A Guide to the Small Business Reorganisation Act of 2019.

AuthorBonapfel, Paul W.
  1. Introduction II. Overview of Subchapter V A. Changes in Confirmation Requirements B. Subchapter V Trustee and the Debtor in Possession C. Case Administration and Procedures D. Discharge and Property of the Estate 1. Discharge--consensual plan 2. Discharge--cramdown plan 3. Property of the estate III. Debtor's Election of Subchapter V and Revised Definition of "Small Business Debtor" A. Debtor's Election of Subchapter V B. Revised Definitions of "Small Business Debtor" and "Small Business Case" IV. The Subchapter V Trustee A. Appointment of Subchapter V Trustee B. Role and Duties of the Subchapter V Trustee 1. Trustee's duties to supervise and monitor the case and to facilitate confirmation of a consensual plan 2. Other duties of the trustee 3. Trustee's duties upon removal of debtor as debtor in possession C. Trustee's Disbursement of Payments to Creditors 1. Disbursement of preconfirmation payments and funds received by the trustee 2. Disbursement of plan payments by the trustee D. Termination of Service of the Trustee and Reappointment 1. Termination of service of the trustee 2. Reappointment of trustee E. Compensation of Subchapter V Trustee 1. Compensation of standing subchapter V trustee 2. Compensation of non-standing subchapter V trustee. 3. Deferral of non-standing subchapter V trustee's compensation F. Trustee's Employment of Attorneys and Other Professionals V. Debtor as Debtor in Possession and Duties of Debtor A. Debtor as Debtor in Possession B. Duties of Debtor in Possession C. Removal of Debtor in Possession VI. Administrative and Procedural Features of Subchapter V A. Elimination of Committee of Unsecured Creditors B. Elimination of Requirement of Disclosure Statement C. Required Status Conference and Debtor Report D. Time for Filing of Plan E. No U.S. Trustee Fees F. Modification of Disinterestedness Requirement for Debtor's Professionals G. Time For Secured Creditor to Make [section] 1111(b) Election H. Times For Voting on Plan, Determination of Record Date for Holders of Equity Securities, Hearing on Confirmation, Transmission of Plan, and Related Notices VII. Contents of Subchapter V Plan A. Inapplicability of [section][section] 1123(a)(8) and 1123(c) B. Requirements of New [section] 1190 for Contents of Subchapter V Plan; Modification of Residential Mortgage C. Payment of Administrative Expenses Under the Plan VIII. Confirmation of the Plan A. Consensual and Cramdown Confirmation in General B. Cramdown Confirmation Under New [section] 1191(b) 1. Changes in the cramdown rules and the "fair and equitable" test 2. Cramdown requirements for secured claims 3. Components of the "fair and equitable" requirement in subchapter V cases; no absolute priority rule 4. The projected disposable income (or "best efforts") test i. Determination of projected disposable income ii. Determination of period for commitment of projected disposable income for more than three years 5. Requirements for feasibility and remedies for default. 6. Payment of administrative expenses under the plan C. Postconfirmation Modification of Plan 1. Postconfirmation modification of consensual plan confirmed under new [section] 1191(a) 2. Postconfirmation modification of cramdown plan confirmed under new [section] 1191(b) IX. Payments Under Confirmed Plan; Role of Trustee After Confirmation A. Debtor Makes Plan Payments and Trustee's Service Is Terminated Upon Substantial Consummation When Confirmation of Consensual Plan Occurs Under New [section] 1191(a) B. Trustee Makes Plan Payments and Continues to Serve After Confirmation of Plan Confirmed Under Cramdown Provisions of New [section] 1191(b) X. Discharge A. Discharge Upon Confirmation of Consensual Plan Under New [section] 1191(a) 151 B. Discharge Upon Confirmation of a Cramdown Plan Under [section] 1191(b) XI. Changes to Property of the Estate in Subchapter V Cases A. Property Acquired Postpetition and Earnings from Services Performed Postpetition as Property of the Estate in Chapter 11 Cases Under Current Law B. Postpetition Property and Earnings in Subchapter V Cases 1. Property of the estate in subchapter V cases of an entity 2. Property of the estate in subchapter V cases of an individual XII. Default and Remedies After Confirmation A. Remedies for Default in the Confirmed Plan B. Removal of Debtor in Possession for Default Under Confirmed Plan C. Postconfirmation Dismissal or Conversion to Chapter 7 1. Postconfirmation dismissal 2. Postconfirmation conversion XIII. Effective Date APPENDIX A APPENDIX B I. INTRODUCTION

