The Bankruptcy Protector

In 2019, Congress enacted the Small Business Reorganization Act. This legislation created a new type of Chapter 11 reorganization under which certain businesses with total debts less than a certain threshold (currently $7.5 million) could reorganize. These provisions, known as Subchapter V eliminated certain requirements for confirmation of a reorganization plan and include other changes to make small business reorganization quicker and less expensive.

The Bankruptcy Protector

In large, complex bankruptcy cases:

• The mediator must have a plan;
• Otherwise, the mediator is going to get run over;
• These are tough cases with very experienced lawyers who often have significant resources to put into the fight; and
• The mediator has to be just as resourceful, just as strong, just as ready to engage as the lawyers.

That’s the view expressed by Judge Gerald Rosen (Chief Judicial Mediator in City of Detroit bankruptcy) [fn.1] in a May 2021 interview on the mediation process in the Detroit bankruptcy [fn. 2].

Congress and the President finally extend the $7.5 million debt limit for Subchapter V eligibility:

• by “unanimous consent” in the Senate;
• by a vote of 392 – 21 in the House; and

A legislative history of the new law is at this link.

The new law is bi-partisan and uncontroversial. But there are some bells and whistles, as discussed below.

“SUNSET” – Again!

The Bankruptcy Protector

It seems like a small thing: Chapter 11 debtors in two states paying lower quarterly fees than Chapter 11 debtors in the other 48 states.

What’s the big deal?

Alabama and North Carolina throw a political hissy fit, three or four decades ago. They want their own Bankruptcy Administrator system (not the U.S. Trustee system established everywhere else). And they are rewarded. The reward includes lower quarterly fees.

Where’s the harm in lower quarterly fees? What follows is an attempt to:

“The Congress shall have Power To . . . establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”

–U.S. Constitution’s Bankruptcy Clause (Art. 1, Sec. 8, cl. 4).

An Old Losing Streak—Article III

“No State shall . . . pass any . . . Law impairing the Obligation of Contracts.”

–Art. I, Sec. 10, U.S. Constitution

Increasingly, states are expanding their laws on debtor/creditor relationships, such as receiverships and assignments for benefit of creditors.

Some of these expansions look suspiciously like a Bankruptcy Code Lite—e.g., adding “stay” provisions.

And that can be a constitutional problem, according to long-standing (and recent) opinions of the U.S. Supreme Court.

What follows is a brief summary of three such opinions.

There’s a new U.S. Circuit Court opinion on a person’s right to a jury trial, when sued by the Securities and Exchange Commission before one of its administrative judges.

And guess what:

The Bankruptcy Protector

This term, Supreme Court Justice Elena Kagan has authored a pair of opinions related to arbitration. The first of these decisions, Badgerow v. Walters, 20-1143, 142 S. Ct. 1310 (2022) came down on March 31, 2022, where Justice Kagan, writing for the 8/1 majority, held that a court must have an independent basis of federal jurisdiction to undertake a petition to confirm or vacate an arbitration award.