Fact Sheet

& Staff







Dissent From Recommendation Regarding Small Business Chapter 11 Cases

Babette Ceccotti, Hon. Robert Ginsberg

The Commission's study of small business cases generated a substantial volume of testimony and written commentary from interested parties. The record gathered in the development of these proposals reveals widely divergent reactions both to the problems identified in the Recommendation and the proposed solutions. A number of the individual proposals are undoubtedly worthwhile. For example, the identification of necessary financial information to be generated by the debtor and establishing benchmarks which could indicate that a company is unable to reorganize (such as an inability to maintain insurance coverage) would offer additional structure where a lack of oversight otherwise leaves cases with no clear path to a resolution.

While a need for improved case management is evident from a review of the studies and case management programs in districts where local initiatives have already taken hold,(2573) whether the set of proposals comprising the Commission's Recommendation is the correct, "one size fits all" solution is a separate and more questionable notion. Unlike the 1994 small business amendments, which sought to simplify the process for less complicated cases, the Commission's Recommendation sets up a requirement-laden, inflexible program aimed primarily at removing cases from the system that cannot confirm plans in the limited time permitted. In effect, the Recommendation creates a double standard for access to Chapter 11 based on the amount of the debt.(2574)

If anything, the debate generated by the development of the proposal made a convincing case for encouraging local initiatives designed to address case management concerns in a particular district. For example, a study of ten Los Angeles Division bankruptcy judges submitted by then U.S. Trustee Marcy J.K. Tiffany identified various characteristics of the cases filed in that district, discussed the compliance mechanisms that grew out of the problems in that district, and reviewed their effectiveness. Undoubtedly, Judge Small and Judge Perris' efforts involved similar locally based studies. Rather than combine individual features of these and other, locally developed programs into one, substantively detailed, mandatory case management system, a better approach would have been to propose a process for the identification of case management issues and the development of local solutions.

The Recommendation unnecessarily reduces the flexibility that is one of the most valuable features of Chapter 11 and substitutes case micro-management through statutory and rules requirements.(2575) The judges would become gatekeepers and schedulers, severely constrained even in the granting of extensions.(2576) In addition, the proposed amendments to the standards for conversion or dismissal under section 1112 or appointment of an trustee under section 1104(2577) would operate harshly to reduce the discretionary nature of the current provisions. While the Commission heard some complaints that extensions of time to meet basic compliance requirements were not being determined and applied realistically, the Recommendation has gone too far in taking away the courts' discretion in imposing remedies.

The portion of the nation's economy supported by small business is highly interdependent, with small businesses often serving as suppliers to and buyers from other small businesses. Employees, businesses that buy and sell, taxing authorities, utility companies and many other entities suffer whenever a small business is forced to close or when assets are dissipated in a lengthy and expensive liquidation. Everyone benefits when these businesses and their owners have access to a bankruptcy system that provides an opportunity to save a viable business or, when a feasible reorganization is not possible, to liquidate efficiently. Yet, the Commission's Recommendation would make reorganization more difficult for many failing companies.

The Recommendation presents a genuine concern that businesses, unable to scale the hurdles of the new requirements, will not even seek to reorganize. For those businesses and others who depend upon their existence, the merits of utilizing Chapter 11, e.g., enhancement of asset value, an orderly and collective resolution of claims, and the preservation of jobs, will not be available at all.

The $5 million debt definition raises the possibility that the term, "small business" as used in the Recommendation, could actually apply to a majority of the business cases filed in a district, as the Report concedes.(2578) Moreover, by its terms, the Recommendation applies to all "single asset" real estate cases as well. The Recommendation thus reveals an unmistakable sense that it is not the failing business lingering aimlessly in Chapter 11 that is the target so much as it is Chapter 11 itself. If that is the message of the Recommendation, then a more fundamental debate about Chapter 11 must be resolved--or at least the clear policy choices identified--before large scale case management proposals can be realistically considered.



2573  See, e.g., Hon. Samuel L. Bufford, "Chapter 11 Case Management and Delay Reduction: An Empirical Study," 4 Am. Bankr. Inst. L. Rev. 85 (1996) (studying selected case dockets in the Central District of California); Marcy J.K. Tiffany, U.S. Trustee, Region 16 "Fast Track, Statistics and Delay Reduction: A Comparative Analysis," (presenting a similar analysis); Letter from Hon. Elizabeth L. Perris to John Gose (November 26, 1996) (describing a "local culture" of "judicial attitude, court processes and attorney practices" that does not permit Chapter 11 cases to languish); Hon. A. Thomas Small, "Small Business Bankruptcy Cases," 1 Am. Bankr. Inst. L. Rev. 305 (1993). Return to text

2574  The prescribed time limits, the standards for obtaining extensions, the additional compliance requirements and the limitations on subsequent bankruptcy filings clearly would work to limit access to the bankruptcy system. Whether this raises potential constitutional questions has not been explored. Return to text

2575  As the Commission learned in its study of these issues, a persuasive argument can be made that few changes, if any, need to be made to the Bankruptcy Code or rules to produce better case management in a system where the judges take charge of case management. See, e.g., Bufford, 4 Amer. Bankr. Inst. L. Rev. at 85-86; Letter from Hon. A. Thomas Small to Stephen H. Case (Feb.12, 1997). Return to text

2576  Given the serious, substantive, and effective case management programs that have been initiated by bankruptcy judges, this is a curious and ironic feature of the Recommendation. Return to text

2577  These proposals are not limited by the Recommendation to the "small" business cases. Return to text

2578  While the ostensible rationale for the proposals is a lack of creditor oversight, no such distinction is made in the scope of the cases that would be subject to "small business" treatment. Return to text

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