Publications
September 4, 2019 Article

Bankruptcy Alert: Significant Implications of the New Small Business Reorganization Act of 2019

Small Business Reorganization Act of 2019 (H.R. 3311)

On August 23, 2019, President Trump signed the Small Business Reorganization Act of 2019 (H.R. 3311) (the “SBRA”) into law.  Lenders should be aware of the ramifications of the SBRA, as the new law will likely result in increased bankruptcy filings by smaller, family-run businesses that had previously been unable pursue reorganization under Chapters 11 and 13 of the Bankruptcy Code. 

In the past, smaller companies were forced to choose between liquidating their assets under Chapter 7 of the Bankruptcy Code or pursuing the time-consuming – and increasingly-expensive – procedures for reorganization under the current version of Chapter 11.  Similarly, registered business entities, such as corporations and limited liability companies, have been ineligible to pursue reorganization under Chapter 13, which allows “individuals” to commit their “excess monthly income” to a court-approved repayment plan and receive a discharge of their pre-bankruptcy debts at the end of the plan. 

The SBRA, which becomes effective February 19, 2020, introduces and applies aspects of the Chapter 13 process in Chapter 11 proceedings.  The stated aim of these changes is to streamline and expedite the reorganization of “small business debtors,” a term defined as businesses entities or individuals operating businesses with aggregate secured and unsecured debts totaling not more than $2,725,625 (which number is adjusted for inflation). 

Significant aspects of the new SBRA provisions include:

  • Subject to certain limitations, debtors will remain in possession of their property and assets and may continue to operate their businesses.
  • The small business debtor must file a reorganization plan within 90 days of the bankruptcy petition date, which the Court may extend based on circumstances “for which the debtor should not justly be held accountable.”
  • Only the debtor may file a reorganization plan.  Creditors are not permitted to file competing plans.
  • Unless the Court orders otherwise, no creditor’s committee will be appointed.
  • The United States trustee’s office in each district will appoint an individual to serve as the “standing trustee” to handle all cases filed under the SBRA or appoint trustees on a case by case basis from a panel.  Much like a Chapter 13 trustee, the trustee in SBRA cases will be charged with examining the debtor’s management, assisting with the formulation of a reorganization plan, monitoring the debtor’s compliance with statutory requirements, and receiving and disbursing payments to creditors under the plan.  
  • An initial status conference must be conducted within 60 days from the bankruptcy petition filing date, subject again to court extension based on circumstances “for which the debtor should not justly be held accountable.”
  • The debtor must file a report at least 14 days prior to the status conference, detailing the efforts that have been undertaken to formulate a consensual plan of reorganization.
  • The SBRA requires the small business debtor to commit such future earnings and income to the supervision of the standing trustee as is necessary to consummate the reorganization plan.
  • The SBRA debtor’s plan may modify the rights of creditors whose claims are secured solely by a mortgage on the debtor’s principal residence if: (a) the loan secured by the mortgage was not used “primarily to acquire” the residence; and (b) the loaned funds were “used primarily in connection with the small business of the debtor.” 
  • The SBRA also creates a new mechanism for approval of the debtor’s plan over creditor objection.  The modified provisions for ‘cram-down’ permit the Court to approve the plan over creditor objection if the plan does not “discriminate unfairly” and is “fair and equitable” as to each class of dissenting impaired creditors that votes against the plan. 
  • For secured creditors, a plan is “fair and equitable” if it meets the requirements of current 1129(b)(2)(A) (i.e., lien retention and payments having a present value at least equal to the value of their collateral). 
  • For unsecured creditors, a plan is “fair and equitable” if: (A) it requires the debtor to submit all of its projected disposable income to make the payments called for under the plan; or (B) the value of the property to be distributed during the life of the plan is “not less than the projected disposable income of the debtor.”
  • “Disposable income” is defined as income minus operating expenses, living expenses, and any domestic support obligations. 
  • Notably, the SBRA appears to eliminate the so-called “absolute-priority” rule for SBRA cases under current 1129(b)(2)(B)(ii), such that ownership may retain control of the small business debtor post-confirmation even when claims of the debtor’s unsecured creditors have not been repaid in full.
  • The debtor will be eligible for a discharge upon completion of all plan payments, except for non-dischargeable debts or debts on which the last payment is due after the plan period (3-5 years, as applicable).

The SBRA also changes certain aspects of preference cases (90-day claw back) for debtors in possession and trustees:

  • The preference statute will now require that debtors in possession and trustees perform reasonable due diligence and consider the preference recipient’s known or reasonably knowable affirmative defenses before filing suit.
  • The SBRA amends the venue statute for recovery actions like preference and fraudulent transfer cases by providing that any such action against a non-insider to recover less than $25,000 must be brought in the judicial district were the defendant resides.  

Firm Highlights

Press Coverage

As More States Release COVID-19 Cases by Town, Maine Says It Could Take 6 Months

As more states continue to release information on the number and distribution of coronavirus cases, officials from Maine's public health agency claim that making tallies available to the public under the state's Freedom of...

Publication

Legislative Alert: Governor’s Economic Recovery Committee Update

The Governor’s Economic Recovery Committee met on Friday June 26 th to hear reports from the Chairs of all six subcommittees. In the reporting on Friday the biggest monetary ask was from the Infrastructure...

News

ACTIONS. NOW. FOR CHANGE.

Our country and our communities are suffering and in turmoil due to the racial injustices that have occurred for centuries and are still happening all around us today. It is difficult to comprehend and...

Press Coverage

Maine drops residency requirement for recreational marijuana businesses

Since Mainers voted to pass the Maine Marijuana Legalization Act in 2016, lawmakers have been wrestling with how to regulate sales. Last week, recreational marijuana businesses in Maine cleared a major hurdle to operation...

Press Coverage

Officer-involved Shootings Video - Maine Behind the Curve on Public Access to Information

More than three months after officers were involved in a fatal shooting of a Minot, Maine, resident, the Androscoggin County Sheriff's Office and the Office of the Attorney General continue to deny requests to...

Publication

Contractor's Guide to Mitigating Risks in the AIA A201-2017 General Conditions

The AIA A201-2017 is generally a well-understood contract document and is used in a significant number of construction projects each year. While this standard contract covers most risks, there are a number of areas...

News

Preti Flaherty Attorney William Saturley Named Among America’s Top 100 “Bet-the-Company Litigators” for 2020

Preti Flaherty is proud to announce that attorney William Saturley has been selected for inclusion on the list of America’s Top 100 “Bet-the-Company Litigators” for 2020. America’s Top 100 recognizes the most qualified and...

Publication

Maine Workers' Comp Alert: WCB Transition to In-Person Hearings Likely to Occur No Sooner Than August 2020; Section 312 IME’s Have Resumed

A conference with Maine Workers' Compensation Board Executive Director John Rohde was held last week to discuss the transition to in-person hearings at the WCB. The WCB Subcommittees also met to discuss recent developments...

News

Eighteen Preti Flaherty Attorneys Selected as Chambers USA Leaders in Their Field

Eighteen Preti Flaherty attorneys and five practice groups have been selected for inclusion in the 2020 Chambers USA Guide to America's Leading Lawyers for Business , the highly regarded directory of leading attorneys and...

Publication

Preti Flaherty COVID-19 Resources

In response to the ongoing COVID-19 pandemic, Preti Flaherty's attorneys have maintained a constant stream of the most up-to-date information and resources for our clients, business partners, and others struggling to navigate these complex...