 You're watching FJTN, the Federal Judicial Television Network. Welcome to the Federal Judicial Center's program on the business aspects of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. We will not try to cover all the business-related aspects, but only the most important ones that will affect Chapter 11 practice. You will assume that by now you are familiar with the terms of the new law. Hopefully you've seen the FJC overview, and perhaps you have seen and participated in other similar programs. Joining me here today are two Chapter 11 experts, Judge Susan Sonderby from the Northern District of Illinois and Professor Ken Clee from the UCLA School of Law. I'm Susan, and welcome Ken. There is an outline to help you follow our presentation, and we've included references to a number of helpful materials, specifically Professor Clee's business manuscript, and the new suggested interim rules and the interim official forms. A memorandum by the Bankruptcy Rules Committee reporter, Jeff Morris, is especially helpful in navigating the terms of the suggested interim rules. The Bankruptcy Rules Committee and the Standing Rules Committee have approved the suggested interim rules, and each local court has been asked to adopt those rules without changes. The Judicial Conference of the United States has also approved the forms. Now while they're interim forms because they've been approved by the Judicial Conference, they are nevertheless official forms and pursuant to Bankruptcy Rule 9009 will be binding on all courts. I think it's important to keep in mind what's not covered by the suggested interim rules and the official forms. There's no standard plan or disclosure statement form for use in small business cases. That will come later. There's no uniform reporting form. That also will come later. But the effect of that is that on October 17th, Section 308 of the Bankruptcy Code will not be effective because that section becomes effective 60 days after the form is adopted. Also there's no rule or form that provides information for the debtors related companies. Now can there are a number of changes to the definitions in Section 101? One of those changes is to 101-14 relating to disinterested person. What's the reason for that change and why is that significant? Well the reason for the change is easy. The large investment banking houses that were being conflicted out of Chapter 11 cases wanted to be able to participate, and so they were successful in getting Congress to delete all express references to investment bankers in Section 101-14. As a result there's no per se disqualification for an investment banker who underwrote securities for the debtor within three years before the date of the filing of the petition. By the same token though, the underwriter, the investment banker has to be disinterested in order to be employed as a professional person in Chapter 11, and this change actually might allow courts now to take a harder look at things that were done four or five years even before the filing, and it may be that although it's unlikely courts will appoint conflicts investment bankers or financial advisors in cases where these bankers have a conflict the way they appoint special counsel if counsel has a conflict, that they will have to hold a pillow text type hearing at the inception of the case to determine if the investment banker was guilty of securities fraud or otherwise would be someone who's not disinterested. Now I've heard the argument that in a prepack case it's probably a good idea to keep the investment banker in place. What do you think about that? I think it is because prepack cases are generally confirmed very quickly. There's no point in getting somebody else on board. On the other hand, if they want to apply to be employed by the Chapter 11 estate, they're going to have to be disinterested. So it's best if they can get paid pre-petition and hopefully just ride through and not have to render services in the case. What other changes are there with respect to professional compensation? There are a couple of changes in the new law to Section 328 and Section 330 of the bankruptcy code. There's one change in Section 328 that doesn't look all that important. It allows compensation to be done on a fixed or percentage fee basis and maybe the percentage fee basis clarifies the law with respect to, for example, real estate agents. Would that apply usually to attorney's fees? I don't think so. Most attorneys are compensated based on reasonable compensation on their hourly rates. Sometimes they'll have a contingency fee. That's sort of like a percentage fee but that's already been in the law since 1978. There are important changes in Section 330 with respect to the compensation of a trustee. With respect to a Chapter 11 trustee and, for that matter, other professionals in Chapter 11 cases, there's a specific set of factors outlined in Section 330A3 that the court is supposed to take into account in determining whether compensation is reasonable. On the other hand, there's a conflicting provision in Section 330A7 that says in determining the reasonable compensation of a trustee, the court is to look to a commission based on Section 326. And this raises a couple of obvious interesting questions. The first one is does this apply only to Chapter 7 trustees or does it apply to Chapter 11 trustees and if so, how do you square 330A3 with 330A7? That's something judges will decide. And the other point is is that in looking at a commission based on Section 326, I think the trustees thought that they were going to get commissions based on the cap that set forth in 326, but some courts might disappoint them and say, look, 326 is a range and I'll give you commission and the commission is going to be half of the cap or something like that. Now what about the change with respect to board certification? There's a provision that's included in Section 330A3E that talks about board certification as an additional factor to determine reasonable compensation. I don't know that this adds a whole lot because whether you're rendering services comparable to your peers has always been a factor to be considered, but it does raise the complication. What does it mean to be board certified? If I want to set up a board and certify the people in my law firm, I don't think that's going