Congress passed the Small Business Reorganization Act of 2019 (the “SBRA”) to give small businesses a better chance to successfully reorganize under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). One of the SBRA’s most important amendments was the addition of Subchapter V to Chapter 11 of the Bankruptcy Code, which was designed to reduce the cost and complexity of a small business reorganization. Because the statute’s express terms do not address its application to existing debtors, courts have been forced to address issues of conversion and eligibility. Generally, conversion of a case is permissive under Rule 1009 of the Federal Rules of Bankruptcy Procedure, and a debtor may amend a voluntary petition “as a matter of course at any time before the case is closed,” so long as the trustee and any other entities affected by the amendment are given proper notice. A party opposing the amendment of a voluntary petition may object “on a timely basis, and the Court may undertake eligibility considerations.”
Chapter 11 debtors that seek to convert their case and proceed in Subchapter V will have their eligibility evaluated based on several criteria: (1) whether their initial petition was filed before or after the enactment of the SBRA; (2) whether conversion will prejudice creditors; and (3) whether the debtor has engaged in bad faith conduct. This memorandum discusses these eligibility requirements. Part I discusses the procedural issues that arise when a debtor seeks to convert their existing Chapter 11 case to one under Subchapter V. Part II examines debtor conduct and other considerations that may cause a court to deny a debtor’s motion to convert.