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To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
American Bankruptcy Institute

Analysis of S.1914 Business Reorganization Provisions

Written by:

Christian C. Onsager, Co-chair

ABI Business Reorganization Committee

Faegre & Benson LLP

Prepared by the American Bankruptcy Institute<

Web posted and Copyright ©

June 16, 1998, American Bankruptcy Institute.

The purpose of this paper to analyze the potential impact of S.1914 as it relates to business reorganizations. It is the product of the Business Reorganization Committee of the ABI. The ABI is the nation’s largest multidisciplinary organization of professionals devoted to research and education on issues related to insolvency. ABI’s more than 6,200 members represent both debtors and creditors in business and consumer cases. While ABI takes no advocacy positions on pending legislation, it regularly testifies before Congressional committees and provides analysis of the impact of such legislation.

Overall Comment

In 1994, Congress authorized and funded the National Bankruptcy Review Commission, which filed its report in October 1997. The Commission heard many hours of testimony by various interested parties and had the benefit of recommendations from its Working Groups. The ABI assisted the Commission by preparation of a survey on preference laws, a survey of ABI members’ impressions on various issues, and a series of symposia on nine different issues. The recommendations of the Commission are far-reaching and, in some instances, controversial.

The Commission’s final Report recognized that the Bankruptcy Code is a complicated and integrated system, composed of many pieces designed to balance the rights of the different interests. Since the adoption of the Code in 1978, there have been numerous amendments designed to address the concerns of a particular constituency. Such modifications to the system often have unintended consequences and provisions which appear to prefer a particular creditor group vis a vis a debtor may adversely affect the rights of other creditor groups. This often unintended effect can jeopardize potentially successful reorganizations. Successful cases preserve jobs and provide a source of continuing business for trade creditors.

Although the centerpiece of S.1914 relating to business reorganizations is the adoption of "small business bankruptcy" provisions, a number of other provisions of the Billcould significantly impact the business reorganization process and the rights of various constituencies.

Section by Section Analysis

Title IV

General Comment. One impetus for the creation of a separate procedure for small business cases is the perception that Chapter 11 in its current state is not "one size that fits all." The small business provisions may, however, not eliminate the perceived problems for small and medium size cases, if there is not sufficient flexibility to create exceptions when appropriate for the benefit of creditors and reorganizing businesses.

Section 401—Small Business Defined. S.1914 proposes to define small businesses in terms of a total noncontingent, liquidated, secured and unsecured debt of $5 million or less (excluding insider debt) or unlimited debt for single asset real estate debtors. Under these limits, approximately 86% of current Chapter 11 cases would be small business cases. The use of total unliquidated noncontingent debt has the advantage of relative certainty, and Bankruptcy Judges are generally familiar with this test.

The disadvantage of a binding debt limit test is that it is not always an accurate guide to the potential complexity of a reorganization case. Thus, many debtors with smaller amounts of liquidated debt, but large amounts of unliquidated potential liabilities, may be forced into a faster track Chapter 11 which is not necessarily in the best interests of thevarious creditors constituencies. Indeed, some of these constituencies may be holders of the unliquidated debt, such as tort claimants or holders of claims relating to environmental liabilities. For example, a Chapter 11 case in Maine involved a small independent power producer, which was a small town’s major employer. A flood disrupted its operations and created serious "downstream contamination" issues. Sorting out environmental claims (both potential and actual) and insurance coverage, as well as sale of the business, took over a year. A 150 day deadline would have caused the failure of the case to the detriment of the employees, the economy of the small town and the creditors.

Such cases are not unusual. At a minimum, some mechanism should be considered which would allow the court to "opt out" of the small business procedure in the appropriate case.

Section 402—Rules for Disclosure Statement and Plan. A disclosure statement is intended to contain such information as is necessary to allow creditors to cast an informed vote, but is often an item of considerable cost to even a small business debtor. Following a trend in the Bankruptcy Courts, Section 402 grants significant additional flexibility regarding the form, content and timing for approval of a disclosure statement in Chapter 11 cases. The ability to streamline a disclosure statement, especially in cases where the creditors are already familiar with the business, offers the advantage of expense reduction.

One concern is the language in proposed § 1125(f)(2)(B), which would allow a courtto eliminate a separate disclosure statement. The disclosure statement requires the debtor to set down in writing its forecasts and the assumptions on which such forecasts are based. The disclosure statement process serves as an important control on business debtors, as well as an important source of information for unsecured creditors who, as a body, are often not represented in smaller cases. If this section is read to permit the total elimination of the disclosure statement, it would shift the burden of discovering critical information to unrepresented creditors, who may be in the least favorable position to obtain and disseminate the information in a cost efficient manner. The court’s ability to streamline the disclosure statement to fit the case would provide beneficial flexibility.

Section 403—Standard Form Disclosure Statements and Plans. Section 403 proposes the development of standard form disclosure statements for small business cases. Such forms, particularly in very small cases, offers the potential advantage of reducing costs and providing often unsophisticated debtors with help as to the type of information to provide. Care should be taken so that any rule mandating the use of standard forms does not conflict with the flexibility of the court under proposed Section 402.

Section 404—Uniform National Reporting Requirements. Proposed section 404 would require periodic reports to be filed by the small business debtor with certain current and projected financials. The proposal requires basic information which virtually any debtor,including small business debtors, should be able to produce in order to allow the Court to evaluate their prospects for reorganization on an ongoing basis. In addition, the section would give the Bankruptcy Court flexibility to expand the reporting requirements if deemed appropriate.

Any increase in the cost or potential burden on management of the debtor should be deminiums as Section 404 would require only relatively simple and basic information.

Section 405—Uniform Reporting Rules and Forms. This section would require the development of Bankruptcy Rules regarding the uniform national reporting requirements mandated under section 404. Such rules would have the advantage of potentially reducing the cost of the reporting requirements and thus the cost of the overall reorganization effort. Standard forms would be disadvantageous only to the extent the rules do not provide sufficient flexibility to vary the forms when appropriate.

Section 406—Duties in Small Business Cases. This section would expand on the duties of a small business debtor. It would require the debtor either (i) to file its most recent "balance sheet," "statement of operations and cash flow statement" and its most recent federal income tax return, or (ii) to state that the financial statements and income tax returns are not available, all within three days of the filing of the petition. The apparent object of this expanded duty is to provide creditors and the U.S. Trustee with increased informationfrom the outset of the case, pending the filing of the schedules. The additional information would supplement the initial financial report already required to be filed with the U.S. Trustee, which is due fifteen days after filing of the petition.

There is an ambiguity regarding the contents of the statement of operations or a cash flow statement. Also, there is some question as to the utility of the information at the outset of the case, particularly for unsecured creditors. Much of the information will be contained in the schedules which, under the proposed statutory amendments, will have more stringent requirements. Accordingly, the additional burden on the debtor may add some cost while being of little use to creditors.

Section 406 would require either senior management or counsel to attend court scheduling conferences, initial debtor interviews, and the meeting of creditors. This statutory amendment does not appear to change current practice in most courts.

Section 406 would make it more difficult for a small business debtor to obtain an extension of the time to file schedules. There is limited flexibility given to the court to extend the deadline. The books and records of many small business debtors are in disarray and are often a contributing cause to a reorganization filing. Under the proposed language, it is unclear whether such disarray would constitute "extraordinary and compelling circumstances" that would merit an extension, and thus a case may fail unnecessarily to the potential detriment of unsecured creditors.

Section 406 would require timely filing of post-petition financial and other reports, the maintenance of insurance, and the timely filing of tax returns. This does not change existing practice in many courts.

Section 406 would require timely payment of all administrative expense tax claims, which is generally consistent with existing practice in many courts. The proposal is unclear as to whether a debtor is required to only make payment in the amount shown in a filed return even if the governmental taxing unit asserts a larger claim.

