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 Chapter  11
2. Revisions in the treatment of preference challenges to creditors
3. Reclamation reform

Small Business Reorganization

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 or insiders)

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 Courts

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.

Preferences

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".

Characteristically, 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 debtor’s 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 its’ 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 creditor’s industry.

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 benchmarks.

Reclamation

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 reclamation demand.

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 Cornyn’s 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 Bankruptcy.