SBRA Provides Significant Changes For Small Businesses

Mon, 06/29/20
By: James Sansone

With uncharacteristic prescience, last year Congress amended the U.S. Bankruptcy Code by enacting the Small Business Reorganization Act of 2019 (SBRA). Going into effect in February 2020, just in time to address the economic disaster caused by COVID-19, the SBRA is the federal government’s newest effort to make bankruptcy reorganization a more attractive option for small businesses.
 

A customary Chapter 11 bankruptcy was designed to allow a debtor to reorganize its debt structure in order to keep its business alive and pay creditors over time. SBRA has important implications for businesses. It is aimed at simplifying the Chapter 11 process for small businesses by lowering costs and relaxing the stringent requirements of the plan confirmation process. It could mean the difference between a business being able to weather the current storm or having to permanently close its doors and liquidate assets.
 

Before SBRA, financially impaired businesses contemplating bankruptcy had two choices: Chapter 7 or Chapter 11. Under Chapter 7, a trustee is appointed, and the debtor automatically loses control over its business and assets.  The debtor’s nonexempt assets are sold (liquidated), and the proceeds are paid to creditors.  Since a debtor automatically loses control over its assets, Chapter 7 is not an option for a business wanting to remain open.
 

Under Chapter 11, a debtor ordinarily continues business operations while reorganizing its financial affairs. Reorganization is achieved by way of a written plan of reorganization approved by the Court. Through a confirmed reorganization plan, the debtor can restructure its obligations to creditors and pay those obligations over time. A successful reorganization maintains a business’s “going concern value” and get the most out of the value of the debtor’s estate.  The debtor remains in possession and control of its business and is authorized to continue business operations pending reorganization.  However, transactions not in the ordinary course of business require court approval. The  Court performs oversite functions through the entire process and may appoint a U.S. trustee “for cause.” The debtor must prepare and submit monthly financial and operating reports, which can be costly. Accordingly, a lot of small businesses are unable to afford the considerable costs associated with attorneys, accountants, and other professionals essential to navigate the procedural and statutory requirements of Chapter 11 bankruptcy.
 

The SBRA creates a hybrid of Chapter 11 and Chapter 13. Under the SBRA, qualified debtors can retain control over their business operations (similar to a Chapter 11). However, the debtor will no longer be subject to the more costly requirements of Chapter 11, and like Chapter 13, a trustee will be appointed to each case. However, the debtor will no longer be subject to the more costly requirements of Chapter 11.
 

In addition, the SBRA provides that a committee of unsecured creditors will not be appointed unless ordered by the Bankruptcy Court for cause. This will also decrease the costs of Chapter 11.
 

Here are some highlights of the SBRA:

1. Only the debtor may elect to have the subchapter apply.
2. Debt limitation: To qualify, debts must total less than $2,725,625 (secured and unsecured). This has been temporarily increased to $7.5 million. This increase is set to sunset on December 31, 2020, unless extended.
3. The contents of the plan need to include a brief history of business operations, a liquidation analysis, and projections of payments by the debtor.
4. The proposed plan may modify a mortgage that is encumbered by the principal residence of the debtor, “if the value received in connection with the granting of the security interest was (a) not used primarily to acquire the real property; and (b) used primarily in connection with the small business of the debtor.”
5. It eliminates the absolute-priority rule which allows for more flexibility with creditors.
6. There is no disclosure statement required to accompany the plan.
7.  A plan  must be filed within 90 days of the petition filing date.
8. The Court may confirm a plan over the objection of the debtor’s creditors, provided that such plan does not discriminate and is fair and equitable for each class of claims or interests that is impacted by the plan.

As we continue to monitor the novel coronavirus (COVID-19), CMPR lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors.
 

Knowledge is power.  It is not too soon to review all options for your business during this challenging economic time.  If you have questions or would like additional information, please contact James Sansone (jsansone@cmprlaw.com; (707) 526-4200, ext. 186).