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NACM's Latest Letter to Sen. Sheldon Whitehouse (D-RI), Regarding Bankruptcy Reform

Written by Super User.

The National Association of Credit Management (NACM) recently sent a new letter to Sen. Sheldon Whitehouse (D-RI), the culmination of a series of meetings among staffers in Whitehouse’s office and members of NACM’s Government Affairs Committee. Below is a copy of the letter as it was delivered:

Sent August 27, 2010

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

Dear Senator Whitehouse:

NACM greatly appreciates the chance to work with your office and with others on S. 3675, the Small Business Jobs Preservation Act, in order to make it as beneficial as possible to small businesses and the economy at large. However, in its current form, we have found numerous provisions that we believe would do more harm than good for both the debtors and creditors involved in bankruptcy cases, as well as for the greater American economy. We continue to support the principles of efficiency and expediency in bankruptcy, but must object to certain specific portions of the bill that we believe are contrary to its stated goals.

The following are some alterations that we would make to S. 3675 as it was first introduced:

-Firstly, the procedure outlined by the bill should not be elective, and Section 1181 should be altered or removed to reflect this. While the bill necessarily includes provisions that shorten deadlines and increase supervision in small business cases, NACM believes that, given the choice, most small business debtors would opt to take their chances with Chapter 11 rather than adhere to the bill's admirably more stringent deadlines and increased supervision. Allowing debtors to choose when these provisions will apply could very easily defeat their intended purpose, and drive more small businesses into a Chapter 11 process that is ill-suited to fit their needs.

-The bill's current arrangement that allows creditors' committees only to form on court orders should be altered to more easily allow the creation of these committees. Specifically, in Section 1182(b) of the bill, reference to Sections 1102 and 1103 should be removed and these provisions dealing with creditors' committees should continue to apply in all cases arising under this statute. As outlined in our previous letter, NACM considers the right to form this committee a benefit to both creditors and debtors. While we recognize that, in most small business cases, no committee is ever formed, the right to do so should remain readily available. Therefore, we believe the bill should be altered to require the U.S. trustee to send out notices in order to form a creditors' committee in every case, just as they would in a normal Chapter 11. However, the statute should also be changed to indicate that if after 30 days no creditors' committee is formed, control over the case would then revert permanently to a standing trustee to be appointed in the case. This offers creditors a fair enough chance to join and participate on a committee without slowing down the debtor's progress through bankruptcy.

-Section 1189 of the bill provides that only a small business enterprise debtor may file a plan and must do so no later than 90 days after the order for relief. NACM believes that other parties, such as the trustee or creditors' committee, should be allowed to file plans as well. This provision should be altered to allow the small business enterprise debtor the exclusive right to file a plan for 90 days after its filing, at which point other parties may be allowed to propose plans of their own. As suggested in our prior letter, should no plan be confirmed within 180 days of the filing, the Code should direct the court to enter an order converting the case to a Chapter 7 liquidation, barring the debtor's ability to show substantive circumstances that would warrant an extension.

-Section 1182(b) of the bill should also be changed to remove the reference to Section 1125, which deals with disclosure concerning and solicitation of a Chapter 11 plan. Section 1125(f) and the remaining parts of Section 1125 that currently deal with small business bankruptcy cases are intended to protect creditors by promoting the dissemination of sufficient information to explain the terms of the plan and should be retained.

-Several provisions in S. 3675 pose a significant threat to the absolute priority rule, which NACM believes should be maintained in all small business filings. Deleting the Section 1129 provisions, referred to in Section 1182 of the bill, in small business cases, including Section 1129(b) and Section 1129(a)(15), eliminates the protections that should be afforded to creditors who may object to a debtor's plan, whether the debtor is a small business or an individual. Section 1129 in its entirety should be allowed to apply and Section 1182 of the bill should be revised to ensure that these protections are maintained. Additionally, Section 1193 of the bill should be removed in its entirety. Keeping Section 1129 intact obviates the need for this additional language as now the small business debtor will still be required to show its compliance with all of 1129 in order to achieve confirmation. Removing Section 1193 of the bill, and allowing Section 1129 of the Code to remain intact would preserve the absolute priority rule, which requires the full payment of any class of unsecured claims that does not accept the plan before any distribution can be made to junior interests, such as the debtor's shareholders. This is designed to protect the right of unsecured creditors to oppose a plan while preventing the filing of insider plans that do not provide fair treatment of unsecured claims. The related discharge provision in Section 1194 of the bill should also be removed.

