The Small Business Reorganization Act: Blessing or Curse?

By Michael King posted 12-04-2020 18:16

  

QUESTION:  SHOULD I WORRY ABOUT THE SMALL BUSINESS REORGANIZATION ACT OF 2019?

ANSWER:  CREDITORS SHOULD BEWARE OF SIGNIFICANT NEW PROTECTIONS BEING GIVEN DEBTORS UNDER THE SMALL BUSINESS REORGANIZATION ACT!


The History of Small Business Bankruptcies.

In October 2005, I wrote:

The costs of a Chapter 11 bankruptcy reorganization are often more than a small business debtor can handle.  Statistics show that many small business Chapter 11 reorganization proceedings eventually become Chapter 7 liquidation proceedings.  Congress wanted to help small business debtors move through the bankruptcy process more swiftly and so it created the concept of the small business debtor. 
Congress set the limits of non-insider, non-affiliate, non-contingent debts at $2 million for businesses engaged in commercial or business activities to be small business debtors in 2005. 

Unfortunately, during the Great Recession, many businesses with less than $2 million worth of debt also had insufficient assets and business prospects in order to reorganize.  Valuations and business revenue dropped so dramatically for many businesses that reorganization even under the streamlined processes became an impossibility.  Many businesses simply were liquidated either through Chapter 7 liquidations or § 363 sales of assets in Chapter 11 proceedings. 

The Small Business Reorganization Act of 2019.


One of the impediments to the efficacy of the 2005 Small Business Debtor Bankruptcy provisions was the debt limit of $2 million.  The 2019 Small Business Reorganization Act initially only raised the limit to $2,725,625.  The Corona Virus Aid Relief and Economic Security Act on March 27, 2020, raised that limit to $7.5 million, however.  Thus, many more businesses are eligible for this expanded relief.  Under current law, the expanded limit to $7.5 million will revert to $2,725,625 on March 27, 2021. 

Beware:  The Debtor Runs the Railroad!


Only the debtor can propose a Plan of Reorganization in a small business reorganization case.  The debtor is not required to solicit votes and does not need to seek creditor support to confirm a Plan of Reorganization.

The "absolute priority rule" no longer applies in small business reorganization cases. A small business owner may now retain an ownership interest in the reorganized debtor, provided that the Plan does not discriminate unfairly and is fair and equitable with respect to each class of claims.  This change allowing the debtor to keep an ownership interest after confirmation of the Plan without agreement from creditors who are being paid less than the full amount of their claims is a major change from prior bankruptcy law!

Let's Move it Along!


The court will set an initial status conference within 60 days of the filing of bankruptcy petition to make sure the case is moving expeditiously. 

The small business debtor must file a Plan of Reorganization within 90 days of filing the bankruptcy petition.  The only way the 90-day time limit can be extended is by order of the Court if the small business debtor shows the delay was caused by circumstances beyond its control.

A Standing Trustee Has a Seat on the Train. 


Every small business reorganization case will have a Standing Trustee to make sure the reorganization is proceeding properly.  Although the Standing Trustee won't operate the business of the debtor, it will ensure that distributions are made to creditors under the confirmed Reorganization Plan.  Also, the Standing Trustee will be responsible for accounting for all property of the bankruptcy estate.

Looks Like a Chapter 13 Consumer Plan to Me!

The debtor in the small business reorganization must apply all of its hoped-for disposable income towards payments to creditors for at least three years and no more than five years under a Plan of Reorganization.  The small business debtor only receives a discharge of indebtedness after all the Plan payments are made which could take 3 to 5 years. 

Will it Work? 


As I wrote in 2005:

While the intent of Congress was to streamline the small business debtor reorganization bankruptcy and to also provide more information to creditors, one wonders whether either of these objectives will be actually accomplished. . . . . [L]et's face the fact that we are dealing with small business debtors who do not have the best business practices. 
To expect that simply changing the rules will improve the results may be naïve.

Nevertheless, if you need additional information concerning the impact of the Small Business Reorganization Act of 2019 or any other aspects of the Bankruptcy Code, please call me.

Michael R. King
Gammage & Burnham 40 North Central 20th Floor, Phoenix AZ 85004
602-256-4405   Email  Mking@gblaw.com

This article may be distributed with attribution but may not be excerpted or modified without the permission of the author.

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