Small Business Reorganization Act (SBRA) of 2019 updates to Chapter 11

The Small Business Reorganization Act (SBRA) of 2019 added a new subchapter V to Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 1181-1195).  It is applicable solely to “Small Business Debtors” who file a bankruptcy petition on or after February 19, 2020.  For debtors who qualify, filing under the new subchapter is likely to be

• Quicker – statutory timelines are compressed.
• Cheaper – no UST fees, no committees, and shorter process
• Easier – can confirm without support from impaired classes and cram down certain secured claims.

SBRA Qualification

Who qualifies as a small business debtor under the statute? There are three requirements:

• First, 50 percent or more of the Debtor’s debt must have arisen from business or commercial activities (excluding single asset real estate businesses);
• Second, aggregate debts total $2,725,625 or less (that is, all non-contingent, liquidated, secured and unsecured debts together);
• Third, small business debtors must opt-in by checking a box on the voluntary petition form.

SBRA Administration

Administration of SBRA cases differs significantly from a traditional Chapter 11 case, blending concepts from current Chapter 12 and 13 cases. Primarily, in an SBRA case:

• the US Trustee must appoint a Standing Trustee in every case whose responsibility is to facilitate the small business debtor’s reorganization and oversee plan implementation over three to five years;
• within 45 days of the petition date, the small business debtor must file a report detailing its efforts to draft and implement a consensual plan of reorganization;
• within 60 days of the petition date, a mandatory status conference must be held (except for circumstances beyond the small business debtor’s control);
• only the small business debtor may file a plan, which generally must be done within 90 days of the petition for relief, and which must contain a brief history of Debtor’s business operations, a liquidation analysis, and projections of the Debtor’s ability to make plan payments;
• no disclosure statement is required, unless the Bankruptcy Court so orders;
• no quarterly UST fees are required; and
• no committees will be appointed (absent a Bankruptcy Court order).

So, what does the subchapter V Standing Trustee do? This role is similar to the standing trustees in Chapters 12 and 13, but expanded in some respects.  The Standing Trustee in a subchapter V proceeding:

• receives plan payments from the small business debtor, and makes payments to creditors;
• oversees the small business debtor’s estate until (i) substantial consummation of a consensual plan, and (ii) all contested plan payments are complete.
• must appear at the initial status conference;
• facilitates the small business debtor’s consensual plan of reorganization;
• supervises the small business debtor with respect to the bankruptcy.

The Standing Trustee may make adequate protection payments to secured creditors prior to confirmation, after notice and a hearing. And if a small business debtor in possession is removed for cause, the Standing Trustee takes over (like a Chapter 11 trustee).

SBRA Confirmation

The small business debtor plan confirmation requirements also differ significantly from traditional Chapter 11 cases.

First, the Absolute Priority Rule does not apply. Debts to tax authorities, and for wage and benefit claims, then secured creditors, then unsecured creditors, are paid first. Then shareholders/members divide any remaining assets.

A small business debtor may cram down or modify a mortgage (to reduce the interest rate or extend the maturity) if the mortgage loan proceeds were used to fund the business rather than primarily to purchase the small business debtor’s residence.

No consent from an impaired class is needed for confirmation, so long as the court determines the plan is fair and equitable to each impaired, non-consenting class. The criteria and analysis are similar to a Chapter 13 plan.

The small business debtor’s post-petition property and earnings are property of the estate

In sum, the SBRA is applicable only to the narrowly defined small group of business debtors filing a petition for relief on or after February 19, 2020. A standing trustee is appointed in every case, no US Trustee fees are required, and no committees are appointed.  Only the small business debtor may file a plan, which generally must be done within 90 days of the petition date. The Absolute Priority Rule does not apply, and the Debtor does not need to obtain support from impaired classes.

For more information, contact Melissa De Groff via email to mdegroff@kgrlaw.com or call 317.692.9000.