CARES Act expands access to Chapter 11 bankruptcy relief

By now you likely have heard – and perhaps benefited from –the federal Coronavirus Aid, Relief and Economic Security, or CARES. Understandably, much of the focus of the act has been on much-needed loan and other programs to assist small and mid-sized companies survive the impact of the crisis.

However, the CARES Act also includes critical reforms to Chapter 11 of the Bankruptcy Code. These reforms will allow those cash-strapped businesses for which the new loan programs may be insufficient to survive this downturn and reorganize successfully.

Specifically, the CARES Act amended the Small Business Reorganization Act of 2019 (SBRA) by increasing the eligibility threshold from $2,725,625 of debt to $7.5 million of aggregate debt (exclusive of loans by shareholders or other insiders) for businesses filing for Chapter 11 relief and electing treatment under the new Subchapter V of Chapter 11 of the Bankruptcy Code.

This increased debt threshold will provide small businesses with greater access to the SBRA’s benefits while businesses grapple with the short and long-term impacts of COVID-19.

The SBRA, which took effect on Feb. 19, added a new Subchapter V to Chapter 11 of the Bankruptcy Code to provide a streamlined, efficient and cost-effective opportunity for small businesses to successfully reorganize under Chapter 11. The SBRA was a consequence of the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11, co-chaired by Bernstein Shur’s Bob Keach, who also testified before the relevant Senate and House subcommittees in support of the SBRA.

Here are a few of the significant provisions for Subchapter V cases, as amended by the CARES Act:

• Debtors with non-contingent (secured and unsecured) liabilities totaling not more than $7.5 million (excluding insider debt) may opt for Subchapter V relief.
• The SBRA provides that the company’s management remains in control of the company, absent unusual circumstances, throughout the case. The SBRA, like other Chapter 11 cases, assumes a debtor-in-possession. The U.S. United Trustee Program will appoint what has been referred to as a “consulting” trustee in every Subchapter V case, but the Subchapter V trustee does not operate the business and does not investigate the debtor or its operations (unless the court orders the trustee to do so), but rather is primarily responsible for assisting the debtor in formulating a plan, negotiating with creditors, and otherwise ensuring a successful reorganization. Except in highly unusual circumstances, the trustee will not hire professionals, thus saving costs.
• A creditors’ committee is not appointed in a Subchapter V case, unless ordered by the court for cause. Again, this reduces the costs of Subchapter V cases.
• Within 60 days of filing for bankruptcy, the bankruptcy court will hold a status conference to determine how best to proceed with the case, permitting the court to customize proceedings as needed.
• Only a debtor may file a plan of reorganization, and the debtor must file its plan within 90 days of the bankruptcy filing, unless extended due to circumstances for which the debtor should not be held accountable. Given the permitted structure of plans, this deadline will not be problematic for the vast majority of debtors.
• Certain requirements for the contents and confirmation of a plan are modified through the SBRA, including provisions that allow court approval of the plan, even if creditors object or vote to reject the plan, and which enable the owners of the company to retain their interests without paying creditors in full or obtaining their consent.

The Covid-19 pandemic is causing unprecedented disruption to our economy and creating enormous pressure on large and small businesses alike across a broad array of industry sectors. The CARES Act reforms to the SBRA provide struggling businesses with broader access to relief available under Chapter 11 of the Bankruptcy Code, giving them an opportunity to weather this crisis and emerge stronger afterwards.

Bob Keach and Sam Anderson are co-chairs of Bernstein Shur’s Business Restructuring and Insolvency Group, representing clients throughout the United States.