Congress Did Something for Small Businesses: Small Business Reorganization Act of 2019.
Updated: Mar 31, 2020
I stepped away from “big law” on July 31 to start my own law practice focusing on commercial litigation, bankruptcy, and complex judgment collection. After making the jump, I received loads of kind notes and well-wishes from my former colleagues and friends. What I did not expect, but truly appreciate, is the swift action of the United States Congress, Senate, and the President to enact an entirely new form of bankruptcy to aid small businesses and the upstart firm of Michael H. Moody Law, P.A.
On August 23, 2019, Donald J. Trump, enacted the Small Business Reorganization Act (SBRA), which will become effective February, 2020. The SBRA is significant because it is an actual law passed on a bipartisan measure in an age where that kind of thing just never seems to happen. This is a moment of historic significance. But it is also significant because it offers up a new and powerful tool for sorting out the financial affairs of small business debtors.
The SBRA creates a new Chapter 5 in bankruptcy that small business debtors (those with aggregate liabilities less than $2,725,625) may elect to use in lieu of Chapter 11. Instead of having to comply with some of the truly arcane and illogical rules of Chapter 11, Chapter 5 Debtors have the option to propose a plan that makes sense and is equitable to creditors. No longer does a plan proponent have to gerrymander to get an impaired accepting class of non-insider creditors to obtain approval of a plan that is otherwise fair and equitable to all. Chapter 5 also eliminates the heavy cost of creditors committee counsel which burden many small debtor bankruptcy estates under Chapter 11. In addition, Chapter 5 eliminates the requirement that there be a disclosure statement which normally just repeats what is in the plan of reorganization with some extra verbiage.
After filing a Chapter 5 case, a Chapter 11 panel trustee will be appointed to (1) account for the debtors property; (2) appear at an initial status conference and all other hearings; (3) facilitate the development of a consensual plan; and (4) supervise and control property and funds to be distributed under the plan. The Debtor must propose a plan within 90 days. This plan must pledge repayment for three to five years of the businesses’ “disposable income” which is defined to mean “income not reasonably necessary…for the continuation, preservation or operation of the business of the debtor.” 11 U.S.C. § 1191(d).
Since pretty much all honest small business debtors file bankruptcy because they have no disposable income or negative income, most small debtors can likely get away with a small, reasonable payment to creditors over the three to five-year plan period. And lawyers of all stripes will certainly get a lot of work out of defining the contours of what is “reasonably necessary” and for the “continuation,” “preservation,” or “operation” of the business. Make no mistake that disjunctive “or” will the be key feature of many a judicial opinion. Imagine a small business bankruptcy of a research and development company with nothing to show but some world-changing tech and a bunch of creditors. Going forward the company may have a viable technology, but it cannot reasonably expect to receive a profit for 3-5 years, let alone "disposable" income. How will the courts grapple with the plan payments for this company, and can it just pay a minimal amount and eliminate all of its debts? To be determined. Likely so.
The SBRA also eliminates many antiquated bankruptcy laws, which often make practitioners have to structure Chapter 11 plans in odd ways that don’t actually serve to benefit anyone. A Chapter 5 debtor does not have to have an “impaired class of non-insider creditors” voting in favor to confirm a plan. A Chapter 5 debtor may pay administrative claims over time under the plan instead of in full on the effective date. A Chapter 5 debtor doesn’t have to comply with the “absolute priority rule” allowing small business owners to keep a stake of the business if the plan does not discriminate unfairly and is fair and equitable to each class of claims and interests. A Chapter 5 debtor also receives its discharge of all unpaid claims after the payments have been made under the 3 or five year plan.
In addition, the SBRA significantly changes the laws for avoiding and recovering preferential payments, requiring that the plaintiff consider a recipient’s potential affirmative defenses under § 547(c) of the Bankruptcy Code before filing a preference action. It also requires preference actions to recover $25,000 or less be brought in the district where the defendant resides, where earlier law required this only for actions seeking less than $13,650. This should save other businesses from having to choose between forking over a bunch of money or fighting a foreign war at great expense.
In sum, the SBRA may serve to be a significant new tool in the arsenal to sort out the affairs of small business debtors. Please contact Michael H. Moody Law, P.A. if we can help you navigate you or your clients’ bankruptcy, judgment collection, or commercial litigation legal affairs.