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58–267 PDF 2010

S. HRG. 111–600 

COULD BANKRUPTCY REFORM HELP PRESERVE 

SMALL BUSINESS JOBS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT 

AND THE COURTS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 17, 2010 

Serial No. J–111–80 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MATT MINER, Republican Chief Counsel 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

SHELDON WHITEHOUSE, Rhode Island, Chairman 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

BENJAMIN L. CARDIN, Maryland 

EDWARD E. KAUFMAN, Delaware 

JEFF SESSIONS, Alabama 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY GRAHAM, South Carolina 

SAM GOODSTEIN, Democratic Chief Counsel 

MATT MINER, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Feingold, Hon. Russell, a U.S. Senator from the State of Wisconsin, prepared 

statement .............................................................................................................. 99 

Grassley, Chuck, a U.S. Senator from the State of Iowa, prepared statement .. 100 

Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama .......................... 3 

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island ...... 1 

prepared statement .......................................................................................... 145 

WITNESSES 

Bennett, Thomas, Judge, Northern District of Alabama, Birmingham, Alabama ...................................................................................................................... 13 

Bullock, Charles D., Esq., Attorney, Southfield, Michigan .................................. 7 

Mason, Joseph, Associate Professor, Department of Finance, Louisiana State 

University, Baton Rouge, Louisiana ................................................................... 11 

Mendenhall, Edward D., Jr., Small Business Owner, Warren, Rhode Island .... 5 

Small, A. Thomas, Judge, Eastern District of North Carolina, Co-Chair National Bankruptcy Conference, Small Business Working Group ..................... 9 

QUESTIONS AND ANSWERS 

Responses of Thomas B. Bennett to questions submitted by Senator Grassley . 26 

Responses of Joseph Mason to questions submitted by Senators Grassley 

and Sessions ......................................................................................................... 41 

SUBMISSIONS FOR THE RECORD 

American Bankers Association, Commercial Finance Association, Independent 

Community Bankers of America, and Financial Services Roundtable, joint 

letter ...................................................................................................................... 51

Bennett, Thomas, Judge, Northern District of Alabama, Birmingham, Alabama, statement and attachment ....................................................................... 60 

Bullock, Charles D., Esq., Attorney, Southfield, Michigan, statement ............... 92 

Mason, Joseph, Associate Professor, Department of Finance, Louisiana State 

University, Baton Rouge, Louisiana, statement and attachment .................... 102 

Mendenhall, Edward D., Jr., Small Business Owner, Warren, Rhode Island, 

statement .............................................................................................................. 114 

National Association of Credit Management, Robin Schauseil, CAE, president, 

and Phyllis L. Truitt, Chairman and Director of Credit Atlas World Group, 

Columbia, Maryland, joint letter ........................................................................ 116 

Small, A. Thomas, Judge, Eastern District of North Carolina, Co-Chair National Bankruptcy Conference, Small Business Working Group, statement 

and attachment .................................................................................................... 118 

(1) 

COULD BANKRUPTCY REFORM HELP 

PRESERVE SMALL BUSINESS JOBS? 

WEDNESDAY, MARCH 17, 2010 

U.S. SENATE, 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE

COURTS, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC 

The Subcommittee met, pursuant to notice, at 10:33 a.m., Room 

226, Dirksen Senate Office Building, Hon. Sheldon Whitehouse presiding. 

Present: Senator Sessions. 

OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. 

SENATOR FROM THE STATE OF RHODE ISLAND 

Senator WHITEHOUSE. The hearing will come to order. 

I’m delighted to have the distinguished Ranking Member not 

only of this subcommittee, but of the Senate Judiciary Committee, 

Senator Jeff Sessions of Alabama, with us. I will make an opening 

statement and then recognize the witnesses and allow the distinguished Ranking Member to say a few words. Then we’ll get to the 

testimony. 

I will warn each of you that we have a 5-minute clock on the initial testimony, and I will use the gavel. So for those of you who 

have prepared longer remarks, spend some time to think about 

what your core message is that you can distill into 5 minutes of 

oral testimony. 

While some economists have declared that the recession is over, 

its painful aftermath in the form of a prolonged period of unemployment continues nationwide. The national unemployment rate 

stands at almost 10 percent, and the situation is even worse in 

some areas; Senator Sessions’ home State of Alabama has an 11.1 

percent unemployment rate, and my home State of Rhode Island 

ranks third nationwide, at 12.7 percent. Job retention and preservation should be, and is, the top of our legislative agenda. 

Today we are going to explore changes to the Bankruptcy Code 

that could help small companies to reorganize, stay in business, 

and keep employees employed. The ideas we will discuss today are 

worthwhile to consider for two reasons: 1) small businesses account 

for over half of all jobs nationwide; and 2) unlike other job-preserving measures like tax cuts and government investment, bankruptcy reform can be accomplished with zero cost to the Federal 

budget. 

2 

While small business bankruptcy reforms may prove a powerful 

tool in cutting job losses, the need for a new bankruptcy reorganization option has been clear for some time. Chapter 11 was designed for large, publicly traded companies and does not work well 

for smaller companies for a number of reasons. 

First, Chapter 11 extinguishes equity so the debtor-owners exit 

the bankruptcy not owning their company anymore. A change in 

shareholders may not discourage big corporations from reorganizing, but for small businesses the corporate entity and its owner 

are not so easily disaggregated. 

Second, small businesses often have a number of trade creditors 

and other unsecured creditors that do not participate in a Chapter 

11 because their claims are too small. This failure to participate 

leaves the secured creditors steering the bankruptcy, often toward 

liquidation. 

Finally, the Chapter 11 process is time-consuming and expensive 

and attorneys’ fees and other administrative costs often eat up so 

much of the firm’s value that there’s not enough left for the firm 

to emerge from bankruptcy as a going entity. 

The National Bankruptcy Conference has proposed addressing 

these three issues by opening up Chapter 12, a process currently 

available only to family farms and fishermen, to a wider group of 

small businesses. I expect that Judge Small will discuss this proposal in his testimony today. I have reviewed the NBC’s report and 

believe that they make a strong case for the Chapter 12 approach. 

I want to stress, however, that I look forward to hearing the 

thoughts of all the witnesses on positive steps to promote small 

business bankruptcy reform. It appears from the written testimony 

that each of our witnesses acknowledges that certain changes to 

bankruptcy law might help to preserve small business value and to 

save jobs. 

As we discuss the NBC proposal, there are a number of variables 

about which I’m interested in getting the witnesses’ feedback: is 

the proposed definition of small business entity appropriate; should 

the reforms be made permanent or enacted on a trial basis, as 

Chapter 12 for family farms initially was? 

Through it all, one thing is clear: small businesses are the lifeblood of our economy, particularly in Rhode Island, but nationwide. 

They are hurting now in today’s economic climate. We should be 

considering all options, including reforms to our Bankruptcy Code, 

to help small businesses keep their doors open and keep their employees on the payroll. I look forward to a lively discussion with a 

distinguished panel of witnesses. 

Ed Mendenhall owned a fitness center in Warren, Rhode Island 

from 1996 to 2009. In his testimony, Mr. Mendenhall will describe 

his efforts to save his business. Mr. Mendenhall is a graduate of 

the University of Rhode Island and has an extensive background 

in personal training, martial arts, and fitness. 

Chuck Bullock practices bankruptcy law in Detroit, Michigan, 

sort of the epicenter, perhaps, for economic distress in our country 

right now. He has represented small business debtors and secured 

and unsecured creditors. A graduate of the University of Michigan 

and the University of Memphis School of Law, Mr. Bullock teaches 

bankruptcy at Cooley Law School. 

3 

Tom Small served as U.S. Bankruptcy Judge for the Eastern District of North Carolina from 1982 to 2009. He also served as president of the National Conference of Bankruptcy Judges and as a 

board member of the American Bankruptcy Institute. He holds degrees from Duke University and Wake Forest University School of 

Law. Judge Small continues to be an active member of the National Bankruptcy Conference and serves as co-chair of its Small 

Business Working Group. Judge Small helped Senator Grassley to 

draft the original Chapter 12 back in the 1980’s. 

Joseph Mason is the Herman Moyes Louisiana Bankers Association chair of Banking at the Louisiana State University, and Senior 

Fellow at the Wharton School. Dr. Mason’s academic research focuses primarily on investigating liquidity in thinly traded assets 

and illiquid market conditions. A graduate of Arizona State University, he has an MS and Ph.D. from the University of Illinois. 

