NACM Letter to Sen. Whitehouse Regarding Small Business Bankruptcy, Preference Reform

Sent June 29, 2010

Honorable Sheldon Whitehouse
Hart Senate Office Building
Room 502
Washington, D.C. 20510

Dear Senator Whitehouse:

Since the hearing you held in the Senate Judiciary Committee's Subcommittee on Administrative Oversight and the Courts in March, entitled "Could Bankruptcy Reform Help Save Small Business Jobs," NACM has found it necessary to reiterate its support for the principles listed in our prior letter, while adding more details as to how we believe they can be realized.

The following are some specific alterations we would make to the Bankruptcy Code, each one geared toward increasing expediency, efficiency and fundamental fairness in the small business bankruptcy process.

-NACM believes that creditors should retain voting rights in all small business cases. However, NACM would also support changes to the Bankruptcy Code that would have a non-voting creditor deemed to consent to the proposed reorganization plan. Such a measure would balance the interests of creditors and debtors and make confirmation of a plan easier, thereby increasing the speed of the proceedings. It would also encourage and hopefully increase creditor participation in a case, which we believe is valuable in any bankruptcy filing.

-As previously discussed, both in our prior letter and by witnesses in the March hearing, small businesses should not be allowed to languish in the bankruptcy process, much to the detriment of the business itself, the bankruptcy estate and the creditors. Therefore, the deadlines for these filers should be shortened, such that a debtor has the exclusive right to file a plan for 120 days after its Chapter 11 filing, and a plan must be confirmed no later than 180 days after the Chapter 11 filing. Should no plan be confirmed within such 180-day period, the Bankruptcy Code should direct the bankruptcy court to enter an order converting the case to a Chapter 7 liquidation unless the debtor can show substantive circumstances which would warrant more time. Such a change would both enhance the speed of cases while ensuring that small businesses unable to reorganize are quickly liquidated, rather than being allowed to continue draining assets from both the estate and its creditors.

-The definition of small businesses should be revised to include debtors that are not single-asset real estate debtors, with up to $5 million in debt, as small business debtors who could utilize the expedited small business filing procedure. The current $2,343,300 debt threshold is simply too small to accommodate the number of smaller firms forced into navigating the onerous requirements of a standard Chapter 11, which, as has been noted, is designed for much larger firms.

-Finally, the absolute priority rule should be maintained in small business filings, if for no other reason than to protect unsecured creditors from the filing of an insider plan that does not provide fair treatment of unsecured claims by allowing them to invoke the absolute priority rule to block approval of such a plan.

With regard to the Bankruptcy Code as a whole, NACM believes its previously stated position on preference reform is also consistent with its support of a faster, fairer bankruptcy process for small businesses. The current preference statute allows debtors and trustees to force small credit grantors to negotiate a return of a portion of a preference claim, without regard to the appropriateness of the claim, because these small credit grantors cannot afford legal counsel to fight the claim. The preference statute also functions to pay only for collection efforts without providing any benefit to the estate itself, and acts as yet another hurdle preventing the quick confirmation of a fair, successful reorganization plan. NACM contends that no bankruptcy legislation would be complete without a measure that addresses the abuse of the Code's preference statute. As previously noted, the easiest way to do this would be to shift the burden from the creditor to the trustee to prove that the transfer does not qualify as an ordinary course transaction as part of the burden of proving a preference claim. Again, such a change would not only reduce delays in the bankruptcy process and serve to restore balance between creditors and debtors, but would also benefit small businesses, as the burden of preference abuse falls hardest on the nation's smaller firms.

Again, we look forward to working further with you and your office on making effective improvements to the nation's Bankruptcy Code and using all that is at America's disposal to save and create small business jobs.

Thank you for your time and consideration,

Robin Schauseil, CAE
NACM President


Phyllis L. Truitt, CCE
NACM Chairman
Director of Credit
Atlas World Group


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