The proposed amendment would also require the debtor to establish separate accounts for the deposit of trust fund taxes. Segregation of such taxes is not required outside of bankruptcy and may result in some small increase in administrative expense.

Section 406 would also allow the U.S. Trustee, bankruptcy administrator or a designated representative to inspect the debtor’s business premises, books, and records after reasonable prior written notice. This provision would expand upon the existing rights of the U.S. Trustee or bankruptcy administrator, which are available only after notice to the debtor and opportunity for hearing in the event of any dispute. The provision raises due process concerns. Moreover, as a practical matter, the U.S. Trustee or bankruptcy administrator may not have the resources to conduct such inspections or the expertise to accurately analyze the information. The intent of "designated representative" is unclear, and could allow the designation of creditors or others whose interests are potentially adverse to the debtor. For example, provisions to preserve trade secrets are not included.

Section 407—Plan Filing and Confirmation Deadlines. Section 407 of the bill would set a statutory deadline of 90 days for the small business debtor to file a plan of reorganization and imposes stricter requirements on any extension. This section must be considered in connection with Sections 408 and 409 , which would require a court to confirm a plan within 150 days of the petition date and would only allow extension of confirmation on the same conditions. In some cases, these shortened deadlines may be appropriate to bring a measure of objective discipline to the process.

However, the use of deadlines presumes that speed equates with efficiency, lower cost, and the best interests of creditors. In many cases, the interests of the unsecured creditors are better served if confirmation is delayed. For example, a debtor may need additional time to carry out a changed marketing strategy; a turn-around expert may need additional time to actually accomplish the task of turning around the company’s business; or a company’s product may need additional development time. In many cases, it would appear the primary beneficiary of statutory deadlines for plan filing and confirmation are secured creditors. Thus, absent the ability of the Courts to grant extensions that would benefit unsecured creditors, sections 407, 408 and 409 appear to strengthen the protection of secured creditors at the expense of the often unrepresented unsecured creditors.

Further, Chapter 11 is often used to effectuate an asset sale of the company to a buyer who will continue some or all of the business. The proceeds of sale often significantly enhance the return to secured and unsecured creditors. As a practical matter, such casescannot be filed initially as Chapter 7 liquidation cases because a trustee does not have the ability to operate the business in order to maintain its going concern value. Once the sale has taken place, however, such cases are often converted to Chapter 7 as a more efficient mechanism for distributing the sale proceeds. The bidding and sale process may take longer than the proposed deadlines. Conditioning an extension of the statutory deadlines on a showing that a plan of reorganization can be confirmed may thus allow one creditor constituency to disrupt the sale process to the detriment of the other creditors.

The statutory deadlines also create practical mechanical and practical problems. Bankruptcy Rule 2002 requires at least 25 days’ notice of the hearing on approval of the disclosure statement and an additional 25 days’ notice for the hearing on confirmation. The statutes, however, leave only a 60-day gap between the time a plan may be filed and the time it must be confirmed (the difference between 90 and 150 days). There may also be an issue of availability on a court’s calendar.

Section 410—Duties of the United States Trustee and Bankruptcy Administrator. Section 410 of the bill would impose significant new duties on the office of the United States Trustee, including the obligation to investigate the debtor’s viability and to review and monitor the debtor’s activities throughout the case. There may be benefits from an institutionalized role for a bankruptcy examiner who could evaluate and monitor the debtor’s business for the benefit of creditors. In reality, however, this institutionalization may createmany problems. Chapter 11 filings encompass every conceivable kind of business with every conceivable kind of problem. A useful investigation of a debtor’s viability and business plan and monitoring of the debtor’s activities require numerous different types of expertise for each type of business. The U.S. Trustee’s office currently neither has this diverse expertise nor the funds with which to develop such expertise.

Moreover, there is the potential for a dramatic increase in the bureaucracy that would be required to implement these investigatory duties. The investigation and continuous monitoring of a debtor’s viability is not a process which takes one or two hours, if it is to be accurate and useful. In a strong economy, there are approximately 27,000 Chapter 11 filings a year. Of these, it is conservatively estimated that at least 80% will be small business cases as defined by the statute even if the average investigation and monitoring were only ten (10) hours per case, and the case load remained constant - it would take over five thousand full time employees. The resulting manpower needs could be significant.

Section 411—Scheduling Conferences. This proposed section would require the court to hold a status conference on its own motion or the request of any party. Generally, it reiterates a power which virtually all bankruptcy courts believe they can now exercise. Consideration should be given to changing the language "shall hold such status conferences" to "may hold such status conferences," so that each court will not be required to hold a conference at the whim of every creditor.

Section 412—Serial Filer Provisions. Generally, section 412 provides that the automatic stay will not be available to a small business debtor that files a new Chapter 11 case within two years of obtaining confirmation of a plan of reorganization in a prior case. Currently, whether and under what circumstances a debtor may file successive Chapter 11 cases differ from court to court. Courts either (a) allow a successive Chapter 11 filing subject to requirements of good faith; (b) allow a successive filing after a showing that the prior confirmed plan has failed for reasons that could not reasonably be foreseen or (c) prohibit all successive Chapter 11 filings. This provision provides certainty with regard to the ability to file sequential Chapter 11 cases.

However, rather than defining the requirements for a permissible second Chapter 11 filing, the proposal would remove the protections of the automatic stay in the second case unless the debtor makes certain evidentiary showings sufficient to justify a reimposition of the stay. This provides little relief for the unsecured creditors in the second filing. The proposal would benefit secured creditors at the potential expense of unsecured creditors.

However, the secured creditor may be allowed to foreclose before the debtor (and the potentially unsecured creditors) has obtained relief. This concern is reflected in the current Bankruptcy Code which provides for the stay to be automatic, subject to the right of a creditor to obtain an order "lifting" the stay in the appropriate circumstances.

The proposal would allow the debtor to obtain an order reimposing the stay in a second Chapter 11 case upon a showing that it could confirm a feasible plan, other than aliquidating plan. This appears to statutorily reverse the current assumption that a second Chapter 11 filed for the purpose of liquidation is presumptively in good faith. As noted, an liquidating Chapter 11 is often a useful vehicle to maximize the return for creditors by preserving the going concern value of all or some of the business pending a sale (i.e., pending a liquidation). For that reason, liquidating plans are often favored by both secured and unsecured creditors and the statute appears to eliminate this valuable use of Chapter 11 in serial filings for no apparent countervailing benefit. If, as a matter of policy, the reversal of burdens regarding the automatic stay is deemed the appropriate control mechanism for serial filings, it may be more appropriate to provide for automatic imposition of the stay as in all other bankruptcy cases, subject to reduction in burden of proof on the part of the secured creditor for its removal or a shift of the burden of proof to the debtor to support continuation of the stay.

Further we note that the proposed statute appears to be internally inconsistent. Subsection (1)(D) would appear to remove the stay in those circumstances in which subsection (3)(A) would impose it.

Section 413—Expanded Grounds for Dismissal or Conversion and Appointment of Trustee. Section 413 of the bill establishes additional grounds for dismissal or conversion of a Chapter 11 case. It also would set short deadlines within which the court must hold a hearing and rule on a motion to dismiss or convert. The list of new grounds are generallyduplicative of those currently examined by the courts and codification could provide uniformity.

Other language in the proposal warrants scrutiny. Currently, the bankruptcy court "may" dismiss a case upon the requisite showing, which generally relates to the "best interests" of creditors. The proposed section 413 appears to make dismissal mandatory if a creditor makes the requisite showing regardless of the best interests of the general creditor body. As a result a single creditor with its own agenda can cause a dismissal of the case to the disadvantage of the majority of other creditors, secured or unsecured. There appears to be little reason deprive the bankruptcy court to weigh the interests of all constituencies.