Thomas Bennett has been a U.S. Bankruptcy Judge for the 

Northern District of Alabama in Birmingham since 1995. For over 

15 years he was a partner with the law firm of Bowles, Rice, 

McDavid, Graff & Love, PLLC, and served as the head of the firm’s 

Bankruptcy, Creditors’ Rights, and Commercial Litigation practice 

groups. Judge Bennett graduated from Gerard College in Philadelphia, Pennsylvania in 1966 and received his undergraduate and 

graduate degrees in Economics, as well as his law degree, in from 

West Virginia University. 

I now turn to our Ranking Member for any remarks he would 

care to make. Then we will swear the witnesses and proceed with 

the testimony, beginning with Mr. Mendenhall. 

STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM 

THE STATE OF ALABAMA 

Senator SESSIONS. Thank you, Mr. Chairman. 

Of course, bankruptcy is a Federal court. Our economy evolves 

and bankruptcy rules and procedures, I think, should be reviewed 

by Members of Congress periodically to make sure that we are operating on the most effective, efficient level possible. Dynamic economic activity is part of the American strength, and being able to 

borrow money at a reasonable rate of interest is part of our American strength. 

Business people who fail and just can’t make it are able to walk 

away, often usually without—sometimes, at least I’ll say—personal 

liability and can start again. Many people who have been successful in business have a history of having failed businesses before 

that. So, we are in a dynamic economy. 

I think maybe the Japanese experience should share with us that 

keeping zombie banks and zombie institutions alive that really 

ought to go away and start over again can be a mistake also. So, 

we’ll discuss those issues and remember that the freedom to succeed is also the freedom to fail, and people who wish to become rich 

1 day aren’t always to be provided assistance when they have not 

been successful. 

So I hope we’ll learn something today about how we can preserve 

and create new jobs by helping small businesses reorganize in a 

convenient, effective way, but in doing so I hope we’ll balance the 

rights of those who’ve invested in these small businesses, too. 

4 

Many investors and lenders are small businesses themselves and 

we must be sure that we’re not robbing Peter to pay Paul. We must 

make sure that we are not using our bankruptcy laws to force one 

small business to subsidize another small business. 

Bear in mind that reorganization is not solely about keeping a 

failing business alive, it’s about preserving the value of an operating business so that lenders can be paid back, if they can be, and 

also to give that company a chance to succeed through bankruptcy 

protection. So we’ve got to be careful about all of these issues. 

It’s great to have Judge Bennett here. He’s well-respected in our 

State and throughout the bankruptcy community in America. He’s 

been on our bench since 1995. Judge, we appreciate you and the 

resource and insight you’ve provided to me and my staff over the 

years. 

Of course, we have the current choice between Chapter 7 and 

Chapter 11. Chapter 7 is liquidation and Chapter 11 allows a bankruptcy court to help reorganize the company in a way that allows 

it to be successful, to hold off certain creditors, and create a situation in which more creditors get paid more money than if one or 

two had come in and liquidated the company or destroyed the company just to get their short-term gain. I think that’s a good policy. 

As to whether we can use the agricultural idea, I guess I’ll say 

I’m open to it, but I have some concerns about it. There is no doubt 

in my mind that if you recreate procedures that significantly reduce a secured creditor’s priority in bankruptcy and in liquidation 

circumstances, then that secured creditor in the future will be less 

likely to loan money, and if he or she does, to do so with perhaps 

higher interest rates to guard against the dangers of the erosion 

of what they thought they had when they started out with a secure 

loan. There’s just no free lunch here, somebody is going to pay. 

Sometimes I think we should ask ourselves, who would best pay, 

the small business who made the loan? Should that person subsidize the failing small business or should we just have the taxpayers do it? It’s easier for us to maybe require the person who 

made the loan to be responsible because if we would have to raise 

taxes or increase the debt if we do it otherwise. But as a matter 

of economics, I’m not sure which one is more morally defensible as 

a policy. 

So I am open to this. Mr. Chairman, thank you for your leadership. I have confidence that we can find some things that we can 

agree on to make the system better, and hopefully we’ll agree on 

the big things. 

Thank you very much. 

Senator WHITEHOUSE. Thank you, Senator Sessions. 

If I could ask the witnesses to stand and be sworn. 

[Whereupon, the witness was duly sworn.] 

Senator WHITEHOUSE. Thank you very much. Please be seated. 

I would like to welcome Edward Mendenhall from my home State 

of Rhode Island, a small businessman who for many years ran a 

small business in Warren, Rhode Island. 

Mr. Mendenhall, please proceed. 

5 

STATEMENT OF EDWARD D. MENDENHALL, JR., SMALL 

BUSINESS OWNER, WARREN, RHODE ISLAND 

Mr. MENDENHALL. Chairman Whitehouse and Ranking Member 

Sessions, thank you for the opportunity to appear today before the 

Subcommittee and tell my story, and for looking into ways to help 

small businesses stay open. 

My story begins at the end of 1995, when I decided to open a 

health club in Warren, Rhode Island. I grew up in the area and 

recognized the need for a health club, so I decided to open one myself. Shortly thereafter, I secured a reasonably priced location, 

moved into the building, and began to renovate it 24/7 with the 

help of family and friends. 

In October 1996, we officially opened the doors. Though the location wasn’t ideal and the business was very young, we grew into 

a successful business and we were actually profitable from day one. 

We put every dollar back into the business and continued to grow 

and improve over the years. In 2001, we were able to endure the 

opening of a larger, better funded competitor because our customer 

base had grown so loyal. 

In 2005, things took an unexpected turn when our landlord refused to renew our lease. While moving to a new facility and a better location was definitely part of our long-term strategy, the news 

was devastating at that time. Our type of business requires a large, 

open floor plan on a main road, and there were very few suitable 

locations in the area. To make matters worse, we didn’t have the 

cash necessary to build out a new location at the time, so we were 

on the verge of losing everything we had worked so hard for all 

those years. 

So the first thing we did was to enlist the expertise of a health 

club design and marketing firm to make sure we did it right. They 

began with a marketing analysis and we began the search for potential locations. We found ourselves with no other option than to 

lease space. At that time, there were only two spaces available for 

lease. 

In late summer/early fall of 2006, we finally negotiated a deal to 

move into a shopping plaza and applied for the financing. Our financing needed to be secured by my personal home and assets. 

Now that we had the financing in place, we were waiting on the 

actual lease documents to be completed. 

We needed to begin the renovations right away in order to make 

the January opening date. In the health club industry, the first 

quarter sets up the rest of the year, as more people are inclined 

to join the club after their New Year’s resolutions. 

As negotiations on the lease for the plaza space dragged on, another space opened up and we signed a lease with them in April 

of 2007. In the fall of 2007, we had the new space completely gutted and began the closing process with our bank. We again had 

hopes of a January opening to seize on the New Year’s resolutions 

crowd, and continued to do what we could to keep the project moving forward. However, it wasn’t until January that we were finally 

ready to close on the loan. 

Days before the closing date, the bank informed us that a UCC 

filing had to be cleared before proceeding with the closing. Unfortunately, because my business partner couldn’t use any collateral, the 

6 

bank that financed the stock purchase filed the UCC against our 

shares. By the time we found a solution and notified the bank that 

we were going to clear the UCC filing, they informed us that our 

file had been taken out of closing and sent to storage in another 

State. 

We then had to begin the closing process all over again and had 

to resubmit all documentation. We were informed by a bank employee that, for the course of our loan, everyone at the bank involved with our loan had either been fired or quit during the process. Within the bank there was a lot of confusion, 

miscommunication, and misplaced documents. This caused the 

whole process to be far longer and more painful than it should have 

been. 

The delays ultimately caused our original landlord to evict us in 

the summer of 2008. The eviction process began in July 2008, when 

our landlord literally began taking over our space and renovating 

around our customers while we were still trying to operate. Immediately our sales dropped by $10,000 per month, which equated to 

about 25 percent of our sales. 

Luckily, we found a small vacant building around the end of September that was to serve as a temporary location. It wasn’t ideal, 

but it did save us. We operated there until we opened the new facility in April of 2009. We finally closed on the loan in October of 

2008 and the club opened in April 2009, 2 years behind schedule. 

Our average sales prior to the eviction were enough to cover the 

minimal expenses at the new location, including the new debt service. A year of normal operations and growth in a new facility would 

have put us back on track. By the time the new club was open, we 

were behind in bills and needed to free up cash-flow so we would 

have a chance to breathe and focus on growing. We were looking 

for help everywhere: the Economic Development Corporation, the 

SBA, our banks, new banks, private investors, everywhere. 

