Tuesday, May 12, 2020

Small Business Reorganizations under New Subchapter V-copy of James Shenwick Outline to be presented at World Wide Land Transfer on Wednesday May 27 2020 at 10.00AM to 11.30AM

Small Business Reorganizations under
New Subchapter V of Chapter 11
of the Bankruptcy Code

Through the World Wide Land Transfer
~ All of Their Classes are Complimentary

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The purpose of this class will be  to discuss  the changes to
the new Subchapter V of the bankruptcy code and its impact
on small business reorganizations.
On August 23, 2019, President Trump signed into law the
Small Business Reorganization Act of 2019 (“SBRA”),
Pub. L. No. 116-54 (2019). Congress increased the cap
to $7,500,000 for the next year as part of the Coronavirus
Aid, Relief, and Economic Security (CARES) Act from
SBRA became effective on February 19, 2020
These provisions are not a new chapter of the bankruptcy
code, but a subchapter of chapter 11 of the bankruptcy code
and the existing chapter 11 sections will apply unless
otherwise modified by Subchapter V. 
There are 3 chapters of the bankruptcy code that are used in
this district and they are chapter 7, chapter 13 and chapter 11. 
Subchapter V is a subchapter of chapter 11 and not a new
chapter of the Bankruptcy Code 
In the way of background, chapter 7 cases are liquidations
for individuals or businesses, chapter 13 are organizations
for individuals (not businesses) where the individual uses
3 to 5 years of future earnings (disposable income) to pay
creditors and chapter 11 are reorganizations or liquidations
for individuals or businesses.
As will be discussed below Subchapter V is a blend of
chapter 11 and chapter 13 and the goal of the law is to
make it easier and cheaper for small businesses
to reorganize!
In this district, 90% of chapter 11 filings are unable to
reorganize and those cases are converted to chapter 7
(closed by the Bankruptcy Trustee) or dismissed as
“no asset” cases. 
This change in the law is an attempt by Congress to
simplify the reorganization process and reduce the
cost of small business chapter 11 filings. 
Subchapter V can be found at 11 U.S. Code sections 1182
through 1195.
  1. Debtor. Section 1182(1) defines a Debtor (individual or
    business) as a person engaged in commercial or business
    activities that has aggregate noncontingent liquidated
    secured and unsecured debts as of the date of the filing of
    the bankruptcy petition of not more than $7,500,000 not
    less than 50 percent of which arose from the commercial
    or business activities of the Debtor.
    1. Noncontingent liquidated debt, both secured and
      unsecured debt must not exceed $7,500,000.
    2. 50% or more of the debt must have arisen from
      commercial or business activities of the Debtor.
    3. Non-contingent debt refers to a debt that is owed
      at present without any acts needing to occur first.
    4. Contingent debt is one in which there is a
      'triggering event' or some condition
      precedent for the debt to exist.
    5. Subchapter V does not apply to publicly traded
      companies 1182(B)(ii) 
II. Trustee. The United States Trustee (a government agency
which is a component of the Department of Justice)
shall appoint a standing trustee as a Trustee in a
case filed under this chapter 1183(a)
  1. What are the roles of a Trustee in Subchapter V?
1. Appear and be heard at the status conference before
the Bankruptcy Judge assigned to the case
2. Attend plan confirmation hearing; 
3. Ensure that the Debtor commences making timely
payments required by a plan confirmed under
this subchapter; 
4. If the Debtor ceases to be a Debtor in possession,
perform the duties specified in section 704(a)(8) and
paragraphs (1), (2), and (6) of section 1106(a) of this
title, including operating the business of the
Debtor and 
  1. Facilitate the development of a consensual plan of
    reorganization-this is a new role for a Trustee.
    Developing a consensual plan is primarily the role
    of Debtor’s counsel. 
  1. If the plan is confirmed under the service of the trustee in
    the case shall terminate when the plan has been
    substantially consummated  ⸹1183(c)(1)
III. Operation of the Business. The Debtor shall have the
right to run its business  ⸹1184.
IV. Removal of the Debtor ⸹1185. On request of a party in
interest, and after notice and a hearing, the court shall
order that the Debtor not be a Debtor in possession
for cause, including fraud, dishonesty, incompetence,
or gross mismanagement of the affairs of the Debtor.
V. Property of the Estate.  If a plan is confirmed, property of the
estate includes, includes  property pursuant to section 541 of
the Bankruptcy Code and (1) property that  the Debtor
acquires after the commencement of the case,  (2) earnings
from services performed by the Debtor after the date of
commencement of the case but before the case is closed, 
dismissed, or converted to a case under chapter 7, 12,
or 13 ⸹1186.
  1. The Debtor shall remain in possession of all property
    of the estate ⸹1186(b).
VI. Status Conference ⸹1188
  1. Not later than 60 days after the entry of the order for
    relief under this chapter, the court shall hold a status
    conference to further the expeditious and economical
    resolution of a case under this subchapter ⸹1188(a).
