Legislative Update Significant Business Bankruptcy Provisions in Pending Legislation

<i>The Bankruptcy Reform Act of 2001 (S. 420/H.R. 333) will be the subject of a House-Senate conference committee once Congress returns from its summer recess after Labor Day. This month's Update highlights the key areas affecting business bankruptcy.</i>

</p><h3>Significant Business Bankruptcy Provisions in Pending Legislation</h3>

<p><i>Written by:<br>
Prof. Jack F. Williams<br>
American Bankruptcy Institute<br>
Robert M. Zinman Resident Scholar</i><br>
<a href="mailto:jwilliams@abiworld.org">jwilliams@abiworld.org</a&gt;

</p><h4>Pre-pack Fast Track</h4>

<ul>
<li>The court may order a U.S. Trustee not to convene a meeting of creditors or equity security-holders in certain circumstances:
<ul>
<li>Debtor has filed plan before meeting.
</li><li>Debtor has solicited acceptances of the plan prior to commencement of the case.
</li></ul>
</li></ul>

<p><b>(§402 amending §341 of the Code.)</b>

</p><h4>Dirt Is King!</h4>
<ul>
<li>Unexpired lease of non-residential real property is deemed rejected if the trustee fails to assume by the earlier of:
<ol>
<li>120 days after order for relief or

</li><li>confirmation order.
</li></ol>
</li><li>Court may extend the "drop-dead" date for 90 days for cause.
</li><li>Any further extensions are subject to the lessor's consent.
</li><li>The trustee's authority to assign under §365(f) is subject to §365(b) requirements.
</li></ul>

<p><b>(§404 amending §365 of the Code.)</b>

</p><h4>Retention and Compensation</h4>
<ul>
<li>Investment bankers need not be "disinterested." <b>(§414).</b>
<ul>

<li>Pre-petition relationship no longer disqualifying in itself.
</li><li>Limited utility.
</li></ul>
</li><li>Board certification an appropriate factor in fee awards <b>(§415).</b>
</li><li>District court has exclusive jurisdiction over §327 disputes.
</li><li>Committee composition
</li><li>Court may change committee membership to ensure adequate representation of parties <b>(§405).</b>
</li><li>Court may order increase in members in certain circumstances where a small business creditor with a large claim (large from the specific creditor's perspective) was left off.
</li></ul>

<h4>Utility Service</h4>
<ul>

<li>"Assurance of payment" includes cash deposit, letter of credit, certificate of deposit, surety bond, prepayments or other forms agreeable to the trustee and the utility.
</li><li>Utility entitled to assurance of payment within 30 days of the filing in a chapter 11 case.
<ul>
<li>Court may modify any assurance of payment agreement upon request.
</li></ul>
</li></ul>

<h4>Reclamation Claim Expansion</h4>
<ul>
<li>Seller's right to reclaim goods from insolvent debtor recognized up to 45 days after receipt of the goods.
</li><li>Significant change in existing law.
</li></ul>

<p><b>(§1227.)</b>

</p><h4>Chapter 11 Deadlines</h4>
<ul>
<li>Period of exclusivity for filing a plan capped at 18 months from order for relief <b>(§411).</b>
</li><li>Period of exclusivity for solicitation of acceptances capped at 20 months from order for relief <b>(§411).</b>
</li></ul>

<h4>Chapter 11 Tax Disclosure</h4>
<ul>
<li>Adequate disclosure requires full discussion of potential federal and state tax consequences of the plan to the debtor and a hypothetical investor.
</li></ul>

<p><b>(§717.)</b>

</p><h4>Confirmation Conditioned on Filing Returns</h4>
<ul>
<li>Prohibits a court from confirming a plan in a chapter 11 case unless requested tax returns are filed.
</li></ul>

<p><b>(§1228.)</b>

</p><h4>Interest on Tax Claims</h4>
<ul>
<li>Provides specific rate for interest on federal tax claims in accordance with the Internal Revenue Code.
</li><li>Provides for use of state law for interest on state tax claims.

</li></ul>

<p><b>(§704.)</b>

</p><h4>Chapter 11 Plan Payments on Tax Claims</h4>
<ul>
<li>Confirmation requirements for payment of priority tax claims:
<ul>
<li>regular cash installment payments,
</li><li>over a 5 year period from order for relief, and
</li><li>in a manner not less favorable than the most favored non-priority unsecured claim provided for in the plan.
</li></ul>
</li></ul>

<p><b>(§710.)</b>

</p><h4>Small Business Cases</h4>
<ul>
<li>Small Business Case (SBC): Chapter 11 case with a Small Business Debtor (SBD).
</li><li>SBD: Person having non-contingent debts of less than $3 million (excluding debts owed to affiliates and insiders) as of the petition date or order for relief.
</li></ul>

<p><b>(§432.)</b>

</p><h4>U.S. Trustee's Miranda Warnings to SBD</h4>
<ul>
<li>U.S. Trustee must:
<ul>
<li>Conduct initial interview of SBD;

</li><li>Investigate business viability;
</li><li>Inquire about business plan;
</li><li>Explain debtor duties and obligations;
</li><li>Attempt to obtain agreed scheduling order;
</li><li>If appropriate, inspect premises, review records, ensure tax returns have been filed;
</li><li>Diligently monitor the SBD; and
</li><li>Promptly move for conversion or dismissal when appropriate.
</li></ul>
</li></ul>

<h4>SBD Duties</h4>
<ul>
<li>Chapter 11 SBD must:
<ul>
<li>File most recent financial statements and tax returns;
</li><li>Attend Code or court-ordered meetings;

</li><li>Timely file schedules and statements;
</li><li>Timely file post-petition reports;
</li><li>Maintain customary insurance;
</li><li>Timely file tax returns and other governmental filings;
</li><li>Timely pay administrative expense taxes unless contested; and
</li><li>Permit the U.S. Trustee to inspect premises, books and records.
</li></ul>
</li></ul>

<h4>SBC Disclosure Statement Requirements</h4>
<ul>
<li>Court should consider the following in reviewing adequacy of disclosure statement:
<ul>
<li>complexity of case,
</li><li>benefit of additional information to parties in interest, and
</li><li>costs of additional information.</li></ul>

</li><li>In SBC, plan itself may satisfy disclosure requirements.
</li></ul>

<h4>SBC Plan Deadlines</h4>
<ul>
<li>Period of exclusivity: 180 days from order for relief unless extended for cause <b>(§437)</b>.
</li><li>Plan must be confirmed, if at all, by 45 days from filing of plan unless extended by court.
</li><li>Drop-dead: Disclosure statement or plan must be filed within 300 days from order for relief.
</li></ul>

<h4>Preference Power Scaled Back</h4>
<ul>

<li>§547(e)(2) is amended to increase grace period from 10 to 30 days <b>(§403).</b>
</li><li>§547(c)(2) is amended to provide that the ordinary-course-of-business defense is met if, among others, a transfer was made:
<ol>
<li>in the ordinary course of business of the debtor and transferee or
</li><li>in accordance with ordinary business terms <b>(§409).</b>
</li></ol>
</li><li>In business cases, immunity from preference attack for transfers less than $5,000 <b>(§409).</b>
</li><li>Preference action of $10,000 or less must be brought in the district where the defendant resides <b>(§410 amending 28 USC §1409(b)).</b>
</li><li>Extends to 30 days the time period for perfection of security interest in property in debtor's possession for affirmative defense purposes <b>(§1222).</b>