In August of last year Congress passed, and Mr. Trump signed, legislation to make Chapter 11 more helpful for “small business” debtors, “The Small Business Reorganization Act” (“Subchapter V”), see https://www.congress.gov/116/bills/hr3311/BILLS-116hr3311enr.pdf. Subchapter V became effective February 19th of this year. Principal changes for “small business” debtors which elect Subchapter V treatment include elimination of the “absolute priority rule” applicable to Chapter 11 plan confirmation (this rule generally precludes a Chapter 11 debtor from obtaining confirmation of a plan which permits ownership of the debtor to retain any property under the plan unless unsecured creditors’ claims are paid in full, absent a substantial capital infusion by the debtor’s owners). This provision will make it easier for a small business debtor to obtain confirmation of a plan over the objections of unsecured creditors.
However, another provision, pertaining to preferences, makes it more difficult for a debtor to “claw back” “preference” payments to unsecured creditors, and increases the “due diligence” duties of a debtor (or trustee) before filing a preference action. In addition, a stranding trustee, who will serve as a fiduciary for creditors, will be appointed in all cases where the business elects Subchapter V treatment.
The recently enacted Coronavirus Aid, Relief, and Economic Security (“CARES”) Act will make small business bankruptcy relief more accessible to many businesses, by temporarily (for one year) raising the threshold small business debt eligibility limit from $2,725,625 to $7.5 million.
These changes will affect both creditors and debtors of businesses eligible for small business bankruptcy relief. We currently represent a creditor in a Chapter 11 case where the bankruptcy court this week has granted the debtor’s motion to dismiss the pending case in order to refile under Subchapter V.
You have questions about small business bankruptcy loans, please give Partner Attorney, Frank Schepers a call at 402-397-7300.