LHP Debt

Following the filing, the Reed creditors challenged Alecto’s Subchapter V eligibility, arguing that the LHP debt was noncontingent and liquidated and, as such, Alecto’s total qualifying debt would be above the $7.5 million statutory threshold.

The Bankruptcy Court found that the LHP debt was contingent and unliquidated, concluding that Alecto had not received a demand for payment before the petition date, and thus, had no way of calculating the amount owed. Accordingly, the Bankruptcy Court held that the LHP debt did not count toward the Subchapter V debt limit. The District Court affirmed, agreeing that the LHP debt was contingent because no demand for payment was received before the petition date and unliquidated because the amount due was not precisely calculable.

The Plan and Settlement

In addition to challenging its ability to be a Subchapter V debtor, the Reed creditors also objected to Alecto’s plan of reorganization that incorporated a settlement of potential fraudulent transfer claims against its insiders arising from a transaction known as the “Sunrise transfer.” This was a transfer pursuant to which Alecto transferred ownership of a subsidiary holding a medical office building appraised at $50.7 million for approximately $28.4 million to certain “insiders” of Alecto.

Pursuant to the proposed settlement embodied in its plan, the insiders would pay $25,000 in exchange for a release of claims. The Reed creditors objected to the plan, claiming that this settlement was not within the requisite “range of reasonableness” required and, as such, the Bankruptcy Court could not confirm the plan with this settlement.

During the confirmation hearing, Steven Balasiano, an independent director appointed to investigate and settle claims against Alecto’s affiliates and insiders, testified that he approved the settlement after concluding that there were no viable avoidance claims. Relying on a forensic analysis as well as unrebutted evidence that Alecto was solvent at the time of the alleged fraudulent transfer, Balasiano testified that he thought the settlement was appropriate as there were no viable claims against these insiders and that by suing these insiders, the estate would be saddled with significant fees and costs associated with such litigation. Based upon this testimony, the Bankruptcy Court overruled the Reed creditors’ objections and confirmed the plan. The District Court affirmed, holding that the Reed creditors “failed to demonstrate that the settlement and releases embodied in the [p]lan fell below ‘the lowest point in the range of reasonableness.’”

The Third Circuit Appeal

The Reed creditors appealed and, upon appeal to the Third Circuit, the Third Circuit affirmed the Bankruptcy Court’s conclusion that: (i) the LHP debt was both contingent and unliquidated as of the petition date and, as such, Alecto was eligible for Subchapter V relief and (ii) the settlement was within the lowest range of reasonableness.

When Is a Claim Contingent and Liquidated?

In rejecting the Reed creditors’ contention that Alecto was not eligible for Subchapter V relief, the Alecto court found that a claim is contingent when the debtor’s obligation to pay does not come into existence until some future event occurs. Here, the LHP settlement agreement required LHP to “make written demand” before any payment became due. Since LHP did not do so until after Alecto filed for bankruptcy, the LHP debt was contingent as of the petition date (which is the date that matters for purposes of determining Subchapter V eligibility).

As to the issue of whether the claim was liquidated, the Alecto court noted that “a debt is liquidated if its amount is readily and precisely determinable.” LHP’s claim did not satisfy this standard because Alecto had received no invoices and the monthly amounts due under the underlying leases varied based on numerous factors. According to the Alecto court, “Alecto had no way of knowing how much it owed LHP prior to receiving a written demand for payment.” Because the LHP debt was contingent and unliquidated as of the petition date, Alecto could properly proceed under Subchapter V.

Settlement Approval and the Martin Factors

Turning to the settlement of the insider claims, the Alecto court examined the standards for approving settlements pursuant to the Federal Rules of Bankruptcy Procedure, and in particular, Rule 9019 of the Federal Rules. Pursuant to Rule 9019, a bankruptcy court may “approve a compromise or settlement” of a claim after notice and a hearing. In evaluating whether a settlement is “fair and equitable,” courts apply the factors set forth in In Re Martin, 91 F.3d 389, 393 (3d Cir. 1996), assessing: “(1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors.” As part of this analysis, a court “need not decide the numerous questions of law or fact raised by litigation but rather should canvas the issues to determine whether the settlement falls above the lowest point in the range of reasonableness.” In re Capmark Fin. Grp. Inc., 438 B.R. 471, 515 (Bankr. D. Del. 2010).

Applying these factors, the Alecto court found that the potential avoidance claims had “very little probability of success on the merits, if any,” based on unrebutted evidence that Alecto was solvent at the time of the Sunrise transfer. The second factor was “neutral” given the absence of evidence regarding collection. As to the third and fourth factors, litigation would have been complex and costly, and the settlement benefitted creditors by providing distributions that included the $25,000 contributed by the insiders.

The Alecto court rejected each of the Reed creditors’ challenges to the Bankruptcy Court’s analysis, holding that objecting parties bear the burden of producing evidence in support of their objections, that expert solvency testimony is not a precondition to settlement approval and that the Bankruptcy Court acted within its discretion in relying on internal documents reviewed by both Balasiano and a forensic consultant.

Conclusion and Commentary

The Alecto decision provides express guidance on the meaning of “contingent” and “unliquidated” under the Subchapter V debt limit and confirms that courts should look to the plain terms of prepetition agreements to determine whether a claim is noncontingent and/or liquidated. The opinion also reinforces the deferential standard governing bankruptcy court approval of settlements under the Martin factors. In trying to overcome this standard, an objecting creditor bears the burden of producing evidence to demonstrate why the settlement should not be approved, and even insider settlements of small dollar amounts can survive a challenge when supported by a credible investigative record and unrebutted evidence of solvency.

For debtors, the decision underscores the importance of carefully structuring prepetition settlement agreements, particularly demand and payment provisions, to preserve Subchapter V eligibility.

For creditors, the decision highlights the need to develop and present affirmative evidence in support of objections to both Subchapter V eligibility and proposed settlements, rather than relying on the perceived inadequacy of the debtor’s case in chief. Creditors who suspect a debtor may file under Subchapter V should consider making written demands or taking steps to liquidate claims before a petition is filed. Had LHP made its demand pre-petition, the LHP debt likely would have pushed Alecto over the $7.5 million threshold and made Alecto ineligible for Subchapter V relief.

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