Pub. 11 2020 Issue 2

www.wvbankers.org 24 West Virginia Banker By Debra Lee Allen, Spilman Thomas & Battle, PLLC Rescuing the Small Business: Subchapter V T he economics of the COVID-19 pandemic is taking its toll on the country's small businesses, many without resources to survive an extended downturn in business. Enter the Subchapter V small business debtor bankruptcy case. In August 2019, with what may now appear to have been foresight, Congress passed the Small Business Reorganization Act ( “ SBRA ” ), designed to remove the cost and complexity of a Chapter 11 bankruptcy for small businesses. The Act became effective February 19 2020, and we can expect this next wave of bankruptcy cases to be replete with Subchapter V cases. At the passage of the SBRA, a small business debtor had less than $2,725,625 in debt, at least 50% of which arose from the debtor's commercial or business activities. The Coronavirus Aid, Relief and Economic Security Act raised the debt limit temporar- ily to $7.5 million for cases filed prior to March 27 2021. SBRA did not repeal the small business debtor provisions of Chapter 11 created in 2005 by the Bankruptcy Abuse Prevention and Con- sumer Protection Act. Consequently, a small business debtor can proceed as a small business case under Chapter 11, or it can elect Subchapter V. The election is made in the original petition, but it can also be made in a pending bankruptcy case. A trustee is appointed in a Subchapter V case, but the debtor remains in possession of its assets and continues to operate its business. The Subchapter V trustee has certain oversight and monitoring duties, similar to a Chapter 12 trustee. Most important, the Subchapter V trustee is tasked with facilitating the development of a consensual plan of reorganization. The Subchapter V trustee ’ s role is terminated if a consensual plan of reorganization is confirmed. If the plan is not consensual, the trustee ’ s position continues and the trustee makes plan payments. A Subchapter V debtor can be removed as a debtor-in-pos- session “ for cause. ” However, in Subchapter V, cause can be based on bad acts, i.e., fraud, dishonesty, incompetence, or gross mismanagement, prior to the bankruptcy filing, as op- posed to the broader Chapter 11 provisions, which focus on bad acts after filing. If the Subchapter V debtor in possession is removed, the trustee assumes the duties of the debtor, in- cluding the operation of the business. However, the Subchap- ter V trustee cannot file a plan of reorganization, which is relegated to the debtor only. The Subchapter V debtor does not have to pay quarterly U.S. trustee fees, and there is no unsecured creditors committee unless appointed by the court for cause. If the confirmed plan is a cramdown (see below), the debtor's earnings and prop- erty acquired after commencement become the property of the bankruptcy estate. If the confirmed plan is consensual, the property of the bankruptcy estate is the more common interests as of the filing. Requirements for confirmation of a plan of reorganization are streamlined. Subchapter V creates an entirely new requirement for a status conference with the court to be held not less than 60 days after filing. The debtor must report on efforts under- taken to achieve a consensual plan of reorganization. Only the debtor may propose a plan, which must be proposed within 90 days of filing the petition. There is no deadline for obtaining confirmation. No disclosure statement is required.