Law360 (April 17, 2020, 3:09 PM EDT) --
Once the full impact of COVID-19 finally hit home, life in America immediately and dramatically changed, with businesses across the country reducing hours or shuttering doors, as Americans took refuge in their homes. This state of affairs and continued business interruption may last until June or beyond.
The level of damage to America’s otherwise stable economy has yet to be assessed although measures have been taken by Congress to minimize the harm, including the recently enacted Coronavirus Aid, Relief and Economic Security, or CARES, Act. To its credit, Congress has amended the Bankruptcy Code to include changes to the Small Business Reorganization Act, or SBRA.
The SBRA is available to both companies and individuals that have debts primarily from commercial or business activities. It formerly applied to small business debtors with $2.7 million or less in combined secured and unsecured debt, and the CARES Act increased that debt limit to $7.5 million for a one-year period.
However, because the SBRA is not suited for larger companies, a more robust amendment of the Bankruptcy Code is required to ensure that these companies can survive the downturn.
While the Bankruptcy Code is a powerful tool to assist businesses in financial distress, the code in its current state is ill-equipped to address the level of rapid triage that businesses affected by the virus will need. The Bankruptcy Code is like an aircraft carrier when businesses in this economic climate need a cigarette boat.
A typical midsize to large Chapter 11 case is expensive and can last several months to over a year or more, with layers of administrative and procedural complexity. In today’s environment, companies will need to restructure in a matter of weeks and without the huge expense of a traditional Chapter 11 case.
In order to effectively address the crisis, Congress, as it continues to assemble a Marshall Plan for economic recovery, should consider further amendments to the Bankruptcy Code to (1) address the massive number of Chapter 11 cases that are anticipated and (2) streamline the process and timeline to confirm a Chapter 11 case from months to days.
While an out-of-court restructuring has been the traditional route for most companies in financial — but not operational — distress, the exigencies and breadth of the current financial collapse, coupled with a limited liquidity runway for many businesses and the time constraints associated with negotiating with multiple creditors, make that choice less attractive than filing for Chapter 11 if a fast-track option is available.
The working title of my proposal is the Viable Assistance to Critical Companies In Need Economic, or VACCINE, Act. It is intended to address the key disrupting factor contributing to most companies’ financial distress in the age of COVID-19: lack of liquidity resulting from business interruption.
In short, businesses in America, in particular small to medium-sized, will require not only economic aid comprised of federal, state and local assistance, as well as traditional lending, but a statute that provides these companies breathing room to get their affairs in order and increase their odds of achieving financial recovery and economic viability to pre-COVID-19 levels.
The proposal in its basic form is a deferred payment plan for businesses that would provide companies with sound business fundamentals a simple, efficient, cost-effective and uniform restructuring platform under the umbrella of the Bankruptcy Code and protection of the bankruptcy courts to pay creditors in full over time (or reinstate debt obligations) using a combination of government loans and/or grants, private lending and future cash flow.
The message to the principals of these companies is that you can resume your business operations with some confidence of achieving a recovery. The message to creditors of these companies is that you will have some certainty of being paid for goods and services, conditioned upon providing continued economic support to the company.
More importantly, the proposal would be far less costly than traditional Chapter 11 cases and not be overly burdensome on bankruptcy court resources, which are already dealing with a deluge of Chapter 11 cases for multimillion- and billion-dollar companies.
The concept of a fast-track Chapter 11 case has been around for several decades and is known in bankruptcy circles as a prepackaged or prenegotiated Chapter 11 case.
A prepackaged Chapter 11 case is one where a company in financial distress reaches an agreement on the terms of a Chapter 11 plan with its key creditors and solicits acceptances for the plan per the voting requirements of the Bankruptcy Code prior to filing for bankruptcy. The plan is subject to approval by the Bankruptcy Court.
While a streamlined process, the prepackaged plan takes time and is subject to potential time-consuming litigation.
In contrast, in a prenegotiated plan scenario, which takes even more time, the company reaches an agreement with as many creditors as possible prior to the commencement of the bankruptcy case but does not actually solicit votes until after the filing of its Chapter 11 plan.
In both scenarios, the company is required to prepare and file a comprehensive disclosure statement that discusses the company’s business, the terms and conditions of the plan, and the general requirements for confirmation. Because both of these options are costly and time-consuming, they are not well-suited for this economic environment.
