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Small Business Reorganization Act of 2019

(Written by Geoffrey E. Marr of Marr Law Group)
The Small Business Reorganization Act of 2019 (“SBRA”) codified in Subchapter V of Chapter 11 of the Bankruptcy Code became effective in February 2020. SBRA was designed to minimize the time and expense of small business reorganization. SBRA was also designed to remove many of the cumbersome requirements associated with a traditional Chapter 11 case for businesses with total aggregate debts (both secured and unsecured) under $2,725,625. The recent CARES Act, designed to aid small businesses suffering from the COVID-19 crisis, significantly increased the debt limit to $7.5 million for one year. SBRA and the increased debt limitations should allow many more small business debtors to successfully reorganize under its provisions. 
Key features of the new SBRA include:

  • Eligibility: A person (which includes an individual/partnership) or entity engaged in commercial or business activity with aggregate secured and unsecured debts of $7.5 million maybe a small business debtor;
  • Debtor In Possession: The small business debtor may operate as a debtor in possession and manage/operate its own business post-petition subject to the normal prohibitions including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the commencement of the bankruptcy case or for failure to perform its obligations under a confirmed plan.
  • Creditors Committee: There are no creditor committees in order to streamline the process and reduce administrative fees.
  • Sub-chapter V Trustee: A case trustee is appointed in each case. The case trustee monitors the debtor's progress during the case in order to promote consensual plans of reorganization. The bankruptcy court cannot appoint a traditional chapter 11 trustee or examiner in a small business reorganization
  • Plan of Reorganization: Only the small business debtor may file a plan of reorganization and it must be filed within 90 days of the petition. The small business debtor doesn’t need to solicit plan acceptances with a separate disclosure statement. Instead, the plan itself must include a brief history of the business operations, a liquidation analysis, and projections with respect to the small business debtor’s ability to make payments under the proposed plan. All of the small business debtor's disposable income must be contributed to plan payments to creditors, and the plan must be at least three years and cannot exceed five years.
  • Plan Confirmation: The plan confirmation requirements track the criteria of section 1129(a) of the Bankruptcy Code, with the critical exception that the debtor does not need to obtain the acceptance of an impaired class of creditors. The small business debtor can also pay administrative claims over the life of the plan instead of on the effective date.
  • Ownership Interests: Owners are able to retain their equitable interests in the small business.
  • Mortgage Modification: In certain circumstances, an individual small business debtor may modify the mortgage on his/her principal residence, provided that the mortgage loan wasn’t used to acquire the residence but was used primarily in connection with the debtor’s small business.
  • Discharge: If the small business debtor completes the payments required under a confirmed plan, he/she/it can receive a discharge of debts as provided under section 1141(d).
  • United States Trustees: There are no quarterly fees due during the pendency of the case or post-confirmation to the US Trustee.
The legislative changes to the Chapter 11 process contained in SBRA should provide immeasurable assistance to the successful reorganizations of many small business reorganizations. The recent increased debt limit to $7.5 million for eligible small business debtors is exactly the prescription needed in light of the looming COVID-19 crisis. Mr. Marr may be reached at gemarr59@hotmail.com concerning questions regarding this legal article.
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