This summer saw the passage of new federal statutes that amend the Bankruptcy Code. Specifically, On August 23, 2019, President Donald Trump signed into law the Family Farmer Relief Act of 2019 (the “FFRA”), and the Small Business Reorganization Act of 2019 (the “SBRA”).  

Family Farmer Relief Act of 2019

The FFRA is perhaps the most significant change to the Bankruptcy Code in that it increased the debt eligibility limit applicable to agribusinesses. Previously, the debt limit for a family farmer to be eligible for Chapter 12 relief was approximately $4.4 million.  Due to the FFRA, the debt limit increased to $10 million. Chapter 12 of the Bankruptcy Code is designed to provide debt relief to family farmers with regular income. The goal of the increased debt limit is to make Chapter 12 relief available to more family farmers who would have otherwise had to seek bankruptcy relief under the more onerous and expensive Chapter 11.

Small Business Reorganization Act of 2019

Unlike the FFRA, the SBRA did not go into effect immediately.  Rather, the SBRA will take effect in February, 2020. The SBRA will create a new subchapter within Chapter 11 of the Bankruptcy Code for small business debtors. While provisions for small business debtors within the other subchapters of Chapter 11 remain, a small business debtor may elect to proceed under the new subchapter instead. Furthermore, the debt limit for a small business debtor under either option remains the same (approximately $2.5 million). However, the SBRA amends the definition of a small business debtor. The new definition requires that not less than 50% of the debtor’s debts arose from the debtor’s commercial or business activities. 

The New Chapter 11

This new subchapter includes significant changes to a small business debtor’s Chapter 11 case and streamlines the requirements for the plan proposal and confirmation processes. Specifically:

Trustee Duties

• The most substantial structural changes under the SBRA to a small business debtor’s Chapter 11 case are that no committees are to be appointed absent cause and a trustee will be appointed in each small business debtor’s case as a matter of course to perform certain administrative and supervisory duties. For example, the trustee duties will include:
  • appearing and being heard regarding the value of property subject to a lien, confirmation or modification of the plan, or sale of property of the estate;
  • facilitating the development of a consensual plan;
  • ensuring the debtor commences making timely payments required by a plan;
  • examining and potentially objecting to proofs of claim; and
  • opposing the debtor’s discharge, if advisable.

Plan Filing Deadline

• Under current Chapter 11, a small business debtor has the exclusive right to file a plan during the first 180 days of the case and must file a plan within the first 300 days of the case to avoid dismissal. After filing the plan, the debtor has 45 days to obtain confirmation of the plan, unless extended by court order.  Under the SBRA, the debtor will have the exclusive right to file a plan, though it must be filed within the first 90 days of the case.  Additionally, there will no longer be a fixed deadline to obtain confirmation. 

Confirmation Requirements

• The confirmation requirements are changing. Specifically, the SBRA contains two key differences for cramdown plans. First, small business debtors are no longer required to have an accepting impaired class to confirm a cramdown plan. Instead, the plan need only not discriminate unfairly and be fair and equitable with respect to classes of impaired claims and interest. Second, the absolute priority rule is absent from the SBRA. As a result, equity holders can retain interests under the plan without paying higher-priority classes in full.

Preference Litigation and the SBRA

The SBRA also includes two provisions that specifically pertain to preference litigation. Historically, it has been the plaintiff’s burden to prove the elements of a preference under § 547(b), and the defendant’s burden to prove affirmative defenses under § 547(c).  Moving forward, the SBRA amends § 547(b) to provide that the trustee or debtor-in-possession:

“may, 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), avoid any transfer of an interest of the debtor in property.”

The transfer still must meet the enumerated elements of a preferential transfer. In other words, the SBRA requires a trustee to take into account a target defendant’s potential affirmative defenses when determining whether to exercise the authority to commence an action to recover a preference. 

The second provision addresses the venue where such preferential transfer actions might be commenced.  The current law requires a preference action to be commenced in the district where the defendant resides if the amount sought to be recovered was less than $13,650. The SBRA increases the monetary threshold to $25,000.

 

Michael Pugh is an experienced associate with TOKN’s Bankruptcy, Business Law, and Litigation teams. To learn more about Michael, please visit his profile here. To contact Michael, please see his email above.