CFA Public Affairs Update

Small Business Bankruptcy Bill Problematic for Secured Lenders

Legislation has been introduced in the United States Senate by Senator Sheldon Whitehouse (D-RI) that would amend the federal Bankruptcy Code to make the Chapter 11 bankruptcy process less onerous for small businesses.

Stating that the Chapter 11 process is too costly for small business, Whitehouse introduced the Small Business Job Preservation Act (S. 3675) which would supplement Chapter 11 with an alternative reorganization process geared toward small, family-owned businesses. This Chapter 11S would allow small business owners to retain ownership, while permitting payments to creditors over time. It would also provide for a standing trustee to oversee the reorganization to ensure that all interests are taken into consideration, reduce administrative costs, which can be prohibitively high in Chapter 11, and increase budgetary flexibility by allowing administrative expenses, such as attorneys' fees, to be paid over time. As proposed, the provisions of the bill would apply to businesses with up to $7,500,000 of debt.

The CFA Advocacy Committee Subcommittee on Bankruptcy Legislation , chaired by David Grende, has requested the CFA Co-General Counsel Richard Kohn of Goldberg Kohn and Jonathan Helfat of Otterbourg Steindler Houston & Rosen coordinate an analysis of the bill and to draft a list of CFA's concerns. The Co-General Counsel were aided in this effort by Gary Samson and William Kiekhofer of McGuireWoods, Ron Barliant and Randall Klein of Goldberg Kohn and Doug Taber and Jill Zellmer of GE Capital.

Based on the analysis of this group, CFA believes that the overall impact of the legislation would be to reduce the availability, and increase the cost, of secured credit to small businesses that would be covered by the bill at the very time when such businesses, and the U.S. economy as a whole, can least afford it. While the bill may preserve certain jobs for some failing businesses by facilitating their reorganization in certain limited respects, it will have a serious negative impact upon the preservation of jobs, and the creation of new jobs, for many businesses because it will inhibit financing for such businesses. There are two main reasons for this. First, the bill significantly cuts back on the rights and protections that secured creditors have under current bankruptcy law when providing financing to small businesses, thereby increasing the risk of such financing. Second, secured lenders will be reluctant to expose themselves to the uncertainty and unpredictability of the untested bankruptcy regime established by the bill, in which their rights could be affected in unexpected ways. As a result, CFA believes that secured creditors will be incentivized to redirect their loans away from small businesses that could be covered by the bill, and to focus their resources instead on larger prospective borrowers that would not qualify for protection under the proposal. Alternatively, secured lenders will increase the cost of credit extended to small businesses to reflect the perceived increased risks created by the legislation.