Introduction
The main point: It’s easier for small businesses to file a Chapter 11 bankruptcy. Prior to this change in the law, a dry cleaner would be treated no differently than Delta Airlines. That is now a thing of the past.
The Small Business Reorganization Act of 2019 streamlines existing rules governing the efforts of small businesses to restructure successfully under Chapter 11 of the Bankruptcy Code. The law effectively makes it more difficult for creditors to contest small business Chapter 11 cases, but it also provides creditors in all bankruptcy cases several major benefits through changes to the preference laws.
Subchapter V of Chapter 11
A small business debtor is a business entity or an individual which is engaged in business whose aggregate non-contingent debts (excluding debts to affiliates or insiders) do not exceed $2,725,625 and which elects to be treated as a small business. The Act adds a new Subchapter V to Chapter 11 of the Bankruptcy Code to make it easier and less expensive for small businesses to successfully reorganize.
The Act’s Key Provisions Include:
- Only the small business may file a Chapter 11 plan, but the Act requires that the debtor file its plan within 90 days of the date it files its bankruptcy petition, except in certain circumstances.
- A standing trustee, similar to those appointed in Chapter 13 cases, will be appointed to oversee each small business case.
- A creditors committee will not be formed.
- The Chapter 11 plan can modify the rights of a creditor secured by a security interest in the debtor’s principal residence if the loan secured by the residence was not used to acquire the residence but was used in connection with the debtor’s business.
- The Court can confirm a debtor’s plan without the support of any class of claims as long as the plan does not discriminate unfairly and is deemed to be fair and equitable with respect to each class of claims.
- To be considered fair and equitable, the Chapter 11 plan must provide that all of the debtor’s projected disposable income to be received during the length of the plan will be applied to make payments under the plan for a period of 3 to 5 years.
Note: As in all Chapter 11 cases, creditors will need to be vigilant to ensure that Courts properly evaluate Chapter 11 plans, especially those that lack creditor support, and that their rights are properly protected.
Changes to Preference Laws
The Act makes several significant changes to existing preference laws which will be welcomed by creditors.
Currently, trustees and debtors in possession have broad authority to file lawsuits to recover preferential transfers which were made 90 days prior to the date the bankruptcy case was filed, or in the case of insiders, one year.
Under the prior law, if the amount of the transfer was less than $13,650, then the trustee or debtor in possession would have to file the lawsuit to recover the transfer in the federal district where the defendant resides, not in the district where the bankruptcy case is pending.
Key Updates Under the Act:
- The Act raises the threshold for non-insider defendants from $13,650 to $25,000 so that claims of less than $25,000 must be filed in the district where the defendant resides.
- In addition, the Act adds as a requirement that, before filing the lawsuit to recover a preference, the trustee or debtor in possession must exercise reasonable due diligence and must:
“. . . take into account a party’s known or reasonably knowable affirmative defenses . . .”
Due to costs and logistics, preference suits are rarely filed outside of the district where the bankruptcy case is pending, so raising the threshold to $25,000 effectively immunizes most transfers less than $25,000 from recovery.
Furthermore, the Act’s due diligence requirement will certainly result in a reduction of the number of preference lawsuits.
Conclusion
The Small Business Reorganization Act of 2019 significantly improves the process for small businesses filing for Chapter 11 bankruptcy in Atlanta by simplifying procedures, reducing creditor influence, and protecting small business assets through reasonable thresholds and due diligence requirements.
Frequently Asked Questions
What is the Small Business Reorganization Act of 2019?
The Small Business Reorganization Act of 2019 is a law that simplifies the Chapter 11 bankruptcy process for qualifying small businesses. It introduces Subchapter V, which provides faster timelines, reduced costs, and less creditor interference to help small businesses reorganize more effectively.
Who qualifies as a small business under Subchapter V?
To qualify, a business (or an individual engaged in business) must have non-contingent debts not exceeding $2,725,625 and must elect to proceed under Subchapter V. Debts to affiliates or insiders are excluded from this calculation.
What role does the standing trustee play in Subchapter V cases?
A standing trustee is appointed in every Subchapter V case to monitor the debtor’s progress, assist with plan confirmation, and ensure compliance. This role is similar to trustees in Chapter 13 bankruptcies, but without control over the debtor’s operations.
Can a small business modify a home mortgage under Chapter 11?
Yes, but only if the mortgage was not used to acquire the debtor’s primary residence and was instead used for business purposes. In such cases, the Chapter 11 plan may alter the terms of the loan.
How did the Act change preference lawsuit rules?
The Act raised the threshold for filing preference lawsuits from $13,650 to $25,000 and added a due diligence requirement. This change reduces frivolous lawsuits and protects smaller transactions from being pursued unnecessarily.