BAPCPA

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Business Bankruptcy Issues Recent Developments

Legislation Introduced To Repeal Certain Business Bankruptcy Changes Made By BAPCPA’s 2005 Amendments

On April 2, 2009, Representative Jerrold Nadler (D-NY) introduced a bill entitled the "Business Reorganization and Job Protection Act of 2009." The bill has been co-sponsored by Representative Steve Cohen (D-TN), the Chairman of the Subcommittee on Commercial and Administrative Law of the United States House of Representatives Committee on the Judiciary. As of the date of this post, the bill’s official text has not been printed but the National Association of Credit Management has made available on its website what appears to be a final or near-final draft of the legislation, which you can access by clicking here. I plan to provide an update on the blog once the official version of the bill as introduced becomes available.

Introduction of the bill follows testimony before the Subcommittee on Commercial and Administrative Law by a number of bankruptcy professionals and law professors, including my partner and the Chair of Cooley Godward Kronish LLP‘s Bankruptcy & Restructuring Group, Lawrence Gottlieb. Click here for a prior post about his September 26, 2008 testimony, which focused on the disappearance of reorganizations of retailers since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as "BAPCPA"). A link to Representative Nadler’s press release on the bill’s introduction can be found here.

The Legislation’s Proposed Changes. The Business Reorganization and Job Protection Act of 2009, introduced as H.R. 1942, would make several major amendments to the Bankruptcy Code. The common theme is that the proposed bill would repeal certain changes made by BAPCPA and restore the statutory language that was in place before BAPCPA was enacted in 2005. The four principal changes are as follows:

  • Real Estate Leases. The bill would change Section 365(d)(4) of the Bankruptcy Code by repealing the maximum 210-day period within which debtors could assume or reject non-residential real property leases. Instead of the current 120-day initial period and up to a 90-day extension, the statute would revert back to the initial 60-day period under the prior law but, more importantly, would allow the bankruptcy court, for cause, to grant further extensions without any time limit.
  • Utilities. Similarly, the bill would repeal Section 366(c) of the Bankruptcy Code, which now requires a deposit of cash or certain cash equivalents to provide adequate assurance of payment to utilities. If enacted, the bill would allow debtors to establish adequate assurance of payment with something short of a monetary deposit, as had been the case under the pre-BAPCPA law.
  • 20-Day Goods Administrative Claim. The bill would also make changes to the law relating to shipments by vendors prior to a bankruptcy filing. It would repeal Section 503(b)(9) of the Bankruptcy Code, added by BAPCPA, which gives an administrative claim to vendors for the value of goods received by a debtor in the ordinary course of business during the 20 days before the bankruptcy petition.
  • Reclamation. Another change the bill proposes to make is to go back to the pre-BAPCPA language in Section 546(c) of the Bankruptcy Code governing reclamation claims, specifically to repeal language that had expanded the potential reclamation claim for vendors to the 45 days before a bankruptcy petition. The bill would reinstate the pre-BAPCPA provisions restricting reclamation to that provided for under the Uniform Commercial Code (generally only a 10 day period) and permitting an administrative claim or secured claim to be provided to a reclaiming vendor in lieu of a return of the goods pursuant to a valid reclamation claim.
  • Effective Date. Finally, the bill proposes that its changes would apply to cases commenced on or after the date of its enactment, meaning it would apply to cases filed after the bill became law but not to cases filed before it became law.

Conclusion. If the Business Reorganization and Job Protection Act of 2009 were enacted, it could have a major impact on Chapter 11 bankruptcy cases, in particular those involving retailers. As explained in a recent article by several of my colleagues, the cumulative changes made by BAPCPA have had a profound impact on retail Chapter 11 cases. Repealing them could enable retailers the opportunity to emerge from Chapter 11 — the way they often did in the years before the BAPCPA amendments were adopted. Otherwise, we are likely to continue to see more retailers forced into going of out business sales in Chapter 11.

Business Bankruptcy Issues Recent Developments

New Article Looks At BAPCPA’s Impact On Retailers In Chapter 11

My colleagues Lawrence C. Gottlieb, Michael Klein, and Ronald R. Sussman recently authored an article entitled "BAPCPA’s Effects on Retail Chapter 11s Are Profound," in the February 2009 edition of the The Journal of Corporate Renewal, published by the Turnaround Management Association. You can access a copy of the article by clicking on its title in the prior sentence.

