For Immediate Release
NACM Applauds Senate on Passage of Bankruptcy Bill
March, 11, 2005: Columbia, Maryland—The National Association of Credit Management (NACM) applauds Senate passage of S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, sponsored by Senate Finance Committee Chairman Charles Grassley (R-IA). The Senate passed the legislation on March 10, by a vote of 75-24. NACM has been advocating that the Bankruptcy Code be overhauled with regard to commercial bankruptcies. Although the consumer aspects of the bill have received most of the media’s attention, important measures vital to commercial creditors were at stake. Specific Legislative Provisions: There are many provisions in the existing Bankruptcy Code that NACM has identified as unfair to the unsecured trade credit grantor. NACM has long supported modification of those provisions. NACM worked diligently with the National Bankruptcy Review Commission (NBRC) and with policymakers in Congress to highlight these problems and offer specific recommendations to address these inequities. NACM is encouraged that S. 256 has satisfactorily addressed many of these issues. Three of the most important issues to NACM members 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 NACM has sought for some time to create an expedited procedure to assist small businesses through a Chapter 11 reorganization process. It is clear that the less time a small business spends in the reorganization process in the courts, the more assets are preserved in that estate for creditors and for the business itself. The key features of the small business expedited procedures are: • • • A small business is defined as a company with $2 million or less in secured and unsecured debts (excluding debts owed to one or more affiliates or insiders) In order to expedite the process, the hearing on the disclosure statement and hearing on confirmation of a plan of reorganization can be combined Only the debtor can file a plan of reorganization within the first 180 days. However, the debtor has a maximum of 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 by a maximum of 45 days after the reorganization plan is filed with the court. Failure to do so will generally result in a conversion to Chapter 7 It is very difficult to get any extensions beyond the 180-day period. In essence, an extension will only be given for extenuating circumstances and only if the debtor can demonstrate by a preponderance of the evidence that it is more likely than not the court will confirm a plan within a reasonable period of time
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The ability to have a case converted from a Chapter 11 to a Chapter 7 is also subject to a similar higher standard. This states that a plan should not be converted to a Chapter 7 if there is a "reasonable likelihood" that a plan can be confirmed To expedite the process, the debtors will be allowed to use standardized forms and disclosure statements that will be developed by the Advisory Council to the Courts Small business senior management is strongly urged, but not necessarily required, to attend all meetings with the trustee
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Under a separate provision, S. 256 will allow the courts to allow small businesses to serve as members of a creditors’ committee if the small businesses more accurately reflect the aggregate debt load 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". Typically, 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. The premise of this section of the law is to prevent any one creditor from receiving preferential treatment over other creditors and to ensure equitable distribution of any funds in the estate. Typically, the amount of the preference action against small business creditors represents less than the cost of litigation to defend the payment regardless of the merits of the case. Survey results presented to the NBRC indicated that most creditors believe that for preference amounts under $10,000, it is not cost effective to mount a legal challenge to defend the payments they received. Further, it was revealed that preference recoveries rarely were returned to the debtors' estates but rather, in most instances, paid only for the cost of issuing the preference challenges. For this reason, NACM has sought to curtail the blanket pursuit of preference recoveries against unsecured creditors. The specific provisions include: • There can be no preference recovery action brought against a non-insider business trade grantor if the aggregate amount of the preference is $5,000 or less. The purpose of this proposal is to protect small trade creditors who are most susceptible to preference demands of $5,000 or less. However, transfers to insiders are still set at one year. Further, amounts recovered with this threshold will increase the likelihood that preference recoveries will benefit all creditors and not pay merely for collection efforts. A preference recovery action against a non-insider seeking less than $10,000 must be brought in the bankruptcy court in the district where the trade creditor has its principal place of business. The Judiciary Committees believe that this provision will force trustees to examine more carefully the merits of a preference case before they proceed with recovery actions. It attacks the practice of allowing the trustee for the debtor to issue blanket preference challenges. 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 a debt incurred by the debtor in the ordinary course of business between the debtor and 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 of the industry.
