Bankruptcy & Creditors’ Rights Alert

Small businesses often struggle to reorganize in bankruptcy. To address this issue, Congress passed the Small Business Reorganization Act of 2019. The act took effect in February 2020 and makes small business bankruptcies faster and less expensive. At the time of enactment, the act only applied to business debtors with secured and unsecured debts less than $2,725,625.

Setoff is a right that allows a creditor to offset a prepetition debt owed to a debtor with its prepetition claim against the debtor.  See In re Luongo, 259 F.3d 323, 334 (5th Cir.

Setoff is a right that allows a creditor to offset a prepetition debt owed to a debtor with its prepetition claim against the debtor. See In re Luongo, 259 F.3d 323, 334 (5th Cir. 2001). This remedy is aimed at preventing the inequitable and inefficient result that occurs when a creditor is forced to pay a 100% of its prepetition debt owed to a debtor, without resolving its prepetition claim. In such circumstances, the creditor is often forced to later prosecute its unresolved claim against the debtor and is commonly only awarded a fraction of the value of its claim.

The brick-and-mortar retail industry has been in a state of flux since online retailers such as Amazon started business in the mid-‘90s. Recent years have been particularly difficult for retailers: in 2018, retailers represented 5 of the 10 largest Chapter 11 bankruptcies. The pace of retail bankruptcies showed no signs of slowing in 2019, with retailers such as Payless Holding LLC, Forever 21, Gymboree, Z Gallerie, and many others all filing Chapter 11 petitions.

On March 18, 2020, the U.S. District Court for the Southern District of Ohio (the “District Court”), acting as appellate court for the U.S. Bankruptcy Court for the Southern District of Ohio (the “Bankruptcy Court”), affirmed the Bankruptcy Court’s decision that certain alleged liability of the Debtor, Edward Dudley, Sr., stemming from his role as treasurer for certain charter schools, was dischargeable and not exempt from bankruptcy discharge under 11 U.S.C. § 523(a)(8)(A)(ii).  That is the provision which excludes student loans and similar obligations from discharge.

The CFPB announced that it settled with Think Finance, LLC and six subsidiaries on February 5.

Bankruptcy and class actions each establish elaborate procedures and provide a convenient forum to resolve numerous claims against one or more defendants, in an efficient manner. However, while a class action focuses on providing adequate representation to claimants with similar claims, bankruptcy focuses on enabling an insolvent company to reorganize. The two goals do not necessarily blend well in every circumstance.

The Small Business Reorganization Act of 2019 (“SBRA”) became effective on February 19, 2020, after being enacted by Congress at blazing speed.  Indeed, the legislation was first introduced into the House of Representatives on June 18, 2019, was received by the Senate on July 24, 2019 and was signed by the President on August 23, 2019.  The SBRA is intended to help small businesses restructure their debts in bankruptcy more effectively.

In Whirlpool Corporation v. Wells Fargo Bank, N.A., et al. (In re hhgregg, Inc.), No. 18-3363 (7th Cir. Feb. 11, 2020), the Seventh Circuit Court of Appeals recently held that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA“) created a federal priority rule rendering a secured lender’s first-priority, floating liens on inventory superior to the reclamation claims of a trade vendor. The facts in the case are typical, and the holding does not mark a demonstrative shift in common practice.

Facts

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