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MEMORANDUM

Re: Proposal of the Small Business Working Group

To: National Bankruptcy Review Commission

From: The Small Business Working Group
Stephen H. Case, Advisor, Small Business Working Group
Jennifer C. Frasier, Staff Attorney, Small Business Working Group
George H. Singer, Volunteer Staff Attorney, Small Business Working Group

Date: February 14, 1997

Re: Proposal of the Small Business Working Group

I. EXECUTIVE SUMMARY

Chapter 11 does not work well for "small business" bankruptcies.

A.Summary of Need for Reform

· When it works, chapter 11 is very effective.

· Contrary to expectations in 1978, creditors do not participate in smaller cases.

·The imbalance thus created permits too many debtors to languish in the system.

·Every person appearing before the Working Group has conceded that reforms are needed for small business cases.·350

B.Summary of Proposal

· Impose new separate-track rules on "small business" chapter 11 debtors. The members of the Small Business Working Group are still refining their consensus about the exact definition of "small business debtor."

· The amended statute would require the rules committee to impose uniform, national reporting rules on small business debtors.

· Expand the grounds for relief and the remedies permitted under Bankruptcy Code section1112. Expanded grounds would include, among other things, failure to (i) file reports and schedules, (ii) pay administrative expenses, (iii) attend certain meetings and hearings and (iv) file and confirm plans within short deadlines (unless extended by the court on a showing that confirmation of a plan within a reasonable time is more likely than not). Expanded relief would include, among other things, lifting the stay, appointment of a trustee or examiner and forced sale of assets in the chapter 11 case.

· Call for U.S. Trustees and Bankruptcy Administrators to conduct certain early procedures and to move promptly for relief under amended Bankruptcy Code section 1112 if they find that material grounds to do so exist.

· Require schedules and statements of affairs to be filed promptly.

· Require that certain segregated bank accounts for tax monies be created and that certain reports of anticipated taxes be filed.

· Create broad new flexibility in disclosure requirements and direct the rules committee to develop standard forms for disclosure statements and plans of reorganization.

· Require disclosure statements and plans of reorganization to be filed within 90 days respectively, and plans to be confirmed within 120 days. [ FN: If a hearing on the disclosure statement is to be held before plan confirmation, then a change to the Bankruptcy Rules will be needed to accommodate the thirty-day period called for between the filing date and the confirmation date.]

· Permit extensions of the foregoing only if the debtor shows it is more likely than not to confirm a feasible plan within a reasonable time.

· Require the bankruptcy court to hold certain early scheduling hearings.

· Deny the automatic stay to repeat small business chapter 11 filers unless they show legitimate entitlement thereto. [ FN: The Small Business Working Group notes that liaison with the Consumer Bankruptcy Working Group may be necessary on this point about serial filings by individuals.]

II. Need for Reform

When it works, and it often does, chapter 11 is a remarkable tool for saving jobs, protecting going-concern values, and producing recoveries for creditors. The Small Business Working Group supports the continued availability of relief under chapter 11 for debtors of all types, large and small. However, as the ensuing paragraphs demonstrate, the current chapter 11 apparatus does not work effectively in smaller business cases. The expectations of the framers of the 1978 Code that there would be active creditor participation in all chapter 11 cases have not been realized. Hence, many cases which lack policing by creditors languish in the system, ultimately produce poor results and undermine public confidence in chapter 11.

Since its creation in 1978, chapter 11 of the Bankruptcy Code has served as the framework for business reorganizations of virtually every type and size of enterprise experiencing financial distress. [ FN: The previous provisions governing business reorganizations were contained in three different chapters of the Bankruptcy Act--chapters X, XI, and XII. See Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (repealed 1978). The Bankruptcy Reform Act of 1978 represents a Congressional view that a consolidated approach to business rehabilitations was preferable to an inflexible, multi-track system that was riddled with unnecessary inefficiency and cost. See generally , H.R. R EP . N O . 595, 95 th Cong., 1 st Sess. 222 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6182; 124 C ONG . R EC . S17, 406 (Oct. 6, 1978).] Indeed, the types of restructures, orderly liquidations and business enterprises to which chapter 11 is available appears to be virtually unlimited. [ FN: See 11 U.S.C. §§101(41), 109 (1994). Chapter 11 provides a single, consolidated framework within which all businesses large and small, publicly or closely held, corporations or partnerships, may attempt to reorganize. Chapter 11 imposes the exact same set of rules on business entities regardless of the size of the enterprise, the nature of the industry or the complexity of the problems.] Nearly twenty years have elapsed since the inception of a unified chapter and the test of time and experience has shown that a "one-size-fits-all" approach to business rehabilitation does not in many instances serve the needs of society or the ends of justice.

When Congress fashioned a consolidated approach to business rehabilitations, an underlying assumption was that debtors-in-possession would work together with active committees of creditors and equity security holders in order to negotiate and formulate a plan of reorganization. [ FN: H.R. R EP . N O . 595, 95 th Cong., 1 st Sess. 401 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6357 (indicating that committees of creditors and equity security holders "will be the primary negotiating bodies for the formulation of the plan or reorganization "). Congress believed that: Under the consolidated reorganization chapter, the procedure will be a combination of features of current chapters X and XI. There will be at least one committee in each case . Because unsecured creditors are normally the largest body of creditors and most in need of representation, the bill requires that there be a committee of unsecured creditors. H.R. R EP . N O . 595, 95 th Cong., 1 st Sess. 235 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6195 (emphasis added).] The role of committees was also viewed by Congress to be integral to the "supervision of the debtor in possession" and would serve to "protect their constituents’ interests." [ FN: Id. See 11 U.S.C. §1102 (1978) (amended)(providing that "the court shall appoint a committee of creditors holding unsecured claims ")(emphasis added).] History has demonstrated,however, that in the vast majority of business bankruptcies, there is often creditor apathy." [ FN: S ENATE C OMM . ON THE J UDICIARY , 103 D C ONG ., R EPORT ON S.540 at 43 (Oct. 28, 1993).] Indeed, national statistics reveal that a committee of creditors was constituted in only 15.3% of the 8,606 pending chapter 11 cases filed between January, 1993 and January, 1996. [ FN: S UMMARY BY C IRCUIT OF C REDITOR C OMMITTEE D ATA , E XECUTIVE O FFICE OF U NITED S TATES T RUSTEES (February 21, 1996). Accord L INDA E. S TANLEY , C HAPTER 11 S TATISTICS BY B USINESS T YPE & Y EAR , D EVELOPED BY THE S AN F RANCISCO O FFICE OF U.S.T RUSTEE , Oct. 18, 1996 (reporting that a creditors ’ committee was appointed in only 6 out of 119 chapter 11 cases (.05%) filed in the Northern District of California in 1995. In only 20 % of these cases was counsel appointed).] In other words, 84.7% of the pending chapter 11 cases during a given time period lacked the participation and "supervision" of a creditors’ committee that Congress envisioned would be a cornerstone to a consolidated chapter. [ FN: See supra note 7.] The fusion of the previous relief chapters has thus not resulted in the joint administration of bankruptcy estates in most business cases as originally contemplated but, rather, in a system dominated far too often by the exclusive and largely unsupervised direction of the debtor-in-possession. [ FN: See Lynn M. LoPucki, The Debtor in Full Control--Systems Failure Under chapter 11 of the Bankruptcy Code (Second Installment) , 57 A M . B ANKR . L.J. 247 (1983).]