We had applied for an ARC loan to pay our equipment leases. If 

approved, it would have freed up $7,000 a month in working capital for 5 months. We couldn’t even get the banks to take the application, never mind consider it. They said they just didn’t want to 

be bothered with the paperwork. 

We also applied for a deferment with our bank. We were told by 

the SBA that our bank could approve a deferment for up to 1 year 

without SBA approval. It took 4 months and a lot of paperwork 

just to get an answer. We were eventually granted a 3-month interest-only deferment. Unfortunately, this would not be a significant 

help. 

An ARC loan and a longer loan deferment, by themselves, would 

have been enough to save the business if granted soon enough. 

This would have given us the time we needed to grow and catch 

up on the past-due bills. When we closed our doors, we had accumulated approximately $140,000 in past-due bills. Half of that 

amount also would have saved the business while we caught up 

with the rest over time. I guess when you look at the big picture, 

a relatively small amount of help would have helped us avoid having to go bankrupt with over $1 million in debt. A little flexibility 

on timing could have saved our business. 

7 

Last year we met with a bankruptcy attorney, hoping that if we 

filed we could buy enough time to make it to the first quarter of 

the year and get our business back on track. Unfortunately, the attorney told us our business value was too small to warrant reorganization in Chapter 11; the only bankruptcy option for us was liquidation. 

We have now lost the business, our entire life’s savings, our credit, and now probably our house, which was used to secure the loan, 

and it didn’t have to be that way. Timing worked against us. If we 

had a little more time we could have stayed in business, become 

profitable again, and avoided laying off 25 full-and part-time employees. So Senators, please consider ways to help small businesses 

like mine have a fighting chance to stay in business. 

Thank you. I am happy to answer any questions. 

Senator WHITEHOUSE. Thank you, Ed. That was incredibly important testimony and I appreciate that you have come here to deliver it. 

[The prepared statement of Mr. Mendenhall appears as a submission for the record.] 

Senator WHITEHOUSE. The next witness, Charles Bullock, is a 

day-to-day practitioner deeply engaged in the practical situations of 

debtors and secured and unsecured creditors in our Michigan bankruptcy courts. 

Mr. Bullock. 

STATEMENT OF CHARLES D. BULLOCK, ATTORNEY, 

SOUTHFIELD, MI 

Mr. BULLOCK. Mr. Chairman and members of the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, my 

name is Charles Bullock. I am a practicing attorney and founder 

of the Michigan-based law firm, Stevenson & Bullock, PLC. I am 

licensed in both Michigan and Tennessee. My practice concentrates 

on individual and small business bankruptcy cases, representing 

trustees, creditors, debtors, and other interested parties in Chapters 7, 11, 12 and 13. 

My substantive comments are premised on the firm belief that 

there must be an alternative to the current process set forth in 

Chapter 11 when a small business seeks relief in bankruptcy and 

attempts to reorganize. I do not, however, believe that such an alternative would require one to revisit the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 

I agree with those who have called on this body to refrain from 

reflexive legislative efforts which do not afford a wholesale solution, particularly the comments of the well-respected jurist, Hon. 

Thomas B. Bennett of the U.S. Bankruptcy Court in the Northern 

District of Alabama, who, during his December 5, 2007 testimony 

before the Senate Committee on the Judiciary, when discussing the 

looming foreclosure crisis, stated, ‘‘I am here to urge caution and 

restraint in doing anything which attacks what is only a portion of 

a greater problem’’. I strongly agree with that premise. Caution 

and restraint must be implemented in doing anything which attacks what is only a portion of a greater problem. 

I hold a view that seems to be shared by all experts in the field, 

whether they are for or against a piece of legislation, which is that 

8 

any legislative solution should attempt to address the entire problem. With that in mind, I strongly support amending Chapter 12 

to accommodate small business enterprises seeking to reorganize. 

It is my firm belief that the immediate and long-term benefits of 

such Chapter 12 accommodation would address more than a portion of the greater problem and would provide little risk to those 

you desire to assist and to those many more not contemplated to 

be affected by the proposed legislation. 

This solution benefits everyone involved in bankruptcy. It continues the business operation, retains jobs, and enables creditors to 

be paid. This is a commendable attempt to attain balance and increase the potential benefits of a reorganizing bankruptcy case. As 

the Subcommittee is aware, reorganization in bankruptcy is attained through Chapters 11, 12 and 13. 

The U.S. Bankruptcy Code provides that a debtor that is not an 

individual may not be a debtor under Chapter 13 of Title 11. Stated another way, only an individual may be a Chapter 13 debtor. 

Furthermore, only a family farmer or family fisherman may be a 

debtor under Chapter 12. 

Because of these restrictions, debtors engaged in business that 

are not eligible for relief under Chapter 12 or 13 that seek to reorganize in bankruptcy are required to file for relief under Chapter 

11, regardless of size, amount of revenue, or the amount of the 

creditor base. 

Insurmountable challenges are often imposed on both creditors 

and debtors when a small business seeks relief in the existing 

Chapter 11. Significant impediments to successful reorganization 

under Chapter 11 include, among other things, the high costs, balloting, and the lack of a standing trustee. 

If the goals of the bankruptcy process are to provide a structured 

environment supervised by the court in which financially troubled 

companies may remain in business, continue to provide and create 

jobs, and restructure and retire debt, Chapter 11 fails miserably in 

addressing small business issues. 

I have represented or closely interacted with nearly every party 

in a typical Chapter 11 reorganizing case. My experience dictates 

that Chapter 11 obligates debtors, creditors, and equity security 

holders to invest limited resources in the technical legal process 

rather than allowing the parties to specifically allocate those resources to the substantive reorganization efforts. 

In the best legislative solution, a reorganization of a small business would assist the debtor and ensure that the debtor attends to 

the critical components of the case. That legislative solution would 

promote expediency, which is essential for small business cases to 

succeed. 

I have marveled at the efficiency of the Chapter 13 process: the 

modest administrative expenses in Chapter 13, in relation to Chapter 11; the usefulness of a standing trustee; and the benefits inuring to both debtor and creditors once a plan is confirmed. As a result, I am convinced that Chapter 12 is a good fit for the small 

business debtor. 

The Chapter 12 requirements of Section 1222 relating to the contents of a plan, Section 1225 relating to confirmation of a plan, are 

well-suited for traditional small business debtors. These provisions 

9 

are quite similar to Chapter 13 requirements of Sections 1322 and 

1325. 

In light of the cumbersome nature of Chapter 11 and the fragile 

nature of many small business debtors, the resulting lower administrative expenses incurred by a debtor in Chapter 12 recommend 

this alternative. So, too, creditor costs would be lower in Chapter 

12. Balloting and unsecured creditors committees will give way to 

an independent and disinterested Chapter 12 standing trustee who 

would represent the interests of all creditors. 

Inasmuch as feasibility is a condition of confirmation in Chapter 

12, a judicial gatekeeper will have a better ability to maintain its 

docket and the integrity of the bankruptcy system by confirming, 

converting, or dismissing these cases. In the Eastern District of 

Michigan where I practice, we have an exceptionally diligent, albeit 

extremely overworked, court. 

In his opening statement, the Ranking Member has made an insightful comment about zombie banks. Similarly, Chapter 11 seems 

to have the unintended consequence of creating zombie debtors because of the administrative process and impediments to confirmation. Chapter 12, however, requires that the court specifically address feasibility, which is something not required in Chapter 11. As 

a result, this may better address the problems of such debtors. 

Thank you. 

Senator WHITEHOUSE. Thank you very much, Mr. Bullock. I appreciate your testimony and that you’ve taken the trouble to come 

here and join us. 

[The prepared statement of Mr. Bullock appears as a submission 

for the record.] 

Senator WHITEHOUSE. Our next witness is Judge Small, who was 

really, I gather, present at the creation of Chapter 12 as one of the 

draftsmen who assisted Senator Grassley when he prepared that 

piece of legislation. 

Without further ado, Hon. Thomas Small. 

STATEMENT OF HON. A. THOMAS SMALL, U.S. BANKRUPTCY 

JUDGE, RETIRED, EASTERN DISTRICT OF NORTH CAROLINA, 

CO-CHAIR, NATIONAL BANKRUPTCY CONFERENCE, SMALL 

BUSINESS WORKING GROUP 

Judge SMALL. Thank you, Mr. Chairman and Senator Sessions, 

for inviting the National Bankruptcy Conference to testify this 

morning. 

Before I retired in September of last year, I was a Bankruptcy 

Judge for the Eastern District of North Carolina, and most of my 

Chapter 11 cases that I handled were small businesses. 