to work. Ken, there's also a change with respect to creditors committees and that attorneys who represent individual creditors on the committees no longer can be compensated. Well that's right. The 1994 law put a provision in, I think somewhat by accident, that resulted literally in allowing individual creditors committee members to have their attorney's fees compensated. There was a split in the circuits on this provision as a matter of fact. The statute has now corrected that and so there's no right to compensation for individual creditors to have their attorney's fees paid, but they'd still be able to submit substantial contribution applications in appropriate cases. Now in our last program we made the observation that key employee retention plans are really going to be unworkable under the new law, but I know that attorneys are very imaginative. What kind of things do you expect bankruptcy judges to see in this regard? Well my guess is in looking at section 503c you're going to see very little, if anything, ever brought under 503c1, which talks about the key employee retention programs. The standards are just untenable. And the same thing with respect to severance payments under section 503c2, it's just not going to be workable. But there's a big opening in section 503c3 for other types of compensation plans. Those can be approved if the judge determines that they are justified by the facts and circumstances of the case. So I think this is going to open the door to all kinds of other plans, the most obvious of which will be bonus compensation plans that are tied to actual performance during the case. Well, last time we mentioned that there were some changes to the individual debtors who in chapter 11, one of those changes is if an unsecured creditor objects, and that individual in chapter 11 has to commit all of the disposable income to the debtors plan for a period of five years. And I've been asked a number of times, does the means test apply with respect to disposable income as it does in chapter 13? The answer to that question is no, it does not. 1129a15b incorporates 1325b2, which is the ordinary disposable income test, and not 1325b3, the means test and the new official forms take that into consideration. Now in chapter 13, we've got a standing trustee that collects all the money and makes the distributions. We don't have a standing trustee in chapter 11 individual cases. Susan, do you think we're going to see some kind of dispersing agents or something? Well, there's going to have to be some mechanism to disperse these funds to the creditors. There's no provision in the statute regarding this. I don't think that judges probably are apt to trust the chapter 11 debtor to do this, so perhaps a dispersing agent is going to have to be appointed. Or else the debtor's going to have to arrange for some type of exit financing so they can pay off the creditors. Now there are no statistics that tell us how many individuals are in chapter 11, but we do know that there are very few non-business chapter 11 cases. I think last year they were fewer than a thousand. My guess is that you're going to see fewer individuals going into chapter 11 because of these new changes to the law. They'll have to pay a quarterly fee for five years. They'll have increased professional fees. Their plan is subject to modification at the request of unsecured creditors. And they won't have the automatic right to dismiss the case. And Susan, you mentioned it, maybe one way to get around this five-year period. Ken, I was thinking of perhaps having exit financing available so that they could pay the full five years worth right at the beginning of the case. What do you think about that idea? I think it's a good idea and it's the type of creative thinking that's going to have to be done to make these things work in chapter 11. One of the problems with it is, though, how do you know what the disposable income is going to be for the five years? It can vary, and of course, I guess you could have modifications after the fact. I think another way around this is to have the debtor issue plan notes, just like corporate debtors do in chapter 11. And the note would obligate the debtor to pay the whole five years of income. That would allow the court to grant the debtor a discharge right away and close the case. Now, creditors may not agree to that unless the note is backstopped by the exit financer or by some other sort of financial accommodation to make sure that the payments are going to be made. Well, I think the general rule is that the discharge would come at the end of the five years, but what you're saying is that the court could modify that. Yes, this is a critical distinction between chapter 11 and chapter 13. If you take a look at section 1141-D5, you'll notice that in chapter 11, unlike chapter 13, the court has the discretion to grant the discharge before the completion of the five years of payments. And we're not just talking about the hardship discharge situation that I'll get to in a minute. We're talking about right off the bat. And I could see a judge saying, if you've drafted your plan in a way to issue notes or other types of securities, that's it. The plan is substantially consummated. I don't have to have this case open for five years. We don't need to have to have you pay those five years of quarterly fees to the U.S. trustee. Can you mention hardship discharge? It's really not a hardship requirement. No, it's not a hardship requirement at all. It's much more relaxed than that. All you have to do if you, for some reason, haven't made your payments is go in and show that you've paid creditors at least as much as they'd get in chapter 7 and that you're not convicted of some felony or some type of fraud. What about the discharge? I'm sorry. And the court can grant the discharge. What about the discharge rules for individuals? Have they changed at all? Well, there are substantial rules on non-dischargeable debts that have changed for individuals. And of course, all of those are incorporated into chapter 11, as they have been all along. It's going to be even less productive for the individual debtor to get a discharge based on all the additional categories of non-dischargeable debts and the changes within categories. Well, you know, upon confirmation of a plan in chapter 