When Congress passed the Small Business Reorganization Act (“SBRA”) in August 2019, we lived in a different world. The SBRA added a “Subchapter V” to the Bankruptcy Code for small business debtors, responding to longstanding criticism of the Bankruptcy Code’s costs and complexities on small businesses trying to reorganize. The SBRA became effective exactly one year ago, on February 19, 2020, and when many businesses in the United States shut their doors in March 2020, many thought that the timing of the SBRA was just right to serve the needs of the small business community. On the paper anniversary of the SBRA’s effective date (the first wedding anniversary is colloquially referred to as the paper anniversary), we have looked at how the SBRA has helped small business debtors and how Congress modified Subchapter V this year to further help struggling small businesses. We are also highlighting a few issues coming out of Subchapter V so far.
How SBRA Changed the Landscape of Bankruptcy for Small Business Debtors
A small business debtor is defined by the Bankruptcy Code as a debtor that has aggregate noncontingent debts of no more than $2,725,625. At least 50% of the debt must have arisen from commercial or business activities, excluding debts owed to affiliates or insiders.
Subchapter V provides a standing trustee (known as a “Subchapter V Trustee”) in all small business chapter 11 cases that oversees the case and seeks to facilitate the development of a consensual plan. Subchapter V also expands the definition of property of the estate to include earnings and property acquired post-petition, removes the requirement to pay U.S. Trustee quarterly fees, relaxes the disinterestedness requirement under section 327(a), removes the requirement for appointment of a creditors’ committee and a full-blown disclosure statement, and relaxes some of the requirements for plan confirmation.
These benefits are favorable to small business debtors who may have otherwise avoided seeking bankruptcy protection due to the costs of chapter 11. According to a Bloomberg Law Analysis, Subchapter V accounted for approximately 18% of all chapter 11 cases filed through October in 2020. Many of the filings, however, were only possible because of the increased liability limit provided by the CARES Act.
Congress’ Modifications to Subchapter V in its First Year
The Coronavirus Aid, Relief, and Economic Security Act (aka the “CARES Act”), passed on March 27, 2020, temporarily increased the maximum debt threshold for a small business debtor to qualify under Subchapter V to $7,500,000. The Consolidated Appropriations Act (the “CAA”), passed on December 21, 2020, did not extend the maximum debt threshold past March 27, 2021. The CAA did, however, modify other Bankruptcy Code provisions specifically for Subchapter V debtors. The CAA amended section 364 of the Bankruptcy Code so that a bankruptcy court may authorize Subchapter V debtors to obtain a loan under the Paycheck Protection Program. The CAA also amended section 365(d)(3) of the Bankruptcy Code to allow Subchapter V debtors experiencing financial hardship from the COVID-19 pandemic to extend their time to assume or reject leases beyond an initial 60-day extension for another 60 days.
Subchapter V Issues Arising in the First Year
As with any new law, Subchapter V has generated multiple decisions interpreting its provisions.
There is disagreement about whether a Subchapter V debtor needs to be engaged in a business at the time of filing. In In re Wright, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020), the court considered whether a debtor must be actively engaged in business to be eligible under Subchapter V. The court found that “[a]lthough the brief legislative history of the SBRA indicates it was intended to improve the ability of small businesses to reorganize and ultimately remain in business, nothing therein, or in the language of the definition of a small business debtor, limits application to debtors currently engaged in business or commercial activities.” The decisions in In re Bonert, 619 B.R. 248 (Bankr. C.D. Cal. 2020) and In re Blanchard, 2020 WL 4032411 at *2 (Bankr. E.D. La. July 16, 2020) both adopted the reasoning in Wright. But the court deciding In re Thurmon, 2020 WL 7249555 (Bankr. W.D. Mo. Dec. 8, 2020) disagreed, finding that the plain meaning of “engaged in” is “to be active and currently involved.”
In In re Baker, 2020 WL 7501941 (Bankr. S.D. Tex. Dec. 21, 2020), a debtor sought an extension of the plan filing deadline under section 1189(b) of the Bankruptcy Code. Under section 1189(b), the debtor must file a plan not later than 90 days after the order for relief, but the court may extend the period “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” The court considered “whether the need for an extension is attributable to circumstances for which [d]ebtor is not fairly responsible or, to borrow from COLLIER, whether [d]ebtor can clearly demonstrate that the inability to file a plan of reorganization was due to circumstances beyond his control.” Stating that it was a fact-driven inquiry, the Court considered (1) whether the circumstances raised by the debtor were within his control, (2) whether the debtor has made progress in drafting a plan, (3) whether the deficiencies preventing that draft from being filed are reasonably related to the identified circumstances, and (4) whether any party-in-interest has moved to dismiss or convert the debtor’s case or otherwise objected to a deadline extension in any way. In Baker, the Court found that the need for an extension to file a plan was attributable to circumstances for which the debtor should not be held accountable. Some of the factors related to this analysis were (i) the uncertainty related to certain proofs of claim that had not been filed, (ii) the unexpected death of the debtor’s sibling, (iii) the fact that the debtor made substantial progress toward the drafting of a plan, and (iv) the fact that no party-in-interest had filed a motion to dismiss or convert the case or otherwise opposed the debtor’s motion requesting additional time.
In October 2020, we wrote about a decision discussing the section 1111(b) election in Subchapter V cases. See In re: VP Williams Trans, LLC, 2020 WL 5806507 (Bankr. S.D.N.Y. Sept. 29, 2020).
The Future of Subchapter V
In its first year, Subchapter V has proven to be a useful and helpful tool for small businesses seeking to reorganize their business and get a fresh start. But Subchapter V is still new and, particularly in light of the fact that it was temporarily amended by the CARES Act and the CAA in its first year of effectiveness, developments in the case law will continue to be important in determining its benefits and limitations.