United States: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Corporate-Related Revisions to The Bankruptcy Code

Last Updated: July 12 2005
Article by Douglas J. Lipke and Allyson Broderick Russo

On April 20, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "2005 Bankruptcy Revisions") became law. Although largely focused on consumer issues, certain provisions of the 2005 Bankruptcy Revisions involve commercial issues in Chapter 11 cases. The pertinent revisions to the United States Bankruptcy Code (the "Bankruptcy Code"), which become effective on October 17, 2005 (unless otherwise noted), are discussed below.

Exclusive Period for Debtors to File Plan of Reorganization

The 2005 Bankruptcy Revisions limit the bankruptcy court’s ability to extend the exclusive periods for the debtor to file a plan (initially set at 120 days) and to solicit acceptance of the plan (initially set at 180 days). Historically, bankruptcy judges have almost automatically extended the 120- and 180-day periods "in the best interests of the estate." Section 1121 of the Bankruptcy Code is amended to provide that the 120-day exclusive period deadline may not be extended beyond a date that is eighteen (18) months after commencement of the case and the 180-day solicitation deadline may not be extended beyond a date that is twenty (20) months after commencement of the case. The bankruptcy judge’s discretion to extend these dates has been eliminated. Although this amendment may have little effect on smaller Chapter 11 cases, creditors’ committees gain significant leverage in larger cases with their ability to propose their own plans of reorganization or liquidation eighteen (18) months after the commencement of the case.

Key Employee Retention and Severance Plans

The 2005 Bankruptcy Revisions attempt to address what is at least perceived as abuses, both pre- and post-petition, in the executive compensation area in the bankruptcy arena. A new Section 503(c) restricts certain benefits to "insiders," defined to include a director, officer or person in control of the debtor or a relative of a director, officer or person in control. Transfers to or obligations incurred for the benefit of an insider to induce his or her retention are prohibited absent a finding by the court that (a) it 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," (b) the services are "essential to the survival of the business," and (c) the compensation is no greater than "10 times the amount of the mean transfer or obligation of a similar kind given to non-management employees during the calendar year" incurred, or if none, then no greater than 25 percent of any similar transfer to or for the benefit of the insider during the previous calendar year.

Further, a severance payment to an insider must be "part of a program that is generally applicable to all full time employees" and no greater than 10 times the mean severance to nonmanagement employees during the calendar year.

Finally, fraudulent transfer provisions under Section 548 of the Bankruptcy Code have been revised to reach back two years (as opposed to one) for cases filed after April 20, 2006. Further, the provisions were amended, effective as of April 20, 2005 to include pre-petition transfers or the incurrence of obligations "to or for the benefit of an insider under an employment contract" which is "not in the ordinary course of business" and for which the debtor received less than "reasonably equivalent value."

Unexpired Leases of Nonresidential Real Property

The treatment of landlords in large Chapter 11 cases, like K-Mart, has been under much scrutiny, and Congress made certain revisions to benefit lessors. Time periods in which the debtor must assume or reject unexpired leases of nonresidential real property have been further restricted by the 2005 Bankruptcy Revisions. Whereas under the pre-amendment Bankruptcy Code, the debtor had 60 days from the date on which the bankruptcy petition was filed, plus such additional time as approved by the court, to assume or reject unexpired leases, Section 365(d)(4) of the Bankruptcy Code now increases the former period to allow the debtor 120 days from the filing of the commencement of the case to assume or reject unexpired leases. More importantly, the revised Bankruptcy Code eliminates unlimited court-approved extensions, instead providing for one ninety-day extension period "for cause," with no further extensions available unless the lessor consents.

Prior to the amendments, debtors and their assignees successfully argued that only monetary defaults must be cured. Section 365(b)(1)(A) of the revised Bankruptcy Code eliminates the obligation of the debtor to cure defaults relating to the failure to perform nonmonetary obligations under an unexpired lease of real property that are impossible to cure. If, however, such defaults arise from a failure to operate in accordance with a nonresidential real property lease, then the defaults must be cured by performance at and after assumption of the lease in accordance with the lease; in addition, the debtor must compensate the lessor for monetary losses resulting from such nonmonetary defaults.

In a related provision, a newly added paragraph to Section 503(b) grants administrative expense priority, in connection with a nonresidential real property lease that is first assumed and then subsequently rejected, for all monetary obligations due for the two-year period following the later of the rejection date or the turnover date. A claim for any remaining amounts due beyond this twoyear period is subject to the cap currently applied to such claims under Section 502(b)(6).

Equipment and Personal Property Leases and Other Executory Contracts

Generally, a debtor may assume an equipment or personal property lease or executory contract only if it cures or provides adequate assurance that it will promptly cure any defaults. Prior to the 2005 Bankruptcy Revisions an exception under Section 365(b)(2) of the Bankruptcy Code excused the debtor from curing a default that was a breach of a provision relating to "the satisfaction of any penalty rate or provisions relating to a default arising from any failure by the debtor to perform non-monetary obligations." Some courts interpreted this exception to excuse performance of all nonmonetary obligations. The Ninth Circuit Court of Appeals in Worthington v. General Motors Corp. (In re Claremont Acquisition Corp.)1 , however concluded that nonmonetary defaults, which were not penalty provisions, were not excluded and must be cured. The 2005 Bankruptcy Revisions merely added "penalty" immediately prior to "provision" in the above-quoted exception, codifying the conclusion in Claremont.

Query: Did Congress create a new issue in its attempt to solve the nonresidential lease penalty rate and penalty provisions issue discussed above? Could an equipment lessor now argue that even nonmonetary obligations that are impossible to cure (other than ipso facto provisions like the commencement of a case, insolvency or financial conditions specifically excepted in Section 365(b)(2) of the Bankruptcy Code) preclude assumption, because Congress only excepted such impossible to cure obligations in Section 365(b)(1) for nonresidential real estate leases?