As currently structured, chapter 11 fails to promote successful reorganization of financially troubled small businesses. It is true that the definition of "success" of chapter 11 in small business cases is an elusive concept that is unquestionably subject to the varied perspectives of the individual. However, confirmation and consummation of a plan of reorganization are necessary components of success, at least from the viewpoint of policy makers. [ FN: See 11 U.S.C. §1129(a)(11) (1994)(requiring a judicial determination that confirmation is not likely to be followed by liquidation or further reorganization); id. §1112(b)(2), (7) (providing grounds for the conversion or dismissal of a chapter 11 case if there is an "inability to effectuate a plan " or an "inability to effect substantial consummation of a confirmed plan ").] Yet, the best available statistics demonstrate that only a small fraction of the chapter 11 cases filed nationwide ever achieve confirmation. [ FN: See E DWARD M. F LYNN , S TATISTICAL A NALYSIS OF C HAPTER 11, A DMINISTRATIVE O FFICE OF THE U NITED S TATES C OURTS --S TATISTICAL A NALYSIS & R EPORTS D IVISION (SARD), Bankruptcy Division 10 (Oct. 1989)(unpublished report) (finding that the confirmation rate for chapter 11 cases filed between 1979 to 1986 was only 17%); Lynn M. LoPucki, The Debtor in Full Control--Systems Failure Under chapter 11 of the Bankruptcy Code? (First Installment) , 57 A M . B ANKR . L.J. 99, 100 (1983). But see , Honorable A. Thomas Small, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Proposal " (Feb. 12, 1997) (reporting a 62.9% plan confirmation rate in the Eastern District of North Carolina).] And of those cases, only a fraction result in the consummation of a plan and the successful rehabilitationof the debtor’s business. [ FN: F LYNN , supra note 12, at 13 (concluding that only 10 to 12% of the chapter 11 cases filed ever result in successful reorganization ). Accord Susan Jensen-Conklin, Do Confirmed chapter 11 Plans Consummate? The Results of a Study and Analysis of the Law , 97 C OM . L.J. 297, 325 (1992)(finding that only 10% of the chapter 11 cases filed in a particular study area resulted in a consummated plan); Nancy Rhein Baldiga, Is This Plan Feasible? An Empirical Legal Analysis of Plan Feasibility , 101 C OM . L.J. 115 (1996)(concluding that even in cases in which the chapter 11 reorganization plan has undergone an extensive feasibility challenge, half of the confirmed, nonliquidating plans failed to fully consummate).] One study reported that based on historical data, a debtor entering chapter 11 only has a 6.5% chance of confirming and consummating a plan of reorganization as well as surviving as a rehabilitated entity following confirmation. [ FN: Jensen-Conklin, supra note 13, at 325. In light of the facts [sic] that 17% of chapter 11 cases get confirmed, about one-quarter of these involve liquidating plans, and that some of the reorganizations are not successful, it can be estimated that only about 10 to 12 percent of chapter 11 cases result in an actual reorganization of the filing entity. Further, some of these reorganizations may not be considered fully successful even if the business is reorganized and the creditors are paid. Some reorganized businesses will falter a second time. This may lead to a second chapter 11, a liquidation, or the sale of the business. F LYNN , supra note 12, at 13] Another study has revealed that the overall success rate for chapter 11 cases appears lower than under the Bankruptcy Act. [ FN: LoPucki, supra note 12, at 100 (finding in a discrete survey area that cases during the first year following the inauguration of the Bankruptcy Code yielded a confirmation rate of only 26%).] If the effectiveness of chapter 11 as a rehabilitation tool for small business cases is to any degree gauged against plan confirmation and consummation rates, measured reform is imperative.

It has been persuasively argued that the consolidation of separate chapters under the Bankruptcy Act into a single chapter which imposes a uniform set of rules in all business cases, has resulted in delay exceeding that which existed under pre-Code law. [ FN: Lynn M. LoPucki, The Trouble with chapter 11 , 1993 W IS . L. R EV . 729 (comparing the results of five empirical studies of the length of reorganization cases resulting in the confirmation of a plan of reorganization).] chapter 11 contains a number of procedures and assumptions that were designed for large bankruptcy cases (i.e., creditors’ committees). [ FN: Id. at 745.] "When these large-case procedures were applied to ordinary reorganization cases, the dynamics of ordinary cases became more like the dynamics of large cases. Time in chapter 11 for the two kinds of cases simply converged." [ FN: Id.]

The practical experience of those who have appeared before the Small Business Working Group is that a large number of small business debtors seeking refuge in chapter 11 are simply "dead-on-arrival." That is, chapter 11 too often merely serves as an economic hospice where dying debtors are cared for. [ FN: "Chapter 11 is more an intensive-care ward (or mortuary) than a healing potion for sick businesses. " Honorable Edith H. Jones, chapter 11: A Death Penalty for Debtor and Creditor Interests , 77 C ORNELL L. REV. 1088 (1992).]

Far too [frequently], counsel file a chapter 11 petition for a debtor, the business of which is in such straits and so incapable of recovery that the chapter 11 case in nothing more than a holding pattern before an inevitable conversion to chapter 7 or dismissal. Such a case serves no useful purpose and instead merely prolongs a painful process. Clients would be far better served if counsel examined the economic potential of the business before filing a petition to "rehabilitate" a moribund debtor. [ FN: 5 A SA S. H ERZOG & L AWRENCE P. K ING , C OLLIER B ANKRUPTCY P RACTICE G UIDE ¶ 84.02[1][d] (1992). As one bankruptcy judge has remarked in the context of one visionary scheme for resuscitation: Bankruptcy is perceived as a haven for wistfulness and the optimist ’s valhalla where the atmosphere is conducive to fantasy and miraculous dreams of the phoenix arising from the ruins. Unfortunately, this Court is not held during the full moon, and while the rays of sunshine sometimes bring the warming rays of the sun, they more often also bring the bright light that makes transparent and evaporates the elaborate financial fantasies constructed of nothing more than the gossamer wings and of sophisticated tax legerdemain. In re Maxim Indus. Inc. , 22 B.R. 611, 613 (Bankr. D. Mass. 1982).]

Creditors in an open economy have a legitimate interest in a prompt determination of feasibility and the excise of non-viable businesses from the bankruptcy reorganization system.

The length of time businesses remain in chapter 11 is critically important. [ FN: LoPucki, supra note 16, at 729. "Time is money. " Since unsecured creditors are not paid pendency interest on their claims, the loss becomes exponentially greater the longer they are forced to await payment. See Honorable A. Thomas Small, 1 AM. B ANKR . I NST . L. R EV . 305 (1993). Likewise, undersecured creditors are not entitled to interest and, moreover, may not recoup their "lost opportunity costs " while the debtor attempts to reorganize. See United States Sav. Ass ’n v. Timbers of Inwood Forest Assocs. Ltd. ( In re Timbers of Inwood Forest Assocs. Ltd. ), 484 U.S. 365 (1988).] "During that time, the business is at risk because management incentives are inappropriate, professional fees accrue at a rapid rate, and business uncertainties increase." [ FN: LoPucki, supra note 16.] Studies reveal that financially beleaguered companies often languish under the protection of the Bankruptcy Code for literally years, often without providing any meaningful return to unsecured creditors. Indeed, the average time from filingto the confirmation of a plan has been historically estimated by one government analyst to exceed two years. [ FN: F LYNN , supra note 12, at 23-24 (indicating that the median time from filing to confirmation ranged from a low of 461 days to a high of 941 days).] Nearly two-thirds of the chapter 11 confirmations occur in the second or third years after filing, with some cases taking more than five years. [ FN: Id .]