    The Small Business Reorganization Act of 2019 (the "SBRA"), (1) signed by the President on August 23, 2019, enacts a new subchapter V of chapter 11 of the Bankruptcy Code, codified as new 11 U.S.C. [section][section] 1181-1195, and makes conforming amendments to several sections of the Bankruptcy Code and statutes dealing with appointment and compensation of trustees in title 28. (2) SBRA also revises the definitions of "small business case" and "small business debtor" in [section] 101(5lC) and [section] 101(5lD), respectively. (3) It took effect on February 19, 2020, 180 days after its enactment. Appendix A is a chart that lists sections of the Bankruptcy Code that SBRA affects and summarizes the changes.

    The purpose of SBRA is "to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs." (4) A sponsor of the legislation stated that it allows small business debtors "to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business," which "not only benefits the owners, but employees, suppliers, customers, and others who rely on that business." (5)

    It is likely that SBRA will have a significant impact. A preliminary estimate is that approximately 40 percent of chapter 11 debtors in chapter 11 cases filed after October 1, 2007, would qualify as a small business debtor and that about 25 percent of individuals in chapter 11 cases would qualify as a small business. (6)

    New subchapter V applies in cases in which a small business debtor elects its application. In the absence of an election, the existing provisions of chapter 11 that govern a small business debtor apply with one change. SBRA amends [section] 1102(a)(3) to provide that no committee of unsecured creditors is appointed in any case of a small business debtor unless the court orders otherwise. (7)

    Subchapter V resembles chapter 12 in some aspects. It provides for a trustee in the case while leaving the debtor in possession of assets and control of the business. The trustee has oversight and monitoring duties and the right to be heard on certain matters. In some cases, the trustee may make disbursements to creditors.

    But subchapter V differs from chapter 12 in significant ways. For example, whereas chapter 12 confirmation standards ([section] 1225) are similar to those in chapter 13 ([section] 1325), subchapter V confirmation requirements incorporate most of the existing confirmation requirements in [section] 1129(a). Unlike chapter 12, subchapter V does not provide for a codebtor stay.

    Enactment of SBRA requires revisions to the Federal Rules of Bankruptcy Procedure and the Official Forms. The Committee on Rules of Practice and Procedure of the Judicial Conference of the United States (the "Rules Committee") has authority to make changes in the Official Forms prior to the effective date of the SBRA. Changes to the Bankruptcy Rules take three years or more under procedures that the Rules Enabling Act, 28 U.S.C. [section][section] 2071-77, require.

    To take account of the new law, the Rules Committee made changes to the Official Forms and promulgated interim rules (the "Interim Rules") that amend the Federal Rules of Bankruptcy Procedure. (8) The changes to the Official Forms became effective as of the effective date of SBRA. The Rules Committee has recommended that each judicial district adopt the Interim Rules as local rules or by general order. Appendix B summarizes the changes that the Interim Rules make.

    SBRA does not repeal existing provisions that govern small business debtors in chapter 11. Those provisions continue to apply to small business debtors who do not elect to proceed under subchapter V. The existence of two sets of provisions in chapter 11 for small business debtors requires terminology to distinguish them. The Rules Committee proposes to call cases under the existing provisions "'small business cases" and to call cases of electing debtors "cases under subchapter V of chapter 11."

    This terminology is technically accurate. Under the SBRA amendments, a "small business debtor" is not necessarily a debtor in a "small business case." Rather, a "small business case" is only a case under chapter 11 in which a small business debtor has not elected application of subchapter V. In other words, a small business debtor that has elected application of subchapter V is not in a small business case.

    The distinction is important for at least one reason. Section 362(n) makes the automatic stay inapplicable in certain circumstances when the debtor in the current case is or was a debtor in a pending or previous small business case. Because a subchapter V debtor is not in a small business case, [section] 362(n) will not apply in a later case of the subchapter V debtor.

    Bankruptcy judges and lawyers will inevitably adopt shorthand expressions to distinguish the three types of cases that are now possible under chapter 11: a non-small business case; a subchapter V case for a small business debtor who elects it; and a non-subchapter V small business case--a "small business case"--for one who does not. This Article refers to a non-small business case as a "standard" chapter 11 case; to the case of an electing small business debtor as a "sub V case" and to the case of a non-electing small business debtor as a "non-sub V case." And, of course, debtors are either "standard," "sub V" or "non-sub V."


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