On August 23, 2019, the Small Business Reorganization Act of 2019 (“SBRA”) was signed into law and became effective on February 19, 2020, which added Subchapter V to Chapter 11 of the United States Bankruptcy Code. Subchapter V is a relatively new and underused avenue of relief for eligible small business debtors to reorganize more expeditiously and at a lesser cost than those associated with a traditional Chapter 11 proceeding.
Who Can File:
To be eligible for relief under Subchapter V, a debtor must be engaged in business and have a combined total of secured and unsecured debts not more than $7,500,000.00 (excluding debts owed to one or more affiliates or insiders) as of the date of filing for bankruptcy relief. Not less than fifty percent (50%) of the total debt must have arisen from the commercial or business activities of the debtor. The debtor bears the burden of proof that it is eligible for Subchapter V. Courts focus on commercial or business activities, not operations, in assessing a debtor’s eligibility for Subchapter V.1 Thus, even a nonoperating company may be eligible for Subchapter V if it is otherwise engaged in commercial activities.2
Subchapter V Advantages:
The advantages of a fast-track Subchapter V plan confirmation include: (i) no creditor’s committee; (ii) only the debtor can propose the plan; (iii) expedited timeline for confirmation3; and (iv) there is no absolute priority rule.4
Considerations for Businesses Contemplating this Avenue of Relief:
Financial reporting is integral to the Subchapter V process and the successful confirmation of a plan. Because of the expeditious time frame, it is better to prepare for a Subchapter V filing in advance. A filing must include a recent balance sheet, a statement of operations and a federal tax return. Financial projections will be required to support a plan and the use of a secured lender’s cash collateral.
If you have any questions pertaining to Subchapter V bankruptcy filings or any other insolvency matters, please contact Attorney Joseph M. DiOrio, Chair of PLDO’s Banking & Creditor’s Rights Practice Group, or Attorney Amanda M. Perry at 401-824-5100, [email protected] or [email protected].
1 In re Offer Space LLC, 629 B.R. 299, 306 (Bankr. D. Utah 2021) (term “activities” is not equated with “operations” under Subchapter V); see also In re Vertical Mac Constr., LLC, 2021 WL 3668037 at *3 (Bankr. M.D. Fla. July 23, 2021) (the term “activities” is very broad and encompasses “any act of a business or commercial nature” and is broader than the narrower term “operations”).
2 Offer Space, 629 B.R. at 306.
3 The debtor’s plan must be filed within ninety (90) days of petition date. 11 U.S.C. § 1189(b)
4 “Absolute priority rule” provides that a reorganization plan may not give “property” to the holders of any junior claims or interests “on account of” those claims or interests unless all classes of senior claims either receive the full value of their claims or give their consent. Special Commentary: Construction and Application of Absolute Priority Rule in Confirmation of Plan Under Chapter 11 of Bankruptcy Code of 1978 (11 U.S.C.A. § 1129(b)(2)), 175 A.L.R. Fed. 485, 2. In a Subchapter V proceeding, equity holders may retain their interests without providing “new value” that is typically required to meet the new value exception to the absolute priority rule. (New value exception to the Absolute Priority Rule is defined in Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. Lasalle St. P’ship, 526 U.S. 434.)
