August 7, 2019 - Earlier this week the LSTA hosted the 13th installment (or, in Superbowleese, Installment XIII) of its quarterly webinar roundup of Recent Developments in Bankruptcy Law.  As usual, Rich Levin of Jenner & Block spent most of the webinar delving into a number of key recently-decided bankruptcy cases that raise issues of importance to loan market participants (including a case involving pot!) 

This time, however, we began with a discussion of important bankruptcy legislation that was recently passed by both houses of Congress and is on its way to the President for his signature.  The Small Business Reorganization Act of 2019 adds a new elective subchapter V to chapter 11 for a small business with debts under $2.6 million. While the bill is not in the sweet spot of broadly syndicated loans, it is nevertheless important to our market for the principle it upholds, that senior creditors get paid before junior creditors who generally get paid before equity, and, critically, for what it doesn’t do, i.e., adopt much more radical reform proposals that would have eviscerated the absolute priority rule.  Specifically, the legislation provides for the appointment of a chapter 12-style trustee to assist the debtor in reorganizing but otherwise leaves the debtor in possession in place, protects secured lenders by the same standards as existing chapter 11, and requires the debtor to devote its “disposable income”—revenues after payment of operating expenses, living expenses, and any domestic support obligations—to payment of unsecured claims over three to five years, while allowing the debtor to retain ownership of the business. The bill also amends Section 547 of the Bankruptcy Code by providing some additional protection for preference recipients by requiring the trustee to consider potential affirmative defenses before bringing a preference action and increasing the amount below which the trustee may not sue in the home court to $25,000 from $13,650.  (Importantly, this change is not limited to small bankruptcy cases but instead applies to all bankruptcy cases).  The bill (other than the change to Section 547) is modelled on a proposal offered by the National Bankruptcy Conference and is designed to streamline the bankruptcy process for small businesses.  Both Rich, who is a member and former Chair of the NBC, and the LSTA commented on an early draft of the bill and supported its passage.  We then got into the weeds in the cases, including one that addressed an issue that often arises because marijuana use (and sales) has become legal in a number of states while still illegal under federal law. In Garvin v. Cook, decided by the 9^th Circuit Court of Appeals, the debtor leased property to a marijuana establishment, which operated in compliance with state law. The debtor proposed a plan that paid all creditors in full. The plan contemplated retention of the lease and the use of rent paid under the lease as part of the plan. The U.S. trustee objected to confirmation on the ground that the property’s use violated federal law. Section 1129(a)(3) requires as a condition to confirmation that the plan “be proposed in good faith and not by any means forbidden by law.” But the Court ruled that by its express terms, that provision addresses only the means by which the plan is proposed, not the substantive terms of the plan or of the debtor’s post confirmation activities. Therefore, the court overruled the trustee’s “dopey” objection.