What I saw from the bench is consistent with the testimony of 

Mr. Mendenhall and Mr. Bullock. Chapter 11 does not work well 

for many small businesses, and unfortunately for some debtors like 

Mr. Mendenhall, it does not help at all. 

Professor Ed Morrison of Columbia Law School and I are cochairs of a National Bankruptcy Conference Working Group to recommend ways to remove some of the obstacles to reorganization. In 

my written testimony is our report. 

At first, we considered a separate chapter for small businesses, 

much like Chapter 10 legislation supported by Senator Grassley 

10 

and Senator Hefflin from Alabama in the early 1990’s, but we finally realized that a better solution would be to allow small businesses to file for relief under Chapter 12, a time-tested chapter of 

the Bankruptcy Code that has been extremely successful in enabling family farmers to reorganize. Small businesses face many of 

the same obstacles that once confronted family farmers. 

If Senator Grassley were here today, he would see that my testimony is very similar to the testimony I gave almost 25 years ago 

on the national farm crisis at a hearing chaired by Senator Grassley and Senator John East. Today, the crisis facing small business 

is just as dire and the solution, in our opinion, is the same: Chapter 12. 

The problems confronted by distressed small businesses are numerous. First, Chapter 11 was designed for large corporations and 

it’s very expensive. Most of these costs are professional fees. As a 

judge, I tried to reduce these by streamlining the Chapter 11 procedures, but the problems extend far beyond that. In Chapter 11, 

costs must be paid in full at confirmation, and this is a very heavy 

burden for cash-strapped debtors. Chapter 12, though, allows administrative costs to be paid over time. 

Especially troublesome are Chapter 11’s high voting requirements, the Absolute Priority rule and restrictions on downsizing 

through the sale of assets. These give secured lenders an undue influence over a debtor. Chapter 12 eliminates these obstacles. 

There’s no voting, there’s no Absolute Priority rule, and there are 

no restrictions on selling assets to downsize a business. 

Another virtue of Chapter 12 is that it makes small business 

cases subject to case monitoring. In every Chapter 12 case there is 

a standing trustee who gives impartial oversight, examines the 

debtor’s affairs, makes recommendations concerning plan confirmation, mediates disputes, and monitors plan compliance. 

As Mr. Bullock said earlier, this is a great benefit to creditors. 

Another benefit to creditors is that a reorganization preserves the 

going-concern value of collateral, which is always higher than what 

a secured creditor receives from a liquidation. Moreover, creditors 

receive a prompt confirmation decision because Chapter 12 moves 

fast. There are no zombie debtors in Chapter 12. Plans must be 

filed within 90 days and confirmation hearings take place 45 days 

thereafter. Chapter 12 cases that are not viable are quickly dismissed. 

Now, it is true that secured lenders may not be happy giving up 

their right to vote, but under Chapter 12 they always retain the 

right to object to confirmation of the plan. Chapter 12 debtors must 

pay all of their disposal incomes to creditors. All plans must meet 

strict confirmation standards and they must survive the scrutiny of 

an independent trustee. 

The need to address impediments to small business reorganization is urgent. Delay in enacting the legislation will deny a fair 

chance to reorganize to thousands of financially distressed small 

businesses. There is no time or need for further study. 

Now, this is what I know from my experience. In my district, between 1986 and 1999, there were 354 Chapter 12 cases filed. Seventy-seven percent of those family farmers had their plans confirmed, and 50 percent of all of the family farm cases were successVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
11 

fully completed. It’s actually better than that because a lot of the 

cases that were dismissed were dismissed because they entered 

into arrangements with their secured creditors and they didn’t 

need Chapter 12 anymore. 

But Chapter 12 has worked well for family farmers. It is the considered view of the National Bankruptcy Conference that it will 

work well also for small businesses. Thank you. 

Senator WHITEHOUSE. Thank you, Judge Small. We appreciate 

your testimony very much. 

[The prepared statement of Judge Small appears as a submission 

for the record.] 

Senator WHITEHOUSE. Dr. Mason is the Louisiana Bankers Association Chair of Banking at LSU, which brings him up here from 

Tiger Stadium, a place I have been, and appreciate very much that 

you’ve come. I particularly appreciate your closing remarks that ‘‘a 

leaner system with simplified filing and streamlined procedures for 

quick recovery will help those who have the capacity to get back 

to business while preserving collateral value and saving on legal 

bills for others. Such a system has the potential to be an important 

impetus for economic growth in the coming recovery’’, which is the 

premise of this hearing, so we are grateful that you’re here. 

Dr. Mason. 

STATEMENT OF JOSEPH MASON, ASSOCIATE PROFESSOR, DEPARTMENT OF FINANCE, LOUISIANA STATE UNIVERSITY, 

BATON ROUGE, LOUISIANA 

Dr. MASON. Well, thank you. I will try to buildup to that conclusion and reemphasize that remark. But thank you, Chairman 

Whitehouse. Thank you, Ranking Member Sessions, for inviting me 

to testify on this very important topic today. 

I’m an economist. I have a little different point of view than 

many of the attorneys and judges on the panel. A well-designed 

bankruptcy law, to me, is a crucial stabilizer to economic growth. 

Since the times of Thomas Jefferson, the idea has been that the uncertain nature of the farm business deserves special consideration. 

Such treatment was accompanied by restrictions on financial institutions that lent money to the farms so that those institutions 

would be so undiversified, as well as legally hobbled in bankruptcy 

law, that they had no alternative but to forbear on farmers in 

times of poor harvests. 

As the U.S. economy grew and as industrialization took hold the 

traditional family farm became considered a small business, so in 

some ways it looks sensible to allow small businesses to use Chapter 12 as a new bankruptcy alternative. Unfortunately, the present 

approach focuses on preventing bankruptcies rather than facilitating them. As a result, the approach under consideration will 

hurt both economic growth as well as small business owners. 

One of the main problems in small business bankruptcies is that 

small business and personal assets and liabilities are often commingled. It is hard sometimes to see where the boundaries of personal lives and business lives exist, especially in small businesses. 

One simple example is the prevalence of small business subprime 

home lending that played a part in the run-up to the recent crisis. 

12 

One such firm, American Business Financial Services, was the 

subject of a spectacular bankruptcy and fraud allegations in the 

Philadelphia region. I argue that it is those boundaries between the 

personal and the business obligations that lead to the most disruptive losses in small business bankruptcy. The causes of small business bankruptcy and personal bankruptcy are also commingled. 

While many studies seek to categorize the causes of small business bankruptcies, the chief risks are cash-flows and lawsuits and 

what we call key man risk. Cash flows and lawsuits speak for 

themselves. Of course, a skilled manager can help guide a business 

through the minefield, but the skilled manager is often the owner 

or managing partner. Without him or her, the business cannot 

stand. 

Consider, the chief risks facing the key man here in the operation are the same personal financial shocks that cause personal 

bankruptcy: divorce, automobile accident, health care crisis, and 

addictive disorders. So we know there’s a problem. Small business 

bankruptcies are not like large business or personal bankruptcies. 

But while change may be necessary, change is costly. 

We are still dealing with the fallout of changes to bankruptcy incentives in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Liberal rights granted to unsecured consumer 

creditors under the Act are understood to have led to increased 

credit supply and rampant consumer borrowing. 

On the business side, the Act’s extension of safe harbor provisions led to failed firms being drained of cash and assets by margin 

calls on new financial products, leaving the firm a mere shell in the 

aftermath of the recent crisis. 

Similar dramatic changes occurred with the implementation of 

Chapter 12 when agricultural experts noted that even major suppliers of fuel, seed, fertilizer, and chemicals were forced into Chapter 7 liquidation as a result of their customers’ treatment under 

Chapter 12, a manifestation of what today we term ‘‘systemic risk.’’ 

Each time we tinker with bankruptcy laws we impose significant 

costs on all economic agents. We all know the classic tradeoff. Empirical results have shown that higher personal bankruptcy exemptions are associated with more business ownership, but higher personal bankruptcy exemptions are also associated with increased 

credit rationing and higher interest rates. 

The challenge before us, therefore, is not to figure out how to 

prevent bankruptcies. Rather, the challenge is to craft a small business bankruptcy law that can be used. If that’s what we seek, then 

Chapter 12 is probably not the answer. Empirical evidence also 

shows that very few farmers actually use Chapter 12 and that 

bankruptcy relief has not, and cannot, halt the decline in family 

farming. It won’t save small businesses from a recession either. 

