On April 28, 2022, Central District of California Bankruptcy Judge Ernest M. Robles issued a decision in relation to a debtor’s eligibility to act as a small business debtor under Subchapter V of the Bankruptcy Act. In the ruling, Judge Robles found that the debtor, Phenomenon Marketing & Entertainment, LLC (“Phenomenon”), did not have the right to proceed as a small business debtor because at least two of the debtor’s affiliates were “issuers” under the Securities Exchange Act were from 1934 (“Exchange Act”). The decision highlights an issue first identified by the authors in a cover story published in the February issue of the American Bankruptcy Institute Journal entitled Not So Technical: An Error in the Cares Act Correction to Small Business Debtor.
SBRA and Technical Issue with Subchapter V Eligibility
The Small Business Reorganization Act of 2019 (the “SBRA”) precludes publicly traded companies from taking action under Subchapter V by excluding from the definition of a small business obligor “any obligor that is a corporation that meets the reporting requirements under Section 13 or 15 subject to (d) the Securities Exchange Act of 1934.” The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) amended the SBRA to further limit the eligibility of Subchapter V by excluding “any obligor that is an affiliate of an issuer.” By using the phrase “an issuer”, which the Stock Exchange Act broadly defines as “any person issuing or intending to issue securities”, without reference to the issuer being subject to the “reporting requirements” of the Stock Exchange Act, the Bankruptcy Act does not make only publicly traded ones Corporations and affiliates of publicly traded corporations ineligible for Subchapter V, but also formally disqualifies unlisted corporations simply because they have an affiliate that has issued a security.
Problem with legal language and attempts to address the problem
In the article, we proposed a solution that would allow Congress to reduce the potential over-exclusion of Subchapter V obligors by deleting the phrase “an issuer” and “any obligor that is an affiliate that is subject to the reporting requirements under Section 13 subject to, or incorporated by, 15(d) of the Exchange Act of 1934 (15 USC 78m, 78o(d))”, which is used in §101(51D)(B)(ii) and §1182(1)(B)(ii). Seemingly spurred on by our article, Senator Charles Grassley (R-Iowa) introduced the bipartisan party on March 14, 2022 Senate Act 3823, entitled “Insolvency Threshold Adjustment and Technical Correction Act” (the “Technical Correction Act”). Senators Richard J. Durbin (D-IL), Sen. Sheldon Whitehouse (D-RI) and Sen. John Cornyn (R-TX) co-sponsored the legislation. On April 7, 2022, the Senate passed the bill unanimously. On April 11, 2022, the bill was introduced to the House of Representatives, which has taken no further action at this time.
The most notable aspect of the Technical Corrections Act is the restoration of the debt limit for small businesses that choose to apply for $7.5 million for an additional two years under Chapter V (this higher debt limit provision was originally included in the CARES ACT included but expired on March 27, 2022). The original version of the Technical Corrections Act as introduced would have made this increased debt limit permanent, but the bill was later amended in the Senate to include only a two-year extension from the date of passage. The bill also included other technical changes to the bankruptcy law, including the technical correction we proposed in the ABI Journal article.
Decision of Phenomenon Marketing & Entertainment, LLC
In his ruling, Judge Robles conducted a careful analysis of the SBRA as amended by the CARES Act and concluded, as suggested in our article, that the Bankruptcy Act, as amended, excludes debtors where they or an affiliate (a company that owns 20% of the Debtor) is an “Issuer” regardless of whether the Debtor or its affiliate is a public company. In particular, Judge Robles found that at least two of Debtor’s affiliates were “issuers” within the meaning of the Securities Exchange Act. Judge Robles also went into detail about our article in his decision. However, Judge Robles did not conclude that the excessively broad language was the result of an editorial error or represented the actual intent of Congress. Judge Robles discussed the possibility that this Congress may have intended to bar any entity that is either an “issuer” or an affiliate with an “issuer” because Congress oriented the SBRA toward “parent companies” and included one entity “elaborate ownership structures” was a plausible policy choice by Congress. Judge Robles concluded: “[t]o To the extent that Congress intended corporations such as the Debtor to benefit from Subchapter V, it is the role of Congress, not this court, to amend the statute accordingly.”
Judge Robles’ decision highlights the very issue we addressed in the ABI Journal article. The authors believe that Congress had no intention of barring small companies from using SBRA’s powerful tools to turn their businesses around simply because they have a subsidiary that is an “issuer.” Our belief is reinforced by the fact that the Senate passed the Technical Corrections Act, which would specifically correct the overly broad language used in the definition, thereby avoiding the outcome phenomenon. In the end, we agree with Judge Robles that it is up to Congress to decide whether to amend the SBRA, and if the Technical Corrections Act passes the House and is signed by the President, Congress has addressed the issue we are facing in the ABI have identified journal articles and effectively ensure the hard result arrives phenomenon should not be repeated.
 11 USC § 101(51D)(B)(ii).
 11 USC § 101(51D)(B)(iii) prior to the passage of this bill.
 Companies that are subject to the reporting requirements under §§ 13 or 15 d BörsG are generally listed companies. Such entities are excluded from Subchapter V pursuant to 11 USC § 101(51D)(B)(ii).
 Excluding the proposed increase, the current debt limit for Subchapter V obligors is $3,024,725, subject to an inflation adjustment every three years.