Congress Passes Three Acts Amending the Bankruptcy Code
On August 26, 2019, the President signed three Acts amending Title 11 of the United States Code (the Bankruptcy Code): the Family Farmer Relief Act of 2019 (“FFRA”), the Honoring American Veterans in Extreme Need Act of 2019 (“HAVEN Act”), and the Small Business Reorganization Act of 2019 (“SBRA”). The changes wrought by the FFRA and the HAVEN Act are fairly straight forward. The SBRA, however, has left some practitioners wondering what impact the new law will have.
A. The FFRA
The FFRA amended section 101(18) of the Bankruptcy Code, which defines “Family Farmer,” by raising the debt limit from $3,237,000 to $10,000,000. This change became effective immediately and applies to all new Chapter 12 cases. This change allows a broader swath of farmers to access Chapter 12 bankruptcy protection and all the advantages that chapter provides. The number of Chapter 12 filings will likely increase in the coming years as farmers who previously did not qualify now seek bankruptcy protection under Chapter 12. Chapter 12 filings were already on the rise prior to the passage of the FFRA. In 2018, there were 13 Chapter 12 filings in Iowa. So far in 2019, there have been 19 Chapter 12 filings in Iowa. Practitioners and farm credit providers will certainly keep an eye on this number as market pressures continue to mount on farmers in Iowa and across the country.
B. The HAVEN Act
The HAVEN Act amended section 101(10A) of the Bankruptcy Code, which defines “Current Monthly Income,” to exclude Department of Veterans Affairs and Department of Defense disability payments to veterans. By excluding such payments from the debtor’s income calculation, payments to veterans are now treated the same as social security payments. This change became effective on the date it was signed and impacts existing cases as well as new filings. The most likely impact of the HAVEN Act will be that veterans previously forced into Chapter 13 due to income limitations will now be able to file under Chapter 7. Additionally, some veterans previously dissuaded from seeking bankruptcy protection due to the treatment of their disability payments may now choose to file following this change.
C. The SBRA
The SBRA is the biggest amendment to the Bankruptcy Code of the three Acts and arguably the biggest change to the Code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The SBRA makes three changes to the Code. The first is that the SBRA creates a new subchapter V within Chapter 11 aimed at allowing small business debtors to reorganize using simplified and expedited procedures. The second change places a due diligence requirement on trustees and other parties who commence preference actions to consider affirmative defenses. The final change made by the SBRA raises the threshold amount for a trustee to bring a recovery action outside the defendant’s home district.
Small business debtors, which are defined in section 101(51D) of the Bankruptcy Code as a person engaged in commercial or business activities with aggregate liabilities not exceeding $2,725,625, may elect to file under the new subchapter V. Under this new subchapter the owners remain in control of the business, but the United States Trustee appoints a “standing trustee” in the case, which is analogous to the role of a trustee in a Chapter 12 case. The standing trustee’s duties include reviewing the company’s finances and business operations, reporting any fraud or misconduct to the court, and ensuring that distributions are made to creditors according to the plan of reorganization.
Under subchapter V, debtors have two options in crafting a plan of reorganization. The first option is to dedicate all of the company’s net operating income to paying creditors for a “3-year period, or such longer period not to exceed 5 years as the court may fix.” See 11 U.S.C. Section 1191(c)(2)(A). The second option is for the debtor to distribute some or all of its property for the benefit of creditors provided that the value of the property is not less than the projected payments made under the first option. If the debtor successfully completes the plan under either option, the owners are allowed to retain the company’s remaining property. This portion of the SBRA takes effect on February 22, 2020, at which point debtors can begin filing under the new subchapter V.
The second change made by the SBRA amends section 547 of the Bankruptcy Code, which governs preference actions, to require trustees and others who commence preference actions to base their claims on “reasonable due diligence in the circumstances of the case” and consider any “knowable affirmative defenses” of the preference recipients before filing an action. The purpose of this amendment was to put some onus on those filing preference actions. This saves creditors, especially those holding relatively small claims, the time and expense of responding to a preference action to which they have a clear affirmative defense. It is still unclear what impact this change will have. It is not clearly established what constitutes “reasonable due diligence in the circumstances of the case” nor what remedy is available to preference defendants when such due diligence is not used. One can easily envision scenarios in which parties expend more resources litigating the propriety of filing a preference action under this new provision than litigating the action itself. The full impact of this change is yet to be seen.
The final change made by the SBRA is also aimed at saving money for creditors holding relatively small claims. Section 1409(b) of Title 28 of the U.S. Code previously required the trustee to bring an action for the recovery of debt less than $10,000 in the district in which the defendant resides. The SBRA raised that threshold to $25,000. The impact of this change, however, is stunted by the fact that many courts, though none yet in Iowa, have ruled that this threshold does not apply to preference actions.
While the changes made by the FFRA and the HAVEN Act are fairly straightforward, the changes made by the SBRA are less clear because of the introduction of an entirely new subchapter and the new, somewhat ambiguous, due diligence requirement it places on trustees. The potential pitfalls and challenges to practitioners will only be known as the courts determine how to interpret and enforce these new provisions.
Questions relating to this article can be directed to our bankruptcy practice attorneys.
Drew A. Powell
Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.