From an economic point of view, therefore, we want a small business bankruptcy law that smooths the transition of the serial entrepreneur, allowing them to flow into and out of businesses in a 

way that preserves both creditor and entrepreneur value. Economically, the simple key to retaining that value is to intervene earlier 

than is currently the case; of course, that means more bankruptcies. But as authors noted even before the 2005 Act, the surVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
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prising aspect of at least personal bankruptcy, which has been researched in this way, is not how many people use it, but how few. 

So overall, a leaner Chapter 11 system with simplified filing and 

streamlined procedures for quick recovery will help those who have 

the capacity to get back to business, while preserving collateral 

value and saving on legal bills for others. Moreover, such a system 

has the potential to be an important impetus for economic growth 

in the coming recovery. Simplistically extending Chapter 12, however, in the manner proposed will not realize that crucial potential. 

Thank you. 

Senator WHITEHOUSE. Thank you, Dr. Mason. We appreciate 

your testimony. 

[The prepared statement of Dr. Mason appears as a submission 

for the record.] 

Senator WHITEHOUSE. Our next witness is the distinguished 

Judge Bennett from the Bankruptcy Court of Northern Alabama. 

If I could take the liberty of highlighting one of his conclusions, it 

is that it is, and has been clear for decades if not longer, that 

Chapter 11 of the Bankruptcy Code does not allow some businesses 

to reorganize their financial affairs in a timely and efficient manner and at a cost that is affordable. He has great experience in this 

area and it is very helpful to us. 

We look forward to your testimony, Judge Bennett. 

STATEMENT OF HON. THOMAS BENNETT, U.S. BANKRUPTCY 

JUDGE, NORTHERN DISTRICT OF ALABAMA, BIRMINGHAM, 

ALABAMA 

Judge BENNETT. Thank you, Mr. Chairman. 

Let me start off by saying that the right of failure—that is, failure—is essential to our economic system. To the extent that we 

change statutes—and in my view some of the 2005 amendments to 

the Bankruptcy Code did something counterproductive—where we 

either eliminate the right to fail or we delay the right to fail, what 

happens is a misallocation of our resources that is detrimental in 

the long run to everybody at the benefit of a few. 

So what I think needs to be paid attention to is the bigger picture here, and that is, we do not want to create a disincentive for 

failure. The best example, if you want to look at the best example 

in recent history, is the inability to fail in some of the Eastern bloc 

countries of Europe, and their economic troubles were the result of 

not being allowed to fail. 

So in the context of the bigger picture, we need to structure 

something that does something that is efficient for our system. 

That means it should be a system that allows failure to occur when 

it should occur much more quickly than bankruptcy frequently 

does. At the same time, it needs to allow reorganization and identify those businesses that can successfully reorganize in the long 

run much more quickly. 

To give you a good example, Mr. Chairman, you talk about preserving jobs, but there is a price. If you preserve jobs that should 

not be preserved, you lose other jobs. Let me bring it a little bit 

more home to you. You are familiar with Thayer Street in Providence. Great dynamic little street, tons of little businesses there. 

And as you’re aware, they frequently go out of business. 

14 

If you allow businesses to drag out, what’s happens is a slow demise: inventory gradually decreases, jobs gradually decrease over 

time. When, if it was efficient and that business ultimately fails a 

year or two later and the delay is caused by a bankruptcy process, 

if it were efficiently done the business is replaced, more people are 

hired. That’s really the tradeoff and why it is very critical, when 

you do something of the nature that’s proposed, that you have to 

look at those sorts of dynamics. 

The bigger picture of what’s proposed is, and the data is, that 

what we are going to do under the proposed version is move somewhere between about 7 to 95 percent plus of all current Chapter 

11s and make available Chapter 12. I think there’s a definitional 

problem. I think that the liability side alone at $10 million is far 

too high because, on the data I’ve supplied to you, you can have 

at least $3 billion entities in small businesses under definition in 

2009; 300 and some-odd cases with assets of over $10 million would 

have been small businesses. Under the definition, there is a law 

firm in this country that has no debt that has well over 700 lawyers, thousands of employees. There are companies that are very 

large companies that would comply. 

When you realize that the structure of the definition causes a 

vast expansion and shifting of bankruptcy potentially from Chapter 

11 to Chapter 12, and that Chapter 12 does present creditors and 

other interests further risks than they would otherwise face in 

Chapter 11, the market is going to react to this. What you don’t 

want to do is cause a market to decrease the supply of credit, for 

instance. 

That’s the bigger picture here and the difficulties I have with 

Chapter 12. It is not that we shouldn’t do something for small businesses, but the question becomes: what is a small business? Is it 

a business that’s a mom-and-pop grocery store? Sure it is. Is it an 

entity that has 3,500, 1,000, 2,000 employees? I think that at some 

point you have to really keep it at small businesses. 

There are structural changes from going from an 11 to a 12 that 

implicate, with a lot of the entities that would otherwise under the 

definition of a small business in this Act, changes that I don’t think 

Congress contemplates. Do you want them to, for instance, be able 

to reject union contracts and not have the same protections that 

unions have in a Chapter 11? I don’t know that that’s contemplated. But that’s the bigger picture. 

A couple of quick, minor points. If this were enacted, there are 

four vehicles for small businesses, very small individual cases in 

13, the new Chapter 12, the small business portion of 11, and a 

Chapter 11. It’s too complex. You ought to have one provision that 

governs small businesses. 

My suggestion is, you don’t put it in Chapter 12. The reason is, 

I used to get paid to do amendments and it is very complex and 

very difficult not to make a mistake because you can’t think in advance of all the interrelationships. It ought to be separated. Don’t 

mess with the family farmer provisions that people think work, and 

like. Put them somewhere where it won’t mess up those provisions, 

for want of a better term. 

I think that we need to restrict it to truly small businesses, not 

very large businesses. We need to understand the broader implicaVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
15 

tions, which include potentially causing interest rates to rise if it’s 

not done right because of higher systemic risk to lenders, which 

means potentially less business and less employment. I think that 

the small business provisions need to be moved to maybe a new 

chapter, or within the Chapter 11 provisions. 

My time is up, so I am going to quit. 

[The prepared statement of Judge Bennett appears as a submission for the record.] 

Senator WHITEHOUSE. Well, I’m not going to let you quit because 

I’m very interested in your testimony. So I’m going to start with 

my question right back to you to continue the discussion that 

you’ve so ably participated in. I’m going to unpack a few questions. 

Is there any harm to the fishermen or farm owners who presently 

enjoy the benefits of Chapter 12 if its rules are expanded also to 

small businesses? Are they hurt by doing that or do they just continue on? 

Judge BENNETT. To answer your question simply, the answer is 

no, not on the surface. The problem is this, that when you amend 

a statute there are interrelated provisions. Lawyers, unfortunately, 

and judges use words. The reason scientific methodology was developed, is they use mathematics. Mathematics are far more precise 

in analyzing and avoiding problems. 

Words are highly imprecise. I might focus on drafting a statutory 

provision thinking about small businesses and not contemplate 

that what it may do is cause future problems in the context of 

other types of businesses. It’s not that on its face it is an issue, it 

is that there may be legal issues that come up in the future, and 

why take that chance at the expense of farmers and fishermen? 

Senator WHITEHOUSE. So your concern would be that as the 

courts adjudicating Chapter 12 proceedings dealt with small business bankruptcies, they would make Court of Common Law 

changes in the way they did business to accommodate this new 

kind of customers. 

Judge BENNETT. Could be. 

Senator WHITEHOUSE. And that would reflect back onto the farm 

owners and fishermen. 

Judge BENNETT. Could be. 

Senator WHITEHOUSE. OK. You can see that we need to make 

Chapter 11 more efficient for small businesses. I think everybody 

on the panel agrees with that proposition, that it is now failing 

them. Does the general Chapter 12 rubric of having a standing 

trustee and having a confirmation plan that has to be filed and approved relatively rapidly for trying to resolve the business on a 

going-forward basis provide the template for what should be done 

with a small business bankruptcy provision, assuming that we’ve 

correctly defined small business and eliminated the sort of definitional errors that you’ve described? 

Judge BENNETT. The answer is, if you understand the difference 

in the dynamics between a Chapter 11, which is structured to be 

consensual, and if not consensual there are some methodologies 

that you can use to have a case confirmed, versus a Chapter 12 

which is not consensual. 

It basically means, the difference is that in a Chapter 11, if you 

get a plan confirmed, you are essentially trying to get the particiVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
16 

pation of unsecured creditors, and secured. The difficulty in a 

Chapter 12 is that that’s not the case. It’s structured so they receive, theoretically, the indubitable equivalent of what they had as 

a secured creditor as of, in this case, the confirmation hearing. 

