In 2019, Congress passed the Small Business Reorganization Act of 2019 (“SBRA”), whose Subchapter V specifically allowed small businesses to reorganize, discharge certain debts, and pay back a portion of other debts over a 3- or 5-year period. This latter aspect is similar to the standard Chapter 11 employed for large organizations, such as General Motors, the Los Angeles Dodgers baseball club, or the recent reorganizations of cryptocurrency firms Voyager, Celsius, and FTX.
In the Subchapter V bankruptcy, the debtor proposes the plan of reorganization, and the court has the option to cram it down the creditors’ throats (assuming that the Court believes that the plan is objectively fair). This is called a “non-consensual plan of reorganization” in Subchapter V.
In an interesting twist, however, where the court approves the small business’s nonconsensual plan of reorganization, the SBRA allows small enterprises to discharge their debts, even where the creditor alleges debts that stem from fraud, breach of fiduciary duty, tax fraud, malicious conduct, or any other exception to discharge stated under 11 USC Sec. 523(a).
In other words, the exceptions to discharge (debts that cannot be cancelled) stated in 11 USC Sec. 523 (a) do not apply to small business, where the court approves the nonconsensual plan of reorganization.
This may lead to harsh results. For example, in a recent case, the creditor who claimed she was injured by the company’s malicious conduct found her claim to barred, or “discharged.” As a result of the explicit language of the SBRA, her claim was effectively cancelled. The court explained that, if Congress had intended a different result in such a case, it would have said so in the law.
In re Off-Spec Solutions, LLC (Kristina Jayn Lafferty v. Off-Spec Solutions LLC, et al)
BAP ID-23-1020-GCB; Adv. No. 22-06020-NGH (Ninth Circuit Court of Appeals, Bankruptcy Appellate Panel; Appeal from the Bankruptcy Court for the District of Idaho; Filed July 6, 2023)
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