March 28, 2020
Bankruptcy Law Alert
Author(s): Victor G. Milione, Richard C. Pedone, Christopher Fong
Small businesses and lenders need to understand the power of the changes made to the Small Business Reorganization Act.
On March 27, 2020, H.R. 748 (the CARES Act) was enacted to provide emergency assistance and a healthcare response for individuals, families, and businesses affected by the 2020 coronavirus pandemic. The CARES Act modifies the Small Business Reorganization Act (SBRA) and greatly expands the restructuring options available to businesses with less than $7.5 million in debt through March 27, 2021. It is effective immediately. Previously, only businesses with up to $2.7 million in debt could use the SBRA’s expedited provisions.
Small businesses of every type that are negotiating with creditors need to understand the power of these changes. The expedited restructuring possible under the SBRA will now be available to thousands more businesses. Importantly, it appears that the debt limit will be calculated on an entity-by-entity basis. As a result, corporate groups such as restaurant chains, multi-unit franchisees, nursing home chains, and others may now have a tremendous new tool available to them. In addition, even where the debt limit appears to render a group member ineligible because each member is liable on a common debt to a bank or other lender, careful pre-bankruptcy planning and restructuring could render the entity eligible. For example, a lender that wants to work cooperatively with a group of borrowers might agree to restructure its debt for purposes of successful filing under the SBRA by limiting the joint-and-several nature of its claims for purpose of the restructuring.
Small business debtors have traditionally been wary of a reorganization process under Chapter 11, despite its well-acknowledged benefits, due primarily to the potential cost and disruption it often causes. For those businesses that qualify, the SBRA is intended to alleviate those concerns and to make small business bankruptcies proceed under a faster timeline and at reduced cost.
The SBRA can be a valuable tool for small businesses needing to reorganize or that may benefit from the bankruptcy process. We expect that countless businesses that were formerly ineligible for the SBRA, or that ruled out bankruptcy restructuring due to the significant costs, may benefit from a lower-cost bankruptcy restructuring under the SBRA, especially now with the increase of eligible debt levels provided under the CARES Act.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.