The difficulty that people may not understand is that in Chapter 

13s and 12s, unsecured creditors can get nothing. It is not that unsecured creditors receive full payment or partial payment. It could 

be any of those. That dynamic difference between an 11 and 12 is 

this, that unsecured creditors may not want that particular type of 

plan. Frequently, the chief unsecured creditor can be, particularly 

in small cases, the secured lender too whose collateral is at risk on 

the future ongoing operation. 

So with respect to some businesses, depending on the definition 

of small, the dynamic of Chapter 12 is basically a forced confirmation, with the risk being mostly on the value of the secured creditor’s collateral and the unsecured creditors may effectively, if the 

estate otherwise would have had money to pay, not get paid anything. 

Senator WHITEHOUSE. I would be interested in your reaction to 

this observation, which is that that may not necessarily be a bad 

thing. 

Judge BENNETT. Correct. 

Senator WHITEHOUSE. The experience of a great number of debtors, mortgage holders, is that banks have become very difficult to 

work with. In this day and age you spend an enormous amount of 

time waiting on the phone and punching through the numbers and 

trying to find somebody who actually has your file and can make 

a decision, and it’s sort of been bureaucratized to the point where 

it’s incredibly frustrating, at least for Rhode Islanders who I talk 

to, to deal with their creditor, particularly the bank or a secured 

creditor, whenever they have a problem. 

So to me, having a neutral disinterested trustee who can make 

a sensible business decision and enjoys the confidence of the court 

is a better decisionmaker than to leave that poor debtor to the tender mercies of the secured creditor who has their secured creditor 

work-out shop grinding through this stuff and treating them as basically grist for the mill, and what they want to do is grab whatever they can, sell it as quick as they can, cut their losses, and 

move on with very little consideration for the well-being of the 

business itself, or its employees, or the larger community. 

Judge BENNETT. I don’t think that’s necessarily the case. There 

are good and bad in all situations. There are good bankers, there 

are bad bankers. There are good bankruptcy practitioners, there 

are bad bankruptcy practitioners. People don’t shoot themselves in 

the foot knowingly. 

I will tell you, for instance, today, that what I see in the mortgage context is that bankers want to take back properties where 

they’re over-secured and they are perfectly willing to renegotiate 

where they’re deeply under water. The same thing sometimes holds 

true in the business world, but bankers are not necessarily the evil 

side of this. 

Failures are failures. They are failures for a reason. You need to 

look at why the failure occurred. The idea that a trustee who is almost universally a lawyer—and I would suggest to you that lawVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
17 

yers are not very good businessmen. I’m sorry, but they aren’t. 

They’re not trained in it. That’s not what we focus on. 

The idea that a lawyer, which is the predominant number of 

trustees, has the business abilities on some businesses with $10 

million in debt and hundreds or a thousand employees, I would 

suggest to you that that’s not necessarily the people you want looking at it. You want people that have business expertise. They’re not 

necessarily dispassionate. 

If you understand how Chapter 13 and 12 trustees are paid, 

they’re paid by a percentage of assets that roll through the trustee’s accounts to pay out to people, so there is an incentive to let 

them potentially last longer than they should. My experience, 

though, is that most trustees try to do a good job. They’re not business people. They look at the technicalities of the Bankruptcy Code 

and they look at the technicalities of whether you’re following your 

plan as distinguished from being able to do business analysis. 

Senator WHITEHOUSE. My time has expired. Let me turn to the 

distinguished Ranking Member. 

Senator SESSIONS. Thank you. Let’s follow along with that. Mr. 

Bullock, you’ve represented parties on both sides and you’ve heard 

Judge Bennett express reservations about Chapter 12. I know you 

could talk about that for my whole 5 minutes, but what are your 

thoughts? I’ll just give you a chance to respond to that. 

Mr. BULLOCK. Thank you, Senator. I do take issue with the idea 

that an independent fiduciary, a standing trustee, is not suited or 

up to the task. As this Subcommittee knows, the Office of the U.S. 

Trustee is charged with certain duties, including appointing a 

panel of trustees. My experience has been that not only are they 

generally exceptional practitioners, but they are either skilled or 

become skilled in whatever tasks they’re responsible for. The one 

thing, though, that I know about the trustee system is there is the 

opportunity to retain experts. 

Senator SESSIONS. Now, is there a difference in the role of the 

trustee in Chapter 12, the farming chapter, as opposed to Chapter 

11? 

Mr. BULLOCK. Yes. In context, we generally don’t see a trustee 

appointment in a Chapter 11. There are times: malfeasance, fraud, 

basically getting the debtor out. 

Senator SESSIONS. So one of the big changes—I’m just getting 

this in my head. One of the big changes if you go to 12, you’ll have 

a trustee in every case? 

Mr. BULLOCK. No different than you would in a Chapter 13 case, 

where there is a standing trustee who is a fiduciary, has defined 

responsibilities and, again, from my perspective, benefits the system a great deal because of their independence. 

Something else that I would like to point at, and this is an observation being on all sides of the table in Detroit, is that the creditors’ bar, as tasked as the debtors’ bar is currently, their clients, 

frankly, don’t necessarily know what to do with the collateral that 

they have and often, inreflexively, they simply liquidate it, not because they’re trying to be difficult, not because they’re trying to be 

nasty or mean or do anything that would affect the debtor for any 

reason other than, they just don’t want to hold onto the property. 

18 

Senator SESSIONS. But the question to me would be, what do you 

do with the property? If the creditors who presumably loan money 

and are into this company pretty deeply can’t see any viable way 

for it to be successful, maybe they’re better than a trustee in making that decision. 

Mr. BULLOCK. Respectfully, Senator, I believe that through the 

Chapter 12 process, what we have is something called feasibility, 

which is really important. In Chapter 11, there is not a feasibility 

requirement. The judges, our courts, don’t have the defined role of 

looking at the plan and saying, is this or is this not feasible. In 

Chapter 12, they do. 

So looking at a 90-day window where a plan has to be in, where 

in Chapter 11 you’re well north of 100 days, I believe that because 

the judges are looking at feasibility, and because under a case 

that’s called Rash, it’s a Supreme Court case that talks about how 

we value collateral, we look at a part of the Bankruptcy Code. 

And to leave the Code sections out I’ll simply say you look at the 

Code and we’re looking at, rather than liquidation value, which is 

I think the lowest value, we’re looking at, how are we using the 

collateral, the intended use of the collateral, which is a higher 

value, and then the courts are charged with determining what the 

value is. I’ve read in some of the material, there was a thought 

that maybe judges aren’t well-suited to do that. 

Respectfully, our Supreme Court has said that’s exactly what 

they’re supposed to do, and I for one, speaking only for myself, 

would say if there’s a bankruptcy judge in the United States who 

is not capable of valuing collateral, I would encourage whoever is 

responsible for that judge to remove that judge. That’s their job. 

Senator SESSIONS. Well, Judge Small, I’ll let you—now, the 

Bankruptcy Conference, which you’re speaking on behalf of, or at 

least their analysis, favors the Chapter 12 solution. The National 

Bankruptcy Review Commission does not. But are there ways—is 

it important to you that it be precisely adopting the Chapter 12 

route, or could there be a reform of Chapter 11, as I understand 

Judge Bennett to be suggesting? 

Judge SMALL. There could be. That’s how it started out. 

Senator WHITEHOUSE. Your microphone, Judge Small. I’m not 

sure it’s on. 

Judge SMALL. That’s how we started out. As I said, we thought 

about a separate chapter, but the more we thought about it, we realized it was modeled on Chapter 12, why not do Chapter 12? 

We’ve go the body of case law, we know it works. I mean, it works 

really well. 

If I could follow up on just one thing that Judge Bennett said 

about the consensual plans, there are no consensual Chapter 12 

plans. That’s not exactly true. The creditors have the right to object 

to confirmation. They don’t vote, but they do object to confirmation. 

That’s what happened in Chapter 12 cases, they would object. The 

Chapter 12 trustee then would bring the parties together, and most 

of our Chapter 12 cases were consensual plans. They resolved the 

objection and worked out a way that was satisfactory to both the 

creditor and the debtor. So, I just wanted to make that point. 

19 

Senator WHITEHOUSE. Thank you. I think we may go back and 

forth for a while, because I think this is an issue of interest to both 

of us. 

Mr. Mendenhall, let me ask you a specific question about your 

situation. Do you believe that if you had had the opportunity to reorganize your business based on the way it was going, your customer loyalty, and all that, that you would have been able to continue successfully and pay back your creditors in full? 

