What’s New in the Updated Small Business Reorganization Act?

The Small Business Reorganization Act (SBRA) became law on August 23, 2019, and went into effect on February 19, 2020. This is the first time that Congress has amended the Bankruptcy Code since 2005. The stated purpose of the act is to alleviate the costs traditionally associated with the bankruptcy process and improve the prospects for reorganization for small business debtors. See Legislative History, “H.R. 3311, the Small Business Reorganization Act of 2019” The SBRA requires at least 50 percent of the small business debtor’s debt to have arisen from commercial or business activities. Current section 101(51D) defines a “small business debtor” as one that has aggregate, noncontingent, liquidated, secured, and unsecured debts of $2,725,625 or less.

The SBRA seeks to facilitate successful reorganization by adding a new subchapter V to Chapter 11. The following are notable provisions:

• A trustee is appointed to oversee the Chapter 11 bankruptcy matter with duties similar to those of a Chapter 12 trustee. (See section 1183(a).)

• An unsecured creditors committee may be appointed only by order of the court (section 1181(b)).

• Only the debtor can file a reorganization plan and must do so within 90 days of initiating the bankruptcy (section 1189(a)–(b)).

• No disclosure statement is filed unless it is ordered by the court. (See sections 1181(b) and 1187(c).)

• The absolute priority requirement and impaired accepting class requirement for confirmation of a plan (sections 1181(a) and 1191(b)) have been eliminated.

These changes are intended to make the bankruptcy process more efficient for small business debtors and are significantly more debtor-friendly than existing Chapter 11 requirements. Of note, the elimination of the absolute priority rule (i.e., that creditors must be paid prior to a shareholder retaining its interests) and the elimination of the requirement that one impaired accepting class vote in favor of the plan provide the potential for a much easier path to confirmation. However, the court will still need to determine that the plan does not discriminate unfairly and that it is fair and equitable for the classes of claims or interests that have not accepted the plan. To determine if the plan is “fair and equitable,” the plan must

• satisfy section 1129(b)(2)(A);
• provide for application of all of the debtor’s projected disposable income for three years beginning on date the first payment is due (or up to five years, as ordered) to plan payments; and
• determine that the debtor will be able to make all plan payments or that there is a reasonable likelihood that the debtor will be able to make all plan payments. (See section 1191(c).)

Two other debtor-friendly changes listed above are also significant: (1) The debtor will not need to file a disclosure statement, and (2) only the debtor may file a plan of reorganization. These two changes should lessen the time and cost of the reorganization process while also providing the small business debtor more control.

The act also includes two provisions, not limited to small business Chapter 11 cases, pertaining to preferential transfers:

• An additional criterion is added for a trustee to consider before commencing an action to recover a preferential transfer. The trustee is required to determine whether to exercise such authority based on “reasonable due diligence in the circumstances of the case” and take into account a “party’s known or reasonably knowable affirmative defenses.” (See amended section 547(c).)
• The second provision concerns the venue where such preferential transfer actions may be commenced. If the amount in controversy is less than $25,000 (increased from $10,000), then they must be commenced in the district where the defendant resides. (See 28 U.S.C. section 1409(b), as amended.)

To participate in the SBRA, the debtor must check the appropriate box upon filing. It remains to be seen if the act will cause an uptick in small business bankruptcy filings and what bankruptcy litigation arises as a result of the act.