What’s their assessment of the impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as BAPCPA) on retailer Chapter 11 bankruptcies? Here’s an excerpt:

BAPCPA’s numerous creditor-friendly amendments and modifications have profoundly impacted the Chapter 11 process, to the point that it is nearly impossible for retailers to reorganize, regardless of the prevailing national and international economic conditions.

Time and again in the three years since its enactment, BAPCPA has significantly impaired the ability of retailers to obtain the necessary post-petition financing and breathing room from creditors to test and implement a reorganization strategy, regardless of the debtor’s capital structure, the fluctuating state of the credit markets, or the extent to which they compete with large discount retailers like WalMart or online retailers like Amazon.

The article details several of the critical changes BAPCPA made, their effect on retailers, and how the timing of a bankruptcy filing is often critical for a retailer to have any chance of trying for a going concern sale to avoid complete liquidation through going out of business sales.

The Cooley Bankruptcy & Restructuring Group, which Lawrence Gottlieb chairs, is representing official committees of unsecured creditors in many high-profile national and regional retail bankruptcies, including Steve & Barry’s, The Bombay Company, Hancock Fabrics, Lillian Vernon, The Sharper Image, Mervyns, Shoe Pavilion, Boscov’s and Goody’s. The article, drawn from these recent experiences, is important reading for retailers, creditors, and insolvency professionals alike.

Business Bankruptcy Issues Recent Developments

Amendments To The Federal Bankruptcy Rules Take Effect December 1, 2008

Nearly every year, changes are made to the Federal Rules of Bankruptcy Procedure — the ones that govern how bankruptcy cases are managed — to address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. This year’s amendments to the national bankruptcy rules take effect on December 1, 2008. 

Business Bankruptcy Rule Changes. Unlike the more substantive modifications made last year (discussed here), this year’s amendments make a host of relatively smaller, but still important, changes. The most notable ones for business bankruptcy cases involve privacy concerns. New rules have been put in place to protect patients when health care businesses file for bankruptcy while others govern the proposed sale or transfer of personally identifiable information by any type of business. Separate rule changes implement provisions of Chapter 15 (the Bankruptcy Code’s cross-border and international insolvency chapter), address a range of issues in small business Chapter 11 cases, grant courts more flexibility in giving notice to foreign creditors, introduce various consumer bankruptcy procedural changes, and establish a process to allow some bankruptcy court decisions to be appealed directly to the U.S. Court of Appeals.

Interim Bankruptcy Rules Being Replaced. These rules also replace the interim bankruptcy rules that have been in place for the past few years following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as BAPCPA). Some bankruptcy courts, such as the District of Delaware and the Southern District of New York, have already issued general orders retracting the effectiveness of the interim rules effective as of December 1, 2008.

Rules Of The Road. At a time when the financial crisis is likely to push more and more companies into Chapter 11, bankruptcy attorneys and other insolvency professionals will want to review the rule changes closely to make sure they are following the most current version of the Federal Rules of Bankruptcy Procedure. For debtors, creditors, and other parties, this year’s rule amendments should help make management of Chapter 11 bankruptcy cases more consistent with BAPCPA’s changes and, potentially, a more efficient process.

Business Bankruptcy Issues Recent Developments

The 2005 Bankruptcy Law Changes And Their Impact On Retail Reorganizations

On September 26, 2008, my partner Lawrence Gottlieb, the Chair of the Bankruptcy & Restructuring Group at Cooley Godward Kronish LLP, testified before the Subcommittee on Commercial and Administrative Law of the United States House of Representatives Committee on the Judiciary.  Joining him at the hearing were Professor Jay Westbrook of the University of Texas Law School and Professor Barry Adler of the New York University School of Law. The subject of the hearing was "Lehman Brothers, Sharper Image, Bennigan’s, and Beyond: Is Chapter 11 Bankruptcy Working?" You can access their testimony and watch the full hearing by clicking on the link in the prior sentence.

