Chapter 11 of the United States Code mainly deals with the reorganization of businesses that are facing financial distress. But what happens when this legal provision, meant to give struggling businesses a second chance, is contorted to serve less-than-honorable motives? Enter the new proposal.
Sponsored by Mrs. Sykes, Mr. Nadler, and Mr. Gooden of Texas, H.R. 9110 aims to tighten the regulations around Chapter 11 filings. Specifically, it targets filings that are either “objectively futile” or are initiated with “subjective bad faith.” There’s legal jargon galore here, but let’s break it down.
First off, what does “objectively futile” mean? Picture a business that’s beyond saving—it would be pointless to even attempt reorganization. The new bill mandates that such cases be dismissed. If a business doesn’t show tangible plans for revival, it’s the end of the line for their Chapter 11 filing.
Next, we have the standard of “subjective bad faith.” This is trickier but equally important. Say, for instance, that a company juggles its assets or shuffles its paperwork to dodge its creditors. Such tricks would now face stringent scrutiny. The court will dismiss these manipulative filings, acting against veiled tactics aimed at gaining a litigation advantage or stalling creditors.
Key details in the proposed amendments include a 24-month cap. All reorganizations must be concluded within this timeframe, ensuring no endless dragging of feet. Additionally, the bill specifies certain “bad faith” activities, like venue shopping (where a company picks a specific court they think will rule in their favor) or burdening themselves with unpayable obligations to insiders.
Further ensuring accountability, courts will require “clear and convincing evidence” to presume good intentions. This shifts the burden of proof to the debtors, stressing the need for transparency from the get-go.
A particularly noteworthy inclusion in H.R. 9110 is the emphasis on dismissals in cases where businesses do not have a “valid reorganizational purpose.” Essentially, what this means is: if a business is just trying to re-jig its debts without a serious, actionable plan to bounce back, their case won’t stand.
There are also rules aimed at corporations that, in the four years preceding their bankruptcy filing, have undergone major corporate shake-ups, such as mergers or asset transfers designed to shift their financial burdens. These activities will come under greater scrutiny to ensure they haven’t been done to play a fast one on creditors.
As for how this fits into the broader economic landscape, it harks back to a long-standing debate over corporate integrity and fairness in financial recovery processes. By tightening these clauses, the legislation aims to strike a balance between giving genuine businesses a fighting chance and shielding creditors from deceitful maneuvers.
Funding for the enforcement of these new rules largely falls under existing judicial budgets. The provisions enlist the current infrastructure, albeit with bolstered regulations that mandate sharper vigilance and rigorous checks.
What’s next for H.R. 9110? The bill is now referred to the Committee on the Judiciary, where it will undergo detailed scrutiny and discussions. If it clears this phase, it will then move on to the broader House of Representatives and, eventually, the Senate for approval before landing on the President’s desk for final authorization.
In sum, the Ending Corporate Bankruptcy Abuse Act of 2024 is poised to close loopholes in the corporate bankruptcy system. By defining strict timelines and clearly outlining what constitutes bad faith actions, it seeks to bring a semblance of orderliness and justice to a process often seen as fraught with complexities and opportunities for exploitation.
