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Technical Corrections to Bankruptcy Code

By Bob Lawless

On December 23, President Obama signed a bill that made technical corrections to the Bankruptcy Code. As the term "technical corrections" suggests, this is a topic of interest probably only to the bankruptcy geeks in the crowd. The bill was not intended to make any substantive changes but only to correct drafting mistakes from the 2005 changes to the bankruptcy law.

It only took five years and even the technical corrections are too few for a horribly drafted law. Maybe there is a nugget for the persons who have a more general interest in bankruptcy. In addition to being a huge policy mistake, the 2005 law created a lot of problems for lawyers and judges because of its poor drafting. As a service to our readers, here is a copy of the enrolled bill. The public law version is not available as of this writing.

As with any technical correction bill, there is little in the bill meriting comment. Only two things jumped out to me.

First, Congress has fixed the double negative in section 1112(b)(2). If "cause" was established, the original wording required the court not to dismiss or convert a chapter 11 unless unusual circumstances existed showing that dismissal or conversion was not in the best interests of creditors. The double negative meant dismissal should happen only when it was bad for creditors. To the best of my knowledge, no one ever applied the original language in its literal, nonsensical form. Whenever I covered chapter 11 dismissals in class, the language was good stuff with which to torture upper-level law students. I will miss those days.

The second thing actually is somewhat substantive. Section 308 imposes reporting requirements on "small business debtors," which are business debtors with less than about $2.2 million in debt. The bill changes the term "small business debtor" to "small business case," which are small business debtors in chapter 11. As originally drafted, section 308's reporting requirements could have applied to small business debtors outside of chapter 11, even to self-employed individuals in chapters 7 or 13. The original language made a careful distinction between "debtors" (everyone) and "cases" (chapter 11s), and Congress chose to locate the section in the generally applicable provisions of chapter 3. The change now clearly limits section 308's application only to chapter 11.

Because outside of chapter 11 the section 308 reporting requirements would have little purpose other than to harass a debtor, this change is definitely for the better. It does make one wonder (even more) about the 2005 drafting process which now Congress admits put a chapter 11 provision amidst the general provisions of chapter 3. No bankruptcy expert would have made that mistake. The change also leaves the statutory term "small business debtor" fairly pointless except as a predicate to define "small business case." The term "small business debtor" appears in two other spots (sections 362 and 1102) in a way that could only have meaning in a chapter 11.

Is there anything else in the technical corrections bill, even by the low standards I have set above, worth noting?

Full post as published by Credit Slips on December 29, 2010 (boomark / email).