LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 18, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 3695 words

HEADLINE: PREPARED TESTIMONY OF
H. ELIZABETH BAIRD
ASSISTANT GENERAL COUNSEL,
BANK OF AMERICA CORPORATION
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - H.R. 833, "THE BANKRUPTCY REFORM ACT OF 1999"

BODY:

Chairman Gekas and members of the Subcommittee, I am pleased to have this opportunity to present the views of Bank of America regarding H.R. 833, "The Bankruptcy Reform Act of 1999". I am H. Elizabeth Baird, Assistant General Counsel to Bank of America, and in that capacity I am involved on a daily basis in commercial bankruptcy cases. I am also a member of the American Bankers Association's Advisory Committee on Commercial Bankruptcy (ACCB), a group of both inside and outside counsel to commercial banks that provides continuing input to ABA regarding the need for commercial bankruptcy law changes and the potential impact of proposed commercial bankruptcy legislation.
Bank of America commends Chairman Gekas for introducing H.R. 833 which addresses the need for a variety of changes to commercial provisions of the Bankruptcy Code. This proposal follows up on and incorporates some of the best work of the National Bankruptcy Review Commission (NBRC) and of legislative debate in the last Congressional Session. As my testimony details, H.R. 833 includes many provisions that we wholeheartedly support. Other provisions require technical improvements and clarifications. We also must oppose a number of the Bill's Sections on the grounds that they undermine the position and rights of commercial lenders and reduce the probability that businesses will successfully reorganize in Chapter 11. We look forward to working with Chairman Gekas and members of the Subcommittee to improve H.R. 833 so that it can receive our unqualified endorsement and support.
Executive Summary.
Bank of America can support advancement of the majority of this Bill's commercial provisions, subject to improvements and clarifications being made as described in our testimony.
In particular, we strongly support Title IV, which would streamline the treatment of small business and single asset real estate cases in Chapter 11 and improve the prospects of successful reorganization for viable entities. There are several changes recommended in our testimony to further improve on these provisions. We also strongly support the striking of the debt cap in single asset realty cases.
We support the advancement of Title X financial contract reforms and commend the Subcommittee for continuing to ensure that the Bankruptcy Code reflect current economic changes and practices in the financial markets.
We support the changes made in Section 213 of the bill which are designed to eliminate one of the most abusive practices in Chapter 11, continued extensions of the exclusive period in which the debtor alone has the right to file a plan of reorganization.
We support the additions made to the Bankruptcy Code in Title IX which recognize the increasing importance of cross border insolvencies in our global economy.
We also support and are pleased to see the changes made in Sections 211 and 212 which are designed to curb abusive litigation practices in commercial and consumer cases.
We are strongly opposed to Section 205, which is clearly special interest legislation that would make retail reorganizations significantly more difficult, if not impossible in many cases while unjustifiably enhancing the position of commercial lessors at the expense of all other unsecured creditors.
We oppose Section 206 as proposed because it inserts the court into administrative matters, and could lead to detrimental conflict within creditors and equity holders committees. We would not oppose a limited new opportunity for court review of committee composition at the inception of a case.
Finally, we are also opposed to Section 208 which extends the reclamation notification and demand period an additional 25 days from 20 to 45. This extended period is unwarranted and will cause less assets to be available for unsecured creditors.
Title II.
Section 205 would amend Section 364(d)(4) of the Code to provide that when a debtor is a lessee under a commercial lease, the lease will be deemed rejected and the debtor forced to vacate the premises unless the lease is assumed within 180 days after the beginning of the case, or by the date of the order confirming a plan of reorganization, whichever is earlier. This decision-making period could only be extended upon filing of a motion by the commercial lessor.
We are strongly opposed to this provision. It would make successful reorganization more difficult or impossible in the great majority of retail bankruptcies. It would provide shopping center developers and other commercial lessors with unprecedented and undeserved leverage to force premature assumptions. Its adoption would severely prejudice the rights and prospects of other parties in interest to such cases; such as the debtor-in-possession and unsecured lenders, including financial institutions and supplying trade creditors, as well as their employees.
Shopping center developers contend that they suffer unjustifiable uncertainty in Chapter 11 cases regarding whether a reorganizing retailer will continue to occupy leased space. Whatever the merits of their complaints, Section 205 goes much too far in providing redress. Landlords are entitled under current law to receive post-petition rents from reorganizing tenants and to have them be in compliance with all material lease provisions; they can petition the court for relief if those conditions are not being met.
