The year 2020 in bankruptcy law started with an eye on increasing the ability of small businesses to utilize the Chapter 11 process in a more efficient and less expensive way, which lead to a record number of commercial filings, a reduction in consumer filings, and a test of the bankruptcy system.
SBRA aka Subchapter V
In February, the Small Business Reorganization Act went into effect. SBRA, or Subchapter V, allowed businesses with liabilities up to $2,725,625 to file a simplified version of Chapter 11. The goal of Subchapter V was to streamline the reorganization process and reduce costs for smaller commercial debtors during the pendency of the case.
There are key elements of Subchapter V that differentiate it from a typical Chapter 11 reorganization. In a Subchapter V proceeding, only the debtor can file a plan, there is no disclosure statement requirement, the debtor repays its creditors over a period of three to five years, a Subchapter V trustee is appointed, and there are no quarterly United States Trustee (UST) fees. The requirements of Subchapter V allow the business to complete the plan without expending substantial amounts of costs in legal and UST fees.
It proved to be a major incentive for companies to file under the Subchapter V, as quarterly fees under a typical Chapter 11 could run into the tens of thousands of dollars over the life of a Chapter 11 plan. Attorney fees also tend to be reduced under Subchapter V as there is no disclosure statement requirement and no hearing to approve. This allows more of the debtor’s revenues to be used to fund a plan. Additionally, in Chapter 11 proceedings, it could take months before a plan is even filed. In larger cases, this could last years as some debtors could be granted numerous extensions. Unsecured creditors would see no payment during that time. Under SBRA, a Subchapter V debtor is required to file its plan within 90 days of the filing of the bankruptcy case.
The implementation of the CARES Act made a substantial change to SBRA: it raised the debt ceiling to $7.5 million, allowing more businesses to take advantage of Subchapter V and avoid the delays and costs of a traditional Chapter 11 proceeding. The pandemic and CARES Act has led to the month to month increase in business bankruptcy filings by approximately 40 percent from the prior years.
No Spike in Consumer Filings
To the contrary, we have not seen the spike in consumer filings that was expected due to the pandemic. This is believed to be due, in part, to foreclosure and eviction moratoriums being enacted and the paycheck and unemployment stipends from the federal government. The PPP program has also helped prevent businesses from furloughing staff. Whether we see a spike in 2021 will depend on how the government and financial system continue to react to the pandemic.
Proof of Claim Filings Up in Some States
While the number of consumer filings did not explode, plaintiff and debtor attorneys continued to pursue actions concerning the itemization of interest fees and costs in proof of claims. Although this issue has not been widespread throughout the country, we have seen an increase in activity in Florida, Georgia, and Virginia. And although we have no circuit court opinions, several bankruptcy courts have handed down conflicting decisions on how these amounts should be set out.
In Thomas v. Midland Funding LLC (17-0510), a bankruptcy judge for the Western District of Virginia issued a lengthy opinion setting forth her views on whether the breakdown of interest, fees, and costs satisfies the itemization requirement set forth in the Federal Rule of Bankruptcy Procedure 3001(c)(2)(a) which requires “[i]f, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.”
In Thomas, the court decided that the creditor, by failing to properly itemize interest and fees, did not comply fully with FRBP 3001(c), opening itself up to potential sanctions under FRBP 3001(c)(2)(D). The court has the ability to “award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” We will see where the Western District of Virginia proceeds on this issue, but it has laid out a current road map for creditors to follow.
FDCPA, Bankruptcy and Standing
Addressing Fair Debt Collection Practices Act issues on bankruptcy matters is not just occurring within the bankruptcy cases. Although the bankruptcy court may be the proper forum to raise these issues, we have seen an increase of cases filed in federal district courts as well. The question that arises is whether the debtor (plaintiff) has standing to file such an action.
In Trichell v. Midland Credit Management Inc., 964 F.3d 990 (11th Cir. 2020), the Eleventh Circuit held that the debtor received a misleading letter but suffered no injury. As a result, these “information injuries” did not confer Article III standing on the debtor. As debtors attempt to bring FCDPA actions for violations of the discharge injunction or failure to properly itemize interest fees and costs in proof of claims, the Eleventh Circuit calls into question whether such claims will have standing.
The Seventh Circuit has also handed down several similar decisions. See Bazile v. Finance System of Green Bay, 2020 U.S. App. LEXIS 39433 (7th Cir. 2020), Spuhler v. State Collection Service, 2020 U.S. App. LEXIS 39434 (7th Cir. 2020), Brunett v. Convergent Outsourcing, 2020 U.S. App. LEXIS 39270 (7th Cir. 2020), and Gunn v. Thrasher, Buschmann & Voelkel, 2020 U.S. App. LEXIS 39267 (7th Cir. 2020).
New Bill Proposes to Amend Bankruptcy Code
As 2020 comes to a close, we have seen a new bill introduced to amend the Bankruptcy Code. Sen. Elizabeth Warren (D-Mass.) and Rep. Jerrold Nadler (D-N.Y.) have introduced the Consumer Bankruptcy Reform Act of 2020. The proposed legislation would eliminate Chapter 7 and Chapter 13 bankruptcy filings and replace them with a new Chapter 10. It would allow a consumer debtor to have three types of plans, provide for very minimal, if any, payback to unsecured creditors, and allow debtors to create their own valuations for the purposes of stripping all liens, including all residential mortgages. And it would allow for the discharge of student loans and other currently non-dischargeable obligations.
The bill also provides for FDCPA actions in bankruptcy cases and gives the CFPB power in bankruptcy cases. Whether this bill will survive may well be decided by the eventual makeup of the Senate. It may also give creditors the opportunity to push for the amendment of certain rules pertaining to proof of claim filings.
What Will the New Year Bring?
The year 2020 has been a year that many would like to forget. What 2021 brings will be a wait and see scenario. Once foreclosures and evictions are once again initiated, are we likely to see increases in consumer filings? Can small business survive, or will there be additional closures? Will the CARES Act be extended past its sunset date of March 2021?
On FDCPA actions and bankruptcy, will circuit courts provide any additional guidance? At the Supreme Court, will our highest court continue to accept and hear bankruptcy cases? And in Congress, is bankruptcy reform on the horizon?
Maurice Wutscher LLP will continue to monitor all aspects of bankruptcy issues and keep our clients posted on any breaking developments.