Insights

Business Restructuring Review

Legislative Update

On August 23, 2019, President Trump signed into law four pieces of bankruptcy legislation designed to help financially distressed small businesses, disabled veterans, National Guard and reservists, and family farmers. Those laws are the "Small Business Reorganization Act of 2019," Pub. L. 116-54, 133 Stat 1079 (Aug. 23, 2019) (H.R. 3311) (the "SBRA"); the "Honoring American Veterans in Extreme Need Act of 2019," Pub. L. 116-52, 133 Stat 1076 (Aug. 23, 2019) (H.R. 2938) (the "HAVEN Act"); the "National Guard and Reservists Debt Relief Extension Act of 2019," Pub. L. 116-53, 133 Stat 1078 (Aug. 23, 2019) (H.R. 3304) (the "NGRDREA"); and the "Family Farmer Relief Act of 2019," Pub. L. 116-51, 133 Stat 1075 (Aug. 23, 2019) (H.R. 2336) (the "FFRA"). The bipartisan bills passed the U.S. House of Representatives in late July and the U.S. Senate on August 1, 2019.

Small Business Reorganization Act of 2019

Effective in February 2020 (180 days after August 23, 2019), the SBRA adds a new subchapter V to chapter 11 of the Bankruptcy Code. The change is intended to provide a better path for small businesses to restructure successfully, reduce liquidations, preserve jobs, and increase creditor recoveries, while recognizing the value provided by small business owners. Among other things, the SBRA raises the debt limitation for a "small business debtor" (11 U.S.C. § 101(51D)) to include any person in commercial or business activity with aggregate noncontingent liquidated secured and unsecured debts as of the bankruptcy petition date of not more than $2,725,625. It is estimated that approximately 50% of chapter 11 cases could qualify for subchapter V treatment. The law was inspired by the work of the National Bankruptcy Conference and the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11.

Prominent features of new subchapter V include:

  • The appointment of a trustee in every small business case as a fiduciary for creditors, generally in lieu of the appointment of a creditors' committee. However, the trustee will, in most cases, not operate the debtor's business.
  • The debtor's exclusive right to propose a chapter 11 plan, which it must do within 90 days after entry of the order for relief, unless the court extends that time "if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable."
  • More debtor-friendly rules governing the contents of a chapter 11 plan as well as the requirements to confirm a consensual or nonconsensual plan.
  • An amendment to section 547(b) of the Bankruptcy Code—the preference avoidance provision—to add a "due diligence" requirement that, in all bankruptcy cases (not merely subchapter V cases), the avoidance claim asserted by the trustee must be "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under subsection (c)." The change does not specify how proof of the trustee's compliance with this requirement is to be established.
  • A change to the venue requirement of 28 U.S.C. § 1409(b), which requires a trustee to commence small preference cases in the district court for the district where the defendant resides, to increase the dollar threshold to $25,000.

Honoring American Veterans in Extreme Need Act of 2019

The HAVEN Act excludes Veterans Administration and Department of Defense disability payments from the monthly income calculation used for means testing to determine whether a debtor is eligible to file a chapter 7 petition. The bill was included in the National Defense Authorization Act, which passed on June 27, 2019.

National Guard and Reservists Debt Relief Extension Act of 2019

The NGRDREA extends for four years, through December 18, 2023, the exemption from certain bankruptcy means testing for members of the National Guard and reservists of the U.S. Armed Forces.

The Family Farmer Relief Act of 2019

The FFRA updates chapter 12 of the Bankruptcy Code to reflect the economic challenges confronted by distressed U.S. farmers. Chapter 12 was added to the Bankruptcy Code in 1986 to provide reorganization relief to family farmers and fishermen. Farm sizes have increased significantly since 1986, even though net farm income has declined since 2013. A Federal Reserve Bank of Chicago survey released on August 15, 2019, reported that the percentage of troubled farm loans reached a 20-year high in the second quarter of 2019. The FFRA raises the debt limitation for chapter 12 debtors from approximately $4 million to $10 million.

 

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