Business Bankruptcy Provisions of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005
View or download the PDF version of this Alert.
On April 20, 2005, President Bush signed into law the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. While the Act has received
media attention mostly for its consumer provisions, it contains several
sections that will affect business bankruptcies. This Alert highlights several
provisions that are relevant to specific industries and groups, as identified
Commercial Real Estate Investors
|"While the Act has received media
attention mostly for its consumer provisions, it contains several
sections that will affect business bankruptcies."
The Act includes several provisions that will have an impact on owners
of commercial real estate. For example, the Act will force debtors to make
earlier decisions on their real estate needs, before or shortly after filing
bankruptcy petitions. An unexpired lease of non-residential real estate
will automatically be deemed “rejected” if a debtor fails to file a motion
to either assume or reject the lease within 120 days after commencing a
Chapter 11 case. The Bankruptcy Court may extend the period, for no more
than 90 days, upon a showing of cause. Further extensions are permitted
only if the lessor consents.
While this reform is believed to be favorable to lessors of commercial
property, another provision in the Act is less friendly to lessors. That
provision limits a lessor’s ability to recover administrative expenses from
the estate of a debtor that assumes a commercial lease and later rejects
it. With certain exceptions, under the Act, the administrative priority
for such a claim is limited to all monetary obligations due under the lease,
for the two years following the later of the rejection date or the date
of actual turnover of the leased premises.
The Act amends the Federal Truth in Lending Act to require lenders to
disclose certain information when soliciting consumers for credit card accounts
over the Internet. This information includes annual percentage rages for
accounts, annual fees, grace periods for payments and methods for calculating
account balances. Under previously existing law, lenders have already been
required to disclose this information in direct mail solicitations.
The Act contains several provisions impacting healthcare businesses in
bankruptcy. The Act defines the term “healthcare business” broadly to encompass
public and private providers of health services, including hospitals, emergency
service providers, hospices, home health agencies, nursing facilities, assisted-living
facilities, and other businesses. The Act implements a mechanism for disposal
of medical records by healthcare businesses that are closing. The Act requires
appointment of an ombudsman to represent the interests of patients of the
healthcare business in bankruptcy. The Act also imposes a duty on a healthcare
company to exercise reasonable and best efforts to transfer patients from
a closing facility to a nearby facility that provides substantially similar
services and that maintains a reasonable quality of patient care.
|"The Act allows a U.S. Bankruptcy
Court to give recognition to a bankruptcy case, foreclosure, receivership,
or other insolvency-related proceeding pending in another country."
The Act allows a U.S. Bankruptcy Court to give recognition to a bankruptcy
case, foreclosure, receivership, or other insolvency-related proceeding
pending in another country. A trustee, receiver or other “foreign representative”
appointed in such a “foreign proceeding” is empowered to apply to a U.S.
Bankruptcy Court for such recognition. When the U.S. Bankruptcy Court grants
such recognition, certain protections (such as the automatic stay) are extended
to the bankruptcy estate in the United States. The Act gives a U.S. Bankruptcy
Court some discretion to determine whether to grant recognition to a foreign
proceeding. If recognition is granted, in addition to having the protection
of the automatic stay, the foreign representative is empowered to seek other
forms of relief from other Courts in the United States (a power that foreign
representatives probably already have in many cases), and U.S. Courts are
instructed to “grant comity or cooperation to the foreign representative.”
By contrast, if a U.S. Bankruptcy Court chooses to deny recognition of a
foreign proceeding, the Court may issue “any appropriate order necessary
to prevent the foreign representative from obtaining comity or cooperation
from Courts in the United States.”
The Act makes it easier for an investment banker that has provided services
to a debtor before bankruptcy (or an attorney who has represented such an
investment banker) to continue providing professional services to the debtor
while it is in bankruptcy. Previously, the Bankruptcy Code specifically
excluded these professionals from the “disinterested persons” who may be
employed by a debtor. The Act eliminates this exclusion.
Public Companies/Securities Self-Regulatory Organizations
The Act permits “securities self-regulatory organizations,” including
the New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers and others, to continue certain investigations on
publicly traded debtors in bankruptcy, without having to seek modification
of the Bankruptcy Code’s automatic stay.
