Individuals and Small Business Debtors in Chapter 11

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Client - Mr. Navin R. Johnson

• Approximately 2,000,000 in Debts
• Two Businesses
• Johnson Industries doing well
• OptiGrab Co. doing poorly
• Four Pieces of Real Property
• Real Property 1 Homestead
• Real Property 2 Rental/Investment Property
• Real Property 3 Rental/Investment Property
• Real Property 4 Rental/Investment Property

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Limitations on Who May File Under Chapter 13

• 11 U.S.C. 109(e) Only an individual with
  regular income that owes, on the date of the
  filing of the petition, noncontingent,
  liquidated, unsecured debts of less than 336,900
  and noncontingent, liquidated, secured debts of
  less than 1,010,650, or an individual with
  regular income and such individuals spouse,
  except a stockbroker or a commodity broker, that
  owe, on the date of the filing of the petition,
  noncontingent, liquidated, unsecured debts that
  aggregate less than 336,900 and noncontingent,
  liquidated, secured debts of less than 1,010,650
  may be a debtor under chapter 13 of this title.

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What is Consumer Debt and Why Does It Matter?

• 11 U.S.C. 101(8) consumer debt means debt
  incurred by an individual primarily for a
  personal, family, or household purpose.

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Client - Mr. Navin R. Johnson

• Approximately 2,000,000 in Debts
• Two Businesses
• Johnson Industries doing well
• OptiGrab Co. doing poorly
• Four Pieces of Real Property
• Real Property 1 Homestead
• Real Property 2 Rental/Investment Property
• Real Property 3 Rental/Investment Property
• Real Property 4 Rental/Investment Property

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Who Qualifies as a Small Business Debtor?

• 11 U.S.C. 101(51D)(A) a person engaged in
  commercial or business activities that has
  aggregate noncontingent liquidated secured and
  unsecured debts as of the date of the petition or
  the date of the order for relief in an amount not
  more than 2,190,000 (excluding debts owed to 1
  or more affiliates or insiders) for a case in
  which the United States trustee has not appointed
  under section 1102 (a)(1) a committee of
  unsecured creditors or where the court has
  determined that the committee of unsecured
  creditors is not sufficiently active and
  representative to provide effective oversight of
  the debtor.

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How Do you Designate as a Small Business Debtor?
Check the Box!
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Useful Documents that Must be Prepared and
Appended to the Debtors Petition

• 11 U.S.C. 1116 In a small business case, a
  trustee or the debtor in possession, in addition
  to the duties provided in this title and as
  otherwise required by law, shall
• (1) append to the voluntary petition or, in an
  involuntary case, file not later than 7 days
  after the date of the order for relief
• (A) its most recent balance sheet, statement of
  operations, cash-flow statement, and Federal
  income tax return

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Balance SheetAssets
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Balance Sheet Liabilities
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Contingent and Insider Debts are not Counted
against the Small Business Debtor Cap

• 11 U.S.C. 101(51D) a person engaged in
  commercial or business activities that has
  aggregate noncontingent liquidated secured and
  unsecured debts as of the date of the petition or
  the date of the order for relief in an amount not
  more than 2,190,000 (excluding debts owed to 1
  or more affiliates or insiders) for a case in
  which the United States trustee has not appointed
  under section 1102 (a)(1) a committee of
  unsecured creditors or where the court has
  determined that the committee of unsecured
  creditors is not sufficiently active and
  representative to provide effective oversight of
  the debtor.

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Balance Sheet Liability Analysis
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Mr. Johnsons Statement of Operations
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Mr. Johnsons Cash Flow Statement
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Critical Information from Cash Flow Statement
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Federal Tax Return - IRS Form 1040
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The Documents are Not Always Required, but They
are Always Useful.

• 11 U.S.C. 1116 In a small business case, a
  trustee or the debtor in possession, in addition
  to the duties provided in this title and as
  otherwise required by law, shall
• (1) append to the voluntary petition or, in an
  involuntary case, file not later than 7 days
  after the date of the order for relief
• (A) its most recent balance sheet, statement of
  operations, cash-flow statement, and Federal
  income tax return or
• (B) a statement made under penalty of perjury
  that no balance sheet, statement of operations,
  or cash-flow statement has been prepared and no
  Federal tax return has been filed .

