The Small Business Reorganization Act of 2019 affords increased access to Chapter 11 Reorganization for small businesses and some individuals

As businesses and individuals struggle to grasp the consequences of the current COVID-19 Pandemic, many businesses are struggling to determine how they will emerge from this pandemic going forward. How will businesses, who may or may not have been financially secure prior to the pandemic, create a financial plan and navigate the uncertainly following the COVID-19 outbreak? Fortunately, a new subchapter of the Bankruptcy Code was recently implemented that might assist those businesses in building such a plan and emerging from the insolvency concerns caused by this pandemic.

On February 19, 2020, the Small Business Reorganization Act of 2019 (“SBRA”)[1] became effective, and modified several provisions of Chapter 11 of the Bankruptcy Code. These modifications strive to make Chapter 11 more efficient, affordable, and accessible for small businesses throughout the nation. The need for access is increasingly evident as the nation battles the COVID-19 pandemic. The framework of SBRA allows small businesses caught in difficult circumstances to achieve an efficient reorganization and repayment plan for debt. Along with traditional small businesses, individuals who run a business as a sole proprietorship or d/b/a are also eligible to be a small business debtor. A small business debtor is defined as a business entity or person engaged in commercial or business activities that has aggregate noncontingent liquidated secured and unsecured debts as of less than $2,725,625.00.[2] As part of the CARES Act, passed by Congress and signed by the President on March 27, 2020, the debt limit eligibility for SBRA was increased from $2,725,625.00 to $7,500,000.00 in aggregate debt for a period of one (1) year from the effective date of the CARES Act. This increase likely opens the door for thousands of additional businesses and individuals to take advantage of SBRA.

The major advantages of the SBRA amendments, as opposed to a traditional Chapter 11 filing and reorganization plan, are the cost-effective nature of filing, the efficiency from filing a case to receiving a confirmed plan, and the ability for most businesses owners to retain their ownership interest and control. These advantages increase businesses’ and individuals’ access to Chapter 11 and increase the likelihood of successful reorganizations.

Cost-Effectiveness to the Debtor

One of the major barriers to a small-business’ access to a traditional Chapter 11 reorganization is the overwhelming costs of attorneys’ fees required to prepare, file, and complete the case. The SBRA amendments eliminate and/or streamline many of the costliest requirements of Chapter 11, including the formation of an unsecured creditors committee, the requirement to draft and file a disclosure statement, and the need to have an approving impaired class of creditors in the debtor’s Chapter 11 plan. Debtors under a SBRA bankruptcy filing are also not required to pay quarterly fees to the United States Trustee, as is required in traditional Chapter 11 cases.[3] These changes add up to a significant decrease in the overall costs to file and implement a successful Chapter 11 case. Additionally, as discussed below, the timeline for completing a case under SBRA is significantly faster than the traditional Chapter 11 model and thus eliminates many of the costly litigation tactics that are employed under the traditional model.

Efficiency of SBRA Ch. 11 Cases

Along with its cost-effective features, the SBRA also allows a Debtor to create a plan of reorganization, have the plan approved by the Court, and move to implementing the plan much quicker than in a traditional Chapter 11 setting. Unlike in a traditional Chapter 11 case, the Debtor is the only entity allowed to present a plan to the Court. Additionally, the SBRA appoints a Trustee for every filed case, whose role is to assist the Debtor in creating a confirmable plan. The SBRA requires a debtor to participate in a status conference with the Court within sixty (60) days of filing the case and must file a plan with the Court within ninety (90) days of the filing. Whereas some traditional Chapter 11 cases might take a year or more to reach a confirmed plan, a debtor in a SBRA case can (and should) reach a confirmed plan in less than six (6) months. This strict timeline allows (and in some cases forces) the debtor to quickly move towards repayment of its debts and the hopeful resumption of business as usual.

Retention of Business Ownership – avoidance of Absolute Priority Rule

The majority of small businesses throughout the nation are closely held by a single individual/entity or a couple of individuals/entities. Under a traditional Chapter 11 plan, most business owners would not retain ownership of their business unless they were able to repay their creditors in full, which is often not possible. This is known as the Absolute Priority Rule. Under the SBRA, small business owners are allowed to retain ownership interest in their businesses so long as all discretionary income is provided to unsecured creditors over a 3-5 year period.  This can be achieved through a 3-5 year repayment plan or by a one-time payment to creditors of the present-day value of the 3-5 year discretionary income funds. This allows business owners options in seek new financing to restructure and eliminate debt, while retaining ownership of their business operations.

While the SBRA amendments were not created and enacted as a direct response to the COVID-19 pandemic, its enactment comes at a beneficial time for many small businesses navigating uncertainty and potential insolvency. Additionally, the benefits of SBRA will last long beyond the pandemic and will be a welcomed option for small businesses seeking debt relief and restructuring. As with any new legislation, many of the above-referenced provisions will evolve and shift as courts begin to interpret the statutes; however, the overall benefits that SBRA will provide for small businesses are already evident.

This article was authored by Justin T. Campbell, a senior associate with the law firm of Thompson Burton PLLC, who specializes in small business debt restructuring. Questions regarding this article or its contents may be directed to Mr. Campbell at 615.465.6015 or justin@thompsonburton.com.

[1] Public Law No. 116-54 (08/26/2019). The law adds subsections 1181 through 1195 to Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”).

[2] 11 U.S.C. § 101(51D)(A).

[3] Fed. R. Bankr. P. 2015(5) (interim rules)