On August 23, 2019, the Small Business Reorganization Act of 2019 ("SBRA"), the Honoring American Veterans in Extreme Need ("HAVEN") Act, and the Family Farmer Relief Act were enacted into law. These acts made significant changes to the Bankruptcy Code and more recently took effect. This article provides an overview of these changes.

New subchapter V to chapter 11 for small business debtors under the SBRA

The most significant change occurred February 19, 2020, when new subchapter V to chapter 11 became available. 11 U.S.C. §§ 1181-1195. It is designed to help small businesses reorganize, is modeled after chapters 12 and 13, and comes with many promised benefits (and possibly some drawbacks). Small business debtors with less than $2,725,625 in total debt who generate at least 50% of their income from commercial or business revenue can avail themselves of this procedure if they wish. They also retain the right to proceed under a traditional chapter 11 or non-subchapter V small business debtor case, if they wish. Note-single asset real estate debtors may not use the new procedure.

The new subchapter has provisions designed to entice debtors to use it. First, the absolute priority rule does not apply; an owner of a small business no longer needs to offer "new value" to retain his or her ownership interest in the business. Also, an impaired accepting class is not needed to cram down a plan. Costs should be lower; there will be no creditors' committee generally and there are no quarterly fees to pay to the United States Trustee's office. Finally, a debtor may rely on its prior advisors without requiring them to waive their claims; an advisor can be owed up to $10,000 and still be sufficiently "disinterested" to help with a case.

Subchapter V anticipates that standing trustees will be appointed in a manner similar to those who administer chapter 13 cases. These trustees might be financial advisors rather than lawyers. To our understanding, the United States Trustees' office has appointed panels in most (if not all) districts, though some courts' websites may not yet reflect the list of appointees yet.

Once a case is filed under subchapter V, a status conference must be held within 60 days and a plan filed within 90 days. These deadlines may be extended if needed due to circumstances "for which the debtor should not justly be held accountable." Unlike chapter 13, a subchapter V plan may modify a security interest in an individual debtor's primary residence, so long as the value received in connection with the granting of the security interest was not used primarily to acquire the property and was primarily in connection with the debtor's small business. A plan may be confirmed if it is feasible and (1) does not discriminate unfairly and (2) is fair and equitable to impaired classes that do not accept the plan.

However, like a chapter 13 plan, a plan under subchapter V requires dedication "of all or such portion of the future earnings or other future income of the debtor" for three to five years as required to execute the plan. Exactly how much of the debtor's income must be dedicated for the plan to be fair and equitable to creditors is unclear. The discharge only becomes effective after completion of all of these payments, and even then will not apply to debts on which the last payment is due after the plan completes. Given that one study showed that only 37 percent of the 2.6 million chapter 13 cases filed between 2007 and 2014 ended up with the debtor successfully completing the plan, [1] it is not clear how many debtors will successfully navigate this new subchapter.

HAVEN Act

Effective August 23, 2019, the HAVEN Act modified the definition of "current monthly income" to exclude compensation received in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services. This means that disabled veterans no longer need to include disability income for the purposes of the means test, enabling more of them to file for protection under chapter 7 of the Bankruptcy Code.

Family Farmer Relief Act

Also effective August 23, 2019, the Family Farmer Relief Act modified the definition of "family farmer" to increase the debt limit for chapter 12 eligibility to $10,000,000. The change brings the debt limit in line with debt obligations currently incurred by farmers.

SBRA changes to defenses regarding preferential transfer cases

Effective February 19, 2020, the SBRA made two changes to existing preference laws. It added a requirement to section 547(b) of the Bankruptcy Code that will require the debtor or trustee to allege that it has exercised reasonable due diligence and has taken into account the defendants "known or reasonably knowable affirmative defenses." At a minimum, this seems to require examination of a debtor's books and records to afford any obvious subsequent new value defenses the debtor's records reflect. How much more a preference plaintiff must or will do to comply with this provision remains to be seen.

Finally, the SBRA amended 28 U.S.C. § 1409(b), purportedly to ensure that, for preference claims less than $25,000, non-insider defendants would need to be sued in the district where they reside rather than where the bankruptcy case is filed. The majority of cases, however, hold that this subsection does not apply to preference actions. Former Chief Judge Gregg of the Bankruptcy Court for the Western District of Michigan authored one opinion on the subject. [2] Judge Gregg found that preference cases "arise under" the Bankruptcy Code, whereas subsection 1409(b) applies only to cases "arising in" or "related to" a debtor's bankruptcy case. Although some courts have looked past the clear language of section 1409(b) to apply the venue exception, the majority has held that when a statute is unambiguous, it must be applied as written. Thus it seems unlikely that the increase in the section 1409(b) claim cap will yield the results promised.

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