Another example of a fast-track Chapter 11 case exists for small businesses under the SBRA. While this statute is relatively untested, and does not necessarily result in a quick confirmation of a Chapter 11 plan, it is a step in the right direction, in particular with the increased dollar threshold of $7.5 million, although that threshold may well be too low for a vast number of businesses.
Accordingly, for businesses that are suffering only from financial distress stemming from the virus, an even more efficient and fast-paced model without dollar limits needs to be put in place, in particular one that does not have the negative stigma of bankruptcy since these companies, absent the virus, would be conducting business as normal.
The proposal outlined below is intended to provide expeditious relief at considerable savings to the company both in administrative and professional costs and time, and promote judicial economy and resources.
- Once a company determines in the exercise of its fiduciary duty to commence a fast-track Chapter 11 case, it would file a Chapter 11 petition in the district where it has most of its assets, together with schedules disclosing assets and liabilities, secured and unsecured creditors, and leases and executory contracts.
The company would be required to disclose any loans or grants that have been provided by the federal, state or local government, and private lenders, and the terms for the repayment of such obligations.
- Upon the commencement of the Chapter 11 case, the company will enjoy all of the protections of the automatic stay, subject to termination for cause on notice by a creditor for failure to perform under the plan.
- On or about the same time that the company files its Chapter 11 petition, the company will file a combined short-form disclosure statement and plan that discusses the business, the nature of the financial distress, the outstanding amounts owed to secured creditors and unsecured creditors (including priority claims), a business plan and a payment schedule for each of those classes. Administrative expenses will be entitled to payment in full in the ordinary course of business.
- A panel of existing panel trustees, including small business trustees, would be tagged to oversee the process, including conducting a review of the petition, schedules and plan and disclosure statement regarding feasibility. The trustees and their professionals will be paid an hourly rate set and paid by the federal government.
In the event of any deficiencies in any documents, the trustee will coordinate with the company to revise or amend the schedules, plan and disclosure statement. Once the trustee is satisfied that the company can perform its obligations under the plan, he or she will recommend that the Bankruptcy Court enter an order conditionally approving the plan, with final approval after the completion of payments to creditors.
- The plan will treat creditor claims as unimpaired (or reinstated) and provide for payment in full to unsecured creditors who continue to do business with the company over the course of up to 12 months, subject to extension for cause. A company’s tax obligations will be paid in accordance with current provisions of the Bankruptcy Code.
Creditors who are otherwise able to supply goods and services who refuse to conduct business with the company will receive less than full payment on their claims, as determined by the trustee appointed to the case. Because creditor claims are being paid in full or unimpaired, creditors will not be entitled to vote on the plan.
Upon satisfaction of the payments under the plan, the company will receive a general discharge. In the event the company is unable to complete payments under the terms of the plan (as may be modified and extended with notice to creditors), the case may be converted to Chapter 7 for cause.
- Unexpired leases of nonresidential real property and unexpired executory contracts would pass through the Chapter 11 plan and any mutual obligations, other than deferred payments, will not be abridged.
- Bankruptcy professionals will be employed by the company in the ordinary course of business but will be required to disclose any conflicts and connections, reviewable by the Bankruptcy Court as a condition to employment.
Because of the anticipated large number of bankruptcy cases, professionals will not be automatically disqualified in the event they are disinterested persons under the Bankruptcy Code. Bankruptcy professionals will be prohibited from obtaining any personal guarantees from nondebtors regarding the payment of their fees.
There is no lack of talent in the restructuring world to tackle this task. The first step is for Congress to form a blue ribbon panel consisting of the best and brightest restructuring professionals, including lawyers, financial advisors and turnaround experts, and bankruptcy judges, who are tasked with drafting and implementing the legislation.
Sen. Elizabeth Warren, D-Mass., one of America’s preeminent bankruptcy experts, and Sen. Marco Rubio, R-Fla., who chairs the Committee on Small Business and Entrepreneurship, are uniquely qualified to sponsor a bipartisan bill.
The simplicity of the proposal is attractive since, if adopted in some form or another, it will provide the business community a degree of certainty that a measured recovery can be achieved which will promote a company’s business rehabilitation while protecting the interest of creditors, all with relatively minimal statutory and administrative burdens, including burdens on bankruptcy court dockets.
Clearly, this is only a suggestion for a framework. I encourage others in the bankruptcy and financial community to respond with their views and suggestions with the hope that Congress will consider enacting some form of fast-track Chapter 11.
Frank L. Eaton is of counsel to Linda Leali PA.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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