SUBCHAPTER V - REORGANIZATION WITHIN REACH
The lead story in the March Edition of Maricopa Lawyer belonged to none other than EB’s very own Andrew O’Keef. Read on for Andrew’s analysis and insight into this new subchapter of bankruptcy law.
By Andrew O’Keefe
“The new subchapter V of Chapter 11 works wonders for a small business or family needing to reorganize financially. This variety of Chapter 11 can be faster and less expensive than a Classic Chapter 11.” – Lamar Hawkins, Partner at Guidant Law.
In late 2019, Congress enacted the Small Business Reorganization Act (“SBRA”). The SBRA provides a mechanism for small businesses with less than $7,500,000 in debt to efficiently reorganize under the Bankruptcy Code. The expense and complexity of Chapter 11 has made reorganization unachievable Q&A for many small businesses. The SBRA reflects a recognition that reorganization is not a one size-fits-all approach.
The goal of every bankruptcy case is to confirm a plan of reorganization. A plan is essentially just a new contract that a debtor enters into with its creditors. The Bankruptcy Code, in Congress’s judgment, strikes an equitable balance between creditor and debtor interests. It promotes bringing all parties to the negotiating table, and Subchapter V gives debtors the most important tool in bankruptcy—leverage.
The SBRA is nestled within Chapter 11 of the Bankruptcy Code under Subchapter V, but Subchapter V differs from traditional Chapter 11 bankruptcy in a few material ways.
First, the absolute priority rule, which prevents equity interests from receiving or retaining any property under a plan of reorganization before unsecured creditors are paid in full, has been eliminated. In other words, if a debtor pays all of its projected disposable income over the life of the plan, the debtor may retain property under the plan.
Second, a Subchapter V debtor has the exclusive ability to file a plan, rather than creditors having the ability to file competing plans.
Third, a Subchapter V Trustee oversees and facilitates a negotiated, consensual plan of reorganization. A Subchapter V Trustee has a new, unique role in the bankruptcy process, it “transforms the role of the trustee from one of prosecutor to that of mediator, requiring the trustee to work hand-in-hand with the debtor and creditors.”
Fourth, there are no United States Trustee quarterly fees, which can mount up quickly in traditional Chapter 11 bankruptcy. There are also no official creditor’s committees, which can further increase the costs and burdens of confirming a plan in a traditional Chapter 11 bankruptcy.
SBRA has overwhelmingly had positive impacts on small business debtors across the country. In fiscal year 2020 to 2021, Subchapter V plans were confirmed at a rate of 58%, drastically higher than their counterpart small business debtors proceeding under traditional chapter 11 that had a plan confirmation rate of just 25% during the same period. Moreover, the median months to confirmation for Subchapter V debtors was 6.6 months, while the chapter 11 small business debtors’ median months to confirmation was 10.9 months. This increase in plan confirmation rates and efficiency under the debtor-friendly provisions of Subchapter V has enabled small business debtors to receive the much-needed relief they seek.
According to Christopher Simpson, a partner at Osborn Maledon who serves as a Subchapter V Trustee, “Subchapter V is a lifeline for struggling small businesses and business owners. The costs and risks associated with traditional Chapter 11 proceedings are greatly diminished under Subchapter V. Most cases under Subchapter V come down to feasibility. If the Debtor’s plan is feasible and it complies with the requirements of Section 1191 of the Bankruptcy Code, there is a very good chance the Plan will be confirmed.” As the experience in Arizona bankruptcy proceedings has demonstrated, Arizona small businesses are much more likely to successfully reorganize under Subchapter V than traditional Chapter 11, which is a win for small businesses and the Arizona economy as a whole.
The text of this article was originally published in the March edition of “Maricopa Lawyer”, Vol 43 Issue 3, maricopabar.org https://maricopabar.org/?pg=MLArchives
