Bankruptcy Update Blog

Small Business Reorganization Act of 2019

In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“2005 Act”), Congress amended the Bankruptcy Code and Title 28 of the U.S. Code to provide special rules and procedures for “small business debtors.”[1]  The small business provisions of the 2005 Act “institut[ed] a variety of time frames and enforcement mechanisms designed to weed out small business debtors who are not likely to reorganize.”[2]

After 10+ years of practice under the 2005 Act, Congress concluded that “[n]otwithstanding the 2005 Amendments, small business chapter 11 cases continue to encounter difficulty in successfully reorganizing.”[3]  In response and to “streamline the bankruptcy process by which small businesses [sic] debtors reorganize and rehabilitate their financial affairs,”[4] Congress enacted the Small Business Reorganization Act of 2019 (“2019 Act”).[5]  The 2019 Act was signed by the President on August 26 and will become effective 180 days thereafter.

The 2019 Act most notably enacts a new subchapter V for Chapter 11 for small business debtors.  Subchapter V applies in any Chapter 11 case of a small business debtor that elects to have it apply.[6]  The 2019 Act also amends or otherwise affects many other provisions of the Bankruptcy Code, including by declaring about two dozen sections and subsections of Chapter 11 to be inapplicable in subchapter V cases, a half-dozen of which may become re-applicable if the court so orders “for cause.”[7]

Among the numerous provisions of new subchapter V, these are illustrative highlights:

  • A trustee will be appointed in every subchapter V case.  Ordinarily, such a trustee will act as a fiduciary for creditors, usually in lieu of the appointment of a creditors’ committee.  However, a subchapter V trustee would ordinarily not operate the business of the small business debtor.[8]
  • Only the small business debtor may file a plan of reorganization,[9] and it must do so within 90 days after the order for relief (which may be extended by the court “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable”).[10]
  • The rules for the contents of a subchapter V plan of reorganization are more debtor-friendly than under existing Chapter 11.  Notably, a loan secured by the principal residence of the debtor may be modified by the plan if the proceeds of the loan were used for the small business.[11]
  • The requirements to confirm a plan are more debtor-friendly than under existing Chapter 11, particularly the rules for confirming a plan over the opposition of an impaired class of creditors.[12]
 

[1]  “Small business debtor” is defined in Section 101(51D) of the Code.  All references herein to the “Code” denote the Bankruptcy Code, Title 11 of the U.S. Code.

[2]  H.R. Rep. No. 109-31, at 19 (2005).  Cracking down on alleged excesses and inappropriate uses of bankruptcy was a major theme of several other parts of the 2005 Act as well.

[3]  H.R. Rep. No. 116-171, at 4 (2019).

[4]  Id. at 1.

[5]   The 2019 Act was substantially based upon proposals made and vigorously advocated by the American Bankruptcy Institute and the National Bankruptcy Conference.

[6]  Code § 103(i) as added by 2019 Act § 4(a)(2).

[7]  Code § 1181(a).

[8]  Code §§ 1183-84.

[9]  Under Code § 1121(c), any “party in interest” may file a plan at certain times and under certain circumstances.

[10]  Code § 1189.

[11]  Code § 1190.  Modification of such a loan is not permitted under Chapter 11 outside of subchapter V.  Code § 1123(b)(5).

[12]  Code § 1191.