  2. Not later than 14 days before the date of the status
    conference under subsection (a), 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. ⸹1188(c)
VII. Filing of the Plan § 1189
  1. Only the Debtor may file a plan under this
    subchapter. 1189(a) 
  2. The Debtor shall file a plan not later than 90 days
    after the order for relief under this chapter, except that
    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 1189(b).
VIII. Contents of Plan  § 1190
(1)  A plan filed under this subchapter shall
include— (A) a brief history of the business
operations of the Debtor; (B) a liquidation analysis;
and (C) projections with respect to the ability of
the Debtor to make payments under the proposed
plan of reorganization; 
(2) Shall provide for the submission of all or such
portion of the future earnings or other future
income of the Debtor to the supervision and control
of the Trustee as is necessary for the execution
of the plan; and 
(3) Notwithstanding section 1123(b)(5) of this title, may
modify the rights of the holder of a claim secured
only by a security interest in real property that is
the principal residence of the Debtor if the new
value received in connection with the granting of
the security interest was— (A) not used primarily
to acquire the real property; and (B) used
primarily in connection with the small business
of the Debtor ⸹1190(3) allows a Debtor, pursuant
to a confirmed chapter 11 plan, to modify a
mortgage on the Debtor’s principal residence
if the debt was not used to acquire the residence
and used primarily with the operation of the
Debtors small business-this is a major change
in bankruptcy law since first mortgages on a
Debtor’s principal residence cannot be modified.
IX. Confirmation of Plan § 1191
  1. The Court on request of a Debtor shall confirm the plan
    if the plan does not discriminate unfairly, and is fair
    and equitable, with respect to each class of claims
    or interests that is impaired under, and has not
    accepted, the plan. 1191(b)
  2. With respect to a class of secured claims  (A) the plan
    provides that all of the projected disposable income
    of the Debtor to be received in the 3-year period,
    or such longer period not to exceed 5 years as the
    court may fix, beginning on the date that the first
    payment is due under the plan will be applied to make
    payments under the plan; or (B) the value of the property
    to be distributed under the plan in the 3-year period, or
    such longer period not to exceed 5 years as the court
    may fix, beginning on the date on which the first
    distribution is due under the plan, is not less than
    the projected disposable income of the
    Debtor. 1191(c)(2)
  3. The Debtor will be able to make all payments
    under the plan 1191(3)(A)(i) 
  4. The term “disposable income” means the income
    that is received by the Debtor and that is not
    reasonably necessary to be expended— (1)
    for— (A) the maintenance or support of the
    Debtor or a dependent of the Debtor; or (B)
    a domestic support obligation that first becomes
    payable after the date of the filing of the
    petition; or (2) for the payment of expenditures
    necessary for the continuation, preservation, or
    operation of the business of the Debtor.
    1191(d)(1) & (2)
X. Discharge. If the plan of the Debtor is confirmed, as soon
as practicable after completion by the Debtor of all
payments due within the first 3 years of the plan, or
such longer period not to exceed 5 years as the court
may fix, the court shall grant the Debtor a discharge
of all debts §1192
XI. Modification of Plan § 1193
A. The Debtor may modify a plan at any time before
confirmation  ⸹1193(a)
B. If a Plan has been confirmed under  ⸹1191(a),
the Debtor may modify the plan at any time
after confirmation of the Plan and before
substantial consummation of the Plan  ⸹1193(b)
XII. Payments § 1194
A. Payments and funds received by the trustee shall be
retained by the Trustee until confirmation or denial of
confirmation of a plan. If a plan is confirmed, the trustee
shall distribute any such payment in accordance with the
plan. If a plan is not confirmed, the trustee shall return
any such payments to the Debtor 1194(a).
B. The above payment mechanism is similar to chapter 13,
where the Debtor makes monthly payments to the
Trustee who in turn pays creditors.
C. Prior to confirmation of a plan, the court, after notice
and a hearing, may authorize the trustee to make
payments to the holder of a secured claim for the
purpose of providing adequate protection of an
interest in property. 1194(c)
D. ⸹1194(c) allows a secured creditor to make a motion
before the Court for adequate protection payments if the
Debtor is not making payments to the secured creditor, or
the secured creditor does not have an “equity cushion”. 
XIII.  Transactions with professionals.  A person is not
disqualified from employment by the Debtor solely
because that person holds a claim of less than $10,000
that arose prior to commencement of the case. § 1195
A. The above provision is helpful to professional(s) who are
owed money by the Debtor (less than $10,000) who do
not want to waive that claim (meaning they want to be paid
by the Debtor) and they want to represent the Debtor in the
Subchapter V proceeding.
XIV. Impaired Creditors. Subchapter V allows a Debtor to
