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VOL. CLXXV – NO.

11 – INDEX 1091 MARCH 15, 2004 ESTABLISHED 1878

Bankruptcy Law
Representing the ‘Small Business’ Bankruptcy
The decision to openly discuss emotional turmoil.
Opportunities and risks abound those problems with an attorney in The best method to help clients rec-
many cases only occurs after running ognize whether a successful reorganiza-
By Douglas S. Stanger head-on into a “wake up” event. Wake- tion is feasibile is to suggest they seek
up events may be, for example, judg- appropriate guidance from an accoun-
epresenting the small business ments entered or checks bouncing due tant and/or business consultant. An

R debtor successfully can be quite


challenging. There are potential
benefits for electing to file a small busi-
to the execution by a judgment creditor
or taxing authority.
The debtor must be made aware of
attorney should not accept employment
as counsel for a small business unless
the client is willing — prior to the bank-
ness bankruptcy, however, such a filing the risks, potential benefits and costs of ruptcy — to have an accountant inde-
is not devoid of risk — especially if filing for bankruptcy. Prior to complet- pendently review the foundation of its
there is a question as to whether the ing the initial consultation, fees must be financial status. They must understand
debtor will be able to file a plan within discussed. The debtor must recognize the reasons for their financial problems
the strict statutory deadlines. that the bankruptcy process is not an and the potential for a successful out-
Typically, whenever the chief exec- inexpensive course of action. Even in a come.
utive officer and/or shareholder of a small business bankruptcy, fees can run Counsel must have a 12-month pro-
company enter an attorney’s office to anywhere from $7,500 to $50,000. jection prepared with the assistance of
discuss financial problems, the compa- Typically, in a large business, attor- an accountant or other financial profes-
ny has been undergoing problems for neys and accountants may be on staff. sional. That 12-month initial budget is a
some time. And the attorney needs to be The CEOs and shareholders are well requirement for filing with the initial
prepared for the additional emotional aware of the issues and potential advan- operating report by the U.S. Trustee’s
element when an individual who oper- tages and disadvantages of filing a Office. It is a document to which much
ates a small business walks through the bankruptcy. This awareness comes thought and attention must be given
door. much later to your typical small busi- prior to the decision to file a bankrupt-
In all likelihood, they have never ness debtor. cy.
done anything else, and often cannot The attorney’s initial task should be Accountants and business consul-
envision themselves as able to do any- to focus on the business. A thorough tants must properly understand their
thing else. While they might have some understanding of the debts and the role. They are not expected to initially
understanding of what caused the finan- assets must be quickly obtained. Is there be an advocate for the position of the
cial difficulty, their emotional involve- really potential for a successful reorga- owner; they must perform an indepen-
ment limits that understanding, which nization? This needs to be handled with dent review of income and expenses for
frequently is not well developed or even sensitivity. If there is no hope that the the last few years and attempt to assess
correct. business can be reorganized, it is in the what factors caused financial difficul-
client’s best interest to concede and ties. They should consider potential
Stanger, a partner and member of the move on. All too often, Chapter 11 changes, which could reverse negative
bankruptcy practice group at bankruptcies are filed and individuals trends.
Flaster/Greenberg of Cherry Hill, is an go forward without any potential of suc- Accountants and business advisers
approved mediator for the Bankruptcy cess, not having the benefit of closure should understand some basics of bank-
Court, and serves on the U.S. Department until a substantial amount of time pass- ruptcy law. For example, the adviser
of Justice Panel of Trustees. es, lengthening the time and extent of must recognize the fact that a business

This article is reprinted with permission from the MARCH 15, 2004 issue of the New Jersey Law Journal. ©2004 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.
2 NEW JERSEY LAW JOURNAL, MARCH 15, 2004 175 N.J.L.J. 1091

