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Law Review: Jonah R. Hall, A Creditor’s Kerfuffle: How the SBRA Harms Creditors in Small Business Cases, 25 N.C. BANKING INST. 595 (2020)

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By Ed Boltz, 15 April, 2021

Summary:

Despite its whimsical title, this note takes a rather dim view of the Subchapter V bankruptcies authorized by the Small Business Reorganization Act ("SBRA"), finding particularly problematic the replacement of the Absolute Priority Rule from Chapter 11, which precludes small business owners from retaining any equity unless all unsecured creditors are paid, with the Best Efforts Rule, which instead requires all of the projected disposable income of the debtor to be received in a three to five year period after the first payment under the plan is due to be used to make payments to unsecured creditors under the plan.

The Subchapter V Trustee also comes in for particular criticism, with both the fees paid and the assumption that the Trustee will, because of the obligation under 11 U.S.C. § 1183(b)(7) to “facilitate the development of a consensual plan of reorganization”, be primarily on the debtor's "side".

Commentary:

Perhaps the fundamental misapprehension made in this note is the fault of Congress for including Subchapter V under Chapter 11, rather than Chapter 13, to which it actually may have more in common, in terms of the requirement of a Trustee, the level of disclosure, and the Best Efforts Rule. This note assumes that prior to the enactment of the SBRA, most small businesses in financial distress would file Chapter 11, when in fact, it was (and still is) very common for unincorporated sole proprietorships (and corporations that could be collapsed into such) would instead try to shoehorn their reorganization into a Chapter 13.

The valid criticism in the note that only the debtor in a Subchapter V (and not the Trustee or any creditor) can seek a modification (and then only up until substantial consummation of the plan), since that leaves substantial increases in income out of reach creditors, again is disserved by failing to contrast with Chapter 13. Under 11 U.S.C. § 1329 additional parties can seek such a modification for up to 5 years. Which is better and more equitable (especially since in Chapter 7, post-discharge changes in income are not only irrelevant and uncaptured, but also completely invisible) is question that has been pressed with the recent introduction by Senator Elizabeth Warren of the Consumer Bankruptcy Reform Act, which more closely follows the SBRA in regards to making post-petition increases in income not subject to payment to creditors.

The complaints about Subchapter V trustee fees also suffer due to the lack of comparison with Chapter 13 Trustees, who have an obligation, pursuant to 11 U.S.C. § 1302(b)(4), to "advise, other than on legal matters, and assist the debtor in performance under the plan." That this similar duty often seems to be honored more in the breach than the observance, with Chapter 13 Trustees "representing" the interests of creditors, would point to Subchapter V trustees acting (and being expected to act) the same. That Chapter 13 Trustee fees can become overwhelming, both to the detriment of debtors and creditors, would have been helpful for this note as well.

Lastly, given that this note is published in the University of North Carolina Banking Institute Journal, it is a missed opportunity that the author does not appear to have consulted with Judge A. Thomas Small (ret.) of the Eastern District Bankruptcy Court, as he is the primary drafter of the SBRA.

For a copy of the note, please click here:

A Creditor’s Kerfuffle: How the SBRA Harms Creditors in Small Business Cases

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