Amendments create new small business Chapter 11 process, increase Family Farmer Chapter 12 limits, and address abusive avoidance actions
By Roger Cox*
In August, 2019, President Trump signed various bills into law amending the Bankruptcy Code. The two bills with the most potential impact are: the Small Business Reorganization Act of 2019 (“SBRA”), and the Family Farmer Relief Act of 2019. The SBRA will take effect in early 2020. Additionally, there are some statutory changes arguably designed to rein in abusive preference actions (see below):
Small Business Reorg. The amendments effectively create a new subchapter within Chapter 11, which is purportedly for small business debtors. The amendment amends the definition of a small business debtor, now requiring that not less than 50% of the debtor’s obligations arose from the debtor’s commercial or business activities. The debt limit is $2,725,625.00.
Perhaps most significantly, a trustee will be appointed in each small business case, which conceivably creates a structure somewhat like Chapter 12 or even Chapter 13. The trustee remains until substantial consummation of a debtor’s plan. On the other hand, no committees are appointed in new small business structure, absent cause.
Under the small business amendments, only the debtor may file a plan, which must be filed within the first 90 days of the case. There is no longer any fixed deadline to obtain confirmation; however, a status conference within the first 60 days of the case is required.
Speaking of confirmation, the small business debtors are not required to have an accepting impaired class to confirm a plan. The absolute priority role appears to be out. Rather, the plan need only not discriminate unfairly and be fair and equitable with respect to impaired claims and interests. This does include, however, a disposable income component.
The bulk of the SBRA will be codified at 11 U.S.C. § 1181-1195. New Section 1181 will list those Chapter 11 sections or subsections that will be inapplicable to the new small business cases. The SBRA will take effect February 19, 2020.
[Author’s take: this appears to be a well-intentioned step, but the debt limit will severely limit SBRA’s applicability to very small “mom & pop” debtors. $2.7 million is a lot of money, but for many small businesses with any meaningful secured debt, this cap will prove to be unrealistically low. So this may end up effectively being more of a large Chapter 13 (and unlike Chapter 13, not limited to individuals) than a small Chapter 11. The trustee component may also prove to be a challenge, as it adds yet another layer of cost]
Family Farmer Revisions. The debt limit for “family farmers” is increased to $10 million (from a previous limit of approximately $4.4 million). Although this is the only significant change to Chapter 12, commentators speculate there will be an increased number of Chapter 12 filings with the more realistic debt limits.
Amendment to Section 547(b). The following language has been added to Section 547(b) (preference actions) providing that the trustee or debtor-in-possession – in other words, the preference plaintiff – “may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer . . .”. This appears to impose a due diligence requirement on the part of the preference plaintiff, but how and to what extent this can be enforced is open to question. Presumably, however, the intent is to minimize (or eliminate) non-meritorious preference actions targeting nuisance settlements.
Venue – Small Avoidance Actions. 28 U.S.C. § 1409(b) has been amended to increase from $12,850.00 to $25,000.00 the minimum limit for a trustee to bring a preference (or other avoidance) action against a non-insider in a district other than where the defendant resides. So in other words, a recipient of an alleged preferential transfer under $25,000.00 must be sued in that defendant’s home district – limiting the extent to which a small-preference recipient can be hauled into court a world away.
[Author’s take: These are small but welcome steps. One would hope that at a minimum, this will be a check on the large scale, mass avoidance actions that come out of some Chapter 11 cases. In a world where a company can still seek relief in a district thousands of miles away from its actual operational / creditor base, any reform of what had become an abusive process of filing mass preference claims against small vendors in remote jurisdictions is welcome. Note: before these amendments, some courts had held that this special venue provision somehow did not apply to preference actions, despite the obvious legislative intent (???), so it remains to be seen whether this amendment, given its inclusion in the SBRA bill, will be applied any differently in those courts]
*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2019), and a former contributor to the SMU Law Review. He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization. Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.