In his testimony, entitled "The Disappearance of Retail Reorganization In The Post-BAPCPA Era," (a copy of which is available by clicking on its title), he discussed the major impact the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") has had on retail reorganizations. One of his main observations involves the 2005 amendment limiting the time within which a debtor may assume or reject commercial real estate leases to a total of 210 days (if a 90-day extension is granted). He testified that this change, in combination with other BAPCPA provisions that reduce a retailer’s liquidity, has had a devastating effect on a retailer’s ability to reorganize. Among his comments are the following:

BAPCPA has left retailers without adequate time and money to effectuate operational initiatives and cost cutting measures needed to resuscitate their businesses. Retailers now enter the Chapter 11 arena with little choice but to narrowly tailor their strategy to ensure that their lenders are not deprived of the substantial benefits and protections conferred by section 363(b) of the Bankruptcy Code, which authorizes the use, sale or lease of estate property outside the ordinary course of business upon court approval. Section 363(b) offers the unique ability to cleanse the assets of a distressed company by permitting debtors to convey assets “free and clear,” thereby maximizing value by removing the uncertainty of such stigmas as successor liability, fraudulent transfer claims and lien issues that often accompany asset purchases. Prepetition lenders, cognizant of this powerful liquidating tool and mindful of the numerous liquidity hurdles that the debtor must clear as a result of BAPCPA, have little to gain by risking their collateral in pursuit of a reorganization process now widely perceived as hopeless.

Indeed, the constricted time frames and liquidity problems created and imposed by BAPCPA have effectively eliminated the need for existing lenders to provide any more financing than necessary to position the debtor to liquidate its assets in the first few months of the case. Today, the debtor is no longer “in possession” of its assets or its future upon the commencement of its Chapter 11 case. BAPCPA’s constrictive liquidity provisions and the enormous leverage handed to secured lenders as a result thereof have eliminated the ability of retailers to control the Chapter 11 process as a “debtor-in-possession.” Rather, the process is now controlled almost exclusively by prepetition lenders, who have essentially assumed the role of "creditor-in-possession." 

The Cooley Bankruptcy & Restructuring Group, which Lawrence Gottlieb chairs, is representing official committees of unsecured creditors in high-profile national and regional retail bankruptcies such as Steve & Barry’s, The Bombay Company, Hancock Fabrics, Lillian Vernon, The Sharper Image, Mervyns, Shoe Pavilion, Boscov’s and Goody’s. His testimony, drawing on experience in these recent cases as well as many others in the past, underscores how BAPCPA’s key changes have transformed Chapter 11 bankruptcy from a process by which retailers could reorganize into one where almost all face an early liquidation. Retailers, creditors, and insolvency professionals will find his full testimony on the disappearing retail reorganization both timely and informative.

Business Bankruptcy Issues Recent Developments

Northern District of California Bankruptcy Court Local Rule Amendments Take Effect May 1, 2008

As previously reported, in August 2007 the Bankruptcy Court for the Northern District of California proposed amendments to the Bankruptcy Local Rules designed to implement the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as BAPCPA). After taking comments, the final amendments are scheduled to take effect on May 1, 2008.

  • Follow the links for a clean set of the final amended Bankruptcy Local Rules and a redline version showing changes from the current local rules.

Business Bankruptcy Changes. Certain of the amended local rules will affect Chapter 11 corporate bankruptcy cases. These include changes to the rules governing the investment of estate funds, the replacement of a "responsible individual" for a Chapter 11 debtor or debtor in possession, entry of a final decree closing a case, the procedures for bankruptcy appeals, and the general electronic case filing (ECF) procedures. A number of the other revisions are aimed primarily at consumer bankruptcy cases.

Jury Trial Rule Amended. In addition, however, the Bankruptcy Court took this opportunity to modify Bankruptcy Local Rule 9015-2(b), governing jury trials, which the U.S. Court of Appeals for the Ninth Circuit struck down in its September 2007 decision in the In re HealthCentral.com case. An earlier post entitled "Ordinary Course Preference Case Takes Extraordinary Turn: Ninth Circuit Strikes Down Local Bankruptcy Rule On Jury Trials" gives more details on the decision and its impact.

Conclusion. The changes to the Northern District of California Bankruptcy Local Rules may not be as significant for Chapter 11 cases as those recently proposed in the Southern District of New York or adopted in Delaware, but attorneys practicing in the Northern District of California, and businesses with cases or adversary proceedings pending in that court, should be sure to follow them when they take effect on May 1, 2008.

Business Bankruptcy Issues Recent Developments

Two Ways To Get The Updated Bankruptcy Code Online For Free

Looking for a free, online and updated version of the entire Bankruptcy Code, reflecting the amendments made by the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA")? Now there are two ways to access it.