The proposed amendment would also impose specific deadlines by which the court must (a) hold a hearing and (b) decide the matter. The impetus for such deadlines appears to be a perception that certain courts defer or delay such decisions. Assuming this to be the case, the setting of mandatory deadlines for hearings can create problems for the court and creditors. The Bankruptcy Code already sets deadlines, with potentially severe consequences if such deadlines are not met (e.g.. relief from stay hearings). A full hearing on a motion to dismiss may take a half to a full day or more of court time. The Bankruptcy Courts may have difficulty fulfilling another statutory mandate to hold hearings in a relatively short period.

Section 414—Single Asset Real Estate Defined. Section 414 of the bill proposes three changes: (1) defining a single asset real estate as "a single development or project" ratherthan a "single property or project;" (2) excluding from the definition of single asset real estate property on which an affiliate of the debtor is conducting a substantial business (provided the affiliate is also in Chapter 11); and (3) eliminating the current $4 million dollar secured debt cap.

Clarification of the definition of "single asset real estate" would be beneficial, as the current statute is somewhat ambiguous. However, the suggested change does not appear to accomplish such a goal. Moreover, the change to "single development or project" combined with the elimination of any dollar cap on secured debt would expand the definition of single asset real estate cases to include many large real estate projects, (i.e. large residential developments and most shopping center developments would be included) even though these projects do not generally display the characteristics of the more traditional "single asset real estate" cases.

Section 415—Plan Confirmation. Proposed section 415 would impose certain requirements for confirming a reorganization plan involving single asset real estate over the objection of secured creditors holding unsecured deficiency claims. In general, the proposal would condition confirmation on the contribution of new capital sufficient to pay down secured claims to a 75% loan-to-value ratio. In general, this proposal seeks to bring certainty to the concept of the "new value" rule and, assuming new value is permissible, the amount of "new value" that is required to confirm a plan.

The language may create unintended consequences. First, it is not clear that the class of secured claims holding unsecured deficiency claims are creditors that are secured by the single asset real estate. Thus, it is possible that the beneficiaries of the 75% loan-to-value ratio test would not be creditors who are secured by the real estate. Third, the proposal as drafted may be unintentionally overinclusive. A manufacturing business (or other substantial business) that leases its site from an unrelated party would be subject to the requirements of section 415. The Section should be restricted to debtors that own single asset real estate.

The statute provides that new value that must be infused cannot be convertible into any form of debt. Such a restriction would eliminate the possibility of infusion through unsecured or secured subordinated debt or debt that is secured by some other asset of the debtor. The purpose of the provision is apparently to provide the secured creditor with an equity cushion for its secured claim. This restriction on the form of the capital infusion does not appear to be logically related. Fourth, the provision requires a 75% loan to value ratio, notwithstanding the fact that the original loan may have been a high risk venture that was only marginally or even partially secured. As a matter of policy, should the position of such creditors be improved in a Chapter 11 case at the expense other potential beneficiaries of any new value infusion?

Section 416—Payment of Interest. Current law requires a debtor to commence payments to secured creditors in a single asset real estate case within 90 days of the filingequal to current fair market interest rates. The new proposal would require the payments to be made only after the later of ninety days or when the court determines that the case is a single asset real estate case. The proposed language would allow the debtor to make the payments from rents generated by the property, whether or not the secured creditors consent. This change cures a potential ambiguity.

The proposal would also change the applicable interest rate to the currently applicable contract rate rather than the current fair market rate. This change would prevent debtors with fixed rate mortgages from using Chapter 11 as a tool to force refinancing at a lower interest rate if the interest rates have dropped. However, the change is a departure from the rule that a secured creditor should be adequately protected only against the interest it would lose if it were entitled to foreclose and reinvest the funds realized from the foreclosure at current market rates. In all events, the proposal should follow that in H.R. 3150 by adding the words "non-default" between "then applicable" and "contract rate of interest" to prevent a creditor from obtaining an artificially high rate of interest at the expense of other creditors.

Title V

General Comment. In general, Sections 501 through 515 of the proposed bill clarify the rights of taxpayers in the government in bankruptcy cases. For the most part, these proposed changes would further clarify the law or fix minor but troublesome inconsistencies. A few provisions, however, have far-reaching consequences that should be evaluated carefully.

Section 501—Effective Notice to Government. Section 501 of the proposed bill would radically alter the current requirements for notice to governmental units. Any notice to a governmental unit would be required to include various items of information that might be helpful to the governmental unit, such as the taxpayer identification number, the account or contract number or real estate parcel number, a description of the nature of the debt and the particular subdivision, agency or entity of governmental unit that is concerned. The debtor would have the burden of proof regarding the issue of notice in any dispute. Governmental units could, at their election, file a "safe harbor address" with the clerk of the court and notice made to a safe harbor address would be presumed given.

In some instances, notices in bankruptcy cases are sent only to a general address for a state or municipality. Larger governmental units such as states and larger cities apparently encounter difficulties in routing these notices to their correct departments or agencies. Section 501 is an attempt to resolve this problem by requiring debtors to make their notices more specific when dealing with governmental units. The concept of a safe harbor address for each governmental unit would be very useful if governmental units uniformly elect to provide such addresses.

As proposed, however, the notice requirements are potentially very onerous and problematic. The proposed statute covers not only notice of the bankruptcy filing itself, but every motion or other notice sent by the debtor during a case. In a modest Chapter 11 case, such notices are numerous; in a large chapter 11 case, there may be hundreds of notices (which in turn would need to be sent to thousands of different governmental units). Under the proposed statute, the penalty for failing to give any one of these numerous notices in proper form would be to prevent discharge of the obligation to the governmental unit, regardless of the content of the notice.

The proposed notice procedure also treats governmental units significantly more favorably than private parties who may have similar notice difficulties, e.g., larger corporations with numerous divisions.

The mechanics of giving the required notices is likely to create practical difficulties for debtor and its counsel. In a typical Chapter 11 case, a debtor may be required to serve hundreds of parties at a time; the time and expense of giving special notice to governmental units is likely to be substantial. Even in a modest Chapter 11 case, the debtor may own numerous properties in different states or deal with numerous different governmental units in many different locales. In each notice to each of these local government units, the debtor would be required to provide the laundry list of particularized information. In a national retail case, the complexity is beyond comprehension.

Many chapter 11 filings are done on an emergency basis, with little opportunity to prepare. At the outset of many filings, however, a debtor needs emergency relief on matters such as use of cash collateral, financing, authority to pay employees, etc. In such circumstances, it is often impossible as a practical matter to give notice to all non-government creditors, much less all governmental units with the special information particularized for each unit. Yet the penalty for failing to do so even in such exigent circumstances would be the non-dischargeability of the governmental units’ claims, to the potential detriment of the other creditors, as well as to the debtor.

Determining the correct contact person for notices to a governmental unit can be a frustrating and difficult task, even for sophisticated debtors. For example, it is often difficult to determine exactly which governmental department may handle a particular kind of claim. Moreover, notice must often be sent to creditors who the debtor believes may have a claim, but who have yet to assert it. Ascertaining the correct department is difficult enough for debtors who are aware of actual claims by governmental units. The proposed legislation would shift the consequences of this confusion to the debtor and require nothing in return from the governmental units.

It should be noted that the statute imposes the potentially burdensome notice requirements on the debtor, but not on any other party to the case. Thus, notices of actions by other parties that may affect the interests of one or more governmental units will be given in a manner different than is required for notice by the debtor.

Most tax claims are already nondischargeable. In chapter 11 cases, a plan must provide to pay virtually all tax claims in full in order for the plan to be confirmed. The proposed notice requirements therefore are not necessary to ensure payment of tax claims. With regard to other debts, no other creditor is entitled to the same kind of detailed notice. Moreover, making government claims nondischargeable (if the notice is for any reason erroneous) leaves governmental units in competition with other creditors whose debts are automatically not dischargeable, e.g., mothers owed child support. Indeed, the effect of the notice statute may be to elevate the government’s general unsecured claims to nondischarged status while priority tax claims remain dischargeable.

