Since the Small Business Reorganization Act (SBRA) took effect on February 19, 2020, subchapter V has provided small businesses a more flexible, efficient, and cost-effective path through chapter 11. Nearly 8,200 debtors have elected subchapter V treatment since 2020, with their plans confirmed at more than twice the rate and cases dismissed at about half the rate of other small business cases. The U.S. Trustee Program (USTP) has played an integral role in administering subchapter V cases during SBRA’s first four years, including selecting and supervising subchapter V trustees, raising objections to eligibility and plan confirmation when appropriate, and seeking to dismiss or convert cases when warranted.
Given its experience with subchapter V cases, the USTP has taken interest in recent commentary advocating for prepackaged or prearranged plans within subchapter V—a well-known chapter 11 strategy where a debtor solicits or negotiates creditors’ approval of a bankruptcy plan before filing. This article examines the tensions created by importing prepackaged practices into the subchapter V context.
Prepackaged Plans in Chapter 11 Cases
“Prepackaged bankruptcy,” although not mentioned in the Code or Rules, is an established practice for expediting a chapter 11 case. The debtor solicits all impaired creditors for their votes on a plan before filing the case. There are also “partial” prepacks or “prearranged” cases that involve partial solicitation or significant pre-bankruptcy negotiation without any pre-petition solicitation.
Section 1126(b) of the Code authorizes pre-petition solicitation and acceptance of a plan if disclosures comply with either applicable nonbankruptcy law or §1125(a). Rule 3018(b) mandates that votes on a prepackaged plan will not be counted if substantially all members of the voting class are not solicited or if "an unreasonably short time was prescribed ... to accept or reject the plan." Debtors use these provisions to seek quick confirmation of a plan while lowering administrative costs.
Even with these accommodations in place, notice requirements under Rules 3016, 3017, and 2002 require at least 28 days' notice for both approval of pre-petition disclosure adequacy and objections to confirmation. Despite this requirement, courts have sometimes confirmed prepackaged plans within one day after filing by claiming adequate notice was provided pre-petition rather than showing specific cause for shortening notice periods.
Prepackaged Plans in Subchapter V: An Uneasy Fit
Although §1181 makes certain chapter 11 provisions inapplicable in subchapter V cases, §1126 still applies. Therefore, a subchapter V debtor can solicit acceptances and rejections of a plan before filing if compliant with related requirements. However some features of SBRA address many expediency concerns making prepacks attractive in chapter 11 unnecessary here.
A. Subchapter V Reduces Deadlines for Confirmation
SBRA significantly reduces time required compared to regular chapter 11 processes; most notably allowing immediate court-set deadlines post-plan filing without requiring prior disclosure statement approval unless ordered otherwise.
B. Conflict with Eligibility Determinations
A major issue arises regarding parties-in-interest's ability to examine/contest debtor’s eligibility for subchapter V—particularly as benefits offered here were intended only for specific small business types according clear statutory limits preventing others from exploiting this provision unfairly disrupting due process rights involved during such proceedings.
C.Diminishing/Distorting Role Of Trustees
Introducing Pre-pack Process Within This Framework Would Significantly Impact Assigned Trustee Duties Particularly Concerning Facilitation Consensual Plan Development Responsibilities Alongside Potential Conflicts Over Disinterestedness Appointments Further Complicating Overall Case Administration Dynamics Herein Without Offering Tangible Benefits Beyond Existing Mechanisms Available Under Current Legislation
Subchapter V Prepacks Present Heightened Due Process Concerns Given Ability Confirm Plans Without Single Creditor Vote Hence Ensuring Rigorous Scrutiny Any Attempts Curtail Notice Periods Crucial Protecting Stakeholder Interests Throughout Bankruptcy Proceedings Moving Forward
Conclusion
SubChapter Provides Streamlined Bankruptcy Pathway Certain Eligible Small Businesses With Built-In Expedited Timelines Rendering Need Extremely Shortened Deadlines Commonplace Amongst Traditional Prepacks Unnecessary Ultimately Undermining Key Safeguards Integral Ensuring Fair Equitable Outcomes All Parties Involved Across Broader Insolvency Landscape Today And Beyond