President Trump signed the Small Business Reorganization Act of 2019 (the “SBRA”) into law in August of last year and it became effective on February 20, 2020. The SBRA amended the U.S. Bankruptcy Code and is designed to simplify and shorten the reorganization process for “small businesses” and to make the entire process more cost effective. At the same time that the SBRA was coming online, the U.S. economy experienced a severe downturn as a result of the COVID-19 pandemic.

A new chapter has begun in the ongoing saga to clarify the role of the Federal Energy Regulatory Commission (FERC) in bankruptcy proceedings involving FERC-jurisdictional contracts. In a March 30 order, the FERC identified how it will exercise its jurisdiction under the Federal Power Act (FPA) concurrently with the Bankruptcy Court with regard to the proposed rejection of FERC-jurisdictional contracts in bankruptcy.[1]

The federal government made bankruptcy a viable option for small businesses with the passage of the Small Business Reorganization Act of 2019 (SBRA). The act, which became effective Feb. 19, is designed for smaller businesses that cannot afford the high administrative fees and costs associated with traditional Chapter 11 reorganizations.

Barely a month after Bankruptcy Code amendments providing a cheaper, more efficient path to chapter 11 relief for small businesses took effect under the Small Business Reorganization Act of 2019 (“SBRA”), Congress has nearly tripled the debt-eligibility threshold from roughly $2.7 to $7.5 million in response to economic fallout from the COVID-19 shutdown.

On February 19, the Small Business Restructuring Act (SBRA) — the most significant change to the Bankruptcy Code in 15 years — went into effect. The SBRA, also known as Subchapter V of Chapter 11, removed numerous barriers that had long prevented small businesses from reorganizing in bankruptcy. On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) went a step further and significantly expanded eligibility under Subchapter V by raising the debt limit from $2.7 million to $7.5 million. This overview answers key questions about how these new laws work.

State governments can be creditors of individuals, businesses and institutions that are debtors in bankruptcy in a variety of ways, most notably as tax and fine collectors but also as lenders. They can also be debtors of debtors, in their role, for example, as the purchasers of vast quantities of goods and services on credit. And they can also be transferees of a debtor’s property in (at least) every role in which they can be creditors.

On February 19, 2020, the federal Small Business Reorganization Act (SBRA) took effect, providing qualifying small businesses access to a streamlined and less expensive version of the traditional Chapter 11 bankruptcy process. On the heels of SBRA, and in light of the coronavirus outbreak, the March 27, 2020 enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided further relief and opportunity to small businesses by including particular bankruptcy provisions.

Eligibility to File Bankruptcy under the SBRA and CARES Act

In an opinion issued on March 24, 2020, the District Court for the District of Delaware held that pre-petition environmental fines accrued by Exide Technologies were dischargeable debts in Exide’s Chapter 11 bankruptcy case and that penalties that Exide accrued during the pendency of its bankruptcy case were not entitled to administrative priority. South Coast Air Quality Management District v. Exide Technologies, Civ. No. 19-891 (D. Del. March 24, 2020).

The “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) includes bankruptcy-specific provisions that provide enhanced relief for individuals and businesses that have been negatively impacted by the coronavirus outbreak.

As American individuals, employers, and governments are implementing various restrictions from social distancing to quarantines to reduce the rate of new COVID-19 infections, each of these decisions results in an increasingly negative impact on the American economy. Even with the recent financial aid package passed by Congress, with greater credit constraints and a heightened sensitivity to weak consumer demand, small businesses are among those hit the hardest by COVID-19 restrictions.