Presentation of Charles M. Tatelbaum on behalf of the National Association of Credit Management to the Congressional and Administrative Law Subcommittee of the Judiciary Committee of the House of Representatives on March 18, 1999.
I am Charles Tatelbaum, a practicing attorney with the Connecticut and Florida 90-year old law firm of Cummings & Lockwood. I am pleased to appear before you in my capacity as general counsel to the National Association of Credit Management. The NACM is celebrating its one hundred and third year as the largest non profit trade association representing the interests of more than 30,000 commercial credit granting businesses. The NACM's membership is spread throughout the United States and is representative of businesses spanning every size and nature.
The NACM is very pleased to support HR 833 because of the commercial laws it improves, and my comments will only focus on these commercial issues raised in the proposed legislation.
Sections 401 through 415 contain the provisions dealing with small business reorganizations. NACM supports the efforts to create substance and procedure to expedite the administration and conclusion of reorganization cases for small businesses. Considering the hundreds of billions of dollars of creditor claims that are tied up in business bankruptcies, the expeditious conclusion of a reorganization proceeding, whether by confirmation or dismissal, promotes the economic interests of all concerned. Studies and statistics have continued to dramatically show that where small businesses which could successfully reorganize, fully or partially satisfy claims of creditors, continue in the economic stream, create employment and pay taxes, have been unable to do so because of the pressures of the time and expense because of their languishing in Chapter 11. NACM has been a constant supporter of efforts to streamline the process for the prompt resolution of small business reorganizations which will benefit the entire economy.
It has been statistically demonstrated that more than 80 percent of business bankruptcy cases that are filed involve small businesses. If this legislation is enacted, it could have the effect of helping to streamline the bankruptcy process by eliminating much of the time consuming issues that currently involve such cases. Moreover, given the very low rate of successful reorganizations of businesses who file Chapter 11, the improvements contained in the legislation to the reorganization process for small businesses should dramatically affect the reorganizations on a positive basis.
NACM is equally supportive of the provisions contained in Sections 211 and 212 of the Bill to correct inequities which currently exist with respect to the avoidance of preferential transfers. While NACM supports the concept of the equality of treatment of creditors, the current statute creates an environment for the feeding frenzy of trustees and attorneys and others not part of the creditor body at the expense of vigilant trade creditors, with no ultimate benefit being derived by creditors of the bankruptcy estate.
The changes rectify problems in two important areas. The clarification of what constitutes an ordinary course of business transfer rectifies doubt and uncertainty which has permeated the case law and created difficulties for the ordinary transaction of business with distressed debtors. The mere fact that a business may be in financial distress should not create an impediment to ordinary course dealings. Indeed, if this were to be the case, it would only precipitate additional bankruptcy filings. The change created by the legislation clarifies that creditors willing to continue to extend credit to financially distressed businesses will not be penalized.
Likewise, the changes with respect to when and where certain preference actions may be filed are equally beneficial. Statistics have shown that bringing preference actions for $5,000 or under does nothing to substantially enhance distribution to creditors, but does provide for substantial attorneys fees. Additionally, bringing preference actions in distant courts only forces unreasonable capitulation by creditors where they may have legitimate defenses, but cannot put them forward due to the cost involved. These changes will, as well, protect creditors who act in good faith when dealing with financially distressed businesses.
These changes, which are consistent with the recommendations of the National Bankruptcy Review Commission, will help to create an environment of an "even playing field" with respect to bankruptcy administration. Additionally, these provisions, if enacted, will eliminate unnecessary and unproductive litigation which can affect the already overburdened bankruptcy court system which, as I have noted, produces no real benefit to the creditors of the bankruptcy estate.
Currently, instead of having the trade creditor class be the beneficiary of preferential transfer recoveries, the funds that are recovered are paid to the professionals who are employed to recover them, secured creditors, and those unaffiliated with the general creditor body. This has resulted in a large "breakdown" of the system requiring vigilant trade creditors to expend considerable sums for representation only to learn that the ultimate beneficiaries of the recoveries do not correlate to those intended by the original legislation.
NACM wholeheartedly supports the language in Section 206 which permits the court to change the membership of the creditors committee if the change is necessary to ensure adequate representation of creditors and equity security holders. Presently, there is no judicial redress in the event that for whatever reason a creditors committee that is appointed does not adequately represent the creditors as a whole. This provision correctly provides for appropriate judicial oversight of a very important component of the bankruptcy reorganization process.
NACM does wish to call to the Committee's attention its view that the efforts to change the reclamation provisions contained in Section 208 of the bill may not achieve the purposes intended, and, to the contrary, may be detrimental to effective reorganization. Currently, when dealing with the reclamation of goods, the current law does not protect the rights of manufacturers and distributors in most cases. Some of the legal and practical problems that have been created are the following:
1. Vendors do not know of the filing of a bankruptcy proceeding in sufficient time in order to give a reclamation notice.
2. Current law permits reclamation only when the goods are still in the possession of the Debtor when notice is received. With multiple operations of a Debtor, this becomes impossible to prove or verify.
3. The rights of secured creditors pre-empt any reclamation rights.
4. There is no sanction on the Debtor for failing to comply with the reclamation notice.
5. Vendors are required to immediately hire counsel in order to protect reclamation rights, only to be delayed by the lengthy court proceedings.
