Task Force Reports on Ways Courts Can Assist Small Businesses in Financial Distress; Central District of California Proposes Ideas to Streamline Cases, Educate Community

A local group of bankruptcy judges and insolvency professionals has published recommendations for ways that the U.S. Bankruptcy Court for the Central District of California can address obstacles for small businesses needing to file for chapter 11, including educating about the availability of subchapter V.[1] In late 2019, Chief Bankruptcy Judge Maureen A. Tighe started organizing the Small Business Reorganization Task Force to explore difficulties faced by small businesses, whose cases constitute most of the court’s chapter 11 docket, and that are critical to the economic health of Central District’s seven-county area.

The Task Force started its work in February 2020, shortly before the Small Business Reorganization Act of 2019 (SBRA) took effect. Little did task force members know that March 2020 would bring a shutdown of many businesses and reduce in-person contact due to the COVID-19 pandemic. The pandemic not only caused significant and immediate economic impact on small businesses in the Central District — forcing many to shut their doors to the public almost overnight — but it also roiled economies around the world. These unprecedented developments galvanized the Task Force’s resolve to implement the SBRA’s streamlined reorganization procedures in the Central District and make this new law work for as many debtors and creditors as possible.

The Task Force’s more than two dozen members, from a wide array of backgrounds, divided into committees and analyzed different facets of the issues and barriers confronted by financially troubled small businesses in terms of court access, the SBRA-related local rules and forms, and the general “streamlining” of small business reorganizations. The published recommendations included the following components:

• Outreach and Education Model: The Task Force recommends immediate and continuous outreach presentations to chambers of commerce and other business and community organizations concerning bankruptcy and, in particular, the SBRA. A PowerPoint presentation was prepared that might be helpful in this process — explaining in plain and clear terms how bankruptcy works and what nonbankruptcy or “workout” alternatives exists.
• Education Contacts: An extensive list of local organizations to contact for educational presentations related to the SBRA was included. Individuals and bar associations might use this list to develop outreach programs, with the goal of increasing access to this resource and spreading general awareness of some of the legal options for businesses in financial distress.
• Local Forms: The Task Force prepared new forms related to the SBRA, or subchapter V, including a new local status conference form, the “Subchapter V Status Report,” which is already posted on the court’s website as an optional form. In addition, the Rules and Forms Subcommittee proposed a Notice of Subchapter V Trustee’s Fees as an optional form.
• New Local Rules: The Task Force drafted four new local rules related to the SBRA. Specifically, the Task Force recommends new rules to (1) implement Interim Rule 2015’s post-petition, preconfirmation financial reporting duties of the subchapter V debtor; (2) provide a deadline for secured creditors to make an “1111‌(b) election” in a subchapter V case; (3) implement the SBRA’s post-confirmation reporting requirements under either a consensual or nonconsensual plan; and (4) implement the post-confirmation administration and closing of the estate under either a consensual or nonconsensual plan confirmed under the SBRA.
• Amended Local Rules: The Task Force drafted amendments to seven different existing local rules to ensure that the Central District’s rules comport with the SBRA. The Task Force recommended amending the rules governing requirements for chapter 11 debtors in possession, chapter 11 trustees and subchapter V trustees; the bar date in chapter 11 cases; disclosure statements; chapter 11 plan-confirmation and post-confirmation requirements; final decree and the closing of a chapter 11 case; duties of a debtor at a meeting of creditors; and the sale, use or lease of estate property.
• Systemic Issues: The Task Force identified numerous systemic issues, including attorney expertise in small business cases; fostering more bench/bar coordination to support educational practicums; venue reform; improving electronic CM/ECF noticing procedures and functionality; improving access to mediation; and the employment of, and market for, valuation professionals and turnaround experts in small business cases.

Chief Bankruptcy Judge Tighe, who also chairs the Task Force, hopes that the business and insolvency professionals in the community will use the outreach materials to educate businesses in financial distress. The proposed new local rules and forms have already been submitted for approval to the court, which should go into effect this year. “Small businesses in financial distress have the Court’s attention; we will use these recommendations to better address the increasing need for bankruptcy relief as a result of the COVID-19 pandemic,” Chief Bankruptcy Judge Tighe said.

The Central District is the largest bankruptcy court in the U.S., and small businesses with liabilities under $7.5 million make up approximately 95 percent of its chapter 11 cases. In 2019, the court handled 420 chapter 11 cases, of which 399 were small businesses.

The Central District is also large geographically, covering approximately 40,000 square miles and containing more than 400,000 small businesses. But these businesses vary across each of its five court divisions. For example, the Los Angeles and San Fernando Valley Divisions have numerous entertainment-related businesses and “gig” industries. The Riverside Division small businesses are concentrated heavily in manufacturing and retail. With such volume and diversity, the Task Force’s central recommendations are educating the community about the SBRA, and improving ways the court handles the SBRA cases.

Chief Bankruptcy Judge Tighe described the SBRA’s goal as obtaining the best return for both debtors and creditors without running up expensive litigation costs. As she explained, “while we can’t find funds where there are none, we can be as effective as possible in marshalling the resources left in a financially distressed business. We have a wide variety of talented insolvency professionals in our community, and we know they are ready to help as many small businesses as possible survive this pandemic.”

The Task Force has already obtained funding for mediation training for the trustees who will be appointed in the SBRA cases, and it hopes that the speedy resolution of disputes between small business owners and their creditors will increase the chances of recovery for all involved. Similarly, the report recommends that bar associations develop lists of valuation experts and small business turnaround consultants who can assist in these cases. The report is posted on the court’s website.[2]