The Restructuring Report

Congress recently sent two different bills to the President’s desk that are designed to provide an easier path for family farming operations and small businesses to reorganize under the Bankruptcy Code: the Family Farmer Relief Act of 2019 and the Small Business Reorganization Act of 2019. The President recently signed both bills into law.

The Family Farmer Relief Act

The Family Farmer Relief Act increases the debt limit for Chapter 12 bankruptcy cases. Chapter 12 bankruptcy cases are limited to “family farmers” or “family fisherman” with “regular annual income.” 11 U.S.C. § 109(f). Currently, the Bankruptcy Code defines “family farmer” as an individual, corporation or partnership engaged in farming operations (with certain other restrictions) with an aggregate amount of debt below $4,153,150. While $4.15 million may initially seem like a large amount—for most farming operations this aggregate amount will include secured debt on much of the farmland and homestead, multiple revolving input loans, and often tax debt—the debt limit has prevented many small- to mid-sized farming operations from utilizing the Chapter 12 process. The Family Farmer Relief Act attempts to address this issue by substantially raising the debt limit from $4,153,150 to $10,000,000.

As the agricultural industry continues to face tough economic challenges, the increase in the debt limit for Chapter 12 will permit larger farming operations to utilize the streamlined Chapter 12 process (most Chapter 12 cases are completed in under 180 days) and take advantage of the Chapter 12 plan requirements, which allow farming operations to restructure debt obligations differently than in a Chapter 11 case, usually to the benefit of the debtor.

Small Business Reorganization Act

In addition to the changes to Chapter 12, Congress also recognized that the Chapter 11 process has grown too cumbersome and expensive for many small- to mid-sized businesses and has attempted to address this problem with the Small Business Reorganization Act. The Small Business Reorganization Act adds a new Subchapter V to Chapter 11 for the purpose of streamlining the bankruptcy process for small businesses. Subchapter V is limited to “small business debtors,” which are generally defined under the Bankruptcy Code as entities engaged in commercial or business activities with an aggregate amount of debt below $2,566,050. 11 U.S.C. § 101(51D).

One of the goals of the Small Business Reorganization Act is to increase oversight of the process and encourage quick reorganizations. To that end, the Act authorizes the United States Trustee’s Office to appoint a standing trustee for Subchapter V cases with a similar role and duties in a Subchapter V case as those held by Chapter 12 or Chapter 13 trustees. Once a case is commenced, the bankruptcy court will be required to hold a status conference within the first 60 days, and a debtor must file a plan within 90 days after the case is commenced, unless the court otherwise extends the deadline.

One of the other goals of the Small Business Reorganization Act is to increase a small business debtor’s ability to negotiate a plan of reorganization. Under the Act, an official committee of unsecured creditors will not be appointed and a disclosure statement will not be required unless the court orders otherwise. The term of the plan must be at least three years but may not be more than five years. Importantly, Subchapter V abrogates the absolute priority rule for small business debtors, allowing equity holders to retain their interest in the business, as long as the plan provides that all of the debtor’s projected disposable income over the term of the plan will be used to make payments under the plan.

While the new Subchapter V creates a more streamlined process and has strong benefits for small business debtors, especially with the ability to avoid the absolute priority rule, the debt limit of $2,566,050 will likely restrict the number of small business debtors that would be eligible to utilize the subchapter, and it is not clear if the passing of the Small Business Reorganization Act will have the desired effect of making it easier for small- and mid-sized businesses to use the Chapter 11 process. It will take time to see the full impact of the inclusion of Subchapter V on the number of small business Chapter 11 filings.

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