Thomas A. Gugliotti | New Small Business Bankruptcy Reorganization Act

Effective on February 23, 2020, there will be an entirely new “Subchapter” within Chapter 11 (Reorganization) of the United States Bankruptcy Code.  Subchapter V of Chapter 11 of the Bankruptcy Code will provide for a streamlined version of the “reorganization” process otherwise provided for in Chapter 11.  The significance of this new Subchapter V cannot be underestimated.  The intention of this new law is to make Chapter 11 relief more accessible, and increase the likelihood of plan confirmation in a small business Chapter 11 case. 

Most practitioners in the dark arts of Bankruptcy reorganization would readily acknowledge that the cost, complexity and time involved in pursuing a “standard” Chapter 11 reorganization constitute significant prohibitions on success for most business cases.  The process simply costs too much and takes too long.  In addition, and of equal significance is the fact that the “absolute priority rule”, an integral part of the standard Chapter 11 process,  stands as a major roadblock for the “owner” of a business seeking reorganization relief – since that rule requires that absent payment in full to all creditors, the business owner either loses his or her ownership interest,  the owner must obtain the consent of all creditors to allow ownership retention, or the owner must make a significant capital contribution to the reorganized debtor.  These requirements simply make a reorganization of a small business almost entirely impossible.  Available statistics seem to bear out this conclusion. 

The “Small Business Reorganization Act of 2019” will provide an alternate path for a small business to reorganize under Chapter 11.  A qualified small business will have the opportunity to opt into the new Subchapter V procedure.  The new Subchapter V provisions, designed to reduce the cost, streamline the process and induce an owner to take the dive into Chapter 11 reorganization, will create a Chapter 11 case that will include the following mechanics: 

1. No creditors’ committee will be created, and with that, no professional expenses associated with such committee, which expenses usually weigh heavily against the ability to reorganize and confirm a Chapter 11 plan;
2. No payment of quarterly U.S. Trustee fees;
3. No need to file a disclosure statement;
4. While the Chapter 11 plan in all cases must be fair and equitable and not discriminate unfairly, the usual cram down requirements will not apply in a Small Business case. No requirement to have at least one class vote in favor of the proposed plan, and then proceeding with what is usually a contested confirmation hearing;
5. For a plan to be “fair and equitable”, the Debtor’s plan must provide for the payment of all disposable income over a period of not less than 3 nor more than 5 years;
6. While the new Chapter 11 Subchapter V case will be a “debtor in possession” affair, a special version of a Chapter 11 Trustee will be appointed for the purpose of assisting in the advancement of a plan. This will not be an “operating trustee”.  The Chapter 11 Subchapter V Trustee may either be a “standing Trustee” specially appointed by the U.S. Trustee’s office to participate in all Small Business Chapter 11 cases under this Subchapter, or appointed on a case by case basis by the U.S. Trustee.  The small business Chapter 11 Trustee will be charged with the duty to: (a) supervise the restructuring process; (b) review financial information pertinent to the case; (c) make recommendations to the debtor regarding the plan to be proposed;
7. The Debtor will be required to participate in a status conference with the Court within 60 days of the filing of the petition, and file a proposed plan within 90 days of the petition filing;
8. Only the Debtor may file a plan in a case commenced under Subchapter V;
9. The “debt limit” for eligibility purposes for a Debtor electing treatment under Subchapter V is $2.7 million, counting both secured and unsecured debt. 

Time and experience under this new Subchapter V will tell if the intent of the drafters will be met with the realization of a higher “success ratio” in Chapter 11 cases.  

For secured creditors, this new law should have no significant direct, negative impact.  Even in a Small Business Chapter 11 case, the Debtor must still protect, respect and ask for permission to use the creditor’s collateral as presently required.  The Small Business Plan must still provide that the secured creditor will receive through the plan property (usually payment) that has a value which is not less than what the secured creditor would have obtained in a Chapter 7 liquidation (value of the collateral), or if the secured party so elects, treatment of the secured claim as though it was “fully secured” over the life of the plan, including the necessity for a balloon payment at the end of the plan term.  The Debtor will still be required to seek either Court permission or consent of the secured creditor to use “cash collateral”.  The secured creditor will still be entitled to “adequate protection” when its collateral is being used, consumed or depreciating. 

Updike, Kelly & Spellacy typically does not represent Debtors in Bankruptcy proceedings, choosing instead to focus its skill, expertise and arguments in favor of creditors and other interested parties in Chapter11 proceedings. 

For further information regarding the new Small Business Bankruptcy Reorganization Act, contact:

Thomas A. Gugliotti at tgugliotti@uks.com or 860-548-2661

Evan S. Goldstein at egoldstein@uks.com or 860-548-2609

Kevin J. McEleney at kmceleney@uks.com or 860-548-2622