Speed Is Essential: New Bankruptcy Law Requires Parties To Get Involved Early

Sunday, January 1, 2006 - 01:00

The Bankruptcy Abuse and Consumer Protection Act of 2005 includes several provisions that now require creditors and others affected by the filing to take swift action to protect their rights and to take advantage of the new pro-creditor provisions.

Limitation On Exclusivity

The debtor has an initial period of 120 days during which it alone may file a plan. This time period, known as "exclusivity," may be extended upon a showing of "cause." In many large bankruptcy cases filed prior to the Act, enlargements of exclusivity were common, and some cases have been extended for years. For example, UAL Corp., the parent company of United Airlines, filed for bankruptcy law protection in December 2002 and due to judge-ordered extensions, is still in its exclusive period.

Under the Act, exclusivity will be strictly limited to 18 months following the date the case commences. This amendment will require the major players in a bankruptcy case to quickly come to terms on a plan of reorganization. If no plan is filed before exclusivity expires, any party may file a plan. In such a circumstance, a major creditor may be able to gain enough leverage over the debtor to level the playing field.

Quick Assumption Or Rejection Of Leases

The Bankruptcy Code also currently provides the debtor a period of 120 days from the filing of a petition to decide whether to assume or reject leases of non-residential real property. This time period may likewise be extended upon a showing of cause. Courts commonly have extended the deadline for several months and in some cases, years.

The Act will prohibit the bankruptcy court from extending the deadline to a date that is more than 210 days after the order for relief (usually the petition date) without the landlord's consent. Thus, a debtor with operations in many locations will be required to decide very quickly whether and where to cut operations. If a debtor assumes and later rejects a commercial lease, the landlord will be paid in full as an administrative creditor in real dollars for the rent due for two years following the rejection. Landlords may also be able to use their consent to additional extensions as a bargaining chip in their negotiations with debtors.

Pre-Packaged Plans

In addition to encouraging the filing of a plan by limiting exclusivity and the time in which a debtor may assume or reject leases, the Act encourages "pre-packaged" or "pre-arranged" plans. The current law restricts the ability of a debtor to solicit agreements to vote in favor of a plan prior to approval of the disclosure statement. The amendments will allow the debtor to continue to solicit the votes of creditors who have been in negotiations with the debtor pre-petition prior to the approval of the disclosure statement. This will likely allow many more plans to be approved in the early stages of a case, where substantial negotiation occurred prior to the filing. Thus, creditors and interested parties will be required to vigorously assert their rights immediately or risk confirmation of an unfavorable plan.

Small Business Amendments

The Act creates new rules for small businesses. A small business debtor is one with less than $2 million in debt, excluding debt to insiders in a case with no active creditors committee. The new Section 308 of the Bankruptcy Code imposes additional financial reporting obligations on these debtors. In addition, Section 1116 of the Code identifies seven duties applicable to the small business debtor, including the duty to meet with the U.S. Trustee and to allow a representative of the trustee access to the business premises, books and records.

Under the Act, small business debtors must file a plan and disclosure statement within 300 days of the bankruptcy filing. Moreover, the court must confirm a small business plan within 45 days of the plan filing and in certain circumstances can waive the requirement that the debtor file a disclosure statement. Small business cases will certainly be on a fast track, and parties would be well served to become involved in such cases as soon as possible in order to play a role in the negotiation of a reorganization plan.

Conclusion

The Act is designed to speed the chapter 11 process. Creditors and other interested parties must be aware of these changes and likewise become involved in the case quickly. Otherwise, the reorganization may be over as soon as it starts.

Valerie P. Morrison, a Partner in WRF's Bankruptcy &Financial Restructuring Practice, represents diverse clients in financial restructuring matters, complex chapter 11 reorganization cases and bankruptcy litigation. She can be reached at (703) 905-2826 or vmorrison@wrf.com.

Please email the author at vmorrison@wrf.com with questions about this article.