Finally, the proposal as drafted is internally inconsistent regarding proof of notice. The proposed §342(f)(1) states that to take advantage of the statute, the governmental unit must demonstrate "by a preponderance of the evidence, that the governmental unit did not receive timely actual notice as required..." The proposed §342(f)(2) states that the "debtor shall have the burden of proof in refuting an assertion by a governmental unit under paragraph (1) that the governmental unit did not receive the timely actual notice referred to in that paragraph." Thus, each party appears to have the same burden. Further, it is unclear whether the statute is intended to alter the presumption that notice is received by a party if deposited into the U.S. mail, postage prepaid (known as the "mailbox rule") since the statute addresses timely "actual" notice.

Although the provision allowing the government to supply a safe harbor address may be of some assistance, it is effective only to the extent the governmental units voluntarily provide such addresses. Further, many chapter 11 debtors do business in numerous different states other than the district in which the bankruptcy case is filed. Unless every governmental unit files its safe harbor address in every bankruptcy court in the country, the notice of safe harbor addresses will not be effective.

Other less disruptive mechanism may be more effective. For example, the presumption in the statute might be reversed: notice would be ineffective if a governmental unit has filed a safe harbor address, but that address is not used. This would induce governmental units to file safe harbor addresses. The issue of where the addresses would be filed and how debtors and counsel could access them immediately from any jurisdiction would need to be addressed. Governmental units could establish a single central address for bankruptcy notices, e.g. city attorneys and Attorneys General.

Section 508—Periodic Payment of Taxes in Chapter 11 Cases. Section 508 would require payment of unsecured priority claims and tax claims secured by liens under a confirmed plan of reorganization in quarterly installments within six years of the petition date. This provision would resolve the perceived problem of irregular payment plans. Extending the requirement to secured tax claims, however, may have the effect of requiring non ad valorem tax liens to be paid more quickly than senior mortgages. This potentialrearranging of priorities of secured claims should be examined more closely.

Section 514—Standards for Tax Disclosure. Section 514 would require a disclosure statement to contain a full discussion of the potential federal and state tax consequences of a plan of reorganization, not only with respect to the debtor, but with regard to each class of claims or interests. The current practice in most courts is to require a discussion of the potential material federal and state tax consequences to the debtor. Requiring tax disclosures with regard to hypothetical claim holders may create significant problems for reorganizing debtors and their counsel, as well as significant increases in cost. The tax treatment of creditors’ claims very often depends upon the individual situation of the creditor and how the creditor already has treated the debt for tax purposes. Such disclosure would therefore require the debtor and its tax advisors to speculate on the possible ways in which distributions under a plan might be given different tax treatments in the hands of various creditors in different situations, even within a single class. In some instances, a creditor may be entitled to different or more favorable tax treatment than in another case, and the disclosure statement would be misleading if it did not cover that creditor’s special case. Taxing authorities who allow a potentially erroneous disclosure to go unopposed could be estopped from assessing taxes against creditors. The bankruptcy court and the office of the United States Trustee, which comments on disclosure statements (and, in some jurisdictions is required to preapprove disclosure statements before the court will set a hearing) would berequired to develop even more expertise in tax matters to cover this new disclosure. Further, the propenent plan might have to conduct discovery to ascertain the treatment of debts and, in some instances, the basis in such debt.

Title VI

Section 601—Executory Contracts and Unexpired Leases. Section 601 would require business leases of real property to be assumed or rejected on the earlier of 120 days from the filing of a case or confirmation of a plan. The deadline could be extended only upon motion of the landlord.

Assumption of a lease in a Chapter 11 case converts a landlord’s claim for future damages from a general unsecured claim to a first priority administrative expense. In the event the Chapter 11 case fails, courts have held that a landlord’s claim for future unearned rent under unassumed lease is senior to all priority and general unsecured creditors (including employee wage claims, tax claims and the like). For this reason, current law balances the rights of the landlord and the other creditors. By requiring a Chapter 11 debtor to commence making payments to the landlord within 60 days of the filing of the case , while allowing the Court to defer the assumption decision until confirmation of a plan when success of the case is relatively assured. The proposed change accords landlords more favorable treatment to the potential detriment of other creditors.

Moreover, since current law not only requires current payment, but also requires that leases be assumed or rejected no later than plan confirmation, the adoption of small business Chapter 11 provisions with their accelerated time lines for confirmation creates a questionable rationale to grant landlords more of an advantage over other creditor classes.

Section 602—Allowance of Claims or Interests. Section 602 of the proposed bill would change the method of calculating a landlord’s claim by allowing future estimated costs to be added to the calculation for future rent damages, while requiring that the claim be reduced by any mitigation of damages "that is required by law."

Traditionally, a landlord’s claim is calculated under applicable state law, subject to a cap imposed by the Bankruptcy Code. The proposed change would add a federally mandated element to the damage calculation which the law of a particular state may not allow. At the same time, reduction of the claim would apparently only be required if required by the applicable state law. The result is therefore a somewhat non-uniform approach to calculating lessor damages.

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.

U.S. Department of Justice

Executive Office for United States Trustees

Office of Research and Planning

901 E Street, NW, Suite 740 Ph: (202) 616-9193

Washington, D.C. 20530 Fax: (202)
616-4576

Samuel J. Gerdano

Executive Director American Bankruptcy Institute

44 Canal Center Plaza

Alexandria, VA 22314

Dear Mr. Gerdano:

The American Bankruptcy Institute recently posted on its web site
"An Analysis of S. 1914 Business
Reorganization Provisions" by Christian Onsager. Mr. Onsager estimates that
implementation of Section 410 of S. 1914 would require over 5,000 additional United States
Trustee employees. This analysis of the demands on the United States Trustee Programs is
flawed by at least two major errors.

First, his estimate is based on 27,000 chapter 11
filings per year. Annual chapter 11 filings have never reached 27,000 in any year, and the
current annual volume is about 10,000 filings. As of April 1998, the open
chapter 11 caseload for all United States Trustees was 9,930 cases.

Second, Mr. Onsager appears to make a fundamental arithmetic error.
Mr. Onsager estimates that 80 percent of chapter 11 cases will be small business cases
under S. 1914's provisions. Based on his estimate of 27,000 case filings, there would then
be 21,600 cases requiring -- again according to Mr. Onsager -- an additional 10 hours per
case. The additional workload under this analysis would total 210,600 employee hours. A
work year is general estimated to consist of 2,080 hours. Using Mr. Onsager's numbers, S.
1914 would require -- at most -- 103 additional United States Trustee employees.
Mr. Onsager's estimate of 5,000 additional employees is therefore in error by a multiple
of 50, even using his excessive chapter 11 case estimates.

The United States Trustee Program has expressed its support of S.
1914. Because the bill requires practices already put in place by United States Trustees
in many chapter 11 cases, and the chapter 11 caseload is likely to be less than half of
that predicted by Mr. Onsager, the need for additional personnel would be far more modest
than he states. Currently, there are approximately 1,000 employees of the United States
Trustee Program. There may be a need for some increase in United States Trustee personnel
to meet the needs of S. 1914 and the other provisions in the pending bankruptcy
legislation. However, much of the work required by S. 1914 is already being performed by
existing personnel. While there will undoubtedly continue to be debate about S. 1914,
opposition should not be based on exaggerated estimates of additional employees needed to
do the work required by the bill's provisions.

Very truly yours,

Joseph A. Guzinski

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
S. 1914

Analysis Of Title VI

Miscellaneous

Written by:

Mark N. Berman

Hutchins, Wheeler & Dittmar

Boston, Massachusetts

Prepared for the American Bankruptcy Institute

Web posted and Copyright ©

April 27, 1998, American Bankruptcy Institute.