These are handy resources for attorneys and others who need to find the up-to-date Bankruptcy Code online.

Business Bankruptcy Issues

The Terrible Twos? A Look At BAPCPA’s Impact On Business Bankruptcy Cases At Its Second Anniversary

Tomorrow, October 17, 2007, marks the second anniversary of the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known as BAPCPA.  BAPCPA was enacted primarily to make sweeping changes to the consumer provisions of the Bankruptcy Code. However, BAPCPA also made significant revisions in the business bankruptcy arena.  When it was passed, bankruptcy lawyers, creditors, and potential debtors had many questions about how these changes would play out as new cases made their way through the system. Two years out, we now have answers to some of those questions.

In this post I’ll look at a few of BAPCPA’s more substantial revisions and how courts have addressed them so far. These include new rules governing real estate leases, reclamation, the "20 day goods" administrative claim, key employee retention plans, cross-border bankruptcy cases, and an important preference defense. As we walk down memory lane, I’ll also point you to earlier posts where you can find more details on these issues.

Commercial Real Estate Leases. Under BAPCPA, if the debtor is the tenant under an unexpired commercial lease, it must either assume or reject the lease within 120 days of the filing of bankruptcy. The court can extend this time period without the landlord’s consent for 90 additional days, making a total of 210 days, but any further extensions require the landlord’s prior written consent. If the lease is not assumed (or assumed and assigned) within this period, the lease automatically will be deemed rejected and the debtor will have to move out. 

  • Before BAPCPA, debtors initially had only 60 days to assume or reject leases but there was no statutory limit on extensions of that period. Cumulative extensions of a year or more, over a landlord’s objection, were not uncommon under the pre-BAPCPA version of the Bankruptcy Code. That is no longer possible under BAPCPA.
  • Below market leases can represent a significant asset, particularly for retailers with many store leases, and BAPCPA has forced these debtors to move very quickly to assume and assign leases or to sell designation rights to make the most of the 210 day maximum period. In a number of cases, this 210 day limit has depressed the value of the debtor’s leases and the recovery for its creditors.
  • For more on real estate leases, you may want to read "Commercial Real Estate Leases: How Are They Treated In Bankruptcy?" previously posted on this blog.

Reclamation. When a debtor becomes insolvent or files bankruptcy, some vendors may be able to take advantage of a special, although limited, right to get back or "reclaim" certain of the goods. This reclamation right is part of both the Uniform Commercial Code and the Bankruptcy Code. BAPCPA made some changes in the reclamation area and post-BAPCPA cases have put some meat on the bones of those changes. A new, 45-day bankruptcy reclamation right was added to Section 546(c) of the Bankruptcy Code, expanding the Uniform Commercial Code’s 10-day rule. Under BAPCPA, the goods must have been sold in the "ordinary course" of the vendor’s business and the debtor must have received the goods while insolvent. The reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer (now the debtor in bankruptcy).  If the 45-day period expires after the bankruptcy case is filed, the vendor must make the reclamation demand within 20 days after the bankruptcy filing.

Two decisions from earlier this year have helped clarify the impact, and highlight the limitations, of BAPCPA’s reclamation changes.

  • In January 2007, Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware refused to issue a temporary restraining order in favor of a reclamation claimant in the Advanced Marketing Services case who sought to prevent the sale of goods it was trying to reclaim. The Court cited the superior rights of the secured creditor, which had a lien on the goods. A discussion of the case and a copy of the Court’s decision is available at this earlier post.
  • Then, in April 2007, Judge Burton R. Lifland of the U.S. Bankruptcy Court for the Southern District of New York applied the "prior lien defense" in favor of a secured creditor by valuing all reclamation claims in the Dana Corporation case at zero. You can find a discussion of that case and a copy of the decision at this previous post.

The "20 Day Goods" Administrative Claim. Although the post-BAPCPA decisions have not been favorable to vendors in the reclamation area, recent developments have underscored the value of the new Section 503(b)(9) administrative claim. That new provision, added by BAPCPA, gives vendors an administrative priority claim for "the value of any goods received by the debtor within 20 days before" the date a bankruptcy petition was filed "in which the goods have been sold to the debtor in the ordinary course of such debtor’s business."  For an overview of the new provision, you may find the post entitled "20 Day Goods: New Administrative Claim For Goods Sold Just Before Bankruptcy," of interest.

