On April 20 President Bush signed the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” This act represents the biggest overhaul of bankruptcy law in more than 25 years. While the focus of the act, and much of the publicity surrounding its passage, has centered on its consumer provisions, numerous other changes have been made to the bankruptcy laws that govern chapter 11 business reorganizations.

Under the new law, the rights of chapter 11 debtors have been curtailed:

• A debtor’s exclusive right to file a proposed plan of reorganization may not be extended by the bankruptcy court beyond 18 months.
• With certain exceptions, a debtor may not assume an executory contract or lease if the debtor has committed a non-monetary breach of that agreement.
• Non-residential real property leases may be assumed if the non-monetary breach relates to cessation of the business, but the debtor must compensate for pecuniary losses resulting from the closure.
• A debtor/lessee’s nonresidential real property lease is deemed rejected (and possession must be immediately surrendered) by the earlier of 120 days after commencement of the case, or the date of plan confirmation. The court may extend this deadline for an additional 90 days, but any subsequent extension requires the lessor’s consent.
• A debtor may not assume and assign a shopping center lease if the new lessee proposes a use that differs from the use contemplated under the lease.
• If a debtor assumes a nonresidential real property lease after the chapter 11 filing and subsequently rejects the lease, the landlord has an administrative claim for all monetary obligations due to the landlord for the next two years, without any right of setoff or reduction.
• If a personal property lease is not assumed in the plan, the lease is deemed rejected as a matter of law and the automatic stay is terminated without further order of the court.
• A creditor’s right to reclaim goods delivered to an insolvent debtor is extended to cover goods delivered within 45 days prior to the bankruptcy filing. If the creditor fails to make timely demand for their return, the creditor nevertheless is given an administrative claim for the value of those goods.
• A debtor may not avoid a warehouseman’s lien for storage or transportation or other costs related thereto.
• A creditor’s defenses to a preference action brought by the bankruptcy estate are expanded to include payments made in the ordinary course of business or payments made according to ordinary business terms.
• Fraudulent transfers made within 2 years of the bankruptcy filing may now be set aside under the bankruptcy code (previously it was 1 year), and transfers by a debtor to a self-settled trust in certain circumstances may be set aside if made with 10 years of the bankruptcy filing.
• Except in very rare circumstances, retention bonus payments to a debtor’s officers and directors to induce them to stay with the business are curtailed. Severance payments to a debtor’s insiders are also severely limited.
• In most instances, a chapter 11 debtor must continue to make payments to its employee benefit plans, and payment of retiree benefits must ordinarily also be continued.
• Utility creditors may alter or refuse utility service to a debtor if the utility does not receive assurance of payment that is satisfactory to the utility within 30 days of the bankruptcy filing.

Written by Craig Stuppi