The Act increases the protection afforded by the Bankruptcy Code to providers
of utility services to Chapter 11 debtors. The Act will allow a “utility
[to] alter, refuse or discontinue utility service if during the 30-day period
beginning on the date of the filing of the petition, the utility does not
receive from the debtor or trustee adequate assurance of payment for utility
services that is satisfactory to the utility.” Adequate assurance of payment
can be in the form of cash deposits, a letter of credit, a certificate of
deposit, a surety bond, a prepayment, or some other form of agreed-upon
security. However, the debtor can no longer provide adequate assurance by
simply granting the utility an administrative expense claim under the Bankruptcy
Code and indicating that the estate has funds sufficient to pay such a claim.
The Act also prohibits a Bankruptcy Court from considering the timely payment
of utility charges by a debtor or the lack of requirement of a utility deposit
from the debtor, as factors in determining adequate assurance of the debtor’s
payment while it is in bankruptcy.
Trade Credit Managers/Preference Actions
Over the past several years, many businesses have been sued for recovery
of preferential transfers (i.e. payments made by a debtor within 90 days
before a bankruptcy filing). The Act will have a significant impact on actions
by debtors and trustees to avoid preference payments. In the future, it
will be more difficult for trustees and debtors to pursue smaller, “nuisance”
preference actions or other actions. For actions less than $10,000, a trustee
or debtor can sue only in the judicial district where the defendant resides.
Therefore, for example, if the bankruptcy case is pending in Delaware but
the company that received the preferential transfer is incorporated in Illinois,
the preference action must be filed in Illinois if the action is for a recovery
of less than $10,000. The debtor or trustee likely will be prohibited altogether
from pursuing preference actions for less than $5,000 in most business bankruptcies.
Another section of the Act will make it easier for defendants in preference
actions to assert the “ordinary course of business” defense. A defendant
will now be able to establish this defense based on either its own history
of transactions with the debtor, or standards in the parties’ industries.
Under previous law, a defendant was required to prove both of these elements.
Persons Susceptible to Fraudulent Transfer Actions
The Act increases the power to recover property that was “fraudulently
transferred” before bankruptcy. Previously, for property to be recovered
as a fraudulent transfer, the conveyance had to have taken place within
one year before the bankruptcy petition was filed. The Act extends this
“look-back” period to two years. The Act also adds language to expressly
include as a possible fraudulent transfer “any obligation to or for the
benefit of an insider [of the debtor] under an employment contract not in
the ordinary course of business.” These amendments likely will increase
the number of fraudulent conveyance actions commenced against certain investors
in leveraged buy-outs, principals of debtors who are also employees and
others. Additionally, the amendments will likely empower bankruptcy trustees
and others to place greater scrutiny on executive compensation packages
that have increased during the two-year period preceding a business’ bankruptcy.
The Act contains several provisions affecting the tax liability of debtors
and bankruptcy estates, and taxing authorities’ ability to assert priority
claims and seek other remedies. For example, the Act gives a taxing authority
standing to request that a Court dismiss a bankruptcy case, or convert a
Chapter 11 case to Chapter 7, if the debtor fails to file a tax return or
to properly obtain an extension of the due date of a return, after filing
a bankruptcy petition. If a taxing authority files such a request and the
debtor fails to file a required return or obtain an extension during the
following 90 days, the Court must either dismiss the case or convert it
to Chapter 7. The Act also provides that confirmation of a corporate debtor’s
plan of reorganization cannot discharge the corporate debtor from debts
arising from specified forms of fraud on taxing authorities. The Act requires
that a disclosure statement supporting a proposed plan of reorganization
include discussion of the “potential material Federal tax consequences of
the plan to the debtor, any successor to the debtor, and a hypothetical
investor typical of the holders of claims or interests in the case . . .
“ Finally, the Act adds an exception to the automatic stay in bankruptcy
empowering taxing authorities to offset any tax refunds owed to debtors
against certain unpaid prepetition taxes.
Several of the above reforms have been long awaited, while different
versions of this legislation were pending on Capitol Hill for nearly a decade.
The full impact of these reforms and others in the Act will now await interpretation
of these new provisions by Bankruptcy Courts and other federal Courts throughout
Greenberg Traurig has an active national and international insolvency,
reorganization and bankruptcy practice. If you have any insolvency, bankruptcy
or restructuring issues, including questions regarding the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, please contact the authors
of this Alert, Keith J. Shapiro,
Nancy A. Peterman,
G. Ray Warner and
Robert W. Lannan in the
Chicago office (312.456.8400) or your Greenberg Traurig liaison.
© 2005 Greenberg Traurig
For more information, please review our Business Reorganization and Bankruptcy
Practice description, or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.