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Subchapter V’s Impact on Small Business Reorganization

JCR Guest Editor

A little over one year ago, just as the country was heading into a period of unprecedented turbulence caused by the COVID-19 pandemic, the Small Business Reorganization Act (SBRA) went into effect on February 19, 2020. Before SBRA, struggling businesses considering bankruptcy had two options: Chapter 7 or Chapter 11. SBRA provides an additional option to businesses seeking to reorganize by adding Subchapter V to the Bankruptcy Code, which affords small business debtors the option of pursuing Chapter 11 restructuring under laws and rules of (a) “traditional” Chapter 11, or (b) Subchapter V.

SBRA was designed to offer certain benefits for small businesses pursuing reorganization by lowering costs and simplifying Chapter 11 plan confirmation requirements. To that end, debtors proceeding under Subchapter V may enjoy a streamlined reorganization process that includes no disclosure statement requirement or creditors’ committee, no competing plans or U.S. Trustee quarterly fees, payment of administrative expense claims through the life of a Subchapter V plan, and elimination of the absolute priority rule.

As originally enacted, a debtor was eligible for Subchapter V if it owed less than $2,725,625 in noncontingent, liquidated secured and unsecured debts. Subsequently, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, increased the eligibility debt ceiling to $7.5 million until March 27, 2021. On February 25, 2021, it was reported that Senators Dick Durbin (D-IL) and Chuck Grassley (R-IA) introduced legislation to extend the expiring debt ceiling for an additional year, to March 27, 2022. If implemented, the new legislation, the COVID-19 Bankruptcy Relief Extension Act, will provide additional relief for small businesses continuing to face economic challenges due to the ongoing COVID-19 pandemic.

In this month’s issue of the JCR, we explore Subchapter V’s first year, beginning with an article from Neil McCullaugh, Karl Moses, and Chris Hurley of Spotts Fain PC, which highlights the benefits of Subchapter V for small business debtors, reviews available data concerning its use so far, and addresses various related issues presenting for Bankruptcy Courts charged to render decisions involving SBRA statutes.

Next, Diana McGraw of Fox Rothschild LLP examines the role of the trustee in Subchapter V cases. McGraw concludes that as small businesses maneuver through economic hardships, it is critically important that they understand the pivotal role of the trustee and other tools that assist in promoting the statutory purpose of the SBRA.

Chip Ford and Ashley Edwards of Parker Poe focus on what turnaround professionals need to know about Subchapter V and its potential advantages in a post-pandemic economy. In so doing, they highlight areas making Subchapter V an attractive option for small businesses aiming to reorganize and underscore questions that remain about how Subchapter V is most effectively utilized by small businesses and their professionals.

Then, Liz Boydston and Trinitee Green of Polsinelli articulate that Bankruptcy Courts interpreting Subchapter V appear to be friendly to small business debtors pursuing reorganization objectives in good faith. Their article addresses several novel legal issues frequently arising in Subchapter V cases and provides a chronology of rulings handed down by Bankruptcy Courts interpreting new statutory provisions enacted through SBRA.

Finally, Kumar Singla of Sherwood Partners and Erik Weinick of Otterbourg P.C. explain why Subchapter V proceedings and assignments for the benefit of creditors (ABCs) may present viable alternatives for small and midsize debtors in certain situations. Their piece offers a comparative analysis among various restructuring strategies, considering various factors such as speed and simplicity, control and risk mitigation, value, and expense.

Cullen Drescher Speckhart

Cullen Drescher Speckhart

Cooley LLP

Cullen Drescher Speckhart is a partner with Cooley and chair of the firm’s Business Restructuring & Reorganization practice group. With deep experience in corporate restructuring and financial litigation, she provides forward-focused advice to clients with respect to business risk management and strategic implementation. Speckhart also provides tactical guidance to corporations in all aspects of solvency strategy, contingency planning, risk mitigation, and portfolio improvement through acquisitions and sales of assets and other distressed transactions.

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