Pub. 10 2020 Issue 3

19 PUB. 10 2020 ISSUE 3 an independent asset search, and let the lender make a business judgment on the value of continued litigation. And don’t overlook the value of mediation. Sure, it is a meaningful investment, but the case may be resolved, with finality, by the consent of the parties, in the course of one day, rather than over the next 12-24 months. Chapter 11 Reorganization under the United States Bankruptcy Code Ultimately, some borrowers will seek pro- tection under the United States Bankruptcy Code. A predictable effect of the economic devastation wreaked by the coronavirus is that bankruptcy filings are on the rise, and lenders need to be aware of how the Small Business Reorganization Act of 2019 (SBRA) will change the bankruptcy land- scape in certain Chapter 11 bankruptcy cases. The SBRA is a new debtor-friendly fast-track bankruptcy option that will alter the dynamic of negotiations between banks and their small business borrowers who file bankruptcy under Chapter 11. The SBRA went into effect in February 2020 and modified traditional Chapter 11 practices and procedures with the intention of creating a faster, more efficient Chapter 11 process for small business debtors. For example, the SBRA requires debtors to attend a case status conference within 60 days and file a plan within 90 days. At least 14 days before the status conference, debt- ors are required to file a case status report detailing the debtor’s efforts to obtain a consensual plan. Debtors are not required to file a separate disclosure statement, but the plan must include a brief history of the debtor, a liquidation analysis, and financial projections relating to the debt - or’s ability to make payments under the proposed plan of reorganization. It is worth noting that debtors whose entire industry has been shuttered by the orders of state governors have had success asking for more time to propose a plan of reorganization on the theory that neither any financial projection nor any reor- ganization plan can be generated until revenues return. Perhaps the most notable characteristic of the SBRA is that it allows, under certain circumstances, a debtor to “cram down” a non-consensual plan of reorganization. Under the SBRA, only the debtor can file a reorganization plan, and the court can confirm a debtor’s plan without the support of any class of claims as long as the plan is deemed to be fair and equitable with respect to each class of claims and does not discriminate unfairly. Furthermore, the “absolute priority rule” does not apply to SBRA cases. Typically, when a Chapter 11 plan does not propose to pay creditors in full, equity owners lose their ownership interest unless they provide new value to fund the plan of reorganization. The SBRA, however, al- lows for confirmation of a Chapter 11 plan that maintains pre-bankruptcy ownership while discharging the reorganized debt- or’s unpaid debts, as long as the debtor’s plan meets the SBRA’s plan confirmation requirements. To offset this advantage, lenders should consider taking a lien on owners’ equity as part of any pre-bank- ruptcy workout agreement. Because plans of reorganization under the SBRA may only be filed by the debtor, can be confirmed without any class of creditors voting in favor of the plan, and are not subject to the absolute priority rule, prepared debtors with valuation evidence and financial forecasts may be able to quickly confirm a “cram down” plan. Therefore, lenders confronted with SBRA cases must be prepared to act quickly to engage counsel, participate in negotiations with the debtor and trustee to explore the terms of a consensual plan, and to establish and defend the bank’s claims and liens. Conclusion During challenging economic times, financial institutions need to work pro- actively with borrowers on commercial loan workouts that are, to a degree at least, of value to both the institution and the borrower. In doing so, lenders should take the opportunity to analyze loan documents, identify potential issues, and strengthen the lender’s position during the workout process. To the greatest extent possible, lenders should also use the workout process to obtain or to replace missing documents, cure docu- ment deficiencies, fix drafting errors and obtain additional security. Finally, if a borrower files bankruptcy under Chapter 11, the lender needs to be aware of recent changes brought about by the SBRA and act quickly to protect its rights. w During challenging economic times, financial institutions need to work proactively with borrowers on commercial loan workouts that are, to a degree at least, of value to both the institution and the borrower.