The United States Senate has approved sweeping
changes to the U.S. Bankruptcy Code and has sent its version on to the House
of Representatives for consideration.
Although the majority
of the changes affect the consumer in both Chapter 13 and 7, three of the
most important issues to commercial credit grantors contained in S.256 are:
1. The creation of an expedited procedure for small businesses in
2. Revisions in the treatment of preference challenges to creditors
3. Reclamation reform
The key features of the small business reorganization are:
1. Small businesses will be defined as firms with $2 million or less in
secured and unsecured debts (excluding debts owed to one or more affiliates
2. The hearings on both the disclosure statement and reorganization plan
confirmation can be combined.
3. Only the debtor can file a plan of reorganization within the first 180
days. However, the debtor has only 300 days from the date of the bankruptcy
filing to have the plan confirmed. The bill would require the debtor to have
a plan confirmed within 45 days after the reorganization plan is filed with
the court. Failure to do so would result in the conversion to Chapter 7.
4. Extensions, if any, will only be granted for extenuating circumstances.
5. The ability to have a Chapter 11 converted to a Chapter 7 will not occur
if "reasonable likelihood" that a plan can be confirmed exists.
6. Debtors will be allowed to use standardized forms and disclosure
statements. These forms are to be developed by the Advisory Council to the
7. Small business senior management, although not required, will be strongly
advised to attend all meetings with the trustee
S. 256 will allow the courts to appoint small businesses to serve as members
of creditors' committees if the small businesses more accurately reflect the
average debt of the debtor.
Under current bankruptcy law, all payments made by a debtor to creditors
within 90 days of a bankruptcy filing must be returned to the debtor's
estate, unless the creditor can prove that the payment was made in the
"ordinary course of business".
the trustee for the debtor's estate issues demands to all creditors who
received a payment in this 90-day period without regard to the
"ordinary course of business" standard. This is to prevent any one
creditor from receiving preferential treatment over other creditors and to
ensure equitable distribution of any funds in the debtorís estate.
The specific provisions include:
1. No preference recovery action can be brought against a non-insider
business trade grantor if the aggregate amount of the preference is $5,000
or less. However, transfers to insiders are still set at one year.
2. A preference recovery action against a non-insider seeking less than
$10,000 must be brought before the bankruptcy court in the district where
the trade creditor has its principal place of business.
3. The test for whether a payment, under the preference defense provisions,
is made in the ordinary course of business according to ordinary business
terms has been changed. S. 256 attempts to expand the definition of ordinary
course of business to include:
A. Payment of debt incurred by the debtor in the ordinary course of business
between the debtor and itsí creditor;
B. Payment made in the ordinary course of business or financial affairs
between the debtor and creditor; or,
C. Payment made according to ordinary business terms in the creditorís
The court will now be asked to look at the pre-petition history between the
debtor and creditor as a definition of ordinary course of business. Where an
insufficient history exists between the debtor and creditor, the courts can
look to industry standards to determine ordinary course of business
Under current law, a claim for the return of goods by a creditor must be
made within 10 days after delivery to the debtor. In those instances in
which the debtor receives the goods within 10 days of the bankruptcy filing,
the creditor then has 20 days from receipt of goods in which to make a
A provision in S. 256 would give the credit grantor the option of one of two
avenues for relief under the reclamation code. The creditor can make a
reclamation demand for the return of goods delivered within 45 days. Or, if
the return of goods is either impossible or impractical, the creditor would
then receive an administrative priority for goods delivered within 20 days
of the filing. The creditor would be able to use only one of the above
options, not both.
In chapter 11, all reclamation claims are administrative claims and must be
paid in full before a plan of reorganization can be confirmed.
S. 256 is expected to pass in the U.S. House of Representatives because
there are no amendments believed to be unacceptable to the Republican
majority in the House.
The status of S.314, Republican John Cornynís bill, mentioned in our last
column, is not known at this time. However, Senator Diane Feinstein a
Democrat agreed to co-sponsor the bill.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or