Member Article

In February 2020, just prior to the COVID-19 outbreak, the Small Business Reorganization Act of 2019 (Subchapter V) took effect.[1] Subchapter V amends Chapter 11 of the Bankruptcy Code to allow certain individuals and businesses with debts of less than $2,725,625 to file a streamlined Chapter 11 case with the goal to make small business bankruptcies faster and cheaper.[2] 

Subchapter V includes some unique Chapter 11 provisions, such as: (i) appointment of a standing trustee; (ii) only allowing a debtor to propose a plan of reorganization, which must be filed within 90 days of the petition date; (iii) unless court ordered, no unsecured creditor’s committee; (iv) elimination of the rule requiring that new value be given in order for the equity holders of the debtor to retain their equity interest without paying creditors in full; and (v) allowing the modification of certain residential mortgages if the underlying loan was not used to purchase the residence and was primarily used in connection with the business.[3]

Very shortly thereafter, in response to the COVID-19 outbreak, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2020, which, among other things, amended the definition of “debtor” for Subchapter V purposes to increase the debt limitation from $2,725,625 to $7.5 million.[4]

In the wake of these new laws, creative individual debtors have filed under Subchapter V to restructure personal guaranties of defunct business debts. In addition to the $7.5 million debt limitation, in order to qualify as a debtor under Subchapter V, not less than 50% of the debt must have arose from the commercial or business activities of the debtor.[5] Within these parameters, bankruptcy courts have recently found that individuals with debts comprised of at least 50% of business debts, such as individual guaranties, qualify to be small business debtors under Subchapter V.[6]

For instance, the Bankruptcy Court for the Eastern District of Louisiana held that individual debtors’ guaranties of business loans constituted business debt such that the debtors qualified to be small business debtors under Subchapter V.[7] The court found that because the majority of the debtors’ debts arose from operation of the debtors’ currently operating businesses, as well as their now defunct businesses, and were in an amount below Subchapter V’s statutory debt limits, the debtors qualified under Subchapter V.[8]

Following the CARES Act, businesses received additional COVID-19 relief with the enactment of the Consolidated Appropriations Act, 2021 (CAA) on December 27, 2020, which includes multiple amendments to the Bankruptcy Code designed to assist businesses.[9]

Prior to the enactment of the CAA, the Small Business Administration (SBA), which administers the Paycheck Protection Program (PPP), opposed PPP loans for debtors and promulgated rules denying bankruptcy small businesses access to PPP loans.[10] In response, the CAA now expressly permits debtors in Subchapter V of Chapter 11 cases (as well as in Chapter 12 and 13 debtors) to apply for a PPP loan[11]. However, frustrating for larger businesses, debtors in traditional Chapter 11 cases were not included and, therefore, would likely continue to be denied PPP loans in bankruptcy.[12]

Another benefit to Subchapter V debtors is the CAA’s amendment to section 365(d) of the Bankruptcy Code, which allows the court to extend the debtor’s time to perform under an unexpired lease of non-residential property up to 120 days from the petition date if the debtor is experiencing or has experienced a hardship due to COVID-19.[13]

The CAA also amends section 365(d)(4)(A) of the Bankruptcy Code – for all debtors not just Subchapter V – to extend the deadline for a debtor-tenant to assume or reject a non-residential real property lease by an additional 90 days to a total of 210 days after the petition date.[14] Section 365(d)(4)(B)(i) of the Bankruptcy Code already allows the court to extend the deadline to assume or reject a lease, for cause, by an additional 90 days. Therefore, a debtor could potentially have as many as 300 days to decide whether to assume or reject an unexpired commercial lease without the consent of the landlord.

Additionally, the CAA aims to incentivize landlords and vendors to offer flexible payment terms to debtors by amending the preference provisions of section 547 to provide that any “covered payment of rental arrearages” or “covered supplier arrearages” cannot be avoided as preferences.[15] In order to qualify for the exemption, the debtor and the counterparty must have entered into a lease or contract before the petition date, the lease or contract must have been amended on or after March 13, 2020, and such amendment must have deferred or postponed payments due under the lease or contract.[16]

Subchapter V, the CARES Act and the CAA provide multiple new avenues for certain businesses and individuals to restructure their debts in a Chapter 11 case. The CARES Act is currently set to expire on March 26, 2021, however, new bipartisan legislation was recently introduced to extend the CARES Act Subchapter V debt limitation increase to March 27, 2022.[17] The CAA provisions discussed in this article are all scheduled to expire on December 27, 2022.[18]

Notes

[1] See Pub. L. No. 116-54 (2019).

[2] See 11 U.S.C. § 101(51D).

[3] See 11 U.S.C. §§ 1181–1195.

[4] See Pub. L. No. 116-136 (2020).

[5] See 11 U.S.C. § 1182(1)(A).

[6] See e.g., In re Wright, 2020 WL 2193240, at *3 (Bankr. D.S.C. Apr. 27, 2020) (individual debtor with 56% of debt arising from defunct businesses qualified as small business debtor under Subchapter V).

[7] See In re Blanchard, 2020 WL 4032411, at *3 (Bankr. E.D. La. July 16, 2020).

[8] Id. at *2.

[9] See Pub. L. No. 116-260 (2020).

[10] See 85 Fed. Reg. 23,450, 23,451 (Apr. 28, 2020).

[11] See Pub. L. No. 116-260 (2020).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] See Pub. L. No. 116-136 (2020).

[17] See Grassley, Durbin Introduce Bipartisan Legislation to Extend CARES Act Bankruptcy Relief Provisions (senate.gov).

[18] See Pub. L. No. 116-260 (2020).