Congress has in recent years recognized that a "one-size-fits-all approach" to business reorganizations fails to adequately address the needs of a system dominated by small business bankruptcies. [ FN: See 11 U.S.C. §§101(51C), 1102(a)(3), 1121(e) (1994)( "small business " amendments added to the Code by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106); S. 1985, 102d Cong., 1 st Sess. (1991)(failed legislative effort which attempted to create a separate chapter for small business cases).] Trying to make the same set of rules apply to vastly different business enterprises has created problems and inefficiencies.

It takes no elaborate empirical study to justify the conclusion that the problems facing a publicly held corporation facing a mass-tort problem, are quite removed from a "mom-pop" corporation running a shoe repair shop . . . . Obviously, a case involving a publicly held corporation with varied constituents requires safeguards, and therefore, the process is justifiably slow. The cost of administration, while it is subject to the court’s control, is unavoidably high . . . . However, these same safeguards become insurmountable obstacles to . . . small corporations, elevating the costs of the system to unacceptable proportions. [ FN: Honorable Alexander L. Paskay & Frances Pilaro Wolstenholme, chapter 11: A Growing Cash Cow: Some Thoughts on How to Rein in the System , 1 A M . B ANKR . I NST . L. R EV . 331 (1993).]

The need for reform can perhaps best be underscored by the fact that every jurist, academician, practitioner, and representative that has appeared before the Small Business Working Group has, without exception, expressed the unmistakable sentiment that the system needs to be tailored in order to better serve the interests of justice and the needs of debtors and creditors. Although there are certainly differences in opinion as to the nature and extent of reform that should be made, there has not been a single advocate for retaining the status quo. To address these concerns, the Small Business Working Group has undertaken to develop a proposal which will both expedite the process for debtors that can be saved and terminate the process quickly for those which cannot benefit from the protections of chapter 11.

III. Development of Proposal

Nearly eight months ago, on June 20, 1996, the Small Business Working Group held its first public meeting to develop a proposal to improve the administration of chapter 11 bankruptcy cases lacking creditor participation. Since its first session, the Working Group has met across the country at six meetings, at which it formulated its proposal for small business chapter 11 cases. At these numerous gatherings, the Working Group members have invited comment, and presented their concerns and ideas to the public.

The Working Group first memorialized its proposal in a memorandum dated September 7, 1996, Ideas Being Considered by the Small Business Working Group. Since this initial incarnation, the Working Group has publicly circulated and solicited comment on four revised versions. [ FN: Four drafts of the Proposal have been circulated. They were dated October 30, November 25, and December 9, 1996; and January 14, 1997. The name of the Proposal has been the same in each draft.] As a result of these discussions, the Working Group has significantly modified its initial proposal. The development of the Small Business Proposal is described below.

A. No Separate chapter for Small Business Debtors. Prior the promulgation of the 1994 Bankruptcy Reform Act, Congress considered and rejected proposed "Chapter 10" legislation, which would have created a separate chapter for businesses with aggregate, liquidated secured and unsecured debts of less than $2,500,000. [ FN: George H. Singer, "Small Business & Single-Asset Working Group: chapter 10 " (Aug. 12, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).] The proposed chapter 10 generated much controversy on a number of substantive grounds, as well as opposition to adding a new chapter to the Bankruptcy Code. [ FN: Id.] Critics argued that creating an additional chapter would add unnecessary complexity to the Bankruptcy Code. [ FN: Id.] Furthermore, the proposed new chapter deviated from the absolute priority rule, and permitted use of a Chapter-13-like concept of disposable income. [ FN: See ¶ B, infra .]

The Working Group has closely examined the merits of separate chapter status, including exhaustive research and review of testimony. [ FN: Stephen H. Case & George H. Singer, "Working Group Meeting on Small Business & Single-Asset Real Estate " (July 22, 1996)(unpublished memorandum on file with the National Bankruptcy Review Commission).] Its determination not to recommend creation of a separate chapter reflects its conclusion that modifications to the current, carefully crafted chapter 11 framework tailored specifically for the smaller business provides the appropriate building blocks toallow for expedited and reduced-cost treatment of creditor-ignored debtors, and increased recoveries to unsecured creditors.

B. Retention of the Absolute-Priority Rule and Plan-Voting Requirements for Small Business chapter 11 Cases. The absolute-priority rule and plan-voting concept are important tools which legitimize chapter 11 by protecting creditors from unfair treatment by debtors. [ FN: See The Small Business Working Group, "Ideas Being Considered by the Small Business Working Group " (Dec. 9, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission); see also Stephen H. Case & George H. Singer, "Working Group Meeting on Small Business & Single-Asset Real Estate " (July 22, 1996)(unpublished memorandum on file with the National Bankruptcy Review Commission).] The Working Group believes that these creditors protections are fundamental to the Bankruptcy Code’s careful balance between debtor and creditor rights. Furthermore, the Working Group favors maintaining these creditor safeguards to recommending adoption of plan confirmation based on "disposable income" payments, which would likely (i) clog the courts with complex, fact-sensitive litigation about income projections of businesses, and (ii) generate strong opposition in Congress, as did similar legislation proposed as part of the chapter 10 amendments in 1994. [ FN: Several thoughtful and experienced members of the bankruptcy community have urged the Working Group to recommend extending chapter 12 or 13 eligibility to business debtors. The Working Group stron gly believes that the absolute-priority rule and requirements for creditor voting make chapter 11 a legitimate way to address creditors ’ rights. Therefore, it declines to recommend administration of small business debtors in chapters 12 or 13. E.g. , National Bankruptcy Review Commission: Hearings , Transcript at 40-41 (June 20, 1996) (testimony of former Bankruptcy Judge Ralph H. Kelley from the Eastern District of Tennessee); see also , Philip J. Hendel, Position Paper to the National Bankruptcy Review Commission Proposing Expanded Use of chapter 13 to Include Closely Held Corporations and Other Business Entities " (Dec. 17, 1996); Stephen H. Case, Jennifer C. Frasier, & George H. Singer, "September 19, 1996, Working Group on ‘Small Business ’ Bankruptcy " (Oct. 8, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).]

C. Definitional Considerations. Having committed to embracing the current chapter 11 framework to propose improvements to the administration of "small business" proceedings, the Working Group faced a challenging task: determining how to systematize (i) early identification and (ii) rapid disposition of the terminally ill businesses which currently languish in chapter 11 and threaten public confidence in the bankruptcy system. In crafting a definition, the Working Group initially considered attempting to capture all businesses, large or small where, due to lack of creditor participation, enhanced judicial scrutiny is called for. [ FN: Stephen H. Case & George H. Singer, "Preliminary Staff Proposals of the Working Group on Partnerships, Small Business, and Single-Asset Realty " (July 2, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).] Such definition was unworkable because the Working Group found no identifiable way to quantify lack of creditor participation.