Mr. MENDENHALL. Yes. Absolutely. We had the history behind 

us. We had already been in business for over 10 years at the time 

we started the relocation. With the relocation, we had a brand-new 

facility that was almost twice the size of our original facility. So, 

everything was just all the better. So, absolutely. We just needed 

that time to regroup from that eviction and that whole process 

there. 

Senator WHITEHOUSE. And the cost, as you have said, of the fact 

that the system could not accommodate you in that way has resulted presumably in fairly significant losses to your creditors and 

having to—— 

Mr. MENDENHALL. Yes. Absolutely. It totaled over $1 million. 

Yes. 

Senator WHITEHOUSE. And in addition, your own credit, your 

own savings, and potentially your own home are also lost. 

Mr. MENDENHALL. Yes. Exactly. 

Senator WHITEHOUSE. So, pretty considerable economic devastation around you, all for what one might call the want of a nail to 

keep the process supporting your business. 

Mr. MENDENHALL. Exactly. Yes. 

Senator WHITEHOUSE. OK. And is that what—I’ll ask, I guess, 

Judge Small first. But both you and Counselor Bullock referred to 

the benefits inuring to creditors from moving to a Chapter 12-type 

model. Could you elaborate on what you meant by benefits inuring 

to creditors, and is it Mr. Mendenhall’s situation? 

Judge SMALL. I really think there are a lot of benefits to creditors, and primarily it makes reorganization easier. Reorganization 

has got to be better where that secured lender gets the going concern value of the property rather than a liquidation value. If you’re 

looking at those two alternatives, liquidation value is always lower 

than a reorganizational value. 

I think the Chapter 12 trustee brings a lot to this procedure. I 

mean, it’s monitoring. Unsecured creditors don’t participate in 

Chapter 11, small business Chapter 11 cases. There’s a provision 

that says there should always be a Chapter 11 creditors committee. 

There’s never a Chapter 11 creditors Committee in small business 

cases because you can’t get the interests of the small business—the 

small businesses that are the creditors. You can’t get them to vote, 

even though they would support the plan. I’m sure Mr. Bullock can 

speak to that, but it’s almost impossible to get creditor participation in these small business cases. 

That’s why it’s so important to have a Chapter 12 trustee to 

monitor, to make recommendations to the court: is this business 

feasible? If it’s not, it’s not a zombie debtor, we get the debtor out 

of the system. But if there is a chance of viability, then you have 

this trustee monitoring what goes on and he monitors after conVerDate Nov 24 2008 11:20 Sep 28, 2010 Jkt 058267 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\58267.TXT SJUD1 PsN: CMORC
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firmation to make sure the debtor does what the debtor has promised to do in that plan. 

Senator WHITEHOUSE. And Mr. Bullock, you represent both secured and unsecured creditors. What’s your thought on the benefits 

inuring to creditors from reform? 

Mr. BULLOCK. I’m in agreement with Judge Small, and I’d like 

to make an observation. I enjoyed the material that all of the parties submitted to this body. One of the things that I—one of the 

packets that I enjoyed the most was Dr. Mason’s. Within that, 

there is a footnote, it’s footnote 5, and it brings an article from 

1989 to our attention called ‘‘Chapter 12 and Farm Bankruptcy in 

California.’’ 

If you take that article, which is really at the height of when this 

family farming crisis was and it was coming to an end almost, and 

you look at Judge Small’s material, where there’s a graph on page 

14 which shows, back in that time line we have filings up here, and 

then all of a sudden they taper down quickly, I mean, like a bullet, 

straight down. We have to ask ourselves, why? What was it that 

debtors and creditors were doing differently? 

I think what happened is, on page 29 of the article, someone 

played Nostradamus and said one might expect, as more information becomes available on the court’s interpretation and implementation of Chapter 12 regulations, farmers and lenders will increasingly turn to privately negotiated reorganizations to avoid the administrative costs of a formal bankruptcy proceeding. The pattern 

of filing lends some support to this hypothesis. 

I think what happens, and whether it’s intended or unintended, 

is if we have a process like this, the reason we’re not seeing an 

awful lot of work going on in the bankruptcy courts is because the 

parties figure out, here’s what’s going to happen, here’s what 

should happen, and in Chapter 12 we have some evidence that 

that’s what did happen. People starting working outside of court 

rather than in court, and I for one—at least I submit to this body— 

believe that’s a better way of handling these things. But until we 

get there, I think this Chapter 12 fit works. 

Senator WHITEHOUSE. Judge Small, do you agree with Judge 

Bennett’s concerns about the manner in which small business is 

defined, and would you be willing to work to make the definition 

more specific so we’re not getting the sort of huge cases that he 

suggested that seem to be a misfit for this process? 

Judge SMALL. Absolutely. The $10 million number was somewhat 

arbitrary. I think it could be lower. I don’t think it ought to be any 

lower than $5 million. That was the number that the Bankruptcy 

Review Commission recommended. I, frankly, don’t know where 

that number should be. If you overlay $10 million on the Administrative Office’s statistics, I think it would show that like 77 percent 

of the Chapter 11 cases that were filed last year in 2009 would 

qualify for Chapter 12. Maybe that’s too high, but I think maybe 

$5 million or $7.5 million. Unfortunately, when the AO collects 

that information there’s a big gap: they have $1 million to $10 million. It doesn’t draw the distinctions between what would happen 

at $5 million or $7.5 million. 

Senator WHITEHOUSE. Senator Sessions. 

21 

Senator SESSIONS. Well, Dr. Mason, just briefly, anything that 

significant impairs the priority and the security right of a secured 

creditor is likely, is it not, in an economic sense, to cause lenders 

to be less likely to lend to any business and/or charge higher interest rates if they do so? 

Dr. MASON. Disentangling that is a little bit tough because the 

value, the reduced value to one set of lenders, for instance, does not 

just disappear economically. It would go to another set of lenders 

or the borrower. That is part of what we’ve seen here in Chapter 

12. Some of the problems that have arisen in Chapter 12 have arisen because Chapter 12 is specifically designed for a unique kind of 

small business that has a single large fixed asset that’s an input 

to production, and because of that application, Chapter 12 doesn’t 

exactly generalize. 

I think that the discussion we’ve had here is extremely valuable 

because I think we all agree that some factors of Chapter 12 do 

provide a template, in particular, the speed of moving through the 

process, the certainty. 

Senator SESSIONS. I’m kind of being self-limited here, but as a 

matter—if you sign a mortgage that gives you a guaranteed right 

upon failure to pay to take the property back, and that is eroded 

significantly through a bankruptcy rule change, does that ripple 

through the system, as some have told us in the past, and make 

lenders more nervous about lending and therefore rates could go up 

for everyone? Is that the economic sense of it? 

Dr. MASON. Very much so. 

Senator SESSIONS. Now, Judge Bennett, do you think that the 

Chapter 12 procedure that’s been suggested here, does that erode 

any in any noticeable way the security rights of the lender who’s 

got a secured mortgage? 

Judge BENNETT. Bankruptcy impacts on security rights regardless of the chapter. To the extent that a procedure such as Chapter 

12 is faster in identifying the failures and the successes, it can improve the process. To the extent, though, that it pushes through 

failures that should not be pushed through and it is easier in the 

context of the 13s and the 12s because they are so quick to push 

through failures, you could have a negative impact on the collateral 

value because of delay and the stretching out of the creditor during 

the course of the plan if the entity ultimately fails. So the answer 

is, it really depends on the context of the case and the context of 

what’s going on, but the answer is, yes, it could. 

Senator SESSIONS. Well, if you did this through Chapter 11, and 

you’ve expressed concern about cost and speed, I think you’re exactly correct—exactly correct—to say, as decisively and with as 

much clarity as possible, the decision needs to be made that a company has a chance to succeed or it does not. Would you agree, 

that’s a high priority of small business reorganization? 

Judge BENNETT. I think, big or small, the quicker we identify the 

failures and let them fail, it improves the process and it furthers 

our economic interests. 

Senator SESSIONS. And so that being the case, do you think that 

could be achieved more with reform of Chapter 11 than going to 

Chapter 12? Obviously you and the National Bankruptcy Review 

22 

Commission apparently feels that way. Specifically, how could you 

make that occur, effectively? Any ideas for specific reform? 

Judge BENNETT. I think you can adopt portions of what is in 12 

and 13 on timing. I think there needs to be more looking at whether it should be consensual, less consensual, or non-consensual. The 

idea that you can object to a plan is significantly different than 

being intimately involved in forming a business plan. So, I think 

you can work with those aspects. 

