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Small Business Bankruptcy Debtors Take Note

“Small business debtors” are well defined under the Bankruptcy code (11 U.S.C. §101(51D)) and subject to specific requirements and procedures.  Pending amendments to Title 11 indicate that while some of those requirements and procedures may soon be eased or given flexibility, others will have significant consequences for failure to follow.

On April 26, 2012, Sen. Sheldon Whitehouse (D-RI), along with Sen. Chuck Grassley (R-IA), introduced the Small Business Reorganization Efficiency and Clarity Act (S.2370) with the stated purpose of “amending Title 11 of the United States Code to make bankruptcy reorganization more efficient for small business debtors.”  On May 24, 2012, the Bill was Reported by Sen. Patrick Leahy (D-VT) without amendment favorably, and placed on the Senate Legislative Calendar under General Orders, Calendar No. 416.

The Bill appears to be destined for enactment and would amend certain sections of Title 11, impacting small business debtors as follows:

  1. Section 1129(e) would be amended to extend the time period for confirmation of a Code compliant plan from “45 days” after the plan is filed, to “90 days” after the plan is filed.  This amendment is proposed to give greater flexibility to, and ease the burdens on, small business debtors and courts facing time constraints.
  2. Section 308(b) would be amended to require that periodic financial and other reports filed by a small business debtor include the information enumerated in subsections (1) through (5).  Subsection (6), a “catch-all” reporting requirement, would be eliminated under the Bill.  This amendment is proposed to provide more certainty and greater clarity in a small business debtor’s periodic reporting requirements, and prevent small business debtors from the proverbial “dumping of paper” on the court to ensure compliance.
  3. Section 327 would be amended to include new subsection “(g)” providing that “Notwithstanding subsection (a), a person is not disqualified for employment under this section by a small business debtor solely because such person holds a claim of less than $5,000 that arose prior to the date of commencement of the case.” This amendment is proposed to ease the restrictions on a small business debtor’s ability to hire previously employed professionals (i.e. their pre-petition attorneys or accountants) to perform services for the estate.  In accordance with this amendment, Section 104 would also be amended by inserting the new subsection “327(g)” to be included in those subsections requiring periodic dollar amount adjustments.
  4. Section 1112(b)(4) would be amended by redesignating subparagraphs (O) and (P) as subparagraphs (P) and (Q), respectively, and by inserting a new subparagraph (O) to include “the failure of a small business debtor to designate itself as a small business debtor” as constituting “cause” for Conversion or Dismissal.  This amendment is proposed to mandate and enforce the small business designation requirements and procedures under the Code.

Small business bankruptcy debtors should be fully aware of the impact of these amendments on their filings as well as the significant consequences, including Conversion or Dismissal, for their failure to observe same.

Paul S. Murphy