The Small Business Reorganization Act, subchapter V of chapter 11 of the Bankruptcy Code (the “SBRA”) becomes effective on February 19, 2020. (As of the date of this writing, the SBRA had not yet become effective.) Here are the bare outlines of the new small business chapter that offers new promise to debtors in business the sum of whose noncontingent, liquidated secured and unsecured debts does not exceed $2,725,625. Bankruptcy Code § 101(51)(D).
Perhaps the most important changes to chapter 11 under the SBRA are (i) the elimination of the requirement to obtain at least one impaired consenting class of claims in order to proceed to cramdown when not all classes of claims consent to their treatment under the plan; and (ii) the elimination of the absolute priority rule. In cases brought by Main Street small businesses under the SBRA, unsecured or undersecured creditors no longer have the leverage to prevent the confirmation of a plan through those restrictions on confirmation in other kinds of chapter 11 cases.
Another major improvement under the SBRA is the debtor’s ability in some cases to modify a mortgage that encumbers only the debtor’s primary residence, such as an SBA second mortgage on the debtor’s home, securing an SBA loan guaranty required from the debtor’s principal. If a loan that encumbers only the debtor’s primary residence was not used primarily to acquire the real property and the proceeds were used primarily in connection the debtor’s small business, the debtor can modify the mortgage. That is not the case either in an individual chapter 11 case outside of the SBRA, or in a consumer or business chapter 13 case.
Unlike chapter 11 generally, a trustee is routinely appointed in SBRA cases to assist the debtor in formulating and negotiating a consensual plan of reorganization. In these cases filed in the Southern District of New York, there will not be a standing trustee as there are in chapter 12 ,
The Subchapter V trustee is not intended to be an operating trustee as be appointed in other types of chapter 11 cases. But during the introductory period of the Subchapter V, expect trustees to have greater involvement than was apparently intended by Congress.
The trustee’s central responsibility is to assist the debtor in attempting to negotiate a consensual plan. To that end, the UST (for cases in the Southern District of New York) has begun appointing turnaround professionals to serve as Subchapter V trustees.
If the debtor in a Subchapter V Small Business Reorganization Act case is unable to negotiate a consensual plan with its creditors, the debtor’s plan must provide that all of the debtor’s projected disposable income be committed to funding plan obligations for a period of between 3 and 5 years. That requirement does not apply to consensual plans. In some cases, this will be a meaningful difference in the allocation of cash flow. In others, all projected disposable income will be required to fund the debtor’s plan anyway.
Also unlike cases in chapter 11 generally, fees will be not be payable to the U.S. Trustee based on the total of a debtor’s disbursements during a given calendar quarter. Instead, the subchapter V trustee will be entitled to compensation from the debtor under a confirmed plan. It remains to be seen whether this shift in oversight expenses will be a benefit or a burden for qualifying small business debtors.
It is expected that these cases will proceed to confirmation more quickly and with less cost that is the case with other types of chapter 11 cases.
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.