Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.
 
Date:  August 6, 2018
 
To: All Scheer Law Group Clients and Affiliates
 
From: Spencer Scheer
 
Subject:  Senate Passes Small Business Reorganization Act (HR 3311). Bill to be Signed by President.
 
The Senate passed HR 3311 last week and sent the bill to the President for signature. The Bill will almost certainly be signed.  Accordingly, a new Subchapter V will be added to Chapter 11 of the Bankruptcy Code.  Recognizing that many Chapter 11 business filings are in effect consumer filings that are in Chapter 11 because of the monetary limits on consumer Chapter 13 reorganizations, Congress has now created a new class of Business filings,  which are treated as more of a hybrid between a business and consumer filing.  This will result in more expedited processing of “consumer like” Chapter 11 cases and more accountability from the debtor.
 
Notable provisions are: Expedited requirements to file a plan; limitations on the “cram down” rights of the debtor; enhanced right of Trustee/DIP to avoid preferences.  A summary of the legislation can be found at:
 
 
I have pasted in the changes below with red highlight on notable changes.   The Act takes effect 180 days after the date of enactment.  Lots of time to prepare.
 
Please call or email if you have questions about this case. 
 
Spencer Scheer
 
 
Subchapter V Provisions
 
 
  \21\11 U.S.C. Sec. 1202 (2019).
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    New section 1184 sets forth the rights and powers of a
subchapter V debtor in possession (i.e., the debtor remains in
control of the bankruptcy case).
    New section 1185 provides that a subchapter V debtor may
lose its status as a debtor in possession if the court finds,
after notice and a hearing, that the debtor engaged in
fraudulent, dishonest, or incompetent behavior or grossly
mismanaged its financial affairs.
    New section 1186 concerns property of the estate.
Subsection (a) provides that if a plan is confirmed, property
of the estate includes all property acquired by the debtor
after the date of commencement of the case, but before the case
is closed, dismissed, or converted to a case under chapter 7,
12, or 13 of title 11, whichever occurs first. It also includes
all earnings from services performed by the debtor during such
period. Subsection (b) provides that the debtor remains in
possession of all property of the estate unless the debtor is
removed from possession.
    New section 1187 specifies various duties and reporting
requirements of a subchapter V debtor. In addition, it
clarifies that the separate disclosure statement exemption
applies unless the court orders otherwise.
    New section 1188 requires the court to hold a status
conference to further the expeditious and economical resolution
of a case under this subchapter not less than 60 days after the
case is commenced, unless the court extends this period because
such extension is needed as a result of circumstances for which
the debtor should not justly be held accountable. In addition,
this provision requires the debtor, not later than 14 days
before the date of the status conference, to file with the
court and serve on the trustee and all parties in interest a
report that details the efforts the debtor has undertaken and
will undertake to attain a consensual plan of reorganization.
    New section 1189 specifies that only the debtor may file a
plan of reorganization under subchapter V. In addition, it
directs the debtor to file such plan not later than 90 days
after the case is filed, unless the court extends this period
because of circumstances for which the debtor should not justly
be held accountable.
    New section 1190 sets forth various requirements for the
plan of reorganization, including a brief history of the
business operations of the debtor; a liquidation analysis; and
projections with respect to the ability of the debtor to make
payments under the proposed plan of reorganization. In
addition, the plan must provide for the submission of all or
such portion of the future earnings or other future income of
the debtor to the supervision and control of the trustee as is
necessary for the execution of the plan. Section 1190 permits
the debtor to modify the rights of a holder of a claim secured
only by a security interest in real property that is the
principal residence of the debtor if the new value received in
connection with the granting of the security interest was not
used primarily to acquire the real property, but it was used
primarily in connection with the small business of the debtor.
    New section 1191 specifies the criteria for confirming a
plan. It permits the court to confirm a plan even if a class of
claims or interests has rejected the plan providing that such
plan does not discriminate unfairly, and is fair and equitable,
with respect to each class of claims or interests that is
impaired under, and has not accepted, the plan.
    With respect to the condition that a plan be fair and
equitable as to each class of claims or interests, section 1191
sets forth a rule of construction. As to a class of secured
claims, the plan must satisfy one of three alternative
requirements. First, the plan must ensure that the holders of
such claims retain their liens and that they receive on account
of their claims deferred cash payments totaling at least the
allowed amount of their claims, as valued on the plan’s
effective date. Second, if the plan contemplates the sale of
property securing such claims, then the plan must provide that
the claimants’ liens attach to the proceeds of such sale.
Third, if the plan contemplates neither, then the plan must
provide that the secured creditors receive the indubitable
equivalent of their claims.
    In addition, the plan must provide that all of the
projected disposable income of the debtor to be received in the
three-year period, or such longer period not to exceed five
years as the court may fix, beginning on the date that the
first payment is due under the plan, will be applied to make
payments under the plan. Alternatively, the value of the
property to be distributed under the plan in the three-year
period, or such longer period not to exceed five years as the
court may fix–beginning on the date on which the first
distribution is due under the plan–is not less than the
projected disposable income of the debtor.
    As a further condition of confirmation, the court must find
that: (1) the debtor will be able to make all payments under
the plan; or (2) there is a reasonable likelihood that the
debtor will be able to make all payments under the plan; and
the plan provides appropriate remedies, which may include the
liquidation of nonexempt assets, to protect the holders of
claims or interests in the event that the payments are not
made.
    Section 1191 defines “disposable income” to mean the
income that is received by the debtor and that is not
reasonably necessary to be expended for: (1) the maintenance or
support of the debtor or a dependent of the debtor; (2) a
domestic support obligation that first becomes payable after
the date of the filing of the case; or (3) the payment of
expenditures necessary for the continuation, preservation, or
operation of the business of the debtor.
    Finally, with respect to the payment of administrative
expenses (e.g., the debtor’s attorneys’ fees, the plan may
provide for their payment through the plan.
    New section 1192 requires the court to grant the debtor a
discharge as soon as practicable after completion by the debtor
of all payments due within the first three years of the plan,
or such longer period not to exceed five years as the court may
fix. Such discharge pertains to all debts as provided under the
plan except any debt: (1) on which the last payment is due
after the first three years of the plan, or such other time not
to exceed five years fixed by the court; or (2) that is
otherwise nondischargeable.
    New section 1193 sets forth the criteria for modifying a
plan pre- and post-confirmation.
    New section 1194 pertains to the trustee’s responsibilities
for collecting and distributing payments made by the debtor
pursuant to the plan.
    New section 1195 provides that a person is not disqualified
for employment under section 327 of title 11 solely because
that person holds a claim of less than $10,000 that arose prior
to commencement of the case.
    Sec. 3. Preferences; venue of certain proceedings.
Bankruptcy Code section 547(b) authorizes a trustee to avoid
certain prepetition transfers of property that, in sum, are
preferential to a creditor and to the detriment of similarly
situated creditors. Subsection (a) amends section 547(b) to
require the trustee to determine whether to exercise such
authority based on reasonable due diligence in the
circumstances of the case and taking into account a party’s
known or reasonably knowable affirmative defenses.
    Section 1409 of title 28 of the U.S. Code sets forth the
criteria for the venue of certain proceedings arising in
connection with a bankruptcy case. With respect to an action to
recover a debt against a noninsider of less than $13,650, such
proceeding must be commenced in the district court for the
district where the defendant resides. Subsection (b) would
increase this monetary limit to $25,000.
    Sec. 4. Conforming amendments. Section 4 makes a series of
conforming amendments to the Bankruptcy Code.
    Sec. 5. Effective date. Section 5 provides that the Act and
its amendments take effect 180 days after the date of
enactment.