The Small Business Reorganization Act of 2019
Friday, August 9, 2019
The Small Business Reorganization Act of 2019:
Conquering Obstacles and Cleaning Up Small Business Reorganizations
By: Ken Hill – Quilling, Selander, Lownds, Winslett & Moser, P.C
Congress recently passed the Small Business Reorganization Act of 2019, which will simplify and streamline small business reorganizations. President Trump is expected to sign it into law shortly.
The Act will add a new subchapter V to the Bankruptcy Code and make conforming changes to a number of existing sections. The definition of small business debtor under section 101(51D) would have some minor changes, but the aggregate debt limit of $2,566,050 would not change. A debtor that qualifies as a small business debtor would have the option to proceed under the new subchapter V or stick with the existing provisions of chapter 11 applicable to small business debtors. The key points of the Act are:
Debtor’s Professionals. The disinterestedness requirement under section 327(a) is relaxed so that a professional is not disqualified for employment solely because the professional holds a prepetition claim, as long as the claim is less than $10,000.
Trustee. The U.S. Trustee will appoint a trustee for every case under new subchapter V, either through one or more standing trustees in the region like chapter 13 cases or on a case-by-case basis like chapter 7 cases. The subchapter V trustee will have a number of important duties, including accounting for the debtor’s property, appearing at an initial status conference and all significant hearings, facilitating the development of a consensual plan, supervising and controlling property and funds to be distributed under the plan (or actually making the distributions), and examining and objecting to claims. Some of the debtor’s duties as debtor in possession under sections 704(a) and 1106(a) will be reassigned to the trustee. The trustee will remain actively involved until the plan is substantially consummated. The debtor will be required to pay the trustee’s compensation, which will be calculated the same way as for a chapter 13 trustee.
Creditors Committee. No creditors committee will be appointed unless the court orders otherwise for cause.
Property of the Estate. Property of the estate includes earnings and property acquired post-petition and post-confirmation until the case is closed, dismissed, or converted.
Plan. Only the debtor can file a plan; competing plans are not allowed. The debtor must file a plan within 90 days after filing the case. The court can extend that deadline, but only for matters for which the debtor should not justly be held accountable. The plan must include a history of the debtor’s business, a liquidation analysis, and projections.
Disclosure Statement. No disclosure statement is required unless the court orders otherwise. If the court requires a disclosure statement, the existing disclosure requirements for small business cases in section 1125(f) will apply.
Confirmation. An impaired consenting class of non-insider creditors is not required for confirmation. Administrative expenses can be paid over time through the plan rather than having to be paid in full on the effective date. The absolute priority rule is eliminated for cramdown, which will allow existing owners to retain their full ownership without giving any new value, but only if the plan provides for the debtor to distribute all of its projected disposable income over at least three years from the date the first payment is due under the plan (or property having a value of at least that amount). The cramdown requirements for treatment of secured claims under section 1129(b)(2)(A) will still apply.
Discharge. The discharge is not granted until the debtor completes all payments due within the first three years of the plan or such longer period not to exceed five years as the court may fix.
The Small Business Reorganization Act of 2019 will become effective 180 days after it is signed into law and will open the door for a lot more small businesses to reorganize under chapter 11. To see the full text of the Act, go to www.congress.gov and search “H.R. 3311.”
About Ken Hill – Quilling, Selander, Lownds, Winslett & Moser, P.C
Ken Hill, pictured in the trenches of a Tough Mudder obstacle course, is a shareholder with the law firm of Quilling, Selander, Lownds, Winslett & Moser, P.C., where he practices bankruptcy law and general litigation. He is Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization. When he is not practicing law, Ken enjoys mountain biking, wakeboarding, traveling, and spending time with his wife Kim and their two dachshunds, Snickers and Hershey.