By David J. Tong, Esq.
The President signed the Small Business Reorganization Act, which takes effect in mid-February 2020. It changes many Chapter 11 practices for business debtors with total debts under $2,725,625 (secured and unsecured).
Found in a part of Chapter 11 known as Subchapter V, the new law attempts to streamline bankruptcy proceedings for small businesses. Single-asset real estate debtors are not eligible. Only the debtor can file a Plan, which it must do within 90 days, and creditors do not get to vote on the Plan. The debtor must meet with creditors and attempt to obtain a consensual Plan, but the “absolute priority rule” in Chapter 11, which means that the prior owners of the debtor cannot retain their ownership interests unless they pay in “new value”, does not apply to Subchapter V debtors.
The court can confirm the Plan if the court concludes that the Plan does not discriminate unfairly against creditors, that the Plan is fair and equitable, and that the debtor has applied all of the debtor’s expected “disposable income” to the creditor payments due. In some circumstances, a debtor will be permitted to modify a home mortgage if the mortgage funds are used for business purposes. The debtor can stretch out payment of priority claims over five years.
Many creditors, especially secured lenders, will be watching warily to see how the courts interpret this new law. Secured lenders must be very cautious about the “cramdown” issues and will need to tread carefully as to the valuation of secured property.
Creditors will need to be more proactive in a Subchapter V case. Because of the expedited timelines in Subchapter V, establishing a dialogue with the debtor to negotiate favorable Plan treatment is even more important. A strategy that pressures the debtor, while simultaneously offering some concessions, may be the best strategy if employed early in the process. Creditors will have a limited window of opportunity to challenge a debtor’s financial documents, income and expense projections, and the valuation of secured collateral.
We expect that many small businesses will elect to proceed under the Subchapter V provisions instead of under Chapter 11 or under Chapter 13 (except to take advantage of the “super discharge” provisions of Chapter 13 which allow fraudulently obtained debts to be discharged). Our attorneys can assist you in navigating the murky waters of Subchapter V, and invite you to contact us should one of your debtors file under Subchapter V. The earlier you participate in the process, the more likely it is you will end up with a favorable outcome.
David Tong is a partner at Saxon|Gilmore and concentrates his practice in the areas of bankruptcy/creditors’ rights, real estate litigation and complex commercial litigation. A past President of the Tampa Bay Bankruptcy Bar Association, Mr. Tong routinely represents lenders, governmental entities and other creditors in bankruptcy and complex litigation matters. He has litigated numerous cases involving commercial real estate, receiverships and loan restructurings. He can be reached at 813.314.4510 or via email at dtong@saxongilmore.com.
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