11, the property revests in the debtor. If the debtor is going to be making payments over five years, does that make sense or should there be some limitations on the debtor's ability to dispose of some of these assets? I'll tell you, I absolutely would link the issue of revestment and discharge. It seems to me if the debtor hasn't received a discharge and there's still going to be payments over five years, you want to keep that property in custodial edges so that the court has the estate. The creditors aren't going to want to have the debtor revested with property if they're still waiting to get their payment. And there may also be tax reasons to match revestment and discharge as well. One final point on individual debtors is that the individual debtor may also be a small business, in which case they have to comply with the requirements of 1116. And one of those is that you have to append your most recent income tax to your petition. That might be somewhat disadvantageous, I would say, to a non-debtor spouse who may not want that information out on the public as part of the public record. Now, Susan, on our last program, we briefly mentioned the change of the new law with respect to reclamation. What are the specifics of that change and how will it affect Chapter 11 cases? Well, first of all, the reach-back period is extended from 10 days to 45 days. So the seller can now reclaim goods received by the debtor within 45 days before the petition if he makes the reclamation demand within 45 days after receipt. However, this 45-day demand period expires post-petition. And if that happens, then the deadline is actually 20 days after the petition. So the language and the statute does not include any words later of the two deadlines. So I can see that we're going to have some litigation regarding this issue because where the goods were received say 10 days before the petition was filed, the seller could argue that he has 35 days after the petition was filed. When in fact, he only has 20 days. Another result of reading this later of language not to be included in the statute is if you read the statute literally, it says that the 40-day test may never apply. And I say that because the demand period would never expire pre-petition. The oldest goods that the seller can reach back for would be those goods that were received 45 days pre-petition. Now, another change, Congress has deleted the provision authorizing the court to deny reclamation only if it grants a priority claim or a lien to the debtor. Also, or to the creditor, also this raises some issues. Does this deletion suggest that the seller's right to reclaim in the actual goods is really an absolute right? Assuming that the goods are still in the debtor's possession, if so, the debtor could have a significant expenditure of time in trying to monitor these demands, in marshaling these assets, in identifying and segregating these goods. Also, very importantly, there's no corresponding amendments to the automatic stay provision and we know that the debtor here has at least a possessory interest in these goods. Well, that'd still be protected by the state. That'd still be protected by the state. I also have a question regarding this because now with the deletion, will the court still have the ability to grant an administrative expense or a lien? A third change is that Congress deleted the express reference to the seller's statutory or common law right of reclamation. And that is, of course, the state law rights that are under UCC Section 2-702. And so I query whether Congress has, in fact, created a federal right of reclamation or will the seller still have to meet the prerequisites of state law other than, of course, we know the 10-day requirement. There's also another interesting addition. The lead-in clause specifying that reclamation rights are subject to prior rights of secured lenders. I question whether this is just confirmatory of the pre-amendment case law which looked to priority rules under state law or has it expanded the seller's handicap so that any security interest is superior. And finally, there's important provision which has added which obviates many of the problems that the seller may have and that is the new administrative priority at 503B9 for the value of any goods received within 20 days before the petition. Now, Section 546 provides that the seller can use his priority even if he fails to make a demand time way for reclamation and note that this administrative claim will not depend on proof that the goods are still in the debtor's possession. So, some of the issues I see here are the methods of valuing the goods is an open issue. Is it the market value, the liquidation value, the invoice value, the resale value or what? And what is the relevant dates for the valuation? It's not specified in the act. Is it the petition date, the shipment date or some other date? Now, Susan, this will increase the number of administrative claims substantially in the case. It definitely will and that'll have effects on confirmation. And these will be competing with other administrative claims including professional fees. They'll be superior to other unsecured creditors. And that may affect confirmation. That definitely will. That definitely will. Also, another interesting issue is what if the creditor reclaims goods, resells them but resells them at a discount? Is that creditor going to be able to then get an administrative claim for the shortfall? The new priority provisions don't expressly deny administrative status if the goods are already reclaimed. However, under state law, successful reclamation excludes all other remedies. The new priority will have significant impact on the reorganizations not only because of the things that we have discussed but because some of these creditors may be requiring early payment and that may affect confirmation. We in the past have always generally deferred payment and administrative claims until confirmation, so that might have some effect. We also might see some sellers that are moving to convert or dismiss the Chapter 11 if there are doubts about the debtor's ability to pay the 100% at confirmation. So in sum, the new reclamation and priority amendments are definitely more favorable to the suppliers than they are to the debtors and to the debtor's other pre-petition