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News Room

Ideas Being Considered by the Small-Business Working Group

National Bankruptcy Review Commission

One Columbus Circle N.E., Suite G-350 ¶ Washington, D.C. 20544 ¶ 202-273-1813 ¶ Fax: 202-273-1048 ¶ e-mail:nbrchq@erols.com

January 14, 1997

To: Members of the National Bankruptcy Review Commission

Professor Warren

Professor King

Ms. Jensen-Conklin

Ms. Holland

Ms. Jacoby

Mr. Singer

Participants in the NBRC Small-Business Working Groups

Other Persons Being Consulted by the Small-Business Working

Group

The Public

Re: Ideas Being Considered By the Small-Business Working Group

The Commissioners of the Small-Business Working Group [ FN: Messrs. Gose, Hartley and Shepard .] are considering for submission to the full Commission the ideas described in the attached document.

The Working Group

Attachment

National Bankruptcy Review Commission

One Columbus Circle N.E., Suite G-350 ¶ Washington, D.C. 20544 ¶ 202-273-1813 ¶ Fax: 202-273-1048 ¶ e-mail:nbrchq@erols.com

January 14, 1997

Ideas Being Considered by the

Small-Business Working Group

I. Highlights

A. Working Group Seeks to Move Cases Faster

· Make chapter 11 simpler and cheaper for cases that can confirm plans.

Achieve faster conversion or dismissal for the cases which cannot confirm plans.

B. Fact Findings Show Need for Reform

Numerous practitioners, judges and professors have appeared before the Working Group. Not one has contended that chapter 11 works well for small business. The virtually uncontradicted information received so far indicates that:

Creditors Stay Away. Creditors seldom put resources into overseeing their interests in small-business cases.

Debtors Aren’t Supervised. Many, many small-business cases languish too long with inadequate supervision, with possible fraud, corruption and reckless business practices evidently flourishing to an unacceptable degree.

Prevailing Culture is Too Lenient. The prevailing "culture" of chapter 11 unwisely operates to give the benefit of the doubt to too many small-business cases for too long.

U.S. Trustees and Courts Need New Guiding Policies. Present law inadequately instructs the courts and the U.S. Trustee to be more proactive in identifying cases that ought to be moved out of chapter 11.

Imprudent Management Seems Related to Poor Results in Chapter 11. There appears (based on anecdotal data) to be a substantial empirical correlation between (A) debtors who fail to pay post-petition taxes and fail to keep post petition insurance and (B) debtors who cannot confirm plans.

C.Reform Proposals in a Nutshell

Bright-line Definition of Small Business. Define "small business" as any entity with less than $10 million in gross income on its last tax return, indexed for inflation.

Move the Cases Faster. Require a "fast-track" time schedule for plan filing and confirmation.

Require Slow-Moving Debtors to Prove Entitlement to the Benefits of chapter 11. Some debtors will not be able to make the "fast track" time schedule. They should still have a fair chance to reorganize. However, they must themselves prove entitlement to chapter 11 proceeds. Therefore, shift to them the burden of proof for entitlement to the continuing benefits of chapter 11. Provide extensions only for those debtors who prove that they will probably be able to confirm a

feasible chapter 11 plan within a reasonable time.

Toughen the Standard of Proof for Small Business Debtors. Require these "fast track" debtors to prove entitlement to the continuing benefits of chapter 11 by a "reasonable probability."

Require Debtors to Establish Segregated Bank Accounts for Taxes and Timely Pay Certain Obligations. To enjoy the protections of bankruptcy, small-business debtors would be required to establish segregated accounts for taxes, and timely pay post-petition tax obligations, obligations for employees’ payroll withholding taxes, taxes owed on behalf of third parties, insurance, and other like obligations.

Move Failed Cases out of the System Faster. Early on, convert, dismiss, lift the stay, order the business sold in chapter 11 or appoint a trustee in those cases which both (1) fail the deadlines and (2) do not prove entitlement to the extensions.

Increase the Role of the U.S. Trustee in Identifying and Moving Out the Unconfirmable Cases. Require the U.S. Trustee to hold an "initial debtor interview" to examine the business viability of small-business chapter 11 debtors early and move the court to convert, dismiss, lift the stay, order the business sold or grant other appropriate relief at the earliest reliable time.

Require the Courts to Conduct More Status Conferences More Quickly. As part of the fast track, call for the courts to conduct more on-the-record scheduling conferences earlier in the case.

