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SBRA technical amendment = technical foul?

posted by Jason Kilborn

A great Arabic folk idiom describes an all-too-common occurrence: Literally, "he came to apply eye liner to her, but blinded her." [اجا يكحلها عماها  izha ikaHil-ha, cama-ha] In other words, someone attempted to improve a situation but ended up ruining it. I believe I've encountered an example in the "technical amendment" made by the CARES Act to the Small Business Reorganization Act of 2019.

As Bob pointed out almost exactly two years ago, the original SBRA definition of a "small business debtor" was designed to keep out large public companies and their subsidiaries, but the language was ... inelegant. The first of two subsections (laid out in Bob's post) excluded companies subject to reporting requirements under the Securities Exchange Act of 1934 (that is, a company with shares widely held by "the public," as defined by the SEC), while an immediately following exclusion applied to such a company that was an affiliate of a debtor (that is, another company already in bankruptcy). Well, whether you're an affiliate of a debtor or not, if you try to file under subchapter V, and you're subject to the '34 Act reporting requirements, you're excluded by the first subsection, so isn't this second provision redundant?

Yes, but ... in 2020, the CARES Act came to put eye liner on this section and blinded it. Rather than fixing this by saying what seems to have been the intention--that an affiliate of a public reporting company cannot file under subchapter V--instead, a "technical amendment" changed the final provision entirely by simply excluding an affiliate of an "issuer, as defined in section 3 of the Securities Exchange Act of 1934." [the same language was inserted in both sections 101(51D)(B)(iii) and 1182, so this change is not temporary]

The problem, it seems to me, is that the definition of "issuer" in the '34 Act includes far more than a big, public reporting company--it includes any company that issues so many as one share of stock (or other "security"). The '34 Act is generally about trading of public securities, but that's not the only thing it's about, and the definition of "issuer" in the '34 Act is simply reproduced from the '33 Act, with far broader application.

No lesser authority than Judge Bonapfel seems to agree with me. In his excellent SBRA: A Guide to Subchapter V of the U.S. Bankruptcy Code (available for free download from the ABI bookstore), Judge Bonapfel posits that "Congress could not have intended” to exclude any affiliate of a tiny company that has issued so much as one share of stock; rather, the right interpretation is that the exclusion applies only to an affiliate of a public company, “an issuer that is subject to the reporting requirements” of the '34 Act--as was more clearly the intention in the language preceding the "technical amendment" made in 2020 by the CARES Act. I hope courts follow Judge Bonapfel's advice and interpret this provision in accord with its fairly plain intent, but I'm afraid establishing this to the satisfaction of a judge--despite the plain language of the technically amended statute--will be a tough slog in small business cases, where the value at stake is not enough to warrant these kinds of complex legal maneuvers. Ugh!

One last gripe: why did this mess (it seems to me) have to occur at all? Why would we invest so much energy in excluding the sub of a public company from subchapter V? If the grand complexity of Chapter 11 is not necessary because the company has such small debts, why force it into a complex procedure simply because 20% or more of its shares are held by a public company? And in cases of "obvious" abuse, even a cramdown plan under subchapter V has to be confirmed as offering creditors all of the company's excess income over 60 months, as well as being presented in "good faith." Either of these would give any concerned US Bankruptcy Judge an easy out to kick the case out of subchapter V if that's appropriate.

Instead, we have a semi-permanent flaw (it could be further "technically amended," but this seems unlikely--but see UPDATE below) in the definition of "small business debtor." A big deal? Perhaps not, given that the new procedure is primarily designed for small companies owned by one or more individual entrepreneurs, but this strikes me as a technical foul that was an unforced error in the rush to hitch this technical fix to the CARES Act. Which brings to mind a famous American aphorism:  Haste makes waste.

UPDATE: Don't be such a pessimist, I keep trying to tell myself! It turns out that my prediction of the likelihood of another amendment was wrong--in August, Senator Grassley introduced S. 2679, which makes the further technical amendment needed to fix the "issuer" problem. I don't know anything about the protocol for taking up such bills, but this strikes me as likely to have sufficient legs to get over the finish line in the foreseeable future.


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