Does my business qualify as a small business debtor? | Jennings, Strouss & Salmon, PLC

The new subchapter V of chapter 11 of the Bankruptcy Code (subchapter V) was enacted by a law known as the Small Business Reorganization Act of 2019 (SBRA); and, entered into force on February 19, 2020. Shortly after, the COVID-19 pandemic hit the country. In response, and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) came into force. This brief legislation, though now known, is important to consider in light of the time remaining for the increase in debt limits that affects small businesses seeking relief as a small business debtor of the sub- chapter V.

The Arkansas Bankruptcy Code defines a “small business debtor” as follows:
(51D) The term “small business debtor” –
(A) subject to subparagraph (B), means a person carrying on business or commercial activities (including any subsidiary of such a person who is also a debtor by virtue of this title and excluding a person whose main activity is the ownership of unique real estate) who has secured and unsecured liquidated debts that are unconditional on the date of the filing of the application or on the date of the relief order in an amount not exceeding $[7,500,000] (excluding debts owed to one or more affiliated companies or insiders) of which at least 50% arises from the commercial or commercial activities of the debtor; and
(B) do not include-
(i) any member of an affiliated debtor group that has unconditional liquidated secured and unsecured debts in an amount greater than $[7,500,000] (excluding debt to 1 or more affiliates or insiders);
. . . .

In In re 305 Petroleum, Inc., Pacific Pleasant Investments, LLC, Pleasant Point Investments, LLC, 2020 WL 6363718 (Bankr.NDMiss. 2020), 4 separate but affiliated entities sought redress as debtors of the sub- chapter V. Three of 4 businesses classified as small businesses under 11 USC § 101 (51D). However, the fourth was a single real estate debtor within the meaning of 11 USC § 101 (51B). The Court recognized that the SBRA was enacted to facilitate the reorganization of small businesses, stating that the narrow question under consideration was whether debtors, collectively, met the definition of small business debtors.

The Court determined that a debtor must meet both provisions of 11 USC § 101 (51D) (A) and (B) to be considered a small business. The one-asset real estate business (Premier Petroleum Investment, LLC) was not considered a small business. But since it was a subsidiary of the other debtors, its outstanding obligations (i.e. Premier Petroleum Investment, LLC) were included in the recognition of the aggregate liability under 11 USC § 101 ( 51D) (B). Therefore, none of the 4 debtors was qualified as a “small business debtor”; and, each of the cases has been reclassified to a standard Chapter 11 case.

It is also important to note that the parties in 305 Petroleum have identified the single-asset real estate business (Premier Petroleum Investment, LLC) as an “affiliate”. The determination of whether an entity is an affiliate will be made on a case-by-case basis, taking into account the facts of the entities seeking to be classified as a “small business debtor”. 11 USC § 101 (51D) (A) includes “affiliates” who are also a “debtor under this title”. Therefore, if Premier Petroleum Investment, LLC (the single-asset real estate entity) had not filed for bankruptcy, would the court have ruled as well? Probably not. To push the possibilities a little further, as mentioned in my previous blog post “Common misunderstandings or oversights that members of a family business may be inclined to wonder about if they should file for bankruptcy” on November 9, 2020, l The inclusion of non- debtor (but affiliated) entities are increasingly susceptible to substantial consolidation. Therefore, could a litigant (or a creditor) seek to substantially consolidate the affiliated entity for the purpose of disqualifying the small business debtor otherwise qualified from the SBRA?

There are approximately 4 months until the expiration of the increased debt limit provided for by the CARES law, unless extended or modified by future legislation. Bloomberg Law recently reported that 18% of Chapter 11 cases filed from January 1, 2020 to October 31, 2020 were Sub-Chapter V cases. Some of these Sub-Chapter V cases would not otherwise have been permitted without the increase in debt ceilings provided for by the CARES law. So the impact on what would be classified as a small business debtor today will change dramatically in 4 months. Especially if a related entity is considered an affiliate and prevents the small business from the benefits provided by the SBRA.

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