creditors. So this is going to have a significant impact on Chapter 11 cases. This is going to have a definite big impact on Chapter 11's. Now another section that's going to have a significant impact can is 366. How has that changed? The practical implications are that the debtor in possession is going to have to move very early in the case to deal with its utility problems. First, let's talk about how the section itself has been amended. Congress has adopted a new section 366c that has four paragraphs that apply apparently in Chapter 11 cases, although one of them is ambiguously drafted. The first paragraph defines adequate assurance of payment for the purposes of subsection c. It's important to note that this definition, which requires adequate assurance in the form of cash or cash equivalent, will not apply outside of Chapter 11 in the ordinary Chapter 7, 12, or 13 case. Their Section 366b of the bankruptcy code will continue to apply. The 366 requirement also, however, might apply to Chapter 11 debtors, raising the prospect that there are conflicting provisions in Section 366b which requires a 20-day adequate assurance of payment provision and the provisions of Section 366c which for Chapter 11 cases appears to give a 30-day adequate assurance payment. It'll remain to be seen how judges work out these inconsistencies. Nevertheless, from a debtor in possession standpoint, you can't afford to have the utility alter, disconnect, or refuse to provide service. So what you're going to have to do is very early in the case, you're going to have to make a proposal of adequate assurance of payment. The statute says, unless the adequate assurance of payment is satisfactory to the utility, that within 30 days after the date of the filing it receives that assurance, it can go ahead and terminate the service. Now the court is given the power to modify an adequate assurance proposal, but it doesn't have the power to declare one in the first instance. So what a careful debtor in possession should do is to make a proposal of adequate assurance of payment on the first day of the case to all of its utilities and then almost immediately file a motion to modify that proposal so that it can be heard by the bankruptcy court and an order can be entered within the first 30 days of the case. Now in considering whether the modification of or the assurance of payment is appropriate, the court is particularly not permitted to look at whether the debtor gave the utility a pre-petition security deposit or whether the debtor was current in its payments. So it looks like it's going to be just a financial test and we don't know the extent to which the financial requirements of non-bankruptcy law are going to be something the court will look at here. There are also provisions that have to do with the utility's ability to offset a security deposit that it has. Now is that subject to the stay? I think it might be subject to the automatic stay because there's nothing in section 366 that overrides the automatic stay of section 362A7. But there's another provision as well and that is recruitment. This may not be a set off at all as it's classically understood where there are different debts and credits. When the utility takes the security deposit, it's in the nature of recruitment and although nothing in 366 or the bankruptcy code can affect the right of set off, perhaps the right of recruitment could be affected by a 105 injunction. All of those are possible. And then there's the problem that comes up where the utility has agreed as part of a lease to go ahead and provide energy to the debtor in possession. There is nothing in section 366 that interfaces it with section 365B4 of the bankruptcy code. So courts are going to have to be called upon to decide whether the utility must supply the goods or services under 365B4 or doesn't have to because of section 366. Susan, with all these changes to reclamation and utilities how's that going to affect first day orders and first day practice? Well, the new administrative priority for 20 days worth of goods that are delivered pre-petition will surely affect the nature and the scope of first day critical vendor motions. The 20 day window should cover a significant portion of those amounts usually sought to be paid and since the portion will have administrative status perhaps the only issue that we'll see is the timely rest of payment of these administrative claims. Now the suppliers will of course try to get more than 20 days worth of payments of these goods however as to those non-administrative goods the usual problems that we have to deal with in ruling on critical vendor motions will have to be addressed. Also importantly the administrative priority does not alleviate the problems with respect to the payment of shippers or other service providers because the priority relates only to goods. What about the payment of wages? Well wages are generally less controversial than other critical vendor orders because most of those amounts are entitled to a priority in any event. The courts usually scrutinize any requests for excessive payments a little bit more carefully. The amendments increase the wage priority from $4,925 to $10,000 and they also increase from 90 to 180 days the period in which they are earned and similar increases relate to the employee benefits priority. These increases should make first day wage and benefit motions even less controversial because the requests for amounts in excess of this priority cap are probably going to decrease. In our last program we mentioned that the timing of assumption and rejection of the executive contracts has changed. I know you've had a lot of experience in the Kmart case dealing with leases. How significant is this change in Chapter 11 cases? Well this change is going to be very significant. The debtor will now have until 120 days after the order for relief is entered or plan confirmation in order to assume unexpired commercial real estate leases. The courts can extend that 120 day period but only for cause and only for 90 days. Any extension beyond that has to be with the written consent of the landlord and there's no discretion on the court's part to extend that period without the written consent. So what's going to happen? Well as a practical matter the debtor is going to have 210 days in which to