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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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The Small Business Reorganization Act

Last month, the Senate Judiciary Committee reintroduced the Small Business Reorganization Act (SB 1091). SB 1091 is intended to streamline the process for small businesses (those with debts less than $2,566,050) that wish to use Chapter 11 to reorganize. Key provisions of SB 1091 (the “SBRA”) include: Increasing the Debtors’ Ability to Negotiate a Successful Reorganization and Retain Control of the Business. Only the small business debtor may file a plan under subchapter V of the SBRA. The owner of the small business debtor may retain a stake in the company so long as the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests. If a trustee or a holder of an unsecured claim objects to the plan, the court cannot approve the plan unless the plan provides that all of the small business debtor’s projected disposable income to be received during the plan will be applied to make payments under the plan for a period of 3-5 years. Reducing Unnecessary Procedural Burdens and Costs. Unless the court for cause orders otherwise, an official committee of unsecured creditors will not be appointed and a disclosure statement will not be required. Increasing Oversight and Ensures Quick Reorganization. A standing trustee would be appointed in every small business debtor case to perform duties similar to those performed by a Chapter 12 or Chapter 13 trustee and help ensure the reorganization stays on track. The small business debtor must file a plan within 90 days of commencement, which may be extended under limited circumstances. An initial status conference would be required in every case within 60 days of commencement “to further the expeditious and economical resolution” of a SBRA case. If you would like to speak to one of our experienced attorneys regarding your business, please call (312) 878-6976 or fill out a contact form here. Read More
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Senate bill would bar Confessions of Judgments, including for Merchant Cash Advances (MCA)

In what may be a response to the Bloomberg article that discussed Merchant Cash Advances or MCAs, Sens. Rubio and Brown introduced federal legislation on December 6, 2018, to prevent confessions of judgments and related instruments. The text of the bill, which is known as the “Small Business Lending Fairness Act,” provides that: “(a) —In connection with the extension of credit in or affecting commerce, as defined in section 4 of the Federal Trade Commission Act (15 U.S.C. 44), no creditor may directly or indirectly take or receive from a borrower an obligation that constitutes or contains a cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process thereon.”. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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