Amend Section 1112 to Increase the Bases for Conversion or Dismissal. As part of the expanded powers of the U.S. Trustee, enlarge Section 1112 to provide as grounds for dismissal, among other things, inexcusable failure to operate the business in a prudent manner under the circumstances, failure to file or confirm a plan within a reasonable time, failure to demonstrate probability of confirming a feasible plan within a reasonable time, failure to pay post-petition tax returns or taxes or pension payments on a timely basis, failure to file required reports with the U.S. Trustee on a timely basis, failure to appear at § 341 meetings, failure to file schedules, failure to maintain insurance, etc.

Simplify the Paperwork. Develop thoughtful, short, flexible standard forms for chapter 11 plans and disclosure statements. Create a safe harbor from liability for those who use standard forms. Give the courts flexibility to dispense with disclosure statements or depart from the standard forms.

Retain the Rule of Absolute Priority; Have No Separate Small-Business Chapter. The rule of absolute priority gives legitimacy to chapter 11; it should be retained. The special rules for small business require very few changes to present chapter 11. No separate chapter is required.

II. Definition of Small Business

A. Definition. $10,000,000 or less in gross income (as defined in Section 61(a) of the Internal Revenue Code of 1986) determined by reference to the last-filed income tax return, [ FN: Consideration needs to be given to classifying debtors who are members of affiliated groups. Ideas being considered are that when several entities each (i) file chapter 11 petitions and (ii) file tax returns as members of a consolidated group for federal-income-tax purposes, their gross income will be aggregated and they will be treated as one entity for purposes of determining whether they are a "small business " or not. Another issue being considered is whether or not certain items included in "gross income " for federal-income-tax purposes should be excluded for purposes of determining "small-business " status, such as capital gains, and extraordinary or non- recurring items of gain or loss.] indexed for inflation.

B. Nonfilers. Nonfilers, delinquent filers and past-due filers will automatically be treated as "small businesses".

III. Location in Bankruptcy Code

A. Present chapter 11. There is no desire for a special chapter for small business. Instead, special rules for small business will be added as part of existing chapter 11.

IV. Principal Special Rules for Small Business

The following summarizes a new, mandatory, "fast-track" sequence of events being considered by the Working Group for small-business cases. The purposes of these procedures include (i) enabling the bankruptcy court to quickly identify those cases which are not economically viable; (ii) reducing administrative expenses; and (iii) improving public perception of bankruptcy.

No.

Event

Days from Filing

of Petition

Comments

1

Petition filed or order for relief entered; Statement of Anticipated Taxes and Other Like Obligations filed

0

Beginning of case. The debtor will be required to file, concurrently with the voluntary petition, a statement of anticipated taxes and other like obligations (such as employee payroll withholdings), including the nature of payment, payee, and estimated amount of such obligations. The statement must consist of two distinct portions which separately differentiates the debtor’s tax obligations from those obligations owed on behalf of third parties.

2

Debtor must establish segregated bank accounts

Three days [ FN: This time period may need to be enlarged as it has been reported by the San Francisco office of the United States Trustee that banks are often reluctant to establish accounts for bankruptcy debtors.] after petition-filing date (or entry of order for relief)

The debtor must present verified proof to the U.S. Trustee that the debtor has established segregated bank accounts for the receipt of deposits of funds for payment of: (i) the debtor’s tax obligations; (ii) obligations for employees’ payroll withholdings; (iii) taxes owed on behalf of third parties; (iv) insurance, and other like obligations.

3

Debtor must file schedules and statements

15 days after petition-filing date

(or entry of order for relief)

A "fast track" debtor should no longer be able to obtain an extension of time for the filing of schedules and statements, which disclose important financial information about the debtor. As described below, the U.S. Trustee (or Bankruptcy Administrator) will be required to hold an "initial debtor interview" ("IDI") with the debtor twenty (20) days post-petition. Since the IDI focuses on the debtor’s economic viability, the U.S. Trustee must be able to review and investigate the debtor’s schedules and statements prior to the meeting.

4

Initial Debtor Interview

20 days after petition-filing date (or entry of order for relief)

At the IDI, the U.S. Trustee will focus on the debtor’s economic viability as well as case administration issues. The goal of the IDI is to increase the percentage of confirmed plans by enabling the U.S. Trustee to identify early on those cases in which creditors’ interests would be better served by a liquidation of the debtor’s assets or a nonbankruptcy resolution. The IDI will enable the U.S. Trustee to gather and analyze information required to meaningfully participate in Mandatory Status Conference No. 1, described below.