decide whether to assume or reject their commercial leases. So what they're going to have to do is they're going to have to make all these decisions before they file or they're going to have to make these decisions very timely after they file their case. The landlords are now going to have more leverage and they're not going to consent for example to below market leases unless there are significant debtor concessions. Well in addition to the timing changes has there also been changes with respect to the calculation of damages? Yes, there have been numerous changes in this area also. The landlord now can only claim an administrative expense status for all payments that were made two years after the rejection date less the going dark damages and other penalties for assumed then later rejected leases. So there's no set offs against this administrative claim but there will be reductions for any amounts that were actually received by the landlord or to be received by the landlord. What does that mean to be received? Well that's a real question. Of course actually received is very easy but to be received when there's not a new tenant in place can be troublesome. And how definitive this potential receipt must be to qualify as a reduction from the kept claim is going to be something we're going to have to litigate. Okay, what about curing non-monetary defaults? There used to be a split in the circuit. Does the new law resolve that split? Well it appears to. Let me give you just a brief history of what this split is. Under section 365B1A that provided that the debtor could not assume without curing the defaults. We all know that. Under section 365B2D however, cure requirements did not apply to the satisfaction of any penalty rate or provision relating to a default arising from any failure by the debtor to reform non-monetary obligations. Disputes rose as to the meaning of that subsection of 365. The debtors of course argued that they didn't have to cure non-monetary defaults and the landlords of course argued that the only exception to the cure requirements were penalty rates or penalty violations or penalty provisions so the debtors had to cure non-monetary defaults in order to assume their leases. The Ninth Circuit in the Claremont Acquisition case held that a debtor had to cure non-monetary defaults. And also if the default was historical it didn't matter, the cure was impossible. Under the First Circuit's bank vest court that court disagreed and said it was not necessary to cure non-monetary defaults prior to assumption of those leases. The new law appears to clear up this dispute but you have to take a look at what kind of a contract or lease is involved. First let's take a look at the unexpired commercial real estate leases. There's no need to cure non-monetary defaults if it's impossible to cure. But if the breach relates to operating provisions of a lease then the debtor will need to 1. Compensate the landlord for pecuniary losses associated with that default and 2. Abide by lease terms from assumption forward. Do you have any good examples of that? Well there's a good example that was in the Norton article discussing the Claremont and the bank vest cases. Prior to the petition date the debtor failed to remove snow from a parking lot although the lease obligated the debtor to do that. The landlord then had to bring somebody in to remove the snow from the parking lot. So now in order for the debtor to assume that lease the debtor's got to remove the snow from this day on that is from assumption on and pave the landlord for the snow removal that the landlord did in the past. Now of course there's an issue as to what pecuniary losses are and that might be difficult for us as courts to determine but that's going to generate some litigation. Also we may see more liquidated damages claims inserted in the leases to get around this and also what are operational clauses? Is a requirement the debtor file financial reporting requirements? Is that going to be deemed to be an operational clause? For personal property leases it's a little bit different and it's going to be much harder for the debtors to assume these contracts and personal property leases. The new law seems to adopt Claremont and the only exceptions to the cure requirement are for penalty rates or penalty provisions. So the debtor must cure breaches of non-monetary provisions and if there's a historical default too bad the cure is impossible and you can't assume. Kent last time we mentioned that the period of exclusivity has been modified in Chapter 11 cases. Is that going to alter Chapter 11 practice? I think it might alter it substantially in the litigious cases. In the non-litigious cases 18 months to file a plan from the order for relief and 20 months to file to get acceptances from the order for relief that's plenty of time and I don't think you'll see people filing in voluntary cases to get more time based on the order for relief. But in cases where litigation is necessary in order to be able to have a reasonable plan of reorganization this could pose a real problem and I think in terms of the leverage of negotiation at some point in the case maybe 12 months into the case the creditors committee is just going to say you know what we don't want to talk about a plan anymore we're going to wait 6 months when we can file our own plan when exclusivity is gone and they'll just go radio silent in effect for 6 months continue to accrue administrative expenses of course and drag this out. This could lead to substantial case management issues for the courts because once exclusivity expires we could have multiple plans and so the court's going to have to decide do we let the debtors plan if there's one on file go forward and have a first shot at confirmation or do we stop the train and let these other plans come on board because after all 1129C of the code says in confirming competing plans you're supposed to give some credence to the preferences of the creditors. Well I don't know what judges are going to do and the other problem is I don't think you're going to have selective termination of exclusivity anymore. Once exclusivity is gone any party in interest has the right to file a plan and if you have some crazy out there who files a plan is the court going to have to take that one forward to confirmation