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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: On March 10, 2005, the United States Senate passed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”). The United States House of Representatives passed the Act on April 14, 2005, and President George W. Bush signed the Act into law on April 20, 2005. Most of the provisions of the Act will go into effect on October 17, 2005, though certain provisions will be effective immediately. Most of the media attention with respect to the Act has focused on the numerous effects the Act will have on future consumer bankruptcy filings under chapters 7 and 13 of the Bankruptcy Code. However, business bankruptcies under chapter 11 will also be affected significantly by the Act. In many instances, the ability of a debtor-in-possession to control a chapter 11 case will be hindered by the amendments provided for in the Act. Below is a summary of several of the key amendments contained in the Act that will affect business bankruptcies: 1. Retention of Investment Bank as Financial Advisor: Only disinterested professionals may be retained by a debtor to serve as a financial or legal advisor during the debtor’s bankruptcy case. Currently, a debtor’s pre-bankruptcy investment bank (that has underwritten securities of the debtor) is automatically disqualified from providing services after the petition date as a financial advisor. The Act will amend the definition of “disinterested person” under section 101(14) to allow a pre-bankruptcy investment bank to be retained as the debtor’s financial advisor, so long as the investment bank is not a creditor or equity holder of the debtor and has no material adverse interests to the debtor’s estate or any class of creditors or equity holders of the debtor. 2. Professional Compensation: The Act amends section 328 of the Code to provides that, in addition to traditional hourly and contingent fee bases, professionals may be retained on a fixed or percentage fee basis. In addition, section 330 will be amended to provide that when determining the amount of reasonable compensation to be paid to a trustee, examiner or professional, the court may take into account whether the person is board certified or otherwise has experience in the bankruptcy field. 3. Prepackaged Bankruptcies: Section 341 of the Code will now allow the Bankruptcy Court to dispense with the 341 meeting of creditors if the debtor has filed a prepackaged plan of reorganization and has solicited consents prior to the commencement of the bankruptcy case. In addition, section 1125, which governs disclosure and solicitation of votes on a plan, has been amended to provide that debtors can solicit creditors prior to commencement of a case, and without an approved disclosure statement, so long as the solicitation complies with applicable non-bankruptcy laws. 4. Automatic Stay: Section 362 of the Code will now contain additional exceptions to the “automatic stay,” including:
5. Exclusivity Currently, section 1121 of the Code allows for an initial plan exclusivity period of 120 days during which only a debtor may file a plan of reorganization, and an initial solicitation period of 180 days, during which only the debtor may solicit acceptances for a plan of reorganization. Section 1121 also currently provides that the exclusivity period may be extended indefinitely by the court “for cause.” This has allowed debtors such as United Airlines and Owens Corning to maintain exclusivity despite having filed their chapter 11 cases years ago. The Act maintains the initial exclusivity periods, but amends section 1121 by capping a debtor’s plan filing exclusivity period to 18 months, and its plan solicitation exclusivity period to 20 months. 6. Executory Contracts and Unexpired Leases:
7. Sales Free and Clear: Section 363(f) currently provides that a trustee may sell property of the estate free and clear of any interest in such property of an entity other than the estate, so long as certain conditions are met. The Act amends section 363(f) to provide that a sale free and clear of claims and defenses relating to consumer credit transactions and contracts, such as those under the Truth in Lending Act, will not be authorized. 8. Discharge: Currently, non-dischargeability of debts is only applicable to individual debtors. The Act amends section 1141, however, to provide that a corporate debtor’s obligations arising from fraud and owing to a governmental entity, or resulting from evasion or fraud with respect to taxes or customs duties, will be non-dischargeable.
