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…
As discussed in a previous post, on Friday, the Small Business Reorganization Act was signed into law and will take effect in 180 days. The new law, which FactorLaw will further summarize in future blog posts, adds a new subchapter to the Bankruptcy Code that is designed to make the process less expensive and more feasible for small businesses (defined as persons engaged in a commercial or business activity with aggregate and noncontingent debts of less than $2,725,625). The American Bankruptcy Institute indicates that some have estimated that about half the chapter 11 cases filed today could qualify for treatment under this new law.
Stay tuned as we continue to monitor these changes.
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