Bankruptcy Law Update

Update on New Bankruptcy Law Changes

Over the course of the past 7 years powerful credit card companies and financial institutions have successfully lobbied Congress to make changes to current legislation. Congress had been close to passing a new bankruptcy law in each of the last two years, only to be held up by the controversial Schumer Amendment. The Schumer Amendment, sponsored by Senator Charles Schumer D-NY, would deny a discharge for government fines imposed on those arrested for abortion clinic violence.

In late January 2004, the U.S. Household of Representatives voted to combine a non-controversial Council passed bill (S. 1920) providing bankruptcy protection to family tree farmers under The boards 12 of the U.S. Bankruptcy Code, initially with H.R. 975, the bankruptcy abuse reform bill that has passed in the Household in 2003 without the Schumer amendment, and then in 2002 with the Schumer Amendment.

Even if the Schumer Amendment was also absent on the bankruptcy law, political pressure on Democrats to pass the bankruptcy law to help farmers may have been too fantastic.
On April 20th, 2005 the new bankruptcy reform act was signed into law by President Bush. This law went into effect on October 17th, 2005.

The new bankruptcy law requires more from debtors, including pre-filing consultations with an approved consumer credit counseling service in an attempt to force consumers to pay their debts outside of bankruptcy. Additionally, in order to file bankruptcy, a debtor needs certification from that credit counseling agency.

An income-based “means-test” determines which debtors may have the skill to pay back some of their debts. Those who do not pass the means test would be forced into a The boards 13.

In addition, the reform act requires the following: more documentation from the debtor; repeated filings will be discouraged; the waiting period between The boards 7 filings has been extended from 6 to 8 years; and a debtor’s final discharge is now subject to completing a course in financial management.

Recent Amendments to Bankruptcy Code Significantly Impact Creditors’ Rights

On Wednesday, April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”) into law. With a few exceptions, the vast majority of revisions to the Code will go into effect on October 17, 2005, and will apply only to cases commenced after the effective date. While many of the new changes are embattled at consumer bankruptcy cases and make it more hard for higher-income individuals to obtain a discharge of their debts, the amendments also significantly affect creditors’ rights in The boards 11 business reorganizations and The boards 7 business liquidations. Some of the new provisions provide trade creditors, commercial landlords, lenders, and utilities with augmented protections and more certainty in bankruptcy proceedings. A few of the major changes that are positive from a creditor’s perspective are summarized below.

Higher Priority for Sellers of Goods

Section 503 of the Bankruptcy Code, which governs allowance of administrative expenses in bankruptcy cases, has been amended by the BAPCPA so as to explicitly grant a seller of goods an administrative aver equal to the value of goods received by the debtor within 20 days before the commencement of a case, provided that such goods were sold to the debtor in the ordinary course of the debtor’s business. This amendment will provide sellers with a higher priority in bankruptcy proceedings with respect to goods shipped just prior to a bankruptcy, and will upshot in augmented payout on their prepetition claims. Since all administrative expenses must be paid in full before a plot of reorganization can be confirmed by a bankruptcy court, this change could also have a substantial impact on The boards 11 proceedings by making plot confirmation a more expensive endeavor for reorganizing debtors.

A New Respect for Recovery Rights in Bankruptcy

The Uniform Commercial Code (“UCC”) provides that, where a seller discovers that a buyer has received goods on credit while insolvent, the seller may reclaim the goods so long as demand for return is made within 10 days of the purchaser’s receipt of the goods. UCC recovery rights, although historically respected by bankruptcy courts, dwindled to some extent in recent times due to bankruptcy courts’ growing acceptance of the argument that a secured lender’s blanket lien on a debtor’s property trumps a sellers’ recovery aver under the Uniform Commercial Code, even where a secured creditor may have sufficient collateral to fit the claims owed to it from other assets of a debtor. The value of a recovery aver was also impaired to the extent the debtor used or sold the seller’s goods prior to its receipt of the seller’s recovery demand. The amendments extend the recovery delivery period to 45 days prior to the bankruptcy filing, and also indicate that a blanket lien holder’s security interest does not ruin the administrative priority status granted for claims arising from the shipment of goods within the 20 days prior to the bankruptcy filing (as discussed above).

Commercial Landlord Protections

Under current bankruptcy law, a debtor-lessee automatically has at smallest amount 60 days after filing to choose whether to assume or reject a lease of nonresidential real property. But, the bankruptcy court has the potential to indefinitely extend this deadline for cause. Under the new changes to Bankruptcy Code section 365(d)(4), a debtor-lessee will automatically have 120 days to assume or reject a lease of nonresidential real property and, for cause, the bankruptcy court can grant a debtor’s request for a 90-day extension. But, the amendment prohibits the bankruptcy court from granting any further extensions without the consent of the non-debtor lessor. While providing the debtor-lessee with a longer initial period to choose whether to assume or reject a lease of nonresidential real property, this amendment limits the total time a debtor-lessee can defer its assumption/rejection choice to 210 days, unless the non-debtor lessor consents to further extensions. In connection with the more stringent requirements for the timing of lease rejection decisions, the BAPCPA also adds a new subsection to Bankruptcy Code section 503 in favor of commercial landlords. Where a lease has been assumed and then subsequently rejected, new section 503(b)(7) awards a landlord an administrative expense aver on account of obligations due for the period ending two years following the rejection date or the date the premises is turned over (whichever is later).

