THE SMALL BUSINESS BANKRUPTCY BLOG
The Small Business Reorganization Act of 2019 (the “SBRA”) added new Subchapter V to Chapter 11. The SBRA offers small business debtors a streamlined Chapter 11 procedure that should be less costly and time-consuming than a traditional case, and it offers the business owner a better opportunity to retain his or her company going forward. To be eligible for Subchapter V, a debtor must have “noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . in an amount not more than $7,500,000.” 11 U.S.C. § 1182(1)(A). This debt ceiling will fall back down to approximately $2.7 million in the spring of 2021.
Debt limitations are also features of Chapters 12 and 13, and they are the subject of litigation in those chapters. Unquestionably, the debt limitation will be the occasional subject of Subchapter V litigation as well. A recent case provides timely guidance for practitioners, including a court’s view on how PPP loans are treated under § 1182. In In re Parking Mgmt., No. 20-15026, 2020 Bankr. LEXIS 2309 (Bankr. D. Md. Aug. 28, 2020), the debtor had debts of almost $9,000,000, and its eligibility under subchapter V was questioned by the United States Trustee and a major creditor. However, the debtor argued that two types of its debt were unliquidated and/or contingent and thus should be removed from the debt limit calculation: (1) lease rejection damages and (2) the debtor’s obligation to repay its PPP loan. If these debts were found to be contingent or unliquidated, then the debtor would be eligible for a Subchapter V filing.
The lease rejection damages arose simply from the debtor’s decision to reject 12 leases as part of its first day filings. The court found such damages to be contingent. Even though § 365 treats lease rejection damages as a prepetition breach of contract, the rejection is not effective until court approval. In Parking Mgmt., the court held that any lease rejection claims were contingent obligations until the court approved the rejection. Consequently, the court held that such claims are not considered in determining the debtor’s eligibility for Subchapter V.
The debtor also listed a $1.8 million prepetition PPP loan that had not been repaid as of the petition date. To determine whether the debtor would be eligible for Subchapter V, the court had to decide whether the PPP is a noncontingent, liquidated debt as of the petition date. The court reviewed the history and the purpose of the Paycheck Protection Program, which includes loan forgiveness under certain circumstances. The court determined that the debtor's liability to repay the PPP is dependent on the debtor using the funds for ineligible expenses or failing to meet employee retention criteria. Because the debtor's liability to repay the PPP relies on some future extrinsic event which may never occur, the court determined that the obligation was contingent as of the petition date. The court further found that the PPP debt was unliquidated as of the petition date because it was not then known whether the debtor would use the PPP funds for ineligible expenses or would fail to maintain employee staffing levels in accordance with the PPP. Accordingly, the PPP obligation was not included in the Subchapter V debt limits and the debtor was eligible to take advantage of the SBRA.
Because so many small business debtors will have taken advantage of the PPP, In re Parking Mgmt. may be an important case to help debtors stay under the debt limitations of Subchapter V.