Bankruptcy Court rules that SBRA applies retroactively.

In Moore Properties of Person County, LLC, (No. 20-80081; February 28, 2020), Judge Kahn, of the Bankruptcy Court for the Middle District of North Carolina, held that under the specific facts before the Court the SBRA could be applied retroactively such that a debtor that did not qualify as a small business debtor when it filed for bankruptcy relief under prior law was not per se barred from qualifying under the SBRA and thus not barred from making the Subchapter 5 election.

In the Moore case the debtor filed a chapter 11 case before SBRA's effective date. It owned several parcels of real estate and was thus not eligible to make the "small business debtor" designation under the pre-SBRA language of 11 U.S.C. 51, which excluded entities whose primary operation was the business of owning and leasing real estate. Under the SBRA, an entity that owned real estate could qualify as a small business debtor as long as it was not a "single asset real estate" entity.

Judge Kahn held that the change in law could be applied retroactively to encompass a debtor that had already filed for bankruptcy relief prior to SBRA's enactment. Applying longstanding law dealing with the retroactive application of new law, the Court reasoned that "this is not a case in which the Court is asked to apply new law retroactively in violation of the mandates of Landgraf or Security Industrial Bank" and thus "the Court is guided and governed by the obligation to apply the law in effect at the time it has been asked to render its decision."

Judge Kahn further held that because the debtor amended its petition after enactment of the SBRA to designate itself as a small business debtor, that designation stood until a party objected and there was a ruling that the debtor was not a small business debtor. He thus concluded that facially the designation was proper until challenged :

For the reasons set forth above, Debtor designated itself as a small business debtor on the petition date, and that designation controls unless and until the Court determines that it is incorrect. As of the date of the hearing in this case, the designation was not incorrect, and the Debtor is a small business debtor. As a small business debtor, Debtor was entitled to make the election to have subchapter V apply.

Although the Moore decision is interesting because it suggests an existing debtor in possession is not per se barred from making the Subchapter 5 election if it qualifies as a small business debtor under SBRA, it leaves a lot of questions unanswered and seems to invite further challenges. Among other things, the case does not address whether a challenge to a debtor's small business designation through an amendment to the petition will succeed, and whether the propriety of that designation will be determined under the pre-SBRA law or the post-SBRA law. Bottom line ... stay tuned.