Want to Switch a Floundering Chapter 11 to the SBRA? No problem.

by Nancy B. King

The new Small Business Reorganization Act (“SBRA”) went into effect February 19, 2020 and has already been amended under the CARES Act. The SBRA streamlines the Chapter 11 process, making it less expensive and quicker for small businesses needing Chapter 11 relief. Some of its key provisions include faster deadlines, a Trustee to facilitate consensual confirmation, no committees, no separate disclosure statement, no absolute priority rule and modification of home mortgages that guarantee a business debt. For more on the SBRA nuts and bolts, see my article Small Business Reorganization Act: Streamlined Chapter 11 Relief For Businesses and Individuals.

SBRA Decisions Focus on Re-Designation

It is still too early for most of the new provisions of the SBRA to be judicially test-driven. However, this is likely to change, especially with Congress raising the eligibility debt limits from $2.75 to $7.5 million for one year as part of the COVID-19 stimulus package. Thus far, almost all of the SBRA judicial decisions have focused on the issue of whether a pending Chapter 11 case can be amended to re-designate to proceed as an SBRA Chapter 11 to take advantage of the new provisions.

In re Twin Pines Allows Pending Chapter 11 Debtor to Elect Under Subchapter V

The Courts that have examined this issue appear unanimous that Chapter 11 cases pending prior to the enactment of the SBRA can amend the Chapter 11 petition to be designated as SBRA Chapter 11s. In In re Twin Pines LLC, 19-10295 (Bankr. D.N.M. April 30, 2020), a business filed a small business Chapter 11 on February 12, 2019 and filed a small business plan and disclosure statement on the 300th day after the order for relief (the last day allowed by 11 U.S.C. § 1121(e)). The Debtor did not obtain confirmation within the 45 days required by 11 U.S.C. § 1129(e), and on January 31, 2020 the largest creditor filed a motion to dismiss the case alleging gross mismanagement, failure to comply with court orders, and use of cash collateral without permission.

The SBRA became effective on February 19, 2020 and the Debtor filed a “Motion Selecting Subchapter V Treatment and Requesting Leave to File an Amended Petition” contending it could successfully reorganize under the new provisions. The Debtor filed the Amended Petition electing the SBRA pursuant to Federal Rule of Bankruptcy 1009. The United States Trustee objected that: (1) the debtor failed to meet deadlines in the small business case, (2) Subchapter V is unavailable as a matter of law because the deadlines for the SBRA status conference and plan have already passed; and (3) the Subchapter V Trustee could not attend the initial debtor interview or meeting of creditors required to occur within 40 days of the order for relief.

Despite the Debtor’s failure to meet the deadlines under the small business debtor provisions of Chapter 11 and allegations of mismanagement, the Court held that the Debtor can amend the petition to elect under the SBRA. The Court held that even though the deadlines for the Subchapter V status conference and the plan of reorganization had passed, this did not prevent the amended petition because the Court “may extend the period” if the need to extend is attributable to circumstances for which the debtor should not justly be held accountable.” In this case, those circumstances were the unavailability of the SBRA until February 19, 2020, but the Court noted its discretion in such matters. The Court also ruled that the change to the SBRA provisions did not alter the date of the order for relief, and all deadlines that expired could either be extended or no prejudice resulted. In the end, the Court overruled all of the United States Trustee’s objections and allowed the amended petition to re-designate as an SBRA Chapter 11.

Other Bankruptcy Courts Agree with Twin Pines

The Twin Pines case is not anomaly. At least five other courts that have considered the issue on differing facts have held similarly. In re Ventura, --- B.R. ---, 2020 WL 1867898 (Bankr. E.D.N.Y. Apr. 10, 2020) (Court permitted the debtor to elect treatment under the SBRA 15 months after filing a Chapter 11 reorganization that was on the verge of failure and where plan’s sole purpose was to take advantage of mortgage modification only available under the SBRA); In re Bello, No. --- B.R. ----, 2020 WL 1503460 (Bankr. E.D. Mich. Mar. 27, 2020) (“The Court agrees with the reasoning and holding in the recent case of In re Moore Properties of Person Cnty. LLC, finding a debtor in a Chapter 11 case that was pending before the February 19, 2020 effective date of the SBRA could elect to proceed under Subchapter V.); In re Progressive Sols., Inc., Debtor., 2020 WL 975464, at *5 (Bankr. C.D. Cal. Feb. 21, 2020) (“To recap, this Court has found no legal reason to restrict a pending Chapter 11 case to re-designate to a Subchapter V case,” but denying motion on procedural infirmity); In re: Moore Properties of Pers. Cty., LLC, 2020 WL 995544 (M.D.N.C. Feb. 28, 2020) (“the application of subchapter V “does not alter the rubric under which debtors may affect pre-petition contractual rights of creditors, much less vested property rights,” and therefore may be applied in Chapter 11 cases pending at the time of the SBRA’s effective date); In re Body Transit, Inc., 613 B.R. 400, 406 (Bankr. E.D. Pa. 2020) (“I agree with the procedural analysis in Progressive Solutions. Consequently, based on Fed. R. Bankr. P. 1009, I hold that a small business debtor has the right to amend its Chapter 11 petition to elect to proceed under subchapter V and, once the amendment has been filed, the case should proceed under subchapter V until an objection is filed timely and granted by the court.”).

Conclusion

Three months into the SBRA, and about two months into the pandemic, much remains to be decided under the SBRA. However, it appears that pending Chapter 11s may have a new exit strategy besides confirmation, conversion or dismissal. Instead, where eligible, amendment to designate under Subchapter V is also an option.

Prior to becoming a partner with EmergeLaw, PLC, Nancy King served for 25 years as a career judicial law clerk to the Honorable George C. Paine, II (retired) and the Honorable Randal S. Mashburn. She has extensive experience in all aspects of Chapter 11 cases, business bankruptcies, and the practice of law in the U.S. Bankruptcy Court for the Middle District of Tennessee.

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