Statement of Administration Policy: S. 1985 - Bankruptcy Code Amendments and Review Commission

(Senate)
(Heflin (D) Alabama and Grassley (R) Iowa)

Although the Administration supports consideration of Bankruptcy Code revisions, it strongly opposes enactment of S. 1985.

S. 1985 creates a new Bankruptcy Code chapter for small businesses which is badly flawed, as described below. The bill also contains a number of other objectionable provisions, which are described in the Attachment.

Small Business Chapter

S. 1985 would create a new Bankruptcy Code chapter for small businesses intended to provide an alternative to the current business reorganization accorded by Chapter 11. The Administration does not oppose a new chapter to address the special issues arising in small business reorganizations.

However, the Administration strongly opposes this small business chapter because it would:

• Unfairly skew toward debtors the delicate balance of financial interests between debtors and creditors. S. 1985 deprives creditors of important Chapter 11 safeguards such as the right to vote on a reorganization plan, the right to be paid prior to any payments to the small business's principals, and the right to be treated as a fully secured creditor. It also grants a discharge of indebtedness before payments to creditors are complete, depriving them of a remedy when small businesses fail to make their payments. The lack of these safeguards may, in turn, adversely affect the capital costs of all small businesses.
  
  
• Probably increase demands upon Government lending programs. By increasing the risks of extending credit to small businesses, S. 1985 would encourage private creditors to make their lending conditions more stringent. In its role as a lender of last resort, the Government may become the only source of funds for a greater number of small businesses.
  
  
• Potentially deprive creditors of their property in violation of due process under the Fifth Amendment. Unlike the Bankruptcy Code's other reorganization chapters, the small business chapter does not expressly require that secured creditors receive the value of their collateral in a reorganization.
  
  
• Violate the uniformity requirement of the Constitution's Bankruptcy Clause as recently construed bv the Supreme Court. The new chapter would only be effective in certain geographic areas and not in others.
  
  
• Encourage litigation over the vague definition of "disposable income" and the vague confirmation standard of "equitable and fair."

Pension-Related Provisions

The Administration supports many of the provisions in S. 1985 relating to the treatment of pension benefits in bankruptcy and the Pension Benefit Guaranty Corporation.

Pay-As-You Go Scoring

S. 1985 would affect direct spending and receipts; therefore, it is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act (OBRA). A budget point of order applies in both the House and Senate against any bill that is not fully offset under CBO scoring in each year. If, contrary to the Administration's recommendation, the Senate waives any such point of order that applies against S. 1985, the effects of enactment of this legislation would be included in a look back pay-as-you- go sequester report at the end of the Congressional session.

OMB's preliminary scoring estimates are given below. If S. 1985 were enacted, final OMB scoring estimates would be published within five days of enactment, as required by OBRA. The cumulative effects of all enacted legislation on direct spending will be issued in monthly reports transmitted to the Congress.

ESTIMATE FOR PAY-AS-YOU-GO
(outlays in millions)

Attachment

Additional Objections to S. 1985

Supplemental Injunctions Provisions

The Administration strongly opposes provisions of S. 1985 that would:

• Potentially grant bankruptcy courts unlimited power to expand the scope of discharge.
  
  
• Severely limit the Government's ability to enforce environmental obligations.
  
  
• Bind parties that had no notice of the bankruptcy proceeding, risking a violation of the Due Process Clause of the Fifth Amendment.

United States Trustee Provisions

The Administration strongly opposes provisions of S. 1985 that would:

• Place additional responsibilities upon the United States Trustee System while decreasing the System's resources. The United States Trustees are required under Chapter 10 to supervise the administration of estates, just as under Chapter 11. However, S. 1985 fails to allocate to the U.S. Trustee System Fund a portion of the Chapter 10 filing fees, as is done for Chapter 11 filing fees.
  
  
• Require U.S. Trustee attendance at several hundred thousand creditors meetings where such attendance is not currently required.
  
  
• Put U.S. Trustees in the untenable position of giving legal advice to debtors.
  
  
• Require the United States Trustee System to issue uniform bankruptcy compensation guidelines for its offices. The System must accept the law concerning compensation as established in each judicial district. Although S. 1985 would require the System to issue uniform guidelines, the language of S. 1985 does not establish more consistent standards for compensation that would apply to all districts. Thus, the System cannot adopt and apply standards and policies uniformly in each district.

Review Commission

S. 1985 creates a Bankruptcy Review Commission to consider potential Code reforms. The Administration is concerned that creation of such a commission not delay enactment of urgently needed Code amendments.