Many small businesses for which Chapter 11 reorganization was previously impractical will have the opportunity to reorganize more efficiently and economically, while maintaining small business owners’ hard-earned stake in the company.
American Bankruptcy Institute Commission Co-Chair, Bob Keach, testified as to the need for the reform before a congressional subcommittee, stating:
Chapter 11 doesn’t work for small and medium-sized businesses because the Bankruptcy Code (a) places unrealistic and artificial deadlines on [them], which do not give these companies an opportunity to restructure; (b) imposes substantial and costly disclosure and reporting requirements on these companies; (c) does not provide any tools that can help small businesses . . . create and implement an effective reorganization plan; and (d) makes it difficult for a small business owner to maintain an ownership interest in the business under the current Chapter 11.[i]
The SBRA intends to address these concerns and increase the number of successful restructurings by small businesses by adding the newly created Subchapter V to Chapter 11. Subchapter V’s special provisions will apply only to “small business debtors.”[ii] The new changes are set to take effect February 22, 2020.[iii]
Among the most significant modifications to the Chapter 11 process for small businesses are:
- Increased Negotiating Power and Control for Small Business Owners
- The owner of the debtor may maintain an interest in the debtor to the extent this “does not discriminate unfairly, and is fair and equitable, with respect to” the claims and interests of other impaired creditors who have not accepted the plan.[iv]
- For the plan to be “fair and equitable” over an objection by the trustee or an unsecured creditor, all of the debtor’s disposable income to be received during the plan must be applied to make payments under the plan for a period of three to five years.[v]
- The cram down procedure still applies to treatment of secured claims. That is, the debtor cannot overcome the objection of a secured creditor with respect to collateral that the debtor proposes to keep merely by providing that all disposable income will be applied to make payments under the plan for the relevant period.
- Streamlined Chapter 11 Process through Reduced Procedural Burdens and Costs
- Generally, in a small business Chapter 11:
- An official committee of unsecured creditors will not be appointed; creditors’ interests will be represented by the trustee;[vi] and
- A disclosure statement will not be required.[vii]
- For unsecured claims, the process resembles Chapter 13 plans for individuals.
- Generally, in a small business Chapter 11:
- Increased Oversight and Expedited Reorganization
- The debtor has 90 days from commencement to file, though, this may be extended under special circumstances.[viii]
- In every case, a standing trustee will be appointed to perform duties under 11 U.S.C. §§ 704 and 1106, as well as the duties normally associated with a trustee for Chapter 12 and Chapter 13 reorganization cases.[ix] In other words, the trustee will generally act as a fiduciary to creditors, as a substitute for an appointed committee of creditors. But, the business will be operated by the debtor, not the trustee.
- An initial status conference is required within 60 days of commencement “to further the expeditious and economical resolution” of an SBRA case, except in special circumstances.[x]
Lugenbuhl’s bankruptcy team represents a wide array of constituencies, including acting as counsel for numerous corporate and partnership Chapter 11 debtors, as well as committees, trustees, secured and unsecured creditors, bondholders and equity holders. More information about Lugenbuhl’s bankruptcy practice is available here.
The content of this article is not intended to serve as an exhaustive review of the SBRA or laws, statutes or issues related to bankruptcy, creditor/debtor rights and Chapter 11 cases and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.
[i] American Bankruptcy Institute, House Approves Small Business Reorganization Act of 2019 (H.R. 3311) and HAVEN Act (H.R. 2938) (July 23, 2019).
[ii] “Small business debtor” is defined under 11 U.S.C. § 101(51D) (2019). The primary limitation of the definition is that the debtor’s aggregated debt must be less than a statutory amount which tracks inflation, currently $2,725,625. Id. The only debtors specifically excluded from this definition are those primarily in the “business of owning or operating real property.” Id.
[iii] The Act is set to take effect 180 days from its enactment.
[iv] See 11 U.S.C. § 1191(b) (eff. February 22, 2019).
[v] See 11 U.S.C. § 1191(c) (eff. February 22, 2019).
[vi] See 11 U.S.C. § 1102(a) (eff. February 22, 2019).
[vii] See 11 U.S.C. § 1187 (eff. February 22, 2019).
[viii] See 11 U.S.C. § 1183 (eff. February 22, 2019).
[ix] See id.
[x] Id.