The nation's retail sector remains in economic doldrums, underscoring the need for Congressional caution. When a retailer reorganizes, its success is important not only to its own employees, but to the employees of the many companies which supply it with goods. Most retail Chapter 11 cases are filed shortly after a disappointing Christmas shopping season. A major national retailer requires many months to analyze the failings of its prior strategy, implement a new management and marketing plan, and evaluate it after going through future peak sales periods. If bankruptcy law prematurely compels a lessee to assume or reject a lease, it may make unwise and detrimental business decisions that ultimately doom its reorganization effort to failure. If the retailer has been fortunate enough to negotiate a lease which provides it with a below market rate of rent at the time it enters into reorganization effort, the landlord is likely to rebuff any requests for extensions of the decision-making period in the hope that it can force an abandonment and bring in a new tenant at a higher rent. Adoption of this Section would also unjustifiably and unfairly boost the position of landlords if the reorganization fails.

The primary reason that a creditors committee is generally reluctant to permit a retail debtor to assume its lease is that an assumption not only requires the curing of defaults and compensation of the lessor for actual damages, but also elevates all future damages to an administrative expense priority. That is, should the reorganization ultimately fail, the landlord holding an assumed lease will have a large administrative expense claim that may well prevent recovery by any other unsecured creditor. Congress should not permit commercial lessors to use uncertainty as an excuse to boost their own status above all other similarly situated creditors. This would be a deathblow to reorganization prospects, as trade creditors would likely ease to ship to a retailer if their claims would, as a practical matter, be extinguished if it eventually liquidated.
We do agree with commercial landlords that assumption should be required no later than the date of plan confirmation. But extensions of the initial decision-making period should not be subject to the landlord's sole discretion but should be available at the request of any party in interest. While we are concerned that any fixed time limit on extensions will be damaging to the prospects of successful reorganization, it would at least have to be sufficient to allow a retail debtor to adequately test its new strategy in the marketplace; 180 days absolutely fails to meet that standard. Finally, if some variation of this time period is adopted, we would insist on a corresponding change to the Code to address the situation in the case where a landlord does force an assumption, if a liquidation subsequently occurs the landlord should receive administrative priority treatment only for rents and expenses due for the period in which the debtor actually occupied its leased premises subsequent to assuming. But it should be treated as a general unsecured creditor for any rents and expenses owed under any unexpired period of the remaining lease term subsequent to abandonment.
Section 206 would permit the court, on its own motion or that of a party in interest, to order a change in the membership of a creditors or equity security holders committee. We oppose this proposal as presently constituted. As with some other provisions of H.R. 833, it erodes the distinction between the judicial functions of the court and the administrative functions of the U.S. Trustee, and in so doing undermines the fundamental structure of the 1978 Code. In addition, its open-ended nature raises the possibility that it will be utilized by "vulture investors" who may purchase distressed debt and then seek a place on the creditors committee. Such investors have fundamentally different interests than original lenders, and their presence on the committee may lead to conflict and litigation that generate unnecessary expense and are detrimental to the prospects of a successful reorganization.
We would not object to a limited new grant of authority to the court to review the initial composition of committees, if a party in interest makes such request within 30 days after such appointment.
Section 208-The proposed amendment to Section 546(c) of the Code is in our experience unnecessary, as this issue was addressed in the Bankruptcy Reform Act of 1994. Section 546(c ) of the Code recognizes the state law right under the Uniform Commercial Code of an unsecured trade creditor to enforce its limited rights to reclaim goods shipped to the debtor within 10 days of a bankruptcy filing. The 1994 amendments did not enlarge the reclamation rights, but simply expanded procedurally the number of days after filing that a creditor had to make a reclamation demand against the debtor. The number of days was extended from 10 days after receipt of goods to 20 days after the bankruptcy filing if the filing occurred during the aforementioned 10 day period. The current amendment seeks to extend this time further to 45 days. There has been no justification for the extension of this time period and we submit that the current statutory maximum of 30 days, and minimum of 20 days is sufficient.
Title IV- Small Business Bankruptcy.