5

Mandatory Status Conference No. 1

30 days after petition-filing date (or entry of order for relief)

Early judicial intervention through status conferences will help make the chapter 11 process more effective. Status conferences should be on the record, not in camera. They should follow the model of pre-trial conferences under Bankruptcy Rule 7016 for adversary proceedings. The judge will not normally be a proactive manager; rather, he or she will identify scheduling issues, generally insist on compliance with the new, fast-track schedules and respond to motions. Also, in cases where the debtor intends to file a plan on the 45-day deadline, issues about the disclosure statement can be considered at this status conference. At these conferences the U.S. Trustee should play a significant role in protecting the interests of creditors, if they are absent. The U.S. Trustee should single out for careful supervision those cases with a high risk of failure.

6

Deadline to File Plan and Disclosure Statement (Unless Court Has Ruled that No Disclosure Statement is Needed)

45 days after petition filing date (or entry of order for relief)

First major deadline. This time period is thought by some to be just right and, by others, too short. (Nearly all persons appearing before the Working Group have said it is too short.)

7

Mandatory Status Conference No. 2

60 days after petition filing date (or entry of order for relief)

Second major event involving the judge.

In cases where the plan has not been filed, the statute will direct the U.S. Trustee to use this hearing to request the court’s attention to determination of whether the debtor belongs in chapter 11. The court will have wide range of choices. If the plan has not been timely filed, the court shall hold (or schedule promptly) the special extension hearing described below.

If the plan has been timely filed, (a) the disclosure statement can be considered [ FN: See discussion below regarding revised rules for disclosure statements.] and (b) the confirmation hearing can be scheduled. If, at this status conference, the court, being advised by the U.S. Trustee and other parties, determines that the plan appears patently unconfirmable, the court can at that Status Conference (a) dismiss, (b) lift stay, (c) appoint a trustee, (d) order the business sold in chapter 11, (e) convert or (f) order prompt hearings thereafter to consider granting such relief.

8

Special Extension Hearing (held only if the plan is not timely filed or if the plan is not confirmed at originally scheduled confirmation hearing)

On or within 30 days after second status conference

1. Special Standard of Proof. To obtain extension after default in filing plan or failure to achieve confirmation on schedule, debtor must prove at special hearing, by a preponderance of the evidence, that there is a reasonable probability that the debtor can (a) confirm and consummate a feasible chapter 11 plan within a reasonable time and (b) timely perform its post-petition tax and other material obligations during the interval before confirmation. This hearing must be concluded within 30 days of a missed deadline. The ruling must be issued within 30 days after conclusion of the hearing. Appeals as of right will be permitted by any party in interest, without regard to normal limit that interlocutory orders are not appealable.

2. Review of Business Viability. As the above-proposed "initial debtor interview" indicates, the Commissioners on the Working Group believe that, on balance, expanded powers and personnel for the U.S. Trustee plus augmented grounds for dismissal or conversion in Code § 1112 represent the best way to substitute for the normal non-appearance of creditors.




The proposed revised powers of the U.S. Trustee are listed below. The three Commissioners have considered and rejected competing concepts, such as creating a role in small-business chapter 11 like that played by standing trustees in chapter 12 and 13 cases. They have also rejected concepts which would involve having the U.S. Trustee use panels of outside business-feasibility consultants to be called in to assess on an independent basis whether the debtor needing a special extension hearing meets the burden of proof required to obtain the extension.

The Working Group recommends that 28 U.S.C. § 586 be upgraded to mandate that staffing and funding in the offices of U.S. Trustees (and bankruptcy administrators in North Carolina and Alabama) be augmented to provide for the engagement of skillful business-viability analysts. In small-business cases the statute would require the U.S. Trustee, promptly after the petition is filed to:

Initial Obligations of the U.S. Trustee:

¶ meet with debtors-in-possession personally at an "initial debtor interview" ("IDI") held twenty (20) days post-petition. The IDI will focus on both case administration and the debtor’s economic viability;

visit the business premises of the debtor [in advance of the IDI or § 341 Meeting of Creditors];

¶ ascertain and review the state of the debtors’ books and records and the most recent federal and state income and employment- tax returns;

Continuing Obligations of the U.S. Trustee:

¶ verify that the debtor is maintaining appropriate insurance and paying post-petition taxes;

¶ require the debtor to file appropriate monthly reports;

¶ participate in status conferences and other proceedings before the court;

¶ move quickly to seek conversion, dismissal, etc. for cases that do not show a reasonable probability of being successful in chapter 11;

participate as parties and appear as witnesses in Special Extension Hearings and provide independent testimony to the courts on whether the debtor has a reasonable probability of confirming a feasible plan within a reasonable time.

