The Small Business Reorganization Act of 2019 created a small business alternative to Chapter 11 (“Subchapter V”). Subchapter V streamlines the Bankruptcy Court process allowing small businesses to reorganize and rehabilitate their financial affairs in a timely, cost-effective manner. This debt reduction tool provides small businesses a pathway to remain in business, benefitting owners, employees, suppliers, customers, and the communities that rely on them.

In the coming months Subchapter V should have a significant impact on the American economy. Preliminary estimates indicate that approximately
40% of all debtors in Chapter 11 cases filed after October 1, 2007 would have qualified as small business debtors under Subchapter V. As Covid-motivated stimulus and support comes to an end in the fourth quarter of this year, we expect to see many organizations avail themselves to the benefits of a Subchapter V bankruptcy.

Hypothetical Case Study of The Blue Rose Grill

The Blue Rose Grill is a well-established restaurant owned by Jack & Jill Rose in Northern New Jersey. Prior to the Covid-19 pandemic, the Blue Rose had consistent annual revenues of approximately $4,000,000 a year.

The Blue Rose had a bank loan of just under $2,000,000, secured by all the restaurant’s assets. Lease obligations were $29,000 a month with five years remaining. The last rent payment was made in January of 2020. Payroll was running at an average of $23,000 a week. As of mid-March, all 45 employees were placed on furlough and the Blue Rose stopped payments to the Bank. Food vendors and other unsecured creditors were owed $210,000.

In June, the Company brought back a smaller team of employees to run operations for outside dining, which yielded $20,000 a week in revenues. Also in June, the Company started negotiations with the Landlord to amend the terms of the lease. After weeks of discussions, the Company and the Landlord came to an impasse.

On July 1, the Blue Rose filed a petition for relief under Subchapter V. A Subchapter V Trustee was assigned to oversee the case. Unlike a normal Chapter 11 proceeding, no unsecured creditors committee was appointed.

On July 30, the Court held a status conference and the debtor filed a report that contained a projected five-year operating plan. In addition, the debtor outlined the steps undertaken and what remained to be done on its path to achieve a consensual plan of reorganization.

On August 20, the debtor filed its Plan of Reorganization, well ahead of the 90-day deadline allowed by the Court. Under Subchapter V, only the debtor may file or amend a Plan of Reorganization. Pursuant to the new rules, the Plan included a brief history of the Debtor’s business operations, a liquidation analysis, and detailed projections of the Debtor’s ability to make payments under the proposed plan.

Under the Plan of Reorganization, The Blue Rose Grill proposed reducing the secured debt down from $2,000,0000 to $500,000, with the remaining $1,500,000 becoming part of the unsecured creditors’ pool. The Debtor’s liquidation analysis valued the bank’s collateral at $500,000. Based on the cash flow projections, it was determined that out of $1,710,000 in unsecured claims, $600,000 could be repaid from free cash flow (after secured debt service and rent) over the next three years. Unsecured creditors would have to accept an approximate haircut of 65%, as the $600,000 being repaid was more than they would have received if the Blue Rose simply liquidated. Both secured and unsecured creditor pools would be paid out over a five-year timeframe. Conditioned upon confirmation of the Debtor’s Plan of Reorganization, the Landlord agreed to forgive the outstanding rent and enact a voluntary reduction of 25% of the monthly rent in return for a 10% equity stake in the business.

Because Subchapter V allows the Judge to confirm the Plan of Reorganization over creditor objections, no time was wasted soliciting approval from the various classes of creditors. Upon a judicial finding that the Plan was reasonable, the Judge entered an Order for Confirmation, granting the debtor a discharge of its debts and effectively ending the case.

The owners of the Blue Rose Grill not only retained their majority equity in the business, but were able to move forward with a new capital structure that had less debt and was better positioned to meet the operational and financial challenges posed by the Covid-19 pandemic. This case moved much quicker and cost substantially less money thanks to the new rules propagated by Subchapter V.

About Traxi

Traxi is a special situation financial advisor with decades of experience guiding companies through turnarounds and restructurings. Our team comes from diverse backgrounds grounded in banking, accounting, communications, and the law. As restructuring professionals would be happy to discuss the specifics of your situation and help design strategies that make sense for your end goals.

Contacts: Anthony J. Pacchia Robert J. Iommazzo (908) 403-0467 (201),  803-1966,  apacchia@traxi.com and  riommazzo@traxi.com

For more information please visit us at www.traxi.com.