Legislative Update Small Business Provisions

Legislative Update Small Business Provisions

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Small Business Provisions

Section 424—Uniform National Reporting Requirements

This provision would require periodic reports concerning a debtor's profitability, projected financial results, comparison of projections to results, etc.

The U.S. Trustee currently requires operating reports that contain much of this information. It would seem that revision of these forms would be a better approach than requiring another full set of reports. In addition, mere reporting will not achieve compliance. The system needs an entity to file appropriate proceedings to assure compliance, and to move to dismiss, convert or appoint a trustee if the reports show that reorganization is not likely.

It appears that the proposed reporting requirements as currently drafted will simply increase the costs of the bankruptcy process without measurably improving the results. The U.S. Trustee system has the authority to design and implement reporting requirements, and should do so in a way that provides this meaningful and necessary data while avoiding duplicate reporting.

Section 426—Duties in Small Business Cases

This proposed amendment would require debtors in small business cases to: (i) file balance sheets, a statement of operations, cash-flow statements, and federal income tax returns (if these reports exist); (ii) attend meetings scheduled by the court or U.S. Trustee; (iii) to timely file all bankruptcy schedules and statement of affairs; (iv) file all post-petition financial and other reports required by the rules or court; (v) maintain insurance customary and appropriate to the industry; (vi) file tax returns timely and to pay administrative tax claims, making deposit of trust fund taxes daily; and (vii) allow the U.S. Trustee to inspect the debtor's business premises, books and records.

The objectives of this proposal are understandable. As a practical matter, however, some of the provisions may be significantly burdensome without providing significant benefit. Some of the problem may be cured by clarification of the language.

For example, the statute would require senior management to attend all "meetings" scheduled by the court. (Generally, the court schedules "hearings," not meetings.) It is unclear whether the statute requires senior management to attend all hearings. Some hearings involve matters that would not involve senior management. The same is probably true of meetings conducted by the U.S. Trustee. The reorganization effort might be jeopardized if management's time is monopolized by requiring the presence of senior management at a hearing or meeting at which their presence contributes no value. The language of the statute might be clarified to require senior management to attend if specifically required by the court or the U.S. Trustee.

In addition, the requirement for daily deposit of trust fund taxes may present real practical difficulties in many cases. An example might be a debtor in the fast food business or a retail operation with many outlets. It might be difficult, if not impossible, to compute trust fund taxes and deposit them daily. The compliance expense and effort might seriously jeopardize the reorganization effort.

Sections 427, 428, 429—Plan Filing and Confirmation Deadlines

The exclusivity period is shortened from 120 to 90 days. The proposed statute would require plan confirmation in 150 days. These periods can be extended only if the debtor "demonstrates by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time." In general, there is a need to expedite the resolution of small cases and there is a need for effective case management. However, there are real practical difficulties with the proposed time periods.

The deadline for filing proofs of claim (except for governmental units) is 90 days after the first meeting of creditors; creditors' meetings should occur 20-40 days after the case is filed. Therefore, the deadline for claims is frequently more than 120 days after the case is filed. Requiring the debtor to file a plan prior to the proof of claim deadline can be very counterproductive. If a plan is filed and if notices are sent out prior to the proof of claim deadline, all the cost of producing and mailing the plan will be wasted if a significant claim is subsequently filed. (In addition, the court will have wasted significant time in reviewing and in tentatively approving the disclosure statement.) A second plan must be negotiated and filed. The court will be required to review and tentatively approve a second set of documents. Creditors will be confused by receiving two sets of plans and disclosure statements and two ballots.

More important, the government proof of claim deadline is 180 days after the order for relief. Therefore, under its present terms, the statute would require that the plan be confirmed 30 days prior to the deadline for filing government proofs of claim. Bankruptcy Code §1141(d)(1)(A) provides that confirmation of a plan discharges the debtor from all claims that arose prior to the confirmation, whether or not a claim has been filed. Therefore, under the statute as presently written and proposed, it appears that government claims could be discharged even though the deadline for filing the claims has not passed.

Another problem is that claims are often disputed. By requiring plan confirmation in 150 days, the proposed statute leaves no time for resolution of disputed claims.

Yet another problem arises because of the tremendous diversity in bankruptcy cases. It is not unusual for a case to change dramatically as a result of negotiation between the debtor and creditors. All negotiation takes time, whether in matters of finance or in matters of international relations. An arbitrary 150-day deadline can significantly alter the prospect for negotiating a solution in everyone's best interests.

Finally, introduction of an absolute 150-day deadline creates the incentive for some parties to engage in strategic litigation rather than good-faith bargaining. With an absolute deadline in effect, a party that is fully secured (perhaps oversecured) might actually find it profitable to obfuscate and delay rather than negotiate in good faith. The parties harmed in such a circumstance will most likely include the government (as unsecured priority creditors) and non-priority unsecured creditors (frequently including the government).

The court should be allowed substantial discretion to match the statute to the financial realities of each case.

Journal Date: 
Tuesday, June 1, 1999