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Controversy Over SBRA’s Retroactivity

Our February 26 post entitled “SBRA Springs to Life”[1] reported on the first case known to me that dealt with the issue whether a debtor in a pending Chapter 11 case should be permitted to amend its petition to designate it as a case under Subchapter V,[2] the new subchapter of Chapter 11 adopted by the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020.[3]  Since then, three more cases have considered the issue, and two of them permitted the amendment and one did not.

In In re Double H Transportation LLC,[4] Bankruptcy Judge Christopher Mott held that such an amendment was not permitted by SBRA.  “Nothing in the SBRA enabling statute indicates that the SBRA was intended to have retroactive effect--i.e., that the SBRA should apply to pending bankruptcy cases.”[5]  “More importantly,” Judge Mott wrote, permitting a conversion to Subchapter V would “would create a procedural quagmire,” citing as an example one of the SBRA benchmarks that Bankruptcy Judge Scott Clarkson in Progressive Solutions said might be “redundant or procedurally awkward” but should not stand in the way of “the primary purpose of SBRA” as reflected in the legislative history “to promote successful reorganizations using the tools that are now available under current law.”[6]

On the other hand, In re Twin Pines, LLC[7] and In re Deirdre Ventura[8] both permitted amendments to invoke Subchapter V.  Bankruptcy Judge Robert Jacobvitz in Twin Pines, rather than seeking an indication in SBRA that it was intended to have retroactive effect, instead noted the absence of any prohibition or insuperable obstacle to a redesignation of an existing petition, as did Judge Clarkson in Progressive Solutions.  And, as for the risk of a procedural quagmire, Judge Jacobvitz extended all the deadlines necessary to permit the orderly post-amendment progress of the Subchapter V case.[9]

Similarly in Deirdre Ventura, Bankruptcy Judge Robert Grossman found no statutory impediment to the debtor’s redesignating her case as a Subchapter V case.[10]  As for the procedural impediments that are often cited as grounds to permitting a redesignation of a pending case as a Subchapter V case, Judge Grossman wrote that “since there is no prohibition provided by Congress, the Court finds that it is within the Court’s discretion to reset the timelines to allow the Debtor to avail herself of the newly enacted law that was not at her disposal” when she filed her Chapter 11 petition.[11]

[2]  In re Progressive Solutions, Inc., 8:18-bk-14277-SC (Bankr. C.D. Cal. Feb. 21, 2020).

[4]  No. 19-31830-hcm (Bankr. W.D. Tex. March 5, 2020).

[5]  Id., slip op. at 2.

[6]  Progressive Solutions, Inc., slip op. at 8, 10.

[7]  No. 19-10295-jll (Bankr. D.N.M. Apr. 30, 2020).

[8]  2020 WL 1867898 (Bankr. E.D. N.Y. Apr. 10, 2020).

[9]  Twin Pines, LLC, slip op at 8-10.

[10]  Deidre Ventura at *6-*9.  “Given that subchapter V was not available to the Debtor on the Petition Date and the Debtor has made very clear from the outset the nature of [her] Property as a business, the Court will not penalize the Debtor because after careful analysis by Congress the law has been amended to address the needs of debtors that engage in the type of business she operates.”  Id. at *11.

[11]  Id. at *9.