No.

Event

Days from Filing

of Petition

Comments

9

Disclosure Statement Hearing

15 days after the plan has been filed or at the confirmation hearing

The present statute sets as a baseline the requirement that there must be a disclosure statement in all cases, the adequacy of which is determined at a hearing prior to the hearing on plan confirmation. The change favored by the Commissioners on the Working Group is that the court should be free to choose how to deal with the disclosure statement within the following parameters: (1) provide for combined hearings on the plan and the disclosure statement, at the confirmation hearing; (2) permit the debtor to use a standard form and dispense with any hearing [unless timely requested by a party?]; (3) provide as a baseline mandatory use of a standard form without a hearing, but give the court discretion either to dispense altogether with the disclosure statement or to require a hearing and mandate disclosure beyond the standard form.

10

Confirmation Hearing

75 days after the plan has been filed

If the 75-day deadline is not met, the court will on the date set by the court for the confirmation hearing hold (or schedule promptly) a Special Extension Hearing, exactly the same as in No. 8 above, with the debtor required to meet the same standard to continue to enjoy the protection of chapter 11.

11

Closing of the plan (sometimes called "Consummation")

As promptly after confirmation as possible

The Commissioners on the Working Group have rejected the notion of having an outsider monitor the compliance of the debtor with the chapter plan, after confirmation. However, they do recommend that such a role be played, on an active basis, by the U.S. Trustee. [ FN: SHC notes confused. Should reference to deferred discharge be included or not?]

V. Voting and Absolute Priority

There would be no change in the present absolute-priority rule [ FN: The Commissioners on the Small-Business Working Group recognize that the chapter 11 Working Group is also addressing absolute-priority issues, such as the new-value exception. The Small-Business Working Group Commissioners is independently analyzing these issues, and may reach different conclusions than those developed by the chapter 11 Working Group.] and voting requirements. This would avoid adopting the concept of chapter 11 plans for small businesses which could be confirmed upon the basis of payments of "disposable income" to creditors. This is undesirable for two reasons: (1) it would clog the courts with complex, fact-sensitive litigation about income projections of businesses and (2) it would eliminate a feature that was significant in attracting major opposition to the separate small-business chapter in the 1994 amendments. This would also ratify the strong, well-articulated views expressed to the Working Group that the voting and absolute-priority concepts are what make chapter 11 legitimate tools to protect creditors against oppression by debtors. Also, some data made available to the Working Group show that in small business cases, creditors willingly vote away their absolute-priority rights for any reasonable plan proposed by the debtor that gets the creditors higher-than-liquidation recoveries.

VI. Disclosure Simplification

The requirement for a disclosure statement would be continued but simplified. See the chart above for discussion of hearings and the discretion of the judge. When a disclosure statement is required, while plan proponents would always be free to file the disclosure in whatever form they thought fit the circumstances, there would be developed, as an alternative available to everyone, a "safe-harbor" standard-form disclosure statement. The following type of effort would be called for to develop, over a multi-year experimentation period a standard form, e.g., a short set of simple, standard questions that must be answered in a standard-form disclosure statement, e.g., "describe the business briefly"; "state the classes of creditors in the plan and their treatment thereunder"; etc.

At first, courts would be encouraged to prescribe forms by local rule or standing order. After a period of experience with these efforts, the Rules Committee would be asked to develop a nationally uniform set of standard forms.

VII. Plan Simplification

The statute would provide that a standard-form plan would be developed in the same way as discussed above for disclosure materials.

VIII. TIMELY PAYMENT OF CERTAIN OBLIGATIONS; MAINTENANCE OF SEGREGATED ACCOUNTS

The Working Group has determined that debtors who are unable to pay tax-related and insurance obligations should not be entitled, absent a showing of reasonable cause, to enjoy the benefits of protected bankruptcy status at the expense of the public fisc. Moreover, it has been convincingly reported to the Working Group that there is a [strong] correlation between debtors who are unable to meet administrative obligations, and debtors who are not economically viable.