-Section 1193(e) of the bill, which permits a debtor to pay administrative expenses claims, including claims for post-petition goods or services and claims under Section 503(b)(9) for goods sold pre-petition and received within 20 days of the Chapter 11 filing, over time following the effective date of a Chapter 11 plan should be removed. Section 1129(a)(9)(A), which currently requires a debtor to fully pay all administrative expense claims in cash on the plan's effective date should be retained in order to encourage the continued extension of trade credit to small businesses both before and after their Chapter 11 filing.

With regards to the Bankruptcy Code at large, NACM continues to maintain its position on preference reform, which is that the burden of proof for a preference claim should be shifted from the creditor to the debtor or trustee. Philosophically, the current preference statute considers creditors guilty of receiving a preferential payment until they can prove themselves innocent, violating a fundamental tenet of American jurisprudence: that individuals are innocent until proven guilty. Shifting the burden of proof to the trustee would align the preference statute with this fundamental concept and, moreover, would also be consistent with the goal of S. 3675. Preferences fall hardest on the nation's small businesses, and shifting the burden to the debtor would allow creditors to maintain the integrity of their business while also increasing the chances that they would sell goods to a bankrupt debtor on credit right when the debtor is most in need of credit.

NACM believes that this shift in the burden of proof can be achieved by amending Section 547(b) of the Bankruptcy Code, which provides the statutory requirements the trustee needs to prove in order to avoid any transfer of an interest in the debtor in property. Two new subsections should be added to this section of the Code and Sections 547(c)(2) and (547(c)(4) should be removed.

Subsection (6) would read as follows:

(6) that was not in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; was not made in the ordinary course of business or financial affairs of the debtor and the transferee and was not made according to ordinary business terms; and

Subsection (7) would read as follows:

(7) only to the extent that the aggregate amount of the transfers made to or for the benefit of the creditor exceeds the aggregate amount of new value that the creditor gave to or for the benefit of the debtor, which new value is not secured.

The "and" between subsections (4) and (5) of Section 547(b) should be deleted and an "and" should be inserted between subsections (6) and (7) as indicated.

Adding in these two subsections requires the trustee to investigate the nature of the payment the trustee is attempting to avoid to ensure that it is not protected by the ordinary course of business defense, which creditors are currently responsible for proving under Section 547(c)(2). Simultaneously, with the addition of Section 547(b)(6), Section 547(c)(2) would be removed. The proposed Section 547(b)(7) also limits the amount of a preference claim to the difference between the new value given to or for the benefit of the debtor and any payments received by the creditor from the debtor within the 90-day preference period. This change is consistent with the "net result" rule that existed prior to the adoption of the Bankruptcy Code, and would eliminate further litigation on the application of the new value defense under Section 547(c)(4), which would be removed while simultaneously adding Subsection (7) to Section 547(b). These changes would also encourage creditors to continue extending credit to a financially troubled company, replenish the debtor's bankruptcy estate with new goods and services, and promote equality of treatment among similarly situated creditors, all policies that Congress had intended to enact when first creating the preference statute.

NACM looks forward to working further with you and your office on making S. 3675 an effective bill that restores the balance between creditor and debtor in the bankruptcy process, while helping small businesses work through their economic struggles and allowing them to save and create jobs.

Thank you for your time and consideration,
Sincerely,

Robin Schauseil, CAE
NACM President

and

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

 

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