The definition of small business ultimately to be chosen by the Working Group has generated much debate.

[(1) Alternative Definitions of Small Business Debtor. The Working Group considered and rejected defining a small business debtor in alternative terms. [ FN: George H. Singer, "Discussion Summary, June 20, 1996 Working Group Meeting on ‘Small Business ’ Bankruptcy " (July 1, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).] Spokespersons appearing before the Commission expressed serious concerns that a gross income definition (a) would sweep in too many debtors, [ FN: E.g. , Philip J. Hendel, "Letter Regarding the Small Business Reorganization Proposal " (Jan. 24, 1997) (setting forth the position of the ABI Small Business Subcommittee of the Business Reorganization Committee). The author notes that the Working Group ’s gross income test is too liberal. "Experience shows that gross income has little relation to the complexity of a case. " Id .] (b) was an inaccurate indicator of case complexity, [ FN: E.g. , Kenneth Klee, "Electronic Mail Message Regarding the Small Business Working Group ’s Proposed Reform " (Oct. 29, 1996) (arguing that a gross revenue test "[w]ill snag several large illiquid businesses . . Many businesses operate through borrowings and trade credit that leave them with virtually no gross revenues for years. Examples include large land developers and research and development start up companies ").] or (c) was a poor predictor of creditor participation in bankruptcy cases. [ FN: E.g. , Terrance L. Stinnett, "Letter from Goldberg, Stinnett, Meyers & Davis Regarding the Small Business Working Group Proposals " (Nov. 22, 1996).] Rather than a bright-line gross income test to define small business debtors, these individuals or groups would classify small business debtors by debt level, employees, the absence or presence of creditor involvement, or other "objective" indicia of case complexity. [ FN: Stephen H. Case, Jennifer C. Frasier, & George H. Singer, "Discussion Summary, September 19, 1996, Working Group on ‘Small Business ’ Bankruptcy " (Oct. 8, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).]

The Working Group rejected a debt-based definition because many businesses that are small in significance by number of employees have very large debt levels, such as real estate debtors. Size of employees was rejected out of fear that it would be manipulated prepetition in order to escape the new separate-track requirements. Finally, the Working Group rejected a test based on the number of creditors, as no bright-line test could be crafted.

In rejecting traditionally propounded definitions, the Working Group recognized that no definition would be perfect. Until recently, it had been giving favorable consideration to a gross income definition. The Working Group had concluded, that this definition possessed several distinct advantages over any other. First, such definition minimizes judicial discretion and litigation over which debtors are subject to "separate-track" treatment, since gross income is a reliable figure, verifiable against a debtor’s tax return. Second, the definition has the salutary effect of encouraging businesses to file their tax returns, as non-filers are automatically subject to special-track treatment. However, comments from interested parties have suggested that the concept being considered might sweep in large businesses with a low "gross income" as defined in the federal tax laws. Accordingly,the Working Group is still conducting discussions about identification of the correct bright-line test.]

(2) Voluntary Election. The Working Group investigated the success of the 1994 amendments to the Bankruptcy Code concerning "small business" debtors, [ FN: 11 U.S.C. §§101(51C), 1121(e) (1994).] and concluded that the small business option has largely been ignored. [ FN: See Philip J. Hendel, "Position Paper to the National Bankruptcy Review Commission Proposing Expanded Use of chapter 13 to Include Closely Held Corporations and Other Business Entities " (Dec. 17, 1996) ( "[T]he new statutory scheme relating to small business is not mandatory. These provisions have been all but ignored by counsel for debtors, primarily because the period of time provided for exclusivity and filing of plans are constricted when compared to chapter 11 treatment. ").] Accordingly, the Working Group rejects the notion of allowing debtors to voluntarily elect small business treatment. The Working Group believes that eligible debtors, if able to choose, would opt out of the tougher system designed to rapidly dispose of non-viable chapter 11 cases. Moreover, the mandatory nature of the separate-track treatment minimizes judicial discretion in determining "fast track" eligibility, thereby avoiding litigation. [ FN: Stephen H. Case & Jennifer C. Frasier, "Discussion Summary, October 18, 1996, Plenary Session on ‘Small Business ’ Bankruptcy " (Oct. 31, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).]

D. Scheduling Conferences. The Working Group’s proposal aims to quicken the pace of chapter 11 for cases which will confirm a plan, and those which will be converted or dismissed. Part and parcel of this objective is the need to involve the power and prestige of the court early on to set scheduling orders and provide the expedited process with the extra authority inherent in court orders. Accordingly, the Working Group recommends that at least one scheduling conference be held, on the record, early in the case to ensure rapid case processing. This conference will be held no later than 45 days after the entry of order for relief.

E. 90-Day Disclosure Statement and Plan Filing Deadline. The Working Group abandons its proposed 45-day disclosure statement and plan-filing deadline in favor of a 90-day deadline, as the shorter time period was roundly disparaged by creditors’ lawyers and debtor representatives as tooshort, [ FN: E.g. , Robert A. Goering, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Nov. 21, 1996) ( "Forty-five days is just too short to give a small business a chance to put its best foot forward in the presentation of a plan ").] "simply not enough time," [ FN: Richard S. Toder, "Report by The Focus Group of the American College of Bankruptcy Relating to Small Businesses and Single-Asset Real Estate Cases " (Jan 14, 1997).] "unrealistic and unworkable," [ FN: See, e.g., Gary White, "Letter to the National Bankruptcy Review Commission from the National Association of Credit Management " (Dec. 2, 1996).] "draconian," [ FN: E.g., National Bankruptcy Review Commission: Hearings Before the Working Group on Small Business Bankruptcy (Jan. 22, 1997), at 22 (testimony of Keith Shapiro).] and "ridiculous." [ FN: E. Rothberg, "Electronic Mail Message Regarding the Small Business Working Group Proposal " (Oct. 22, 1996).] Alternative proposed deadlines spanned from sixty [ FN: E.g. , National Bankruptcy Conference, chapter 11 Committee, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Dec. 18, 1996).] to one-hundred and eighty days. [ FN: L. E. Creel, III, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Nov. 13, 1996).]

At the beginning of a chapter 11 case, critics argued, the debtor is preoccupied with schedules to prepare, motions to employ professionals, cash collateral motions, and the like. [ FN: E.g. , William C. Beall, "Letter from Beall & Burkhardt to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Jan. 13, 1997).] In short, the time and energies of management and counsel are absorbed by the initiation of the chapter 11 process. [ FN: L. E. Creel, III, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Nov. 13, 1996).] Moreover, a feasible plan can often not be developed until one or more events occur, such as negotiating terms for restructuring secured debts, finding a new source of capital, or decreasing the vacancy rate of rental properties. [ FN: Terrence L. Stinnett, Letter from Goldberg, Stinnett, Meyers & Davis Regarding the Small Business Working Group Proposals " (Nov. 22, 1996).] Accordingly, it was alleged, a prematurely-proposed plan would likely fail to satisfy the requirements of the Bankruptcy Code, especially given the poor condition in which many debtors maintain their records. [ FN: National Bankruptcy Review Commission: Hearings Before the Working Group on Small Business Bankruptcy (Sept. 19, 1996) (testimony of Judge Lisa Hill Fenning).]