Section 1110 Aircraft Equipment

The 2005 Bankruptcy Revisions did not amend Section 1110 relating to certain aircraft equipment and vessels. However, do the amendments to Sections 365(b)(1) and 365(b)(2) (discussed in the two previous sections of this Bulletin) provide a stronger argument for lessors of aircraft that an airline may not effectively make a Section 1110(a) election if it is unable to cure all nonmonetary defaults, even those that are impossible to cure? Section 1110(a) excepts only those defaults specified in Section 365(b)(2), typically referred to as ipso facto provisions, from an airline’s obligation to cure to retain the aircraft.

Query: Can an aircraft lessor now argue that nonmonetary cross-defaults in other leases and financial covenants that do not fit within the ipso facto exception of Section 365(b)(2) preclude a Section 1110(a) election, even if such nonmonetary provisions are impossible to cure?

Aircraft Terminal and Aircraft Gate Leases

The 2005 Bankruptcy Revisions also eliminate the restriction on assignments of aircraft terminal and aircraft gate leases, which appeared in Section 365(c)(4) of the pre-amendment Bankruptcy Code.

Preference Actions

Preference defendants received certain benefits from the 2005 Bankruptcy Revisions. The "ordinary course of business" defense set forth in Section 547(c) of the Bankruptcy Code is revised to require the preference defendant to show that, in addition to the debt being incurred in the ordinary course of business or financial affairs of the debtor and the transferee, the transfer was (a) made in the ordinary course of business or financial affairs of the debtor or (rather than and) (b) made according to ordinary business terms.

In addition, a new paragraph is added to Section 547(c) which prohibits the avoidance of transfers that, in the aggregate, total less than $5,000.

Fraudulent Transfers

Section 548 of the Bankruptcy Code has been amended to allow the trustee or Chapter 11 debtor to avoid fraudulent transfers that were made or incurred on or within two years (up from one year) of the date on which the bankruptcy petition was filed (effective only for cases filed after April 20, 2006).

Wage and Salary Priority

The amount allowed as a priority claim for pre-petition wages, salaries, commissions and contributions to employee benefit plans will more than double under the 2005 Bankruptcy Revisions. Section 507(a) of the Bankruptcy Code is amended to grant a fourth priority unsecured claim for up to $10,000 (increased from $4,925) for wages, salaries and commissions earned within 180 days (increased from 90 days) before the filing of the bankruptcy petition. The Revisions also provide for a fifth priority unsecured claim for contributions to an employee benefit plan arising from services rendered within 180 days before the filing of the bankruptcy petition to the extent of $10,000 per employee.

Reclamation

Although reclamation claimants have increased periods to assert their claims, it is now clear that prior perfected secured creditors prime their claims. Revisions to Section 546(c) of the Bankruptcy Code allow a seller of goods to reclaim the goods received by an insolvent debtor within forty-five (45) days before the commencement of the bankruptcy case (formerly 10 days). The seller must make a written reclamation demand no later than forty-five (45) days after the receipt of such goods, or no later than twenty (20) days after the commencement of the case if the forty-five-day period expires after the commencement of the case. The revisions also make clear, however, that the reclamation right is subject to the prior rights of a secured party in such goods (or the proceeds thereof).

A new paragraph is added to Section 503(b) that grants administrative expense priority for the value of goods received by the debtor within twenty days prior to the commencement of the bankruptcy case where the goods were sold to the debtor in the ordinary course of the debtor’s business.

Utility Deposits

Pursuant to Section 366 of the Bankruptcy Code, a debtor must provide adequate assurance of payment to a utility within twenty days after the commencement of the bankruptcy case, or the utility may discontinue service. The 2005 Bankruptcy Revisions restrict what constitutes "assurance of payment" to include a cash deposit, a letter of credit, a certificate of deposit, a surety bond, a prepayment, or some other form of security that is agreed to by the utility. The utility may alter, refuse or discontinue service if such assurance of payment is not received from the debtor within thirty days after the filing of the bankruptcy petition.

Forward Contracts, Repurchase Agreements, Etc.

The Bankruptcy Code currently offers protections for parties to securities contracts, commodities contracts, forward contracts, repurchase agreements, and swap agreements in the event that the other party to such contracts files for bankruptcy protection. The 2005 Bankruptcy Revisions add a new Section 561 to the Bankruptcy Code that offers similar protections for parties to master netting agreements and cross margining contracts.

Cross-Border Insolvency Cases

A new Chapter 15 has been added to the Bankruptcy Code that governs cross-border insolvency cases. These provisions seek to provide a more effective mechanism for dealing with cross-border insolvency cases by facilitating cooperation between U.S. courts, trustees and debtors, on one hand, and non-U.S. courts and other competent authorities, on the other hand.

Homestead Exemption

The Act amends Section 522 of the Bankruptcy Code to add a new subsection (p) that limits a state homestead exemption to $125,000 for a residence acquired by the debtor within 1,215 days prior to the filing of the bankruptcy petition.

Access to Official Creditors’ Committee

The 2005 Bankruptcy Revisions require a Creditors’ Committee to "provide access to information" to creditors that are not members of the Committee and authorizes the bankruptcy court to compel additional reporting and disclosures to such creditors.

Single Asset Real Estate Cases

The original $4,000,000 of aggregate noncontingent, liquidated secured debts requirement to qualify for special provisions for single-asset real estate debtors has been eliminated. Further, amended Section 362(d)(3) now requires a single-asset real estate debtor to make monthly payments of contract rate interest to its secured creditors, if the debtor has not filed a plan that has a reasonable possibility of being confirmed in a reasonable time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions