SMALL BUSINESS REORGANIZATION ACT: OBTAINING THE BENEFITS OF SUBCHAPTER V FOR CASES FILED BEFORE ITS ENACTMENT

By: Linda Leali

On August 23, 2019, the Small Business Reorganization Act of 2019 (the “SBRA”) was signed into law and became effective on February 19, 2020. The SBRA added a new Subchapter V to Chapter 11 as an elective chapter for small business debtors for whom the existing provisions of Chapter 11 were not providing effective relief. Define small business debtor under the Bankruptcy Code (“Small Business debtor”).

But what happens if a Small Business debtor filed for bankruptcy prior to February 19, 2020? Can that Small Business debtor still take advantage of this new Subchapter V? Would a Small Business debtor even want to have its bankruptcy proceed under this new Subchapter V?

Every case is different, and there are a myriad of factors to consider.  However, there is good news. When certain requirements are met, a Small Business debtor can elect to be under this new Subchapter V by amending its bankruptcy petition to be a Subchapter V Debtor.

One such case allowed the Small Business debtor to change its election to Subchapter V even though the bankruptcy voluntary petition for relief under Chapter 11 was filed February 10, 2020, 9 days before the SBRA went into effect. In the case In re Moore Properties of Person County, LLC, the bankruptcy court allowed the Small Business debtor to change the case to Subchapter V case by amending its petition after the SBRA went into effect.

Moore Properties of Person County, LLC (“Moore Properties”), owned 3 properties leased for farming operations. What makes this decision even more interesting is that on the date the voluntary petition for relief under Chapter 11 was filed, Moore Properties did not meet the definition of a “Small Business debtor.”  Prior to the SBRA, the definition of a Small Business debtor did not include businesses that primarily owned and managed real property.

When the SBRA went into effect, the definition changed.  Under the SBRA, the definition of small business excludes those owners of real property that constitute “single asset real estate.”  Because of the changes in the SBRA, Moore Properties met the definition of a Small Business debtor.  At the date of the hearing (6 days after the SBRA went into effect), no parties objected to the Debtor’s amended election to proceed under Subchapter V.  Despite hearing no objections, the bankruptcy court carefully considered whether this change was permitted, and ultimately concluded that Moore Properties could amend its petition to change its election to Subchapter V.

One of the benefits of Subchapter V is that it modifies the requirements for a Chapter 11 Small Business debtor to confirm a plan.  The bankruptcy court did determine that not all small businesses could elect to make this change. The bankruptcy court clarified that, “[t]o the extent that a case were pending for an extended period of time on the effective date of the SBRA, it is possible that a case could be sufficiently advanced that the substantive alterations in the requirements for plan confirmation arise to a taking of a vested property rights.”  In other words, not all Small Debtors, in particular incases that have been pending for an extended period, can amend the petition to elect to proceed under Subchapter V.

Does that mean if a bankruptcy case was filed months before the SBRA went into effect, it cannot elect to proceed under Subchapter V?  Not quite.  In  the case In re: Deirdre Ventura, the bankruptcy court allowed the debtor that operated a bed & breakfast to amend its petition to take advantage of the benefits of the SBRA even though the case had been pending for over 15 months and a creditor’s proposed plan of reorganization had been scheduled for a hearing on confirmation.

The bankruptcy court in Ventura noted that the typical schedule for a bankruptcy case may be extended because to “argue the Debtor should have complied with the procedural requirements of a law that did not exist is the height of absurdity.”  The debtor was not required to comply with deadlines that clearly expired before the Debtor could have elected to proceed as a Subchapter V debtor.

In the case In re Progressive Solutions, Inc., a debtor was permitted to amend its election to proceed under Subchapter V when the case was filed on November 21, 2018 (455 days before the SBRA went into effect), because the bankruptcy court found that no creditor had rights that were vested by any court rulings and where no other significant events had occurred during the case that would be disturbed by the designation of the case as a Subchapter V case.

In the case In re TWIN PINES, LLC,  the bankruptcy court allowed a debtor to elect Subchapter V even though the debtor filed its Chapter 11 small business petition 372 days before the SBRA went into effect.  The debtor operated a car wash and leased four condominium units in Ruidoso, New Mexico.  The bankruptcy court found that the Subchapter V Trustee’s inability to attend meetings that had previously been scheduled (i.e. initial debtor interview, § 341 meeting, etc) did not prevent the debtor from amending its petition to elect to Subchapter V treatment.

An amendment to a bankruptcy petition can be made at any time as a matter of course before the case is closed.  While an amendment can be filed, whether the election to proceed under Subchapter V will be approved by the bankruptcy court may depend on how far the case has advanced.  

Under Fed. R. Bankr. P. 1020(a), a debtor must state in its bankruptcy petition “whether the debtor is a Small Business debtor and, if so, whether the debtor elects to have subchapter V of chapter 11 apply.” See Interim Rule of Bankruptcy Procedure No. 1020(a), implementing the Small Business Reorganization Act of 2019.

Ultimately, whether a Small Business debtor can amend its petition to elect a Subchapter V designation depends on a number of factors. And whether a debtor would even want to make this change will depend on the unique facts of the case.

Linda Leali, P.A. can advise small businesses with these tough decisions.