Perspective on Banking Law

- September 2005 -

Bankruptcy Code Revisions To Streamline And Expedite Small Business Cases

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) amended various sections of the Bankruptcy Code, and added several new sections which will together significantly affect cases filed by small business debtors. The purpose of these new provisions appears to be to streamline and expedite the progress of cases filed by small business debtors, and to require the U.S. Trustee to actively monitor small business cases in circumstances where, because of the size of the case, it may not be cost effective for the individual creditors to do so. Once the changes mandated by the Act are fully implemented, creditors should save both time and money, as cases filed by small business debtors should be resolved more quickly and with less creditor intervention.

Under the Bankruptcy Code as amended by the Act, a small business debtor is defined as a person, and any affiliate of a person who is also a debtor, who is engaged in commercial or business activity, with aggregate, noncontingent or liquidated debt in an amount of not more than $2 million at the time the petition is filed or, if subject to an involuntary petition, the date of the entry of the order for relief. A person whose “primary activity is the business of owning and operating real property or activities incidental thereto,” however, is not a small business debtor. A person fitting within the above-referenced definition is a small business debtor only if the case is one for which the U.S. Trustee has not appointed an Official Committee of Unsecured Creditors (“Committee”) or where the Court determines that a Committee appointed by the U.S. Trustee is not providing effective oversight of the debtor. A case filed under Chapter 11 where the debtor is a small business debtor is a small business case.

Under the Code as amended, a small business debtor will be subject to more exacting reporting requirements. Under new Section 308, a small business debtor is required to file with the court periodic reports containing the following information:

• The debtor’s profitability;

• Reasonable approximations of the debtor’s projected cash receipts and cash disbursements;

• Comparisons of actual cash receipts and disbursements with projections from prior reports;

• Status of the debtor’s compliance in all materials respects with post-petition requirements, including whether federal tax returns and other required government filings have been made, and whether post-petition taxes and administrative expenses have been paid as and when due;

• If not in compliance with all post-petition requirements, information setting forth the particular failure, and regarding how, at what cost, and when the debtor intends to remedy such failure; and

• Such other matters as are in the best interest of the debtor, creditors and the public interest in fair and efficient procedures under Chapter 11.

In addition to the above-referenced enhanced periodic reporting requirements, a small business debtor will also be required to perform additional duties. Pursuant to new Section 1116, the debtor shall:

• Append to the voluntary petition its most recent balance sheet, statement of operations, cash-flow statements and federal income tax return, or a statement made under penalty of perjury that such financial statements have not been prepared and/or that no federal tax return has been filed;

• Attend, by its senior management personnel, meetings scheduled by the Court or the United States Trustee, to include an initial debtor interview,  scheduling conferences and meetings of creditors convened under section 341, unless the court waives such requirement after notice and hearing upon a finding of extraordinary and compelling circumstances;

• File in a timely manner all schedules and statements of financial affairs unless the court grants an extension after notice and a hearing. According to the Act, the court shall not extend the filing deadline to a date later than 30 days after the entry of the order for relief, absent the court’s finding of extraordinary and compelling circumstances;

• File all post-petition financial reports as required;

• Maintain insurance customary and appropriate to the debtor’s industry;

• File in a timely manner all tax returns and other governmental filings;

• Pay in a timely manner all taxes entitled to administrative expense priority, except if such taxes are contested and diligently prosecuted in appropriate proceedings; and

• Allow the U.S. Trustee or his designated representative to inspect the debtor’s business premises, books and records at reasonable times, after reasonable prior notice.

In addition to requiring small business debtors to perform additional duties, the Act modifies the timeframe which the debtor’s plan must be filed and confirmed.

As amended, Section 1121 extends the exclusive period within which only the small business debtor may file a plan to 180 days, or longer if extended by the court after notice and a hearing, provided the debtor, by a preponderance of the evidence, is able to show that it is more likely than not it will be able to confirm a plan within a reasonable time. The Order extending the exclusive period must be signed before the initial 180 day period has expired, and must impose a new deadline for the debtor’s filing of its plan, and if necessary, its disclosure statement.

Regardless of any order extending the exclusivity period, the plan must be filed within 300 days after the date on which the order for relief was entered, unless extended by the court by application of the same standards applicable for the consideration of requests for an extension of the exclusivity period.

A small business debtor’s plan need not be accompanied by a separate disclosure statement, if the plan provides adequate information. The court must confirm a plan filed in a small business case that meets the requirements for approval within 45 days after its filing, unless the time for confirmation is extended by the court upon the debtor’s demonstration, by a preponderance of the evidence, that the court will likely confirm the plan within a reasonable time.

Another important change may reduce serial filings by small business debtors. As amended, Section 362(n) provides that the filing of a petition will not operate as an automatic stay in cases where the debtor:

• Is a debtor in a small business case pending at the time the new petition is filed;

• Was a debtor in a previous small business case that was dismissed or confirmed within two years of the order for relief in the new case; or

•  Acquired substantially all of the assets of a small business debtor described in the two bullet points set forth immediately above, unless the debtor establishes by a preponderance of the evidence that it acquired such assets in good faith and not for the purpose of evading these limitations.

However, the limitations on the applicability of the automatic stay will not apply to an involuntary case where there is no collusion between the debtor and filing creditors, or to any case where the debtor proves by a preponderance of the evidence that the filing resulted from circumstances beyond the debtor’s control not foreseeable at the time the case was filed, and, that it is more likely than not that the court will confirm a feasible plan, not a liquidating plan, within a reasonable time.

