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www.flastergreenberg.com May 2005

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New Bankruptcy Law Impacts on Businesses Too

President 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 repayingtheir 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 afterthe petition date. At the expiration of the exclusivity period,the debtor’s creditors may file a reorganization plan for thedebtor. If no plan is filed within 300 days after the petitiondate, the case may be dismissed or converted to a Chapter 7liquidation proceeding. Larger debtors will have 18 months tofile 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 debtorcan 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 compensationor a mutually agreed upon form of security between the utility and the debtor. Adequate assurance must be provided within 30days of the petition date in order to prevent the discontinuanceof service. As such, debtors can no longer rely upon the facts andcircumstances 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 servicespost-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 practiceof leaving compensation of management to the “sound business

  judgment of the debtor” and imposes strict Bankruptcy Courtreview and dollar limits on the amounts paid to corporate man-agement and insiders. The Act also specifically limits severancepayments and success fees to insiders.

Enhanced Protections for Debtors’ Employees — While impos-

ing new scrutiny and limits on compensation to managementand insiders, the Bankruptcy Act affords additional protectionfor rank and file employees owed compensation for servicesrendered, but unpaid, prior to the petition date. Specificallythe Act increases the priority claims for rank and file employ-ees owed up to $10,000 for services rendered during the sixmonths prior to the petition date per employee.

New Deadlines for Assuming or Rejecting CommercialReal Estate Leases  — The Bankruptcy Act now allows a

debtor 120 days (as opposed to 60 days) within which todecide whether to assume or reject a commercial real estatelease. However, the Act limits the extension of this deadlineto an additional 90 days, thereby putting an end to thegranting of numerous, open-ended extensions typicallygranted to debtors to make a decision to assume or rejecttheir commercial real estate leases.

  Allowance of Administrative Claim Status for GoodProvided Pre-Petition  — The Bankruptcy Act expandsadministrative claim status to include not only claims forgoods and services supplied to a debtor post-petition, but alsofor goods received by a debtor within the 20 days prior to thepetition date, when the goods were sold to the debtor in theordinary course of the debtor’s business. Because of the newlyimposed administrative claims status, debtors will find it moredifficult to “stock up” on goods before the petition date, as todo so may render the new corporate debtor administrativelyinsolvent as soon as soon as it files for bankruptcy protection

Conversion and Dismissal  — The Bankruptcy Act substantially expands the grounds for the dismissal or conversion of aChapter 11 reorganization proceeding to a Chapter 7 liqui-dation proceeding and places a higher burden on debtors todefeat a motion for conversion or dismissal by establishingthat the requested relief is “not in the best interest(s) of cred-itors and the estate.”

Preference Actions — The Bankruptcy Act includes severaprovisions of note with respect to preference actions:

The Act disallows preference actions with respect tosettlement payments and transfers made pursuant to swapagreements and certain other financial payments.

In cases where debts are not primarily consumer debt, the Act prohibits preference actions where the aggregate of alpayments and/or transfers is less than $5,000.

The Act generally requires that preference actions seekingless than $10,000 be brought in the district court wherethe creditor/defendant resides.

The Act redefines the “ordinary course of business” defense

(continued on back)

1 Although most of the provisions of the Bankruptcy Act become effectiveon October 17, 2005, some of the provisions of the Act will be phased-insooner, with several provisions being effective immediately.

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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 obusiness or financial affairs of the debtor and the creditorand the transfer was made either in the ordinary course ofbusiness or financial affairs of debtor and transferee or madeaccording to ordinary business terms. Thus, the Act eliminates the need for creditors to demonstrate that payments

 were received within the “ordinary course of dealings in theindustry” in order to defend preference actions.

Expanded Reclamation Rights Granted to Creditors  —Under the Bankruptcy Act sellers following the required notification procedures will be entitled to reclaim goods sold oncredit for the 45 day period prior to the petition date subject

as always, to the security interest of senior lenders. In additionthe Act allows administrative claims status for a reclaimingcreditor to the extent of goods delivered to the debtor within20 days prior to the petition date, so long as the goods weresold in the ordinary course of the debtor’s business.

 Although the Bankruptcy Act has received the most attentionfor the impact it will have upon individuals, it will also have asubstantial impact upon corporate debtors attempting toreorganize their financial affairs.

New Bankruptcy Law...(continued from front)

Flaster/Greenberg Notice: The purpose of this Client Alert is tocommunicate 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 theadvice of counsel. Please contact the author to determine how this

information may affect your own practice.

Attorneys in the Bankruptcy Practice Group atFlaster/Greenberg P.C. are available to counsel corporate clientsand individuals with concerns about this new Federal legislation

For more information, contact our shareholder, E. RichardDressel, Esq., who concentrates his practice in bankruptcy anddebtor/creditor rights. Mr. Dressel can be reached at856.661.2280 or by email at: rick.dressel@flastergreenberg.com.

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