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.
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
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.
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.
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
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…
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.
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.
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.
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.
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.
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.
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.
The following guidance has been posted by the United States Trustee in respect to the treatment of the IR rebate checks.
The federal government will soon begin issuing recovery rebates to qualified individuals under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (the “Act”).The rebates total at most $1,200 per individual or $2,400 per married couple filing jointly, with an additional $500 paid for each qualifying child under the age of 17. The rebates are payable in full to qualifying individuals earning less than $75,000, $150,000 per married couple filing jointly, or $112,500 for heads of household, and decrease by 5 percent of income exceeding those thresholds until completely phased out. Two bankruptcy questions have arisen about whether the rebates: (1) should be included in the calculation of current monthly income or projected disposable income; and (2) are property of the bankruptcy estate.The Act explicitly answers the first question. Under Sec. 1113(b)(1) of the Act, which amends 11 U.S.C. §§ 101(10A)(B)(ii) and 1325(b)(2), “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. § 1601 et seq.) with respect to the coronavirus disease 2019 (COVID-19)” are excluded from the statutory definitions of current monthly income and disposable income. Accordingly, recovery rebates received within six months before the filing of the petition should not be included in calculating a debtor’s currently monthly income in a chapter 7 or 13 case, and further should be excluded from projected disposable income available to pay creditors through achapter 13 plan.The Act is silent as to whether the recovery rebate is property of the estate. In chapter 7 cases, the “property of the estate” issue will only arise in cases filed after March 27, 2020, the effective date of the Act. Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances, including: the modest amount of the recovery rebate; the applicability of state and federal exemptions; any interest of a non-debtor spouse in the recovery rebate; the cost to the estate of recovering and administering the recovery rebate,including litigation with debtors who may seek a judicial determination; and the extent to which recovering the recovery rebate will enable creditors to receive a meaningful distribution.In rare chapter 13 cases filed on or after March 27, 2020, the recovery rebate may be relevant to the confirmation standard contained in 11 U.S.C. § 1325(a)(4). For chapter 13 cases filed before March 27, 2020, the recovery rebate is excluded from that analysis because it would not have been available for payment to creditors in a chapter 7 case.Trustees are directed to notify the United States Trustee prior to taking any action to recover recovery rebates or objecting to a chapter 13 plan based on the treatment of recovery rebates.
The City of Chicago has established the Microbusiness Recovery Grant Program, which will distribute $5,000 grants to up to 1,000 eligible businesses. In order to qualify for this grant, a business must have no more than four employees, less than $250,000 in annual revenue, have been in business for one year, have suffered a 25% decrease in revenue due to COVID-19, and be located in a low or moderate income part of the city. Online applications are due on May 4 (https://app.smartsheet.com/b/form/6c163da4b4de4f18a281a76f550d89a0), and grant recipients will be selected on a lottery basis on May 11. For more information about this program, see the program website (https://www.chicago.gov/city/en/depts/bacp/supp_info/smallbusinessresiliencyfundgrantprogram.html).
One would think that a chapter 11 debtor has a strong need for a PPP loan, but the SBA believes otherwise. Guidance issued on 4/24 by the SBA rejects the use of such financing for companies in chapter 11, which is not surprising since bankruptcy was a disqualifying event on the PPP application. Further, if a company enters bankruptcy after applying for a loan but before the funds are disbursed, it is the company’s responsibility to contact the lender and cancel the loan. Late last week, at least one court in Texas issued a TRO in favor of the debtor with respect to a PPP loan.
The SBA’s new guidance, which is embodied in a new Interim Final Rule issued just after the new funding was approved, is in the following Question and Answer format.
Will I be approved for a PPP loan if my business is in bankruptcy?
No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.
The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy. The Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement. Lenders may rely on an applicant’s representation concerning the applicant’s or an owner of the applicant’s involvement in a bankruptcy proceeding.