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On August 23, 2019, President Trump signed into law the
"Small Business Reorganization Act of 2019." The primary
effect of the "SBRA" is the creation of a subchapter to
Chapter 11 for small business debtors, i.e. those with no
more than $2,725,625 in secured and unsecured debts combined, to
address the unique issues faced by those companies in the
bankruptcy process.
In addition to the creation of "subchapter V" to
Chapter 11, the SBRA also makes important amendments to statutory
provisions governing preference actions. As a reminder, section 547
of the Bankruptcy Code permits a debtor, subject to certain
conditions and defenses, to "clawback" payments made to
creditors within 90-days of the filing of a bankruptcy petition (or
one-year for "insiders"). Currently, the Bankruptcy Code
does not explicitly require a debtor or trustee to undertake any
due diligence prior to commencing an action under section 547, but
simply says that a debtor or trustee "may" do so. The
SBRA addresses this issue by requiring a debtor or trustee to
consider a party's statutory defenses "based on reasonable
due diligence in the circumstances of the case and taking into
account a party's known or reasonably knowable affirmative
defenses" prior to commencing an action under section 547.
While this requirement may have been implicit prior to the SBRA,
the amendment may provide an additional defense to parties sued
under section 547.
The SBRA also impacts where preference defendants can be sued.
Currently, claims under $13,650 must be brought in the district
where the defendant resides (as opposed to where the bankruptcy
case is pending), but the SBRA raises this threshold amount to
$25,000. Often times, the simple costs to defend an out-of-state
preference action outweighed the benefits of pursuing valid
defenses in small preference actions. This change flips the
analysis, requiring debtors or trustees to weigh the costs of
bringing out-of-state actions with the prospect of minimal
recovery.
The SBRA will go into effect in February, 2020.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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