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This provision seeks to have the court look to the pre-petition history between the debtor and creditor as a definition of ordinary course of business. Should there be an insufficient history between the debtor and creditor, then the courts can look to industry norms to determine ordinary course of business benchmarks. Reclamation NACM proposed a modification in the treatment of reclamation demands to afford greater relief to creditors under the Bankruptcy Code. Under current law, a claim for the return of goods by a creditor must be made within ten days after delivery to the debtor. In those instances in which the debtor receives the goods within ten 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 approaches for relief under the reclamation code. The creditor can exert a reclamation demand, enjoying the return of goods delivered within 45 days. In the alternative, should the return of goods be impossible or impractical, the creditor would then enjoy an administrative priority for goods delivered within 20 days of the filing. Under the proposal, the creditor would be able to use only one of the options, not both. NACM supports giving the credit grantor greater flexibility under the reclamation provisions, but with practical limitations. It is important to remember that all reclamation claims are administrative claims and must be paid in full before a plan of reorganization can be confirmed. The onus on the debtor to pay all reclamation claims in full before a plan can be confirmed will most likely ensure that no Chapter 11 debtor will be able to secure the cash necessary to pay all administrative claims if the administrative priority period is too long. It must be a reasonable period of time. For this reason, the bill creates a bright line test for administrative priorities set at 20 days prior to the filing for bankruptcy for the receipt of goods by the debtor. Retail Lease Assumption Under the Bankruptcy Code as it is presently written, a tenant in a non-residential (commercial) property must either assume or reject a lease within 60 days after the case has been filed. However, if cause is shown to the bankruptcy judge, this period of time may be extended virtually indefinitely. As a precondition of any extension, the debtor/tenant must remain current with all lease payments, common area maintenance obligations, etc., in connection with the lease. Because the bankruptcy courts have been willing to give debtors virtually unlimited opportunity to decide whether or not to keep the store open or close it, the courts have been very liberal in extending the time for the rejection or assumption of a lease. The shopping center landlords do not like this because they are left with a degree of uncertainty as to whether or not they will have the tenant at a specified date in the future. Even though rent and other charges are being paid on a current basis, landlords claim that this affects, on an adverse basis, their ability to maintain tenant stability within the shopping center. S. 256 proposes that a definite limit be set by which the tenant would be required to either assume or reject the lease and the bankruptcy court could not extend that for any reason. NACM supports this concept. S.256 would also mandate that non-residential real property leases be rejected or assumed before the earlier of 120 days after the order for relief or the entry of order confirming a plan. If no plan was confirmed in the 120-day period, the period could be extended to no longer than 210 days with the consent of the lessor or court approval, so long as the trustee or debtor in possession has performed all post-petition obligations in a timely manner.
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Homestead Exemption Under current law, each state is afforded the prerogative of establishing a set of exemptions to benefit all creditors. There are celebrated stories of abuses of the bankruptcy process in states like Florida and Texas that essentially allow for an unlimited homestead exemption on a personal residency. Congress has attempted to address these abuses by creating a federal treatment for homestead exemptions. S. 256 establishes a cap of $125,000 for homestead exemptions. However, the Bill does allow for some accommodation for the prior state of residency of the debtor, but generally a 1,215-day period is required to exempt property up to the $125,000 limit. The Administration has indicated its preference for a slightly different treatment that would allow states to establish homestead requirements within its borders. NACM supports the idea of limitations on homestead exemptions. However, NACM takes no position on whether either the Congressional or Administrative positions on this proposal are more favorable. S. 256 Expected to Become Legislation Now that the Senate has passed S. 256, it is expected to pass in the U.S. House of Representatives in the next several weeks because there are no amendments attached to it thought to be unacceptable to most of the Republican majority in the House. A final House vote will most likely be completed by next week or soon after Congress returns from Easter vacation. The President has indicated he will sign the bill.
#### The National Association of Credit Management (NACM), headquartered in Columbia, Maryland, supports more than 25,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of Affiliated Associations are the leading resource for credit and financial management information and education, delivering products and services which improve the management of business credit and accounts receivable. NACM’s collective voice has influenced legislative results concerning commercial business and trade credit to our nation’s policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy. www.nacm.org Media Contact: Norma Heim Phone: 410-740-5560 E-mail: normah@nacm.org
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