Small Business Reorganization Act Enables Mortgage Modifications

The CARES Act expanded opportunities for some small businesses to reorganize under Chapter 11 of the Bankruptcy Code using the provisions of the Small Business Reorganization Act (“SBRA”). On a related subject, I want to discuss an interesting recent local court decision that addresses who can take advantage of the SBRA and highlights one of the potential benefits of the newly-available legislation to small business owners.

The SBRA creates a streamlined version of Chapter 11 reorganization for small business debtors, which are defined as debtors whose aggregate debts are less than approximately $2.7M – except for the next year when that amount is increased to $7.5M – at least 50% of which are attributable to a business or commercial purpose. On its face, the statute does not specify whether the SBRA can be retroactively applied to bankruptcy cases that were filed prior to the effective date of the SBRA on February 19th.

 In one of the first cases to address this issue, Judge Grossman of the Bankruptcy Court for the Eastern District of New York decided in In re Ventura, Bankr. E.D.N.Y., Case 18-77193-reg (April 10, 2020), that the answer, under certain circumstances, was yes. Even though the case was filed before the SBRA was in effect and had been pending for 15 months, Judge Grossman allowed the debtor to amend her bankruptcy petition to designate herself a small business debtor and proceed under the provisions of the SBRA.

The Ventura decision also highlights one of the potential benefits for a small business debtor: the ability, in some cases, to modify a mortgage on a principal residence. In a traditional Chapter 11 case, a debtor is not ever permitted to modify a mortgage where the only collateral is the debtor’s primary residence. By contrast, however, under the provisions of the SBRA (incorporated into section 1190(3) of the Bankruptcy Code), a small business debtor has the ability to modify a mortgage where the only collateral is the debtor’s primary residence under the following circumstances: (1) if the proceeds of the loan were not used primarily to acquire the property and (2) if those proceeds were used primarily in connection with the debtor’s small business. This means, among other things, that if a small business owner takes out a mortgage or home equity line of credit with the sole or primary purpose of funding a business, he or she can use the provisions of the SBRA to extend the time in which to make payments of the outstanding balance notwithstanding the contractual terms of the loan.

Both of these developments are good news for small businesses owners dealing with debt, whether they have already filed for bankruptcy or not. Judge Grossman’s decision provides a very persuasive model for other courts to follow.

If you have any questions about the implications of this decision, any bankruptcy questions, or any other legal matters, please do not hesitate to contact the Law Office of Ethan Ganc at info@ethanganclegal.com or 212-929-7500.

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