Accordingly, the Bankruptcy Code and Rules would require debtors to establish segregated accounts for taxes, and timely pay post-petition tax obligations, employees’ payroll withholding taxes, taxes owed on behalf of third parties, or insurance and other obligations to be identified. Furthermore the Code and Ruleswould require the debtor to: (i) timely deposit funds in sufficient amounts into the segregated accounts specified for payment of the above-specified obligations; and (ii) periodically, but no less than monthly, report and present proof of such deposits and/or payment of such obligations to the U.S. Trustee in the manner prescribed by the Bankruptcy Code and Rules.

As described below, debtors who failed to present proof of deposit or payments as specified, could be dismissed, absent a showing of reasonable cause, upon motion of the U.S. Trustee or Bankruptcy Administrator.

IX. TOUGHER STANDARD OF PROOF

Uncontroverted testimony has been provided to the Working Group that it is too easy for debtors who have no intent or ability to reorganize to remain in chapter 11. To make it tougher for economically defunct businesses to hide from creditors in chapter 11, the Working Group would modify bankruptcy law to provide for a more stringent standard of proof to apply at all stages of a small business chapter 11 proceeding. Specifically, the Bankruptcy Code would prescribe that the applicable standard of proof would be "reasonable probability," rather than the current "reasonable likelihood" standard under 11 U.S.C. § 1112(b)(1). See also 11 U.S.C. § 1129(a)(11). The new standard would apply at all stages of the case including, but not limited to, motions to lift the automatic stay, mandatory status conferences, extension hearings, disclosure statement hearings, or plan confirmation hearings.

X. Supervisory Role of U.S. Trustee;

Augmented Grounds for Dismissal

The need for increased supervision of small-business debtors appears established beyond doubt. At present, the data-gathering and -reporting activities in chapter 11 cases do not provide a systematic foundation for this conclusion. [ FN: In America in the 1990 ’s detailed data available to the investing public permit comparison of the relative efficiencies of enterprises such as, for example, the San Diego electric utility and the Cleveland electric utility. Also, newspapers and sports media publish voluminous comparative baseball-performance data about the San Diego Padres and the Cleveland Indians. Oddly, there are few or no data (published or unpublished) which permit comparison of the efficiencies of most governmental functions in the two cities, including comparison of how chapter 11 works in each place (or anywhere else).] However, numerous anecdotal reports presented to the Working Group uniformlyshow (a) that chapter 11 works very effectively for some small businesses, but (b) many small-business cases (probably the preponderance of such cases) have no business in chapter 11 to begin with. A paradigm "bad" small-business chapter 11 case involves a poorly managed debtor with insufficient working capital and inadequate cash flows. It files the case as a last resort when foreclosure threatens to shut down the business. [ FN: One practitioner who appeared before the Working Group called chapter 11 an "economic hospice ." "It is, " he said, "the place where small businesses go to die. The business files, the family struggles for six months. Then the business shuts down. Then the family members grieve for a while until they find other jobs. "] Sometimes the management personnel have not been being paid prepetition, with the available cash all going to stave off creditors. Once the case is filed, however, it has been reported, the managers put themselves back on salary, while creditors go unpaid. Many debtors fail to file reports with the U.S. Trustee after they seek relief. Often, they do not keep business assets insured or workers’ compensation in place. Often, they fall into arrears on post-petition taxes. Sometimes they do not remit taxes withheld from employee paychecks to the government on a timely basis.

These are businesses, in other words, which are so marginal that the benefits to the economy of keeping them in operation are significantly less than the dangers they pose. These are dangers to employees, dangers to the public and dangers to the public fisc. Few or no benefits of job preservation or creation of going-concern value follow from the pendency of these cases. The Commissioners on the Working Group believe that the system should be tightened to the point where it errs on the side of forcing at least a few businesses out of chapter 11 that might have reorganized under present law.

At present, there is typically little creditor participation in most small-business cases. The stakes are just too small to justify creditors taking time to participate in creditors committees. For instance, one study showed that of 119 chapter 11 cases filed in San Francisco in 1995, only 12 had creditors committees. Only three had counsel of record.

