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A Drafting Error in Small Business Reorganization Act?

posted by Bob Lawless

Is there a drafting error in the Small Business Reorganization Act? The other day I posted my estimate that 42% of chapter 11's would qualify, but my sharp-eyed colleague, Ralph Brubaker, noticed something wonky (in all senses of the word) in the new definition of a "small business debtor." (He also tells me that the next issue of the always-excellent Bankruptcy Law Letter will provide an in-depth look at the new law.)

Specifically, the problem is in the exclusionary clause. After defining a small-business debtor as a debtor with less than $2,725,625 in debts, at least 50% of which arose from business activities, the definition then excludes (among other things):

(ii) any debtor that is a corporation subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); or
(iii) any corporation that—

(I) is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); and
(II) is an affiliate of a debtor.

Clause (iii)(I) excludes the same thing as subparagraph (ii) with only slightly different words. Obviously, an extra condition in clause (iii)(II) does not make paragraph (iii) exclude anything that clause (ii) does not already exclude.

Read literally, the definition would allow a small subsidiary of a public-traded company to take advantage of the new small-business debtor rules. The ABI Commission to Study the Reform of Chapter 11 recommended they be excluded. My guess is that the drafters of the new law intended to exclude them, but the language used did not quite get the job done. Is there a reason for this language that I have missed? If not, it would seem to be a prime candidate for a technical correction fix.


Bob -- while you are at it:
How does the trustee get paid in a Small Biz 11 if the trustee is not standing? I guessed it would be covered in 326(b) – and the Conforming Amendments add “subchapter V of Chapter 11” to the first sentence in 326(b) – but there is no reference to new 1183 added to 326(b) so I am not sure how a nonstanding trustee gets paid. Any thoughts? kml

I have the same question as Mr. Lundin. Also, is there a redline of the new law available anywhere? That would be tremendously helpful.

Keith, who said the trustee got paid?

More seriously, I think you're right. There needs to be a reference in section 326(b) to section 1183. Until then, do you think a confirmed plan that authorized payment would be enough? I guess it remains to be seen whether there are many nonstanding trustees appointed in these cases.

And, I am not aware of any redline yet for the new law.

Bob -- of course, trustees don't get paid. I should have seen that.
Ironically, the U.S Trustee has solicited applications for a "panel" of non- standing trustees to handle small biz Chapter 11s in W.D. Pa. Go figure. Your idea of putting trustee comp in the plan is excellent. Thanks for thinking about this. kml

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