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Barry  P. Caplan
503.243.1627
 

Business Bankruptcy Amendments Three Years Hence

November 2008

Barry P. Caplan
503.243.1627
Published in the BAPCPA Business Credit Journal

October 17, 2005 marked the three-year anniversary of the effective date of business amendments in the BAPCPA Act of 2005 (the "Act"). This article will briefly discuss eight Act provisions. This article is the opinion of the author intended to provide NACM members with a "report card." Nationally, approximately two-thirds of Chapter 11 filings involve a quick sale or liquidation. Primarily due to lack of liquidity, there are few true reorganization cases.

A.  Leases and Executory Contracts

The Act reduced the time to assume or reject or assume and assign an unexpired lease of nonresidential real property. Basically, it allowed 120 days after the petition date which could be extended for cause for 90 days. Thereafter, further extensions require the consent of the lessor. While the Act appeared to provide greater leverage to landlords, particularly in retail cases, there is insufficient data in Oregon to support that it has materially changed Chapter 11 practice. However, the fact is that leverage in favor of landlords has indeed been changed. The shortened deadlines impact adversely on a debtor's opportunity to reorganize under Chapter 11 when the process will take time to implement the needed business changes, which is often the situation. 

 

B.  Utility Deposits

Prior to the Act, a utility deposit was required only if a utility brought the need for a deposit to the court's attention. The Act, however, requires assurance of payment which is tantamount to securitization of a reasonable deposit for the utility. The new utility provision provides greater leverage to the utilities. Its affect is to deplete precious cash early in the case for those purposes.

 

C.  Preferences

These changes have had greater impact for general creditors than any other changes in the Act. The ordinary course defense amendment created a less rigorous standard for establishing the defense. This has helped many creditors defend or avoid preference claims against them. Even if a preference payment is not in accordance with the ordinary contractual business terms, the creditor can nonetheless rely on the ordinary course between the debtor and the creditor. The minimum of $5,000 has eliminated the previous de minimus preference claim in which the cost of defending was almost the same as what was at stake. The requirement that a  preference action for less than $10,000 be commenced where the noninsider creditor resides has been useful in giving such defendants home-court protection. It has substantially reduced preference lawsuits even if preference demands have been made. Finally, the lengthening of the perfection period to 30 days for a transferee to perfect their rights has protected otherwise good faith creditors from being "caught" by administrative delays in recording financing statements or obtaining certificates of title. The lengthened time (from 10 days) has substantially reduced that risk.

 

D.  Small Business Debtors

Although the change in the Act has had some impact in how a small business Chapter 11 is conducted, it has not changed substantially the practice in Oregon. The increased duties of a small business debtor has somewhat negated the goal of a faster, cheaper case, particularly due to debtor reporting duties. However, the $2.19 million debt limit has reduced the number of small business debtors as most cases exceed that amount.

 

E.  Single Asset Real Estate

The elimination of the $4 million cap has not resulted in substantial increase in the number of single asset real estate cases ("SARE's"). Instead, SARE's have decreased because such debtors needing Chapter 11 normally own more than just a single asset as real estate. With recent events, there have been numerous developers Chapter 11 filings. Because real estate developers normally have many projects at the same time, they do not qualify as a single asset real estate case.

 

F.  Chapter 11 Plan Issues

The shortening of the period of exclusivity thus far has not significantly impacted Oregon practice. Prior to the Act, many debtors were able to file a plan within the 120-day time frame. When extensions were granted for cause, the U.S. Trustee and the Judge still pushed debtors to file their plan. Presently, in most cases that are capable of being reorganized a plan is filed timely. Exclusivity is of great value in big cases but is not as significant in a liquidating plan or a sale case (such as where a sale takes place under section 363). The two are the most frequent scenarios in this district. Changes in the Act for individual Chapter 11s have been controversial and have yet proved to be very useful. The changes increased the litigiousness of individual Chapter 11 plans and thus adds to the expense and delay of such cases.

 

G.  Creditors Committees

The Act provides that a small creditor can join the committee if it holds claims of a kind represented by the committee. The desire of small creditors to serve has not been frequent. Except in a large case, the U.S. Trustee continues to have difficulty in forming committees (of any size) and getting creditors to serve on committees.

 

H.  Conversion or Dismissal

This Act provided substantial greater powers to convert or dismiss Chapter 11 cases. As a result, the U.S. Trustee has filed such motions more frequently. Thus far, individual creditors have not frequently utilized the provision of the Act in seeking that remedy.

 

I.  Other

In general, the business provisions of the Act to date have not significantly affected Chapter 11 practice in Oregon. To the extent it has, its net effect has been to add financial burdens on the debtor in Chapter 11. The Act has generally made it more difficult for debtors to effectively undertake Chapter 11 relief. To date, the main beneficiaries of the Act have been secured lenders and landlords.

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