6. The procedure gives the Debtor opportunities to force concessions from vendors with respect to post-petition credit in order to gain concessions with respect to reclamation.
7. Traditionally, manufacturers, distributors and other vendors receive little benefit from the current reclamation law.
Increasing the reclamation period from 20 to 45 days will not solve the problem. While this initially appears to protect vendors, it may have the opposite effect. If the reclamation date reaches too far back, Chapter 11 debtors will not be able to confirm a Chapter 11 Plan because of the burden of administrative claims that may be required to be paid on confirmation as a result of the reclamation demands. Placing unreasonable burdens on debtors in order to effect a confirmation does not protect the interests of creditors in the long run.
NACM suggests that rather than changing Section 546(c) of the Bankruptcy Code, the Section should be deleted. NACM suggests that the following new subparagraph c be added to Section 503 of the Bankruptcy Code:
A person that is a seller of goods or a provider of services that has sold goods or provided services to the debtor in the ordinary course of such person's business shall have the right to an administrative expense for all goods or services received by the debtor within 20 days of the commencement of the case.
NACM believes that the following will be the benefits of such a change:
1. All vendors of goods will be protected.
2. There will be no "race" to the courthouse to file notices.
3. Vendors will not be adversely prejudiced if they do not know of the bankruptcy filing during the first days following the filing.
4. All vendors of goods will be entitled to an administrative priority claim for the goods actually received by the Debtor within 20 days of the filing of the bankruptcy case. Thus, Debtors contemplating the filing of a bankruptcy proceeding will have a deterrent to "loading up", as they will know that in order to confirm any Chapter 11 Plan, they will have to pay in full for all goods received within the 20-day period at the time of confirmation, not just those that are in inventory when notice is received.
5. This does not in any way alter the rights of secured creditors, so there should be no opposition by lenders. It does, however, impose a payment obligation on the Debtor which may have to be funded by the lenders in order for a Chapter 11 Plan to be confirmed.
6. Solvency or insolvency of the Debtor is no longer an issue to be considered or litigated.
7. The issue of whether the goods are on hand and are identifiable is no longer an issue to be considered or litigated.
NACM has previously expressed its concern with the language contained in Section 205 of the bill. While NACM clearly supports the most expeditious administration of bankruptcy cases as possible, artificial deadlines should not be created merely to enhance the rights of one constituency. Artificially limiting a debtor's right to assume or reject the lease at 180 days may not always be in the best interest of all creditors and other parties in interest. There is no problem in establishing a deadline which should be the "normal" deadline, but there must be flexibility built into the law to permit the court to modify the deadline if facts and circumstances so warrant. The current Section 205 creates a burden upon large retailers and other similar businesses which may lead to decisions which have a long term effect on the reorganization process being hastily made. NACM urges that the proposed legislation be modified to provide that the court may extend the period to be determined under the amendment within the discretion of the court.
When dealing with the provisions of Section 202 of the Bill, as a practical matter, NACM recognizes that in most prepackaged reorganization proceedings, there is no need for a meeting of creditors, and, upon appropriate motion to the court, after appropriate notice, the court should be able to order that no meeting of creditors need be held. NACM's recognition is based on the continued insertion in the bill of the phrase "after notice and hearing" so that the Court is not able to eliminate a meeting of creditors without first giving those creditors affected an opportunity to respond.
NACM is extremely supportive of the legislation to create new and additional bankruptcy judges. Given the very substantial increase in bankruptcy filings over the last several years, this has created a hardship on the bankruptcy courts. Even though the greatest proliferation of bankruptcy cases is in the consumer area, a clogged bankruptcy court does not effectively permit business debtors and creditors to have their issues resolved on a timely basis.
NACM totally supports the sense of the Congress reflected in Section 607 of the Bill which urges a modification of the Bankruptcy Rules to place a greater responsibility on principals of the debtor and attorneys for the debtor with respect to information provided to the court and creditors on which all parties and the court rely. While the vast majority of papers filed in bankruptcy cases are based upon facts and law that are verified, the courts have noted instances where important documents, especially schedules and statements of affairs, are haphazardly and irresponsibly filed with the court. The clarification to Bankruptcy Rule 9011, as suggested by the sense of Congress, will clarify and strengthen the rights of creditors.
With respect to Section 1012 of the Bill dealing with asset based securitization, NACM has some deep concerns. The effect of this provision would be to remove from the jurisdiction of the bankruptcy court assets that in some instances may be part of the estate for the sole benefit of the secured creditor. This shift will have an adverse impact on other classes of creditors. This will have a chilling effect on Americas trade credit grantors in the day to day extension of credit, by removing any potential for recovery in the event of a default. Additionally, the Committee might want to consider the impact that this provision will have on the ability of the I.R.S. to collect taxes in a default situation.
Mr. Chairman, I ask that the written submission of the National Association of Credit Management which contains additional comments with respect to the proposed legislation be made a part of the record of these proceedings. I thank the Chair, the Committee and its staff for not only the opportunity to participate in these hearings, but also the cooperative responsiveness in working towards a prompt passage of this most important legislation.
The National Association of Credit Management appreciates this opportunity to provide assistance to the Subcommittee. Additional information can be obtained from Mr. Jim Wise, the Pace Companies, 703/516-8600, Mr. Paul J. Mignini, Jr., President, National Association of Credit Management, 410/740-5560, or Charles M. Tatelbaum, NACM counsel 941/649-3181.