Small Business Reorganization Act to Take Effect on February 19

The Small Business Reorganization Act (SBRA) signed into law last year will go into effect on February 19. The law is aimed at making Chapter 11 more readily available to smaller businesses by creating a new Subchapter 5 to Chapter 11. The SBRA also contains changes to preferential transfer laws (and similar avoidance actions) that go beyond small business reorganizations. A few of the highlights for each of the changes are below.
 
Small Business Reorganizations Highlights:
 
In order to qualify as “small business” the maximum amount of non-contingent debt is $2,725,625 and at least 50% of the individual/entity’s income must be derived from commercial activity. It appears that single asset real estate cases cannot elect to be debtors under the new law, however.
 
There will be no creditor’s committee (unless otherwise ordered by the court), instead a trustee will be appointed from a standing panel of SBRA trustees from each district to assist the debtor in getting through the plan confirmation process. The panel trustees will be different than the standing panel of Chapter 7 trustees. SBRA trustees will not operate the business and will serve more as mediators.
 
The plan of reorganization timeline will be greatly expedited with the intended purpose of reducing the typical costs of Chapter 11. The SBRA does away with the requirement of filing and approval of a disclosure statement prior to soliciting acceptance of a plan; and also, does away with certain plan requirements such as the absolute priority rule. The proposed plan of reorganization must be filed within 90 days of filing the petition.
 
It is worth noting, especially for lenders, that these changes could mean an increase in Chapter 11 filings for smaller businesses that may have previously viewed Chapter 11 as too costly or time consuming.
 
Changes to Preferential Transfer Actions
 
These changes not only impact small business but cut across the spectrum of avoidance actions for trustees and debtors in possession. 
 
Before filing such an action the trustee/debtor must take the step of performing “reasonable due diligence” (a term not defined in the statute) into the transferee’s known or reasonably knowable affirmative defenses.
 
The jurisdictional dollar limit contained in 28 USC 1409 is increased to $25,000 such that any such action below that amount must be brought in the district where the defendant resides.