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New Bankruptcy Law Provides Restructuring Option Specifically for Small Businesses

Published: February 6th, 2020

By: Denise D. Dell-Powell

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On February 19, 2020, a new law will go into effect that marks the most significant change to the Bankruptcy Code since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. The Small Business Reorganization Act of 2019 (SBRA) received broad bipartisan support from Congress and offers meaningful relief to small business owners by accommodating their particular needs and concerns.

The new law gives small business owners greater access to the courts by streamlining the bankruptcy process, notes Denise D. Dell-Powell, chair of Dean Mead’s Bankruptcy and Creditors’ Rights Practice Group. The SBRA offers a process that is more proportional to the financial issues and limitations unique to a small business.

The Small Business Reorganization Act (SBRA) of 2019

The SBRA removes the most significant obstacles that historically have prevented small businesses from filing a bankruptcy reorganization by modifying the applicable process to increase efficiency, lower costs and simplify the plan confirmation process.

Small businesses often find that they are too small to successfully reorganize under Chapter 11 but too large to file under Chapter 13. The Chapter 11 process is an expensive and cumbersome one that traditionally has made it an impractical and unaffordable solution for many small businesses needing to reorganize in order to survive. On the other hand, most of them are not eligible to reorganize under the more streamlined process available under Chapter 13. This leaves small businesses only with alternatives such as liquidation, receivership or assignment for the benefit of creditors. Under the SBRA, however, individuals and companies with up to $2,725,625 of business debt soon will be able to reorganize under the newly created subchapter 5 of Chapter 11.

Subchapter 5 eliminates the costly requirements to pay quarterly fees to the United States trustee, to appoint a committee of unsecured creditors and to file a disclosure statement to accompany the debtor’s plan of reorganization – all of which often are impediments for small businesses. Instead, the new law directs the appointment of a trustee who oversees the claims distribution process and who is compensated by the debtor’s estate, similar to a Chapter 13 trustee. Meanwhile, the debtor is left to run the business subject to review at a status conference scheduled within 60 days post-petition and the filing of a plan within 90 days. What is unique is that only the debtor is eligible to file a plan, and it is not subject to votes for confirmation by creditors.

Another critical benefit for small business debtors is the elimination of the requirement that all creditors be paid in full before equity can retain its interests. Instead, the SBRA enables a small business owner to retain his or her interests in the business, provided that the plan of reorganization does not discriminate unfairly and is equitable for each class of claims or interests. The inclusion of this provision is critical in that it allows small business owners to retain ownership of their businesses and file a feasible plan, even if they do not propose to pay their claims to all creditors in full.

Creditor Concerns

It already is difficult for creditors in a Chapter 11 case to accept that they may not receive payment in full for goods and services provided prepetition. Even more exasperating is when the same creditors are presented with a preference action filed by the Chapter 11 trustee seeking to recover payments made 90 days prior to a debtor’s bankruptcy filing. A separate and major component of the SBRA relevant to all creditors is the addition of more restrictive language relating to these preference actions. A trustee now must use “reasonable due diligence in the circumstances of the case” before seeking to avoid any transfer of an interest of the debtor in property – although what constitutes proof of the trustee’s compliance with this requirement is still unclear.

In addition, the minimum limit for a trustee to make a preference claim against a noninsider in a district other than the one in which the creditor resides has been increased from $13,650 to $25,000. This means that in cases where the trustee does bring a claim for less than $25,000, the SBRA requires that the suit be brought in the creditor’s home district. This is a benefit to creditors, as it is expected that this amendment will result in a reduction of preference litigation, particularly in smaller matters.

What the New Laws Mean

The key to the SBRA is proportionality and accommodation, Dell-Powell observes. While it is easy for bankruptcy attorneys to focus on the major cases that dominate the headlines, it should be remembered that the majority of businesses across the country are small businesses as defined by the new legislation. Prior to the passage of the SBRA, these small businesses did not have equivalent access to bankruptcy reorganization by virtue of the imbalanced economies of scale. Because traditional Chapter 11 was designed to address and accommodate complex business reorganizations, it is appropriate to administer these complex cases differently than ones for businesses that are a mere fraction of their size.

Under the SBRA, small business owners will find a more streamlined and accessible process that should open doors to effective reorganization. The law will limit the ability of creditors to effectively block small businesses’ reorganization plans while at the same time establishing a reasonable time frame for debtors to file a feasible plan, which Dell-Powell expects will protect the interests of creditors.

There is still a bit of uncertainty surrounding some of the administrative and procedural details of how the SBRA will function, but more information will be forthcoming prior to the effective date. What is clear, however, is that the new legislation opens the door for more small businesses to file viable Chapter 11 cases that hopefully will yield positive results for both businesses and their creditors.