Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif., has the distinction of filing the first reported opinion on the new small business reorganization provisions of chapter 11 that became effective on February 19. As you might guess, the opinion deals with whether a debtor may convert an existing chapter 11 case to a small business reorganization under Subchapter V of chapter 11, which vastly simplifies the process of confirming a plan.
Judge Clarkson found no impediment to converting an existing chapter 11 case to Subchapter V, so long as conversion would not jeopardize anyone’s “vested rights.”
Robert J. Keach of Portland, Maine, told ABI that “the opinion is correct.” Keach was the co-chair of the ABI commission that recommended the legislation that Congress adopted in the form of the Small Business Reorganization Act of 2019, or SBRA.
The SBRA
The SBRA shot through Congress like a hot knife through butter. On July 23 and August 1, 2019, the bill passed the House of Representatives and Senate on voice votes, respectively, without debate and without amendments. The President signed the bill on August 23. It was effective on February 19. The SBRA is codified at 11 U.S.C. §§ 1181 – 1195.
In an ideal case under the SBRA, a small business debtor can zip through chapter 11 without a creditors’ committee and without a disclosure statement. It is even possible for a debtor to confirm a plan without a vote of creditors. A debtor with aggregate, noncontingent, liquidated secured and unsecured debt less than $2,725,625 is eligible for the SBRA. See Section 101(51D).
The corporate debtor in Judge Clarkson’s case had been in chapter 11 since November 2018, with an amended plan on file since July 2019. Anticipating the effective date of the SBRA, the debtor filed an amended plan under the SBRA on Jan. 30, 2019, using Official Form 425A. At the same time, the debtor filed a motion for authority to amend the chapter 11 petition to elect treatment under the SBRA.
Converting Is Ok; No Motion Is Required
The debtor’s motions were heard by Judge Clarkson on February 20. He filed his opinion and order on February 21, allowing the debtor to proceed under the SBRA.
The debtor’s conversion motion was largely without opposition. Most comments from the U.S. Trustee dealt with practical problems and timing issues in converting to an SBRA.
After discussion in court, it was “conceded by all parties,” Judge Clarkson said, that the statute has no “stated limitations to the application of the SBRA . . . to pending cases.” The U.S. Trustee said there was no prohibition to conversion of a chapter 7 case to an SBRA, according to Judge Clarkson.
Judge Clarkson found no law or rule prohibiting the “resetting or rescheduling” of procedural steps in an SBRA case, such as the initial debtor interview, the Section 341(a) meeting, or the Subchapter V status conference.
If the debtor or “any other party in interest” had “any vested rights” that “would be in jeopardy,” Judge Clarkson said in dicta that “rescheduling would likely be a violation of due process.” Also in dicta, he said that someone with “vested rights” could waive an objection to the “re-setting or rescheduling of such events.”
Judge Clarkson observed that the “primary purpose of the SBRA is to promote successful reorganizations using the tools that are now available under current law.” He therefore “found no legal reason to restrict a pending Chapter 11 case to re-designate to a Subchapter V case, on the facts underlying the Motion.” The arguments against conversion “all have to do with practicality and not legality,” he said.
Citing Bankruptcy Rule 1009(a), Judge Clarkson nonetheless denied the debtor’s motion to authorize conversion to Subchapter V, saying the motion was unnecessary. The rule permits a debtor to amend the petition “as a matter of course at any time before the case is closed.”
Judge Clarkson said that “requiring a debtor to seek leave to amend a petition or schedule is improper, especially in light of Rule 1009.” He therefore ruled that a motion for conversion to Subchapter V “is unnecessary and not required by law.”
Instead, Judge Clarkson said that the debtor should amend the petition to seek relief under Subchapter V, thus invoking “clear procedures for parties” to object. If there is an objection, he said, the “Court may undertake eligibility considerations.”
Once the debtor amends the petition, Judge Clarkson said the court would then “set deadlines appropriate to the implementation of the SBRA.” In that regard, Keach said that “courts should be liberal in extending the plan filing deadlines” in cases that convert to Subchapter V.
Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif., has the distinction of filing the first reported opinion on the new small business reorganization provisions of chapter 11 that became effective on February 19. As you might guess, the opinion deals with whether a debtor may convert an existing chapter 11 case to a small business reorganization under Subchapter V of chapter 11, which vastly simplifies the process of confirming a plan.
Judge Clarkson found no impediment to converting an existing chapter 11 case to Subchapter V, so long as conversion would not jeopardize anyone’s “vested rights.”
Robert J. Keach of Portland, Maine, told ABI that “the opinion is correct.” Keach was the co-chair of the ABI commission that recommended the legislation that Congress adopted in the form of the Small Business Reorganization Act of 2019, or SBRA.
The SBRA
The SBRA shot through Congress like a hot knife through butter. On July 23 and August 1, 2019, the bill passed the House of Representatives and Senate on voice votes, respectively, without debate and without amendments. The President signed the bill on August 23. It was effective on February 19. The SBRA is codified at 11 U.S.C. §§ 1181 – 1195.