HEADS UP!!
Major Changes Made to BUSINESS BANKRUPTCY PRACTICE

Critical Information the “Occasional Practitioner” Needs to Know Now About
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005


By Ann D. Zeigler and Steven D. Shurn

The Bankruptcy Abuse Prevention and Consum-er Protection Act of 2005 (the Act”) comes into effect for most purposes on October 17, 2005. In addition to the changes to consumer bankruptcy practice, discussed in the last issue, there have been significant changes to business bankruptcy practice. This article compares business bankruptcy practice in various areas under current law and under the Code as amended by the Act.1

SMALL BUSINESS CASES
The Act includes several provisions that are limited to small business reorganization cases, in an effort to decrease the time and cost of such cases. The debtor’s management must act very quickly and faces additional financial reporting burdens. Some provisions under the “small business” section apply to all business bankruptcies.
Small business treatment is no longer optional: § 101(51 D)
The Act expands the definition of the “small business case” for Chapter 11 reorganization. A “small business debtor” is a person/entity engaged in commercial or business activities, other than owning or operating real estate, and which has no more than $2 million in debt, excluding debt owed to insiders or affiliates. If the debtor fits the definition, it must proceed under the small business provisions, with their very compressed time frame. The debtor cannot opt to be treated as a regular Chapter 11 debtor. Additionally, in a small business case, no creditors committee is appointed. If a creditors committee had been appointed before the determination of small business status, and if the committee becomes “insufficiently active and representative,” the case may revert to a small business case.
Financial documents filing requirements for small business cases: § 308 and § 1116
The Act places additional requirements on a “small business debtor.” These include, among others, filing financial statements and tax returns within seven days of entry of the order for relief, timely filing of tax returns during the case, and permitting the U.S. Trustee to inspect the debtor’s premises, property, books and records. The Act also requires a “small business debtor” to file periodic financial and other reports containing detailed information, including: (1) the debtor’s profitability; (2) reasonable approximations of the debtor’s projected cash receipts and cash disbursements over a reasonable time; and (3) comparisons of actual cash receipts and disbursements with projections in prior reports.
No Disclosure Statement: § 1125(f)
Under the Act, in “small business cases” the court can determine that a disclosure statement is not required, provided that the plan provides adequate information. Additionally, even if the court does require a disclosure statement in a “small business case,” the court can approve a disclosure statement submitted on a standard form approved by the court.

