The Small Business Reorganization Act of 2019
The Small Business Reorganization Act of 2019 (SBRA) effective February 19, 2020, created a new, streamlined process for small business debtors seeking a fresh start in bankruptcy. With many small businesses struggling to survive the economic disruption caused by the recent COVID-19 (a.k.a. coronavirus) pandemic, debtors and lenders unfortunately may find themselves navigating this new process in the near future. The phase three stimulus bill (the CARES Act), if passed as written, will greatly expand the number of businesses eligible to reorganize under the SBRA, as it raises the maximum debt threshold from $2.7 million to $7.5 million.
While existing law already allowed for a different Chapter 11 process for small business cases, SBRA goes even further, providing new advantages to small business debtors and pitfalls for creditors. Highlights of SBRA include:
- the debtor always remains in possession of the business, unless ordered removed by the court;
- a trustee will always be appointed, but primarily to assist in the formulation of the plan;
- no U.S. Trustee fees;
- there will be no unsecured creditor’s committee unless ordered, for cause, by the court;
- an expedited case schedule, including early status conference and plan submission deadlines;
- only the debtor may propose a plan and no disclosure statement is required;
- the absolute priority rule – which typically requires consent to the plan or full payment to secured and unsecured creditors if the equity owner is to retain an interest in the business – does not apply; and
- potential modification of real property liens on the owner’s personal residence, if the lien was generated for business purposes, rather than to acquire the property.
In addition to these significant changes to the Chapter 11 process when SBRA is elected by a small business debtor, SBRA also imposes general changes to the Bankruptcy Code regarding preference litigation. In any bankruptcy proceeding, a debtor or trustee is now obligated to consider a party’s statutory defenses “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses” prior to commencing a preference action.
These are but a few of the many changes to the Bankruptcy Code created by SBRA and more changes are likely to come as case law develops. If you have any questions on the potential impact of SBRA on your business or lending clients, please contact Mr. Lefevre or Mr. Sandretto.
Disclaimer: The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.