The New Small Business Reorganization Act Comes with New Forms and Rules

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Congress recently enacted the Small Business Reorganization Act of 2019 (the “SBRA”), which created Subchapter V of the Bankruptcy Code, and became effective on February 19, 2020. The SBRA was enacted to expedite and reduce the cost of bankruptcy for small business debtors with debt of approximately $2.7 million. The enactment of the SBRA was timely, as it may provide relief for individuals and small businesses impacted by the COVID-19 pandemic.

A month after the SBRA went into effect, and in response to the economic fallout from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (the “CARES”) Act. The CARES Act expanded this relief to a wider demographic by increasing the debt-eligibility threshold from the approximately $2.7 to $7.5 million. This expanded eligibility expires after one year, temporarily benefiting not only additional small businesses but also larger companies, private equity funds, and individuals looking for a way to reorganize their debts in an effort to save their businesses.

The SBRA did not change existing Chapter 11 provisions regarding small business debtors and thus in order to take advantage of the new Subchapter V, the debtor must make the election at the time of filing, which is now set forth in Line 13 of the Individual Petition (Form 101) and Line 8 of the Petition for Non-Individuals (Form 201). The official bankruptcy forms were also amended to reflect CARES Act changes, including to the Voluntary Bankruptcy Petition forms.

Seven of the biggest changes are:

  • The debtor has exclusive right to file the plan within 90 days after the bankruptcy filing and the debtor does not need to file a separate disclosure statement, but the plan must set out a history of the debtor’s operations, a liquidation analysis and a feasibility analysis; 11 U.S.C. § 1189(b).
  • Elimination, for the most part, of a creditor’s committee in all small business cases including those that proceed under subchapter V; 11 U.S.C § 1102
  • Appointment of a standing subchapter V trustee to facilitate a consensual plan, oppose discharge of the debtor, object to claims and even make adequate protection payments to secured creditors prior to confirmation of a plan. 11 U.S.C. § 1183
  • No Absolute Priority Rule – 11 U.S.C. § 1191(b) permits cramdown confirmation if the plan does not discriminate unfairly and if it is “fair and equitable with respect to” each impaired, nonaccepting class. In a regular chapter 11 case, plan confirmation cannot be achieved over the objection of a creditor if the debtor is retaining equity unless the plan pays creditors in full. The “fair and equitable” requirement in subchapter V does not include the absolute priority rule. However, creditors can insist that the debtor make three to five years of best-efforts plan payments giving them negotiating leverage for a favorable subchapter V plan treatment. 11 U.S.C. § 1191(b).
  • Allows modification of a non-purchase money security interest or mortgage in a residence used in connection with a Debtor’s business. 11 U.S.C. §1190(3).
  • Administrative expenses can be paid over the life of a plan (as opposed to the requirement that such claims be paid on the effective date of the plan). 11 U.S.C. §§ 1191(e) & 1194.
  • The serial filer no-automatic-stay provision of § 362(n) does not apply. 11 U.S.C. § 362(n).

These are just some of the notable provisions that could allow small businesses and individuals to go through the bankruptcy process in a more streamlined and effective way, and it may become an attractive alternative should the economic fallout from this crisis deepen. However, certain restrictions apply if small businesses have applied or intend to apply for the Paycheck Protection Program (PPP), which is part of the CARES Act. The Small Business Administration, in charge of administering the PPP, released an interim rule restricting eligibility for PPP loans if the companies file bankruptcy. This issue has been considered by bankruptcy courts around the country. Hidalgo Cty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cty. Emergency Serv. Found.), 2020 Bankr. LEXIS 1174 (Bankr. S.D. Tex. Apr. 25, 2020); Cosi Inc. v. Small Business Administration et al., Case No. 1:20-ap-50591 (Bankr. D. Del. Apr. 28, 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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