BUSINESS CASES GENERALLY
Expanded rights to reclaim goods:§ 546(c) and § 503(b)(9)
Under the current Code, a seller of goods to a debtor typically can reclaim the goods if the debtor received them while it was insolvent, provided that the seller made a written reclamation demand within ten days after the goods were received. If the ten-day period expired after the bankruptcy filing, the written reclamation demand must be made within 20 days after receipt of the goods. Additionally, a seller entitled to reclamation will often be given an administrative claim instead of the return of the goods, although the return of the goods or administrative claim is lost if the goods have been sold or are no longer identifiable.
Under the Act, a seller who delivers goods to a debtor within 20 days before the petition date will have an administrative expense priority claim for the value of the goods, even if the debtor has sold the goods or they are no longer identifiable. Additionally, a seller of goods delivered within 45 days pre-petition can make a written reclamation demand to the debtor within the later of 45 days after delivery or 20 days after the bankruptcy filing. These expanded reclamation rights are still subject to any preexisting security interest in the goods.
No multiple extensions of the deadline to assume/reject leases: § 365(d)(4)/ Lease rejection damages: § 503(b)(7)
Under the current Code, a Chapter 11 debtor has 60 days from the petition date in which to assume or reject unexpired leases of non-residential real property. It is not uncommon for courts to extend this deadline. Under the Act, the Chapter 11 debtor has 120 days from the petition date in which to assume or reject such leases, and, without the landlord’s written consent, a debtor may only obtain one 90-day extension, for a total of 210 days.
Because of this reduced time period to assume or reject such leases, the debtor—especially the retail debtor—may assume leases that it should have rejected. Under the current Code, once a lease is assumed, if it is later rejected, the entire amount due under the lease is an administrative expense claim. Under the Act, such damages are capped at “all monetary obligations” due under the lease for the two year period beginning at the later of the lease rejection date or the surrendering of the property by the debtor.
Adequate protection payments to utilities: § 366.
Under the Act, utilities are entitled to “adequate assurance” payments at the beginning of the case. While it is unclear exactly what will suffice as “adequate assurance,” the Act makes clear that it cannot be satisfied by the debtor’s payment history, proof of post-petition financing, or allowance of an administrative claim.
Automatic stay termination in single-asset real estate cases: § 362(d)(3) and§ 101(51 B).
To avoid automatic modification of the stay, the Act sets the later of 90 days after the order for relief, or 30 days after the court determines that such debtor is a single asset real-estate debtor, as the time such debtor must confirm its plan. The Act also clarifies that monthly payments on secured debt may be made from rents generated either pre- or post-petition, or from other income generated by the real estate. However, the Act’s definition of single asset real estate does not include the $4 Million cap contained in the current Code’s definition. Thus, it appears that the new automatic stay provisions will apply to all debtors whose primary business is the ownership and operation of a single real estate asset, regardless of value.
Automatic stay termination for rejected personal property leases: § 365(p)(1)
If a lease of personal property is rejected either by motion or by operation of law, such leased property is no longer property of the estate, and the stay under section 362(a) is automatically terminated without action by the lessor or the debtor.
Increased employee wage priority payment: § 507(a)(4)
Under the current Code, unpaid employee wages earned within the 90 days prior to the petition date are entitled to priority in an amount up to $4,925. Now, employee wages earned within 180 days of the petition date are given priority in an amount up to $10,000.
Expanded “ordinary course of business” preference defense: § 547(c)(2)
Under the current Code, a transferee of a preferential transfer can defend such transfer using the “ordinary course of business” defense, by establishing that (a) the debt was incurred by the debtor in the ordinary course of business or financial affairs between the debtor and the transferee; (b) the payment was made in the ordinary course of business or financial affairs between the parties ; and (c) the payment was made according to ordinary business terms. While the transferee still must establish that the debt was incurred in the ordinary course of business between the parties, the Act now requires the transferee to show only that the payment was either made in the ordinary course of business between the parties or that it was made according to ordinary business terms. This change is aimed at protecting trade creditors from preference actions.
Limits on venue: 28 U.S.C. § 1409(b)
Under the Act, 28 U.S.C. 1409(b) has been amended to provide that a trustee’s claim of less than $10,000.00 against a non-insider to collect a non-consumer debt can be brought only in the district where the defendant resides. Under the current Code, no such requirement exists. This new venue requirement will mainly have an impact in collection and avoidance actions.
Extending the perfection period as a preference defense: § 547(e)(2)/ Exten-sion of time to perfect liens: § 547(c)
In general, under the current Code, in determining when a transfer is made for preferential transfer analysis, a transfer is made at the time such transfer takes effect between the transferor and the transferee if such transfer is perfected at, or within 10 days after, such time. In the Act, this ten-day period has been expanded to 30 days. Before the Act, a secured creditor was required to properly perfect a purchase money security interest within 20 days after the debtor receives possession of the purchased property, to protect the transfer of the security interest from being avoided as a preferential transfer. Under the Act, the secured creditor is given an additional ten days – for a total of 30 days – to properly perfect its purchase money security interest. As a result of this Act, the Bankruptcy Code no longer follows non-bankruptcy practice for lien perfection under UCC 9-324. These two provisions are aimed at reducing the number of preference actions brought against secured lenders.
Limits on avoidance of preferential transfers: § 547(i)
If the trustee avoids a preferential transfer made between 90 days and one year before the petition date by a debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be avoided solely with respect to the insider, and not the non-insider entity. The purpose of this provision is to further clarify that a lien given to a non-insider beyond the 90-day preference period is protected from avoidance as to the non-insider. Thus, if a lien given outside of the 90-day preference period to a non-insider entity is preferential to an insider, the lien will not be avoided, but the insider will likely be liable for the value of such lien.
Wider scope for avoiding fraudulent transfers: § 548
In addition to increasing the reach-back period for a fraudulent transfer from one year to two, the Act provides that an employment agreement that was not entered into in the ordinary course of business can be avoided as a fraudulent transfer even if the debtor was not insolvent at the time the employment agreement was entered into. This is a divergence for the current Code’s fraudulent transfer provisions, which require that the debtor was insolvent or became insolvent as a result of the transfer in order for a transfer to be avoided as a fraudulent transfer.
Notices to creditors: § 342
If, within the 90 days prior to the bankruptcy, a creditor sends the debtor at least two communications with the debtor’s current account number and the address at which such creditor requests to receive correspondence, than any notice required to be sent by the debtor to the creditor must be sent to such address and must include such account number.
Limited retention bonuses for management: § 503(c)(1)
Under the Act, retention bonuses may not be paid to an insider unless (a) such bonuses are essential to retaining the person because that person has a “bona fide job offer from another business” with equal or greater compensation, and (b) the services provided by such insider are “essential to the survival of the business.”
Limited severance pay to departing management: § 503(c)(2)
Severance payments cannot be paid to insiders unless (a) the payment is part of a program that is generally applicable to all full-time employees, and (b) the amount of such payments are not greater than ten times of the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.
Wider reach for interest and fees for over-secured creditors: § 506(b)
While the current Code and the Act both provide that an over-secured creditor is entitled to contractual interest and reasonable fees, costs, or charges, the Act also provides that such an over-secured creditor is entitled to interest and reasonable fees, costs or charges if a State statute under which such claim arose provides for such interest and reasonable fees, costs, or charges.
Tax claims: § 511
Interest rates and value discount rates with respect to tax claims shall be determined under applicable non-bankruptcy law. Watch for other major tax changes, especially in the new Chapter 12 for family farmers and fishermen.
No extensions of time to file a Plan: § 1121
The Act provides that the exclusivity period, in which a Chapter 11 non-small business debtor may file a plan and solicit acceptance of such plan, may not be extended beyond 18 months and 20 months after the order for relief, respectively. The Court has no discretion to change these deadlines, regardless of the size or complexity of the case.