can reject executory contracts, and he whose primary activity is the in a small business case. 11 U.S.C. 1125
must understand the potential benefits business of owning or operat- (f) provides that:
of rejection. Very often, it is the accoun- ing real property and activities (1) the court may conditionally
tant who discerns obvious issues that incidental thereto) whose approve a disclosure statement
need to be resolved to have a successful aggregate noncontingent liqui- subject to final approval after
reorganization. dated secured and unsecured notice and a hearing;
While these same issues may not debts as of the date of the peti- (2) acceptances and rejections
have been obvious to the owner, it also tion do not exceed $2,000,000. of a plan may be solicited
could be that the owner was unwilling If a debtor qualifies, the debtor has the based on a conditionally
to face them. For example, leased space ability to elect to be considered a small approved disclosure statement
may be much more than is required or business under 11 U.S.C. 1121(e) of the as long as the debtor provides
cost much more than its comparative Bankruptcy Code. There is no require- adequate information to each
value in the marketplace. I have seen ment that they file a small business holder of a claim or interest
small business entities save several bankruptcy; it is merely an option. that is solicited, but a condi-
thousand dollars each month by reject- In the event the election is made, tionally approved disclosure
ing a lease and moving into a smaller the case is put on a “fast track” and statement shall be mailed at
facility. treated differently than a regular least 10 days prior to the date
Other potential executory contract Chapter 11 case under the code. This of the hearing on confirmation
strategies may include giving up certain can be extremely beneficial in minimiz- of the plan; and
leased and financed equipment. ing costs for a small business debtor. (3) a hearing on the disclosure
Defaulting in certain obligations may The cost factor is probably the pri- statement may be combined
very well be in the debtor’s best inter- mary reason for the enactment of this with a hearing on confirmation
est. The treatment of secured and unse- option and its utilization. Pursuant to of a plan.
cured creditors will form the basis of a §1121(e)(1), “only the debtor may file a A review of these sections referenced
plan. Many times a small business plan until after 100 days after the date above emphasizes the need for substan-
crosses the threshold into financial dif- of the order for relief under this chap- tial prebankruptcy planning, if not sub-
ficulty due to attempts to expand too ter.” stantial optimism that the bankruptcy
fast. What can and will be successful is In all other Chapter 11 cases, can proceed quickly and smoothly.
retooling at the lower level where they other parties cannot file a plan until This may also require prebankrupt-
first met success. 120 days after the date of the order for cy discussions with creditors, especially
Prior to the decision to file the relief under this plan. The debtor is creditors with a security interest in cash
bankruptcy, a consultation should take thus compelled to file its plan earlier, collateral. These streamlined provisions
place with both the debtor and debtor’s if the debtor does not want to have a make the small business Chapter 11 fil-
chosen accountant/business adviser. By potential creditor plan filed first. ing extremely attractive, substantially
that time, counsel will have completed a In addition, under §1121(e)(2), “all reducing the cost of the typical Chapter
separate analysis. Debtor and counsel plans shall be filed within 160 days 11. A debtor may not be burdened with
will now be ready to make the final after the date of the order for relief.” the costs of counsel for the creditors
determination. The plan must be filed within 160 days. committee or a separate hearing and
Chapter 11 filings for larger businesses notice requirements for approval of the
Small Business Election have no similar deadline. disclosure statement and confirmation.
The court can only reduce those Furthermore, it places substantial
The last meeting between the pro- periods for cause, provided that the pressure on counsel to move expedi-
fessionals must confront the decision to request is made within those periods of tiously, usually providing for a more
file bankruptcy. At that time, an analy- time. There is no provision to increase efficient handling of a case. Lastly, it
sis of assets, liabilities and potential for the 160-day period. The 100-day period brings a greater sense of certainty for an
success already will have taken place. A only can be increased if “caused by cir- expeditious resolution to the small busi-
12-month proposed budget will be in cumstances for which the debtor should ness debtor in extreme financial dis-
place and certain cost-cutting factors not be held accountable.” tress. It is always gratifying when a
will have been identified. One of the cost-saving measures is principle can again begin to take a rea-
The next step is to ascertain that, the fact that the appointment of a credi- sonable salary and pay bills once the
after all the information has been gath- tors committee is not an automatic petition has been filed.
ered, the debtor qualifies as a small requirement of the United States
business debtor. Trustee. Even if there is interest in a Current Case Law
A small business debtor is defined committee, the court can order that the
by 11 U.S.C. 101 (51C) as: committee not be appointed. There has not been a significant
a person engaged in commer- Lastly, and noteworthy, is the fact amount of litigation concerning the
cial or business activities (but that a separate hearing to approve the small business debtor provisions of the
does not include a person disclosure statement is not mandatory Bankruptcy Code. Small business
175 N.J.L.J. 1091 NEW JERSEY LAW JOURNAL, MARCH 15, 2004 3

