Just in Time? Small Business Reorganization Act Provides New Bankruptcy Relief for Small Business Debtors

By Robert J. Burvant
Legal Insights

COVID-19 Legal Alerts

While many small business entities have been provided relief from the COVID-19 pandemic through the recently-enacted SBA Payroll Protection Program, certain revisions to the U.S. Bankruptcy Code may provide another measure of relief to small business debtors, as the Small Business Reorganization Act of 2019 (“SBRA”) went into effect on February 19, 2020. The general purpose of the SBRA, which was codified primarily as Subchapter V of Chapter 11 (i.e., 11 U.S.C. Sections 1181-1195), is to streamline the process by which a small business entity can successfully reorganize through bankruptcy, and to make the process less costly and time consuming. The following discusses some of the key provisions of Subchapter V and identifies provisions that differ from existing authority relating to business reorganizations.

As the title of the SBRA suggests, a Subchapter V reorganization is limited to “small” business debtors. In order to qualify, the aggregate debts of a business cannot exceed $2,725,625. (See discussion of CARES Act temporary enlargement of this limit below.) Further, at least 50% of the small business debtor’s debt must arise from commercial or business activities. In order to become a small business debtor under Subchapter V, a debtor simply “opts in” by checking the appropriate box when filing a voluntary petition for bankruptcy relief.

Upon filing for relief under Subchapter V, deadlines are triggered which promote a speedier confirmation process. For example, Section 1188 mandates that the court hold a status conference within 60 days of entry of the order for relief (which is deemed entered upon the commencement of the case) “to further the expeditious and economical resolution” of the proceeding. Additionally, the debtor must file a report detailing its efforts to attain a consensual plan of reorganization not later than 14 days before the date of that status conference. Further, the debtor must file its plan of reorganization within 90 days of the entry of the order for relief.

In terms of oversight during the proceeding itself, Subchapter V allows for the debtor to serve as “debtor in possession” of its assets. Unlike the more general provisions of Chapter 11, a debtor in possession cannot be removed simply “in the interests of creditors”; Subchapter V limits the basis for removal to “cause” (i.e., fraud, dishonesty, gross incompetence) and failure to perform the obligations contained in an approved plan.

In addition, pursuant to Section 1183, the U.S. Trustee appoints a Trustee for each case filed under this subchapter, whose role is similar to that of a Chapter 13 Trustee. The services of the Subchapter V Trustee include appearing at the initial status conference and participating in hearings relating to (a) plan confirmation or modification, (b) the value of secured property of the estate, and (c) the sale of property of the estate. The duties of the Trustee also include facilitating the development of a consensual plan of reorganization and ensuring that the debtor makes timely payments pursuant to a confirmed plan. Also, just as in Chapter 13 proceedings, the Trustee will collect and distribute funds received from the debtor for purposes of adequate protection payments.

Other components of the SBRA also promote the purpose of efficient, cost-effective bankruptcy relief to small business debtors. For example, no official creditors’ committee shall be appointed unless specifically ordered by the court. Further, no quarterly fees are due to the U.S. Trustee in Subchapter V proceedings.

Perhaps the most significant differences between Subchapter V and other Chapter 11 reorganizations concern the submission and confirmation of a proposed plan of reorganization. These differences include the following:

  1. Only the debtor can file a plan of reorganization under Subchapter V, which eliminates the threat of one or more creditors seeking to file a competing plan.
  2. No disclosure statement is required in conjunction with a plan unless the bankruptcy court orders otherwise.
  3. The proposed plan shall include a liquidation analysis and projections regarding the debtor’s ability to make the proposed payments under the plan, and shall also provide for the submission of the debtor’s funds to the Trustee for supervision and control as necessary for the execution of the plan.
  4. Impediments to plan confirmation present in “regular” Chapter 11 proceedings, such as the requirement for a consenting impaired class and the “absolute priority rule” when a plan proposes to pay less than 100% to all creditors, are not applicable to Subchapter V proceedings. Instead, plan confirmation is attainable if a proposed plan does not discriminate unfairly and provides for the application of all of the debtor’s disposable income and property for a three-year period (or up to five years, as ordered by the court).
  5. Property and earnings acquired post-petition are deemed “property of the estate” and are therefore to be included for purposes of the debtor’s plan.
  6. Administrative expense claims need not be paid in full on the plan’s effective date, but can be paid out over the three to five year term of the plan.

All of these changes are designed to further the goal of attaining the confirmation of consensual plans of reorganization in a significantly shorter time frame and with reduced expenditure of court costs and legal fees. It is noted that the provisions of Subchapter V do not address under what circumstances courts will deem it necessary to extend the terms of a plan beyond three years; this issue is likely to be addressed in situations where a creditor would still be owed on a claim after three years of payments under a proposed plan.

In summary, the SBRA’s creation of Subchapter V of Chapter 11 allows small business debtors to proceed similarly to Chapter 13 debtors. Just as with Chapter 13 cases, and assuming a debtor who elects to proceed under Subchapter V meets the eligibility requirements, it can be expected that disputes between small business debtors and their creditors will focus on the value of secured collateral, and whether a nonconsensual plan properly accounts for all of the debtors’ projected disposable income and property over the proposed payout period of the plan.

Finally, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which became effective on March 27, 2020, included a provision which significantly expands the availability of Subchapter V relief. The CARES Act temporarily increases the aggregate debt limit from $2,725,625 to $7,500,000. However, this increased debt limit only applies to cases filed after the CARES Act was passed and sunsets one year from the CARES Act going into law.

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