Congress passed the Small Business Reorganization Act of 2019 (“SBRA”), otherwise known as “Subchapter V,” as a subchapter of chapter 11, to provide a streamlined and economically feasible reorganization option for small businesses in light of the historical difficulties of small businesses to successfully reorganize under ordinary chapter 11. Only “small business debtors,” which are defined as persons or entities engaged in commercial or business activities with total secured and unsecured debt as of the date of filing of less than $7,500,000, may file for subchapter V.
Section 1112 of the United States Bankruptcy Code (the “Bankruptcy Code”) specifically provides for the circumstances in which chapter 11 cases, including subchapter V cases, to be converted to chapter 7 cases or dismissed. The Bankruptcy Code does not address if or how a subchapter V case can be converted to an ordinary chapter 11 case or vice versa. When Congress first enacted SBRA, the courts typically allowed Chapter 11 debtors to amend their bankruptcy petitions to proceed under subchapter V if the debtors were eligible and met all of the subchapter V requirements.
On June 29, 2022, the District of Columbia’s Bankruptcy Court addressed for the first time whether a subchapter V debtor can amend its bankruptcy petition to proceed under ordinary chapter 11 as an alternative to converting the case to a chapter 7 or dismissing the case pursuant to 11 U.S.C. §1112 in In re National Small Business Alliance, Inc., Case No. 21-00031-ELG, Doc. 322, (Bankr. D.C. June 29, 2022). In this case, National Small Business Alliance is a membership-based business that provides referrals and other services to its members. The small business debtor failed to have its plan confirmed five (5) times and was involved in extensive state court litigation.
At a hearing on several motions, including a Renewed Motion to Dismiss or Abstain and Motion for Relief From Stay, Judge Elizabeth L. Gunn held that reorganization, not dismissal or conversion to chapter 7, was in the best interest of the members of National Small Business Alliance and the creditors but also acknowledged that the debtor was unable to meet the requirements of subchapter V. The Court also noted that the Bankruptcy Code did not have a statute specifically allowing for a conversion of a subchapter V case to an ordinary chapter 11 case. However, since there were numerous cases in which debtors in ordinary chapter 11 cases were allowed to amend their bankruptcy petitions to proceed under subchapter V, the Court held that the inverse would apply in this case. In support of her decision to order the debtor to amend its petition to proceed under ordinary chapter 11 was supported because the Court is “empowered to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’ the Bankruptcy Code.” 11 U.S.C. § 105(a).
Interestingly, the order, memorandum and motions in In re National Small Business Alliance, Inc. do not suggest that any of the parties requested that the debtor amend its schedules to proceed as an ordinary chapter 11 case, and therefore, it is unclear whether the relief ordered by the Court was requested by one of the parties at the hearing or whether it was ordered sua sponte.