MEMORANDUM
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
I. EXECUTIVE SUMMARY
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.
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