The Small Business Reorganization Act of 2019 (SBRA) became effective on the eve of the economic free fall stemming from the COVID-19 pandemic. Longleaf Law Partner’s bankruptcy law expert, Cindy G. Oliver, explains the new law in our 13-part series, Bankruptcy Buzz.
Part 13 of 13:
A small business debtor under Subchapter V of Chapter 11 can modify a secured creditor’s rights if the claim is secured by a lien on the debtor’s principal residence and the loan proceeds were not used primarily to acquire the real property and were used primarily in connection with the small business of the debtor (think home equity loans used for business purposes). This is a significant departure from the traditional Chapter 11 prohibition against modifying the rights of a creditor secured only by a security interest in the debtor’s principal residence. This change has significant ramifications, allowing a small business debtor to cram down certain mortgage claims that are traditionally unmodifiable in Chapter 11. After the enactment of the Small Business Reorganization Act on February 19, 2020, but prior to the enactment of the CARES Act on March 27, 2020, a secured creditor could theoretically block a small business creditor from seeking bankruptcy relief under Subchapter V by ensuring that it extended a business loan secured by the debtor’s primary residence in an amount that exceeded the debt ceiling of $2,725,625. Now that the CARES Act has increased the Subchapter V debt ceiling to $7,500,000.00, that is a much taller order.
The information provided in this article does not, and is not intended to, constitute legal advice. No action should be taken in any particular circumstance or fact situation with reliance upon the information contained in this article without obtaining the advice of an attorney.