Amendments to the Federal Rules of Bankruptcy Procedure in Response to the Small Business Reorganization Act of 2019

February 19, 2020 Small Business Reorganization Act of 2019[i] (SBRA) became effective when signed into law in mid-2019. Among other things, SBRA created a new subchapter (Subchapter V) for Chapter 11 of Title 11, United States Code (Bankruptcy Code). The main purpose of Chapter 11 of the Bankruptcy Code is to allow business debtors to restructure and restructure their debts in order to revive their business and continue as a going concern.[ii] However, Chapter 5 creates a leaner and more cost-effective path for “small businesses”[iii] achieve these same goals. In response to the creation of SBRA and the consequent subtitle V, certain amendments were made to several of the Federal Rules of Bankruptcy Procedure (bankruptcy rules or rules),[iv] And one (1) Bankruptcy Rule has been added.[v] These changes to bankruptcy rules take effect on December 1, 2022.

Amendments to the Bankruptcy Rules

In response to the aforementioned SBRA, the following bankruptcy rules were amended:

  • Bankruptcy Rule 1007Checklists, Schedules, Statements and Other Documents; Time Limits – Under amended bankruptcy rule 1007(b)(5), individual Subchapter V debtors are no longer required to file current monthly income statements. In addition, the obligation to file a supplemental schedule under amended Bankruptcy Rules 1007(h) terminates upon confirmation of a Chapter V plan of reorganization or liquidation, unless the plan is not accepted by the impaired class of claims. In such a case, the obligation to file a supplemental schedule terminates when the debtor is discharged.
  • Bankruptcy Rule 1020Chapter 11 Small Business Restructuring Cases
    debtor – Pursuant to Rule 1020(a) of the Revised Bankruptcy Rules, a debtor who files a voluntary petition under Chapter 11 of the Bankruptcy Code has fourteen (14) days to elect to proceed under Subchapter V. Additionally, Rule 1020(c) of the Bankruptcy Rules was deleted and Rule 1020(d) has been redesignated as Rule 1020(c), amended to reflect most small business and subchapter V situations , there will be no committee of creditors.
  • Insolvency Rules 2009Trustees of Estates under Joint Administration Orders – Under the Amended Bankruptcy Rules 2009(a) and (b), if more than one sub-Chapter V case is jointly administered, the debtor’s creditors are not permitted to select a separate trustee for each separate jointly administered estate (by the U.S. Trustee Appointed by Office of Persons) Title V Trustees). In addition, Section 2009(c)(2), which mandates the appointment of trustees in jointly administered Chapter 11 cases, applies, as amended, to cases under subchapter V.
  • Insolvency Rules 2012Change of trustee or successor trustee; accounting – Pursuant to Amendment(a) of the Bankruptcy Rules 2012, if a Chapter V debtor is discharged pursuant to Section 1185(a) of the Bankruptcy Code, the Chapter V trustee will automatically be substituted for any pending proceedings , procedure or matter.
  • Insolvency Rules 2015Obligations to Keep Records, Make Reports, and Notify Cases or Changes in Status – The 2015 Bankruptcy Rules were amended to add Rule 2015(b), which sets forth the duties of subchapter V possession debtors, and redesignates the former (b), (c), (d) and ( e) Subsections (c) ), (d), (e) and (f).
  • Bankruptcy Rule 3010Minor Dividends and Payments Under Chapter 7, Subchapter V, or Chapters 11, 12 and 13 – Amendment to Bankruptcy Rule 3010(b) to include Chapter V cases whereby a Chapter V trustee may not distribute to any creditor less than $15 unless authorized by local bankruptcy rules or court order payment.
  • Bankruptcy Rule 3011 – Unclaimed funds in cases under Chapter 7, Subchapter V, or Chapters 11, 12, and 13 – Amended the title of Section 3011 of the Bankruptcy Code to reflect the fact that Section 347(a) of the Bankruptcy Code applies to subchapter V cases.
  • Bankruptcy Rule 3014Election of a Secured Creditor Under § 1111(b) in a Chapter 9 Municipal or Chapter 11 Reorganization Case – Bankruptcy Code section 3014 was amended to provide a deadline for the court to conduct elections under Section 1111(b) of the Bankruptcy Code, as Section 1125 of the Bankruptcy Code[vi] Not applicable in the case of subchapter V.
  • Bankruptcy Rule 3016Filing a Statement of Plan and Disclosure in a Chapter 9 Municipality or Chapter 11 Reorganization Case – Amended Bankruptcy Rule 3016(b) to reflect that subchapter V debtors are not required to file a disclosure statement (as required by other chapter 11 debtors under Section 1125 of the Bankruptcy Code) unless a court orders to do so. Bankruptcy Rule 3016(d) was amended to include subchapter V cases that may provide official forms of a plan of reorganization and, if required, a disclosure statement.
  • Bankruptcy Rule 3017.1Court Consideration of Disclosure Statements in Small Business Cases or Subchapter V or Chapter 11 Cases – Amended the title and subsection (a) of Bankruptcy Rule 3017.1 to cover situations where a court orders bankruptcy code section 1125 (requiring a chapter 11 debtor to file a disclosure statement) to apply to a subchapter V debtor.
  • Bankruptcy Rule 3017.2Court sets date in subchapter V case without disclosure statement – As noted above, subchapter V debtors are generally not required to file a disclosure statement unless ordered by a court. Bankruptcy rule 3017.2 was added to the rules to authorize the court to act in subchapter V cases other than when a disclosure statement is approved to set a specific time and date.
  • Bankruptcy Rule 3018Accept or reject a plan in a Chapter 9 municipality or Chapter 11 reorganization case – Amending Bankruptcy Rule 3018(a) to take into account the court’s power to set time in subchapter V cases under Rules 3017.1 and 3017.2.
  • Bankruptcy Rules 3019Amending an accepted plan in a Chapter 9 municipality or Chapter 11 reorganization case – Added bankruptcy rule 3019(c) to govern amendment requests

