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Bill may put small business at risk

Even supporters of the bankruptcy bill say some companies could be forced to shut down rather than reorganize.

Faltering businesses seeking protection from their creditors will have less time to settle their debts and reorganize if, as is expected, the bankruptcy bill passed by Congress becomes law.

Most of the proposed changes in the bankruptcy law concern individuals, whom creditors wish to hold responsible for more of their debts. But the changes in rules affecting corporations could ultimately affect far more people.

The bill's changes, intended to prevent companies from languishing in bankruptcy court, could force more small companies out of business, even supporters of the bill say. And critics say the result may be a loss of many jobs at a time when the employment outlook is weakening.

The bill would define small businesses as companies with debts of $3-million or less. Such companies account for more than 80 percent of all companies that filed for protection from creditors under Chapter 11 of the bankruptcy code last year, according to the National Bankruptcy Conference, a non-partisan group of academics, judges and lawyers that has studied changes to the bankruptcy law since the 1930s.

The proposed legislation would set strict timetables for small companies to reorganize, including a deadline of 175 days for a court confirmation of a reorganization plan if there is no organized creditors' group monitoring the case. Some judges now put companies on such a fast track but are willing to be flexible if, for any reason, a company needs extra time because of seasonal business swings or other factors.

Companies that cannot meet the deadline will have their cases dismissed or be pushed from Chapter 11, which is intended to give them time to reorganize, into Chapter 7, which forces them to liquidate their assets.

"Here we are on the precipice of a serious recession," said Elizabeth Warren, a professor at Harvard Law School and an expert on bankruptcies. "Why would you be pushing for liquidation of companies at a time like this?"

The proposed deadline and certain other provisions affecting corporations have been opposed by academics and lawyers as well as union officials who are worried about their members' jobs. Last year, companies with an estimated 2-million workers filed for bankruptcy, while 1.2-million individuals filed, Warren said.

Damon Silvers, associate general counsel of the AFL-CIO, said, "The bill contains a group of rather technical provisions that we think damage the ability of the bankruptcy system to preserve companies as going concerns."

The new requirements are intended to speed up court proceedings. Small businesses generally owe relatively small sums, and typically no creditors are actively lobbying to get their money back. As a result, many of these companies now linger in Chapter 11 rather than speedily dispensing with their debts.

Supporters of the bill say the changes are necessary to preserve the rights of creditors. "Normally, it takes two to three years before creditors see a dime," said Judge Edith H. Jones of the 5th Circuit U.S. Court of Appeals in Texas. "Time is money."

Jones, one of the biggest supporters of the small-business changes, served on a commission set up by Congress in 1994 to make recommendations on reforming the bankruptcy code. A prominent Republican, she is viewed as a potential candidate for the Supreme Court.

The bill's supporters acknowledge that some companies that would be able to reorganize under the current law probably will suffer. "The assessment was that maybe we're better off liquidating a handful of companies too soon," said Todd J. Zywicki, a professor at George Mason University Law School, who advised Congress on the bankruptcy bill.

Sen. Christopher Bond, R-MO., chairman of the Senate's Small Business Committee, promoted an amendment giving judges discretion on how quickly small companies have to file reorganization plans, but that amendment failed to win the support Wednesday of Sen. Charles Grassley, R-Iowa, a sponsor of the bankruptcy bill, a Senate official said. Bond settled for a change that clarified the bill's various deadlines rather than eliminating them.

"We thought the original amendment was better, but we think this one gets the job done," Bond said.

Companies of all sizes would be affected by some other provisions in the bill. After filing under Chapter 11, companies would have only seven months to reject a property lease. Retailers would be most affected. The current system "creates instability in a strip mall," Zywicki said. "It's hard for a landlord to fill space when you know the anchor tenant might not be there."

The amount recovered by creditors actually could be diminished by the new provisions, said Harvey Miller, head of the bankruptcy practice at Weil, Gotshal & Manges, who advised Macy's on its reorganization, which took nearly four years. If the lease provision had been in effect, he said, unsecured creditors would have wound up with far less.

Macy's creditors also would have been hurt by a change in the law that would limit to 18 months a large debtor's exclusive right to file a reorganization plan. Such debtors now have 120 days, but a bankruptcy judge can extend this period of exclusivity indefinitely.

Supporters of the law say the change will keep management from stalling for time and will make it easier for creditors and others to offer their own proposals. But Miller said that, by staying in bankruptcy longer, Macy's ultimately increased creditors' recoveries by 30 percent.

Bankruptcy experts say they are frustrated that the changes in corporate reorganizations have received so little attention from lawmakers.

"There was not significant consideration of the business provisions in any of the hearings," said J. Ronald Trost, chairman of the National Bankruptcy Conference and until recently the head of the bankruptcy practice at Sidley & Austin. "Most of these changes were swept in without any real analysis."