In the absence of creditor participation, no one under present law is, in the view of the Working Group, adequately required by law to supervise the situation. A major reform of the 1978 Code was to restore the courts to their proper function of being impartial dispute arbiters, not their all-too-often former function of beingday-to-day case managers. The statute created the U.S. Trustee system to fulfill the administrative role. The Working Group has found that the U.S. Trustees are functioning better and better all the time, particularly in being proactive in weeding out unworthy cases early. Nonetheless there is much room for further improvement.

The enabling legislation (primarily 28 U.S. C. § 586) primarily requires the U.S. Trustee to supervise trustees in bankruptcy cases and to review compensation of professionals.

Amazingly, not a single word in any statute clearly directs the U.S. Trustee system to examine or supervise the conduct of debtors in possession in chapter 11 cases!

The Working Group recommends correction of this anomaly for small-business chapter 11 cases. The Working Group recommends that 11 U.S.C. § 586 be upgraded to mandate that staffing and funding in the offices of U.S. Trustees (and bankruptcy administrators in North Carolina and Alabama) be augmented to provide for the engagement of skillful business-viability analysts. In small-business cases the statute would require the U.S. Trustee, promptly after the petition is filed to:

Initial Obligations of the U.S. Trustee:

¶ meet with debtors-in-possession personally at an "initial debtor interview" ("IDI") held twenty (20) days post-petition. The IDI will focus on both case administration and the debtor’s economic viability;

visit the business premises of the debtor [in advance of the IDI or § 341 Meeting of Creditors];

¶ ascertain and review the state of the debtors’ books and records and the most recent federal and state income and employment-tax returns;

Continuing Obligations of the U.S. Trustee:

¶ verify that the debtor is maintaining appropriate insurance and paying post-petition taxes;

¶ require the debtor to file appropriate monthly reports;

¶ participate in status conferences and other proceedings before the court;

¶ move quickly to seek conversion, dismissal, etc. for cases that do not show a reasonable probability of being successful in chapter 11;

participate as parties and appear as witnesses in Special Extension Hearings and provide independent testimony to the courts on whether the debtor has a reasonable probability of confirming a feasible plan within a reasonable time.

These new responsibilities would be augmented by a significant enlargement of the remedies now provided in 11 U.S.C. § 1112(b). To the existing grounds for conversion or dismissal would be added the following items: (i) failure to file complete and accurate monthly operating reports; (ii) failure to pay post-petition taxes; (iii) [grossly] imprudent operation of the business; (iv) inadequate insurance; (v) failure or inability to obtain extension plan-filing and disclosure deadlines; (vi) failure to file the Statement of Anticipated Taxes and other Obligations and to present proof of deposit or payment of funds for payment of such obligations; (vii) failure to comply with court orders; (viii) failure to provide documents or information relating to the affairs of the estate in response to a reasonable request of the U. S. Trustee; (ix) failure to attend a meeting of creditors which has been duly noticed or continued pursuant to 11 U.S.C. § 341; (x) failure to attend a duly noticed or continued status conference; and (xi) failure to attend an Initial Debtor Interview ("IDI") with the U.S. Trustee (or Bankruptcy Administrator ("BA")) thathas been duly noticed or continued, or to cooperate with the reasonable requests of the U.S. Trustee related to the IDI or the status conference. [ FN: The intent here is not to provide the U.S. Trustee with administrative subpoena power, but rather to impose a duty on the debtor to disclose meaningful information regarding its business, and to enable the U.S. Trustee to fulfill its statutory duties to hold an IDI and participate in status conferences.]

A new subsection would be added to 11 U.S.C.§ 1112 which provides that, upon a motion for conversion or dismissal by the U.S. Trustee establishing the existence of any of the causes enumerated in 11 U.S.C. § 1112(b), the court would convert or dismiss the case unless the debtor proved by a preponderance of the evidence that there was good cause for any failure and that there was a reasonable probability of confirming and consummating a feasible chapter 11 plan within a reasonable time.

In reaching these recommendations, the Commissioners on the Working Group have decided against recommending that the foregoing enhanced role of the U.S. Trustee be played by others. Consideration was given to recommending a concept for the small-business debtor like the standing trustee of the chapter 12 and 13 type. This was rejected primarily because the Working Group does not believe that every chapter 11 debtor automatically needs supervision and because of the extra expense to debtors that would be involved in introducing officials of this type to the system.