Until the January Meeting of the Commission, the Working Group viewed the proposed forty-five day plan filing deadline as a mechanism needed to rapidly identify and provide grounds to dismiss or convert non-viable cases. At the plenary session in January devoted to consideration of the Small Business Proposal, [ FN: The plenary session was held on Jan. 22, 1997 in the Thurgood Marshall Federal Judiciary Building. A transcript of the session is available upon request to the National Bankruptcy Review Commission.] however, a discussant, the Honorable Thomas E. Carlson, [ FN: Judge Carlson is a bankruptcy judge in the Northern District of California.] suggested that the Working Group’s reliance on the short deadline to identify and weed out the dying or dead business was misplaced. [ FN: National Bankruptcy Review Commission: Hearings Before the Working Group on Small Business Bankruptcy , Transcript at 55-56 (Sept. 19, 1996) (testimony of Judge Thomas E. Carlson).] Judge Carlson suggested that the Working Group would better accomplish its goal through modifications to Bankruptcy Code sections 1104 or 1112. [ FN: Id . Honorable Robert D. Martin from the Western District of Wisconsin has also advocated modifications to 11 U.S.C. §1104 in order to "[r]e-draw the basis for appointment of a trustee, dramatically shifting the burden to the debtor to demonstrate (if such a motion is made) that a trustee ought not be appointed), " e.g. , Honorable Robert D. Martin, "Memorandum to Stephen H. Case Regarding the Small Business Working Group Proposal " (Nov. 8, 1996).]

The Working Group has considered these and other numerous well-reasoned objections, and achieved consensus to extend the disclosure statement and plan filing deadline to ninety days postpetition, and the plan confirmation deadline to 120 days postpetition, while also recommending expanded grounds for dismissal and conversion under Bankruptcy Code section 1112. [ FN: The Working Group decided not to recommend modifications to the grounds for appointment of a trustee under Bankruptcy Code §1104. A detailed description of the Working Group ’s reasons are set forth below.]

F. Disclosure-Statement Flexibility: Standard Forms. A major achievement of the 1978 Bankruptcy Code was embedded in section 1125, which required dissemination of thorough disclosure about reorganization plans while relaxing the especially strong disclosure requirements of the federal securities laws to permit flexibility in the chapter 11 disclosure process. These provisions of the statute were largely influenced by concerns about inadequate disclosure risks in middle- and large-sized business failures. Application of these cumbersome rules to smaller businesses is universally thought to impose too much cost and burden on the smaller business debtor.

Accordingly, the Working Group proposes two recommendations. First, the courts, after notice and hearing, should have the power to waive or modify the disclosure requirements to adapt them as appropriate on a case-by-case basis. Second, the Advisory Committee on Bankruptcy Rules of the Judicial Conference ("Rules Committee") should, after due deliberation, promulgate standard-form disclosure statements and plans of reorganization for small business debtors. While these standard forms would serve as "safe harbors" for debtors electing to file them, they would notpreclude any debtor from deviating from the forms, as long as the alternate filing complied with applicable requirements.

G. Extensions of Deadlines and Shifting the Burden of Proof. The Working Group recognizes that many, perhaps most, debtors who are able to successfully emerge from chapter 11 will need extensions of the disclosure statement and plan filing deadlines. These deadlines are not intended to derail valid reorganization efforts, but rather to flush out those cases which have no prospect of confirming a plan, and therefore no business benefitting from the protections of chapter 11. To implement this concept, the Working Group proposes that debtors requiring deadline extensions must prove entitlement thereto by a "more likely than not" standard.

This standard is not thought to be highly onerous. It would require any debtor needing an extension to bear the burden of coming forward and of persuasion to establish, by a preponderance of the evidence, that the debtor has more than a 50% chance of confirming a plan.

H. Special Provisions for Serial Filers. The Working Group has considered problems that might be created if debtors whose cases were dismissed owing to failure to prove entitlement to extensions simply refile a chapter 11 case. Unregulated, seriatim refilings would completely undermine the purpose of the separate-track rules.

The Working Group has concluded that a stringent prohibition on re-filing is not justified, however, since genuine changes in circumstances may have occurred to justify another trip to the courthouse. Accordingly, the Working Group proposes a limited rule, applicable only to existing small business debtors who file a second case while the first case is pending and those whose cases have been converted or dismissed, which would deny them, upon refiling within two years, entitlement to the automatic stay unless they bear the burdens of coming forward and of persuasion to prove, after they have made subsequent filing, by a preponderance of the evidence, that they are more likely than not to confirm a chapter 11 plan within a reasonable time.

I. No Independent Examiner. The Working Group initially considered recommending appointment of an independent examiner, accountant, "licensed insolvency officer," [ FN: The Working Group has heard testimony that the United Kingdom insolvency system benefits from the participation of licensed insolvency experts. These professionals work in the private sector, are qualified and licensed, represent the debtor and work with debtors ’ management, have business "turnaround " experience, have a duty to creditors, can be sued if negligent, and are temporary officers of the court with a duty to the court. See A. Mark Homan, "Letter to the National Bankruptcy Review Commission Small Business Working Group Describing the UK insolvency licensing regime " (Dec. 23, 1996); see also Bankruptcy Reform--A Time for the Licensed Insolvency Officer ( "LIO ")? , Panel Discussion of the American Bankruptcy Institute (Dec. 1, 1995).] or otherbusiness viability expert. [ FN: Stephen H. Case & George H. Singer, "Preliminary Staff Proposals of the Working Group on Partnerships, Small Business, and Single-Asset Realty " (July 2, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).] Initially, the idea of an experienced expert assessing the debtor’s business viability had great appeal. In particular, the members of the Working Group were impressed by the excellent procedures employed in the United Kingdom which has a licensing program for persons who administer insolvent estates. Nonetheless, this proposal received almost no support. [ FN: Stephen H. Case, Jennifer C. Frasier & George H. Singer, "Discussion Summary, September 19, 1996, Working Group on ‘Small Business ’ Bankruptcy " (Oct. 8, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).] Critics argued that a "monitoring agent" would duplicate the roles already served by bankruptcy judges, U.S. Trustees, Bankruptcy Administrators, and panel trustees. In addition, opponents predicted that appointing monitoring agents would create an army of unneeded professionals, whose credibility and effectiveness would be undermined by perceptions of agents as stereotypical "government bureaucrats." [ FN: Id.] Furthermore, the appointment of monitoring agents would add an unwelcome new layer of costs onto an already expensive process. [ FN: Stephen H. Case & George H. Singer, "Working Group Meeting on Small Business & Single-Asset Real Estate " (July 22, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission).]

