15th April 2020
Jessica K. Bonteque and Alan E. Gamza - Moses & Singer LLP
If you engage in commercial or business activities, or own a company that does, and have less than $7,500,000 in total debt, inclusive of all secured and unsecured debt, the new federal Small Business Reorganization Act (the “SBRA”) may provide a valuable tool to deal with creditors, save your business and preserve your ownership from the aftermath of the coronavirus (COVID-19) pandemic. MSI's NYC law member Moses & Singer explains further.
Large and small companies face the same challenges in dealing with debt that their cash flow cannot cover, but Chapter 11 reorganization under the Bankruptcy Code is too cumbersome and expensive to be useful for small business. The SBRA, added to the Bankruptcy Code effective February 19, 2020, is tailored to allow small businesses to reorganize relatively cheaply and quickly, in a manner similar to Chapter 13 plans for wage-earners. The SBRA provides:
A Cost Effective Streamlined Process. The SBRA simplifies small business reorganizations by removing many of the procedural burdens and costs associated with typical corporate reorganizations. First, the debtor (company or individual) is the only party that can propose a plan to reorganize the business (avoiding the costly situation where other parties-in-interest propose competing plans). Second, the debtor is required to file its plan within 90-days of filing for bankruptcy. Third, the debtor is not required to incur the cost of preparing, filing, and serving a separate disclosure statement in support of their plan or to solicit votes to confirm a plan. Fourth, the debtor is not required to pay certain fees to the Office of the United States Trustee that would otherwise be required. Finally, unless the bankruptcy court orders otherwise, there is no committee of unsecured creditors, but instead a trustee is appointed to oversee the process and facilitate plan payments.
Practical Plan Confirmation Requirements. The SBRA removes the requirement that the owners of a small business provide “new value” to retain their ownership in the debtor when creditors will not be paid in full. Further, unlike in a traditional chapter 11 plan, a debtor under the SBRA may confirm a plan even if none of its creditors agree to the terms of the plan. Instead, for a plan to be confirmable under the SBRA, the plan must not discriminate unfairly and must be fair and equitable.
A plan is deemed to be fair and equitable under the SBRA if it meets three criteria:
Modified Treatment of Residential Mortgages. Notably, the SBRA removes the categorical prohibition against individual small business debtor’s modifying a mortgage secured by their primary residence. The SBRA allows a small business debtor to modify a mortgage secured by a residence if the underlying loan (unless the loan was used to acquire the residence) was primarily used in connection with the small business. Otherwise, secured lenders have the same protections as in non-SBRA chapter 11 cases.
In response to the coronavirus pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) has increased the debt limit under the SBRA from less than $2,725,625 to less than $7,500,000, thereby making its benefits available to a greater number of small businesses. But this increase is currently scheduled to expire one year from the enactment of the CARES Act. Additional relief for small businesses is being considered as part of the federal government’s response to COVID-19. We will address any additional relief made available to small businesses in subsequent alerts.
Moses & Singer provides legal services to prominent companies, individuals and families. Among our broad array of clients are leaders in banking and finance, entertainment, media, real estate, healthcare, advertising and technology.
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