Small Business Relief: How the SBRA of 2019 Will Affect Non-Bankruptcy Lawyers

Congress will soon start receiving thank you cards from small businesses. Effective February 19, the Small Business Reorganization Act (SBRA) of 2019 changed the Chapter 11 game. Before the SBRA, small business debtors wanting to reorganize were staring down the barrel of an expensive process and a briar patch of risks. It was like running with the bulls in Pamplona, but barefoot. Creditors had the leverage. Now armed with the SBRA, debtors heading to bankruptcy court have a little more pep in their step. This article will get you up to speed on what every non-bankruptcy lawyer needs to know about the SBRA and why you should care about it.

Who’s eligible for the SBRA?

Only “small business debtors” that choose to proceed under the SBRA get its privileges and benefits, along with its few detriments. The historical definition of a small business debtor applies to SBRA cases, which includes any “person” engaged in commercial business activities. That’s correct, a small business debtor includes both business entities and their owners. The debtor just needs to have noncontingent, liquidated debts of $2,725,625 or less, a majority of which must have arisen from business activities. If eligible, electing SBRA status still requires a comparison and contrast of the procedural and legal differences between SBRA and non-SBRA cases.

What are the procedural differences between an SBRA case and a non-SBRA case?

SBRA cases will have the look, feel, and obligations of nonSBRA cases, except in a few respects. In non-SBRA cases, Chapter 11 debtors don’t have to answer to a standing trustee; they must comply with the rules and statutes and propose a plan within 300 days, with confirmation to occur within 45 days after filing the plan; and committees of unsecured creditors are authorized. The SBRA is different; it creates a de facto rocket docket with an appointed watchdog and without a committee. Upon the filing of an SBRA case, an independent, standing trustee is appointed to oversee the case and investigate matters of interest. The bankruptcy court will conduct a status conference within 60 days. Debtors must file a plan within 90 days after filing for bankruptcy. SBRA cases do not require debtors to file disclosure statements to help creditors decide how to vote on a plan, and

there is no committee of unsecured creditors.

What are the legal differences between an SBRA case and a non-SBRA case? The SBRA makes it easier for small business debtors to confirm plans ofreorganization. Just like in non-SBRA cases, small business debtors can confirm plans if all classes of creditors accept. Unanimous acceptance is great, but it’s easier said than done. Lack of unanimous acceptance means a debtor proceeds to the “cramdown” provisions of the Bankruptcy Code. In non-SBRA cases, small business debtors face two huge hurdles. First, they need an “impaired accepting class” of creditors to vote in favor of their plan. That’s a fancy way of saying that a debtor needs a class of creditors whose payment terms are changed by the plan. Second, non-SBRA debtors need to satisfy the “absolute priority rule,” which is a fancy way of saying that an owner cannot retain ownership unless the debtor proposes to pay all creditors in full. This often means proposing a 100% plan that the debtor cannot afford.

Enter the SBRA. Small business debtors now welcome the SBRA like a shelter puppy. In an SBRA case, a debtor can confirm a plan even if it has no impaired accepting class of creditors. The plan just has to satisfy the otherconfirmation provisions that apply in a non-SBRA case, like being fair and equitable, being feasible, and not unfairly discriminating among classes of creditors. Maybe most importantly, the absolute priority rule, which strikes fear in the heart of every business owner, does not apply. This means ownership retains their equity as long as the debtor pays unsecured creditors all “projected disposable income” (income less reasonably necessary expenses) over a three- to five-year period.

Are there any downsides for an SBRA debtor?

Don’t fret creditors, the grass isn’t entirely green for SBRA debtors. First, it’s too new to know how courts will interpret it. Uncertainty equates to leverage. Second, SBRA trustees can make life

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difficult or easy depending on the case, so it will become a race to gain credibility and to remain in the trustee’s good graces. Trustees have the potential to play a powerful role, so both sides should respect their authority. Third, in nonSBRA corporate cases, only a very few types of claims are non-dischargeable. In SBRA corporate cases, a creditor’s claim based on a debtor’s fraud, breach of fiduciary duty, or willful or malicious injury becomes non-dischargeable. These considerations could conceivably cause an SBRA-eligible debtor to proceed down the non-SBRA path.

Why should you care?

On a practical level, your favorite roller-skating rink has a chance to survive. Small businesses account for about 44% of the GDP, so tilting the balance of power in their favor may have some economic upside. On a personal level to your clients, SBRA cases will cost less and will likely be easier for debtors to manage. There’s a suspicion that bankruptcy filings will increase, meaning your clients are more likely to be involved in a bankruptcy. On an observational level, new laws need to be interpreted and it will be fun to grab some popcorn and see how the SBRA plays out in court. n

GRIFFIN DUNHAM is a member of Dunham Hildebrand. His firm focuses on insolvency and litigation. The insolvency practice involves business and consumer restructurings and liquidations, which often involve Chapter 7, 11, or 13 bankruptcy filings. The litigation practice involves all types of business disputes, including those involving small business owners. Regardless of the matter, the goal is to protect the client, ensure its future sustainability, and maximize the economic return from the engagement.