Sec. 601. Executory Contracts and Unexpired Leases.

This section proposes to amend Section 365(d)(4) of the Bankruptcy Code to provide that when a debtor is the lessee under a commercial lease, the lease will be deemed rejected and the debtor forced to vacate the premises unless the lease is assumed within 120 days after the beginning of the case. There is also a provision that allows the commercial lease to be assumed at an earlier point in time, i.e. the date of the order confirming a plan of reorganization, but this would appear of limited utility since plans are seldom confirmed within 120 days after a case is filed. Under this amendment, the only way to extend the 120 day period is for the lessor to file a motion asking the court to grant such an extension. Once a lease is rejected, the amendment repeats the language contained in the current version of Section 365(d)(4) requiring that the property be surrendered to the lessor.

This amendment proposes a significant change in the law. It is a change that will most likely benefit lessors of commercial property at the expense of successful reorganizations and unsecured creditors. The current version of Section 364(d)(4) allows the debtor or the trustee a shorter period, 60 days, within which to either assume or reject a commercial lease, but also allows the court to extend that period if a motion seeking such an extension is filed within the 60 day period and the court finds cause for the extension. Cause usually requires that the lessor is being paid all of the rent due under the lease for the period of time subsequent to the filing of the case. In actual practice, it is common for the 60 day period to be extended. It is also common for the extension to exceed an additional 60 days.

Under Section 365(b), which is unaffected by this proposed amendment, a debtor or its trustee can assume a commercial lease by filing a motion, by curing any defaults under the lease, by paying the lessor any damages suffered as a result of the previous defaults and by providing the lessor with adequate assurance of future performance. In order to accommodate the timetable mandated by the proposed amendment to Section 365(d)(4), the debtor or the trustee would have 120 days within which to secure the funds necessary to cure defaults under a lease, to compensate the lessor for any damages and to provide adequate assurance of future performance. While the lessor might be convinced to move for an extension so as to allow the debtor or trustee more time within which to accomplish these tasks, the landlord is likely to do so only when it is in its economic best interest to do so. Where the lease is below market value, i.e. the rent is below what the lessor could now obtain from a new tenant, the landlord will have to weigh the benefits of a higher rental stream from a new tenant and recovery on the unsecured claim obtained by a lessor upon rejection, against the lower rental stream called for by the lease plus the chances that the debtor or trustee, given more time, may be able to secure the necessary funds to cure andcompensate the lessor.

The amendment is also a potential threat to the dividend available to unsecured creditors. When a lease is assumed, not only are defaults cured and the lessor receives compensation for actual damages, but all future damages that might accrue should the debtor or trustee later fail become elevated to the level of expenses of administration, i.e. they must be paid in full before unsecured creditors receive any distribution. As a result, unsecured creditors are usually reluctant to permit a debtor or trustee to assume a commercial lease unless it is done either 1) as part of the plan of reorganization where creditors know what they will receive, 2) as the first step in the ultimate transfer of the lease to a third party who will thereafter be responsible to the landlord for the future rent, or 3) when the debtor’s reorganization is so far along that the prospects for a successful reorganization are real enough to warrant the risk of a large administrative claim by a lessor should the reorganization fail.

The amendment also fails to take the opportunity to resolve a conflict that has arisen in case law concerning the requirement that the property be surrendered to the lessor once the commercial lease has been rejected. Some cases have held that despite the "immediately surrender" language in the statute, the bankruptcy court will not get involved in post-rejection disputes between the lessor and the debtor or trustee regarding the lessor gaining access to the premises. Instead, those courts require the lessor to rely on state court process thereby occasioning further delay and cost to the lessor. Other cases have interpreted the language to allow the bankruptcy court to be the forum in which the lessor can obtain an enforceable court order requiring the lessee to deliver possession to the lessor. Since the same "immediately surrender" language is brought forward in the amendment, it can be expected that this dispute will continue and the application of this law will not be uniform throughout the country.

Section 602. Allowance of Claims or Interests.

This section proposes to amend Section 502(b)(6) of the Bankruptcy Code to alter the way in which a lessor of real estate calculates its claim against the bankrupt estate. A lessor’s claim has long been a concern in bankruptcy legislation because that portion of the lessor’s claim related to future rent reserved under a long-term lease could dwarf the claims of other creditors who often do not have a similar opportunity to mitigate damages, i.e. reduce their damages by finding a new tenant for the premises. Historically, the lessor’s claim has been limited or "capped" with the current version of the statute limiting that claim to the rent reserved under the lease, without acceleration, for the greater of one year, or 15% of the remaining term of the lease, not to exceed three years, plus any rent owed as of the earlier of the date of the filing of the case or the date of surrender/repossession of the property. The proposed amendment will re-write the limit of the lessor’s claim to the sum of the following:

1) monies due under the lease from and after its termination, without acceleration, either; (a) for the next one year period after termination, or (b) for the next 15% of the remaining term of the lease not to exceed three years, plus

2) any monies owed to the lessor as of the filing of the case, plus

3) all costs reasonably incurred or that will be reasonably incurred by the lessor during the one year period after termination of the lease. A non-exclusive list of such costs is included.

The amendment also requires that the lessor mitigate its claim to the extent mitigation is required by law. The mitigation is applied against the lessor’s total damage calculation before applying the limitations or "cap" imposed on claims for future rent.

The amendment has the benefit of codifying the lessor’s obligation to mitigate its claim for damages, although the reference to "any mitigation required by law" suggests that mitigation requirements may vary from state to state and that some states may not require any mitigation at all. The amendment also resolves a conflict in the case law regarding whether mitigation, i.e. the reduction in the claim, is applied to the lessor’s damage calculation before it is limited by this section, or only after the lessor’s claim has been capped. By using the words "monetary obligations" rather than "rent", the amendment also attempts to prevent a lessor from including in its claim a sum attributable to a non-monetary obligation that is denominated as rent under the lease.

The amendment allows the lessor to include in its claim all rent accrued but unpaid up to the date of the filing of this case. The current version of Section 502(b)(6) uses the earlier of the date of the filing of the case or the date of surrender/repossession of the premises. As a result, in those situations where the lessor has recovered possession of the premises prior to the filing of the case but has not yet found a new tenant, the lessor will have a larger claim in the case.

The most significant change proposed by the amendment is to allow a lessor to include as part of its claim any cost reasonably incurred or that will be reasonably incurred within the next year after termination of the lease. The determination of what those costs are is made on the date the claim is to be "determined." It is unclear whether the date of determination is the date the lessor files its claim, the date the bankruptcy court rules on any challenge to the claim or the date an appellate court might overturn a bankruptcy court’s previously erroneous determination. This uncertainty could make debtors, trustees and creditors reluctant to object to a lessor’s claim because of fear that additional costs incurred within the year after termination of the lease, but not then part of the claim, might be added to the claim.The lessor can be expected to include in its claim the costs of brokers’ fees or commissions and tenant improvements relating to securing a new tenant, because those costs are specifically included in the ammendment as examples. Less obvious costs that a lessor can be expected to include in its claim include advertising, security, utilities, taxes, legal costs related to negotiating and documenting a new tenant’s lease, moving expenses paid by the lessor to the new lessee, and the like. Disputes are likely to flourish over whether these costs are "reasonably incurred." Advocates for other parties in a bankruptcy case would also be expected to argue that these costs should not be included in the lessor’s claim because they are as likely to be incurred by the lessor after the normal, non-bankruptcy related termination of a lease. They are only being accelerated due to the bankruptcy related termination of the lease.

Section 603. Expedited Appeals of Bankruptcy Cases to Courts of Appeals.