debtors cannot afford to engage in pro- This court did note that “[U]nlike regard to the asserted intent to cram
tracted and expensive litigation. the time limits fixed for filing a plan in down the two largest creditors, both of
A few of these cases deal with the a single asset real estate case … whom had filed objections. In the event
issue of a debtor violating one of the §1121(e) contains no provision for that there was to be abuse by these par-
timeframes set forth above. The courts extending the 160-day period for plan ticular creditors in using their position
have been extremely consistent and filing.” While the court cited Western on the committee for their own individ-
strict with regard to the enforcement of Steel, it did not address the bankrupt- ual interests, the debtor could seek to
the deadlines. cy rule issue raised in that case regard- have them removed.
In In re Western Steel & Metal, Inc., ing other potential provisions for an While the court certainly recog-
200 B.R. 873 (Bankr. S.D. Ca. 1996), extension. nized the policies behind the act in
the court dismissed a small business The court squarely dealt with the keeping costs down, it seems the court
Chapter 11 on motion of a creditor. The issue of an attempted withdrawal of the was simply not impressed with the
creditor had filed the motion to dismiss small business election. Finding no proofs adduced at the hearing concern-
under §1112(b)(4) due to the failure to cases dealing with this issue, it cited ing the potential plan of reorganization
file a plan within 160 days and also for cases dealing with the withdrawal of and potential adverse effects/costs of
cause under §1112(b)(1), (2) and (3). elections by creditors concerning appointing a committee.
The debtor, seeking to withstand the claims or by debtors in Chapter 12. In Re Aspen Limousine Service,
motion, moved to withdraw the small While the court could not find any Inc., 187 BR 989 (Bankr. D. Col. 1995),
business election and opposed the direct statutory authority, the court did was the only case dealing with the
motion. assert that there is sufficient “analogous scheduling of the streamlined procedure
The court dismissed the case, find- case law” to support the ability to with- — dispensing with the need for a sepa-
ing that the plain language of the statute draw an election. rate disclosure statement hearing. It also
required the result. It is interesting to A withdrawal would only be dealt with issues concerning a creditor’s
note that the court observed that the allowed upon an application being filed competing plan.
debtor had not sought to increase the within 160 days (the time fixed by The debtor had timely filed its plan
period. In one segment of the opinion, §1121(e)(2)), good cause shown and in and disclosure statement, providing for
the court appears to agree that there is the absence of any prejudice to any a 100 percent dividend to creditors. It
no statutory authority for an extension party. As the withdrawal in this case was conditionally approved and had
and in another part references the was beyond the 160-day period, the been sent out to all creditors.
debtor’s failure to seek an extension court could not allow the withdrawal as Thereafter, a creditor filed a liqui-
pursuant to Fed. R. Bankr. P. 9006(b), a defense to the denial of confirmation. dating plan providing for 100 percent
which generally deals with expansion Nor was the court swayed by any argu- payment to creditors. The court had to
of time. ments of excusable neglect under Fed. deal with the “inexplicable and seem-
Furthermore, the court noted that R. Bankr. P. 9024 or “harmless error” ingly absurd results” which may occur
while the debtor had sought to with- under Fed. R. Bankr. P. 9005. “when all of the time lines and rights
draw the small business election, this Four other cases dealt with issues afforded to small business debtors and
issue had not been raised for the court to involving small business bankruptcies. creditors, or other parties interest, by
consider. The court further held that the In re Haskell-Dawes, Inc., 188 B.R. 515 Sections 1121 and 1125 are applied.”
failure to file a plan was cause under (Bankr. E.D. Pa. 1995), dealt with a The debtor would not have the
§1112(b). request by the debtor to dispense with opportunity to proceed with its plan in a
Similarly, in In re Win Trucking, the appointment of a creditor’s commit- proper fashion. In order to reconcile the
Inc., 236 B.R. 774 (Bankr. D. Ut. 1999), tee. The debtor had cited the increased provisions, the court looked to the gen-
confirmation of a plan was denied, on costs, delay and the policies of the small eral powers of the court pursuant to
objection by the United States Trustee business election in support of its §105(d)(2). While the creditor’s com-
when the plan had not been filed within motion. peting plan and disclosure statement
the 160-day period provided by statute. Three creditors had objected. could be conditionally approved and
The deadline could not be avoided by These were also the only three debts treated on an accelerated basis, the
withdrawing the small business election disputed by the debtor. After review- court set forth a sequential process,
without notice, motion or order. ing the statute and certain legislative which would provide primacy and a
The debtor had filed the plan over history, the court did not find that head start to the debtor’s plan.
300 days after the order of relief. After debtor had asserted cause to have the Most recently, in In re Coleman
that time, it sought to file a withdrawal court preclude the formation of a Enterprises, Inc., 275 B.R. 533 (B.A.P.
of its small business election. committee. 8th Cir. 2002), the Bankruptcy
Numerous reasons for the delay were The court did reference the fact that Appellate Panel affirmed a Bankruptcy
asserted, including a change in venue, no financial data of any kind was pre- Court decision holding an election to
new counsel involvement and lack of sented with regard to reorganization qualify as a small business was void and
knowledge, along with personal prob- efforts or the cost effect on creditors. of no force and effect when the statuto-
lems of an attorney. No evidence had been presented with ry limits on debts were exceeded.
4 NEW JERSEY LAW JOURNAL, MARCH 15, 2004 175 N.J.L.J. 1091

The case would, however, continue debtor filed a motion to dismiss, which 1996), provides that a flat-fee arrange-
as a Chapter 11. It is interesting to note was denied. ment in a small business Chapter 11
that the debtor had not timely filed its Lastly, In re Pineloch Enterprises, case, established at the beginning of the
plan, and a creditor had filed a plan. The Inc., 192 B.R. 675 (Bankr. E.D.N.C. case, could be approved. ■