Congress enacted the Small Business Reorganization Act of 2019 (“SBRA”) on August 23, 2019, to facilitate the reorganization of smaller business debtors in the United States. The SBRA, codified as Subchapter V of Chapter 11 of the Bankruptcy Code, became effective on February 19, 2020. Subchapter V’s goal is to provide eligible business debtors with a faster, cheaper, and more feasible path to reorganization than a traditional Chapter 11 case.

Since its enactment, almost 7,500 Subchapter V cases have been filed,[1] representing more than a quarter of all Chapter 11 cases filed. Such filings reached record levels in 2023 and constituted 44% of all Chapter 11 filings for that year.[2] Given the number of cases filed during this time, as well as the number of courts to have published opinions addressing various statutory and procedural issues arising in Subchapter V cases, the American Bankruptcy Institute (“ABI”) created the Subchapter V Task Force (the “Task Force”) in April of 2023, which was charged with reviewing the implementation and administration of Subchapter V.

During the ABI”s Annual Spring Meeting held last week, the Task Force presented its report and recommendations on Subchapter V (the “Report”).[3] The Report made a number of key recommendations on issues relating to eligibility to file a Subchapter V case, the role of the Subchapter V Trustee, case administration issues, plan and confirmation issues, and post-confirmation administrative matters.

Eligibility Recommendations

The Amount of the Debt Cap Should Remain at $7,500,000

Perhaps the most notable of all the Task Force’s recommendations set forth in the Report is that the Subchapter V debt limit be permanently set at $7.5 million, subject to inflation adjustments. The limit was raised during the COVID-19 pandemic and is set to expire in June.[4]

Debts Owed to Affiliates and Insiders Should Remain Excluded from the Debt Eligibility Calculation

The Report recommended that Debts owed to affiliates and insiders should remain excluded from the debt eligibility calculation.

Future Rent Payments on Unexpired Leases & Subchapter V Eligibility

The Report recommended a statutory change to section 1182(1)(A) is necessary to clarify how to treat outstanding liabilities under an unexpired lease for purposes of determining whether a debtor satisfies the debt limit requirement for Subchapter V eligibility.

Role of the Subchapter V Trustee Recommendations

In General

The Report recommended that the U.S. Trustee Program, Bankruptcy Administrators, bankruptcy professionals, and professional organizations like the American Bankruptcy Institute and the National Association of Bankruptcy Trustees, among others, should continue to provide training and other educational programming to support Subchapter V trustees, develop their skills, and to promote uniformity and consistency in skill sets among Subchapter V trustees.

Subchapter V Trustee Compensation

The Report recommended courts use an interim compensation procedure or practice according to a set of key principles described below that include, as appropriate, establishing an escrowed fund or other mechanism to ensure payment of Subchapter V trustees’ fees and expenses, subject to final approval by the court.

Expanding the Duties and Powers of the Subchapter V Trustee

The Report recommended a statutory amendment to clarify the scope of the Subchapter V trustee’s duties and powers but offers some guidance for courts and parties involved in cases warranting an expansion of the Subchapter V trustee’s duties and powers.

Subchapter V Trustee as Mediator

If the parties and court are considering appointment of the Subchapter V trustee to mediate a dispute, the Task Force, in the Report, urged those involved to use caution, acknowledge the potential issues involved, and insist on entry of a mediation order that details the scope of any agreement to appoint the Subchapter V trustee as mediator.

Case Administration Recommendations

Status Conference and Status Report

The Task Force concluded that amendment of section 1188(a) to require an earlier status conference or to state additional requirements for the status reports is not necessary.

Removal of the Debtor in Possession and Consequences for the Case

The Task Force found that the provisions for removal of the debtor in possession in section 1189 should not be changed to permit anyone but the debtor to file a plan upon removal.

Compensation of the Debtor’s Professionals for Services After the Debtor Has Been Removed from Possession

The Report proposed a statutory amendment to section 1185 that would permit the court to approve the debtor’s retention of professionals after removal of the debtor from possession, after notice and hearing, in certain limited circumstances, and provide for their compensation.

Plan and Confirmation Issues Recommendations

Plan and Confirmation Deadlines

The Task Force declined to recommend a statutory amendment that sets a deadline for plan confirmation.

Accounting for the Silent Class

The Task Force recommended an amendment to section 1191(a) to address the existing challenge of achieving a consensual confirmation where a class of creditors neither objects to the plan nor votes to reject the plan. In this situation, the class is silent, and under the current Bankruptcy Code, the plan cannot be confirmed as a consensual plan even though technically, the plan is not nonconsensual.

Scope of the Discharge in Nonconsensual Entity Plans

The Task Force recommended a statutory amendment to section 1192 to clarify the scope of a discharge for a corporate (or other entity) debtor with a nonconsensual confirmed plan.

Post-confirmation Administrative Matters Recommendations

Post-confirmation Reporting Requirement

The Task Force recommended statutory amendments that would impose a uniform post-confirmation reporting requirement for Subchapter V debtors, to be filed by the debtor with the motion for final decree or application for discharge, and implemented through changes to the Bankruptcy Rules, the creation of a new official bankruptcy form, and a directive for collection and publication of pertinent data.

Subchapter V Trustee as the Default Disbursing Agent

The Task Force declined to recommend a statutory change to section 1194(b) which would make the debtor rather than the Subchapter V trustee the disbursing agent.

Post-confirmation Modification Standards

The Task Force did not recommend any statutory changes to Subchapter V’s existing standards for post-confirmation modification of plans.