I got paid in private practice to amend statutes. I have amended 

a lot of statutes. It is a huge danger—I mean, I’ve done amendments on Uniform Commercial Code and other areas, some of the— 

a lot of banking-type of legislation in private practice. 

What you don’t think about when you’re drafting these amendments is how it interrelates to 15, or 20, or 30, or 40 other areas 

because you’re focused on what you’re doing. That’s why I have a 

bias against partial amendments to anything, and it’s cleaner usually and less dangerous to go in and do something new in toto than 

it is to go in and modify existing provisions. 

Senator SESSIONS. Well, thank you all for your thoughts on this. 

Judge BENNETT. Senator, could I say one thing? 

Senator SESSIONS. Yes. 

Judge BENNETT. What we’ve done here today has looked at a 

process where we are absent critical data. If there’s nothing else 

that could be done, there is a treasure trove of data that can be 

obtained off of bankruptcy filings if they are complete and they are 

inputted. 

What we need so we don’t have discussions on theories and ideas 

is to go in and collect data that is available if it is properly 

inputted and properly designed for retraction by non-lawyers. The 

design ought to be done by non-lawyers and non-judges, the people 

that know what it is we need to extract and how to extract it. 

Lawyers and judges can participate, but we would no longer have 

some of what goes on in the discussions of mortgage reform, on the 

BAPSIPA reforms that occurred. A lot of things were said that 

were inaccurate, but you can’t prove it other than by theory. 

Senator SESSIONS. Dr. Mason, I see, nods his head to that. Well, 

who would do that? 

Judge BENNETT. Who would do what? I’m sorry. 

Senator SESSIONS. Who would identify what data you need and 

what entity could be involved in retrieval of it? 

Judge BENNETT. Well, I think it’s mostly in the realm of those 

that deal in economics, that may deal in other areas. I think you 

have to have people that could pinpoint how and what it is you 

want to do. That’s really beyond—you know, I’m a slow country boy 

from West Virginia that moved to Alabama, and it’s beyond my capabilities. But it really is a travesty, a major travesty, that we’ve 

had the ability for decades to accumulate valuable data that would 

give us insights into a whole range of things and we don’t do it, 

and it’s something we really should do. 

Senator SESSIONS. Well, I just thank you. 

Senator WHITEHOUSE. Let me just say that when Mountaineers 

starts talking about slow country boys, you’d better watch yourself. 

[Laughter.] 

Senator SESSIONS. I would say this. 

23 

Judge BENNETT. Well, I understand that you spent a little time 

in the Mountaineer State, Senator. 

Senator WHITEHOUSE. I did. I did, sir, and I enjoyed it immensely. 

Senator SESSIONS. Just briefly, to raise that point, what percentage of the individual bankruptcy filers in the Northern District of 

Alabama filed Chapter 13? Do you recall what that number is? 

Judge BENNETT. It used to be about 70 percent-plus. In the last 

5 years, it became about 60/40, and the trend is now going back 

a little bit more for 13s. 

Senator SESSIONS. And that’s quite different than most bankruptcy courts around the country. Some are—less than 20 percent 

are Chapter 13s, aren’t they? 

Senator WHITEHOUSE. Some of the areas are very low Chapter 

13s and high Chapter 7s for individual bankruptcies. Correct. 

Senator SESSIONS. I guess I’m making the point here, and this 

is driven by the lawyers for the creditors, judges don’t make them 

normally going to—— 

Judge BENNETT. I think it may be, in some instances, driven by 

the debtor’s lawyers, not necessarily the creditor’s lawyers. 

Senator SESSIONS. Excuse me. I mean the debtor’s lawyer. The 

debtor’s lawyers. They think that’s best for the debtor, and the 

debtor will come out in a better position through that mechanism 

than through Chapter 7. All I’m saying is, that’s odd. We’ve got the 

same law in every district, so there are some subtleties in all of 

this, there’s just no doubt about it. How we maneuver a deal with 

the difficulties of bankruptcy law—I guess you’ve all warned us to 

be careful, Mr. Bullock, all the way through, as one that we should 

be careful about. 

Thank you. 

Senator WHITEHOUSE. Let me offer some closing thoughts as our 

time runs out. The first, is that I would appreciate very much, the 

hearing will stay open for—the record of the hearing will stay open 

for an additional week. 

I read both Dr. Mason’s testimony and Judge Bennett’s testimony as recognizing substantial problems with Chapter 11 as a vehicle for small businesses that could reorganize but for the delay 

in cost and inefficiency of the Chapter 11 process as it presently 

is constituted, and you have reservations about Chapter 12 as a 

complete and adequate response to that problem, but you don’t contest that the problem is a real and a significant one. 

I would appreciate it if you would take a moment, if you would 

not mind, and put your thoughts in writing back to this Committee 

as to what positive changes you would recommend. It doesn’t necessarily have to be in legislative-type format—I know, Judge Bennett, you’ve done statutory amendment before—but more from a 

policy point of view what you think are the key elements that 

would help facilitate reorganization of small businesses like Mr. 

Mendenhall’s when they are in distress. 

I take it, from everybody’s testimony, there seemed to be some 

unanimous opinions. One is that there is a universe of small businesses represented here by Edward Mendenhall that are reorganizable and that could continue, and continue to employ people and 

be profitable, that Chapter 11 puts under because of the cost and 

24 

the delay and, some would argue, the secured creditor-driven nature of Chapter 11. 

I think that’s an important universe for us to keep our eye on 

in this process and try to find a way to improve the process to 

serve, and whether it’s through Chapter 12 or through a modified 

Chapter 11, however, I think both of our minds are very open to 

that. But I think we’re also both keenly interested in this problem 

of unnecessary small business failure driven by a Federal process 

and not by the underlying economics of the business. 

So I look forward to continuing to work with all of the witnesses 

as we go forward on this process. I hope that you will not object 

if our staffs continue to be in touch with you as we try to work 

through these issues. I think this is important. I think this has 

been a valuable exploratory hearing and I look forward to persevering along these lines. 

I would like to, without objection, ask for Senator Russ Feingold 

of Wisconsin’s comments to be added to the record of the hearing. 

[The prepared statement of Senator Feingold appears as a submission for the record.] 

Senator WHITEHOUSE. I would like to recognize two important 

guests who are with us: Edward Mendenhall’s wife Kim is with us, 

and has traveled down from Rhode Island. I’m delighted that she 

is here. And Chuck Bullock’s son David has been with us, sitting 

patiently through all of these proceedings, and I appreciate that he 

has taken the trouble to come. 

I look forward to continuing to work with all of you. Judge Small, 

what you and the Bankruptcy Conference have done, I think, is 

enormously valuable. I think that to me your focus on this has 

been commendable and much appreciated, and I think you are the 

core of the solution here and we really look forward to working 

with you as this continues. 

I thank you all for your testimony and your participation in the 

hearing. As I said, the record will remain open for a week after 

this. 

The hearing is adjourned. 

Senator SESSIONS. Mr. Chairman. 

Senator WHITEHOUSE. Yes? 

Senator SESSIONS. I was going to offer for the record—— 

Senator WHITEHOUSE. The hearing is not adjourned. 

Senator SESSIONS. Senator Grassley, who has expressed his concern about the addition. He says there are now 345 Chapter 12 filings and 10,000 Chapter 11 filings, so it would have a great impact 

on a Chapter 12 farmer in a bankruptcy proceeding that he, as one 

of the architects—the prime architect—of. 

I would offer the International Council of Shopping Centers, who 

warned that this could have an immediate impact in terms of the 

credit crisis we’re in. They have some specific concerns about a 

change like this, how it could cause concern. In general, they oppose it. I guess in many ways they are one of the more prominent 

creditors in so many of these cases of small business. Thank you. 

I would offer both of those for the record. 

Senator WHITEHOUSE. Both will be accepted into the record, particularly Senator Grassley’s comments will be accepted with great 

25 

interest because of his long experience in there, as you pointed out, 

as the architect of Chapter 12. 

[The prepared statement of Senator Grassley appears as a submission for the record.] 

[The letter from the International Council of Shopping Centers 

appears as a submission for the record.] 

Senator WHITEHOUSE. As I said, I think we’re at the beginning 

of a process here in which a great number of interests will be engaged, but I am confident that we can find a way through, given 

the universality of you that there is a substantial universe of businesses that are reorganizable, that fail unnecessarily due to the inefficiency of Chapter 11, and that that is something we’re in a position to remedy. 

So, thank you all very much. 

We are adjourned. 

[Whereupon, at 11:57 a.m. the Subcommittee was adjourned.] 

[Questions and answers and submissions for the record follow.] 

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