Coronavirus Stimulus Bill To Expand Access to the Small Business Reorganization Act of 2019

By: Bob Keach and Sam Anderson

Late in the evening of March 25, the Senate passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the growing economic impact of the coronavirus pandemic. As has been widely reported, the bill includes much-needed loan and other programs to assist small and mid-sized companies in surviving the impact of the crisis. (Stay tuned for alerts on those programs!) For those companies for which these programs will be insufficient, the bill also includes critical reforms to Chapter 11 of the Bankruptcy Code that will allow cash-strapped businesses to survive this downturn and reorganize successfully.

In addition to a $2 trillion economic stimulus package, the CARES Act, once passed in the House and signed by the President, will amend the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold from $2,725,625 of debt to $7,500,000 of aggregate debt (exclusive of loans by shareholders or other insiders) for businesses filing for chapter 11 relief and electing treatment under the new Subchapter V of Chapter 11 of the Bankruptcy Code. This increased debt threshold will provide small businesses greater access to the SBRA’s benefits while businesses grapple with the impact of COVID-19.

The Small Business Reorganization Act of 2019

The SBRA took effect on February 19, 2020, and added a new Subchapter V to Chapter 11 of the Bankruptcy Code to provide a streamlined, efficient and cost-effective opportunity for small businesses to successfully reorganize under Chapter 11.  This act was a consequence of the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 co-chaired by Bernstein Shur’s Bob Keach, who also testified before the relevant Senate and House subcommittees in support of the SBRA.

Here are a few of the significant provisions for Subchapter V cases, as amended by the CARES Act:

• Debtors with non-contingent (secured and unsecured) totaling not more than $7,500,000 (excluding insider debt) may opt for Subchapter V relief.
• The SBRA provides that the company’s management remains in control of the company, absent unusual circumstances, throughout the case. The SBRA, like other chapter 11 cases, assumes a debtor-in-possession. The United States Trustee will appoint what has been referred to as a “consulting” trustee in every Subchapter V case, but the Subchapter V trustee does not operate the business and does not investigate the debtor or its operations (unless the court orders the trustee to do so), but rather is primarily responsible for assisting the debtor in formulating a plan, negotiating with creditors, and otherwise ensuring a successful reorganization. Except in highly unusual circumstances, the trustee will not hire professionals, thus saving costs.
• A creditors committee is not appointed in a Subchapter V case, unless ordered by the court for cause. Again, this reduces the costs of Subchapter V cases.
• Within 60 days of filing for bankruptcy, the bankruptcy court will hold a status conference to determine how best to proceed with the case, permitting the court to customize proceedings as needed.
• Only a debtor may file a plan, and the debtor must file its plan within 90 days of the bankruptcy filing, unless extended due to circumstances for which the debtor should not be held accountable. Given the permitted structure of plans, this deadline will not be problematic for the vast majority of debtors.
• Certain requirements for the contents and confirmation of a plan are modified through the SBRA, including provisions that allow court approval of the plan even if creditors object or vote to reject the plan, and which enable the owners of the company to retain their interests without paying creditors in full or obtaining their consent.

Bernstein Shur’s Business Restructuring and Insolvency Group Is Ready To Assist

The Business Restructuring and Insolvency Group (BRI) represents clients throughout the United States. Within ME, New Hampshire, and New England, our group plays a significant role in the majority of business bankruptcy and Chapter 11 cases filed, with an emphasis on representing debtors in Chapter 11. BRI attorneys represented the debtors in the first two Subchapter V cases filed in ME days after the SBRA took effect. Additionally, BRI has access to professionals from other groups within Bernstein Shur, including litigation, real estate, corporate planning, tax law, estates, labor relations, environmental law, governmental relations, and many other fields. We are ready to help our clients through these extraordinary times.