confirm a Plan without the need for obtaining the
consent of a class of “impaired” creditors as is required
under Chapter 11.
  1. An impaired creditor is  a creditor who is paid or accepts
    less than what they are currently owed.
XV. United States Trustee Quarterly Fees have been
eliminated. Other than the initial filing fee, fees are
essentially eliminated, making the process much less
expensive to the petitioner.
XVI. Creditor committee requirement has been eliminated
(only formed for cause in Subchapter V cases)
XVII.  Cram Down has been simplified. In Subchapter 5, if the
creditors can’t agree on the petitioner’s proposed plan,
an application can be made to the Bankruptcy Court
Judge to order the plan approved.  
A. Cram Down standard-The success of the proposed
plan need only be more attractive to the unsecured
creditors than would a conversion to a Chapter 7
liquidation plan (creditors get $1 more under
Subchapter V)
XVIII. Documents needed to file under Subchapter V-the
entity will require the business’ most recent balance
sheet, statement of operations, cash flow statement, a
federal income tax return (or a sworn statement that
such a document does not exist). 
XIX. Plan must be submitted for approval within 90 days.
However, the Bankruptcy Court may extend this
deadline “if the need for the extension is
attributable to circumstances for which the
Debtor should not justly be held accountable.”
(in the COVID-19 environment, courts are likely
to grant extensions liberally)
XX. Disclosure Statement not required. The Act eliminates
the requirement that a disclosure statement is filed,
thereby reducing costs to the Debtor and streamlining
the plan confirmation process. However, the Debtor
must include in the plan certain information customarily
included in a disclosure statement, such as a short history
of the Debtor, a liquidation analysis, and financial
projections reflecting the ability of the Debtor to make
the payments required by the plan
XXI. Trustee-under Subchapter V, a trustee is automatically
appointed, but the Debtor retains control of its assets
and operations. trustees have the authority to investigate
the Debtor’s financial affairs. The trustee’s primary
function is to facilitate a consensual plan among the
Debtor and its creditors, almost like a mediator would
facilitate a settlement in litigation. The trustee’s duties
will include facilitating the development of a consensual
reorganization plan, appearing at major hearings in the
case, and ensuring that a Debtor commences making
timely payments under a plan. 
A.Under the supervision of the Department of Justice,
approximately 250 Subchapter V trustees – mostly
attorneys and accountants – were selected out of
over 3,000 applicants. Most Subchapter V trustees
had recently received their first case assignments
when the COVID-19 pandemic hit.
XXII. Timing of Subchapter V Filing. Small businesses
should carefully consider the timing of a Subchapter V
filing: the Borrower Application Form promulgated by
the U.S. Small Business Administration indicates that
applicants presently subject to a bankruptcy proceeding
are ineligible for the Paycheck Protection Program
XXIII. Plan Term -Consistent with current practice in
Chapter 13 cases, a reorganization plan will
customarily be three years in length but
may be as long as five.
XXIV. Impaired Class. Under Subchapter V, a plan can be
confirmed without the vote of an impaired accepting
class, providing that the plan does not discriminate
unfairly and is deemed “fair and equitable” as to
each class of claims. To meet the “fair and equitable”
requirement under the Bankruptcy Code, Subchapter V
requires that all of the Debtor’s projected disposable
income during the length of the plan be applied
to plan payments.
XXV.  Elimination of the Absolute Priority Rule.
Subchapter V  eliminates the Absolute Priority Rule,
under which a Debtor cannot retain an ownership
interest in its assets unless all creditor claims are
paid in full or the Debtor contributes new value to
fund the Plan. Under Subchapter V no “new value”
contributions are required as a condition of the
Debtor’s asset retention. 
XXVI. Single Asset Real Estate Cases (“SARE”)-if a
Debtor elects to file a bankruptcy case as a SARE,
then they cannot also elect Subchapter V treatment.
Single asset real estate is defined by the Bankruptcy
Code as a single property or project that generates
substantially all of the Debtor's gross income
(§ 101(51B), Bankruptcy Code). If the Debtor's only
business is operating the property and the property
generates substantially all of the Debtor's income, a
SARE typically includes the following types of
properties: Shopping centers, Office buildings,
Industrial and warehouse buildings and
Apartment complexes.
Subchapter V Bankruptcy Provisions can be found at:

1. § 1181. Inapplicability of other sections
2. § 1182. Definitions
3. § 1183. Trustee
4. § 1184. Rights and powers of a Debtor in possession
5. § 1185. Removal of Debtor in possession
6. § 1186. Property of the estate
7. § 1187. Duties and reporting requirements of Debtors
8. § 1188. Status conference
9. § 1189. Filing of the plan
10. § 1190. Contents of plan
11. § 1191. Confirmation of plan
12. § 1192. Discharge
13. § 1193. Modification of plan
14. § 1194. Payments
15. § 1195. Transactions with professionals
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