when nobody else in the case wants it? These are good questions. Do you think we're going to see a lot of hastily filed plans that are going to be subject to modifications later? Absolutely because debtors won't want to lose exclusivity they won't have cut their deals and what they'll do is they'll file their plan in order to take advantage of the 18 month bar it won't be fully thought out and they'll then try to seek a modification but they've still got the outside 20 month limit on gaining acceptances. Okay Susan let's turn for a minute to the avoiding powers last time we mentioned that there was a change to the ordinary course of business defense and how significant a change do you think that is? Well this is going to be very significant I think it's going to result in fewer settlements fewer results of success in mediation attempts and probably more motions for some re-judgment. The ordinary course defense in section 547 has been amended so now the defendant transferee can prove either the preferential transfer was made in the ordinary course of business of the debtor and the transferee or according to ordinary business terms so now it's easier to establish the ordinary course exception and we may see a lot fewer experts being called in these cases now that the industry standard is an option and it's not a requirement. Some commentators are noting that the amendment will probably just eliminate the ordinary business terms prong of the defense completely so we won't even have it any longer and defendants are going to be less likely to mediate or settle because their burden now is really lightened. Also under the range of reasonable settlement amounts which has to be shown under rule 9,019 a motion to approve a compromise may change. Okay last time we mentioned that there's been the depresio fixed so we won't cover that again but I did want to cover the new preference defense under 547C9. Well 547C9 provides that a trustee cannot avoid a transfer where the debtor has primarily business debts and the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000. Now as an initial matter I just might note that this $5,000 limitation is listed as a preference defense and not as an element of the trustee's case. What are the implications for default judgments now? Well I think that defendants are going to have to make sure that they raise that defense because even if it's obvious to the judge the judge is not going to be able on his or her own motion to grant that relief. The judge is going to have to just look the other way and enter a default judgment. I query whether or not the trustees are going to actually put judges in that position but that's one of the things out there that we're going to have to deal with. The question that is interesting is does 549C9 apply to multiple transfers to one recipient? Say we have because a stature provides for a transfer and refers to such transfer what happens if the aggregate value of each transfer among a number of transfers to one particular creditor during the preference period is less than $5,000 but the aggregate value of all the transfers as the creditor exceeds $5,000. Good question. It is. There are two others I want to mention under 548 and one relates to the avoidance of transfers under employment contracts. How does that work? Well under 548 as amended the trustee can avoid obligations incurred or transfers made to or for the benefit of insiders under employment contracts not in the ordinary course of business. The trustee still needs to demonstrate that the insider received less than reasonably equivalent value and that is measured at the time the obligation was incurred. The debtor's financial condition at the time of the transfer is now irrelevant and insolvency as a requirement is eliminated but how is the court going to determine what is outside the ordinary course? For example, if a company gives insider executives large financial incentives and it may be objectively ordinary for that company to do so but subjectively not ordinary and then what if the practice may be ordinary for the company but not ordinary in the industry and I guess the underlying question is why should the industry standard apply in any event? There's one other change to 548E which has been added and that provides that a trustee can avoid any transfer within 10 years prior to the petition made by the debtor to a self-settled trust of which the debtor is a beneficiary when the transfer was made with the intent to hinder, delay, or defraud a person that was or will become a creditor. Ken, you've already mentioned the fact that attorneys for individual creditors on creditors committees can no longer be compensated. What changes with respect to creditors committees that we need to know about? Yes, there are a few. The statute's been amended to once again clarify that the bankruptcy judge has the power to order the alteration of the composition of a committee although it's not clear if the court orders the U.S. trustee to do so whether the court can give specific names or whether it's within the U.S. trustee's discretion and of course in your part of the country where you have bankruptcy administrators you don't even have to worry about that. There is a provision that provides for the appointment of a small business concern creditor to the committee and this is a creditor whose debt might not be very large in the case but it's a very large debt for that particular creditor and there's a provision now where the court can order that type of creditor appointed to the committee. Again, not clear if the court picks the actual creditor or has to order the U.S. trustee to exercise its discretion to figure out which one but I think the most significant amendments in 11.02 have to do with the new provisions in 11.02B3 that require a creditor's committee to disclose committee information to non-committee members and I think this section is going to cause all kinds of problems for debtors and committee members and their professionals because a lot of that information is very sensitive information so one thing the committee might do around the spirit of this provision is to have a subcommittee appointed that gets the information from the debtor or have the committee's professionals be the repository of the information with an injunction that did not