Small Business Reorganization Act

The Small Business Reorganization Act (SBRA) became effective on February 19, 2020. It creates a new Subchapter V of Chapter 11 bankruptcy, which is meant to provide a more cost effective and streamlined option for reorganization than a traditional Chapter 11 bankruptcy case. The debt limit for the SBRA was $2,725,625 of secured debt and unsecured debt, but was temporarily increased to $7,500,000 for one year (under the CARES Act).It is safe to say that most judges, practitioners and commentators view this as a much needed amendment to Chapter 11 to permit quicker, less expensive, and more effective resolutions in reorganizations.

The SBRA is available to both businesses and individuals. To qualify as a small business debtor, the debtor must be a person or entity engaged in commercial or business activity with aggregate non liquidated secured debt and unsecured debt as noted above. The SBRA requires that 50% or more of pre-petition debts come from commercial or business activities. It does not include single asset real estate cases if substantially all of its gross income is generated from the operation of the Single Asset Real Estate. Public companies and affiliates are also excluded from filing under the SBRA.

A small business debtor is required to file first day motions which are typical of Chapter 11 bankruptcy cases and can be time consuming and expensive. The debtor must also file a copy of the business’ most recent balance sheet, a statement of operations, a cash flow statement and federal income tax returns or a sworn statement that such documents do not exist.

In all cases, a standing trustee will be appointed from a pool of trustees. The purpose of this trustee is to mediate and facilitate the reorganization of the debtor. If there is a non consensual plan, the trustee needs to act as an intermediary or mediator to bring about agreement for plan payments. The trustee also has the authority to investigate the financial affairs of the debtor, but only if a party in interest requests an investigation and the court approves it. The trustee may also object to proofs of claim. The debtor, however, is the only party that may propose a plan of reorganization without creditor confirmation.

The timelines are strict. Within sixty days of the order for relief, the Bankruptcy Court shall hold a status conference to further expedite an economical resolution of the case. Fourteen days prior to the conference, the debtor must file a report detailing the efforts to obtain a consensual plan or reorganization. While the debtor must file the plan of reorganization 90 days after the order for relief, there is no deadline as to when the court must approve the plan. These are dramatic differences from Chapter 11 bankruptcy where a plan is rarely filed early in the case and cases often tend to drag on for several years.

Subchapter V is viewed as a much needed method to expedite reorganizations for small businesses or individuals. Case law is still developing and determining the precedent and guidelines under the new law. Nevertheless, it should be a consideration for any small business with financial problems.

Legal Editor: Gregory Messer, September 2020