A local businessman, Woody (“Woody”), is the 100% owner of a toy store in Miami, Florida (the “Company”). The Company is an LLC, and Woody has elected to be taxed as an S Corp.

The Company was successful for many years, but recently international trade wars, rising costs, and increased competition has resulted in decreased profitability, and the Company can no longer pay its debts as they come due.

The Company operates out of a store front located in a strip mall that Woody owns. The strip mall is valued at $375,000 and has a mortgage on it with a balance of $500,000 owed to Buzz Bank. The monthly rental payment is $4,000 a month and the lease is a triple net lease (additional rent includes the taxes). The monthly mortgage payment is $2,500 per month, which includes principal, interest and an escrow payment for taxes and insurance. The Company is 2 months behind in its rent to Woody and Woody is six months behind in his mortgage payments to the Buzz Bank.

The Company owns office furniture, fixtures and inventory including some rare toys, which have combined total a value of $50,000. The Company also has receivables totaling $25,000. In order to upgrade the toy displays, 3 years ago, the Company took out a secured line of credit from Mr. Potato Head, which has a current balance of $450,000 bearing a nondefault interest rate of 10% and a default interest rate of 18%. The Company increased the line of credit from $100,000 to $450,000 two years ago when it began experiencing cash flow problems. Mr. Potato Head has a blanket security interest on all of the personal property of the Company as well as on all of the Company’s receivables, and properly recorded a UCC-1 with the Florida Secretary of State at the time of the loan.

To draw business in, the Company also leases from Army Men, Inc., a custom wacky waving inflatable tube man, at $5,000 per month, with 11 months left of on the lease. At the end of the lease, the Company can purchase the custom wacky waving inflatable tube man for fair market value. The Company is 1 month behind on this lease.

Most of the proceeds of the line of credit went to pay the normal operating expenses of the Company, including the rent, wages of the Company’s 2 employees, other costs associated with the office condominium, and costs associated with the operation of the business, including Woody’s salary of $200,000 per year. In the last 6 months, however, Woody has not taken any salary or distributions.

1 year ago, Woody’s father, Andy who lives outside the Southern District of Florida, lent the Company $100,000. The loan, which is memorialized in a promissory note, bears interest at 10% a year and is unsecured. Over the last year, the Company has repaid Andy $35,000. In addition, through the years, Woody has contributed $500,000 towards the Company, which on the Company tax returns are characterized as a shareholder loan, although no written loan documents were ever executed.

The Company is current on all state and federal taxes, as well as payroll.

Finally, the Company has other unsecured debt, including to its accountant, for $100,000, various toy suppliers for another $125,000, and a Company credit card debt of $50,000 which Woody has used for company and, within the last year, some personal expenses including for Woody’s adult child’s groceries while she is at university (about $25,000).

Woody has personally guaranteed the Company’s obligations to Mr. Potato Head. When the Company increased the line of credit to $450,000, Woody secured his personal guarantee with a mortgage on his home which, at the time, Woody owned free and clear. The value of the home is $350,000. Woody has utilized his personal credit cards not only to pay for his own personal expenses such as groceries and utilities, but also to pay some expenses of the Company (approximately $35,000). Woody’s total personal credit card balance is $75,000.

Despite all these problems, Woody has forged new relationships with several executives at Pixar Studios and believes that an influx of new toy business is around the corner. In addition, Woody has been introduced to a few local magicians, who can also provide new business. Andy, with whom Woody remains close, has stated he is willing to help keep the Company going “for a little while” to help Woody get on his feet again.

Woody believes that if he can somehow work out the debts owed to Buzz Bank and to Mr. Potato Head, then after paying the normal operating costs of the Company and a modest salary for himself (at $80,000 per year), then, over the next 5 years, the Company will have sufficient cash flow to pay some amount to the unsecured creditors, albeit nowhere close to what is currently owed.

Woody’s friend Bo Beep tells him about a new type of bankruptcy, so he sets up an appointment to discuss these issues with Bankruptcy Attorney. He would like to discuss not only how to proceed with regard to the Company, but he also would like to discuss the personal guarantees that he owes, and how a potential bankruptcy filing (or other insolvency proceeding) would affect him personally.

Based on facts as stated does the Company qualify for the Small Business Debtor Reorganization Act of 2019? What facts, if any, could prevent or disqualify Company from filing under the SBRA?

If Woody personally filed as a Small Business Debtor, what actions could you take with respect to Woody’s personal guarantees and homestead property collateral?

a. With respect to the homestead property and mortgage what factors should the court consider in determining whether said mortgage is subject to modification?

What possible actions could a trustee in the Company’s bankruptcy under the SBRA take against Woody, Andy, Woody’s daughter, or non-insider third parties?

The Company has filed for bankruptcy under the SBRA, Buzz Bank’s CEO, Buzz Lightyear, is furious that Woody has filed and vows to “make things difficult to infinity and beyond.” What role should the SBRA Trustee have in dealing with the Debtor and Buzz Bank?

What if Woody or the Company filed for chapter 11 bankruptcy prior to Feb. 20, 2020, can either amend the petition to designate themselves as a “small business debtor?”