What is the sudden impact of the Revised Bankruptcy code on Business Reorganizations
By Shulman, Leonard & Huttenhoff, Robert*
The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (hereinafter the “Act”) was enacted primarily to prevent perceived consumer bankruptcy case abuses (i.e. personal Chapter 7 cases involving consumer debt). Numerous changes also dramatically impact business reorganizations, however. The Act became effective on October 17, 2005 and most changes apply only to cases filed on or after that date. Some of the more significant changes affecting business reorganizations are described below.
Chapter 11 Plan Exclusivity Under
the Revised Code
Amended section 1121(d) now caps the exclusivity period for filing a disclosure statement at 18 months, and for confirming a plan at 20 months. Debtors will no longer be able to indefinitely delay negotiating a proposed plan with creditors and will need to proceed quickly towards an exit strategy.
Assumption of Non-Residential Leases Under
the Revised Code
Under revised section 365(d)(4), a debtor/lessee must assume or reject a lease before the earlier of 120 days after the date of the order for relief or the date of entry of an order confirming a plan. A debtor (or trustee or landlord) may seek an extension for cause for up to a maximum of an additional 90 days for cause. Further extensions will be available only with the “prior written consent of the lessor.” 11 U.S.C. §365(d)(4)(B)(ii). Thus, absent the landlord’s consent, the debtor or trustee must decide to assume or reject the lease no later than a maximum of 210 days after the date of the order for relief.
The Act also caps the damages a landlord may seek when a lease is assumed by a debtor or trustee and later rejected. The current law provides that the entire amount of the lease payments owed on an assumed lease is entitled to an administrative priority claim. Under new section 503(b)(7), the administrative claim for such an assumed (and later rejected) lease is capped at two years worth of lease payments from the date of rejection.
New Section 365(b)(1)(A)—one of the few provisions of the Act benefiting the debtor—allows a debtor to assume an unexpired lease of real property without having to cure defaults of non-monetary obligations/acts. Under current law a debtor cannot assume a lease if there has been a non-monetary default that can’t be cured. For example, violation of a contractual “going dark” provision, where a debtor fails to continuously operate the business, works a default. Lessors often close stores prior to filing bankruptcy, violating these provisions. The Code revision allows a debtor to assume such a lease provided the debtor is not in default at or after the time of assumption and compensates the lessor for any actual economic loss sustained as a result of the default. This allows a debtor to reinstate a valuable lease that would otherwise be lost.
Tax Provisions Affecting Business Reorganizations
The revised Code also requires a debtor to pay the taxing authority in a manner no less favorable than treatment accorded holders of other non-priority unsecured claims. There are other tax provisions in the revised Code that made it compelling for a business debtor to seek to reorganize prior to the October 17, 2005 effective date of the Act.
Priority Wage Claims Under the Revised Code
Utilities and Adequate Assurances Under the
Vendors Reclamation Rights Under the Revised Code
New Provisions Affecting “Small Business Debtors”
Before the amendments, whether to elect the small business debtor treatment was left to the option of debtor. The revised statute requires that a debtor falling within the definition of a small business debtor must comply with new, special requirements.
The “exclusivity period” for small business debtors is slightly modified. For such businesses, the revised Code provides the debtor a 160-day exclusivity period after the order for relief and an absolute plan-filing deadline of 300 days after the order for relief. These deadlines may be extended by the court if a debtor can establish that it is likely to confirm a plan within a reasonable period of time.
Additionally, the revised Section 1116 requires (among other things)
that a small business debtor must file with the Court its most recent
balance sheet, statement of operations, cash-flow statements and federal
tax returns within 7 days after the commencement of its case.