Before diving in to the details of the Small Business Reorganization Act of 2019, take your gloves off. You’re going to need all your fingers to cross-reference the myriad of bankruptcy law passages that are cryptically referenced there. For a head start, keep reading: you can consider this guide a means of freeing up at least enough fingers to grab hold of your favorite beverage.
For starters, why even care about this law? Two basic reasons: it’s brand new, taking effect in February, 2020, and it offers hope to businesses hit hard (or shut down) by the economic implosion wreaked by fear of illness. So, to start:
First of all, the law adds a new “subchapter V” to the existing Chapter 11 of title 11.
The new passages begin with 11 USC s. 1181, so awe will start there:
11 USC 1181: This section contains a laundry list of other code sections that do NOT apply when using the new law to reorganize a small business. In most cases, these neutered sections are replaced by alternate procedures within the new subchapter V. Existing sections that do NOT apply under the new law include (Sections are in title 11, the bankruptcy code, unless noted):
Setting dates for status conferences; s. 105(d).
Formal definition of the term “debtor-in-posession”; 1101(1).
Various sections concerning the use of trustees (heretofore rare in Chapter 11); ss. 1104-1108.
What counts as property of the estate; s. 1115.
Duties of debtors and trustees; s. 1116.
Who may file a plan; s. 1121.
Plan payments and sale of property; parts of s. 1123.
Modification of a Chapter 11 plan of reorganization; s. 1127.
Rules for confirmation of plans, including the detested “absolute priority rule”; parts of s. 1129.
Vesting property of the estate in the debtor; s. 1141(d)(5).
11 USC s. 1182: This section is straightforward, and defines the terms “small business debtor,” and “debtor in possession” under the new subchapter.
11 USC s. 1183: A long section providing for the appointment of a trustee in every small business Chapter 11 case. The duties of the trustee are written so that in normal circumstances, the trustee will not operate the business. Trustees will also not file substitute schedules for debtors. They are able to distribute support payments to recipients. Trustees are relieved of duties following the “substantial consummation” of a plan; debtors are responsible for filing a pleading informing the court and trustee of substantial consummation. Cross references: ss. 704, 1106
11 USC s. 1184: A short explanation of the rights and powers of a debtor in possession. Cross references: ss. 330, 1106
11 USC s. 1185: Debtor in possession status can be removed in cases of fraud or incompetency, and reinstated when appropriate, after notice and a hearing.
11 USC s. 1186: “Property of the estate” is defined in the same way as in sec. 541, with the addition that property acquired post-petition and pre-conversion is included as belonging to the estate, as well as post-petition earnings. Property of the estate remains in possession of the debtor in normal circumstances. Cross reference: s. 541
11 USC s. 1187: Lists the debtor’s filing requirements, which include balance sheets, cash-flow statements, and federal tax returns, but in the usual case, does not include separate disclosure statements. Cross references: ss. 308, 1106 (1), 1125.
11 USC s. 1188: The court will schedule a status conference within 60 days of a petition being filed; 14 days prior to the conference, the debtor must file a report concerning negotiations with creditors for consensual resolution.
11 USC s. 1189: Only the debtor may file a plan. The plan should be filed within 90 days of the petition date.
11 USC s. 1190: The contents of the plan must include a history of the business, a liquidation analysis, and projections of the debtor’s ability to make plan payments. Future projected income is committed to the trustee for the life of the plan. The plan may modify loans secured by the debtor’s principal residence, if the funds were intended for business purposes. Cross references: s. 1123 (b) (5).
11 USC s. 1191: Provides the rules for confirmation of the plan: it must not discriminate between members of a class, and be fair and equitable to impaired, non-consenting creditors. The “absolute priority rule” does not apply to small business cases under the new subchapter. Projected disposable income must be committed to the plan for a 3-5 year period. Debtors are allowed to deduct reasonable personal support payments, and funds needed to operate the business, from the definition of disposable income. Cross references: ss. 507 (a), 510, 1129
11 USC s. 1192: Specifies the extent of a discharge under the new law. Most debts are discharged after completion of plan payments. Exceptions are those found in the laundry list of s. 523 (a) (student loans, etc.) and any debt “on which the last payment is due after the [3-5 year length of the plan]. Cross references: 503, 1141
11 USC s. 1193: Rules for modification of plans: the debtor may modify anytime before confirmation, and is excused from the requirement of having to commit all personal services income to the new plan. Post confirmation plans require notice and a hearing. Cross reference: 1123 (a) (8).
11 USC s. 1194: Authorizes the trustee to distribute plan payments. If a plan is not confirmed, the trustee will refund plan payments to the debtor, less allowed administrative claims, adequate protection payments, and trustee fees. Cross reference: s. 503
11 USC s. 1195: Allows persona with small claims against the estate to be employed as professionals. Cross reference: s. 327
To read the full text of the new law click here.
That is the entirety of the new law. It is sure to be tested by fire, and changing economic circumstances will make sure it is well used early on in 2020. Many businesses will be looking to rebuild after the epidemic, shedding debt from the shut down, but continuing operations in to the future. For many, the Small Business Reorganization Act may come to their rescue.
By Doug Beaton
Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form: