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Creditors applaud long-awaited bankruptcy reform legislation: an interview with NACM government affairs representative, Jim Wise.

The Bankruptcy Reform Act of 1994 is the first major change in bankruptcy legislation in 10 years and brings some important changes for creditors and debtors alike. Among the areas targeted by Congress were small business reorganizations, reclamation, Chapter 13, creditors' committees, and more. Jim Wise, NACM's government affairs representative, sheds some light on the recent changes, which went into effect with President Clinton's signature in October.

BC: What are the details of the provisions concerning small business reorganizations?

JW: This provision is an attempt to get small businesses in and out of bankruptcy as expeditiously as possible. The less time that a small business spends with court procedures, the less capital of the small business that is spent on legal costs. Congress has allowed small businesses, defined as having no more than $2 million in total debt, to elect to use this process. The period of exclusivity for the debtor is limited to 100 days and all plans must be filed within 160 days. In addition, the confirmation process has been shortened to provide that the Disclosure Statement will be conditionally approved and subject to inquiry at the same hearing as the confirmation of the plan--a consolidation of steps that should greatly expedite the process.

BC: Explain the significance of extending the reclamation timetable from 10 to 20 days.

JW: Under current law, if a seller ships goods to a buyer who is insolvent, the seller has 10 days in which to exert a reclamation claim demanding the return of those goods. In real life, however, the seller is oftentimes unaware that the buyer is insolvent when the goods are received. By the time that many sellers become aware that the buyer is insolvent, the 10-day period has passed. Congress extended the period in which the seller can exert the reclamation claim from 10 to 20 days in those instances in which the buyer has not filed for bankruptcy protection with the court within the 10-day reclamation period.

BC: Can you explain how creditors will have an expanded role in electing a Chapter 11 trustee when one is directed to be appointed by the court?

JW: The Bankruptcy Code provides that in cases of fraud or gross mismanagement, the court may order the appointment of a Chapter 11 trustee. It has been the responsibility of the U.S. Trustee's office to appoint this individual to serve as a Chapter 11 trustee. By allowing creditors to elect this trustee, the new provision gives creditors a greater impact in the reorganization process by ensuring that management is operating a D-I-P in the best interests of the estate. The Chapter 11 trustee can be a person experienced in the specific industry needed, thereby eliminating much of the guesswork from this election.

BC: Debtors will now be required to pay default interest or interest on interest to cure a default. Explain what creditors need to know about this.

JW: This change limits the amount a secured creditor can obtain to cure a default in a secured transaction. Under the new law, the amount of interest necessary to cure a default under Chapters 11, 12, and 13 will be determined by the agreements between the parties and non-bankruptcy law--but with limits to the secured creditor only to the terms of the initial contract. This should eliminate a secured creditor's ability to inflate the amount of his claim through additional interest charges. It should be stressed that this provision only applies to agreements entered into after the date that the new law became effective.

BC: What expanded definitions of bankruptcy fraud and crime are contained in the bill?

JW: Congress has expanded the application of the U.S. Criminal Code to encompass bankruptcy fraud and crimes. The new law permits the extended use of the RICO statutes to cover bankruptcy fraud--ideally giving credit grantors an effective tool to fight bankruptcy fraud and the process an additional deterrent to criminal activity within bankruptcy processes.

BC: While the law clarifies that members of a creditors' committee may be reimbursed for expenses incurred in the performance of committee duties, another provision expands those eligible to receive reimbursement to include the Pension Benefit Guaranty Corporation (PBGC) or other government units that act as the guarantor of pension benefits. What effect might this have on creditors?

JW: You have identified the two changes that Congress made with respect to creditors' committees. First, creditors can now rely on the law to be reimbursed for their expenses in the performance of their duties as members of creditors' committees. However, we have also expanded the list of those eligible to serve on creditors' committees to include the PBGC or other similarly oriented government units. The fact that the PBGC can sit as a creditor committee member is not troubling per se. But it can create a problem in the overall reorganization process as the interests of the PBGC may not be the same as trade creditors and lenders.

BC: We understand that the limit on priority claims has been doubled. What does that mean for creditors?

JW: Congress doubled the amount of limit on priority claims--that means that wage and benefit priorities are raised to a collective amount of $4,000 per employee. This could become an obstacle to a Chapter 11 reorganization effort in those instances where there are large numbers of employees whose wages and benefits have not been paid. By extension, it could also have an effect on distributions to unsecured creditors in Chapter 7 liquidations where large employee debts exist.

BC: What changes have been made within the bankruptcy court system itself?

JW: One of the changes provides that bankruptcy judges will now be able to conduct jury trials--if two conditions are met. First, the District Court specifically designates the bankruptcy judge to conduct the trial. Second, all of the parties involved in the bankruptcy must agree to the court trial.

Another important change is the Rule 16 modification. Under the new law, the court or any party in interest in a bankruptcy may ask for a status conference and demand to expedite the case. The effect of this provision will be to require the debtor to more promptly decide on executory contracts, impose time certain deadlines for the filmng of reorganization plans and disclosure statements, and generally stop the costly delays in the bankruptcy process.

Finally, the new law creates three-member bankruptcy appellate panels for each Federal Circuit. This should short-circuit the long delays currently realized in forwarding bankruptcy appeals to the various U.S. District Courts.

BC: Explain how the commission to study revisions and changes to the Bankruptcy Code might be set up and what the timeline might be.

JW: What the Commission will do is take a couple of years to solicit input from a wide variety of interest groups as to shortcomings that exist in the Bankruptcy Code. The Commission will then report back to Congress with a series of recommendations for improving the code. With the new legislation, Congress indicated that it doesn't believe that the code itself is in need of massive revision. It truly was their intent to fine-tune certain aspects of the code. However, a number of key players who were controlling the bankruptcy reform debate will not be returning to Congress. We may very well end up with a new Congress with a new perspective on how to improve the bankruptcy process for everyone--regardless of the recommendations of the Commission. In fact, by the time that these recommendations are presented for Congressional consideration, at least one more election cycle will have elapsed. Our priorities may undergo significant changes by then.

BC: What will be NACM's role in the continued process of amending the U.S. Bankruptcy Code?

JW: The NACM Government Affairs Committee has come up with a wide range of issues that they would like to present to the Blue Ribbon Commission for consideration. These issues must first be endorsed by the NACM Advisory Committee before they are adopted for the association. These changes represent a comprehensive approach to bankruptcy reform--everything from preference revisions to technical corrections in the new Small Business expedited Chapter 11 process. The Government Affairs Committee has continued in its efforts to bring the code back to a point of balance between creditors' rights and preserving the interests of the debtor.

Kevin C. Naff is communications associate/editor, NACM.
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Title Annotation:National Association of Credit Management
Author:Naff, Kevin C.
Publication:Business Credit
Article Type:Interview
Date:Jan 1, 1995
Words:1395
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