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Subchapter V Cases - Small Business Reorganization Act of 2019

Small Business Reorganization Act of 2019

The Small Business Reorganization Act (SBRA) went into effect on February 19, 2020.  It amends the Bankruptcy Code to create a new subchapter V to chapter 11 for the reorganization of small business debtors.  It does not repeal existing chapter 11 provisions regarding small business debtors, but instead creates an alternative procedure that small business debtors may elect to use. 

Specifically, the Act:

• Adopts the definition of a “small business debtor” as a person engaged in commercial or business activity with an aggregate or noncontingent liquidated secured and unsecured debts as of its bankruptcy filing date of not more than $2,725,625, see 11 U.S.C. §§ 101(51D), 1182.  NOTE:  the CARES Act, effective March 27, 2020, temporarily increased this debt limit to $7,500,000 for one year;

• Requires the appointment of an individual to serve as a trustee, who would perform many of the same duties required of a chapter 12 trustee, and requires such trustee to monitor the debtor’s progress toward confirmation of a reorganization plan, see id. § 1183; and

• Eliminates the automatic appointment of a committee of creditors (when requested by creditors), and instead provides that a committee will only be appointed upon a showing of cause, see id. § 1102(a)(3) (as amended).

The SBRA also contains several provisions related to the filing and confirmation of a plan of reorganization. Among other changes discussed below, the SBRA:

• Requires the bankruptcy court to hold a status conference within 60 days of commencement of the case (which time may be extended under limited circumstances) and requires the debtor to file a report 14 days before the status conference detailing the debtor’s efforts to attain a consensual plan of reorganization, see id. § 1188;

• Provides that only the debtor may propose a plan, see id. § 1189(a);

• Requires that the debtor file a plan within 90 days of commencement of the case (which time may be extended under limited circumstances), see id. § 1189(b); and

• Unless the court orders otherwise for cause, eliminates the requirements of filing a disclosure statement and solicitation of votes of creditors, see id. § 1181(b).  In lieu of a disclosure statement, the plan of reorganization must provide a brief history of the debtor’s business operations, a liquidation analysis, and projections of the debtor’s ability to make payments under the proposed plan of reorganization.

There are two ways to have a plan confirmed under subchapter V—consensually under § 1191(a) or nonconsensually under § 1191(b).  To have a consensual plan under § 1191(a), all the requirements of § 1129(a), other than § 1129(a)(15), must be met.  The trustee’s service is terminated upon substantial consummation, see § 1183(c), and the debtor receives a discharge at confirmation under § 1141(d).

If a consensual plan is not confirmed under § 1191(a), the debtor may seek a nonconsensual confirmation under § 1191(b).  The SBRA authorizes a bankruptcy court to confirm a plan over the objection of creditors, providing such plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. See id. § 1191(b). Section 1191(c) specifies the criteria that a plan must satisfy to be fair and equitable.  The plan must either provide that: (1) all of the debtor’s projected disposable income to be received in the 3-year period (or up to 5-year period, if the court directs) of the plan will be applied to make payments under the plan; or (2) the value of the property to be distributed under the plan during such period is not less than the debtor’s projected disposable income.  See § 1191(c)(2).  In addition, the court must find that:  (1) the debtor will be able to make all payments under the plan; or (2) there is a reasonable likelihood that the debtor will be able to make all payments under the plan and the plan provides appropriate remedies (e.g., liquidation of nonexempt assets) to protect the holders of claims or interests in the event that the payments are not made.  See § 1191(c)(3).  With respect to a class of secured claims, the court must also find that the plan satisfies the criteria specified in § 1129(b)(2)(A).  See § 1191(c)(1).  If a plan is confirmed under § 1191(b), the trustee remains in place until the plan is completed, and the debtor does not receive a discharge until completion of all payments due within the first three years of the plan, or such other longer period not to exceed five years as the court may fix.  See §§ 1192, 1194(b).