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Small Business Debtors Monthly Operating Report
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Standard Chapter 11 Debtors Monthly Operating
Report
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Monthly Reporting Requirements for a Small
Business Debtor

• 11 U.S.C. 308(b) A small business debtor
  shall file periodic financial and other reports
  containing information including
• (1) the Debtors profitability
• (2) reasonable approximations of the debtors
  projected cash receipts and cash disbursements
  over a reasonable period
• (3) comparisons of actual cash receipts and
  disbursements with projections in prior reports
  
• (4)
• (A) whether the Debtor is
• (i) in compliance in all material respects with
  postpetition requirements imposed by this title
  and the Federal Rules of Bankruptcy Procedure
  and
• (ii) timely filing tax returns and other required
  government filings and paying taxes and other
  administrative expenses when due

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Remedying Failures Under Section 308

• 11 U.S.C. 308(b)(4)(B) A small business
  debtor shall file periodic financial and other
  reports containing information including
• (1) the Debtors profitability
• (2) reasonable approximations of the debtors
  projected cash receipts and cash disbursements
  over a reasonable period
• (3) comparisons of actual cash receipts and
  disbursements with projections in prior reports
  
• (4)
• (A) whether the Debtor is
• (i) in compliance in all material respects with
  postpetition requirements imposed by this title
  and the Federal Rules of Bankruptcy Procedure
  and
• (ii) timely filing tax returns and other required
  government filings and paying taxes and other
  administrative expenses when due
• (B) if the debtor is not in compliance with the
  requirements referred to in subparagraph (A)(i)
  or filing tax returns and other required
  government filings and making the payments
  referred to in subparagraph (A)(ii), what the
  failures are and how, at what cost, and when the
  debtor intends to remedy such failures

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Useful Documents that Must be Prepared and
Appended to the Debtors Petition

• 11 U.S.C. 1116 In a small business case, a
  trustee or the debtor in possession, in addition
  to the duties provided in this title and as
  otherwise required by law, shall
• (2) attend, through its senior management
  personnel and counsel, meetings scheduled by the
  court or the United States trustee, including
  initial debtor interviews, scheduling
  conferences, and meetings of creditors convened
  under section 341 unless the court, after notice
  and a hearing, waives that requirement upon a
  finding of extraordinary and compelling
  circumstances
• (3) timely file all schedules and statements of
  financial affairs, unless the court, after notice
  and a hearing, grants an extension, which shall
  not extend such time period to a date later than
  30 days after the date of the order for relief,
  absent extraordinary and compelling
  circumstances
• (4) file all postpetition financial and other
  reports required by the Federal Rules of
  Bankruptcy Procedure or by local rule of the
  district court
• (5) subject to section 363 (c)(2), maintain
  insurance customary and appropriate to the
  industry
• (6) (A) timely file tax returns and other
  required government filings and (B) subject to
  section 363 (c)(2), timely pay all taxes entitled
  to administrative expense priority except those
  being contested by appropriate proceedings being
  diligently prosecuted and
• (7) allow the United States trustee, or a
  designated representative of the United States
  trustee, to inspect the debtors business
  premises, books, and records at reasonable times,
  after reasonable prior written notice, unless
  notice is waived by the debtor.

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Requesting that Committee Not be Appointed in a
Small Business Case

• 11 U.S.C. 1102(a)(3) On request of a party
  in interest in a case in which the debtor is a
  small business debtor and for cause, the court
  may order that a committee of creditors not be
  appointed

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Cause for Not Appointing a Committee

• The debt in the case is mostly secured
• There is little unsecured debt
• The unsecured creditors in the case have too
  little an economic stake in the outcome of the
  case
• The overall cost to the estate is too great to
  justify the increased expense of a committee.

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Comparison of Time to File Schedules for a
Regular Chapter 11 Debtor and a Small Business
Debtor
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Comparison of Plan Exclusivity Period for a
Regular Chapter 11 Debtor and a Small Business
Debtor
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Case Timeline Comparison for a Regular Chapter 11
Debtor and a Small Business Debtor
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• Key Statutes
• 101(51)(C) small business case
• 101(51)(D) small business debtor
• 308 Small Business Debtor reporting
  requirements
• 1112(b)(2)(A) no dismissal/conversion of SBD
  case if reasonable likelihood of timely plan
  confirmation
• 1116(1)-(7) Small Business Debtor duties
• 1121(e) SBD plan exclusivity, plan filing,
  and plan confirmation deadlines and extensions
  (order to be entered before deadline expiry)
• 1125(f) SBD disclosure statement may not be
  necessary, may be standard form, or may be
  conditionally approved for solicitation with
  approval combined with confirmation hearing
• 1129(e) SBD confirmation to be within 45 days
  after plan filing