in conclusion

Chapter V of the Bankruptcy Code offers unique advantages, allowing small business debtors a streamlined and cost-effective method of navigating Chapter 11 bankruptcy proceedings. Many times, amendments or additions to the Bankruptcy Code are accompanied by related amendments or additions to the bankruptcy rules in order to further their essential purposes. Small businesses considering Subchapter V protection (or creditors or other interested parties who may have to participate in a Subchapter V case) should consult an experienced attorney to navigate the complexities that accompany bankruptcy proceedings.

If you have any questions or would like more information, please contact Travis Powers (powerst@whiteandwilliams.com; 212.868.4837).

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[i] bar. L. No 116-54, 133 status. 1079 (2019).

[ii] Despite this primary intent, natural persons may seek protection under Chapter 11, and corporate debtors may seek Chapter 11 liquidation rather than reorganization.

[iii] Defined as (subject to certain exceptions) “a person (including any affiliate of such person, which is also a debtor under this heading, excluding a person whose principal activity is a single asset real estate business) engaged in commercial or business activity as of filing On the date of the application or the date of the Relief Order, the total amount of non-contingent liquidation secured and unsecured debts does not exceed $7,500,000 (excluding debts owed to 1 or more affiliated companies or insiders) not less than 50% or by the debtor’s arising out of commercial or business activities” 11 USC § 1182(1)(A). When Subchapter V first went into effect, the debt limit was set at $2,725,635. In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) in March 2020. In the CARES Act, the Chapter V debt limit was raised to $7,500,000 for one year, or through March 2021. Congress then extended the raised debt limit until March 27, 2022, at which time it expires and reverts to its original $2,725,625. However, on June 21, 2022, President Biden signed a bill bringing $7,500,000 of the The debt ceiling was further extended until June 21, 2024.

[iv] One of the “basic purposes” of the insolvency rules is to “prescribe the procedures to be followed in various types of insolvency matters”. A-Fab Engineering Company F. CW Mining Corporation (About CW Mining Corporation), Do not. UT-09-017, 2009 Bank. LEXIS 4055, at *20 (10th Cir. BAP, December 30, 2009) (Quote In re Stacy405 BR 872, 878 (Bankr. ND Oh. 2009)).

[v] Four (4) additional bankruptcy rules have been amended, but these amendments are beyond the scope of this alert.

[vi] Among other things, Section 1125 of the Bankruptcy Code requires Chapter 11 debtors to attach a disclosure statement with their plan of reorganization or liquidation. Elections under Section 1111(b) of the Bankruptcy Code generally occur at any time prior to the conclusion of the disclosure statement hearing. However, Chapter V debtors are not required to file a disclosure statement. Accordingly, Amended Bankruptcy Rule 3014 states that the court will set the applicable election deadline.

This communication should not be construed as legal advice or a legal opinion as to any particular fact or circumstance. The content is provided for general information only and you are advised to consult an attorney regarding your situation and legal issues.

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