This section proposes to amend Section 158 of Title 28 of the United States Code which contains the statutory provisions governing appeals in bankruptcy cases. The proposed amendment maintains the existing structure of bankruptcy appeals, but adds a new feature which applies exclusively in circumstances where an appeal has been taken from a bankruptcy court to the federal district court. In that event, if the district court has not filed its decision within 30 days after the appeal was filed, then the amendment would permit the appeal to be taken to the appropriate court of appeals. In such an instance, the court of appeals is required by the amendment to issue an order directing the clerk of the district court from which the appeal was taken to make the bankruptcy court’s decision the decision of the district court. That decision is then made the subject of the appeal to the court of appeals.

The current bankruptcy appeal system provides for two levels of appeal. First, an appeal may be taken from the bankruptcy court to the district court or, if the circuit has established a bankruptcy appellate panel, then the appeal may go from the bankruptcy court to the bankruptcy appellate panel. A further appeal may then be taken from the decision of either the district court or the bankruptcy appellate panel to the courts of appeal. When the National Bankruptcy Review Commission considered recommendations to Congress, it issued recommendation 3.1.3 to the effect that Congress should eliminate the first layer of review, i.e. all appeals to the district court or the bankruptcy appellate panel should be eliminated. Instead, all appeals would go directly from the bankruptcy courts to the courts of appeal. The proposed amendment does not implement the Commission’s recommendation.

The amendment appears to address the situation where a decision is needed from the district court within a 30 days time frame but no decision is forthcoming. In such an instance, the amendment will allow a party to the appeal to jump from the district court and pursue the matter in the appropriate court of appeal. However, there is no time requirement for a decision in that higher court. Furthermore, no parallel provision is proposed for matters pending before the bankruptcy appellate panel. This might motivate appellants to choose to pursue an appeal in the district court rather than the bankruptcy appellate panel if they view quick access to the court of appeals as advantageous.

The amendment appears to anticipate the elimination of the district courts from appellate review of bankruptcy cases except to the extent emergency consideration requires a resolution within thirty days. It is unlikely that an appeal from a decision of a bankruptcy court will be capable of going through the normal process of designating an appellate record, designating issues on appeal, briefing and oral argument leading to a decision within 30 days after the appeal is filed with the district court. It is possible that adoption of the amendment will result in emergency appeals going to the district court and bankruptcy appellate panel, while regular, non-emergency appeals will be heard whether by the bankruptcy appellate panel or the court of appeals.

It is also curious that the proposed amendment refers to " [a]ny final judgment decision, order, or decree of a bankruptcy judge entered for a case in accordance with Section 157. . ." (emphasis added). Section 157 consistently uses the word "proceeding" in addition to the word "case" when referring to matters that are place before the bankruptcy courts. The proposed language leads to a suggestion that a "proceeding" may not be subject to the special 30-day right to remove a matter from the district court and send it the court of appeals. This could lead to litigation over whether an issue is presented in a "proceeding" or in a "case."

Sec. 604. Creditors in Equity Security Holders’ Committees.

Section 604 proposes to amend Section 1102(a)(2) of the Bankruptcy Code to permit the court to order a change in the membership of a committee appointed in a bankruptcy case. In order to make such an order, the court must first receive a request from a party in interest although it is allowed to act on its own motion. The court must also determine that the change in committee membership is necessary to ensure adequate representation of creditors or equity security holders.

The existing Section 1102(a)(2) allows the court to order the appointment of additional committees of creditors or of equity security holders. It is silent about the court’s authority to order a change in the membership of an appointed committee. Some bankruptcy courts have found that authority in Section 105 of the Bankruptcy Code. The amendment would eliminate any confusion in this issue.

Assuming the amendment is adopted, it will remain unclear whether a court order requiring a change in membership of a committee will allow the court to designate exactly how that change should be effected or whether responsibility for choosing the actual members of a committee will remain vested in the United States Trustee. It is reasonable to expect that the Office of the United States Trustee will take the position that only it has the authority to designate who will be members of the committee. To clear up this uncertainty, the amendment could specify who will have the power to designate members of a committee, i.e. the court or the United States Trustee, if the court feels that a change is necessary to ensure adequate representation.

Sec. 605. Repeal of Sunset Provisions.

Section 605 proposes to eliminate the sunset provision applicable to Chapter 12 of the Bankruptcy Code which governs the adjustment of debts of a family farmer with regular annual income. If the amendment is adopted, Chapter 12 will be become a permanent feature of the Bankruptcy Code.

The National Bankruptcy Review Commission proposed at 4.4.1 of its recommendations that the sunset provision be eliminated and Chapter 12 be made a permanent addition to the Bankruptcy Code. The amendment will implement that recommendation.

Sec. 606. Cases Ancillary to Foreign Proceedings.

Section 606 proposes to amend Section 304 of the Bankruptcy Code. The main purpose of Section 304 is to allow a foreign representative, i.e. a duly selected trustee administration or other representative of an estate in a foreign proceeding, to initiate a case ancillary to that foreign proceeding in the United States Bankruptcy Court. This amendment will increase the protections afforded to residents of the United States when a foreign insurance company, not engaged in the business of insurance or reinsurance in the United States, initiates a foreign proceeding. If the amendment is adopted, it will prohibit the bankruptcy court from enjoining actions, enforcing judgments, ordering turnover or ordering other appropriate relief, whenever there is a United States creditor with a claim against certain deposits or multi-beneficiary trusts authorized under state insurance laws.

Section 304 allows the United States Bankruptcy Court system to co-exist with foreign proceedings. The bankruptcy courts are given flexibility to enter orders which are requested by a foreign representative but the entry of those orders is not mandatory. Section 304(c) requires that the bankruptcy court be guided by what will best assure an economical and expeditious administration of the estate consistent with just treatment, protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the foreign proceeding, comity and similar notions. The proposed amendment is absolute in prohibiting the bankruptcy court from considering any order if the foreign proceedings meets the amendment’s qualifications. Such an absolute and inflexible provision may undercut efforts to generate uniformity of bankruptcy proceedings throughout the world.

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
S. 1914

Analysis Of Title IV

Small Business Bankruptcy

Written by:

Joseph B. Collins

Joseph H. Reinhardt

HENDEL, COLLINS & NEWTON, P.C.

Springfield, MA

Prepared for the American Bankruptcy Institute

Web posted and Copyright ©

April 27, 1998, American Bankruptcy Institute.

Introduction. The small business bankruptcy provisions set forth in Title IV of the proposed bill include many of the recommendations made by the Bankruptcy Review Commission ("Commission"). The Commission expressed its concern that no bankruptcy purpose was served by lengthy and inconclusive reorganization proceedings that served primarily to protect debtors from creditor action. The Commission was concerned that Chapter 11 lured many small business debtors that had no realistic hope of confirming a Plan of Reorganization. Conversely, the Commission also recognized that a successful reorganization can save jobs, enhance the return to creditors and preserve the going value of a business.

The proposed bill sets up a class of cases to which special reorganization provisions apply. That class includes all debtors having liquidated debt less than $5,000,000.00 and all single asset real estate cases. Although statistics are not available, this classification may include the great majority of Chapter 11 cases. Certain provisions of the bill seem to relax the difficulty of reorganization for a small business. For example, the provisions that modify disclosure statement requirements should assist debtors in Small Business Cases. The preparation of a disclosure statement sufficient to satisfy the requirements of the existing Code has always been a time consuming and expensive proposition for debtors.

Other sections of the bill seem to make the reorganization process more complex for small companies. The bill not only restricts the time for filing and confirming a Plan of Reorganization, but also increases the debtor's duties during that period by requiring additional reporting requirements and attendance at additional conferences.

With these observations in mind, comment is provided on each of the proposed sections of Title IV - Small Business Bankruptcy.

