Courts throughout the country are broadly permitting amendment of bankruptcy petitions filed prior to the effective date of the Small Business Reorganization Act (“SBRA”) to Subchapter V of Chapter 11.
Here is a discussion of four cases reaching this conclusion.
Debtor may amend its petition in a case filed prior to enactment of SBRA. The debtor sought authority to amend the case from a small business chapter 11 case to a subchapter V small business debtor case (lest there be confusion, a “small business case” is a small business chapter 11 case that is not a “subchapter V” case. 11 U.S.C. § 101(51C)). The case was first filed on November 21, 2018 as a small business chapter 11 case. At a hearing on February 20, 2020, the day after the SBRA became effective, the debtor asked that the petition be re-designated a subchapter V “small business debtor” petition. The court ruled that the amendment can be made at any time without leave of court pursuant to FRBP 1009(a).
On February 10, 2020, nine days before the effective date of SBRA, the debtor filed a small business chapter 11 case. A creditor immediately objected because the debtor was the owner of three real properties, and its primary activity was the business of owning or operating real estate, making the debtor ineligible for designation as a “small business debtor” under then language of 11 U.S.C. § 101(51D). Five days after the effective date of SBRA, the debtor filed an amended petition to one under subchapter V. The court authorized the amendment in light of SBRA’s revision to section 101(51D). That statute used to say that a debtor whose primary activity is the business of owning or operating real estate is not a “small business debtor,” but now the exception applies to a debtor who operates “single asset real estate.” Here the debtor owned three separate properties, each leased for third party farming operations, so it was not a single asset real estate debtor. At the time of the hearing the “small business debtor” designation was correct and the debtor was entitled to amend as of right under FRBP 1009.
Citing the two cases discussed above, the court agreed that the debtor has the right to amend its petition. Further, it determined that the standard applicable to a creditor’s objection is whether the creditor will be prejudiced by the amendment or whether the amendment is made in bad faith. Because the objecting creditor did not satisfy its burden of proof, the court overruled the objection and approved the amendment.
An individual case was originally filed under chapter 13, then converted to chapter 11 and, finally, after the effective date of SBRA, the debtor amended the petition to one under Subchapter V. Applying Moore, the court approved the amendment.