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FactorLaw's Summary and Analysis of the Small Business Reorganization Act

1. THE SUBCHAPTER 5 ELECTION. Chapter 11 now contains a “Subchapter 5” which applies only to “small business debtors” that make a so-called “Subchapter 5” election. See 11 U.S.C. §§ 1181-1195. Absent such an election, the small business case will be administered under the existing small business provisions of Chapter 11. Although the 2005 BAPCPA amendments to the Bankruptcy Code streamlined the Chapter 11 process for small business debtors (i.e., a plan has to be confirmed within 300 days), the process was still viewed as too onerous and expensive for those that qualified. Subchapter 5 provides small business debtors the option of using a new law designed to make the chapter 11 process faster and cheaper, including the process for selling a distressed business under a plan. It brings to Small Business Cases under Chapter 11 features previously available only in Chapter 12 or 13 cases. SBRA also reshuffles the leverage between debtors and creditors and tries to promote consensual outcomes. 2. THE INTERIM BANKRUPTCY RULES. Interim amendments to the Federal Rules of Bankruptcy Procedure also have been promulgated to guide cases where the debtor has made the Subchapter 5 election. The interim bankruptcy rules, including Interim Bankruptcy Rule 1020, implement the SBRA. New forms also may be forthcoming. 3. MAKING THE ELECTION. The Subchapter 5 election must be made on the petition for relief for voluntary cases or within 14 days after the order for relief in involuntary cases. Although the Subchapter 5 election is made when the bankruptcy petition is filed, Rule 1020(b) suggests the petition can be amended to make the Subchapter 5 designation after the filing. Doing so may not be advisable, however, because a delayed election may cause key deadlines to be missed. Another potential issue involves the retroactive application of the SBRA to cases pending before its effective date. 4. ELIGIBILITY CRITERIA. Subchapter 5 cases are available to any entity or individual engaged in commercial or business activity with aggregate and liquidated debts of not more than $2,725,625, of which more than 50% is commercial or business debt. The new law helps clarify eligibility. More than 50% of the debt has to be commercial or business. In view of SBRA’s changes to the absolute priority rule, inter alia, individual chapter 11 debtors with primarily business debts should consider whether they can make the Subchapter 5 election. The eligibility requirements to be a small business debtor have been modified insofar as more than 50% of the debt now must be from the commercial or business activities of the debtor and the exclusion for single asset real estate debtors has been clarified. 5. CRAMDOWN VS. CONSENSUAL PLANS: SBRA differentiates between confirmation under §1191(a) and 1191(b). Section 1191(a) deals with a plan that is accepted by all classes of claims – i.e., a consensual plan. Section 1191(b) addresses a “cramdown plan.” As discussed herein, certain SBRA provisions apply, or do not apply, depending upon whether the plan is consensual or not. Existing law differentiates between a consensual plan and a cramdown. However, the requirements to confirm a cramdown plan are essentially the same as the requirements for a consensual plan, other than the absolute priority rule. The SBRA eases the burdens for confirming a cramdown plan and thus provides debtors with more leverage to negotiate concessions from creditors. Conversely, debtors fare better under SBRA if they are able to negotiate a consensual plan. As discussed herein, the SBRA tries to foster consensual plans. 6. NO ABSOLUTE PRIORITY RULE. Like in Chapter 13, the absolute priority rule does not apply with respect to classes of unsecured creditors when the debtor makes the Subchapter 5 election. Thus, the owners of the business can retain their ownership interest even if unsecured claims are not paid in full. Similarly, an individual debtor can retain property even if they do not pay unsecured creditors in full. Secured creditors, on the other hand, still must be paid in accordance with §1129, but like before, their claim can be bifurcated into a secured and unsecured portion. Also, secured creditors can still make the §1111(b) election. Prior to SBRA, the owners of a small business debtor could not retain their ownership interests unless all creditors, including unsecured creditors, were paid in full. Similarly, an individual that qualified as a small business debtor could not retain any property absent payment in full of all creditors. Paying creditors in full prior to allocating value to equity was codified in the “fair and equitable” test of §1129(b), which also codified the absolute priority rule. The absolute priority rule is a long-standing requirement of chapter 11 and in the past could be a strong impediment to the confirmation of a plan. Under SBRA, to be “fair and equitable” as to unsecured creditors, the small business debtor n… Read More
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Mack Industries - Agenda for October 15, 2020, Omnibus Hearing

We just posted the agenda for the Mack Industries October 15, 2020, omnibus hearing. Visit our Mack Industries page for more information. Read More
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Agenda for Mack Industries September 2020 Omnibus Hearing

We just posted the agenda for the Mack Industries Omnibus Hearing on September 17, 2020. Visit our Mack Industries page for a copy. Read More
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Agenda Posted for August 20 Omnibus Hearing in Mack Industries Case

We just posted the agenda for the August 20, 2020 Omnibus Hearing in the Mack Industries case. Go to our Mack Industries page for more information. Read More
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Mack Industries July Omnibus Hearing Agenda

We just posted the agenda for the upcoming Omnibus Hearing in the Mack Industries case. The hearing is on July 16, 2020, at 10:45 a.m. See the agenda on our Mack Industries page. Read More
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U.S. TRUSTEE PROGRAM EXTENDS TELEPHONIC OR VIDEO SECTION 341 MEETINGS TO CASES FILED THROUGH OCTOBER 10, 2020

