Plan Confirmation Standards Under Small Business Reorganization Act of 2019

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By Donald L. Swanson

The Small Business Reorganization Act of 2019 is said to provide a “Chapter 12-type” reorganization opportunity for small businesses within Chapter 11.

That comparison is apt. Here’s why:

  1. Chapter 12 came into existence, back in 1986, because farmers had difficulty getting plans of reorganization confirmed under Chapter 11;
  2. The Small Business Act exists, today, because small businesses have had difficulty getting plans of reorganization confirmed under Chapter 11;
  3. The culprit in both cases has been the absolute priority rule, which denies plan confirmation unless unsecured creditors agree to receive less than 100%; and
  4. Both Chapter 12 and the Small Business Act eliminate the absolute priority rule.

Plan Confirmation Standards

However, standards for confirmation of a plan under the Small Business Act follow Chapter 11, not Chapter 12. What follows is a summary of plan confirmation standards under the Small Business Act.

–Disclosure Statement Lite

The Small Business Act retains a disclosure statement requirement (§ 1190), which doesn’t exist in Chapter 12. Granted, it’s a disclosure statement lite, consisting of only three items:

  1. a brief history of the business operations of the debtor;
  2. a liquidation analysis; and
  3. projections on the ability of debtor to make payments under the proposed plan.

–Chapter 11 Confirmation Standards that Do NOT Apply

Plan confirmation standards for Chapter 11 are established in § 1129(a) & (b). Generally, the confirmation standards of § 1129(a) will still apply.  However, the Small Business Act declares (in § 1191(a) & (b)) that the following provisions of § 1129 do NOT apply in a small business case:

  • Unless explicitly incorporated, cram-down provisions of § 1129(b) do NOT apply: such (b) requirements take effect only when paragraph (8) of § 1129(a) is not satisfied.
  • Paragraph (8) of § 1129(a) does NOT apply. Paragraph (8) requires that each class of claims has either “accepted the plan” or “is not impaired under the plan.” This exclusion eliminates the absolute priority rule, which appears in the cram-down requirements of § 1129(b).
  • The “at least one class” of impaired claims “has accepted the plan” requirement in paragraph (10) of § 1129(a) does NOT apply—this exclusion removes any requirement for creditor acceptance of a debtor’s plan.
  • Special provisions for “individual” debtors, under paragraph (15) of § 1129(a), do NOT apply.

–Explicitly Incorporating § 1129(b) Items

The following confirmation requirements from § 1129(b) are explicitly incorporated into the Small Business Act (by § 1191(b) & (c)).

The plan must not “discriminate unfairly” and must be “fair and equitable” for “each class of claims or interests that is impaired under, and has not accepted the plan”—this is a verbatim copy of language from § 1129(b)(1). [Editorial Note: The “not accepted” reference is curious, since voting to accept or reject a plan is eliminated.]

The “fair and equitable” standard includes the following details:

  • Requirements of § 1129(b)(2)(A) for secured claims must be satisfied;
  • The plan must contribute all of debtor’s “projected disposable income” to making plan payments for three to five years;
  • The plan must be feasible (i.e., there must be a “reasonable likelihood” that “debtor will be able to make all payments under the plan”); and
  • The plan must provide “appropriate remedies” to “protect” creditors from a failure to make payments, including “the liquidation of nonexempt assets.”

–Lien on Residence Rule

The Small Business Act changes an existing Chapter 11 rule prohibiting modification of lien rights “secured only by a security interest” in Debtor’s “principal residence” (see § 1123((b)(5)). The new rule (in § 1190(3)) authorizes modification of such lien rights when the “new value” debtor received for such lien was, (a) “not used primarily to acquire” the residence, and (b) “used primarily” in the debtor’s small business.

–§ 1123 Contents of Plan

The provisions of § 1123 on “Contents of plan” will still apply, except for [see § 1181(a)]:

  1. the lien on principle residence rule noted above;
  2. the future income from individual services rule in § 1123(a)(8); and
  3. the creditor-plan rule for an individual debtor in § 1123(c).

Conclusion

The Small Business Reorganization Act of 2019 appears to have delivered on its promise to make reorganization under Chapter 11 a possibility for small businesses.

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