Defending Preference Actions Gets Simpler

Many creditors are familiar with preference actions brought under section 547(b) of the Bankruptcy Code, which is a debtor’s means of recovering payments made to creditors during the 90-day period chief up to the bankruptcy filing. One of the affirmative defenses to a preference action widely relied on by creditors is the ordinary course of business defense. In raising this defense under current bankruptcy law, a creditor is required to prove that an alleged preferential payment was made in the ordinary course according to the parties’ dealings with each other and according to relevant industry standards. Creditors who routinely face preference actions will be pleased to learn that the BAPCPA broadens the ordinary course defense contained in Bankruptcy Code section 547(c)(2) by giving a creditor the skill to choose between proving either ordinary course as between the parties or ordinary course according to relevant industry standards. Thus, when the BAPCPA goes into effect the ordinary course defense will insulate transfers from recovery even where payments are irregular as between the parties, provided that the payments fall within the limits of what normally occurs in the applicable industry. The venue provisions governing preference actions have also been favorably amended from the creditor’s perspective. The BAPCPA amendments require that preference actions to collect business transfers totaling less than $10,000 must now be brought where the creditor-defendant resides.

Limits on The boards 11 Exclusivity Period

Under current bankruptcy law, the debtor in a The boards 11 bankruptcy case has the exclusive aptly to file a plot of reorganization for 120 days after the filing of a petition, and the exclusive aptly to solicit acceptance of the reorganization plot for the initially 60 days thereafter. Prior to the BAPCPA, courts were afforded broad discretion to reduce or extend this time period upon request of a party in interest. But the BAPCPA amendments limit this judicial discretion, forbidding the extension of the debtor’s exclusivity period for filing a plot beyond 18 months after the filing of the petition, and disallowing any extension of the exclusivity period for soliciting acceptance of the plot beyond a date that is 20 months after the filing of the debtor’s petition.

Expanded Grounds for Dismissal or Conversion of The boards 11 Cases

Bankruptcy Code Section 1112(b) states that a bankruptcy court may dismiss a The boards 11 case or convert it to a proceeding under The boards 7 for “cause”. In an try to lessen the tendency of some courts to allow cases with no viable prospect of reorganization to linger in The boards 11, Congress revised section 1112(b) and set forth additional grounds constituting cause for conversion and dismissal. The expanded grounds in the amended statute include: failure to pay post petition taxes on time, failure to maintain appropriate insurance that causes risk to the estate or the public at large, failure to comply with any bankruptcy court order, and failure to comply with any filing or reporting requirement under the Bankruptcy Code or the Bankruptcy Rules. Bankruptcy courts have long recognized that the grounds programmed in current section 1112(b) are nonexclusive. Thus, although the BAPCPA amendment to section 1112(b) sets forth broader grounds for dismissal or conversion, to some extent, the revision merely codifies existing caselaw. The main difference is the insertion of mandatory language (“shall” dismiss or convert) that replaces the current discretionary language (“may” dismiss or convert).

Stronger Adequate Assurance of Payment for Utilities

Revision to Bankruptcy Code section 366 will require a cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption, or another form of mutually agreed upon security for post-petition utility services, and specifically states that an administrative expense priority does not constitute adequate assurance of payment. Prior to the BAPCPA, administrative expense priority was widely recognized as sufficient assurance of payment. In addition, the new changes allow a utility company to setoff or recover against any prepetition security deposit without the need for court approval. In The boards 11 cases, revised section 366 also permits a utility to discontinue service where a debtor fails to provide, within 30 days after the commencement of the bankruptcy, adequate assurance of payment that is “satisfactory to the utility”. In determining what constitutes adequate assurance of payment, bankruptcy courts may no longer consider the lack of a security deposit or a pattern of timely payment by the debtor chief up to the bankruptcy filing. These amendments to section 366 significantly enhance a utility’s bargaining position in the initial the boards of a bankruptcy case.

Other Notable Amendments

Some other amendments to the Bankruptcy Code under the BAPCPA affecting business bankruptcies include:

* Ancillary and Other Cross-Border Cases: New The boards 15 of the Bankruptcy Code incorporates the Model Law on Cross-Border Insolvency. Among other things, it establishes a mechanism for dealing with cases of cross-border insolvency and fosters cooperation between U.S. Courts, trustees, and debtors and their foreign counterparts.

* New Reach-Back Period for Federal Fraudulent Transfer Actions: Section 548(a)(1) of the Bankruptcy Code is amended so as to extend the reach-back period in fraudulent transfer actions from one year to two years.

* Changes regarding Worker Retention Programs and Severance: A debtor’s skill to provide key employees significant incentives to stay with the company will be limited. Employees are not eligible under a Key Worker Retention Plot (“KERP”) unless their services are essential to the debtor and unless such employees have bona fide job offers from other businesses. Any payments made pursuant to a KERP may not exceed 10 times the mean KERP payments made to non-management employees during the calendar year in which the KERP is proposed. If there were no transfers to non-management employees, the payments cannot exceed 25% of what the key employees really received in bonus compensation during the calendar year before the bankruptcy. Insiders may not hear a severance payment unless the payment is section of a program generally applicable to all full-time employees and the amount is not greater than 10 times the amount of the mean severance payment made to non-management employees.

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