Small Business Reorganization Act
Subchapter V of Chapter 11 Amendments
For a period of one year from February, 2020, the CARES Act allows more small businesses to qualify as a debtor under the small business reorganization provisions of chapter 11 recently added by the SBRA.
The Bankruptcy Code provides special rules and procedures for “small business debtors.” See 11 U.S.C. §101(51D). Congress recently found that “small business chapter 11 cases continue to encounter difficulty in successfully reorganizing.” H.R. Rep. No. 116-171, at 4 (2019). Because of this, Congress enacted the SBRA (11 U.S.C. §1181 et seq.), which was signed by President Trump in August 2019 and became effective on February 19, 2020. The goal is to streamline small business bankruptcies, establish an expedited schedule for reorganization, reduce legal expenses, and provide more debtor friendly plan requirements and confirmation standards.
Previously, to qualify as a “small business debtor,” a business must have had non-contingent, liquidated debts (secured and unsecured) totaling not more than $2,725,625. (11 U.S.C. § 1182(1) and 11 U.S.C. §101(51D). The CARES Act modifies the SBRA by raising the threshold to $7.5 million in debts, excluding insider and affiliate debt, but this section has a sunset provision such that one year from enactment, the amendment expires and the $2,725,625 threshold is reinstated. No affiliate of a public company is eligible pursuant to amended SBRA.
Struggling businesses may want to file for Chapter 11 now to take advantage of the SBRA’s more friendly procedures. Some of the key provisions include:
• The United States Trustee will be required to appoint a trustee in every small business chapter 11 case. The trustee will have a role in assisting the debtor in developing a plan of reorganization, and will be responsible for disbursing payments under a plan. However, the trustee will serve in a mostly supervisory role and will not generally be involved in any operational aspects of the business. See 11 U.S.C. §§ 1183-1184. In this sense, the SBRA preserves the notion of a “debtor in possession” in small business cases.
• An unsecured creditors’ committee will not be appointed unless ordered by the court for cause. See 11 U.S.C. § 1102(a)(3).
• A status conference must be held within 60 days of the date of the petition to determine how best to proceed with the case. The date of the status conference may be extended if cause is demonstrated. See 11 U.S.C. § 1188(a).
• A plan of reorganization must be filed within 90 days of the petition date, although the court can extend the deadline if circumstances outside the control of the debtor merit an extension. Only a debtor may file a plan, and no disclosure statement is required. However, a plan must contain some information, such as a liquidation analysis and a projection of a debtor’s ability to make payments under the plan, traditionally associated with a disclosure statement. See 11 U.S.C. § 1189.
• A plan may modify the rights of a secured lender with a lien on the principal residence of the debtor if the “new value” received from the loan was not used primarily to acquire the residence and was used primarily in connection with the small business. See 11 U.S.C. § 1190. Modification of such a loan is otherwise prohibited in chapter 11 cases. See 11 U.S.C. § 1123(b)(5).
• The SBRA makes it easier for a debtor to confirm a plan and maintain ownership of its business. In a typical chapter 11 case, the “absolute priority rule” ensures that owners cannot retain equity in a business unless creditors are paid in full by the chapter 11 plan. The SBRA abrogates this rule and provides that existing owners of a business may retain their full ownership without providing any “new value,” but only if the plan provides for the debtor to distribute all of its projected disposable income over at least three years and no more than five from the date the first payment is due under the plan. See 11 U.S.C. § 1191.
• In a regular Chapter 11, the debtor must pay admin expense claims on the effective date of the plan. Under the SBRA, a small business debtor may stretch payment of administrative expense claims out over the term of the plan. See 11 U.S.C. § 1191(e).
• Under the SBRA, a discharge is not granted until the debtor completes all payments due within the first three years of the plan or a longer period not to exceed five years as the court determines. The discharge applies to all debts addressed by the plan except for debts on which the last payment is due after the term of the plan or which are non-dischargeable. See 11 U.S.C. § 1192.
New Bankruptcy Provisions Under Cares Act