The Future Of Small Business Bankruptcies And Creditors' Committees After The SBRA: In Re Bonert And In Re Lear Capital

• Published date: 24 August 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy
• Law Firm: Winston & Strawn LLP
• Author: Ms Jennifer P. Porter, Carrie Hardman and Kenneth L. Perkins

With the passage of the Small Business Reorganization Act (the "SBRA") in 2019,¹ Congress made significant changes to the Bankruptcy Code² that affect small businesses.³ These changes include removing the appointment of a creditors' committee as a matter of course for small businesses and the creation of subchapter V,⁴ a new, additional, and streamlined bankruptcy option for eligible small businesses.⁵ Two recent cases, In re Bonert⁶ and In re Lear Capital, Inc.,⁷ offer an opportunity to examine these changes and may offer insight into what lies in store for small business chapter 11 bankruptcy cases.

BACKGROUND TO THE SBRA

Congress has long attempted to assist small businesses seeking to reorganize rather than liquidate their business. In 1994, the Bankruptcy Reform Act⁸ created the "small business debtor" designation and procedures applicable to qualifying debtors, which the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")⁹ modified. However, while such Acts introduced various procedural protections, the substantive statutory regime for small business debtors largely mirrored the regime in place for traditional chapter 11 debtors, including its administrative costliness and complexity.¹⁰ Accordingly, the changes introduced in 1994 and 2005 proved largely ineffective to reduce the costs associated with the administration of chapter 11 cases, and many small business reorganizations failed.¹¹

The SBRA amended the provisions of the Bankruptcy Code, introducing several substantive changes to the provisions affecting small businesses. Two notable changes are: (1) the creation of subchapter V, a streamlined alternative to a traditional small business chapter 11 case; and (2) the modification of the procedure surrounding the appointment of creditors' committees in small business and subchapter V cases.

SUBCHAPTER V

The SBRA introduced a new type of chapter 11 case, called a subchapter V case, for eligible small businesses that elect subchapter V designation. Subchapter V cases differ from small business cases in several ways.¹² For example, the SBRA provides for the appointment of a subchapter V trustee, who does not displace management in the operation of the debtor, to assist in developing a consensual restructuring plan.¹³ In addition, subchapter V debtors face stricter timelines than small business debtors, encouraging a prompt confirmation process and reducing the administrative costs associated with lengthier chapter 11 cases.¹⁴

Additional advantages of subchapter V for debtors include: (a) equity holders' ability to retain their ownership interests without paying all creditors in full (elimination of the "absolute priority rule");¹⁵ (b) elimination of the general requirement to file a disclosure statement;¹⁶ (c) the subchapter V debtor's exclusive right to file a plan;¹⁷ and (d) the ability to confirm a plan even if all classes reject the plan so long as the plan does not discriminate unfairly, is fair and equitable to any dissenting class, and the debtor commits its projected disposable income (or the value thereof) for a period of three to five years to distributions to creditors.¹⁸ In addition, in order to alleviate the costs of chapter 11 administration, subchapter V debtors do not have to pay quarterly U.S. trustee fees¹⁹ and are allowed to pay administrative expenses over time under a plan.²⁰

The SBRA, as originally enacted, provides that the qualifications to be a subchapter V debtor are the same as for any small business debtor.²¹ However, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act temporarily increased the debt limit for subchapter V debtors to $7,500,000.²² This temporary increase has been extended twice,²³ with the current extension set to sunset on June 21, 2024.

CREDITORS' COMMITTEE APPOINTMENTS UNDER THE SBRA

The SBRA alters the appointment of creditors' committees in small business chapter 11 cases. In traditional chapter 11 cases and small business cases before the enactment of the SBRA, the United States Trustee ("UST") is required to appoint a committee of general unsecured creditors to represent the interests of general unsecured creditors.²⁴ The UST may also appoint additional creditors' or equity holders' committees as appropriate.²⁵ The bankruptcy court may also order, upon request, the appointment of additional...