“Small Business Debtor” And “Subchapter V” Co-Exist As Separate Systems In Chapter 11

Co-existing, side-by-side (photo by Marilyn Swanson)

By: Donald L Swanson

A little-known effect of the enactment of Subchapter V is this:

  • Prior “small business debtor” rules now co-exist, side-by-side, with (and separately from) Subchapter V rules in Chapter 11; and
  • We have two separate-but-similar systems for small business debtors.

A Chronology

Consider this chronology of changes that illustrate the side-by-side existence:

  1. August 23, 2019—the Small Business Reorganization Act of 2019 becomes law.  This Act creates Subchapter V as part of Chapter 11.  The definition of “debtor” in § 1182(1) of Subchapter V is “a small business debtor,” as defined in 11 U.S.C. § 101(51D) [Fn. 1].  
  2. February 19, 2020—Subchapter V becomes effective.
  3. March 27, 2020—the Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act) becomes law.  This Act amends Subchapter V in various respects, including a new definition of “debtor” in § 1182(1) [Fn. 2] that is almost-identical to the § 101(51D) definition of “small business debtor.”  The only difference in the two definitions is the eligibility limit: the new § 1182(1) definition has an eligibility limit of $7,500,000, while the old § 101(51D) limit remains at $2,735,625.
  4. March 27, 2021—unless extended, the definition change in § 1182(1), with its $7,500,000 eligibility limit, will automatically expire on this date (and the Subchapter V debtor definition will automatically revert to § 101(51D) and its $2,735,625 eligibility limit).  

Co-Existence

One effect of Subchapter V’s enactment and the CARES Act amendments, therefore, is this: the “small business debtor” rules and “Subchapter V” rules co-exist, side-by-side, as separate systems.  Illustrating this co-existence is the following statutory provision:

  • 11 U.S.C. § (51C) says (emphasis added): “The term ‘small business case’ means a case filed under chapter 11 of this title in which the debtor is a small business debtor and has not elected that subchapter V of chapter 11 of this title shall apply.”

Confusion

One confusion-inducing oddity of the foregoing chronology is this:

  • Paper versions of the 2020 Bankruptcy Code, printed in early months of 2020, do not contain the CARES Act amendments; and
  • Such confusion won’t be cleared-up until paper versions of the Bankruptcy Code are printed on 2021.  

An example of such confusion (I’m talking about my own confusion) comes from reading the opinion, In re Serendipity Labs, Inc.,  This opinion makes multiple references to eligibility provisions in § 1182(1)(B)(iii).  But when I look up that statute in my 2020 version of the Bankruptcy Code, I see no such thing—instead, the only place I can find the referenced language is in § 101(51D).  So, I’m confused.

It takes a while to run down what is causing the confusion—i.e., the absence of CARES Act amendments from my 2020 Bankruptcy Code book.

“Small Business” Rules Remain

But what took even longer to realize is this: the § 101(51C) definition of “small business case” and § 101(51D) definition of “small business debtor” continue to exist as a separate system from Subchapter V.  For example:

  • § 1129(e) provides a standard for confirmation of a plan in a “small business case,” which has no effect on confirmation of a Subchapter V plan;
  • § 1125(f) provides special disclosure statement rules for “a small business case,” while such disclosure statement rules are eliminated from Subchapter V unless a court orders otherwise (§ 1181(b));
  • § 1121(e)(1) provides special exclusivity rules for filing a “small business” debtor’s plan, while Subchapter V allows only a debtor to file a plan (§ 1189(a)); and
  • § 308(b) provides periodic reporting obligations for a debtor in a “small business case,” while corresponding reporting requirements in Subchapter V are in § 1187.

Conclusion

“Subchapter V” rules and “small business debtor” rules co-exist as separate systems under Chapter 11. 

Further, any debtor filing Chapter 11, who can qualify as a “small business debtor” under § 101(51D), has three filing options:

  1. filing under Subchapter V;
  2. filing a “small business case” under § 101(51C), etc.; or
  3. filing as a regular Chapter 11 debtor.  

—————————

Footnote 1.  11 U.S.C. § 101(51C) & § 101(51D)currently read like this:

(51C) The term “small business case” means a case filed under chapter 11 of this title in which the debtor is a small business debtor and has not elected that subchapter V of chapter 11 of this title shall apply.

(51D) The term “small business debtor”—(A) subject to subparagraph (B), means a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $2,725,625 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor; and (B) does not include—(i) any member of a group of affiliated debtors that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $2,725,625 (excluding debt owed to 1 or more affiliates or insiders); (ii) any debtor that is a corporation subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); or (iii) any debtor that is an affiliate of an issuer (as defined in section 3 of the Secuirties Exchange Act of 1934 (15 U.S.C. 78c)).

Footnote 2.  11 U.S.C. § 1182(1) currently reads like this:

In this subchapter: (1) Debtor.—The term “debtor”—(A) subject to subparagraph (B), means a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor; and (B) does not include—(i) any member of a group of affiliated debtors that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $7,500,000 (excluding debt owed to 1 or more affiliates or insiders); (ii) any debtor that is a corporation subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); or (iii) any debtor that is an affiliate of an issuer, as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).

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