The Small Business Reorganization Act of 2019, also known as SBRA (Pub. L. No. 116-54), became effective on Feb. 19, 2020. This legislation allows a small business debtor to choose, during the filing process, to proceed under subchapter V within chapter 11. A primary legislative goal behind the SBRA is to expedite the reorganization process for small businesses by enabling them to confirm a plan with the aid of a private trustee, specifically a subchapter V trustee.[2] The key provisions of the SBRA aim to enhance a debtor’s capacity to negotiate a successful reorganization while maintaining control of its business.[3] Additionally, the legislation seeks to minimize unnecessary procedural burdens and costs by eliminating such requirements as the creditors’ committee and disclosure statement for the reorganization plan.[4]
In chapter 11 bankruptcy, the acceptance of a plan by secured creditors is crucial for determining compliance with the “cramdown” provisions of § 1129(b). If a class of creditors is both unaccepting and impaired, the bankruptcy court can only confirm the plan if at least one other impaired class has accepted it.[5] However, subchapter V cases, which are governed by 11 U.S.C. § 1191, have their own specific cramdown criteria. Section 1191(a) provides that “[t]he court shall confirm a plan under this subchapter only if all of the requirements of section 1129(a) ... are met.”[6] However, § 1191(b) allows confirmation even if paragraphs (8), (10) and (15) of § 1129(a) are not met, provided the plan is “fair and equitable” for each impaired nonaccepting class.[7] Section 1191(c) defines “fair and equitable” under nonconsensual plans, incorporating discretionary and mechanical criteria.[8]
Notably, subchapter V allows cramdown confirmation without the satisfaction of § 1129(a)(10). As such, confirmation is possible in subchapter V cases, even if no impaired class of creditors accepts the plan. The trustee may still object to confirmation if criteria in § 1191(b) and (c) are not met in cramdown cases.[9]
There are inevitably cases that involve creditors who may be unsophisticated, negligent or apathetic. For those who are apathetic or negligent, a swift bankruptcy process that relies on the discretion of the court and the trustee to safeguard creditors’ interests might be deemed reasonable and efficient. However, when dealing with unsophisticated creditors, particularly in the context of subchapter V, an ethical dilemma arises: Is prioritizing reorganization over due process justified?
Due process is a fundamental right embedded in the U.S.’s foundational documents, and legal professionals are trained on its procedural and substantive requirements. Chapter 11 bankruptcy proceedings are intricate mechanisms designed to facilitate the financial restructuring of businesses facing insolvency. It is not rare that creditors, even secured creditors, that are owed large sums of money lack the sophistication to promptly and effectively engage in the bankruptcy process — even in slower, more conventional chapter 11 processes.
In subchapter V, the pace is accelerated, with the debtor required to submit a status report within six weeks and a reorganization plan within three months of filing.[10] The primary objectives of subchapter V are to address obstacles to successful reorganization for small businesses by relaxing chapter 11’s complex requirements, reducing costs and expediting the process.[11] This combination of speed and relaxed standards, including nonconsensual confirmation, introduces a unique element in bankruptcy: plans confirmed without the consent of any interested parties other than the debtor, relying on the trustee and the court’s sua sponte investigation as safeguards.
“A court of bankruptcy is a court of equity, seeing to administer the law according to its spirit, and not merely by its letter.”[12] Under these novel regimes of change in the subchapter v context, a practitioner cannot help but wonder whether enabling such an automatic mechanical option for confirmation, even in rare circumstances
[1] Elias is an attorney at the Houston office of McGinnis Lochridge, L.L.P. and serves as the Liaison of Public Education for the Young Lawyers Committee of the Bankruptcy Section of the State Bar of Texas. He can be reached by email at eyazbeck@mcginnislaw.com.
[2] See U.S. Department of Justice Executive Office for United States Trustees, Handbook for Small Business Chapter 11 Subchapter V Trustees February 2020, p. 1-1.
[3] Id.
[4] Id.
[5] See 11 U.S.C. § 1129(a)(10).
[6] 11 U.S.C. § 1129(a).
[7] See 11 U.S.C. § 1129(b); Subsection (a)(8) mandates unanimous acceptance from all impaired classes for the plan. As a precondition for cramdown under 11 U.S.C. § 1129(b), subsection (a)(10) necessitates acceptance from at least one impaired class of claims. Additionally, subsection (a)(15) stipulates that in cases where an unsecured creditor objects to the plan filed by an individual debtor, the debtor must pay the greater of the claim amount or the debtor’s projected disposable income over five years.
[8] See 11 U.S.C. § 1129(c).
[9] See 11 U.S.C. § 1183(b)(3).
[10] See 11 U.S.C. § 1188.
[11] See Hon. Paul W. Bonapfel, “A Guide to the Small Business Reorganization Act of 2019,” 93 Am. Bankr. L.J. 571, 574 (2019).
[12] Johnson v. Norris, 190 F. 459, 463 (5th Cir. 1911).