In addition to recent programs from the U.S. Small Business Administration (“SBA”), such as low-interest disaster loans, small businesses may benefit from amendments to the U.S. Bankruptcy Code, which became effective on February 19, 2020. The Small Business Reorganization Act of 2019 (the “SBRA”) is the new subchapter V to chapter 11 of the Bankruptcy Code, which preceded the existence of the current COVID-19 outbreak. While not tailored to solve COVID-19’s economic effects, the SBRA’s enactment may prove prescient. As is likely the case with the SBA and other lending initiatives, the SBRA is expected to be amended as a direct result from COVID-19.
Whereas chapter 13 of the Bankruptcy Code provides for individual, consumer reorganization, and chapter 7 provides for individual and business liquidations, chapter 11 is primarily utilized for business reorganizations. Generally, chapter 11 debtors focus on a restructuring of a business debtor’s assets and liabilities through a confirmed plan, which may be achieved through a variety of transactions, including reorganizations, asset sales, and liquidations. Congress designed the recent SBRA to enable small businesses to progress through chapter 11 faster and cheaper than in the past. Under prior law, the administrative costs of chapter 11, alone, overwhelmed many small businesses. Under the SBRA, a chapter 11 debtor, and the debtor alone, may elect to proceed under subchapter V. But, to qualify as a “small business debtor” a debtor must have combined debts—secured and unsecured—of $2,725,625.00 or less, and more than 50% of those debts must arise from the debtor’s commercial or business activities. Entities that are “single asset real estate” debtors—which derive substantially all income from operating real estate property—however are not eligible for SBRA relief. Key features of the SBRA and chapter 11 cases under subchapter V include:
- Appointment of a standing trustee to monitor the debtor’s progress;
- Filing requirements, such as filing with the court the most-recent balance sheet, a statement of operations, a cash-flow statement, and federal income tax return, or a sworn statement that such documents do not exist;
- Professionals (i.e., law firms or accounting firms) may continue to represent or advise a debtor post-petition provided that a firm’s prepetition claim is less than $10,000.00, which allows for continuity between a debtor and a familiar professional firm;
- No requirement for the appointment of a creditors’ committee; and
- No requirement to file a plan disclosure statement and only the debtor may file a plan.
The SBRA, though, is not a panacea to the financial despair that numerous small businesses are already facing. Earlier this week, on March 22, 2020, the National Bankruptcy Conference, a group of judges, lawyers and professors, sent a letter to Congressional leaders stating that the current bankruptcy system requires modifications and temporary relief “for individuals and businesses to avoid massive numbers of both bankruptcies and economically untenable foreclosures.” The NBC’s recommendations included addressing and modifying tax credit programs for small businesses, increasing the SBRA’s debt limit, and additional protections for consumer debtors. At least one of those recommendations has been heeded by Congress, because the forthcoming federal stimulus package in response to COVID-19 provides that the existing SBRA debt limit will be raised to $7.5 million for a period of one year, allowing significantly more debtors to avail themselves of subchapter V under the SBRA.
Last, the majority of bankruptcy courts across the country have acted swiftly to address the administrative restrictions and logistical hurdles created by prohibitions on travel and gathering-size. Of note, in the divisions of the U.S. Bankruptcy Court for the Eastern District of Virginia, multiple Standing Orders have been entered that provide for telephonic hearings, suspension of § 341 meetings of creditors scheduled in the near future, and a 14-day extension of all deadlines falling between March 18 and March 31. Courts across the country have taken similar actions but, as always, check with each court’s own website for the most current details and information.
As recent weeks have shown, the current business environment is changing almost daily. At this time, legislation remains pending, and each business has its own unique concerns; please contact us with specific questions as we can assist.
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