Chapter 11 – Subchapter V – SBRA

The Variations in Types of Chapter 11 Cases: a) Standard Chapter 11, b) Small Business Chapter 11 and c) Subchapter V Chapter 11 – Compared and Contrasted

Even prior to the changes that Subchapter V of Chapter 11 brought to reorganization cases for small business, there was attention on the idea of having a more expeditious type of Chapter 11 case available for small businesses. While the standard Chapter 11 case was appropriate to larger businesses, it was not optimal for small business debtors who needed a more efficient way to reorganize. The provisions for Small Business Chapter 11 cases, which were enacted earlier, and for Subchapter V, which were enacted just recently, both tried to make the process more efficient and less burdensome for the small business debtor looking to reorganize in bankruptcy. However, the flip side to simplifying the process, was shorter deadlines in the case, to make the process move faster. Thus in order from the most complex and having the longest, least rigid deadlines, to the most efficient and having the tightest deadlines, we can arrange the Chapter 11 choices as follows: a) Standard Chapter 11 (“Standard- 11”) with the longest and least strict deadlines, b) Small Business Chapter 11 (“SB-11″) with short and strict deadlines, and c) Subchapter V Chapter 11 (V-11”) with shorter deadlines than SB-11, but less strict than the deadlines of SB-11.

We shall below compare and contrast in terms of history, eligibility, requirements, deadlines, advantages/disadvantages and strategy the following types of chapter 11 cases: a) Standard-11, b) SB-11, and c) V-11:

