Karl Johnson, Taft Stettinius & Hollister LLP
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editor: Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
On February 19, 2020, the Small Business Reorganization Act and related interim Bankruptcy Rules go into effect. Congress passed the SBRA with the intent of making Chapter 11 reorganization available to small businesses who were previously priced out of the option. The bulk of the SBRA is codified into a new subchapter V of chapter 11 at 11 U.S.C. §§ 1181-95 (2020).
For small businesses who qualify, subchapter V provides some notable benefits, including:
- No quarterly trustee payments;[i]
- No creditor committee, unless appointed “for cause” only;[ii]
- No operating trustee, unless the debtor is removed as debtor-in-possession—only an appointed trustee with limited duties;[iii]
- No required disclosure statement, unless ordered by the court “for cause” only;[iv]
- Ability to avoid the absolute-priority rule and confirm over dissenting, impaired classes;[v] and
- Professionals are not disqualified from employment under § 327 solely because they have a pre-petition claim against the estate, if it is less than $10,000.[vi]
A debtor must qualify as a “small business debtor” and elect into subchapter V on its petition.[vii] By incorporating the “small business debtor” definition—albeit in amended form, the SBRA sets the debtor’s aggregate, noncontingent liquidated debt limit just over $2.7 million.[viii] While the debtor must still be primarily engaged in business and commercial activities, individuals may still qualify for subchapter V—provided at least 50 percent of the debts are business related and the other small business debtor qualifications are met.[ix] The SBRA also amended the small-business-debtor definition’s exclusion relating to real estate activity to, now, only exclude those in the primary “business of owning single asset real estate.”[x]
Subchapter V also provides its own special timelines. To help facilitate the reorganization process, the bankruptcy court is required to hold a status conference within the first 60 days after the petition date.[xi] The court can extend this deadline if appropriate under the circumstances.[xii] In advance of the status conference, the debtor is required to provide a written update regarding its efforts to achieve a consensual reorganization plan.[xiii] Unless provided an extension by the court, the debtor is required to file a reorganization plan within 90 days of the petition date.[xiv] There is no opportunity for competing plans.[xv]
One of the most notable features of subchapter V is the ability to avoid the absolute priority rule over creditor objections to the plan. Essentially, a cramdown option in § 1191(b) replaces the standard cramdown option in § 1129. Generally speaking, § 1191(b) requires the bankruptcy court to approve a plan, over the objection of creditors if the plan is non-discriminatory and is “fair and equitable” as to all impaired, objecting classes—even if there are no consenting classes. The plan payments in this case would be distributed through the trustee.[xvi]
The applicable definition of “fair and equitable” in this case permits the debtor to propose a plan that provides for payments toward the plan to be the projected “disposable income” of the debtor over the plan period or its projected equivalent value.[xvii] Subchapter V’s definition of “disposable income” differs from the Chapter 13 definition in a couple of key ways. Most notably, § 1191(d) does not substitute the means-test calculation for those with above-median-family income.[xviii] This makes sense, since it would be nonsensical for non-individual debtor’s, and permits a more realistic assessment of (and litigation over) what expenditures are “necessary for the continuation, preservation, or operation of the business of the debtor.”[xix] It is also notable that, while the statute permits up to a five-year plan period, the statute does not provide any guidance in determining when and to what degree to divert from the default three-year plan period—apparently leaving the plan length up to the debtor.[xx]
These are just a few of the highlights of the SBRA, which also includes some other amendments to the code not directly related to the new subchapter V.[xxi]
[i] 11 U.S.C. § 326(a), (b).
[ii] 11 U.S.C. § 1181(b), with reference to § 1103.
[iii] 11 U.S.C. § 1181(a), with reference to § 1104-06; § 1183; Fed. R. Bankr. P. 2012, 2015(b) (2019 interim).
[iv] 11 U.S.C. § 1181(b), with reference to § 1125; § 1187(c).
[v] 11 U.S.C. § 1191.
[vi] 11 U.S.C. § 1195.
[vii] 11 U.S.C. § 1187(a); Fed. R. Bankr. P. 1020(a).
[viii] 11 U.S.C. § 101(51D)(A).
[ix] 11 U.S.C. §§ 101(41) (defining “person”); § 101(51D).
[x] 11 U.S.C. § 101(51D).
[xi] 11 U.S.C. § 1188(a).
[xii] 11 U.S.C. § 1188(b).
[xiii] 11 U.S.C. § 1188(c).
[xiv] 11 U.S.C. § 1189(b).
[xv] 11 U.S.C. § 1189(a).
[xvi] 11 U.S.C. § 1194(b).
[xvii] 11 U.S.C. § 1189(c).
[xviii] Compare with 1325(b)(2), with reference to § 707(b)(2)(A).
[xix] 11 U.S.C. § 1191(d)(2).
[xx] Compare 11 U.S.C. § 1129(a)(15) (referencing the calculation in § 1325(b)(2)), with § 1191 (excluding § 1129(a)(15)’s requirements, but not replacing the § 11325(b)(2) calculation).
[xxi] See e.g., 11 U.S.C. § 547(b) (adding trustee due-diligence before bringing preference actions); 28 U.S.C. § 1409(b) (increasing the venue threshold for recovery proceedings).