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• Key Rules
• FRBP 1020
• SBDs designation is binding unless and until
  court enters an order finding the SBDs statement
  is incorrect
• UST or party in interest may object to
  designation until longer of 30 days from 341 or
  30 days from amended designation
• If Comm appointed, case proceeds as a SBC only
  after court determines (i) the Comm has not been
  sufficiently active and representative to provide
  effective oversight of the debtor, and (ii)
  debtor satisfies definition of a SBD
• FRBP 3016(d) SBD may use Official Forms 25A
  (SBD Plan) and 25B (SBD DS)
• FRBP 3017.1 Court may conditionally approve
  SBDs DS
• Key Forms
• 1. Petition
• 2.  Balance Sheet
• 3.  Statement of Operations
• 4.  Cash-Flow Statement
• 5.  Federal Income Tax Return
• 6.  Alternatively, statement that these do not
  exist
• 7.  Form 25C - SBD reduced form of MOR
• 8.  Periodic financial and other reports.
• 9. Form 25A SBD Plan
• 10. Form 25B SBD DS

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• Key Cases
• In re Franmar, Inc., 361 B.R. 202 (Bankr. D. Co.
  2006) generally on 1116 duties to append
  reports to petitions and dismissal possibilities
  for failures.
• In re Florida Coastal Airlines, Inc., 361 B.R.
  286 (Bankr. S.D. Fl. 2007) on non-applicability
  of 1121(e)(2) plan-filing deadline to
  creditors.
• In re AMAP Sales Collision, Inc., 403 B.R. 244
  (Bankr. E.D. NY 2009) 1121(e)(3) extension of
  time on plan exclusivity, plan filing, and plan
  confirmation do not require a mini trial also
  citing Congressional mistrust and lack of faith
  in SBDs (e.g., provisions intended to heighten
  administrative scrutiny and judicial oversight of
  small business bankruptcy cases, which often are
  least likely to reorganize successfully).
• In re Safeguard-RX, Inc., Slip Copy, 2009 WL
  249767 (Bankr. S.D. Tex.) 1121(e)(3)
  extension denied for failure to address issues in
  plan and show financial planning in disclosure
  statement (this debtor appears to have abused the
  USTs and Courts considerable patience)
• In re Fall, Slip Copy, 2009 WL 1586542 (Bankr.
  N.D. Ohio) 1112(b) dismissal for many
  reasons, including debtor failing to file plan
  within 1121(e) exclusivity period and offering
  no more than vague promises of future
  improvements.

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• Key Cases (cont.)
• In re J.D. Manufacturing, Inc., 2008 WL 4533690
  (Bankr. S.D. Tex) converting case to chapter 7
  due to SBDs inability to confirm a plan under
  1121(e)(2) and 1129(e).
• In re Luther, 2007 WL 1063008 (Bankr. D. Md.)
  convoluted pro se case where court was forced to,
  sua sponte, schedule a hearing for extension of
  confirmation deadline under 1121(e)(3) and
  1129(e), and, subsequently, entering a show cause
  order for dismissal/conversion.
• In re Save Our Springs (S.O.S.) Alliance, Inc.,
  388 B.R. 202 (Bankr. W.D. Tex. 2008) extensive
  analysis (and denial) of requested extension of
  time to confirm under 1129(e) due to failure of
  debtor to produce sufficient evidence that
  confirmation is more likely than note court also
  agrees with reasoning of Florida Coastal in
  relating subsequently filed plans back to
  prior-filed plans if amendments are not
  substantially different.
• In re Caring Heart Home Health Corp., 380 B.R.
  908 (Bankr. S.D. Fla. 2008) court lacked power
  to extend 1129(e) 45-day deadline for
  confirmation if outside such time, even under
  Rule 9006 (court also not impressed with the new
  SBD provisions curious drafting and
  legislation which is replete with odd
  provisions-including a number of traps for the
  unwary).
• In re Navin R. Johnson d/b/a Optigrab, to come??
  

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Navin Gets His Groove Back!
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