be given to committee members so it never becomes part of the committee information. Failing that though, I think there's going to be significant problems with committee members who sign confidentiality agreements and maybe even a potential waiver of the attorney-client privilege if the committee has to turn over communications from the committee council to non-committee members. I think it's going to be harder to get creditors to serve on creditors committee. It sure should be. Okay, but let's turn now to some of the small business provisions. We mentioned in the last program that there were such changes and we'll be discussing those at the FJC workshop in September so I'll limit my comments to just a few key points. Suggested interim rule 10-20 brings some certainty to the definition of a small business debtor. Now when a petition is filed, the debtor must declare whether or not it is a small business debtor and that declaration will control the case. If the debtor says I'm a small business debtor, the debtor will be a small business debtor until a creditors committee is appointed and then the debtor will not be no longer a small business debtor. However, or until there is some order determining that the creditors committee is not operating properly. Can you see that small business debtors might be encouraging creditors to form creditors committees to avoid the designation of a small business? I think they'll absolutely go out and do that because they won't want to be stuck with the shorter exclusivity period and the increased reporting requirements and requirement that their senior management attend various conferences. But I'm worried that if such a committee is formed, the creditors could play games strategically and after the 300-day period to file a plan has expired, they could just ban the committee and say now you're a small business debtor, your time to file a plan has expired. That could be a serious problem. Actually, I like some of the small business requirements. I like the fact that they'll have to file tax returns on time, that they'll have to pay their taxes on time and I like the idea that the U.S. trustee or in our district, the bankruptcy administrator, will be going out to visit the properties making an inspection and I kind of hope that they actually take some photographs. I know it would be helpful to me to see what the business looks like. What do you think about that idea? I agree wholeheartedly. Every time I represent a debtor, I go see the premises. I'm reading countless papers. Well, also it seems to me that status conferences are going to be very helpful in small business cases and probably in all Chapter 11 cases. But I worry about the problem of ex parte contact. You'll be talking about another creditor that may not be there at the status conferences. And I sure don't want to have bankruptcy judges going back to the time when we presided over meetings of creditors. But on the other hand, my status conference, which is basically a telephone call with the bankruptcy administrator and counsel for the debtor, I don't think that's going to get it either if you're trying to avoid ex parte contact. Ken, who do you think should be invited or given notice to these status conferences? Well, certainly any significant secured creditor should get notice and perhaps the top 20 unsecured creditors should. Beyond that, I don't know because notice is costly and in these small business cases, administrative expenses can eat up any return that's going to be given to creditors. Okay, one other problem I'd like to mention is the 45-day rule that after a plan is filed, the plan has to be confirmed within 45 days. I don't know how you can really do that unless you conditionally approve the disclosure statement and combine the two hearings and even doing that it's going to be difficult. One thing I was thinking about is maybe there could be an approval of the disclosure statement before the plan is filed based on a draft of the plan and since the 45 days doesn't run until the actual plan is filed that may be one way of getting around that requirement. I'm also concerned about the requirement that the plan can be the disclosure statement. How in the world is the debtor going to know that they can safely go out and solicit votes without knowing that the plan is adequate disclosure? You're either going to have to have some kind of conditional approval or you're going to have a final approval based on an unfiled draft of the plan. There's some interesting new provisions relating to small business. One of them is that the small business debtor under section 1116 is going to have to maintain insurance that is customary and appropriate to the business. Can you see that as being a problem? I see it as being a big problem. There are all different kinds of insurance and what is customary or appropriate for this particular debtor is something that can be litigated in many different ways. What's an appropriate deductible? Is there self-retention that's appropriate? What types of insurance does the debtor have to get? Do all perils have to be insured against? I think this is going to be particularly troublesome and of course there's a related provision in the conversion and dismissal section that we'll get to. Right. Well, you mentioned the conversion and dismissal section. That's 1112 and there have been significant changes there. There are new definitions of what is cause for converting or dismissing a case. Failure to pay timely, failure to timely pay taxes, failure to satisfy timely any filing or reporting requirement and failure to maintain appropriate insurance that poses risks to the estate or to the public. Now that's not exactly the same standard as the requirement that you have customary and appropriate but it's pretty close and it applies not only in small businesses but to all business cases as well. Of course there's also the change in 1112 that changes may dismiss or convert to shell dismiss and convert and that looks like it takes away the discretion of the bankruptcy judge. However, the court does not have to dismiss or convert if the bankruptcy judge finds unusual circumstances specifically identified by the court that established that the request for a requested conversion or dismissal is one, not in the best interest of creditors and two, not