On August 23, 2019, President Trump signed the Small Business Reorganization Act (SBRA) into law, intended to streamline bankruptcy reorganizations for small business debtors with limited aggregate liabilities. The SBRA provides debtors who qualify as a small business debtor the option to proceed under the new subchapter V instead of proceeding under existing applicable provisions of Chapter 11, which remains an option.
The SBRA is intended to:
- increase the small business debtor’s ability to negotiate a successful reorganization and retain control of its business;
- reduce unnecessary procedural burdens and costs; and
- increase oversight of small business debtors and ensure expedient reorganization.
Chapter 11 is the only bankruptcy option for a small business organized as a partnership, limited liability company, or corporation. Chapter 11 is also the only bankruptcy option for individual business debtors who seek reorganization but whose amount of debt exceeds Chapter 13’s eligibility requirements.
As an elective framework for small businesses seeking to streamline and expedite reorganization, SBRA includes the following important provisions in subchapter V of Chapter 11:
- § 1183 Trustee. Under SBRA, a standing trustee would be appointed in every small business debtor case to perform duties, not unlike those performed by a Chapter 12 or Chapter 13 trustee, to facilitate an expedient reorganization.
- § 1186 Property of the estate. Under subchapter V, if a plan is confirmed under § 1191(b), property of the estate includes, in addition to property specified in § 541, all property that the debtor acquires after the date of commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
Property of the estate also includes earnings from services performed by the debtor after the date of commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
- § 1188 Status conference. SBRA requires that a status conference is held in every case within 60 days of commencement “to further the expeditious and economical resolution” of a case under subchapter V.
- § 1189 Filing of the plan. Only a small debtor may file a plan of reorganization, but it must do so within 90 days of filing the bankruptcy case. While a small business debtor is not required to file a disclosure statement, the plan must include a history of the debtor’s business, projections, and liquidation analysis. Provided that the plan does not discriminate unfairly and is fair and equitable to each class of claims or interests, the owner of the small business debtor may retain a stake in the business enterprise.
- § 1191 Confirmation of plan. Whereas a standard Chapter 11 plan requires an impaired consenting class of non-insider creditors to confirm a plan, a plan under the new SBRA provisions does not require an impaired consenting class for confirmation.
SBRA does not require administrative claims to be paid in full on the effective date and instead allows them to be paid through the plan over a period of time. SBRA does not require the plan to comply with the absolute priority rule.
However, in exchange for the increased plan confirmation flexibility, the SBRA does impose other constraints, for example, the use of the debtor’s disposable income to make plan payments over a period of three to five years.
- § 1192 Discharge. Once a debtor completes all payments due within the first three years of confirmation of the plan or a longer period of up to five years, the debtor will receive a discharge.
If a plan is confirmed under § 1191(b), the § 1141(d) discharge still applies, but as provided for in § 1192. Specifically, the debtor receives a discharge of all debts provided in § 1141(d)(1)(A), and all other debts allowed under § 503 and provided for in the plan, except any debt—(1) on which the last payment is due after the first 3 years of the plan, or such other time not to exceed 5 years fixed by the court; or (2) of the kind specified in § 523(a).
- § 1195 Transactions with professionals. SBRA relaxes the § 327 disinterestedness requirement, thus a professional is not disqualified for employment if the professional holds a prepetition claim of less than $10,000.
The new provisions of subchapter V of Chapter 11 of the Bankruptcy Code are the result of bipartisan Congressional efforts to provide small business debtors with more flexibility and efficient trustee supervision. While the existing applicable provisions under the Bankruptcy Code (Title 11) are still available to small businesses, these new provisions are intended to alternatively enhance small business debtors’ ability to reorganize under the Code.
The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.
