The Small Business Reorganization Act of 2019 (SBRA) went into effect on February 19, 2020. The SBRA created Subchapter V within Chapter 11 of the Bankruptcy Code with the goal of providing “main street” business debtors with a more efficient manner of restructuring their debts. So, after a pandemic-filled year and a half, what have we learned about Subchapter V? Davenport Evans Lawyer Anthony M. Hohn explains.
- Debtors Are Using It
In the Eighth Circuit, which includes South Dakota, 43.5 percent of all Chapter 11 filings were Subchapter V cases. Did COVID-19 skew those numbers because more businesses were in financial distress? That remains to be seen. The CARES Act made more businesses eligible for Subchapter V by increasing the debt limit from around $2.7 million to $7.5 million. The debt limit was set to return to its original level after one year, but was extended until 2022 with the enactment of the COVID-19 Bankruptcy Relief Extension Act. While Subchapter V has been popular with business debtors, it will be interesting to see if filings decrease when the debt limit returns to its original level.
- Eligibility is Broad
In general, Subchapter V debtors (1) have to be engaged in a commercial or business activity; (2) have secured or unsecured “non-insider” debt of not more than $7.5 million; and (3) 50% of the debt has to have arisen from commercial or business activities. Thus far, courts have been quite liberal in applying those requirements. Creditors have been largely unsuccessful in challenging a debtor’s ability to utilize the debtor-friendly Subchapter V.
- Debtors “Absolutely” Like it
There are numerous benefits for debtors in Subchapter V cases, the most significant of which is elimination of what is known as the “absolute priority rule.” In a typical Chapter 11 case, a dissenting class of unsecured creditors must be paid in full (with some exceptions) before equity holders are paid. Subchapter V eliminated that rule, meaning the court may confirm a plan over the objection of unsecured creditors as long as all projected disposable income over a certain time period will be applied to the plan. This allows owners to continue managing the business and reaping the benefits during the pendency of the bankruptcy case and plan. In addition, there is no mandatory appointment of a creditor committee, no requirement to file a disclosure statement, the exclusive right of the debtor to file the plan, the ability to cram down secured debt on a principal residence, and the possibility of confirming a plan despite all classes of creditors rejecting the plan. The list of benefits to debtors goes on. There is no wonder why debtors have largely jumped at the chance to file Subchapter V cases when eligible.
A year and a half after enactment of the SBRA, it appears Subchapter V cases are here to stay. Davenport Evans is here to assist you with your Subchapter V questions, as well as all of your other creditors’ rights issues. Contact a Davenport Evans lawyer at 605-336-2880 or [email protected].
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.