After extensively investigating the purposes and operation of the U.S. Trustee and Bankruptcy Administrator programs, [ FN: See, e.g., Jennifer C. Frasier, "Meeting with the San Francisco Office of the United States Trustee " (Dec. 6, 1996) (unpublished memorandum on file with the National Bankruptcy Review Commission); see also , Stephen H. Case & Jennifer C. Frasier, "Discussion Summary, October 18, 1996, Plenary Session on ‘Small Business ’ Bankruptcy " (Oct. 31, 1996) (unpublished memorandum on file with National Bankruptcy Review Commission).] the Working Group has concluded that these programs have enormous potential to systematize early identification and disposition of economically defunct entities. Indeed, efficient procedures for administering chapter 11 cases already exist in the Bankruptcy Administrator program, [ FN: In the Middle District of Alabama, for example, the number of days from the petition date to conversion or dismissal is only 6.1 months. Dwight H. Williams, "Letter to the National Bankruptcy Review Commission " (Dec. 5, 1996) (enclosing chapter 11 data for the Middle District of Alabama for 1995).] which operates only in Alabama and North Carolina. [ FN: Detailed guidelines for Bankruptcy Administrators are set forth in the Manual for Bankruptcy Administrators , Judicial Conf. Regulations and Director ’s Guidelines for Bankruptcy Administrators (April 20, 1994).]

Despite the lack of any statutory directive to examine or supervise the conduct of debtors in possession, a number of dedicated U.S. Trustees have also improved the efficiency of chapter 11. For example, the efforts of the U.S. Trustees for Regions 16 and 17 have contributed to a steady reduction in the number of days from case commencement to disposition. [ FN: Marcy J.K. Tiffany, Fast Track, Statistics, and Delay Reduction: A Comparative Analysis (Oct. 1996) (unpublished article on file with the National Bankruptcy Review Commission) (analyzing case disposition rates for the Central District of California from 1989-1994. The author concludes that the administrative activities implemented by the United States Trustee significantly contributed to delay reduction in administration of chapter 11 cases).] In San Francisco between January of 1992 and October of 1996, for instance, the median number of days from case commencement to conversion or dismissal has decreased from 10.8 months to 7.5 months. [ FN: Linda E. Stanley, "Letter to the National Bankruptcy Review Commission " (Nov. 14, 1996) (enclosing chapter 11 data for San Francisco from January 1992 to October 1996).]

The Working Group believes that augmenting the statutory duties of U.S. Trustees and affirming the procedures guiding Bankruptcy Administrators will enable these professionals to provide an effective substitute for inactive creditors. For this reason, and concerns over the costs of alternative proposals, the Working Group rejected its initial proposal to recommend appointment of independent viability experts in separate-track chapter 11 cases.

J. Enlarged Statutorily-Mandated Responsibilities for U.S. Trustees and Bankruptcy Administrators. Although many U.S. Trustees and Bankruptcy Administrators supervise chapter 11 debtors in possession and ensure prompt disposition of chapter 11 proceedings, no statute imposes any clear duty to do so. The Working Group has proposed to remedy this deficiency in two ways. First, the U.S. Trustee or Bankruptcy Administrator would be called upon to diligently monitor separate track debtors to ensure compliance with required financial reporting (see infra). Second, and at the heart of the Working Group’s proposal, the U.S. Trustees or Bankruptcy Administrators would be required, in appropriate circumstances, to move the court promptly for dismissal, conversion, or other suitable relief. This would codify the better practices now employed in the field, make them uniform and national, and give them the weight of Congressional approval.

K. Special Reporting and Schedule-Filing Requirements. A major objective of the Working Group has been to improve techniques for early identification of those debtors which have a reasonable probability of succeeding in chapter 11 and those which do not. Under present practice, fulfillment of this objective is sometimes difficult because basic business data about the enterprise is often not available. Some jurisdictions require the prompt filing of useful financial reports while other do not. Nothing in the Bankruptcy Code, however, requires routine financial reporting during the pendency of a proceeding, and there are no sanctions for failure to disclose economic information.

The Working Group proposes to address this deficiency, first, by demanding that all debtors pay a price for the right to enjoy the powerful protections of chapter 11. Under the Proposal, the debtor must report sufficient financial information to permit the courts, the U.S. Trustees, and the Bankruptcy Administrators to make informed decision about the quality of business practicesemployed by the small business debtor, the results of operations, and the prospects for the business. Accordingly, the Working Group requests the Rules Committee to promulgate uniform, national rules for reporting by small business debtors, keeping in mind the need for balance between the requirements of third parties for information and economy, simplicity, and practicality for debtors.

To assist the U.S. Trustees and Bankruptcy Administrators in their supervision and evaluation of small business chapter 11 cases, the Working Group proposes requiring the debtor to promptly file its schedules and statements.

L. Segregated Deposit Accounts. The Working Group has received considerable anecdotal information supporting its conclusion that numerous debtors, suffering from cash shortages, finance their day-to-day operations by using cash withheld from employee paychecks or sales-tax revenues collected at the cash register, or other like "trust fund" taxes, to pay bills and provide the business with working capital. This chronic problem is often witnessed by chapter 7 trustees in converted cases.

The Working Group proposes to remedy this abuse by requiring all small business debtors to establish, promptly after the petition is filed, segregated bank accounts for deposit of tax funds withheld or collected from third parties. In addition, the Working Group’s data have convinced it to require debtors to file statements of anticipated taxes due. Neither of these requirements will pose problems to well-managed debtors who, in or out of chapter 11, would never use third-party tax funds for working capital, and who regularly project expenses, such as taxes, as a normal management practice.

The Working Group’s proposed requirements would stop the practice of free-wheeling with government money, and require all debtors to proactively plan for payment of their tax liabilities.

M. Expanded Grounds for Conversion or Dismissal under Section 1112. Section 1112 of the Bankruptcy Code, in its present form, provides limited grounds for conversion or dismissal of chapter 11 cases. Reform of section 1112 is a necessary component of the Working Group’s effort to systematize the elimination of non-viable debtors early in the chapter 11 proceeding.

The Working Group proposes three principal modifications.

First, the grounds for relief under section 1112 would be enlarged. New bases for relief under the amended section 1112 would include, among others, failure to comply with reporting rules, failure to pay administrative claims when due, failure to file tax returns, failure to create and maintain segregated bank accounts, failure to file schedules when due, unexcused failure to attend interviews and hearings, failure to meet plan-filing and confirmation deadlines, unauthorized use of cash collateral, [failure to pay mortgage payments at the contract rate, including interest], and gross mismanagement of the business.

Second, the menu of choices for remedies the court may elect to impose would be enlarged. In addition to conversion or dismissal, there would be added the following "sanctions:" lifting the automatic stay, appointing a trustee or examiner, or ordering assets sold in the chapter 11 case without conversion.

Third, to prevent misguided application of the foregoing new provisions, the debtor would be entitled to avoid the imposition of unwelcome relief upon a showing of a reasonable justification for the acts, omissions or situations complained of by the moving party, and that it is more likely than not that the debtor can confirm a plan within a reasonable time period.

N. Proposed Modifications to Bankruptcy Code Section 1104. Chief Bankruptcy Judge Robert D. Martin of the Western District of Wisconsin offered the Working Group a thoughtful proposal which he has asserted would greatly reduce cost and delay in chapter 11 cases. Specifically, Judge Martin has advocated modifying section 1104 to provide that, at any time after the commencement of the case and prior to the filing of a plan, any party in interest could file a motion requesting the appointment of a trustee. [ FN: Honorable Robert D. Martin, "Memorandum to Steve Case Regarding the Small Business Working Group Proposal " (Nov. 8, 1996).] Judge Martin has argued that the threat of losing control of its business would create a powerful incentive for the debtor to rapidly proceed through bankruptcy. [ FN: Id . at 3.] The Working Group has adopted Judge Martin’s suggestion in modified form.

