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Web posted and Copyright © March 1, 2001, American Bankruptcy Institute.

This month's update summarizes the excerpts of the business bankruptcy provisions in H.R. 333/S. 220, now pending in Congress. The summary was prepared by the House Judiciary Committee.

TITLE IV - GENERAL AND SMALL BUSINESS BANKRUPTCY PROVISIONS

SUBTITLE A - GENERAL BUSINESS BANKRUPTCY PROVISIONS

SEC. 402. MEETINGS OF CREDITORS AND EQUITY SECURITY HOLDERS.

Section 402 amends §341 of the Bankruptcy Code to permit a court, on request of a party in interest and after notice and a hearing, to order the U.S. Trustee to not convene a meeting of creditors or equity security holders if a chapter 11 debtor has filed a plan for which the debtor solicited acceptances prior to the commencement of the case.

SEC. 403. PROTECTION OF REFINANCE OF SECURITY INTEREST.

Section 403 amends §547(e)(2) of the Bankruptcy Code to increase the perfection period from 10 to 30 days for the purpose of determining whether such transfer is an avoidable preferential transfer.

SEC. 404. EXECUTORY CONTRACTS AND UNEXPIRED LEASES.

Section 404(a) amends §365(d)(4) of the Bankruptcy Code to establish more finite deadlines by which an unexpired lease of non-residential real property must be assumed or rejected. It provides that such lease shall be deemed rejected if the trustee fails to assume it by the earlier of 120 days after the date of the order for relief or the date on which an order of confirmation is entered. The court may extend this time period for an additional 90 days on motion of the trustee or lessor for cause. If such extension is granted, the court may permit a subsequent extension only upon the lessor's written consent.

Section 404(b) amends §365(f)(1) to make a trustee's authority to assign an executory contract or unexpired lease subject to §365(b), amended by the Act.

SEC. 405. CREDITORS AND EQUITY SECURITY HOLDERS COMMITTEES.

Section 405(a) amends §1102(a)(2) to permit, after notice and hearing, a bankruptcy court, on its own motion or on motion of a party in interest, to order a change in a committee's membership to ensure adequate representation of parties in a case. In addition, it specifies that the court may direct the U.S. Trustee to increase the membership of a committee for the purpose of including a small business concern if the court determines that such creditor's claim is of the kind represented by the committee and that, in the aggregate, is disproportionately large when compared to the creditor's annual gross revenue.

SEC. 409. PREFERENCES.

Section 409(1) amends §547(c)(2) of the Bankruptcy Code to provide that a trustee may not avoid transfer to the extent the transfer was in payment of a debt incurred by the debtor in the ordinary course of the business or financial affairs of the debtor and the transferee and such transfer was either made (1) in the ordinary course of the debtor's financial affairs or business, or (2) in accordance with ordinary business terms. Present law requires the recipient of a preferential transfer to establish both of these grounds in order to sustain a defense to a preferential transfer proceeding. In a case that does not have primarily consumer debts, §409 provides that a transfer may not be avoided if the aggregate amount of all property constituting or affected by the transfer is less than $5,000.

SEC. 410. VENUE OF CERTAIN PROCEEDINGS.

Section 410 amends §1409(b) of title 28 of the U.S. Code to provide that a preferential transfer action in the amount of $10,000 or less must be filed in the district where the defendant resides. This amount is presently fixed at $1,000.

SEC. 411. PERIOD FOR FILING PLAN UNDER CHAPTER 11.

Section 411 amends §1121(d) of the Bankruptcy Code to mandate that a chapter 11 debtor's exclusive period for filing a plan may not be extended beyond a date that is 18 months after the order for relief. In addition, it provides that the debtor's exclusive period for obtaining acceptances of the plan may not be extended beyond 20 months after the order for relief.

SEC. 414. DEFINITION OF DISINTERESTED PERSON.

Section 414 amends §101(14) of the Bankruptcy Code to eliminate the requirement that an investment banker be a disinterested person.

SEC. 415. FACTORS FOR COMPENSATION OF PROFESSIONAL PERSONS.

