BANKRUPTCY CORNER
The Small Business Reorganization Act
Five Months In
JASON S. RIGOLI
Two issues from the recently enacted Small
Business Reorganizations Act (SBRA) have
been percolating through the courts. While
neither has made it to the Eleventh Circuit,
yet, they are two important issues.
Individual Guarantors and Sub V Chapter 11
Eligibility
One issue that has been an issue for the
new subchapter V small business chapter
11 bankruptcy cases (11 U.S.C. §§ 1181-1195)
is eligibility, especially for guarantors of
business debts when the entity is defunct.
A “small business debtor” is defined as
a person engaged in commercial or
business activities (including any
affiliate of such person that is also a
debtor under this title and excluding
a person whose primary activity
is the business of owning single
asset real estate) that has aggregate
noncontingent liquidated secured and
unsecured debts as of the date of the
filing of the petition or the date of the
order for relief in an amount not more
than $2,725,625 (excluding debts owed
to 1 or more affiliates or insiders) not
less than 50 percent of which arose
from the commercial or business
activities of the debtor[.]
11 U.S.C. § 101(51D). The objection to
eligibility in cases of individual guarantors
of defunct business is whether the “engaged
in commercial or business activities”
“limits application to debtors currently
engaged in business or commercial
activities.” In re Wright, Case No. 20-01035-
hb, 2020 Bankr. LEXIS 1240 at *7, 2020 WL
2193240 at *3 (Bankr.D.S.C. April 27, 2020)
(emphasis in original).
Courts that have had this issue have,
applying the cannons of statutory
construction, determined that nothing
in the definition limits the application of
subchapter V to debtors currently engaged
in business. It is enough that the debts
equaling 50% or more of the total debts of the
debtor were from business or commercial
activities. See Wright, LEXIS at *8, WL at *3
(holding debtor “is ‘engaged in commercial
or business activities’ by addressing
residual business debt and otherwise
meets the remaining requirements under
§ 101(51D).”); In re Blanchard, Case No.: 19-
12440, 2020 Bankr. LEXIS 1909 at *7 (Bankr.
E.D.La. July 16, 2020) (holding same); see
also In re Bonert, No. 2:19-BK-20836, 2020
Bankr. LEXIS 1783 at *14, 2020 WL 3635869,
at *5 (Bankr. C.D. Cal. June 3, 2020).
Venue for Small Dollar Preferences
The SBRA also amended the venue statute,
28 U.S.C. § 1409(b). Section 1409(b) creates
an exception to venue generally lying in the
court where the bankruptcy case was filed,
including for certain smaller dollar amount
claims. The SBRA increased the threshold
for a proceeding to recover a debt owing
by a noninsider from $13,650 to $25,000,
however, by not specifically referring to 11
U.S.C. § 547, the majority of courts continue
to hold that 28 U.S.C. § 1409(b) does not
apply to preference actions. Why? Because
28 U.S.C. § 1409(b) only places venue in “the
district in which the defendant resides”
for “a proceeding arising in or related to” a
bankruptcy case and not for a “a proceeding
rising under title 11” – the Bankruptcy
Code, which is the title of the United States
Code § 547 is found. See Novak v. Parts
Authority LLC, Case No. 20-2948, 2020 U.S.
Dist. LEXIS 126202 (E.D.N.Y. June 16, 2020)
(holding the SBRA amendment to 28 U.S.C.
§ 1409(b) still does not include preference
actions brought pursuant to 11 U.S.C. § 547
). See also In re Tadich Grill of Washington
DC LLC, 598 B.R. 65, 67-72 (Bankr. D.C. 2019)
(finding 28 U.S.C. § 1409(b) does not apply
to avoidance actions and collecting cases
on both sides at page 67).
Accordingly, trustees or debtors in
possession can still make recipients of
avoidable small dollar preference payments
defend the action in the bankruptcy court
where the bankruptcy is pending instead
of having the matter tried in the local
bankruptcy court – “home venue” – of
the defendant, making it costlier for the
defendant and less costly for the plaintiff.
This article is submitted by Jason S.
Rigoli, Esq., Furr Cohen, 2255 Glades Road,
Suite 301E, Boca Raton, FL 33431, jrigoli@
furrcohen.com
1
As a result of the COVID-19 Pandemic, this definition
was temporarily modified by the CARES Act, to increase
the debt limit to $7,500,000.00 for all case filed between
March 21, 2020 and Mach 21, 2021, when it automatically
sunsets back to the $2,725,625, barring any further
congressional action.
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