New Laws Provide Small Business Bankruptcy Relief and Additional Protections For Veterans

It could not have occurred at a more appropriate time in our economic lives.  The Small Business Reform Act of 2019 (“SBRA” or “Subchapter V”) became effective on February 19, 2020.  It provides a simple and quick process for reorganization in bankruptcy for small businesses.  Moreover, in response to COVID, the SBRA is currently available for debtors who owe $7,500,000 or less.

The purpose of SBRA is to provide a streamlined reorganization process for small business debtors, as defined in 11 U.S.C. section 101 (51 D)(A), by implementing a procedure to obtain a consensual plan of reorganization.

Eligibility

To qualify as a small business debtor under SBRA the debtor’s aggregate amount of debt, which was originally $2,725, 625, was increased to and cannot exceed $7.5 million.  Section 101 (51 D)(A).  However, pursuant to the enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) the eligibility threshold will return to $2,725,625, after one year from February 19, 2020.  Small business debtors must opt into Subchapter V by checking the appropriate box in item 13 of a voluntary petition.  A debtor that initially files a voluntary Chapter 11 can mid case, file an amendment of the voluntary petition by designating the case to one under Subchapter V.  In re Progressive Solutions, Inc., 2020 Bankr. Lexis 467 (Bankr.C.D.Cal. 2020).  In Progressive Solutions, Inc, supra, the court determined that no leave of court is required to file an amendment, however if there is a re-designation a party in interest can object within 30 days after either the date the amendment was filed or the conclusion of the creditor meeting.  The court will then conduct a hearing to determine eligibility.  Rule 1020 (b) of the Federal Rules of Bankruptcy Procedure.

The other requirement for Subchapter V eligibility is that at least 50% of the small business debtor’s business must be derived from commercial business activities.  Sections 101 (51D) (A), and 1182 (1) and (2).

SBRA also modifies the real estate exclusion for a small business debtor.  A debtor whose primary activity is the business of owning real estate remains ineligible but the language “or operating real property or activities incidental there to” has been stricken and replaced with “single asset real estate”.  Section 101 (51 D)(A).  Therefore, a debtor whose primary activity is to own or operate more than one property is now eligible for Subchapter V.

Once a Subchapter V is filed (or the pending Chapter 11 is amended) the Office of the United States Trustee will appoint a Subchapter V trustee whose primary responsibility is to facilitate the development of a consensual plan of reorganization.  Also, if the debtor ceases to be a debtor in possession then the Subchapter V trustee’s duties include operating the business.  Section 1183 (b)(5) and (7).  The full panoply of the duties of a Subchapter V trustee are set forth in section 1183.  The services of the Subchapter V trustee terminate when the plan has been substantially consummated.  Section 1183(c)(1) and (2).

The Subchapter V trustee is to collect and retain payments until the plan is either confirmed or denied.  If the plan is confirmed, then the payments are distributed in accordance with the plan terms.  Section 1194(b).  If the plan is not confirmed the trustee is to return to the debtor all payments made, after deducting unpaid administrative claims, adequate protection payments to secured creditors and the fees of the trustee.  Section 1194 (a).  The fees for the trustee are identical to those of chapter 12 and chapter 13 trustees consisting of a 5% fee from all payments received by such individual under the plan.  28 U.S.C. section 586.

Definition of a Small Business Debtor

It is still a debtor in possession with all the rights and powers, other than the right to compensation under section 330.  The small business debtor shall perform all functions and duties of a standing trustee, except the duties specified in paragraphs (2), (3) and (4) of section 1106 (a). Section 1184.

A debtor can still be removed as a debtor in possession for “cause, including fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtor, either before or after the date of commencement of the case, or for failure to perform the obligations of the debtor under a plan confirmed” under Chapter V.  Section 1185(a).

The Plan and The Approval Process

No later than 60 days after entry of the order for relief (unless extended on a finding that an extension is warranted attributable to circumstances for which the debtor should not be accountable), the court will conduct a status conference to facilitate the expeditious and economical resolution of the case.  Section 1188 (a) and (b).  What if the debtor amends its petition at a time subsequent to 60 days after entry of the order for relief? When is the status conference held? It is believed that the status conference would be held within 60 days after filing the amendment.