The proposed amendments to section 1104 will ease the burden on parties seeking appointment of a chapter 11 trustee. The Working Group believes, however, that the judge should also have the option of dismissing or converting the case, granting relief from stay, or ordering that assets be sold, where a basis for relief is established under amended section 1112.

O. No Automatic Dismissal for Administratively Insolvent Small Business Debtors. While there was some initial support in the Working Group for such a proposal, critics convincingly argued that automatic dismissal due to a debtor’s failure to timely pay postpetition taxes (or other like payments), would be unwise. Automatic dismissal would unnecessarily impinge upon judicial discretion and risk destroying a viable company’s ability to reorganize. [ FN: Jennifer C. Frasier, "Meeting Notes, " Meeting with the Executive Office of the United States Trustee in San Francisco on Dec. 2, 1996.]

P. No Requirement that the Debtor Initially Demonstrate Feasibility. The commencement of a chapter 11 proceeding is a busy time for the debtor and its counsel, who arepreoccupied preparing schedules and motions to initiate the chapter 11 process. [ FN: L. E. Creel, III, "Letter to the National Bankruptcy Review Commission Regarding the Small Business Working Group Proposal " (Nov. 13, 1996).] Conditioning application of the automatic stay on the debtor’s demonstration of feasibility would invite immediate and costly litigation at an already hectic time. Moreover, such a rule would afford creditors with dramatic leverage over debtors, and impede the debtor’s valid reorganization efforts. Accordingly, the Working Group rejected the idea of requiring small business debtors to demonstrate feasibility as a prerequisite to protection of the automatic stay.

Q. No Deferred Discharge. The Working Group considered and rejected recommending deferral of discharge in all cases until completion of plan payments. The Working Group proposes no change in the language of section 1141; however, it believes that the costs of routinely enforcing the deferred discharge rule would disproportionately impact unsecured creditors, whose recoveries would be diminished by the increased expense of administering the debtor’s estate.

R. Real Estate Issues. As to real estate issues, the Working Group will be presenting detailed proposals at a later date. It is presently inclined to recommend elimination of the $4 million cap now included in the definition of single asset real estate in section 101 of the present Code. It also is inclined to favor requiring postpetition payments at the contract rate provided for in the secured debt obligations of the single asset realty debtor. It is also inclined towards [outlawing] use of the new value exception in single asset real estate cases. Finally, the Working Group has under consideration the problems raised in the McConnville decision of the 9^th Circuit, problems involving condominium associations, and problems involving use by debtors of the automatic stay to prevent eviction for nonpayment of rent.

IV. Proposal

The following definition had been under favorable consideration by the Working Group but is now being reconsidered. The Working Group hopes that it will reach consensus on a new approach in time for discussion at the February Meeting:

[A. Bright-Line Definition. Define "small business debtor" as any debtor in a case under chapter 11 (including any group of affiliated debtors) which either (determined as at the date of the entry of order for relief):

(1) had less than $5,000,000 in gross income as determined pursuant to section 61(a) of the Internal Revenue Code of 1986, as amended, for the debtor’s most recent taxable year ended prior to the commencement of the case for which the debtor’s federal annual income tax return has been filed; or

(2) is more than 30 days delinquent in filing any federal annual income tax returns (after giving effect to valid extensions, if any) for its most recent taxable year.]

B. Require the Promulgation of Uniform National Reporting Guidelines for Small Business Debtors. Require the rules committee to adopt, within a reasonable time after enactment, uniform national reporting rules covering the matters described below, which would apply only to special-track debtors and which may provide different treatment for different classes of debtors. The rules at a minimum shall require:

(1) small business debtors to file periodic financial and other reports designed to reveal, upon the basis of accounting and other reporting conventions determined by the rules committee to embody the best practical balance between (i) on the one hand, the reasonable needs of the court, the U.S. Trustee, the Bankruptcy Administrators and creditors for reasonably complete information and (ii) on the other hand, appropriate affordability, lack of undue burden, economy and simplicity for debtors. The rules shall prescribe reporting as to:

(a) the overall adequacy of debtor’s books and records and the debtor’s capability to comply with the reporting requirements of the rules in a reasonable manner within a reasonable time;

(b) the debtor’s profitability, i.e., approximately how much money the debtor has been earning or losing during current and relevant recent fiscal periods;

(c) what the reasonably approximate ranges of projected cash receipts and cash disbursements (including those required by law or contract and those that are discretionary but excluding pre-petition debt not lawfully payable after the entry of order for relief) for the debtor appear likely to be over a reasonable period in the future;

(d) how to approximate actual cash receipts and disbursements since the last report compare with results then projected;

(e) whether the debtor is or is not in compliance in all material respects with (i) post-petition requirements imposed by the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the guidelines and (ii) the requirements of applicable nonbankruptcy law to pay administrative claims and file tax returns, as will be required by the amended statute and rules and, if not, what the failures of compliance are, how and when the debtor intends to remedy such non- compliance and what the estimated costs thereof are; and

(f) such other matters applicable to small business debtors as may be called for in implementation of the standards set forth below.

C. Enlarge Sections 1104, 1112 and Other Appropriate Sections as They Apply to Small Business Debtors.

(1) Add to section 1112 [ The Small Business Working Group wishes to consult with the chapter 11 Working Group about whether to recommend extending the application of some or all of the proposed changes to Bankruptcy Code section 1112 to all chapter 11 debtors.] (and make conforming amendments in sections 1112, 362, 363, 1104, 1122 and other appropriate sections), in so far as they apply to small business debtors, provisions to the effect that:

(a) on any motion seeking relief against the small business debtor under section 1112, the motion shall be granted (with the exact relief given being selected in the discretion of the court from the choices permitted by the amended section) (i) upon a prima facie showing by the movant that material grounds exist unless (ii) the debtor satisfies the burdens of coming forward and of persuasion that (A) there was a reasonable justification for the acts, omissions or situations alleged by the moving party and (B) it is more likely than not that the debtor will confirm a chapter 11 plan within a reasonable time; and

(b) if any of the grounds specified in section 1112 are found to exist, the court may, in its discretion, as alternatives to conversion or dismissal, order (i) lifting of the automatic stay,(ii) the appointment of an examiner or trustee or (iv) that all (or some identified portion) of the debtor’s assets be sold under the supervision of the court, in the chapter 11 case

(2) Add to section 1112, in so far as it applies to small business debtors, as grounds for relief thereunder:

(a) failure to comply in one or more material respects with either (i) any one or more applicable local rules or (ii) the uniform national reporting rules referred to above or (iii) both;

(b) failure to (i) pay all administrative claims when due irrespective of whether the claimant has requested payment (except for those which are being contested in good faith by appropriate proceedings prosecuted with appropriate diligence) or (ii) file all tax returns due after the entry of order for relief within the deadlines (including extensions) imposed by law or (iii) both;

(c) failure to be current in all material respects in creating and maintaining the segregated bank accounts to be required by the amended statute (unless the debtor demonstrates that it was unable, despite reasonable diligence, to find a bank which would accept the deposits on reasonable business terms);

(d) failure to file schedules and statements of financial affairs within the deadlines (including extensions) imposed by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure;

(e) unexcused failure to (i) attend initial debtor interviews, (ii) attend mandatory scheduling conferences scheduled by order of the court; (iii) allow the U.S. Trustee or Bankruptcy Administrator to inspect the debtor’s premises; and (iv) appear at meetings of creditors under §341(a) of the Bankruptcy Code;

(f) failure to file and obtain approval of disclosure statements, in any, and to file and confirm plans of reorganization within deadlines or extended deadlines imposed by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure;

(g) unauthorized use of cash collateral which is harmful to the creditor; and

(h) gross mismanagement of the business.

