By: Scott S. Rever, Esq.
Counsel: Genova Burns LLC
The Small Business Reorganization Act of 2019 (“SBRA”) was signed into law by President Trump on August 23, 2019. The law enacted a new subchapter of Chapter 11 of the Bankruptcy Code, which is codified at 11 U.S.C. §§1181 – 1195. The law was established to assist small business debtors in reorganizing their financial affairs in a timely and costs efficient manner. Due to the requirements of Chapter 11, oftentimes the cost of the case alone is the death knell of the small business debtor’s ability to reorganize its affairs. Other times, one large creditor controls the debtor’s fate and blocks the debtor from emerging from bankruptcy intact and viable. Prior to the enactment of the SBRA, small business cases were like a roach motel, you could file the Chapter 11 case to get into bankruptcy but you couldn’t get out. The motivation behind the enactment of the statute is to give small business debtors a chance of survival in and after Chapter 11, and to serve public policy by preserving the jobs small businesses create. The timing of the enactment of the statute is eerie. It is as if someone had a crystal ball as to what was to come – a pandemic and its detrimental impact, particularly on small businesses.
Pursuant to the provisions of the SBRA as enacted, a debtor could generally not qualify as a small business debtor if its debts exceeded $2,725,625.00. However, pursuant to the Coronavirus Aid and Relief and Economic Security act (“CARES Act”), which was enacted and effective on March 27, 2020, the debt limitation to elect to utilize the provisions of the SBRA was increased to 7.5 million for one year. In light of the coronavirus pandemic and its impact on small businesses, Congress sought to allow greater use of the provisions of the SBRA to assist small businesses.
Appointment of a Subchapter V trustee is mandatory in a Subchapter V case. I am one of ten Subchapter V Panel Trustees in the District of New Jersey. Since its enactment, I have served as Trustee in several cases, but I expect many more small businesses to take advantage of Subchapter V in 2021. The number of filings and appointments will substantially increase in light of COVID-19 and as practitioners get more familiar with the significant benefits of the SBRA.
A Subchapter V Trustee is not a trustee in the traditional sense like a trustee in Chapter 7, Chapter 11 and Chapter 13 cases. In a Chapter 7 liquidation proceeding, the trustee’s job is to administer the case and liquidate any non-exempt assets to make a distribution to creditors. In Chapter 11, the trustee can take possession and control over a debtor’s assets and business, and assist the debtor in reorganizing or liquidating under Chapter 11. In a Chapter 13 case which is exclusively for individual debtors, the trustee traditionally receives monthly payments from the debtor in the amount of the debtor’s disposable income after normal monthly expenses and distributes those funds to creditors. The Subchapter V trustee generally does not take control and possession of the debtor’s assets, and except in certain circumstances, it does not distribute money to creditors. The Subchapter V trustee’s duties are specifically delineated in 11 U.S.C. §1183. The trustee’s primary role is to serve a monitoring and mediating function, to help resolve issues between debtors and creditors to assist the parties in confirming a consensual plan. The Subchapter V trustee also serves as a liaison to the Office of the United States Trustee to advise of any issues in the case that require its attention. The trustee also serves as a neutral and objective participant in the proceedings to assist the parties and the Court. While the trustee has more substantive duties such as objecting to the debtor’s discharge if necessary, and making distributions to creditors under a confirmed but non-consensual plan, these duties are the exception and not the rule.
So while a Subchapter V trustee’s role is very different from its sister trustees, it is alike in the sense that its purpose is to preserve, protect and further the underlying purposes of the Bankruptcy Code, a debtor’s fresh start, its ability to reorganize, fairness to the competing interests of creditors, and to preserve and uphold the integrity of the bankruptcy system and process.
All of the Subchapter V trustees in the District of New Jersey are attorneys. In performing its duties, a Subchapter V trustee needs to be cognizant of the extent of its fees in the case. One of the goals of Subchapter V is to keep the costs of the case to a minimum. Throughout the case, the trustee should have a limited role, monitoring the case and assisting the parties in resolving issues as needed. In furtherance of the cost saving purposes of Subchapter V, a trustee’s ability to retain counsel or other professionals is extremely limited to the rarest of circumstances and only when absolutely necessary. For example, a trustee’s retention of professionals has been allowed when its role is expanded pursuant to 11 U.S.C. §1183(b)(5), when a debtor is removed as a debtor-in-possession per 11 U.S.C. §1185 for cause, including fraud, dishonesty, incompetence or gross mismanagement. This has happened at least once in this District when the debtor’s principals used PPP loan proceeds for their personal benefit.
Like all things, the SBRA has pros and cons but in the writer’s opinion, in the right cases, the pros far outweigh the cons. I say the right cases because under the SBRA, while only the debtor may file a plan, it must be filed within 90 days of the bankruptcy filing. The ability to extend this period is limited to circumstances for which the debtor should not justly be held accountable. Accordingly, if filing a case under the SBRA a debtor and its counsel must have its ducks in a row and a game plan as to how it will reorganize because the case cannot languish for many months and possibly years like traditional Chapter 11 cases sometimes do.
