GT Alert

Business Bankruptcy Provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

April 2005

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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 below.

Commercial Real Estate Investors

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.

Consumer Lenders

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.

Healthcare Providers

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.

International Business

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.”

Investment Bankers

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.

Utilities

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.

Taxing Authorities

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 the country.

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

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