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Proposed Changes Regarding Small Business Bankruptcy Proceedings

By Robert E. Chernicoff, Esquire

The structure of Chapter 11 under the Bankruptcy Code appears to be fundamentally sound. Historically, Chapter has not worked well for “small business” bankruptcies. The Bankruptcy Reform Act of 1994 was the first substantive amendment to the Bankruptcy Code since 1984. The 1194 Act introduced the concept of the “small business debtor” to Chapter 11. Prior to the 1994 amendment, there was some criticism of Chapter 11 bankruptcies for the amount of time and expense that occurred in Chapter 11 reorganizations. The expenses of Chapter 11 reorganizations often made such reorganizations out to reach for many small businesses. In fact, administrative expense associated Chapter 11 were the ultimate demise for many small businesses that were attempting to reorganize.

In order to assist the small business to reorganize, certain amendments to the Code were included in the 1994 Act, which were aimed at alleviating the overwhelming burdens for small business. The amendments provided for a “fast track” system for small businesses. The fact track was aimed at making Chapter 11 bankruptcy more feasible for small businesses by accelerating normal Chapter 11 timetables. For example, 11 U.S. C. § 11259f) allows the court to conditionally approve the sufficiency of a debtor’s disclosure statement without notice and avoid a disclosure statement hearing by combing the disclosure statement hearing with the confirmation hearing.

Another advantage of the small business designation can be found at 11 U.S. C. § 1102 (a)(3), which allows the court to order that a committee of creditors not be appointed. The option of not appointing a committee of creditors greatly reduces administrative expenses for the debtor.

Under the 1994 Amendments, in order to elect treatment as a small busies, the debtor must fit into the following definition:

“small business” means a person engaged in commercial or business activities (but does not include a person whose primary activity is the business of owning or operating real property and activities incidental thereto) whose aggregate non-contingent liquidated secured and unsecured debts as of the date of the petition do not exceed $2,000,000.

11 U.S. C. § 101(51C)

In practice, however, the small business election rarely occurs. First, many businesses do not meet the asset threshold of $2,000,000.00. More importantly, Section 1121(e) requires the debtor to file a plan within 160 days after the petition date. This is often not feasible given the circumstances of a case.

Many different groups have recognized that they’re to be a small business reorganization provisions. The Bankruptcy Reform Council essentially proposed a new “Chapter 10”, which was designed to be for small businesses. This would be a total reworking of reorganizations for small businesses, which would incorporate some to the provisions of Chapter 13. Congress, unfortunately as it did with many other provisions, did not listen to the Review Council, but rather incorporated some other ideas with respect to the small business in the pending proposed legislation. Generally, the proposed legislation does not have a large number of provisions dealing with small business and, of course, the most important and the most renowned are the provisions relating the consumers.

The proposed bill would extend the allowable debts of a debtor to be a maximum of $3,000,000.00 in order to be considered a small business case. All case that have $3,000.000.00 or less in debt would automatically become a small business case without a requirement of an election. This contrary to current law, which requires that the debtor actually elect to be a small business, case. Thus, there would be nor cases which would be under the fast track as to deadlines for the filling of a plan.

Another proposed change contained in the current in the current bill is that the plan itself could be deemed to contain adequate disclosure so as to permit creditors to make an informed decision voting for the plan. Thus change should cut down on costs and the time for confirmation. Further, When the Bankruptcy Court considers the adequacy of a disclosure statement for a small business the court is to take under advisement “the complexity of the case, the benefit of additional information to creditors and other parties in interest and the cost of providing additional information”. Thus, the court is to have more discretion in deciding whether adequate information is provided and particularly to consider the cost to the debtor of providing such information.

The debtor would have an exclusive period for filling a plan of 180 days instead of 100 days as tin the current Code. Further, the must file the plan within 300 days unless extended for cause. There is an absolute limit on the extension of these deadlines. The exclusive period can only be extended to 18 months and the plan must be filed with 20 months after the order for relief. These deadlines are a little more practical.

There are additional proposals whereby the Rules Committee is to develop a standard form of plans and disclosure statements. Other provisions are that there could be a combined hearing on the disclosure statements and no confirmation. Small business debtors are required to file certain financial reports regarding their post filing operations. It is unclear how this would differ from the current monthly reports required by the Office the U. S. Trustee other than making the requirement statutory.

There is, of course, some criticism of these amendments. The absolute deadlines for the filling of plans while extended, would still make confirmation difficult. For example, one to the amendments, in a small business case under Section 1129, the plan must be confirmed 175 days after the date of the Order for Relief unless otherwise extended. This is somewhat contrary to the new provisions, which allow up to 300 days for the filing of plan. It is unclear as to whether extensions are absolutely necessary for the confirmation of the plan under this provision given that the plan may not be filed until up to 300 days after the Order for Relief. Nonetheless, this means that secured creditors can provide for delays whereby the plan would not be confirmed with the deadline affixed by the Code (or by the Court) and thus, the case would ultimately either be converted or dismissed.

Other provisions as to small businesses and Chapter 11 are contained in the proposals. These include expanding the ground for conversion or dismissal under Section 1112. These are:

  1. Failure to comply with a court order;
  2. Failure to timely satisfy filing or reporting requirements;
  3. Failure to appear before the court or the U.S. Trustee for scheduled hearings or meetings;
  4. Failure to pay postposition taxes or file tax returns; and
  5. Failure to act diligently in proposing a plan

Ultimately, many of the provisions which are contained in the proposed legislation, particularly with respect to financial reporting, may actually impose greater duties upon small debtors and sill make it more difficult for a small debtor case.