Unanswered Questions: Small Business Reorganization Act of 2019

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Subchapter V of Chapter 11 of the Bankruptcy Code

By: Donald L Swanson

The Small Business Reorganization Act of 2019 passed into law on August 23, 2019, and it becomes effective 180 days thereafter—on February 19, 2020.

The new law is also known as “Subchapter V,” because that’s how it’s formally designated and housed under Chapter 11 of the Bankruptcy Code (see photo above).

In the meantime, we’ve all been studying, listening and learning, in preparation for the Act’s effective date—which is nearly upon us.

What follows are some questions I’ve heard about the Act that don’t seem to have a ready or clear answer and will await action by the various bankruptcy courts and their appellate overseers.

A generalized basis for predicting answers to such questions is this:

  • Since the obvious intent of Congress is to help small businesses in financial stress and to abbreviate their Chapter 11 process, courts will try to avoid roadblocks when they can.

BAPCPA, by contrast, was enacted back in 2005, with the specific intent—literally—of making life hard for consumer debtors in bankruptcy, especially for middle class debtors. And courts have effectuated that intent ever since.

Transitions Questions

Hypothetical: Let’s say your client filed Chapter 11 in February of 2019 as a small business debtor, under 11 U.S.C. § 101(51C & D), § 1129(e) and Fed.R.Bankr.P. 1020. You haven’t been able to get a plan confirmed under the old law and want to proceed under the new one.

Questions:

  1. Can you elect to proceed under the new law, if your client qualifies, or does the new law apply only to cases filed after its effective date? Does it make a difference whether you elected initially (under Rule 1020(a)) to proceed as a small business?
  2. If you can proceed under the new law, what happens to deadlines under the new law (e.g., 60 days after filing for a status conference and 90 days for filing a plan, under § 1188(a) & § 1189(b))? Do the deadlines start upon the Subchapter V election?

Possible Answers:

1.  The most interesting answer I’ve heard, to the first set of questions on application of the new law to old cases, cites a distinction between the enactment of BAPCPA in 2005 and the enactment of Subchapter V in 2019. Here’s the distinction:

  • BPCPA explicitly declares: “this Act shall not apply with respect to cases commenced under title 11, United States Code, before the effective date of this Act” (see § 1501(b)(1) of Public Law 109-8); but
  • Subchapter V contains no such language.

Such a distinction could be significant, if not decisive, in addressing many transitions issues.

But what about a failure, in our February 2019 hypothetical, to initially elect a small business status under Rule 1020(a)? Is that an impediment to proceeding under Subchapter V?  My answer is this: I have no idea.

2.  As to the second set of questions, plan-related deadlines for a small business debtor can be extended under § 1121(e)(3), when a plan can be confirmed within a reasonable time. The bugaboo is that such an extension order must be “signed before the existing deadline has expired”—which won’t help in our hypothetical February 2019 petition filing.

Adding to the uncertainty is the Committee Note for proposed Interim Rule 1020, which says:

“The rule does not address whether the court, on a case-by-case basis, may allow a debtor to make an election to proceed under subchapter V after the times specified in subdivision (a) or, if it can, under what conditions.”

It will be interesting to see how bankruptcy courts and their appellate overseers wrestle with these transitions issues.

Short-Term Plan—Less Than 3 Years?

Back in early December 2019, I heard a bankruptcy judge say that a non-consensual Subchapter V plan need not last 3 to 5 years: a shorter-term plan is possible.

I was shocked . . . I didn’t think that possible.

And then I got excited. Here’s why: back in the Farm Crisis years (1980s and 90s), we were able to confirm lots of short-term plans in Chapter 12 (e.g., one month and six months plans). The short-term arrangements were a boon for the debtor (e.g., got a discharge quickly) and for every creditor to be paid under the plan (e.g., legal and trustee fees shut off quickly). But short term plans in Chapter 12, since then, have gone the way of woolly mammoths.

What the bankruptcy judge said, back in December, is that both the plan confirmation and discharge provisions in Subchapter V allow for short term plans. Here are those provisions:

  • “§ 1191. Confirmation of Plan” says in subparagraph (c)(2) that a debtor must either, (i) pay all disposable income for 3 to 5 years, or (ii) pay value, within the 3-year period, that is “not less than the projected disposable income”; and
  • “§ 1192. Discharge” says, “as soon as practicable after completion by the debtor of all payments due within the first 3 years of the plan, . . . the court shall grant the debtor a discharge” (emphasis added).

Notably, there is no requirement in either the confirmation or discharge statutes that the plan must run for a full three years.

Here’s a huge, “Thank you!,” to that bankruptcy judge for bringing this possibility to everyone’s attention.  Only time will tell whether her view prevails.

“Consensual” Plans – Voting?

Everyone knows how plan voting works in a regular chapter 11 cases under § 1126:

–Debtors cannot solicit acceptance of a plan until a disclosure statement is approved; once a disclosure statement is approved, copies are sent to creditors with an order on plan confirmation procedures and ballots for accepting or rejecting the plan; then creditors can vote on and/or object to the plan by specified dates; and negotiations ensue on rejections and objections as confirmation hearing approaches.

But that process won’t apply in Subchapter V, which eliminates the prohibition on immediate solicitation of creditor acceptance. Moreover, Subchapter V:

  • does not use the word “vote” or the word “ballot”;
  • does not cite or even reference the voting provisions of § 1126;
  • uses the word “consensual” only twice (in § 1183(b)(7) on trustee duties and in § 1188(c) on preparations for a status conference); and
  • uses the words “accepted” or “acceptance” only four times: (i) once in § 1191(b) on confirmation when an impaired class has “accepted” the plan, and (ii) three times in § 1193(d) on “deemed” acceptance of a modified plan.

So . . . how does a creditor consent to a plan or reject a plan? What if no one files an objection to a plan, or if all filed objections are resolved by the confirmation hearing—is that acceptance? What if ballots are distributed and only one creditor in the unsecured class submits a vote—does that vote speak for the entire class?

How all of this will work remains to be seen. As to predictions, here are a couple:

  1. The voting standards of § 1126 (i.e., counting only ballots cast and applying the >50% nose count and 2/3 in amount standards) will still control, if-and-when ballots are actually used; and
  2. Based on the brevity-of-process goal, a creditor’s failure to file an objection will be equivalent to acceptance, if-and-when ballots are not used.

Why A 5 Years Plan?

Subchapter V authorizes plans that run from 3 to 5 years. Why would anyone want to be in bankruptcy for 5 years, and defer receiving a discharge until all 5 have expired, when 3 years is an option?

In Chapter 13, by contrast, there is no option for middle class debtors: they must have a 5 years plan. Why? Because that’s the penance Congress requires of such debtors. Similarly, an individual debtor in a regular Chapter 11 case must have a 5 years plan (see § 1129(a)(15))—for the same reason.

Here’s what I’m hearing from Chapter 12 and Chapter 13 experts on why a debtor would choose a 5 years plan: it depends on the amount of equity a debtor is trying to save, compared with debtor’s projected cash flow. For example, if debtor has an unencumbered lot worth $100,000 that’s needed in the business, and debtor’s cash flow will require 4.5 years to pay for that equity, a plan longer than 3 years is necessary.

So, such experts suggest, the distinction between 3 and 5 years for a Subchapter V plan is a choice for the debtor to make—it’s not like other chapter cases where a 5 years plan is imposed upon debtor by law.  Time will tell whether they are right.

Conclusion

The effective date of the Small Business Reorganization Act of 2019 is nearly here.

It will be interesting to see how bankruptcy courts and their appellate overseers wrestle with and resolve each of the questions identified above.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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