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Client Alert-Chapter 11 Bankruptcy is Now Much More Accessible and Practical for Many Businesses at a Time When It Is Needed the Most

Mar 30, 2020
  • Bankruptcy and Creditors' Rights
  • FisherBroyles News

The extent and breadth of changes brought to the United States, and indeed, the world, by COVID-19 will probably not be fully understood for a long time.  There are, however, several legislative changes made in recent days that are likely to have an immediate impact on small businesses.  One that should be important for those advising small businesses in economic crisis are the amendments to The Small Business Reorganization Act of 2019 (H.R. 3311, “SBRA”) which itself only became law on August 23, 2019 and took effect less than six weeks ago, on February 19, 2020.  Specifically, eligibility for relief under the SBRA is expanded by increasing the cap on debt from $2,725,625 to $7.5 million for the next year.  This means that many more businesses, and individuals with significant business debt, will be able to take advantage of SBRA’s most cost-effective and streamlined provisions.

It sounds counterintuitive, but bankruptcy can be very expensive.  Chapter 11, which is the reorganization chapter mostly utilized by businesses, is complicated and cumbersome, requiring many trips to the courthouse and almost daily assistance by experienced counsel.  Nearly every issue facing a debtor requires advice about how it must be handled differently once the case is filed, and then, completing the disclosure statement and plan process to exit from bankruptcy requires voluminous drafting, negotiating with multiple parties, and sometimes litigating numerous issues. And, the absolute priority rule made it difficult for owners to be able to restructure their businesses and come out of chapter 11 owning the reorganized company.

It is no wonder, then, that organizations like the American Bankruptcy Institute, the National Conference of Bankruptcy Judges and the National Bankruptcy Conference successfully worked hard to bring SBRA into existence.  The SBRA, according to its legislative history, allows small business debtors “to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business” which “not only benefits the owners, but employees, suppliers, customers, and others who rely on that business.”[1]  The SBRA is available to both business entities and individuals, so long as 50% or more of their debt is commercial or business.  Unfortunately, however, eligibility was limited to those with total noncontingent liquidated secured and unsecured debts of less than $2,725,625,[2] thus limiting access to its streamlined, efficient provisions.

Some of the main benefits of electing SBRA’s provisions – and it is voluntary — can be summarized as follows:

  • A new type of trustee is appointed, whose primarily role is to facilitate confirmation of a consensual plan;
  • The absolute priority rule is eliminated, thus making it easier for business owners to reorganize and retain their business;
  • The requirement of preparing a separate disclosure statement for a plan is eliminated, thus shortening and simplifying the plan process;
  • Confirming a plan over a creditor’s objection, i.e. a “cramdown” plan, is simplified;
  • Only the debtor may file a plan within the first 90 days, giving the debtor more control over the process;
  • Deadlines are shorter so that the time period from filing to confirmation is shorter;
  • No committee of unsecured creditors will normally be formed, thus eliminating one of the negating parties in the plan process and eliminating a cost borne by other chapter 11 debtors.

 

Takeaway:  By increasing the eligibility cap to $7.5 million for the next year, Congress has significantly increased the number of businesses and individuals who have access to Chapter 11 reorganization under the streamlined, more cost-effective provisions of the SBRA.  This means that more individuals and businesses affected by the COVID-19 quarantines and prohibitions will have more options for recovery.

 

Patricia B. Fugée

Cleveland/Columbus/Detroit offices

27100 Oakmead Drive, #306

Perrysburg, OH 43551

Office: (419) 874-6859

email:  [email protected]

[1] In re Progressive Solutions, Inc., 2020 Bankr. LEXIS 467, *5-6 (Bankr. C.D. Calif. 2020), quoting Unofficial Transcript of Oversight of Bankruptcy Law and Legislative Proposals: Hearing Before the Subcomm. on Antitrust, Commercial & Admin. Law of the H. Comm. on the Judiciary, 116th Cong. 27 (2019) (on file with H. Comm. On the Judiciary Staff).

[2] 11 U.S.C. § 101(51D)(A).

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