June 12, 2020 The U.S. Trustee Program is extending the requirement that section 341 meetings be conducted by telephone or video appearance to all cases filed through October 10, 2020. However, if the responsible U.S. Trustee or case trustee determines that an in-person examination of the debtor is required to ensure the completeness of the meeting or protection of estate property, the U.S. Trustee may approve the continuation of the section 341 meeting to an in-person meeting in a manner that complies with local public health guidance. Read More
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Mack Industries Omnibus Hearing Agenda

We just posted the agenda for the upcoming Omnibus Hearing in the Mack Industries case. The hearing is on June 18, 2020, at 10:45 a.m. See the agenda on our Mack Industries page. Read More
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Mack Industries Omnibus Hearing Agenda

We just posted the agenda for the upcoming Omnibus Hearing in the Mack Industries case. The hearing is on May 21, 2020, at 10:45 a.m. See the agenda on our Mack Industries page. Read More
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Chicago Bankruptcy Court Going Virtual

On May 13, 2020, the Bankruptcy Court for the Northern District of Illinois implemented General Order 20-05, which provides that effective June 1, 2020, all trials and evidentiary hearings will be held by video using the Zoom for Government platform. The court will post on its web site a Model Pretrial Order for use in video trials and evidentiary hearings. Read More
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Pier 1 Bankruptcy Court Abates Payment of Post-petition Rent due to Pandemic

Like other national retailers, Pier 1 Imports filed for bankruptcy in March, hoping to sell its assets and to liquidate under-performing locations. Then the Covid19 Pandemic hit the U.S. with its full force, causing mandatory stay at home orders in a majority of the States. It was just a matter of time before the Pandemic started to impact the ebb and flow of large bankruptcy cases. In the case of Pier 1, in-store sales compared to the prior year fell approximately 65% for stores that were to remain open and approximately 55% for the stores that were closing. Faced with am unanticipated cash crunch, Pier 1 sought and obtained orders from the Bankruptcy Court that permitted the accrual of post-petition rent obligations at certain locations, instead of the current payment thereof. This relief was granted and recently extended to the end of May despite the objection of landlords, who argued the Debtor had to perform all of its obligations under the leases pursuant to section 365(d)(3), including the obligation to pay rent on an as incurred basis. In rejecting this construction of section 365(d)(3), the Bankruptcy Court reasoned that “section 365(d)(3) does not give the Lessors a right to compel payment from the Debtors in accordance with the terms of the underlying leases. Rather, to the extent that the Debtors are obligated to pay rent and fail to timely pay such rent, the Lessors are entitled to an administrative expense claim. Administrative expense claims under sections 507(a)(2) and 503(b) of the Bankruptcy Code, such as post-petition date unpaid rent, must be paid “on the effective date of [a] plan . . . [in] cash equal to the allowed amount of such claim. 11 U.S.C. § 1129(a)(9)(A); see also In re Circuit City Stores, Inc., 447 B.R. at 511. As such, any allowed claims for accrued but unpaid post-Petition Date rent must be paid by the Debtors on the effective date of any plan confirmed in these Bankruptcy Cases. To compel payment by the Debtors now would be to elevate payment of rent to the Lessors to superpriority status…” The question is whether the Pier 1 holding will become the new normal in bankruptcy cases and how aggressively will landlords fight the issue, particularly when the market for re-leasing the space is compromised due to the depressed retail environment. Read More
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New Mexico Court Orders SBA to Make PPP Funds Available to Chapter 11 Debtor

Today the Bankruptcy Court in New Mexico (In re Roman Catholic Church of the Archdiocese of Santa Fe, 18-13027 (Bankr. D. N.M.) ordered the SBA to make PPP funds available to a chapter 11 debtor and stated that if the debtor does not get the funds, the court will entertain an adversary proceeding against the SBA for compensatory and punitive damages. The decision from the New Mexico court comes on the heels of a contrary decision in the Cosi bankruptcy case earlier this week, when the Delaware bankruptcy court ruled that it could not force the SBA to make PPP funds available to a chapter 11 debtor. Some of the specific findings of the New Mexico Court include: “The Court finds that Defendant’s decision to exclude bankruptcy debtors from the PPP is arbitrary and capricious. While a borrower’s bankruptcy status clearly is relevant for a normal loan program, the PPP is the opposite of that. It is not a loan program at all. It is a grant or support program. The statute’s eligibility requirements do not include creditworthiness. Quite the contrary, the CARES Act makes PPP money available regardless of financial distress. Financial distress is presumed. Given the effect of the lockdown, many, perhaps most, applicants would not be able to repay their PPP loans. They don’t have to, because the “loans” are really grants. Repayment is not a significant part of the program. That is why Congress did not include creditworthiness as a requirement. Defendant’s inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements in this way was arbitrary and capricious, beyond its statutory authority, and in violation of 11 U.S.C. § 525(a). By a separate final judgment, the Court will grant Plaintiff the relief it requests. If Defendant’s actions result in Plaintiff not obtaining the $900,000 it requested, Plaintiff may file an adversary proceeding for compensatory and, if appropriate, punitive damages. Read More
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