Sec. 401. Small Business Defined. Under the present version of the Code, §§101(51)(B) and (51)(C), small business activity is bifurcated into small business entities with total undisputed debt of $2,000,000.00 or less (exclusive of owners/operators of real estate) and single asset real estate cases with undisputed secured debt of $4,000,000.00 or less. The bifurcation continues with the distinction that the small business provisions are elective §1121(e), while the single asset real estate provisions are mandatory §101(51)(B). The bifurcation concludes with provisions §§1102(a)(3), 1121(e) and 1125(f), which tend to simplify and expedite the reorganization process in Small Business Cases.

The proposed bill will make designation as a Small Business Case mandatory in single asset real estate cases and when the total debt of other debtors is $5,000,000.00 or less. The bill will eliminate most of the bifurcation between a small business and single asset real estate cases. Certain distinctions will, however, exist for the single asset real estate case as discussed in the analysis of §§415 and 416 of the proposed bill.

Although statistics do not seem to be available, it seems that the vast majority of Chapter 11 cases will be Small Business Cases under the proposed bill. The mandatory application of thesmall business provisions of the bill will, therefore, result in a substantial change in small business reorganization efforts throughout the country.

Sec. 402. Flexible Rules for Disclosure Statements. Under the present Code, Small Business Cases have a simplified disclosure statement procedure. Single asset real estate cases face a full disclosure statement requirement. The proposed bill provides the potential for elimination of a disclosure statement altogether, at the Court's discretion. Even if the Court elects to proceed with the disclosure statement process, it can do so in a procedurally simplified manner, due to the proposed use of form disclosure statements and the combination of disclosure statement and plan confirmation hearings.

Sec. 403. Standard Form Disclosure Statements and Plans. This Section is a major departure from the present Code, which has no provision for standard form disclosure statements and plans. The present disclosure standard is adequate information along the lines of an investment prospectus, §1125. The proposed bill provides for a balance in the construction of standard forms between "reasonably complete information" for the Courts, creditors, economy and simplicity for debtors. Standard form disclosure statements and plans have the potential for reducing the time that a debtor spends in bankruptcy and the expense of the case.

Sec. 404. Uniform National Reporting Requirements. This Section represents an entirely new set of provisions for reporting, unparalleled in the present Code. These reports deal with profit and loss, financial projections, historical comparisons of the current financial data with past projections, statutory and rules compliance, and tax compliance.

These reporting requirements are likely to add to the administrative cost of a Small Business Case. Small businesses do not have the ability to produce them, although the desirability of the reports cannot be denied, many Debtors will be obliged to seek professional assistance to comply with the proposed new reporting requirements.

The new provisions also do not address the fact that the Office of the U.S. Trustee already requires Debtors to provide some of the information required by new §404. The U.S. Trustee's Operating Guidelines and Reporting Requirements for Chapter 11 Cases ("OGRR") requires debtors to provide information regarding cash flow, unpaid administrative expense, and tax compliance. If the OGRR continues, small business debtors will have inconsistent and duplicative reporting requirements for the Court and for the U.S. Trustee.

Title IV generally seems to shift the responsibility for monitoring the Debtors day to day activities from the U.S. Trustee to the Court. The requirement that statutory reports be filed with the Court rather than with the U.S. Trustee is one example of this. In the days preceding the enactment of the Bankruptcy Reform Act of 1978, much concern was expressed about the Bankruptcy Courts involvement in the administrative and business aspects of the case, rather than with the application of the law. By involving the Court in financial reporting and status conferences (See §406), Congress should be aware that it is taking a step back in that direction.

Sec. 405. Uniform Reporting Rules and Forms. The guidelines for the structure and format of the financial reporting rules is the same as that for the content of form disclosure statements and plans, the balancing of a need for information with simplicity and economy for debtors.

Sec. 406. Duties of a Trustee or Debtor in Possession in Small Business Cases. The present version of the Code contains two sections that deal with the duties of a debtor. Section 521 deals with a debtor's duties in general and focuses predominantly on individual debtors. Section 1106 is applicable (with the exception of the investigating requirements) to Chapter 11 debtors in possession through the mandate of §1107.

The proposed bill specifies certain additional duties to be performed by a small business debtor. Some of these duties (i.e., filing tax returns and paying post petition taxes, maintenance of insurance, and filing required post petition financial reports) codify existing practice. Other requirements go beyond existing practice and should be considered separately.

a. Additional Financial Disclosures to be Filed With Voluntary Petition.

The additional documents that a debtor will be required to filed with the voluntary petition are typical of those items that will be produced at the request of the U.S. Trustee or a Creditor's Committee in a Chapter 11 case. What is significant about the requirement is that these documents must be appended to the voluntary petition or in a case of an involuntary case filed within three days after the entry of an order of relief. The Bankruptcy Rules have long recognized the fact that a debtor often enters bankruptcy in response to exigent circumstances, see generally, Rule 1007. The Bankruptcy Rules have established procedures that allow a debtor to seek extensions of time to file the various lists, schedules and statements required to commence a bankruptcy case. In order to make the requirements for Small Business Cases consistent with the debtor's other bankruptcy duties, proposed §1115(1) might be amended by deleting the phrase "append to the voluntary petition or, in an involuntary case, file within 3 days after the order for relief" and inserting the word "file."

b. Attendance at Interviews, Conferences and Meetings.

The present law requires a debtor to attend a meeting held pursuant to §341. The U.S. Trustee has also assumed the responsibility for conducting initial meetings with the debtor and its largest creditors at the outset of a case. Typically these meeting will determine whether a Creditor's Committee is appointed. Proposed §1115(2) modifies current practice by requiring initial debtor interviews and adds the additional requirement for scheduling conferences to held before the Court.

With respect to initial debtor interviews, the law seems to codify the U.S. Trustee's existing practice and require attendance by the debtor's senior management personnel and its counsel.

With respect to scheduling conferences, a new requirement is imposed. These conferences are to be held before the Court and are apparently nonevidentiary. Since a debtor's time is at a premium under the expedited requirements for Small Business Cases, one wonders why senior management personnel of a small business would be required to attend a scheduling conference.

c. Depositing Taxes into Separate Accounts.

Proposed §1115(6)(C) requires the establishment of separate deposit accounts into which all taxes collected or withheld must be deposited within one business day after receipt. The requirement for the escrow of taxes within one business day after receipt is a substantial departure from the routine practice of most solvent and insolvent companies. Every business that collects a sales tax, for example, would be required to implement a procedure for the daily accounting and escrow of sales tax receipts in order to comply with the law. The imposition of this new requirement will undoubtedly add additional pressure to owners of small businesses that are placed under pressure by the condensed time limits of the new bill.

Sec. 407. Plan Filing and Confirmation Deadlines. Proposed §407 reduces the time within which a small business debtor may file a plan from 100 days to 90 days. The Section also reduces the time within which a third party can file a plan from 160 days to 90 days. The Section also makes it more difficult for the debtor to obtain an extension of the time within which a plan might be filed. Under existing law, an extension may be given if the debtor can show that the need for an increased time period is the result of circumstances for which it should not be held accountable. Under the proposed law, the debtor must demonstrate by clear and convincing evidence that is more likely than not to confirm a plan within a reasonable period of time.

The most obvious effect of the compressed time period for the filing of a plan is to place pressure on a debtor to formulate its reorganization alternatives shortly after the commencement of the case. A more subtle effect of this section is to create circumstances in which it would be difficult for a third party to file a competing plan within the statutory time constraints. A debtor that fears a competing plan is not likely to inform its competitor of its reorganization plans until the last day allowed for the filing of a plan. Since the third party will not know whether it can offer a better plan until the debtor's is filed, and since the preparation of a competing plan requires a significant expenditure of time and effort, third parties may be less likely to expend the resources necessary to file a competing plan.

Sec. 408. Plan Confirmation Deadline. Section 408 adds a new paragraph to §1129 of the Bankruptcy Code that mandates the confirmation of a plan on or before 150 days from the commencement of a case. Since most plans are likely to be filed on the 90th day filing the commencement of the case, this basically leaves a 60 day period for plan confirmation. During this 60 day period, the following events would have to occur:

1.The filing of a plan and disclosure statement presumably with a Motion seeking the Court's conditional approval of the disclosure statement.