in the best interest of the estate. Ken, what do you think unusual circumstances means? I think it means circumstances that don't occur very frequently certainly any kind of a natural disaster like a three mile island situation or a hurricane that prevents the debtor from timely filing tax returns or other reports that's going to be obvious. Short of that though, I think it's going to require a lot of creativity on the part of lawyers and judges to be able to come up with things and as you go by and these things happen in case after case I don't know we're going to be able to say they're unusual anymore. Well, the term unusual circumstances how does that relate to some of the other new terms in the bankruptcy code, special circumstances for example under 707B or extraordinary and compelling circumstances or exigent circumstances. Any idea? I don't know. This sounds like a standard of review on appeal. One other option that bankruptcy judge has if you find cause to convert or dismiss a case is to appoint a trustee or examiner or do we have that ability? Well maybe not so clearly. There certainly is a reference to section 1104A3 where the standard talks about appointing a trustee if there is cause to appoint a trustee or examiner but the section for the appointment of an examiner is 1104C so while the standard talks about the appointment of a trustee or examiner and the best interest of the estate the statute only talks about appointment of a trustee we'll just have to see how that plays out. Let me switch now to the notice requirements under 342. I've been somewhat concerned about this but I've always thought of it in terms of a consumer problem but the more I think about it the more I think it's even more of a problem in chapter 11 cases. In consumer cases the debtor is not the one that sends out the notices usually the court does that but in chapter 11 cases it's the debtor or debtor in possession that sends out all sorts of notices and I think that that may be a significant problem and 342C2A which is the section that tells the debtor where notices have to go to creditors applies in all chapters not just 7 and 13 and it's not limited to consumer debts can you see this as a problem? I think it's going to be a big problem I was thinking about some ways to avoid it one might be to have the notices in the chapter 11 cases sent by the clerk of the court and have the clerk not delegate that to the debtor and not have the debtor sending those notices or having the clerk designate some other notice provider to send those notices other than the debtor I was thinking about a local rule also that would say that if an attorney makes an appearance in the case on behalf of a creditor then any notice to that attorney would be deemed under 342G1 to have been brought to the attention of the creditor as that term is used in that section and perhaps at status conferences it might be a good idea to discuss if the key creditor is there what the appropriate address would be to notifying that creditor and then finally I would suggest that there's going to be a new bankruptcy rule effective December 1st 2005 2002G that which would allow the creditor to make other arrangements as to where to receive notices and I think that that would preempt the problem and would get better notices to creditors and would just eliminate that problem now with respect to healthcare and cross-border changes there have been a number of changes we don't have time to get into all of them but I think one significant change is with respect to section 304 of the bankruptcy code and what's that change? It's repealed you can go under chapter 15 now but 304 petitions can no longer be filed there are some suggested interim rules that deal with healthcare and cross-border and again we don't have time to go into all of those but I do want to specifically mention two regarding cross-border rule 2002P deals with notices to creditors with foreign addresses and rule 3002 gives the court discretion where the creditor has a foreign address to extend the time for filing proofs of claim in healthcare there are all sorts of new duties that are imposed on debtors and trustees and I think Susan probably has a good idea for bankruptcy judges early in the case to figure out exactly how the trustee is going to be paid for all those additional services I think this is something to be discussed at this section 105 conference Well Susan do you have anything else you'd like to add before we conclude our program? No other than to say that I think that we as judges really have our work cut out for us there is a lot to this act a lot we're going to have to digest the litigation that's going to come to us because of this but it's going to be interesting to see how it plays out Ken? I have a few things first of all this business about foreign creditors with foreign addresses I've talked to some creditors council who are changing their address preferences to overseas addresses so that they can take advantage of this provision and exploit it and where we saw debtor abuse under some of the previous law we're now I think going to see debtor abuse perhaps under this law the other thing I want to add is that section 1141 D6 has a provision relating to non-dischargeability of corporate debtors debts for the first time under the bankruptcy code and so we might see increased non-dischargeability litigation in business cases these categories are for fraudulently or falsely filed tax returns or for fraud to the government either based on a written false financial statement or for actual fraud and also for certain qui tam claims as well okay well that concludes our program on the business aspects of the reform act of 2005 I want to of course thank Judge Sunderby and Professor Clee for giving us the benefit of your expertise the federal judicial center is also producing a program on consumer bankruptcy I hope you will watch that and then there will be a final program in the series after the law takes effect and after we've had an opportunity to experience some of those changes please remember to fill out your evaluation forms they'll be very helpful to the federal judicial center and they'll be invaluable in the preparation of our last program in the series thank you so much for watching and as Judge Sunderby says good luck with the changes