Set Your Clocks for 12:01am: Happy New Bankruptcy Act!

How are you celebrating Small Business Reorganization Act of 2019 Eve?

In case you’re wondering what I’m talking about, at 12:01am, the Small Business Reorganization Act of 2019 takes effect tonight.

So, if you wake up tomorrow morning and there have been a hundred or more small business and individual Chapter 11 bankruptcy cases filed overnight, this is why.

It’s because the debtors’ counsel think the new Act provides some tactical advantage for their small chapter 11 case. (And, disclaimer: by “small,” it’s a case where total debts is less than $2,725,625.)

Once upon a time, Chapter 11 was meant to be used for big cases–think K-Mart, Sears, Enron, American Airlines. Then, about 10 years ago, we started seeing more individuals and smaller “mom and pop” businesses filing bankruptcy.

Part of the reason was that these cases were “too big” for a Chapter 13. So, they got shoe-horned into an overly complex Chapter 11 case. It’s been generally a bad fit for many debtors.

In a way, the new Act makes a small chapter 11 case resemble a “big” chapter 13 case. Here’s how:

The process is accelerated, and the debtor must submit a plan within 90 days of the case being filed. Plus, the changes shave down some of the administrative requirements in a typical chapter 11, like the appointment of a creditors’ committee and the need to file a disclosure statement.

Also, there is now a “Sub-Chapter V” Trustee appointed in a case, who will oversee and, in some situations, manage the progress and implementation of a repayment plan.

Also, in the most Chapter 13 model possible, the discharge will not be granted until the debtor completes all payments due within the first three years of the plan or a longer period not to exceed five years (depending on the plan terms).

Finally, the part that gets all the attention is the elimination of the “absolute priority rule,” which requires a business owner to pay “new value” in order to retain any interest in a business unless creditors are paid in full. It used to be that creditors could object and require the debtor pay new money in order to keep a business, and, if none is paid, the creditors had to be paid in full. This is now gone.

So, if you wake up tomorrow morning and you see a lot of new Bankruptcy Cases, you may wonder why the debtor’s law firm stayed up so late to file it.

This is why.

But, creditors, please know this–there’s nothing really to do to stop or prevent this new Act’s application. Just wake up tomorrow and re-read the Act. And, be sure to re-read Chapter 13 while you’re at it.

Riverwood Cabins Files for Bankruptcy, with more than 4 Million in Customer Deposits at Issue

Ten or 12 years ago, it wasn’t a shock when a builder filed for Bankruptcy and left behind dozens of half-completed projects and unaccounted for customer deposits in its wake of discharge and dispair.

But, in our modern/better/faster/stronger economy, I was really surprised to see Riverwood Cabins, LLC file a Chapter 7 Bankruptcy in Nashville a few days ago.

Riverwood Cabins builds prefabricated cabins and modular log homes for customers (generally in Tennessee), and then delivers the cabins nationwide to the customer’s land for assembly.

Per the Bankruptcy Schedules, Riverwood claims assets of $265,205.18, and total debt of about $5,900,000.

Of that debt, here’s what’s mind-blowing: that debt includes $4,468,842 (*) in unaccounted for customer deposits that are claimed as debts.

To be clear, the customers who paid 50% down as a deposit for the cabin, and, now, that money is gone and entirely unaccounted for.

This isn’t a few dollars short here and there. This is 4 MILLION dollars.

In the Great Recession, a little shortage here and there wasn’t a shock.

Builders would dip into a little bit of funds from Project C so that they could finish up Project A. Then, a few weeks later… in order to finish Project C, they might dip into the funds on Projects E and F. In the end, the whole scheme would come crashing down when the shortages outpaced the new contracts from new customers.

But I haven’t seen this type of shortage before.

I’m literally shocked by the large number of customers (about 65) who don’t have cabins or any explanation of where their cabins–or their deposits–are.