PROCEDURAL CHANGES
The Federal Rules of Bankruptcy Procedure and required forms are also being overhauled to give effect to the Act. An interim edition of the new Rules, reflecting the amendment in the Act, has been issued by the Rules Committee of the Judicial Conference of the United States. During the extended formal process for officially amending the Bankruptcy Rules, each federal district has issued a General Order adopting the interim Amended Rules for local use. This provides uniform amended Bankruptcy Rules throughout the country during the amendment process. For those with long memories of bankruptcy practice, this interim procedure is known as a “Marathon Rule.”

IN SUMMARY
This article is only a very brief summary of some of the amendments to the Bankruptcy Code related to business bankruptcy cases. The Act is more than 600 pages long, and amends not only the Bankruptcy Code, but also the Internal Revenue Code, and other bankruptcy-related sections of other federal statutes. For more information on the amended Bankruptcy Code and the General Order containing the new Bankruptcy Rules, check the court website for the Southern District of Texas, www.txs. uscourts.gov. You can also get helpful information about the amendments from the American Bankruptcy Insti-tute, www.abiworld.org. And, of course, seminars on the Act amendments are being held through all your favorite CLE providers. In the words of Douglas Adams, in The Hitchhiker’s Guide to the Galaxy: “Don’t Panic!”

Endnotes
1. All section references are to the amended Bankruptcy Code, 11 U.S. C. §§ 101 et seq., unless otherwise noted.

Ann D. Zeigler and Steven D. Shurn practice in the bankruptcy section of HughesWattersAskanase, LLP.

< BACK TO TOP >