Simon PLC Attorneys & Counselors – May 2020 Memorandum
CHAPTER 11 BANKRUPTCY – SMALL BUSINESS REORGANIZATION ACT – SUBCHAPTER V
Bloomfield Hills, Michigan – The Small Business Reorganization Act of 2019 (“SBRA” or the “Act”) became effective on Feb. 19, 2020. This revision to the United States Bankruptcy Code is an effort to reduce the cost and time of chapter 11 for a small business. The SBRA will only apply to a “small business debtor”: a person or entity engaged in commercial or business activities with aggregate secured and unsecured debts of $2,725,625, at least 50 percent of which arose from the debtor’s commercial activities. A single asset real estate debtor is excluded from this definition. On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) significantly expanded by raising the debt limit from $2.7 million to $7.5 million. The debt limit will return to its prior level after one year.
Subchapter V provides a number of benefits to debtors, but there are several creditor benefits as well. Among these is a requirement that a trustee be appointed to oversee and monitor, facilitate a consensual plan, and make distributions to creditors in certain cases. The debtor is obligated to provide the trustee with financial information regarding the business. The court can strip a small business debtor of management for causes such as fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the commencement of the bankruptcy. If that happens, the trustee takes over the operation of the debtor’s business.
While only the debtor can file a plan of reorganization, it must do so within 90 days. The court may extend this period, but only “if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” The debtor must also meet with creditors to obtain a consensual plan. However, the court can confirm the plan over the objections of creditors if it does not discriminate unfairly against creditors, the Plan is fair and equitable, and the debtor has applied all of the debtor’s expected disposable income for three to five years to its debts. Exactly how much income for the plan to be “fair and equitable” to creditors is unclear.
Perhaps the biggest change is that the debtor does not need to pay creditors in full in order to retain their equity interest in the business, as was the rule. Also, no impaired accepting class is needed to cram down a plan, which was also a key protection for creditors under the old law. However, cram down in a subchapter V case has not changed in regard to secured claims.
The SBRA also imposed additional requirements regarding preference claims. Trustees are now obligated to investigate the likelihood of defenses to a preference claim before filing suit. Exactly what the trustee must do to comply with this requirement is not clear. Also preference actions that seek to collect less than $25,000 must be filed in the jurisdiction where the defendant resides. While the SBRA provides expanded benefits for debtors, the appointment of a trustee and an expedited time frame for filing a plan are additional protections for creditors.
Simon PLC Attorneys & Counselors is ready to assist with protecting creditor client interests under the SBRA.
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