Title IV is based upon the small business bankruptcy recommendations of the National Bankruptcy Review Commission (the "NBRC"). The NBRC found that less than ten percent of businesses filing in Chapter 11 ever successfully confirm a reorganization plan. It also found that the great majority of cases lingered in Chapter 11 for several years. Based upon those findings, it recommended that Chapter 11 be altered so that those small businesses that had reasonable prospects of a successful reorganization could do so in an expedited and less administratively burdensome manner. Its recommended changes would also more quickly ferret out those small businesses with no realistic prospects for success in reorganization, and in so doing remove a burden on the bankruptcy courts and provide fairer treatment to other parties in interest.
We commend Congressman Gekas for following the general thrust of the NBRC's recommendations in this area. We support Section 402's revised definitions for business debtors with liquidated debts of $4 million or less as well as all single asset real estate (SARE) cases. The issue of an appropriate measure of "small business" received extensive NBRC discussion, and the $4 million dividing line is a reasonable demarcation. It is also appropriate to encompass SARE cases within this framework. Since by definition there is only a single asset involved and no other significant business being engaged in by the SARE debtor, the prospects for successful reorganization can be discerned quickly. We note that there seems to be an unintended inclusion in Section 402 of an amendment to Section 524 regarding violation of reaffirmation agreements. This is a consumer provision and it should be moved to Title I if retained at all. For the record, we also oppose this provision and direct you to the testimony of the American Bankers Association in this regard.
The flexible rules for disclosure statements in Section 401 will significantly simplify procedures in small business bankruptcies. Section 403 will mandate standard form disclosure statements and plans that balance the need for the court, creditors, and other parties in interest to receive reasonably complete information against the debtor's need for simplicity. This Section has the potential for reducing the time the debtor spends in bankruptcy and the total expense of the case. This same balance is struck in Section 405 in regard to uniform reporting rules and forms.
Section 404 requires uniform national reporting requirements regarding profit and loss, financial projections, current financial data compared with past projections, and statutory, rules, and tax compliance. These desirable reports will generally require debtors to obtain some professional assistance, but it will help them focus on key measurements and factors that are crucial to successful reorganization. Consideration should be given to harmonizing these requirements with the U.S. Trustee's Operating Guidelines and Reporting Requirements to avoid undesirable inconsistency and unnecessary duplication. We also question this Section's requirement that such reports be filed with the court rather than the trustee, which appears to erode the Code's beneficial structure of assigning administrative and business aspects of cases to the U.S. Trustee so that the court can focus on application of the law.
Section 406 codifies a debtor's duties in a small business case. Some of these, such as attending a Section 341 meeting, are the existing practice of the U.S. Trustee. The additional financial disclosures are typical of the items that will be requested by a creditors committee in a larger Chapter 11. There has been some criticism that asking the debtor to produce these documents concurrently with the filing may be unrealistic, and we would not object to considering whether provision for a short extension is appropriate. However, we note that this Section allows a debtor to file an affidavit in lieu of this information if the financial records do not exist. The very reasons that most small business cases languish in Chapter 11 without eventual confirmation is that there is often not a creditors committee forcing the debtor to focus on fundamental financial issues.
Sections 407, 408 and 409 collectively establish expedited deadlines for plan filing and confirmation. These deadlines are necessary to achieve the title's goal of quickly separating promising from hopeless cases. We would suggest several improvements to further that goal. First, we believe that extensions should only be granted a single time, and only in circumstances for which the debtor should not be held accountable. Second, third parties should be given a reasonable period in which to prepare a competing plan. The Section proposes a 90 day deadline for both a debtor's plan and a competing plan of reorganization, which would encourage the debtor to wait until the last moment to file, and discourage third parties from proposing a competing reorganization plan. We would propose a 90 day exclusivity period and a 120 period by which all plans must be filed. This would give a competing plan proponent 30 days within which to file a plan after the exclusive period elapses. Third, the provision should also permit a shortening of the filing period on request of a party in interest upon a showing that such acceleration is in the best interest of the estate. Finally, extensions of the plan confirmation deadline should have an absolute limit of one year from the date of the order for relief.
Section 410 establishes unprecedented statutory duties for the U.S. Trustee.

We believe this provision should be substantially narrowed to prevent the generation of excessive expenses and to prevent an undesirable assumption of judicial duties by this administrative officer.
