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Big Changes for Small Business Coming to Chapter 11 Bankruptcy

February 13, 2020

By: Jason Johnson

In the coming weeks, the Small Business Reorganization Act (the “SBRA”) will go into effect.

As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005—the most significant large-scale change to the Bankruptcy Code since its enactment—Congress amended the Bankruptcy Code to define certain businesses as “small business debtors,” and to provide special rules and procedures for reorganization cases involving such debtors. Unfortunately, these changes did not have the impacts desired by Congress—largely due to the continued significant costs associated with the Chapter 11 process. Accordingly, the SBRA was passed by the 116th Congress and signed into law by the President on August 23, 2019. As a result, on February 19, 2020, debtors (both companies and individuals) with non-contingent, liquidated debts (both secured and unsecured) of not more than $2,725,625 may choose to reorganize under the new Subchapter V of Chapter 11, rather than the other subchapters.

The SBRA goes much further than the 2005 revisions to the Bankruptcy Code, and is intended to provide meaningful relief to small business owners who need to reorganize. It removes many of the procedures required under the “normal” Chapter 11 process and, as a result, will greatly reduce the cost of Chapter 11 to small businesses, while increasing the efficiency of the reorganization process. For instance, it eliminates the requirement that debtors in these cases pay quarterly fees to the United States Trustee, it eliminates the possibility of the appointment of an Official Committee of Unsecured Creditors, and it eliminates the requirement that confirmation of the Debtor’s proposed plan of reorganization be preceded by the filing and approval of a disclosure statement (though the liquidation analysis and projections typically associated with disclosure statements will be incorporated into reorganization plans filed under the SBRA). A Subchapter V Trustee will be appointed in each case, both to assist with the confirmation process and—similar to a Chapter 13 Trustee—ensure that the debtor commences payments to creditors under a confirmed plan. Also similar to Chapter 13, the length of a proposed plan under the SBRA may not be less than 3 years and no longer than 5 years. With the requirement of a status conference by the bankruptcy court within 60 days of filing, the requirement of the filing of a plan of reorganization by the debtor within 90 days of filing, and the elimination of the possibility of a competing plan by creditors, the confirmation process should be much faster and more streamlined than in “normal” Chapter 11 cases.

For secured creditors, there is one significant change and some unanswered questions. Secured creditors holding liens on the principal residences of debtors may see the terms of their loans altered more severely than in other Chapter 11 cases, if the proceeds of the loan were not used as purchase money for the residence and were instead used to fund the debtor’s business. For other commercial secured loans, the big question is the interest rate that the bankruptcy courts will apply to the restructuring of these loans.

As with any major new law, questions remain over the impact of its implementation. One thing is certain: while the SBRA will not have much of an impact on the “mega case” districts like the District of Delaware and the Southern District of New York, it is likely to have significant impacts on the way business bankruptcy cases are conducted in most jurisdictions throughout the country, including Florida.

If you have a customer or borrower who is indicating that they may file for protection under the Bankruptcy Code, you should immediately seek out competent bankruptcy counsel.

Jason Johnson is board certified in Business Bankruptcy, is a former President of the Central Florida Bankruptcy Law Association, has been representing creditors and other parties in bankruptcy cases for over 20 years, and is a former judicial law clerk in the United States Bankruptcy Court for the Middle District of Florida.

For more information contact Jason or any member of the Bankruptcy & Restructuring Group.

Jason

“It’s a phase.”

That was Jason’s dad’s response when Jason told his dad he was going to law school – a predictable reaction, since Jason’s undergraduate degree was in Animal Science (pre-veterinary medicine).  Even more startling to his dad: Jason had already studied for and taken the entrance exam, applied to law schools, and secured acceptance and student loans before ever telling his dad about his plan.  More than 20 years later, his dad has long-since come around to the idea that he was meant to do this.

Jason believes there are two types of litigators—problem creators and problem solvers—and Jason is a problem solver. For his clients, that means looking for ways to achieve their goals in the most efficient, cost-effective way. Recognizing that there is a bit of an inherent tension in being a litigator, as often, the better you are at your job, the better you are at taking work off your own plate, Jason often jokes with his clients that “While I am all about the ‘Jason Johnson Full-Employment Program,’ it may not be in your best interests to implement that program, and it is your interests that must control.”  It is the creativity required to be a problem solver that is one of the reasons he most enjoys litigation.  Opponents who mistake his professionalism and reasonableness for weakness, though, do so at their peril, as being a problem solver and a zealous advocate are not mutually exclusive traits.

Jason is Board Certified in Business Bankruptcy by the American Board of Certification. He is a commercial litigator and the senior member of the firm’s Bankruptcy & Restructuring and Creditors' Rights practices. Jason represents commercial lending institutions, REITs, hedge funds, equity groups, financial services corporations, equipment lessors, commercial landlords, real estate developers, asset purchasers, and other secured and unsecured creditors in federal and state court matters throughout the State of Florida. His extensive experience in all aspects of bankruptcy, commercial foreclosure and workout proceedings have ranged to cases involving client assets exceeding $50-billion-dollars and claims exceeding $1-billion-dollars.

Jason also handles “white collar” criminal matters which, not surprisingly, sometimes flow from creditors’ rights cases. Additionally, Jason is a Florida Supreme Court Certified Circuit Mediator, acting as a trusted and effective mediator to help warring parties resolve their complex commercial litigation and complex bankruptcy litigation matters.

With deep roots in Florida, Jason has developed longstanding relationships in Central Florida’s business and political circles. He began his law career as a judicial law clerk to the Honorable Arthur B. Briskman of the United States Bankruptcy Court for the Middle District of Florida. A former President and current Board member of the Central Florida Bankruptcy Law Association, Jason is a longstanding leader in the Central Florida bankruptcy bar.

When not practicing law, Jason enjoys road cycling, Gator athletics, drinking fine bourbon, and spending time with his wife and daughter. Though he grew up surfing the warm waters off the Florida coast, he is more likely to be found on any present-day vacation sliding down the snow-covered Alps than at the beach.  He is happy to discuss your legal issues, his shift from vet school to the law, or about some of his more “interesting” Animal Science experiences—just don’t ask about the latter over dinner.

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