Subchapter V has numerous cost saving benefits for a small business debtor. In cases filed under the SBRA, a committee of unsecured creditors will not be appointed in the case unless the Court for cause orders otherwise. In traditional Chapter 11 cases, the United States Trustees Office is charged with the responsibility of appointing a creditors committee. A creditors committee is appointed in non-SBRA cases as a watchdog over the case and the debtor’s activities and conduct, so the interests of creditors are protected and distributions to creditors can be maximized. A creditors committee has the ability to retain professionals including counsel, accountants, financial advisors, etc. The debtor is responsible for paying the fees of the creditors committee’s professionals. If the creditors committee and their counsel is aggressive, the fees could be tens of thousands of dollars or substantially more. The small business debtor, already struggling to survive, and faced with having to pay its own professionals’ fees, is now burdened with the fees of the creditors committee’s professionals making it even more unlikely that the small business debtor will survive. The provisions of the SBRA eliminating the requirement to appoint a creditors committee is a substantial benefit to the small business debtor. While creditors may be losing some protection, presumably the Subchapter V trustee and the United States Trustee’s oversight in these cases will protect creditor interests while at the same time eliminating a significant obstacle to a small business debtor’s ability to reorganize.
The SBRA also eliminates the requirement of a disclosure statement with a debtor’s plan of reorganization. In a traditional Chapter 11 case, acceptance or rejection of a plan requires that creditors receive adequate information about the debtor and the plan in the form of a disclosure statement before voting on the plan. Ordinarily, this involves a two-step process whereby the disclosure statement needs to be approved by the Court prior to soliciting votes from creditors. Thereafter, there is a hearing on confirmation of the plan. The SBRA eliminates this two-step process and does away with the requirement to file and obtain Court approval of a separate disclosure statement prior to the solicitation of votes. Notwithstanding the foregoing, the debtor’s plan must contain certain required information which would otherwise be in the disclosure statement. The elimination of the disclosure statement requirement under the SBRA will save the small business debtor the costs and delay involved in preparing and obtaining Court approval of the disclosure statement.
The SBRA also eliminates the requirement that a small business debtor pay quarterly fees to the United States Trustees Office. In a traditional Chapter 11 case, pursuant to 28 U.S.C. §1930(a)(6)(A) a debtor is required to pay quarterly fees to the United States Trustees Office based upon disbursements it makes while in bankruptcy. Depending on the funds that flow through the debtor’s accounts during the case, the quarterly fees can have a significant impact on small business debtors and their ability to reorganize. While the small business debtor is still required to file monthly operating reports, the elimination of the quarterly fee provides a significant benefit to small business debtors hoping to reorganize their financial affairs.
In addition to the foregoing cost saving benefits, there are substantive provisions particular to the SBRA to assist debtors in reorganizing their financial affairs. Subchapter V changes the cram down provisions of traditional Chapter 11 cases. In a traditional Chapter 11 case, if all impaired classes of creditors do not accept the plan, a debtor can cram down the plan if at least one class of impaired creditors accepts the plan. Moreover, if the debtor attempts to confirm a cram down plan, the absolute priority rule applies generally prohibiting holders of equity interest from retaining their interests in the debtor or receiving anything under the plan unless unsecured creditors receive full payment on their claims. Accordingly, in a traditional Chapter 11 case, a large unsecured creditor that controls a voting class could block the debtor from confirming a plan. Under the SBRA, a debtor can cram down and confirm a plan even if an impaired class does not vote to accept the plan. In addition, under the SBRA, the absolute priority rule is eliminated. To confirm a cram down plan, the SBRA requires that with respect to each impaired class that has not accepted the plan, the plan does not discriminate unfairly and is fair and equitable. This imposes a projected disposable income requirement to confirm a cram down plan which is set forth in 11 U.S.C. §1191(c)(2). Accordingly, the provisions of the SBRA give the debtor more leverage to confirm a non-consensual plan, limiting creditors, particularly large creditors’ ability to block confirmation of a plan.
Moreover, another benefit of the SBRA to small business debtors is that if the Court confirms a cram down plan, administrative claims, including professional fees can be paid through the plan over time as opposed to requiring them to be paid in full on the effective date as traditionally required under Chapter 11. The foregoing gives the debtor flexibility to enable it to confirm a plan when it lacks the financial wherewithal to pay administrative claims in full on the effective date of the plan which is usually shortly after confirmation of the case.
In this trustee’s opinion, the benefits of the SBRA to small business debtors, especially in the current environment, cannot be overstated. The SBRA is a valuable tool in the small business debtor’s tool box to help small business debtors emerge from bankruptcy as a viable entity, furthering public policy by preserving the small business owner’s livelihood and the jobs small businesses create.
