Small Business Bankruptcies Under Subchapter V
A new provision of the Bankruptcy Code covering small businesses took effect in February 2020. Referred to as "Subchapter V," it provides a streamlined process for reorganization of businesses under a certain debt threshold. This article focuses on issues revealed in case law since the law took effect.
January 19, 2021 at 11:30 AM
8 minute read
A new provision of the Bankruptcy Code covering small businesses took effect in February 2020. Referred to as "Subchapter V," it provides a streamlined process for reorganization of businesses under a certain debt threshold. 11 U.S.C. §§1181-1191. As part of the CARES Act response to the coronavirus passed in March, Congress amended Subchapter V through March 2021 only, to raise the initial debt threshold of $2,725,625 to $7.5 million.
Within 90 days of a bankruptcy filing, Subchapter V debtors must file a plan providing for payments to creditors over a three to five-year period. The payments must equal the debtor's "disposable income," defined below. 11 U.S.C. §1191(d). Subchapter V eases or eliminates some of the critical hurdles faced by Chapter 11 debtors in confirming a plan. Under Subchapter V, normally no disclosure statement is required, no official creditors' committee is formed, administrative expenses may be paid after a plan is confirmed, the debtor has an unlimited exclusive right to file a plan, and a vote of creditors is not required to confirm a plan. Also, unlike under Chapter 11, debtors may retain equity in their business without the consent of creditors even if creditors are not paid in full. This article focuses on issues revealed in case law since the law took effect.
Eligibility
In re Serendipity Labs, 2020 Bankr. LEXIS 3164 (Bankr. N.D. Ga. Oct. 19, 2020) determined a debtor was ineligible for Subchapter V because it was an "affiliate" of an "issuer" under Bankruptcy Code §1182(1)(B)(iii). An "affiliate," under the Code, includes an "entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor." 11 U.S.C. §101(2)(A). In this case, Steelcase, a public company (by definition, an "issuer" under the Securities Act), owns 27% of debtor Serendipity's voting securities, rendering the debtor ineligible for Subchapter V treatment. The debtor argued the relevant percentage was 6.51%—the percentage of Steelcase's shares authorized to vote on debtor's bankruptcy. The court rejected this, holding under the plain meaning of the statute, "An entity that owns 20% or more of the voting securities of a chapter 11 debtor is an affiliate of the debtor, whether or not it has the power to vote those securities" (quoting In re Interlink Home Health Care, 283 B.R. 429, 439 (Bankr. N.D. Tex. 2002)).
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