Section 415 amends §330(a)(3) of the Bankruptcy Code to permit the court to consider, in awarding compensation, whether the person is board-certified or otherwise has demonstrated skill and experience in the practice of bankruptcy law.

SEC. 417. UTILITY SERVICE.

Section 417 amends §366 of the Bankruptcy Code to provide that assurance of payment, for purposes of this provision, includes a cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption or other form of security that is mutually agreed upon by the debtor or trustee and the utility. It also specifies that an administrative expense priority does not constitute an assurance of payment.

With respect to chapter 11 cases, §417 permits a utility to refuse or discontinue service if it does not receive adequate assurance of payment within 30 days of the filing for the petition that is satisfactory to the utility. The court, upon request of a party in interest, may modify the amount of this payment after notice and a hearing.

SEC. 419. MORE COMPLETE INFORMATION REGARDING ASSETS OF THE ESTATE.

Section 419 requires the Advisory Committee on Bankruptcy Rules, after consideration of the views of the Director of the Executive Office for U.S. Trustees, to propose official rules and forms directing chapter 11 debtors to disclose information concerning the value, operations and profitability of any closely held corporation, partnership or other entity in which the debtor holds a substantial or controlling interest. This provision is intended to ensure that the debtor's interest in any of these entities is used for the payment of allowed claims against debtor.

SUBTITLE B - SMALL BUSINESS BANKRUPTCY PROVISIONS.

SEC. 431. FLEXIBLE RULES FOR DISCLOSURE STATEMENT AND PLAN.

Section 431 is intended to streamline the disclosure statement process and to provide for more flexibility. Section 431(1) amends §1125(a)(1) of the Bankruptcy Code to require a bankruptcy court, in determining whether a disclosure statement supplies adequate information, to consider the complexity of the case, the benefit of additional information to creditors and other parties in interest, and the cost of providing such additional information.

With regard to a small-business case, §431(2) amends §1125(f) to provide that if the plan itself supplies adequate information, a separate disclosure statement may not be required.

SEC. 432. DEFINITIONS.

Section 432 amends §101 of the Bankruptcy Code to define a "small business case" as a chapter 11 case in which the debtor is a small business debtor. This provision, in turn, defines a "small business debtor" as a person (including affiliates that are also debtors, but excluding a person whose primary activity is the business of owning or operating real property or activities incidental thereto) having non-contingent, liquidated secured and unsecured debts of less than $3 million in the aggregate (excluding debts owed to affiliates or insiders of the debtor) as of the commencement of the case. This definition applies only in a case where the U.S. Trustee has not appointed a creditors' committee or where the court has determined that the committee of unsecured creditors is not sufficiently active and representative to provide effective oversight of the debtor. The definition does not apply to any member of a group of affiliated debtors that has aggregate noncontingent, liquidated secured and unsecured debts in excess of $3 million (excluding debts owed to one or more affiliates or insiders).

SEC. 434. UNIFORM NATIONAL REPORTING REQUIREMENTS.

Section 434(a) adds a new provision to the Bankruptcy Code imposing additional reporting requirements for small business debtors. It requires a small business debtor to file periodic financial reports and other documents containing the following information with respect to the debtor's business operations: (a) profitability, (b) reasonable approximations of projected cash receipts and disbursements, (c) comparisons of actual cash receipts and disbursements with projections in prior reports, (d) whether the debtor is complying with post-petition requirements pursuant to the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, and (e) whether the debtor is timely filing tax returns, paying taxes and other administrative expenses when due, and making other required governmental filings. In addition, the debtor must report on such other matters that are in the best interests of the debtor and the creditors and in the public interest.

SEC. 436. DUTIES IN SMALL BUSINESS CASES.