D. Strengthen the Powers and Duties of the U.S. Trustees and the Bankruptcy Administrator With Respect to Small Business Debtors. Amend 28 U.S.C. § 586 (the general statute governing the powers and duties of the U.S. Trustee) and the Manual for Bankruptcy Administrators, [ Section 302(d)(3)(I) of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. 99-554, 100 Stat. 3119, 3123, provides that statutory authority for the Judicial Conference of the United States to establish the bankruptcy administrator program.] (governing the duties of Bankruptcy Administrators) to require U.S. Trustees and Bankruptcy Administrators in every small business debtor case (except where they, in their reasonable discretion determine that the conduct enumerated below is not advisable in the circumstances):

(1) (a) to conduct initial debtor interview with the debtor’s controlling owners and top operating managers reasonably promptly after the debtor’s schedules are filed; (b) to visit the appropriate business premises of the debtor and ascertain the general state of the debtor’s books and records and the debtor’s compliance with applicable tax laws in connection with or reasonably promptly after such interview (wherever possible, these events shall be combined with other events so as to minimize to the most reasonable practicable extent the amount of time of debtor personnel spent in court and at official meetings); and (c) to monitor diligently on a continuous basis the debtor’s activities, with a view to identifying as promptly as possible those debtors which are not more likely than not to be able to confirm a chapter 11 plan within a reasonable time; and

(2) in cases where, upon the basis of continuing monitoring or otherwise, the U.S. Trustee or the Bankruptcy Administrator finds material grounds for any relief under Bankruptcy Code § 1112, to move the court promptly for the relief which the U.S. Trustee or the Bankruptcy Administrator determines to be appropriate in the circumstances.

E. Require Small Business Debtors to File Schedules Sooner. Require that all schedules and statements of financial affairs for small business debtors be filed within limits set by the Rules, unless the court and the U.S. Trustee or Bankruptcy Administrator consent to an extension, which extension or extensions shall not, in any event, exceed 30 days after the entry of order for relief in the aggregate absent extraordinary and compelling circumstances.

F. Segregated Deposit and Payment of Certain Tax and Other Payments. Require the small business debtor:

(1) to create within three business days (or as soon thereafter as possible in case all banks contacted during the first three business days decline the business) of the entry of order for relief separate deposit accounts with a bank or banks in which the debtor shall be required to deposit, until a plan is confirmed or the case is dismissed or converted or a trustee is appointed, on the next business day after receipt, all taxes collected or withheld by it for governmental units; and

(2) file on or before the time of the initial debtor interview with the U.S. Trustee or Bankruptcy Administrator a statement of identity of payees, anticipated due dates and approximate, estimated amounts of taxes and other legally mandated payments governmental units for the ensuing twelve months after the entry of order for relief, with separate identification of which payments are for the debtor’s own account and which are taxes payable by or collected from third parties which have been collected by the debtor with a duty to remit same to governmental units.

G. Create New Flexibility in Rules Relating to Disclosure Statements; Create Standard Forms for Disclosure Statements and Plans.

(1) Give the bankruptcy courts or other courts of competent jurisdiction discretion, after notice and hearing, to waive the requirements for, or simplify the content of, disclosure statements in small business cases wherethe benefits to creditors of fulfillment of full compliance with Bankruptcy Code § 1125 are outweighed by cost and lack of meaningful benefit to creditors which would exist if the full requirements of § 1125 were imposed.

(2) The rules committee shall be required to adopt, within a reasonable time after enactment, uniform safe-harbor standard forms of disclosure statements and plans of reorganization for small business debtors, after such experimentation on a local level as they deem appropriate. These forms would not preclude parties from using documents drafted by themselves or other forms, but would be propounded as one choice that plan proponents could make, which, if used and completed accurately in all material respects, would be presumptively deemed upon filing to comply with all applicable requirements of Bankruptcy Code §§ 1123 and 1125. The forms shall be designed to fulfill the most practical balance between (i) on the one hand, the reasonable needs of the courts, the U.S. Trustee, the Bankruptcy Administrator, creditors and other parties in interest for reasonably complete information to arrive at an informed decision and (ii) on the other hand, appropriate affordability, lack of undue burden, economy and simplicity for debtors.

H. Require the Disclosure Statement, if any, and Plan to be Filed Promptly. In small business cases only, require that the disclosure statement, if any, and plan must be filed within 90 days after the entry of order for relief, unless extended as permitted below.

I. Require the Plan to be Confirmed Promptly. In small business cases only, require the plan to be confirmed within 120 days after the entry of order for relief, unless extended as permitted below.

J. Limit the Power of the Court to Extend the Deadlines; Impose the Burdens of Coming Forward and Persuasion on the Debtor. Permit extensions of the deadlines for filing and approving disclosure statements, if any, and filing and confirming plans of reorganization only if the debtor, having duly noticed and appeared at the necessary extension hearing, if any, and having carried the burdens of coming forward and persuasion, demonstrates by a preponderance of the evidence that it is more likely than not to confirm a plan of reorganization within a reasonable time. No such deadline may be extended unless a new deadline is imposed at the time the extension is granted. The Bankruptcy and Judicial Codes will require the U.S. Trustee or the Bankruptcy Administrator, as the case may be, to be a recipient of notice of extension hearings and to participate actively therein, in order to assure, to the maximum extent feasible, that the interests of creditors and the public are protected when determinations are made as to whether small business debtors receive extensions and have proven by a preponderance of the evidence that it is more likely than not that they will confirm a plan within a reasonable time.

K. Require the Bankruptcy Court to Conduct Certain On-the-Record Scheduling Hearings. Require the bankruptcy court or other court of competent jurisdiction to conduct at least one scheduling hearing no later than 45 days after entry of the order for relief, on the record, to be sure that the deadlines discussed above are met. The court shall also conduct such other scheduling hearings as it deems fit and proper. Whenever possible, these hearings shall be schedules in conjunction with other mandatory events so as to minimize to the most reasonable practicable extent, the time of debtor personnel spent in court and at official meetings.

L. Limit Serial Filings by Small Business Debtors. Provide in the Bankruptcy Code that, once an order converting or dismissing a case for a small business debtor has been entered, then neither that debtor nor any entity with whom the debtor has merged or which has succeeded to substantially all the debtor’s assets or business shall, in the event it files a second case while the first case is pending or in the event that it again becomes a debtor in a chapter 11 case within two years after the order of conversion or dismissal has become a final order, be entitled to the automatic stay unless, after it has become a debtor, it bears the burdens of coming forward and of persuasion, by a preponderance of the evidence, that (1) the new case has resulted from materially changed circumstances not foreseeable at the time the first case ended and (2) it is more likely than not that it will confirm a feasible plan within a reasonable time.