On October 17, 2005, most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") became effective. Although BAPCPA made far-reaching amendments concerning consumer debtors, BAPCPA also made significant changes to business bankruptcy law, most of which favor creditors. Some changes to the business bankruptcy law are discussed below.
1. Payment on Pre-Petition Shipments Of Goods. BAPCPA creates substantial additional rights in favor of vendors who sold goods to the debtor prior to the bankruptcy filing. Vendors who sell a debtor goods in the ordinary course of business within 20 days before the bankruptcy case is filed are entitled to a post-petition administrative claim — payable at 100 cents on the dollar — for the value of those goods. Prior to BAPCPA, these vendors typically only had a prepetition general unsecured claim payable at a fraction of their invoice amount for the goods sold to the debtor.
2. Reclamation Claims. Vendors may now exercise their right to reclaim goods 45 days after the debtor's receipt of the goods, or 20 days after the bankruptcy case if the 45-day period expires after a bankruptcy case is commenced. Prior law limited the reclamation "window" to 10 days after receipt of the goods.
3. Preferences: Ordinary Course Defense. Under the pre-BAPCPA law, to successfully defend a preference action a creditor had to prove that the payment at issue was made in the ordinary course of both parties and that the payment was made in accordance with "ordinary" industry terms. In other words, a creditor had to establish both defenses to avoid preference liability. BAPCA has made it easier to defend a preference action by allowing a creditor to avoid preference liability if it can prove only one of the two defenses. This change reduces the creditor's burden of proof necessary to avoid preference liability.
4. Preferences: Minimum Claim Thresholds. BAPCPA provides protection for small creditors of a debtor who have received relatively small payments during the 90-day pre-bankruptcy preference look-back period. Creditors who receive aggregate payments not exceeding $5,000 may now be exempt from preference liability. BAPCPA does not make clear, however, whether this new affirmative defense applies to all payments made to that creditor in the aggregate or if the defense applies to singular transactions.
5. Preferences: Small Actions in Defendant's Home District. Creditors who have received potential preference payments in an amount less than $10,000 will no longer have to defend themselves in a bankruptcy court which could be located in another state. Instead, such preference actions must now be commenced in the creditor's home district.
6. Preferences: DiPrizio Doctrine. Under pre-BAPCPA law, payments to a non-insider lender who received a payment more than 90 days but less than one year prior to the bankruptcy filing were subject to preference liability if such payment benefited an insider of the debtor. For example, if a bank whose loan to a debtor was guaranteed by the company's owner received a payment after the 90-day look back preference period but before the one-year preference look-back limitation, then that payment was subject to possible preference attack because the payment benefited the insider owner/guarantor. Earlier revisions to the Bankruptcy Code tried to fix this problem, but never quite got it right. BAPCPA changed the law to make it clear that only payments actually made to the insider are subject to potential preference liability. The bank is now, therefore, off the hook.
7. Commercial Leases. Prior to the enactment of BAPCPA, judges could delay up until the end of the bankruptcy case any decision whether to assume or reject a commercial real estate lease. Debtors with a substantial number of commercial real estate leases liked this flexibility in determining which locations they wished to keep open or close down in order to propose a viable plan of reorganization. BACPA provides that a debtor must now decide whether to assume or reject within a maximum of 210 days after the commencement of the bankruptcy case, unless the lessor consents to a greater extension of time.
8. Exclusivity. Prior law granted the debtor the exclusive right to proposed a plan of reorganization during the first 120 days of a bankruptcy case. Generally, courts would continue this deadline indefinitely for "cause" such as the size and complexity of the bankruptcy case. BAPCA changed this practice and courts cannot extend the exclusivity period more than 18 months after the commencement of the bankruptcy case.
9. Executive Compensation and Severance. BAPCPA severely limits the administrative priority claims for certain types of executive compensation and severance in bankruptcy. BAPCPA prohibits the debtor from providing any retention or severance benefit to an executive unless, among other things, the executive already has a bona-fide job offer in hand from another company. Since it is at least counterproductive to require a key employee to look for and find another job before his employer can ask to pay him a stay bonus, and equally unlikely that the employee with a bona fide job offer from a non-bankrupt company would choose to remain with a bankrupt company, it appears that a debtor's ability to provide severance or retention benefits has been severely curtailed.
10. Nondischargeabiltiy of Certain Corporate Debts. Under pre-BACPCA law, a reorganizing corporate debtor's discharge of debts was pervasive. Under BACPCA, certain corporate debts will be subject to nondischargeability actions, such as a tax as to which the willfully attempted to evade or defeat such tax.
These are only some of the highlights. The law has already produced substantial confusion and at least one odd result. Many of the BACPA changes are difficult to understand simply because they are poorly written; lawyers and bankruptcy judges have complained aloud about some of the apparent drafting errors, though Congress is not likely to fix them in the near future. And although the consumer changes were designed to make it harder for individuals to discharge their credit card debt, there was an unprecedented rush by many consumer to file bankruptcy cases before the October 17, 2005 effective date. Though the credit card industry anticipated some increase in pre-October 17 filings in their fourth quarter forecasts, the sheer number of filings forced many of them to revise those projections upward to substantially increase their anticipated bankruptcy losses.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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