CLIENT ALERT
www.flastergreenberg.com
New Bankruptcy Law Impacts on Businesses Too
P resident George W. Bush signed into law the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005
(the “Bankruptcy Act” or the “Act”) on April 20, 2005.1
The Bankruptcy Act has received the most attention for its pro-
visions making it more difficult for individuals to avoid repaying
their debts. However, the Bankruptcy Act also presents new chal-
lenges for businesses seeking to reorganize their financial affairs.
Some highlights of the Bankruptcy Act that pertain to
businesses are:
Shortened Reorganization Process — Small businesses
(defined under the Bankruptcy Code as essentially being busi-
nesses with less than $2,000,000 in debt) will have the exclu-
sive right to file a plan of reorganization for six months after
the petition date. At the expiration of the exclusivity period,
the debtor’s creditors may file a reorganization plan for the
debtor. If no plan is filed within 300 days after the petition
date, the case may be dismissed or converted to a Chapter 7
liquidation proceeding. Larger debtors will have 18 months to
file a plan of reorganization; however, the Bankruptcy Act lim-
its the Bankruptcy Court’s ability to grant continuous exten-
sions of the exclusivity period, during which only the debtor
can file a plan of reorganization.
Enhanced Protections Afforded Utilities — Utilities’ entitle-
ment to “adequate assurance” of payment for post-petition util-
ity services is now defined under the Bankruptcy Act in eco-
nomic terms, including a cash deposit, security bond, letter of
credit, certificate of deposit, prepayment of utility compensation
or a mutually agreed upon form of security between the utility
and the debtor. Adequate assurance must be provided within 30
days of the petition date in order to prevent the discontinuance
of service. As such, debtors can no longer rely upon the facts and
circumstances of the bankruptcy case, such as prior payment his-
tory or granting administrative claim status, to satisfy the “ade-
quate assurance” required for the continuation of utility services
post-petition. Rather, debtors now must budget for the contin-
uation of utility services post-petition.
Expanded Review of Compensation of Debtors’ Officers and
Directors — The Bankruptcy Act revamps the common practice
of leaving compensation of management to the “sound business
judgment of the debtor” and imposes strict Bankruptcy Court
review and dollar limits on the amounts paid to corporate man-
agement and insiders. The Act also specifically limits severance
payments and success fees to insiders.
Enhanced Protections for Debtors’ Employees — While impos-
1
Although most of the provisions of the Bankruptcy Act become effective
on October 17, 2005, some of the provisions of the Act will be phased-in
sooner, with several provisions being effective immediately.
May 2005
ing new scrutiny and limits on compensation to management
and insiders, the Bankruptcy Act affords additional protection
for rank and file employees owed compensation for services
rendered, but unpaid, prior to the petition date. Specifically,
the Act increases the priority claims for rank and file employ-
ees owed up to $10,000 for services rendered during the six
months prior to the petition date per employee.
New Deadlines for Assuming or Rejecting Commercial
Real Estate Leases — The Bankruptcy Act now allows a
debtor 120 days (as opposed to 60 days) within which to
decide whether to assume or reject a commercial real estate
lease. However, the Act limits the extension of this deadline
to an additional 90 days, thereby putting an end to the
granting of numerous, open-ended extensions typically
granted to debtors to make a decision to assume or reject
their commercial real estate leases.
Allowance of Administrative Claim Status for Goods
Provided Pre-Petition — The Bankruptcy Act expands
administrative claim status to include not only claims for
goods and services supplied to a debtor post-petition, but also
for goods received by a debtor within the 20 days prior to the
petition date, when the goods were sold to the debtor in the
ordinary course of the debtor’s business. Because of the newly-
imposed administrative claims status, debtors will find it more
difficult to “stock up” on goods before the petition date, as to
do so may render the new corporate debtor administratively
insolvent as soon as soon as it files for bankruptcy protection.
Conversion and Dismissal — The Bankruptcy Act substan-
tially expands the grounds for the dismissal or conversion of a
Chapter 11 reorganization proceeding to a Chapter 7 liqui-
dation proceeding and places a higher burden on debtors to
defeat a motion for conversion or dismissal by establishing
that the requested relief is “not in the best interest(s) of cred-
itors and the estate.”
Preference Actions — The Bankruptcy Act includes several
provisions of note with respect to preference actions:
The Act disallows preference actions with respect to
settlement payments and transfers made pursuant to swap
agreements and certain other financial payments.
In cases where debts are not primarily consumer debt, the
Act prohibits preference actions where the aggregate of all
payments and/or transfers is less than $5,000.
The Act generally requires that preference actions seeking
less than $10,000 be brought in the district court where
the creditor/defendant resides.
The Act redefines the “ordinary course of business” defense
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New Bankruptcy Law...
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to preference actions to require a showing that the transfer
was in payment of a debt incurred in the ordinary course of
business or financial affairs of the debtor and the creditor
and the transfer was made either in the ordinary course of
business or financial affairs of debtor and transferee or made
according to ordinary business terms. Thus, the Act elimi-
nates the need for creditors to demonstrate that payments
were received within the “ordinary course of dealings in the
industry” in order to defend preference actions.
Expanded Reclamation Rights Granted to Creditors —
Under the Bankruptcy Act sellers following the required noti-
fication procedures will be entitled to reclaim goods sold on
credit for the 45 day period prior to the petition date subject,
as always, to the security interest of senior lenders. In addition,
the Act allows administrative claims status for a reclaiming
creditor to the extent of goods delivered to the debtor within
20 days prior to the petition date, so long as the goods were
sold in the ordinary course of the debtor’s business.
Although the Bankruptcy Act has received the most attention
for the impact it will have upon individuals, it will also have a
substantial impact upon corporate debtors attempting to
reorganize their financial affairs.
2900 Fire Road, Suite 102A Attorneys in the Bankruptcy Practice Group at
Egg Harbor Township, NJ Flaster/Greenberg P.C. are available to counsel corporate clients
08234 and individuals with concerns about this new Federal legislation.
609-645-1881 For more information, contact our shareholder, E. Richard
Dressel, Esq., who concentrates his practice in bankruptcy and
debtor/creditor rights. Mr. Dressel can be reached at
856.661.2280 or by email at: rick.dressel@flastergreenberg.com.
Suite 840
Wilmington, DE 19801 Flaster/Greenberg Notice: The purpose of this Client Alert is to
302-351-1910 communicate recent legal developments that may be of interest to
readers. The general information is summarized and should not be
construed as legal advice or opinion, nor is it a substitute for the
advice of counsel. Please contact the author to determine how this
information may affect your own practice.