10. Venue for Avoidance Actions: The Act amends 28 U.S.C. section 1409 to restrict venue for adversary proceedings to recover debts of less than $10,000 to the defendant’s district of residence. 11. Fraudulent Conveyances: The Act increases the look-back period under section 548 from one year to two years prior to the petition date, meaning that the debtor will be able to sue for transfers it made in the two-year period prior to the petition date. The Act also expends the criteria for fraudulent transfers to include: payments made to an insider under an employment contract, outside the ordinary course of business, where the debtor did not receive reasonably equivalent value. 12. Single Asset Real Estate Cases: The Act amends section 362(d)(3) to provide that a single asset real estate debtor has until the later of (a) 30 days from the date which a court determines that the case is a single asset real estate case or (b) 90 days from the petition date to file a plan or commence interest payments (at the applicable nondefault contract rate) to the lender. Failure to make such payments will allow the lender to obtain relief from the stay to proceed against the subject property. 13. Administrative Expense Priority for Trade Vendors: The Act adds to the Code section 503(b)(9), which grants administrative expense priority for the value of goods delivered to a debtor in the 20 days prior to the petition date. 14. Committees: Currently, the United States Trustee has the authority to appoint an official committee of unsecured creditors, and may appoint additional committees of creditors or equity holders as it deems appropriate. The Act amends section 1102 to provide that upon request of a party in interest, the court may compel the United States Trustee to change the membership of a committee to ensure adequate representation of creditors or equity holders. The court may order the United States Trustee to increase the number of members in a committee to include a small business if such business holds claims that are disproportionately large compared to its annual revenue. Also, committees will now be required to provide access to information to creditors holding claims of the type represented by the committee, solicit and receive comments from creditors, and be subject to court orders compelling additional reports or disclosure to be made to such creditors. 15. Employee Wage Priority: Currently, employees of a debtor are entitled to a priority claim of up to $4,925 for unpaid wages accrued up to 90 days before the petition date. The Act amends section 507 to increase the cap to $10,000, and the time of accrual to 180 days before the petition date. 16. Modification of Retiree Benefits: The Act amends section 1114 to provide that, upon request of a party in interest, the court may reinstate retiree benefits that were modified up to 180 days prior to the petition date, to the extent that the debtor was insolvent at the time the modifications were made, unless it is found that the balance of the equities clearly favors such modification. 17. Reclamation: Currently, the Code preserves nonbankruptcy rights of a seller of goods to reclaim goods sold to a debtor if the debtor received such goods while insolvent. The Act amends section 546 to provide for a new right of reclamation, which allows a seller to reclaim goods that were delivered to a debtor within 45 days of the petition date. In addition, pursuant to the Act, section 546 will no longer provide that a seller of goods may be granted administrative expense priority in lieu of reclamation. The amendment has also clarified that the right to reclaim goods is subject to the superior interests of creditors having a security interest in the debtor’s inventory. Accordingly, a vendor seeking to avail itself of the right of reclamation should obtain the grant of a purchase-money security interest from those customers it views as being vulnerable to a potential bankruptcy filing. 18. Dismissal or Conversion of a Case: Section 1112 currently provides that a court may convert or dismiss a case “for cause,” and lists ten possible causes. The Act amends section 1112 by providing that a court shall convert or dismiss a case upon a showing of cause, and defines “cause” to include, among other things: diminution of the estate and the absence of a reasonable likelihood of reorganization, gross mismanagement, failure to maintain adequate insurance, failure to comply with Bankruptcy Court orders, failure to provide requested information to the United States Trustee and failure to pay taxes or file tax returns after the petition date. There are exceptions, however, to this rule: (a) if unusual circumstances exist which establish that dismissal/conversion is not in the best interests of the creditors and the estate; (b) if the debtor or a party-in-interest objects and establishes that (1) there is a reasonable likelihood that that a plan will be confirmed during the debtor’s exclusive period and (2) the cause for dismissal is an act or omission of the debtor, there is a reasonable justification therefor, and the act or omission will be cured in a reasonable time as fixed by the court. 19. Appointment of Examiner or Trustee: Currently, section 1104 provides that the court shall appoint a trustee if “cause” exists, which includes fraud, incompetence, dishonesty or gross mismanagement of the debtor, or if such appointment would be in the best interests of creditors and the estate, and further provides that if a trustee is not appointed, an examiner shall be appointed where necessary to conduct an investigation of possible fraud, incompetence, dishonesty or gross mismanagement. The Act amends section 1104 to provide that, in addition to the above grounds, the court shall appoint a trustee or examiner where grounds exist to convert or dismiss a case under section 1112, but the court determines that appointment of a trustee or examiner would be in the best interests of creditors and the estate. In addition, the Act amends section 1104 to require that the United States Trustee seek appointment of a trustee if there are grounds to suspect fraud, dishonesty or criminal conduct in the management of the debtor or its public financial reporting. 20. Tax Provisions: Section 346, which addresses the treatment of state and local tax claims, has been entirely rewritten. In addition, the Act makes certain other changes which will affect the treatment of tax claims in bankruptcy, including:
21. Key Employee Retention Plans: The Act adds section 503(c), which significantly limits the ability of a debtor to establish key employee retention plans (“KERPs”). Under section 503(c), a debtor will only be able to receive administrative expense treatment for amounts paid to an insider for the purpose of inducing such insider to continue working for the debtor if (a) the insider already has a bona fide job offer from another business at the same or greater rate of compensation, (b) the services provided by the insider are essential to the survival of the business and (c) either (1) the proposed KERP payment is no greater than 10 times the amount of the average obligation of a similar kind given to nonmanagement employees for any purpose or (2) if no such transfers had been made to nonemployees, the proposed KERP payment is no greater than 25% of any similar payment made to the insider during the previous calendar year. In addition, severance payments to insiders will be prohibited unless as part of a program applicable to all full-time employees of the debtor, and the payment is not greater than 10 times the amount of the average severance payment given to nonmanagement employees. 22. Cross-Border Bankruptcies: Section 304, which currently governs the commencement of proceedings ancillary to a foreign insolvency proceeding, will be stricken, and a new chapter 15 will added to the Code. Chapter 15 will provide for, among other things, the commencement of a proceeding for recognition in the United States of a foreign insolvency proceeding. * * * If you have any questions or would like assistance regarding the matters discussed above, please contact: Steven M. Hartmann, Esq. Neal H. Levin, Esq. Harley J. Goldstein, Esq. Aaron L. Hammer, Esq. |
