Prepared by Marcus Pratt, Attorney – Korde & Associates, P.C. serving all of New England
As we turn the page on 2019 and embark on a new decade, debtors’ attorneys will be armed with new tools in their “bankruptcy tool belts.” Effective February 19, 2020, the provisions of the Small Business Reorganization Act of 2019 (“SBRA”)—known colloquially as Subchapter V of Chapter 11—go into effect. Subchapter V adopted to create streamlined procedures for the Bankruptcy Court, potentially resulting in reduced costs (and related benefits) for individual small business debtors—with an emphasis on debtors under the Subchapter being able to file consensual plans of reorganization.
To be eligible, a debtor must be a “small business debtor” as defined by 11 U.S.C. § 101(51D)—specifically, he or she must be a “person engaged in commercial or business activities,” and may not be a single asset real estate debtor. Further, a prospective Subchapter V debtor must have non-contingent, liquidated non-insider secured and unsecured debt totaling less than $2,725,625—with at least fifty (50)-percent of such debt having arisen from certain commercial and/or business activities of the debtor. Additional highlights of Subchapter V include, but are not limited to: a debtor remains in possession and operates his or her business during the bankruptcy; provisions regarding use of cash collateral and sale of assets traditional to Chapter 11 still apply; there is no established creditor committee unless the court orders otherwise for cause; the filing of a disclosure statement is not required, but a brief history of the business operations of the debtor, and similar items that would usually appear within a disclosure statement must be included in any proposed Chapter 11 Plan; acceptance of one accepting impaired class is not required to confirm a non-consensual plan; the absolute priority rule does not apply; and most notably—debtors may seek to cramdown a mortgage on a principal residence if the loan proceeds were used “primarily in connection with the small business of the debtor” and not to purchase the residence.
A final difference between a “traditional” Chapter 11 filing and a filing made under Subchapter V will be the appointment of a Subchapter V Trustee at the commencement of a proceeding under such Subchapter. The Trustee’s primary function is to facilitate the development of a consensual plan of reorganization and to distribute plan payments if a cramdown plan is confirmed. The SBRA allows for the appointment of either standing or case-by-case trustees in Subchapter V cases. The United States Trustee’s Office will make such appointments; in Region 1 (which encompasses most New England states), for example, the United States Trustee’s Office has elected to establish a pool of potential Subchapter V trustees and to make appointments case-by-case, factoring in, among other things, geographic considerations.
At the recent New England Bankruptcy Conference held December 11, 2019, District of Massachusetts Chief Judge Christopher Panos reported that when the SBRA was signed into law, the American Bankruptcy Institute (ABI) had estimated that approximately fifty percent (50%) of the then pending Chapter 11 cases would have been eligible for Subchapter V protection. As a prospective Subchapter V debtor must affirmatively elect Subchapter V treatment on a petition to proceed under the provisions of Chapter 11, several issues remain unclear heading into 2020—most notably, whether a debtor with a pending Chapter 11 case can make such an election after the effective date of the SBRA. Only time (and likely litigation of this issue) will tell.
Contact Attorney Pratt at firstname.lastname@example.org or (978) 256-1500, Ext. 237 for additional information regarding Subchapter V treatment of New England debtors.
This blog post is provided for educational and informational purposes only and is not intended and should not be construed as legal advice or used as a substitute for competent legal advice. By using this information, you understand that there is no attorney-client relationships between you and the author of this post.