Section 436 adds a provision to chapter 11 intended to implement greater administrative controls over such cases. The provision requires a chapter 11 trustee or debtor to:

(1) file with a voluntary petition (or in an involuntary case within seven days from the date of the order for relief) the debtor's most recent financial statements (including a balance-sheet, statement of operations, cash-flow statement and federal income tax return) or a statement explaining why such information is not available;

(2) attend, through its senior management personnel and counsel, meetings scheduled by the bankruptcy court or the U.S. Trustee (including the initial debtor interview and meeting of creditors pursuant to §341 of the Bankruptcy Code), unless the court waives this requirement after notice and a hearing upon a finding of extraordinary and compelling circumstances;

(3) timely file all requisite schedules and the statement of financial affairs, unless the court, after notice and hearing, grants an extension of up to 30 days from the order of relief, absent extraordinary and compelling circumstances;

(4) file all post-petition financial and other reports required by the Federal Rules of Bankruptcy Procedure or by local rule of the district court;

(5) maintain insurance that is customary and appropriate for the industry, subject to §363(c)(2);

(6) timely file tax returns and make other required government filings;

(7) timely pay all administrative expense taxes (except for certain contested claims), subject to §363(c)(2); and

(8) permit the U.S. Trustee to inspect the debtor's business premises, books and records at reasonable hours after appropriate prior written notice, unless notice is waived by the debtor.

SEC. 437. PLAN FILING AND CONFIRMATION DEADLINES.

Section 437 amends §1121(e) of the Bankruptcy Code with respect to the period of time within which a small business debtor must file and confirm a plan of reorganization. It provides that a small business debtor's exclusive period to file a plan is 180 days from the date of the order for relief, unless the period is extended after notice and a hearing, or the court, for cause, orders otherwise. It further provides that a small business debtor must file a plan and any disclosure statement not later than 300 days after the order for relief.

SEC. 438. PLAN CONFIRMATION DEADLINE.

Section 438 amends §1129 of the Bankruptcy Code to require that a plan in a small business case be confirmed not later than 175 days from the date of the order for relief, unless this period is extended pursuant to §1121(e)(3) (as added by §437 of the Act).

SEC. 439. DUTIES OF THE U.S. TRUSTEE.

Section 439 amends §586(a) of title 28 of the U.S. Code to require the U.S. Trustee to perform the following additional duties with respect to small business debtors:

(1) conduct an initial debtor interview before the meeting of creditors for the purpose of (a) investigating the debtor's viability, (b) inquiring about the debtor's business plan, (c) explaining the debtor's obligation to file monthly operating reports, (d) attempting to obtain an agreed scheduling order setting various time frames (such as the date for filing a plan and effecting confirmation), and (e) informing the debtor of other obligations;

(2) if determined to be appropriate and advisable, inspect the debtor's business premises for the purpose of reviewing the debtor's books and records and verifying that the debtor has filed its tax returns;

(3) review and monitor diligently the debtor's activities to determine as promptly as possible whether the debtor will be unable to confirm a plan; and

(4) promptly apply to the court for relief in any case in which the U.S. Trustee finds material grounds for dismissal or conversion for the case.

SEC. 442. EXPANDED GROUNDS FOR DISMISSAL OR CONVERSION AND APPOINTMENT OF TRUSTEE.

Section 442(a) amends §1112(b) of the Bankruptcy Code to mandate that the court convert or dismiss a chapter 11 case or appoint a trustee (whichever is in the best interests of creditors and the estate) if the movant establishes cause. An exception applies if (a) the debtor or a party in interest objects and establishes by a preponderance of the evidence that a plan having a reasonable possibility of being confirmed will be filed within a reasonable period of time; and (b) the grounds include an act or omission for which there exists a reasonable justification for such act or omission and that will be cured within a reasonable period of time. The court must commence the hearing on a §1112(b) motion within 30 days of its filing and decide the motion not later than 15 days after commencement of the hearing unless the movant expressly consents to a continuance for a specified period of time or compelling circumstances prevent the court from meeting these time limits.

SEC. 445. PRIORITY FOR ADMINISTRATIVE EXPENSES.

Section 445 amends §503(b) of the Bankruptcy Code to add a new administrative expense priority for a non-residential real property lease that is assumed under §365 and then subsequently rejected. The amount of the priority is the sum of all monetary obligations due under the lease (excluding penalties and obligations arising from or relating to a failure to operate) for the two-year period following the rejection date or actual turnover of the premises (whichever is later), without reduction or setoff for any reason, except for sums actually received or to be received from a non-debtor. Any remaining sums due for the balance of the term of the lease is treated as a claim under §502(b)(6) of the Bankruptcy Code.

 

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