1. History – a) Standard -11 was created under the Bankruptcy Reform Act of 1978 (BRA) which continues to be the base uniform federal bankruptcy law, that despite many amendments and clarifying caselaw, still governs bankruptcy cases today. b) SB-11 was created in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), which was mainly motivated by the idea that bankruptcy code provisions needed to be tightened to prevent potential abuse and manipulation of the bankruptcy laws by debtors who were not properly motivated or qualified to proceed under bankruptcy protection. c) V-11 was created in 2019 under the Small Business Reorganization Act (SBRA). In 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily raised the V-11 debt threshold to $7.5 million – as an effort to provide emergency assistance to people and businesses affected by the pandemic. As of June 21,2024, the debt threshold for V-11 has been reduced to $3,024,725.
2. Eligibility Debt Amount – c) For V-11 cases commenced after June 21, 2024, debtors must have less than $3,024,725 in combined, liquidated, non-contingent combined debt.  b) SB-11 has a combined debt limit which is presently at $2,725,625 million since the CARES Act only pertained to V-11 and not to SB-11.c). a) Standard 11 has no such eligibility debt amount limit.
3. Eligibility Debt Type – b) SB-11 and c) V-11 both require that at least half the debt arise mostly from the business or commercial activities of the debtor (50%), except for a filing for a single asset real estate debtor which does not qualify under either SB-11 or V-11. a) Standard-11 does not have such requirements.
4. Type of Trustee Appointed – Under a) Standard-11 and b) SB-11, it is the United States Trustee’s Office that oversees Chapter 11 cases, not by appointing a private attorney from a panel of private attorneys, as is done in Chapter 7 or 13, but by directly involving their office’s attorneys and financial analysts in the U.S. Trustee’s oversight of the Chapter 11 debtor in possession and the debtor’s attorney in his reorganization efforts for the debtor. The emphasis of the U.S. Trustee’s office is the legal and administrative requirements of the Chapter 11 case. By contrast, c) V-11 allows for a radical change in that the trustee in charge of the case is not an attorney and not from the U.S. Trustee’s office, but is a private businessperson from a panel of private business persons, who oversees the case from the business the perspective. The goal of the V-11 business trustee is to review, encourage and understand the case from the business perspective. This is advantageous for the debtor and its attorney who sometimes find that the U.S. Trustee’s are more focused on the administrative requirements of a case and on legal niceties which may sometimes conflict with the economic and practical realities of reorganizing a debtor.
5. Time to File a Plan of Reorganization and Disclosure Statement – b) SB-11 has a deadline of 300 days to file a plan and disclosure statement; c) V-11 has a deadline of 90 days to file a plan, and requires a shorter plan but no disclosure statement; a) Standard-11 has no deadline to file a plan and disclosure statement and the deadline for both is set by court order. All these deadlines can be extended by court order after the debtor makes a motion explaining its need for an extension, except for the standards to extend the 300 day deadline for SB-11, which are relatively strict standards.
6. Exclusivity for D to File a Plan – b) Under SB-11 the debtor has exclusivity to file a plan for 120 days and if the D, files the plan within that time, but fails to confirm the plan in 180 days, the D will also lose exclusivity; although these deadlines can be extended the standards for extensions are strict under SB-11. c) V-11 allows the D never to lose exclusivity. a) Standard-11 has the same exclusivity deadlines as SB-11 (120 days, subject to plan confirmation in 180 days), but extensions of the debtor’s time under such periods are given under a less strict standard, subject to a limit of 18 months of exclusivity to file the plan and 20 months to confirm the plan.
7. Deadline to Confirm a Plan – For b) SB-11 the deadline to confirm a plan is 45 days after the plan is filed; but this deadline, while it can be extended, is difficult because it needs a motion showing cause for the extension and a written order to be entered within the 45 day period; because motion practice can easily require several weeks and the reality of needing to know whether another extension is needed and can be justified requires more than several weeks, this 45 day deadline is extremely difficult because it usually requires several extensions where any mishap in timing or delay can be devastating for the reorganization process. c) V-11 has no deadline to confirm a plan after it was filed within 90 days into the case. a) Standard-11 also has no statutory deadline to confirm a plan once it has been filed, except for a potential court deadline.
8. Disclosure Statement Required? a) Under Standard-11 a disclosure statement is required and is important in giving critical information in what is often a large and complex reorganization where the disclosure statement needs to be approved (usually after several court ordered revisions) and distributed to creditors. b) Under SB-11 a disclosure statement is also required but usually gets less attention and/or revisions since the plan is usually more straight forward and less confusing. c) Under 11-V, a disclosure statement is not required and not applicable.
9. Plan Requirements – Under a) Standard-11 and b) SB-11 the plan requirements are similar, although the reality is that the SB-11 plan will usually be simpler. c) Under V-11 the requirement is for a short plan which is more similar to a chapter 13 plan than to a traditional Chapter 11 plan.
10. Goals of the Varied Chapter 11 Case Types Based on the Statutes that Created Each One -b) SB-11 originated as part of the Bankruptcy Abuse Act where the goals of Congress were to prevent Chapter 11 abuse (bankruptcy abuse was considered to be unwarranted delay, repeated bankruptcy filings, bad faith filings, unnecessary filings, etc.) by creating short, hard to extend deadlines with drastic consequences for even minor violations. Given its goals SB-11 does not give the small business debtor many advantages and foists difficult deadlines on the debtor that are hard to navigate in cases that do not easily confirm. In sharp contrast, c) V-11 originated under the Small Business Reorganization Act (SBRA) and was temporarily expanded by the CARES Act; these statutes which amended V-11 were much more sympathetic to small businesses struggling to survive and/or reorganize during the drastic economic disruptions caused by the Covid-19 pandemic and the government quarantines and mandates meant to protect the public during that time. But the major law formed in an atmosphere that was understanding of debtor’s and their needs was the a) Standard-11, which originated under the seminal 1978 Bankruptcy Relief Act (BRA) which was drastic overhaul of the country’s outdated bankruptcy laws, and meant to enact better, clearer federal bankruptcy reorganization laws. The goals of the statutes which created the various Chapter 11 variations are very different, with the BRA of 1978 and the SBRA of 2019 and the CARES Act of 2020 being sympathetic to debtors, resulting in Standard-11 and V-11 schemes that are workable and sympathetic to debtors. The Bankruptcy Abuse Act of 2005, on the other hand, was very different and is difficult on debtors in that it was meant to curb debtor abuse and is more sympathetic to creditors. This is why b) SB-11 hurries the debtor and is draconian if a deadline to extend the time to confirm plan is not timely entered; this is not even a statutory requirement for the other Chapter 11 variations. By sharp contrast c) V-11 originated just prior to and during the Covid pandemic and is very sympathetic to small business debtor’s and is generally not draconian but more forgiving with deadlines.
11. Strategy: Go With V-11 or Standard-11, but not SB-11, Where Possible – If filing a bankruptcy reorganization case for a small business that meets the debt level requirements and other requirements of V-11, than file the small business under V-11 and avoid SB-11. If this is not possible and V-11 is unavailable, then file under Standard-11 and again avoid SB-11 which is mostly disadvantageous compared to both V-11 and Standard-11. This difference exists because of the statutory origins of a) Standard-11 and c) V-11 which were statutes sympathetic to the debtor, whereas b) SB-11‘s statutory origins were statutes that were suspicious and wary of the debtor.