QUESTION:   WILL THE DEADLINES SET BY THE SMALL BUSINESS REORGANIZATION ACT OF 2019 ACTUALLY SPEED UP SMALL BUSINESS BANKRUPTCIES?

ANSWER:    SMALL BUSINESS REORGANIZATIONS WILL ONLY BE FASTER IF THE DEADLINES ARE ENFORCED.

Other than sunrise and sunset, few deadlines are self-enforcing!
The mandatory expedited deadlines in the Small Business Reorganization Act won’t speed up cases unless judges enforce them.  If the Standing Trustees and the creditors actively urge courts to enforce the rules, there is a chance that small business reorganizations will be timely completed.

What are the basics of the new Subchapter 5 Small Business Bankruptcies?
Currently, small business debtors must have less than $7,500,000 in non-contingent, secured and unsecured debt to be eligible to reorganize under the Act. 

Small businesses may spread debt payments over three to five years and pay “projected disposable income,” to make those payments.  Unlike other chapter 11 reorganizations, small business debtors will not be discharged of their debts until completion of all Plan payments. 

The debtor will be able to maintain ownership of the business even if the Plan payments are less than the full amounts due creditors.  Moreover, only the debtor can propose a plan of reorganization in a small business reorganization case.  The debtor does not need to solicit votes or obtain creditor support to confirm a Plan of Reorganization. 

These and other changes in the usual chapter 11 bankruptcy procedures are supposed to streamline reorganizations and make it easier for small businesses to restructure. 

What are the new deadlines that are designed to streamline small business reorganizations?
“[N]ot later than seven days” after filing for bankruptcy the debtor must file “its most recent balance sheet, statement of operations, cash-flow statement, and Federal income tax return. . . .”  11 U.S.C. § 1116(1)(A).  These requirements are not new, but they are not rigidly enforced.  Moreover, this seven day deadline for disclosure of assets and debts doesn’t apply if the debtor files “a sworn statement that” it doesn’t have these things.  11 U.S.C. § 1116(1)(B).  Thus, the hope of getting prompt financial information from the debtor may often be illusory.

Status Conference in 60 days?
The court “shall” require a Status Conference within 60 days after the case is filed “to further the expeditious and economical resolution of a case.”  The 60-day deadline for the initial Status Conference can only be extended if “the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” 

In practice, if the debtor files a Motion to Extend the period for holding the Status Conference, a hearing will need to be set to determine whether the need for the extension was something beyond the debtor’s control.  Thus, the debtor will probably get some delay on the 60-day period by simply asking for it. 

Initial Report of debtor’s attempts to obtain creditor support?
“Not later than 14 days before the date of Status Conference. . . the debtor shall file with the court and serve on the Trustee and all parties in interest a report that details the efforts the debtor has undertaken and will undertake to attain a consensual Plan of Reorganization.”  11 U.S.C. § 1188(c).  But if no report is filed within 14 days before the initial Status Conference what will happen?  In all likelihood, the debtor will say that it was unable to comply with the 14-day deadline and use that as part of the excuse for an extension of time for the 60-day Status Conference under § 1188(b). 

But won’t the Reorganization Plan be filed within 90 days of the filing for bankruptcy?
“The debtor shall file a Plan not later than 90 days” after filing the bankruptcy petition.  11 U.S.C. § 1189(b).  Even though the debtor “shall” file within 90 days, “the court may extend the period if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.”  Do you see any trend here?

But won’t the “Standing Trustee” police these deadlines?
The Trustee “shall” furnish information concerning the estate and its administration as requested by parties in interest.  11 U.S.C. § 704(a)(7).  But if the Debtor does not provide the information, how can the Trustee provide it to anyone?

The Trustee “shall” “investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business. . . .”  11 U.S.C. § 1106(a)(3).  Creditors should not expect these investigations prior to the 60-day Status Conference or the 90-day filing of a Plan of Reorganization.

The Trustee “shall” appear and be heard at the 60-day Status Conference.  If the debtor delays the Status Conference and the report that was required 14 days before the Status Conference, what will the Trustee have to work with? 

The Trustee has a lot of duties that it “shall” perform under 11 U.S.C. § 1183, but many of these were duties required of Trustees under existing law in §§ 704(a) and 1106(a) of the Bankruptcy Code.  Experience has taught us that Trustees have often been unable to perform these various mandated duties.

What should creditors do to make sure Small Business Reorganizations are streamlined as promised?
Creditors should be vigilant of the time limits and bring any infractions promptly to the attention of the Court.

Creditors should also work closely with Standing Trustees to help the Trustees have the information and the support to fulfill the various mandated duties provided by the Bankruptcy Code.  If your business needs help enforcing its rights under the Small Business Reorganization Act of 2019 or any other part of the Bankruptcy Code, please call me.

Mike

Michael R. King • Mking@gblaw.com • 602-256-4405

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