September 29, 2020

Volume X, Number 273

September 29, 2020

Subscribe to Latest Legal News and Analysis

September 28, 2020

Subscribe to Latest Legal News and Analysis

Big Changes for Small Business Bankruptcies

The Small Business Reorganization Act of 2019 (SBRA) was signed into law in August 2019 and will go into effect on February 19, 2020. The goal of the SBRA is to make small business bankruptcies faster and less expensive. There are a number of key features of the SBRA of which creditors and other potential parties in interest should be aware:

  1. Debtors (both companies and individuals) with 50% or more of their debt arising from business or commercial activities, and with total noncontingent, liquidated debts (both secured and unsecured) of no more than $2,725,625 may seek relief under the SBRA.

  2. A trustee, from a designated group of new subchapter V trustees, will be appointed in each case. The trustee’s role will be similar to that of a Chapter 13 trustee, and the trustee will, as needed, help the debtor formulate a consensual plan, report fraud or misconduct, and monitor distributions in accordance with the terms of the plan. Despite the involvement of the trustee, SBRA debtors are not responsible for payment of traditional trustee fees.

  3. There are no creditors’ committees unless court ordered.

  4. Only the debtor may file a plan under the SBRA.

  5. A plan must be filed within 90 days of the petition date. The deadline can be extended if circumstances exist for which the debtor should not be held accountable.

  6. Unlike a traditional Chapter 11 debtor, a debtor who elects to proceed under the SBRA does not have to file a disclosure statement. The plan, however, must include some of the information that is traditionally included in a disclosure statement, including a brief history of operations, a liquidation analysis, and a projection of the debtor’s ability to make payments under the proposed plan.

  7. A court can confirm a plan under the SBRA even if all impaired classes vote to reject the plan.

  8. If the court approves a plan without the approval of impaired classes, then the debtor, in order to obtain a discharge, must apply all disposable income received over a three- to five-year plan to payment of creditor claims.

  9. The SBRA eliminates the traditional Chapter 11 absolute priority rule, which precludes lower classes of creditors from receiving a distribution unless the claims of creditors in each above class are paid in full. This provides the possibility that the debtor’s equity holders may retain their interests without contributing new value.

  10. The SBRA removes the requirement that the debtor pay administrative expense claims on the effective date of the plan. Instead, the debtor may stretch payment of administrative expense claims out over the term of the plan.

  11. The SBRA allows individual debtors, unlike in traditional Chapter 11s, to modify certain residential mortgages where the underlying loan was used primarily in connection with the debtor’s commercial or business activities, as opposed to being used to purchase the residence.

  12. The SBRA requires a plaintiff bringing a preference suit to consider the potential affirmative defenses that a defendant may raise before filing the suit.

  13. Under traditional Chapter 11s, attorneys were precluded from representing the debtor in bankruptcy if the debtor owed them attorneys’ fees before filing bankruptcy. The SBRA provides that attorneys are not disqualified from such representation if the unpaid fees total $10,000 or less.

These are material changes that will significantly impact the rights and procedures to which both debtors and creditors are accustomed in traditional Chapter 11s. And the applicability of the SBRA to potential traditional Chapter 11 filers is also significant. It has been estimated, based on recent Chapter 11 statistics, that up to half of Chapter 11 debtors will be eligible to file under the SBRA.

©2011-2020 Carlton Fields, P.A. National Law Review, Volume X, Number 43

TRENDING LEGAL ANALYSIS


About this Author

David L. Gay SHAREHOLDER Creditors’ Rights and Bankruptcy Distressed Asset and Workout Litigation and Trials
Shareholder

David focuses his practice on bankruptcy and creditors’ rights, corporate reorganizations and restructurings, and commercial litigation. He represents debtors, creditors, financial institutions, trustees, and creditors' committees in Chapter 11 reorganizations and Chapter 7 liquidations, as well as in fraudulent transfer actions, preference actions, and litigation against directors and officers. As an experienced litigator in federal and state courts, David is known for his strategic approach throughout all phases of commercial litigation, from pre-litigation consulting to post-judgment...

305-539-7265
Yolanda P. Strader Litigation Attorney Carlton Fields Law Firm Miami
Shareholder

Yolanda Strader handles a wide variety of commercial litigation matters, including class actions, real property disputes, business torts such as fraud and breach of fiduciary duty, business divorces, breach of contracts, creditors' rights, bankruptcy litigation, and consumer finance issues implicating a number of statutory regimes, such as the Truth in Lending Act (TILA), the Real Estate Settlement and Procedures Act (RESPA), the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act (FDCPA). With experience spanning from the inception of a case through post-judgment recovery efforts, Yolanda stands ready to try cases. She also strives to find smart solutions that recognize the goals of the businesses and industries she services, including banks, lenders, loan servicers, real estate management firms, receivers, hospitals, and law firms. Yolanda also has experience litigating large-scale matters requiring a command of electronically stored information (ESI) and large databases.

Yolanda is active in the South Florida legal community. She is a past president of the Wilkie D. Ferguson Jr. Bar Association, formerly known as the Black Lawyers of Miami. As president of the Ferguson Bar, she spearheaded a number of initiatives to enhance diversity in the legal profession and to help deserving students in Miami. Yolanda was also a director on the board of the Dade County Bar Association and recently served on the Leadership Team for the Man and Woman of the Year Campaign for the Leukemia and Lymphoma Society of South Florida.

Yolanda was selected as a recipient of the 2016 National Bar Associations "40 Under 40 Nation’s Best Advocates” Award. She was also named to the Florida Rising Stars list by Super Lawyers Magazine (2013–2019) and the Daily Business Review (2014). She was recognized as one of 40 Under 40 Black Professionals by Legacy Magazine in 2012, and as one of 40 Under 40 Outstanding Lawyers of South Florida by the Cystic Fibrosis Foundation in 2013.

305.539.7332