Small Business Reorganization Act of 2019
On August 23, 2019, President Trump signed the Small Business Reorganization Act of 2019 (SBRA; H.R. 3311; new subchapter 5, U.S. Bankruptcy Code) into law. The Act, aimed at promoting more quicker, cheaper, and overall more efficient restructuring solutions for small businesses in bankruptcy, takes effect February 19, 2020.
Several of the more significant features of the new subchapter 5 include:
- Elimination of creditor sponsored plans
- Elimination of a creditors’ committee (for the most part)
- Elimination of the Absolute Priority Rule (claim priority)
- Ability of a Debtor to modify a non-purchase money security interest or mortgage in a residence used in connection with a Debtor’s business (creditors beware)
- Confirmation of a Plan can be obtained without the support of any class of claims, so long as the plan meets certain requirements, and
- The serial filer no-automatic-stay provision of 11 U.S.C. § 362(n) does not apply.
Additional noteworthy benefits may include:
- Consensual plan: discharge occurs upon the effective date of the plan
- Non-consensual plan: discharge it is not granted until the debtor completes all payments due within the first three years of the plan or for such period as the court may fix which is to not exceed five years.
- No means test under either §§ 1322(d) or 1325(b)
- No requirement to pay UST quarterly fees
- Debtor is not required to prepare or seek approval of a disclosure statement
The removal of quarterly trustee fees and creditor committee appear aimed at reducing the cost of restructuring. There are some caveats, however. The would-be Debtor must still meet the statutory definition of a “small business debtor” under 11 U.S.C. § 101(51D). The definition is also being revised and includes a requirement that at least 50% of the debt of the Debtor arose from commercial or business activities. Also, the Debtor exclusivity period is reduced from 300 days to 90 days. The Debtor must file a plan within 90 days after filing the case unless extended by the Court. And only the Debtor may file a plan.
Another important distinction is that in proceeding under Chapter V, a standing Trustee shall be appointed in the case as typically occurs in Chapter 12 or 13. The U.S. Trustee will appoint the Trustee from an available pool of candidates. U.S. Trustees will likely do so predicated upon compatibility factors. For instance, if there is a candidate Trustee whose prior experience and skills match up to a new Debtor, that would likely be considered for purposes of whom to appoint. The new Trustee is then compensated similarly as Chapter 12 and 13 trustees. The Trustees will oversee claims and distribution and provide oversight, but will not operate the business unless the Debtor in possession is removed for cause, in which case then the Trustee will take charge.
Big changes are afoot and designed to make restructuring under bankruptcy a better, more affordable process for small businesses. But there are questions yet to be answered. Will the newly available cramdown on principal residences under certain circumstances become a major problem for home lenders who have grown accustomed to the protections afforded a claim secured by a principal residence? Will the removal of application of the serial filing no automatic stay provision of 362(n) create a pathway for abusive serial filings? What issues may arise with the removal of the Absolute Priority Rule? Also, will small businesses elect to proceed under the new Chapter V given the fast track requirements of a plan to be filed in 90 days and appointment of a Trustee? These questions and many more will soon be answered when the H.R.3311 takes effect February 2020, just two short months away.