2.A hearing on conditional approval of the disclosure statement, together with any objections that might be filed to the Debtor's Motion seeking conditional approval.

3.The modification of the disclosure statement in order to comply with any requirements that the Court might make in granting conditional approval.

4.The printing of the plan and disclosure statement and the circulation of the plan and disclosure statement to creditors.

5.The expiration of a 25 day solicitation period; Rule 2002(b), plus a three day mailing period, Rule 9006(f).

6.The preparation of a report on acceptances and other documents and materials necessary to confirm the plan.

7.The confirmation hearing and funding of the plan.

The events noted above, of course, involve only the bankruptcy requirements. Since many plans contemplate a sale of assets or a financing transaction, the debtor would have to coordinate these events so that they took place within the statutory deadlines. Although no statistics seem to exist, we feel that it is safe to say that very few Chapter 11 cases have been confirmed on this fast of a track. Even with the reduced disclosure statement requirements, the schedule for the debtor will be grueling.

Sec. 409. Prohibition Against Extension of Time. Section 105 of the Bankruptcy Code gives the Bankruptcy Court broad authority to enter Orders necessary and appropriate to carry out the bankruptcy process. Under this section, the Bankruptcy Courts have historically entered a wide variety of orders that have been deemed appropriate to further the bankruptcy process.

Proposed §409 will restrict the Court's discretion to grant extensions of time for the filing or confirmation of a Plan under §105.

Sec. 410. Duties of the U.S. Trustee and Bankruptcy Administrator. The present Code does not contain any statutory duties for the U.S. Trustee or Bankruptcy Administrators that are aimed at Small Business Cases. The duties promulgated in the proposed bill, however, are similar to those that have already been undertaken by many U.S. Trustees without the statutory mandate. For example, an initial conference is held in many jurisdictions in which many of the issues enumerated in proposed §586(a)(3)(H) are discussed.

The proposed statute departs from existing practice by suggesting that the U.S. Trustee should attempt to develop a scheduling order. The concept of a scheduling order is new to the Bankruptcy Code. The proposed statute contains no guidance as to what is to be scheduled, how an order will be presented to the Court, or what the U.S. Trustee's rights are if its attempts to reach agreement with a debtor fail.

Sec. 411. Scheduling Conferences. Under the present Bankruptcy Code, the Court had the discretion to hold status conferences. The proposed bill mandates status conferences that are requested by parties in interest. As noted in connection with §404, status conferences tend to deal with administrative, rather than legal aspects of the case.

Sec. 412. Serial Filer Provisions. The present Code does not contain any specific provisions for dealing with serial filers. The serial filer problem is becoming increasingly prevalent in consumer and Small Business Cases. The proposed bill seems to adequately address the problem.

Sec. 413. Expanded Grounds for Dismissal or Conversion and Appointment of Trustee. In the present Code, the Court has a significant level of discretion as to whether to convert, dismiss or appoint a Trustee. The proposed bill serves to significantly reduce this discretion, making conversion or dismissal mandatory in certain specified circumstances. The proposed bill goes on to force motions to dismiss or convert to the top of the Court's docket by requiring hearings to be held within 30 days from the filing of the Motion and decisions within 15 days thereafter.

There are two places in the proposed bill where the language might be changed to clarify the apparent intent of the bill. Specifically, §1112(b)(2)(A)(i) should be changed by deleting the word "an" and inserting the word "the". Also, §1112(b)(2)(A)(ii) might be changed by deleting the phrase "by order of" and inserting the phrase "within the period of time ordered by". Also, §1112(b)(3)(J)(i) and §1112(b)(3)(J)(ii) might be revised to conform more precisely with Paragraph (2)(A). Specifically, Paragraph (3)(J)(i) could be amended to read "within the applicable period of time specified in this title; or" and Paragraph 3(J)(ii) could be amended to read "within the period of time ordered by the Court; and".

Sec. 414. Single Asset Real Estate Defined. Under the present Code, a single asset real estate case is limited to situations where the aggregate secured debt does not exceed $4,000,000.00. The proposed bill removes the debt limitation and thus subjects all single asset real estate projects to the requirements of a Small Business Case.

The new bill continues to exclude from the definition of single asset real estate cases, those companies in which substantial business, other than the business of operating the real property, is involved. Given the difficulties that real estate projects will have in meeting the deadlines of the proposed bill, and in consideration of the difficulties that a real estate project will have in confirming a plan under the revisions to §1129, it can be anticipated that litigation over the "substantial business" exclusion will increase.

Sec. 415. Plan Confirmation. There is considerable debate under the present Code and its interpretive case law as to whether there is a "new value exception" to the Absolute Priority Rule. This conundrum frequently arises in single asset real estate cases in which the plan proposes to "cram down" the secured creditors' claim. The proposed bill gives the secured creditor the right to limit the Court's ability to find that the new value exception has been satisfied to circumstances in which the new value is at least equivalent to 25% of the value of the real estate. The 25% capital contribution would be payable in cash. This requirement, taken together with the time frame in which the single asset case must proceed to confirmation, will make it very difficult for real estate projects to successfully reorganize.

Sec. 416. Payment of Interest. This section of the proposed bill requires that a Debtor pay a contract rate of interest on the value of the creditors' interest in collateral in a single asset real estate case. This changes the current law which required the payment of a fair market rate of interest.

The proposed bill also provides that such payments may begin as early as 30 days from the date that the Court determines that the debtor is a single asset real estate case.

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.

To amend the Truth in Lending Act to prohibit the distribution of any negotiable check or other instrument with any solicitation to a consumer by a creditor to open an account under any consumer credit plan or to engage in any other credit transaction which is subject to that Act, and for other purposes.

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.
MEMORANDUM

Family Farmer Protection Act of 1997 (S. 1024)

Web posted and Copyright ©
July 11, 1997, American Bankruptcy Institute.

On July 16, 1997, Sen. Charles Grassley (R - Iowa) introduced The Family Farmer Protection Act
of 1997 (S. 1024), also co-sponsored by Sens. Richard Durbin (D - Ill.) and
Thomas A. Daschle (D - S.D.), intended to make chapter 12 of title 11 of the United States Code
permanent.

The bill would repeal the sunset provision of Section 302 of the Bankruptcy Judges, United
States Trustees, and Family Farmer Bankruptcy Act of 1986 (28 U.S.C. 581) by striking
subsection (f). The bill also seeks to clarify the rights of family farmers after the completion of a
plan.

Below are the text of the proposed bill and the relavant text of PL 104-127, which initiated
the exception to loan prohibitions for family farmers.

S. 1024

...

SEC. 2. REPEAL OF SUNSET PROVISION.

Section 302 of the Bankruptcy Judges, United States Trustees, and Family Farmer
Bankruptcy Act of 1986 (28 U.S.C. 581 note) is amended by striking subsection (f).

SEC. 3. CLARIFICATION OF RIGHTS OF FAMILY FARMERS AFTER
SUCCESSFUL COMPLETION OF A PLAN.

Section 2008h(b)(2), of title 7, United States Code is amended by adding `or has
successfully completed a reorganization plan under Chapter 12 of title 11, United States
Code (the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act
of 1986, Public Law No. 99-554, as amended)' after `title'.

PL 104-127

Sec. 648 of H.R. 2854

SEC. 648. DELINQUENT BORROWERS.

(b) LOAN AND LOAN SERVICING LIMITATIONS- The Consolidated Farm and
Rural Development Act (7 U.S.C. 1921 et seq.) (as amended by subsection (a)) is
amended by adding at the end the following:

`SEC. 373. LOAN AND LOAN SERVICING LIMITATIONS.

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.