Key Employee Retention Plans. One of BAPCPA’s most notable changes was the significant restrictions imposed on key employee retention plans, known as KERPs. Prior to BAPCPA, KERPs were a very popular way of making sure that a company could retain its most important officers and employees to guide it through bankruptcy. Citing perceived abuses, however, Congress added language in BAPCPA that requires debtors to satisfy nearly impossible standards before courts would be permitted to approve payment of retention bonuses (or severance payments) as administrative claims to officers and other insiders of a bankrupt company. In short, a debtor would have to show that the individual was essential the the survival of the business and that he or she had a bona fide job offer from another business at the same or greater rate of compensation.

Debtors looking to compensate key officers have moved away from retention plans entirely and instead have turned to incentive plans. 

  • Several courts have approved incentive plans covering insiders but have applied certain factors to judge the reasonableness of the plan, including an assessment of the relationship between the plan and the results to be obtained, the cost of the plan, and whether the plan’s overall scope is fair and reasonable.
  • In May 2007, the Delaware Bankruptcy Court even approved a downward adjustment to an incentive plan’s targets, permitting a bonus to be paid to insiders, when the original plan’s targets turned out to be unrealistic. 
  • For more on this topic, including copies of three significant decisions in the Dana Corporation, Global Home Products, and Nellson Nutraceuticals cases, follow the link to this earlier post on key employee incentive plans.

Chapter 15 On Cross-Border Bankruptcies. BAPCPA added a new chapter to the Bankruptcy Code to adopt an internationally drafted Model Law on Cross-Border Insolvency.  Chapter 15 is used principally by representatives of, or creditors in, foreign insolvency proceedings to obtain assistance in the United States, by a debtor or others seeking to obtain assistance in a foreign country regarding a bankruptcy case in the United States, or when both a foreign proceeding and a bankruptcy case in the United States are pending with respect to the same debtor. Follow the link in this sentence for a detailed overview of Chapter 15.

  • In a recent case involving two Bear Stearns hedge funds, the Bankruptcy Court in the Southern District of New York refused to recognize proceedings pending in the Cayman Islands as either a foreign main or foreign nonmain proceeding, denying those entities Chapter 15 protection in the United States.
  • You can find the details on this case (and a copy of the original and amended decisions) here and here.

Preferences. Before it took effect, one of BAPCPA’s most talked about changes was a revision to the "ordinary course of business" defense to preference claims. BAPCPA dropped the requirement that a preference defendant establish that a transfer was both (i) made in the ordinary course of business or financial affairs between the debtor and the defendant and (ii) made according to ordinary business terms.

  • BAPCPA’s main change was to replace the "and" with an "or", meaning that a preference defendant now has to establish only one of the two prongs (instead of both) to prevail on the defense. When it was enacted, many bankruptcy lawyers believed this change would favor preference defendants. 
  • In something of a surprise, however, the first case interpreting the revised statute applied a brand new standard to the "ordinary business terms" provision. Unlike the prior analysis of that prong, the new standard examined the question from the perspective of both the creditor (as had been done pre-BAPCPA) and the debtor (the new BAPCPA twist). As a result, in that decision the preference defendant lost. For more on the decision, in the In re National Gas Distributors, LLC case, check out this post on David Rosendorf’s BAPCPA Blog.
  • There have been surprisingly few cases interpreting this section, so it remains to be seen whether other courts will follow the National Gas Distributors interpretation.

Another Great BAPCPA Resource. In addition to the BAPCPA Blog, which has posts on many decisions from BAPCPA’s first year, don’t miss Steve Jakubowski’s Bankruptcy Litigation Blog, in particular his BAPCPA and BAPCPA Outline topics. Steve has posted on a range of BAPCPA issues, including major consumer decisions and many business bankruptcy decisions.

Acting Like A Two Year Old? As we begin the third year under BAPCPA, the law is beginning to take early steps toward greater clarity in some areas but much remains to be decided. In particular, few appellate decisions have been issued on BAPCPA’s key changes, giving us little guidance on how the Courts of Appeals will interpret the new law.  As always, stay tuned for more developments and feel free to subscribe to the blog by email or by RSS to your feedreader.