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The Small Business Bankruptcy Reorganization Act; This New Law May Be Getting Lots of Attention

April 6, 2020

By
Lea Pauley Goff
Member, Stoll Keenon Ogden PLLC
(502) 568-5731
lea.goff@skofirm.com

Emily L. Pagorski
Member, Stoll Keenon Ogden PLLC
(502) 568-5763
emily.pagorski@skofirm.com

Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC
(502) 560-4258
thomas.rutledge@skofirm.com

The current coronavirus pandemic is causing unprecedented economic disruption in the United States. The plight of businesses small and large has been well documented. We can only anticipate that many, particularly smaller businesses without significant capital base, will either entirely fail or seek to reorganize in bankruptcy. Many of the smaller businesses will no doubt seek to re-organize under the new small business reorganization act (“SBRA“), a new reorganization option that became available only in February 2020.

Prior to the SBRA, businesses were typically handled in bankruptcy under either Chapter 7 or Chapter 11. Chapter 7 cases involve a trustee appointed to liquidate the assets of the bankruptcy estate, distributing the proceeds, if any, to creditors. Companies entering Chapter 7 do not emerge as reorganized entities; it is a pure liquidation proceeding.

In contrast, in a Chapter 11 reorganization, absent the appointment of a trustee, the debtor retains control of the business and seeks reorganization of its debts or liquidation of its assets through a court approved plan or sale. During the pendency of the bankruptcy, the debtor may not, absent court approval, undertake transactions outside of the ordinary course of its business, and the debtor must submit typically monthly reports to the court as to its financial activities. In addition, the debtor’s unsecured creditors are entitled to participate in a creditors’ committee although such a committee is not always appointed. If one is, the cost of the professional advisors including attorneys and accountants retained on behalf of the creditors’ committee are an expense of the bankrupt debtor. Certain statutory fees must also be paid by the debtor on a quarterly basis. The net effect of these limitations and cost is that often a small business, paradoxically, cannot afford a Chapter 11 reorganization.

The SBRA is intended to address that paradox, creating a streamlined process by which small businesses will be able to, successfully reorganize. This is achieved by significantly reducing the transactional costs of a Chapter 11 reorganization.

Companies eligible to utilize the SBRA are those with aggregate secured and unsecured debt as of the time of the bankruptcy filing of not more than $2,725,625. However, under the CARES Act, for one year, this debt limit is raised to $7,500,000, significantly increasing the class of companies that may be able to seek relief under the SBRA. Further, it should be noted that there are excluded from the definition of a “small-business debtor“ companies “whose primary activity is the business of owning or operating real properties.”

Assuming eligibility for the SBRA, numerous of the more burdensome requirements of Chapter 11 will not be applicable. For example, the monthly reporting requirements to the court are waived unless the court should determine they are necessary in the particular instance. Likewise, unless the court should order otherwise for cause shown, there will not be a creditors’ committee. As such, the debtor can avoid those often significant costs. That said, each debtor will be subject to a private trustee. As set forth in a February 19, 2020 press release from the United States Department of Justice, which oversees the appointment of those trustees, the aim is to “appoint private trustees with business experience to serve as [SBRA] trustees, minimize the need for costly litigation, and ensure compliance with the Bankruptcy Code and the expeditious resolution of cases.”

In a Chapter 11 bankruptcy, the debtor has the first right to submit a plan of reorganization for a limited or “exclusive” period. That plan must include a detailed disclosure statement. Also, after the exclusivity period ends, the creditors may themselves submit a proposed plan of re-organization. The SBRA modifies these rules such that a disclosure statement is not required and only the debtor may submit a plan of reorganization. These procedural changes are intended to prevent disputes between the debtor and its creditors that typically prolong the reorganization process, thereby reducing the debtor’s transactional costs in seeking reorganization.

As for that plan of reorganization, it will be confirmed if it provides that all of the projected “disposable income“ of the business will, over the next 3 to 5 years, be used to make payments to creditors.

In addition, certain requirements as to the contents of the plan customary in Chapter 11 will not be required in a SBRA proceeding. Assuming all other requirements are satisfied, the owners of the debtor will continue to be its owners, and they will not be subject to the “new value“ rule otherwise applicable in Chapter 11 reorganizations.

The SBRA represents new opportunities for companies needing to seek bankruptcy protection. At the same time, with respect to the creditors of those ventures, it presents a new set of rules and requirements that, as contrasted with a typical Chapter 11 reorganization, may be seen as disadvantageous. Regardless, in the current economic crisis, this essentially brand-new statute is no doubt going to be well tested.

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Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for over 120 years.

Attorneys with Stoll Keenon Ogden PLLC’s Bankruptcy and Financial Restructuring Group would be happy to help assist small businesses and their creditors.

Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.