The Small Business Reorganization Act of 2019 (“SBRA“) is in effect as of yesterday, February 19, 2020. The SBRA was enacted to provide smaller business debtors with a more streamlined path to restructuring their debts. Below are some highlights of the new law.

Absolute-Priority Rule

In LNV Corporation v. Ad Hoc Group of Second Lien Creditors (In re La Paloma Generating Company, LLC, Adv. Pro. No 19-50110 (JTD) (D. Del. January 13, 2020), a Delaware bankruptcy court recently held that actions taken by a senior secured creditor to enforce its rights under an intercreditor agreement did not constitute a breach of the duty of good faith and fair dealings owed to the junior lienholders. The circumstances in La Paloma are not uncommon.

Background

The laws of preferential and fraudulent transfers under the Bankruptcy Code can often seem theoretical and formulaic. When certain boxes are checked, it appears, at first blush, that a pre-bankruptcy transfer can be avoided, regardless of any intent or surrounding circumstances.

In MicroBilt Corporation v. Ranger Specialty Income Fund, L.P. et al. (In re Princeton AlternativeIncome Fund,LP), Case No. 3:18-CV-16557 (D.N.J. Nov. 27, 2019), the District Court for the District of New Jersey recently affirmed a bankruptcy court's decision to appoint a chapter 11 trustee, without conducting a traditional evidentiary hearing.  The holding reinforces that a bankruptcy court has broad discretion to grant extreme remedies in a case.

Facts

In In re Linn Energy, LLC, 2019 WL 4149481 (5th Cir. Sept. 3, 2019), the Fifth Circuit recently reminded us that if a debt instrument looks like a security and quacks like a security, it likely is a security for purposes of subordination under section 510(b) of the Bankruptcy Code. The implications of characterizing an instrument as a security under section 510(b) is that any claim arising therefrom is subject to subordination to general unsecured creditors.

A debtor has the right to assume or reject any executory contract or unexpired lease through its bankruptcy, pursuant to the Bankruptcy Code. A trademark license is an executory contract that is subject to assumption or rejection if performance remains due from both parties to the contract. A debtor will reject a trademark license if it believes that there is no net benefit to the counterparty to the contract continuing to perform its obligations and thereby will repudiate any further performance of its obligations.

A debtor has the right to assume or reject any executory contract or unexpired lease through its bankruptcy, pursuant to the Bankruptcy Code.  A trademark license is an executory contract that is subject to assumption or rejection if performance remains due from both parties to the contract.

Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending. At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.

A Defaulted Construction Loan and Frustrated Attempts to Foreclose:

In Popular Auto, Inc. v. Reyes-Colon (In re Reyes-Colon), Nos. 17-1971, 17-1972, 2019 WL 1785039 (1st Cir. April 24, 2019), the First Circuit recently ruled that “special circumstances” does not authorize a bankruptcy court to use its equitable powers to contravene the numerosity requirement for an involuntary petition under section 303(b)(1) of the Code. This twelve year dispute did not end well for the petitioning creditors.

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection.