Significant Business Bankruptcy Provisions in Pending Legislation

Written by:
Prof. Jack F. Williams
American Bankruptcy Institute
Robert M. Zinman Resident Scholar
[email protected]

Pre-pack Fast Track

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

(§402 amending §341 of the Code.)

Dirt Is King!

• Unexpired lease of non-residential real property is deemed rejected if the trustee fails to assume by the earlier of:
  1. 120 days after order for relief or
  2. confirmation order.
• Court may extend the "drop-dead" date for 90 days for cause.
• Any further extensions are subject to the lessor's consent.
• The trustee's authority to assign under §365(f) is subject to §365(b) requirements.

(§404 amending §365 of the Code.)

Retention and Compensation

• Investment bankers need not be "disinterested." (§414).
  • Pre-petition relationship no longer disqualifying in itself.
  • Limited utility.
• Board certification an appropriate factor in fee awards (§415).
• District court has exclusive jurisdiction over §327 disputes.
• Committee composition
• Court may change committee membership to ensure adequate representation of parties (§405).
• 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.

Utility Service

• "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.
• Utility entitled to assurance of payment within 30 days of the filing in a chapter 11 case.
  • Court may modify any assurance of payment agreement upon request.

Reclamation Claim Expansion

• Seller's right to reclaim goods from insolvent debtor recognized up to 45 days after receipt of the goods.
• Significant change in existing law.

(§1227.)

Chapter 11 Deadlines

• Period of exclusivity for filing a plan capped at 18 months from order for relief (§411).
• Period of exclusivity for solicitation of acceptances capped at 20 months from order for relief (§411).

Chapter 11 Tax Disclosure

• Adequate disclosure requires full discussion of potential federal and state tax consequences of the plan to the debtor and a hypothetical investor.

(§717.)

Confirmation Conditioned on Filing Returns

• Prohibits a court from confirming a plan in a chapter 11 case unless requested tax returns are filed.

(§1228.)

Interest on Tax Claims

• Provides specific rate for interest on federal tax claims in accordance with the Internal Revenue Code.
• Provides for use of state law for interest on state tax claims.

(§704.)

Chapter 11 Plan Payments on Tax Claims

• Confirmation requirements for payment of priority tax claims:
  • regular cash installment payments,
  • over a 5 year period from order for relief, and
  • in a manner not less favorable than the most favored non-priority unsecured claim provided for in the plan.

(§710.)

Small Business Cases

• Small Business Case (SBC): Chapter 11 case with a Small Business Debtor (SBD).
• 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.

(§432.)

U.S. Trustee's Miranda Warnings to SBD

• U.S. Trustee must:
  • Conduct initial interview of SBD;
  • Investigate business viability;
  • Inquire about business plan;
  • Explain debtor duties and obligations;
  • Attempt to obtain agreed scheduling order;
  • If appropriate, inspect premises, review records, ensure tax returns have been filed;
  • Diligently monitor the SBD; and
  • Promptly move for conversion or dismissal when appropriate.

SBD Duties

• Chapter 11 SBD must:
  • File most recent financial statements and tax returns;
  • Attend Code or court-ordered meetings;
  • Timely file schedules and statements;
  • Timely file post-petition reports;
  • Maintain customary insurance;
  • Timely file tax returns and other governmental filings;
  • Timely pay administrative expense taxes unless contested; and
  • Permit the U.S. Trustee to inspect premises, books and records.

SBC Disclosure Statement Requirements

• Court should consider the following in reviewing adequacy of disclosure statement:
  • complexity of case,
  • benefit of additional information to parties in interest, and
  • costs of additional information.
• In SBC, plan itself may satisfy disclosure requirements.

SBC Plan Deadlines

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

Preference Power Scaled Back

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