The Commissioners also rejected the concept of having the U.S. Trustee operate panels of independent business-feasibility evaluators to be called into cases on an ad hoc basis. Again, this idea was deemed inappropriate because of expense-to-the-debtor concerns.

The Working Group has been impressed with the knowledge about abuses in small-business cases which the U.S. Trustees and bankruptcy administrators revealed in their appearances before it. With additional funding and use of non-lawyer business analysts, the Working Group believes that over a reasonably short time, high-quality concentrations of experience and judgment will be developed in the U.S. Trustee program. Accordingly, in the end, use of augmented staff will operate better and more efficiently than imposing another set of requirements that chapter 11 debtors must engage and pay another set of private-sector professionals.

[Post-confirmation supervision, reporting and discharge deferral to be discussed further among the Commissioners]

XI. Single Asset Real Estate

The Commissioners on the Working Group are interested in how spokes people at the December meeting addressing single-asset real estate will respond to the following questions:

If the foregoing new rules for small-business cases were adopted, what additional, alternative or different special rules for single-asset-real-estate cases would be desired?

If not, what changes, additions, etc. would they want?

What role do they see for the rule of absolute priority and the new-value exception in single-asset real estate?

What should the definition of single-asset real estate be?

What changes, if any, should be made in Section 365, and elsewhere as to unexpired leases and executory contracts?

Should there be an automatic trustee in single-asset cases?

As comparing the DIP with an incentive to hold on to his property and make peace with the creditor versus the trustee who at least sometimes has fee-revenue incentives to drag out the case, which is better for the creditor?

[Note to Commissioners: What follows is the unrevised text we were dealing with in August. It has not been revised, pending discussion and instruction to the staff.]

A. Definition. [Note to Commissioners: This is a new idea, not discussed on conference calls, which S. Case proposes for consideration.] Much controversy surrounds this subject. One way to address this is to have a relatively unambitiousdefinition that would "catch" the most obvious cases, while leaving obvious loopholes, but also providing that the special rules would apply if the debtor agreed to them at the time of borrowing mortgage debt. This way, lenders could try to impose it and borrowers would resist and, so long as the election could only be made when there was no financial extremis situation, the market would determine --at least sometimes -- if more restrictive rules applied. Having said that, here goes . . . .

"Designated Real Estate Debtor" means an entity which:

owns, leases or operates one or more parcels of largely contiguous land or a

structure or group of structures or both used or (in the case of undeveloped land) potentially being usable for any one or more of the following principal purposes, or any combination thereof: rental of significant portions of the space in the structure or structures to unaffiliated persons for office, residential [as in present statute, exclude less than 4 residential-units buildings?], retail-store, warehouse or hotel use; and either

(a) fewer than [35] [100] [?] entities are beneficial owners [on definition

of "beneficial owner" consider using very clear, well developed definition used by SEC in context of Section 16 of the Securities Exchange Act of 1934] of the equity interests in the entity; or

(b) has elected in writing, or consideration, in a contract with a creditor

providing for the [lending of money] [extension of credit] to the debtor, at any time more than [36] [??] months prior to the filing of the case to be a Designated Real Estate Debtor in case at any time prior to the payment in full of the [borrowing] [credit extended] and all related interest and fees, if any an order for relief shall have been entered against such entity in a case under chapter 11 of title 11, U.S. Code."

S. Case’s theory is that the foregoing would "catch" a high percentage of the types of cases now considered abusive, but would exclude farms, industrial and utility properties that get mixed up in job-related and other issues that involve broader questions of chapter 11 policy. It would also leave out publicly held realtyenterprises unless they "opted in" at the time of borrowing, early enough so that the duress of being in a workout would not leave them coerced into accepting Designated status. Does this appeal to any of the Commissioners?

B. Auto Trustee. A chapter 11 trustee shall automatically be appointed for every Designated Real Estate Debtor. [However, the equity shall have the same rights to get a plan filed and confirmed as if it were a non-real estate small-business debtor?]

C. Auto Dismissal. The case will be automatically dismissed on motion of [_________] if the debtor shall have failed to pay in full, when due, all post-petition accruals of real estate tax, federal tax, all other tax, insurance and interest at the pre-default, non-contract rate.

D. New Value Exception. The new-value exception to the absolute priority rule will not be available to a Designated Real Estate Debtor unless the plan provides for payment in full [over what time schedule?] of all principal and interest [at what rate?] secured by mortgages on the assets of the debtor.

 

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