In preparation for the status conference the debtor shall file a status report within 14 days of the status conference and serve it on parties and interest and the trustee.  The purpose of the report is to detail the efforts the debtor has undertaken and will undertake to attain a consensual plan of re-organization.  Section 1188(c).

Modification of the disclosure statement and the process for approval of the plan highlight the goal of the SBRA.  The first prong of the streamlined process is that the plan is filed no later than 90 days after the entry of the order for relief, except if there are extraordinary circumstances for which the debtor should not be justly accountable.  And only the debtor can file a plan.  There can be no competing plans.  Section 1189.  To further aid in the implementation of obtaining a consensual plan, no creditor committee is appointed “unless the court for cause orders otherwise”.  Section 1181 (b).  In most cases no separate disclosure statement is required.  Section 1181 (b).  Instead the plan shall include a brief history of the business operations of the debtor; a liquidation analysis; and projections with respect to the ability of the debtor to make payments under the proposed plan of reorganization.  Section 1190 (1).  Yet if the court does require the filing of a disclosure statement then section 1125 (f) is applicable.  Section 1187 (c).  In addition, the Subchapter V plan now allows the debtor to modify a secured creditor’s lien in real property that is the debtor’s residence if the new value provided to the secured creditor in connection with the granting of the secured interest was used to acquire the real property and used primarily in connection with the small business of the debtor.  Section 1190(3).

Further modifications of the plan approval process focus on “what is property of the estate”? Business owners can retain their interest in the debtor without paying holders of non-consenting impaired classes.  Section 1181 (a).  Disposable income has been redefined to mean income that is received and not reasonably necessary to be expended for (1) maintenance and support of the debtor or dependent of the debtor; (2) a domestic a support order that first becomes payable post petition; or (3) for the payment of expenditures necessary for the continued operation or preservation of the debtor’s business.  Section1191(d).  Concerning post petition earnings, section 1115 defining the scope of property of the estate in an individual case, is not applicable.  Under SBRA if a plan is confirmed without the consent of all impaired classes property of the estate includes all post petition property acquired and earnings from services performed before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13.  Section 1186 (1) and (2).  Additionally, the plan shall provide for the submission ·of all or such portion of the future earnings or other future income of the debtor to the trustee as necessary for execution of the plan.  Section 1190 (2).

Plan confirmation is simpler than for other Chapter 11 cases.  If all the requirements of section 1129(a) other than (8), (10) and (15) are satisfied, then the court shall confirm the plan notwithstanding the absence of an impaired accepting class of claims so long as the plan is fair and equitable and does not unfairly discriminate.  Section 1191 (b). A plan may be modified before confirmation unless it fails to meet the requirements of sections 1122 and 1123, with the exception of section 1123 (8) regarding the commitment of income from personal services now found in section 1190 (2).  Modification after confirmation, before or after substantial confirmation, may be approved if circumstances warrant.  Section 1193(b ).  The time within which the debtor may modify the plan is three years or longer as may be approved by the court not to exceed five years. 1193 (c).

Under section 1192 if the plan is confirmed under section 1191 (b) then as soon as practicable after completion by the debtor of all payments due within the first three years of the plan or such longer period not to exceed five years, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant to get a discharge of all debts provided in section 1141 (d)(1) and all other debts allowed under section 503 except any debt on which the last payment is due after the first three years of the plan are such other time not to exceed five years or of the kind specified in section 523 (a) of this title.

The Haven Act

The HAVEN ACT,  known as the “Honoring American Veterans in Extreme Need Act of 2019” provides that veterans can exclude disability benefits from the calculation of current monthly income.  The new law means that veterans will no longer be compelled to pay a portion of their disability benefits to creditors under chapter 13 plans.  Section 101 (10A) now excludes “monthly compensation, pension, pay, annuity or allowance under title 10, 37, or 38 in connection with a disability, combat related injury or disability, or death of a member of the uniformed services.”  The HAVEN ACT applies to pending cases.  It places military disability benefits in the same protected category as Social Security benefits.

Gary B. Rudolph, Co-chair, Insolvency Law Committee
Sullivan Hill