• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to take effect October 2005
  • April 28, 2005
  • Law Firm: Kilpatrick Stockton LLP - Atlanta Office
  • The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted on April 20, 2005 and will take effect on October 17, 2005, with the exception of certain provisions designed to address corporate bankruptcy abuse that will take effect immediately. While the press has reported the Act as targeting issues relating to bankruptcy cases filed by individuals with primarily consumer debts, a number of the Act's provisions will significantly change corporate bankruptcy cases. The following is a summary of the key provisions of the Act that will generally affect corporate cases.

    Retention Bonuses Generally Prohibited
    Section 503 of the Bankruptcy Code (the "Code"), which provides for the allowance of expenses necessary for the administration of a debtor's bankruptcy estate, has been amended to prohibit retention bonuses absent a finding by the court that the payment is essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation; the services provided by the person are essential to the survival of the business; and either the payment to be made is not greater than an amount equal to ten times the amount of the mean transfer or obligation of a similar kind given to non-management employees for any purpose during the calendar year in which the transfer is made or not more than 25% of compensation provided to the person during the prior year.

    Limitations On Transfers To Insiders, Officers And Consultants
    Section 503 has also been amended to provide that severance payments to insiders may only be made as part of a program generally applicable to all full-time employees and the amount of the payment may not be greater than ten times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made. The amendments to section 503 further prohibit all other transfers or obligations outside of the ordinary course of business not justified by the facts and circumstances of the case, including transfers made to or obligations incurred for the benefit of officers, managers, or consultants hired after the date of the filing of the petition.

    The United States Trustee Is Required To Seek Appointment Of A Trustee For Suspected Fraud
    Section 1104 of the Code has been amended to require the United States Trustee, an official of the Justice Department whose office is charged with monitoring bankruptcy cases, to move for the appointment of a trustee in a chapter 11 case if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtor's chief executive or chief financial officer, or members of the governing body who selected the debtor's chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor's public financial reporting. This amendment takes effect immediately but applies only to cases commenced on or after April 20, 2005, the date of enactment of the Act.

    The Debtor's Exclusive Right To Propose A Plan May Not Be Extended Beyond 18 Months From The Petition Date
    Section 1121(d) has been amended to provide that the 120-day period within which the debtor has the exclusive right to propose a plan may not be extended beyond a date that is 18 months after the petition date (i.e. the date the case is commenced). Similarly, the 180-day period within which the debtor has the exclusive right to solicit plan acceptances may not be extended beyond a date that is 20 months after the petition date.

    Debtor Has Maximum 7 Months To Determine Whether To Assume Or Reject A Commercial Real Estate Lease Absent Landlord Consent To A Longer Period
    Section 365(d) of the Code has been amended to provide that an unexpired lease of non-residential real property shall be deemed rejected if not assumed or rejected by the earlier of 120 days after the petition date or the date of entry of a confirmation order. The court may extend the expiration of the 120-day period for 90 days on motion of the debtor or the lessor for cause.

    If the court grants such an extension, the court may only grant subsequent extensions upon prior written consent of the lessor in each instance. Current law permits a debtor to wait until confirmation of a plan to determine whether to assume or reject a commercial real estate lease. This amendment will significantly impact the chapter 11 cases of large retailers, who typically require many months to make determinations regarding lease assumption or rejection.

    A related amendment to section 503(b) of the Code provides that in instances where a non-residential real property lease previously assumed under section 365 is subsequently rejected, the lessor will have an administrative expense claim for all monetary obligations due for 2 years following the later of the rejection date or the date of actual turnover of the premises.

    Non-Monetary Defaults Under Executory Contracts And Unexpired Leases That Are Impossible To Cure May Be Compensated
    Section 365 of the Code has been amended to permit assumption of an executory contract or unexpired lease where there has been a non-monetary default that cannot be cured; however, any pecuniary loss to the non-debtor party to the contract or lease resulting from such a default must be compensated. Current law prohibits assumption where there is a non-monetary default that cannot be cured absent consent of the non-debtor party.

    Adequate Assurance Of Post-Petition Payment To Utilities
    Section 366 of the Code provides that a utility may not alter, refuse or discontinue service to a debtor solely because the debtor filed a bankruptcy petition or owes money to the utility for service provided prior to the filing of the petition. The debtor has 20 days following the petition date to provide the utility with adequate assurance of payment for service to be provided post-petition.

    Adequate assurance may be in the form of "deposit or other security." While section 366 is seemingly straightforward, there has been exhaustive litigation over the meaning of "adequate assurance of payment" and "a deposit or other security," particularly in the cases of large telecommunications firms where telephone utilities are the major suppliers of the debtors' product.

    Section 366 has been amended to provide that "adequate assurance of payment" means a cash deposit; a letter of credit; a certificate of deposit; a surety bond; a prepayment of utility consumption; or another form of security that is mutually agreed upon between the utility and the debtor or the trustee. The amendment further provides that an administrative expense priority shall not constitute an assurance of payment.

    In addition, in a case filed under chapter 11, a utility may alter, refuse or discontinue utility service if during the 30-day period beginning on the date of filing of the petition the utility does not receive from the debtor adequate assurance of payment for utility service that is satisfactory to the utility. A court may order modification of the amount of an assurance of payment in a chapter 11 case and, in making such a determination, may not consider: the absence of security before the date of the filing of the petition; the payment by the debtor of charges for utility service in a timely manner before the date of the filing of the petition; or the availability of an administrative expense priority. Further, a utility may recover or setoff against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court.

    Committee Confidentiality Generally Abolished
    Section 1102(b) of the Code has been amended to provide that a committee appointed under subsection 1102(a) shall provide access to information for creditors who hold claims of the kind represented by the committee and who are not appointed to the committee.

    The committee must also solicit and receive comments from such creditors and be subject to a court order that compels any additional report or disclosure to be made to such creditors.

    Pre-Petition Lock-Up Agreements Permitted
    Section 1125 of the Code has been amended to provide that"...an acceptance or rejection of the plan may be solicited from a holder of a claim or interest if such solicitation complies with applicable non-bankruptcy law and if such holder was solicited before the commencement of the case in a manner complying with applicable non-bankruptcy law."

    Administrative Expense Status For Goods Sold To A Debtor Within 20 Days Of The Petition Date
    Section 503(b) of the Code has been amended to provide that a seller of goods may recover as an administrative expense the value of any goods sold to a debtor in the ordinary course of the debtor's business within 20 days of the petition date. In addition, section 546(c) of the Code has been amended to provide that a seller of goods may reclaim goods sold to a debtor in the ordinary course of the seller's business if the debtor has received such goods while insolvent within 45 days of the petition date.