Increasingly Popular SBRA Permits Restructuring Personal Guarantees of Corporate Debt

Another court has held that personal guarantees of a defunct business’s debts will suffice for an individual to qualify as a debtor under the Small Business Reorganization Act, or SBRA, which is codified primarily at 11 U.S.C. §§ 1181 – 1195.

In the case before Bankruptcy Judge Meredith S. Grabill of New Orleans, the husband and wife debtors had been in chapter 11 for nine months. In April, the U.S. Trustee filed a motion to dismiss or convert the case to chapter 7.

The debtors responded a week later by amending their petition to proceed under the SBRA, also known as subchapter V of chapter 11. Ideally, a small business debtor can confirm a plan under the SBRA 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. The SBRA became effective on February 19.

The U.S. Trustee objected to proceeding under the SBRA, citing “no real progress” in the chapter 11 case. A creditor also objected, claiming that the debtors did not qualify under the definition of a “small business debtor” in Section 101(51D)(A).

To be eligible for subchapter V, Section 101(51D)(A) provides that the debtor must be “a person engaged in commercial or business activity” who has not more than $7.5 million in secured and unsecured debt, “not less than 50 percent of which arose from the commercial or business activities of the debtor.”

Judge Grabill said that more than $1.1 million of the debtors’ debts arose from personal guarantees of debts owing by separately incorporated businesses in which they had interests. Their consumer debts were less than $300,000.

The objecting creditor submitted that “a person engaged in commercial or business activity” means someone who is “currently” engaged in business. The subchapter V trustee, however, argued that “engaged” does not mean “currently engaged.”

Judge Grabill agreed with In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020), where Bankruptcy Judge Helen B. Burris of Spartanburg, S.C., held that restructuring the debt of a defunct business is enough to qualify. To read ABI’s report on Wright, click here.

Judge Grabill held that the debtors qualified as small business debtors under the SBRA because their debts “stem from [the] operation of both currently operating businesses and non-operating businesses, and those debts do not exceed the SBRA’s debt limit.”

The U.S. Trustee primarily objected to treatment under the SBRA in view of “practicality and scheduling issues.”

Quoting In re Progressive Solutions Inc., 18-14277, 2020 WL 975464 at *5 (Bankr. C.D. Cal. Feb. 21, 2020), Judge Grabill wrote that “‘there are no bases in law or rules to prohibit a resetting or rescheduling of these procedural matters.’” Judge Grabill was referring to rescheduling the status conference and the deadline for filing a plan under the SBRA.

However, Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif., added dicta in Progressive by saying there could be a violation of due process rights if a creditor had “vested rights” lost by redesignation under subchapter V. To read ABI’s report on Progressive, click here.

Judge Grabill said she had allowed creditors to come forward laying out vested rights that would be lost. None did, so she denied the motion to dismiss or convert.

N.B.: Judge Grabill was editor-in-chief of the Tulane Law Review and clerked on the Fifth Circuit.

Statistics

Subchapter V is already popular. ABI’s Edward Flynn reports that 603 cases have proceeded under subchapter V since the SBRA became effective in February. They are being filed at a rate of about 30 or more cases per week, he said.