We draw the Subcommittee's attention again to what appears to be an error in section placement at the beginning of Section 412. This initial paragraph is an amendment to Section 362 of the Bankruptcy Code as it is amended by Section 122 (note that the reference to Section 124 in the statute is also incorrect) which then refers back to Section 117 of the Bill. This Section should be moved to Section 117 of the Bill. (And also note that as currently drafted, there are two paragraph (2)s to that subsection).
Section 412 as it applies to small business cases would prevent abuse of the Code's automatic stay provisions by serial filers who have no intent or ability to confirm a plan. However, there is one substantive change that must be made to this Section. As presently drawn, it applies to all Chapter 11 cases. To correct this, the words "by or against a small business debtor" should be inserted after the word "title.".
Section 415 requires the debtor to pay a contract rate of interest on the value of the creditors' stake in collateral in a SARE case; and provides that such payments may begin as early as 30 days from the date that the court determines that the debtor is a SARE case. We support the thrust of this provision as furthering the prevention of abuse in such cases. However, it requires substantive and technical modification. It appears to grant the debtor unbridled discretion to use cash collateral (rents) even if other funds are available; the Code presently permits the use of cash collateral only with the consent of lenders. The "sole discretion" proviso should be deleted and replaced by language which makes clear that rents and other cash collateral may only be used in the absence of any other available funds. In addition, the Section should be clarified to remove any doubt that the contract rate of interest to be applied is that applicable in the absence of a default, so that a hyper-literal judge cannot conclude that there is no "then applicable" contract rate.
Title VIII.
Section 812 amends current Section 506(c) of the Bankruptcy Code to explicitly provide for recovery of ad valorem taxes from property securing a claim. This provision appears to be unnecessary and creates an unintended problem in Section 506(b) of the current Code. It is unnecessary because in most if not all instances, a property that a secured creditor takes over will remain subject to the ad valorem tax and that tax will be paid upon the eventual sale of the property, or if the property remains in the possession of the debtor, the taxes will be paid as a part of the plan of reorganization. Adding the taxes to Section 506(c) expenses only reduces the likelihood that a secured creditor will be able to recover its interest and fees and expenses under Section 506(b) as an oversecured creditor. We strongly urge the Subcommittee to delete this Section as unnecessary and punitive to the interests of secured claimants.
Title XI.
Section 1111, dealing with priorities appears to incorporate a typographical error. It refers to the Section as amended by "Section 323" of the Bill. There is no Section 323. It should instead reference Section 142 of the Bill. The same comment applies to Section 1112; there is no Section 320 of the Bill.
Additional Suggestions.
In addition to our commentary on select provisions of H.R. 833 we offer an additional recommendation for the Subcommittee's consideration:.
In Section 603 of S.1914 introduced in the last Congress, there was an attempt to deal with the problem of bankruptcy appeals. This Section responded to the NBRC's determination that the current absence of an expeditious bankruptcy appeals process creating a broad body of binding precedents is a serious deficiency in our system. We would encourage the Subcommittee to take up this issue again, but perhaps in a different manner. We are working with other constituencies to develop language that would address this issue.
We are fully supportive of the proposed clarifying amendment to Section 546(g) of the Code that the American Bankers Association has suggested. This is a technical amendment to changes made in 1994 which allow a debtor to return goods to a trade creditor shipped prebankruptcy within 120 days after the filing of a petition in full satisfaction of the creditor's claims and with the consent of such creditor. The amendment would clarify that the return of the goods to the creditor is subject to superior rights of secured lenders in the goods. For example, if a secured lender loaned the debtor money to purchase the goods, and took a security interest in the goods, the debtor would not be able to return the goods to the trade creditor without paying the secured creditor for the value of its security interest in the goods.
We would like to take this opportunity to make the Subcommittee aware of a pending bankruptcy case before the United States Supreme Court, which may be decided during your consideration of commercial bankruptcy reform and which decision may prompt requests for changes in the Code. In 203 North LaSalle Street Partnership, the Supreme Court will decide whether the new value exception to the absolute priority rule survived the enactment of the 1978 Code.
Conclusion.
Mr. Chairman, Bank of America appreciates having this opportunity to present our views regarding commercial bankruptcy reform. We look forward to working with the Subcommittee in the days ahead to perfect H.R. 833. I would be happy to answer any questions.
END

LOAD-DATE: March 23, 1999