By Robert E. Eggmann and Thomas H. Riske
– Shortages of materials and skilled labor continue to put increased pressure on some small construction contractors and subcontractors to consider bankruptcy reorganization. Unfortunately for them, the hope of re-emerging in Chapter 11 is often unsuccessful because the rules are complicated, challenging and not traditionally well-designed for their needs.
Last year, the federal Small Business Reorganization Act (“SBRA”) became law, added a new “Subchapter V” to Chapter 11 that streamlines bankruptcy procedures for small contractors and provides new tools designed to achieve more successful restructuring. Subchapter V should be welcome news for many small contractors facing financial difficulties, although individual circumstances will dictate whether this is the right course of action.
A person or entity must be engaged in commercial or business activity with an aggregate liability below $2,725,625. At least half of the debt must have arisen from the business. The CARES Act provides for a temporary increase of this threshold to $7.5 million that is scheduled to roll off in 2021.
In Subchapter V, no creditors’ committee is appointed unless a court orders otherwise, making it the exception and not the rule and saving the small business money.
Appointment of Trustees
The SBRA created a new type of trustee, a Subchapter V trustee, to be appointed in every case. The trustee’s duties include appearing at the first status conference and hearings that concern major case milestones, facilitating the development of a consensual reorganization plan, and making payments to creditors under the plan.
No disclosure statement is required unless a court orders otherwise, which removes a common source of protracted battles among the parties involved.
Only the small business debtor may file a plan of reorganization under Subchapter V and must do so within a shortened 90-day timeframe from the order for relief. The rules for the contents of a Subchapter V plan of reorganization are more debtor-friendly. Notably, a loan secured by a principal residence can now be modified if the proceeds of the loan were used for the business.
There are two ways to have a plan confirmed:
- Consensual. Subchapter V strives to help the debtor and creditors reach a consensual plan. Confirmation of a consensual plan terminates the trustee and the debtor receives a discharge upon confirmation, two important incentives for debtors.
- Cramdown. A plan can still be confirmed if some or even all classes of creditors don’t accept it, so long as the plan doesn’t discriminate unfairly, and is “fair and equitable” to impaired unsecured creditors. A “reasonable likelihood” of repayment must be demonstrated, and the plan must provide remedies to protect creditors if payments are not made.
Voting rules change significantly under Subchapter V. As mentioned above, a debtor can now confirm a plan with no votes from creditors.
Absolute Priority Rule
In Subchapter V there is no absolute priority rule, allowing debtors to retain ownership without adding new value – provided the reorganization plan does not discriminate unfairly and funds the repayment of creditors in three to five years by committing all projected disposable income.
This article was originally published in St. Louis Construction News and Review on September 22, 2021.
Robert Eggmann and Tom Riske are attorneys in the firm’s financial restructuring and bankruptcy practice. They both serve as Chapter 11 Subchapter V trustees in the Central and Southern Districts of Illinois, respectively.
This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.