To: National Bankruptcy Review Commission

From: The Small Business Working Group

Stephen H. Case, Advisor
Jennifer C. Frasier, Staff Attorney

Date: June 13, 1997

Re: Revised Small Business Proposal


The structure of chapter 11 is fundamentally sound. Chapter 11 has not, however, consistently

worked well for "small business" bankruptcies.

A.Summary of Need for Reform

When it works, chapter 11 is very effective in preserving jobs and going-concern values.

¶When creditors do not participate, however, as is generally true in smaller cases, there isn’t effective oversight of the debtor-in-possession.

¶Preparing the typical drafted-from-scratch plan and prospectus-type disclosure statement is a substantial burden on the debtor, and increases cost and delay in small business chapter 11 cases.

¶A majority of small business chapter 11 debtors have no realistic prospect for rehabilitation.

¶Nearly all of the people who have appeared before the Working Group concur that reforms are needed for small business cases.

B.Summary of Proposal

¶Strengthen the 1994 "small business" amendments and further reduce cost and delay in small business chapter 11 cases by creating new mandatory rules.

¶Expand the definition of "small business" chapter 11 debtors to include those debtors with aggregate liquidated, noncontingent debts of $5 million or less [or a menu of options of three, five, or ten milliondollars or less]. [ FN: The structure of a menu of choices for voting purposes remains to be determined. The Working Group will explain this alternative approach at its public meeting on June 20, 1997 in Detroit, Michigan.]

¶Further simplify the plan and disclosure process by:

(i)directing the Rules Committee to develop standard-form plans and disclosure statements; [ Such forms should be compatible with current statistical database systems and designed to facilitate the collection of reliable data] and

(ii)authorizing the court to dispense with disclosure statements altogether in appropriate cases.

¶Require the debtor to file a plan and disclosure statement within 90 days and to confirm a plan within 150 days unless the debtor gains an extension by demonstrating that it is more likely than not to confirm a feasible plan within a reasonable period of time. Similar to current law, generally provide the small business debtor with the exclusive right to file a plan during the initial 90-day period.

¶Establish additional benchmarks under section 1112 of cases unlikely to confirm a plan. New statutory examples of "cause" for conversion or dismissal would include: (i) failure to comply with a court order; (ii) failure timely to satisfy filing or reporting requirements; (iii) failure to appear before the court or the U.S. Trustee for scheduled hearings or meetings; (iv) failure to pay postpetition taxes or file postpetition tax returns; and (v) failure to act diligently in proposing a plan.

¶When cause exists to convert or dismiss a case, shift the burden of proof to the debtor to establish (i) that there is a reasonable justification or excuse for the act or omission constituting "cause," (ii) that the act or omission will be corrected promptly, unless there are compelling circumstances which justify an extension, and (iii) that the debtor is more likely than not to confirm a plan within a reasonable time.

¶Create uniform rules requiring small business debtors to file financial reports regarding postfiling operations in order to (i) educate debtors about proper maintenance of books and records, (ii) assist in assessing a debtor’s reorganization prospects and, (iii) where necessary, aid the debtor in carrying its burden of proof required to obtain certain extensions.

¶ Require the bankruptcy court to hold a minimum of one on-the-record scheduling hearing on notices to all parties in interest, unless the debtor and U.S. Trustee file an agreed-upon scheduling order early in the case.

¶ Postpone application of the section 362 stay to certain repeat small business chapter 11 filers, unless and until they show legitimate entitlement to such protection.