Finally, Section 586 of Title 28 has been amended to require the U.S. Trustee’s office to actively manage small business cases. In each small business case, the U.S. Trustee must:

• Conduct an initial debtor interview as soon as possible after entry of the order for relief, before the first meeting of creditors, during which the U.S. Trustee shall:

  • Begin to investigate the debtor’s viability;

  • Inquire about the debtor’s business plan;

  • Explain the debtor’s obligation to file monthly operating reports and other required reports;

  • Attempt to develop an agreed scheduling order; and

  • Inform the debtor of other obligations.

• If appropriate and advisable, visit the appropriate business premises of the debtor, ascertain the state of the debtor’s books and records, and verify that the debtor has filed its

• Review and monitor diligently the debtor’s activities to identify as promptly as possible whether the debtor will be able to confirm a plan.

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Tucker Arensberg Seminar Recap

Bank Secrecy Act & Anti-Money Laundering

One of the most important issues facing financial institutions today is compliance with the Bank Secrecy Act.  In June, 2005, Tucker Arensberg sponsored a seminar titled “Bank Secrecy Act and Anti-Money Laundering” to address these issues and provide important information regarding compliance with the Bank Secrecy Act (BSA).  Attorneys from Tucker Arensberg, along with special guest speakers, provided insights on money laundering risks and discussed key strategies and compliance tools. 

William Campbell Ries, of Tucker Arensberg, began the seminar with an overview of bank secrecy and money laundering issues. Bill emphasized that compliance with the requirements imposed upon banks by the BSA is important because sanctions are mandatory.  Most significantly, the Act requires the development of a BSA compliance program that includes requirements for internal controls, a compliance officer, employee training, testing, and recordkeeping. 

Terry Haines, former Chief Counsel and Staff Director for the U.S. House of Representatives’ Committee on Financial Services, talked about the cultural and political climate that provided the context for the development of the Patriot Act (i.e. the 9/11 terror attacks, anthrax attacks on the Capital, and the Enron scandal).  He pointed out that the goals of the Act were to make U.S. citizens safer, make the country’s financial system more secure and attack the financing of terrorist groups.

Tucker Arensberg attorneys discussed anti-money laundering program requirements, currency transactions reporting, and suspicious activity reporting.  They discussed the key elements of the required anti-money laundering programs and the “know your customer” rules, including customer identification information and

identity verification procedures. 

Lee Jeffrey Ross, Senior Advisor for the Office of Terrorist Financing and Financial Crimes of the U.S. Treasury Department, provided an overview of how terrorist financing works.  He discussed how terrorist groups raise funds, their use of charities, and why attacking the flow of money is so important. 

Doreen Eberley, the FDIC Deputy Regional Director for the New York region, presented the final topic of the seminar: Bank Secrecy Act compliance.  She gave specific examples of compliance failures and details on when and why enforcement actions are instituted.

Two “Compliance Break-out Sessions” were held.  Bill Ries led a break-out session on trust departments.  Mr. Ries spent much of the session talking about possible red flags of which trust departments should be aware.  Eric Schumann, shareholder with Tucker Arensberg, led a break-out discussion on retail banking issues.  The discussion focused on issues related to money services businesses and lending. 

For the final segment of the seminar, there was a questions and answers panel, with all of the speakers participating, in addition to a representative from Congresswoman Melissa Hart’s office.  The panelists included:

Bill Ries, a shareholder at Tucker Arensberg, heads the firm’s Investment Management and Fiduciary Services Practice Group and is Co-chair of the Financial Institutions Practice Group. 

John Montgomery, a shareholder at Tucker Arensberg,  has devoted his career of over 30 years to the representation of banks, leasing companies, and other lending organizations. 

Eric Schumann, a shareholder at Tucker Arensberg, concentrates his practice on the  representation of lenders in commercial and corporate finance transactions. 

Doreen Eberley is the Deputy Regional Director, Risk Management for the New York Region of the FDIC’s Division of Supervision and Consumer Protection and is responsible for overseeing the FDIC’s bank supervisory activities in the Region’s mid-Atlantic States.  She previously served on the staff of the U.S. House of Representatives’ Committee on Banking and Financial Services during the 105th Congress. 

Terry Haines is a partner at Alexander Strategy Group, a public policy consulting firm based in Washington, D.C. and Hong Kong.  He served as Chief Counsel and Staff Director of the U.S. House of Representatives’ Committee on Financial Services.  Terry worked with Congressional leadership and senior Bush Administration officials to spearhead the enactment of many landmark laws, including the Sarbanes-Oxley Act, federal terrorism insurance legislation, and the USA PATRIOT Act. 

Lee Jeffrey Ross, Jr. serves as Senior Advisor in the area of money laundering and terrorist financing in the Office of Terrorist Financing and Financial Crimes in the U.S. Department of the Treasury.   Prior to joining the Treasury Department, Jeff served with the Department of Justice where he specialized in counter-money laundering policies in the Asset Forfeiture and Money Laundering Section, as well as in the Office of the Assistant Attorney General of the Criminal Division.  After the attacks of September 11, 2001, Jeff worked with the FBI to establish its interagency counter-terrorist financing Task Force and served as the Department of Justice representative to that Task Force.

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