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Chapter 11 and Commercial Bankruptcy Practice
Although primarily designed for large corporate reorganizations, Chapter 11 is available to individuals and smaller business entities as well. The process and procedures of Chapter 11 and the associated professional fees can be extremely expensive.
The basic concept involves the debtor reorganizing its affairs and proposing a Chapter 11 plan of reorganization or liquidation. A disclosure statement containing detailed information about the plan is approved by the Court. The disclosure statement and plan are served on all creditors. The creditors vote to accept or reject the plan. Even if rejected by most creditors, the court can still confirm the plan under certain circumstances.
Unlike most other chapters of the Bankruptcy Code, a Chapter 11 petition does not automatically vest all of the debtor’s property in a trustee. Rather, the debtor is said to be a Debtor In Possession of its assets or a DIP.
The court may appoint a trustee for cause including fraud, incompetence or gross mismanagement.
1. COMMITTEES
a. The U.S. Trustee will appoint a committee of unsecured creditors in most Chapter 11 cases.
b. In larger cases, a committee may also be appointed to represent equity holders, bondholders, landlords, tort claimants and other stake holders in the debtor.
c. The expenses of these committees (including professional fees), are administrative expenses of the Chapter 11 case.
d. The committee members are fiduciaries obligated to represent the interests of their class of claimants, negotiate the plan terms, supervise the debtor’s operations, and participate in any necessary litigation.
e. BAPCPA also requires a committee to provide access to information about the Debtor to creditors who hold similar claims and are not appointed to the committee.
f. Committees are also required to solicit and receive comments from their constituent creditor bodies.
g. Committee membership
(1) BAPACPA provides that a party may move the Court to order the United States Trustee to change the membership of a committee if the change is necessary to ensure adequate representation of the claimants.
2. REORGANIZATION OR LIQUIDATION
a. Most of the provisions of Chapter 11 are designed to allow a debtor to reorganize its operations, return to profitability and repay its creditors. Nevertheless, a Chapter 11 plan can reorganize or liquidate the debtor.
b. On occasion, liquidating Chapter 11 plans call for conveyance of all of the debtor’s assets to a Chapter 11 liquidating trust. The liquidating trust will liquidate assets and pay them out to creditors as provided in the Chapter 11 plan.
3. PRE-PACKAGED CHAPTER 11 PLANS
a. The development of a Chapter 11 plan is usually a negotiating process. The Code provides great flexibility for the debtor and the creditors to draft a consensual plan. If this proves impossible, the court can determine whether or not to confirm the plan.
b. The plan drafting process often begins long before the bankruptcy filing. Frequently, the debtor and the major creditors have reached an agreement on a plan before the case is filed and seek its confirmation immediately upon filing. This is frequently known as a pre-packaged Chapter 11 filing.
4. CHAPTER 11 DISCLOSURE STATEMENT
a. Before seeking confirmation of a plan of reorganization, most debtors must obtain court approval of a disclosure statement about the plan.
b. The disclosure statement provides creditors with information to make an appropriate decision in voting for or against the plan and in supporting or opposing confirmation of the plan.
5. FIRST DAY MOTIONS AND ORDERS
a. Immediately after the filing of a large bankruptcy, a debtor will typically file a series of motions with the court, accompanied by requests for expedited hearings on the motions. These motions request authority for the debtor to perform numerous actions or avoid certain requirements.
b. The hearings on the motions typically take place within 48 hours of filing without full notice to all creditors.
c. Courts will often grant the motions on an interim basis, with final approval granted only upon notice to all creditors.
d. As a practical matter, the course of a case is frequently determined at this early stage of the bankruptcy and the right to appear and object is often meaningless.
e. Typically notice of the first day motions will be provided to counsel for major creditors, including the debtor’s secured lender, major landlords, trade creditors and others who have taken part in the pre-filing negotiation process.
f. In a major Chapter 11 case one could expect to see the following first day motions:
(1) Motion to Consolidate (Procedurally) and for Joint Administration of Related Chapter 11 Cases
(2) Motion to Extend Time to File Lists, Schedules and/or Statements Authorize Filing of Lists of Creditors and Equity Security Holders in Lieu of Matrices, and Grant Certain Related Relief
(3) Motion to Appoint Claims and Noticing Agent and Approve Form and Manner of Notice of Section 341 Meeting
(4) Motion to Authorize Entry of Administrative Order Establishing Notice, Case Management and Hearing Procedures
(5) Motion to Authorize Entry of Administrative Order Establishing Procedures for Interim Compensation and Reimbursement of Expenses of Professionals
(6) Motion to Authorize Debtors to Retain, Employ and Pay Certain Professionals in the Ordinary Course of Their Business
(7) Motion to Authorize Payment of Pre-Petition (A) Wages, Salaries and other Compensation and (B) Costs and Expenses Incident Thereto
(8) Motion to Authorize (A) Continuation of Insurance and Workers’ Compensation Programs and Policies and (B) Payment of Premiums
(9) Motion to Authorize Payment of Pre-Petition Trust Fund Taxes and Receipts
(10) Motion to Authorize Debtors to Pay Certain Critical Vendors
(11) Motion to Approve (A) Continued Use of (i) Cash Management Systems and (ii) Existing Bank Accounts and Business Forms, and (B) Accord Superpriority Status to All Post-Petition Intercompany Claims
(12) Motion to Determine Adequate Assurance of Payment for Future Utility Services
(13) Motion to Approve Use of Cash Collateral and Adequate Protection
(14) Motion to Authorize Post-Petition Secured Credit
(15) Motion to Expedite Hearing On First Day Pleadings
(16) Application to Employ Attorneys for Debtors
(17) Application to Employ Financial Advisors for Debtors
(18) Motion to Extend Time to Assume or Reject Unexpired Leases of Nonresidential Real Property
g. The debtor may also seek authority to employ auctioneers, real estate agents, collateral control agents or any number of other professionals depending upon the debtor and the nature of its businesses.
6. ISSUES AFFECTING THE DEBTOR’S ONGOING OPERATIONS
a. Obtaining Credit (§ 364):
(1) The debtor/trustee may obtain unsecured credit in the ordinary course of its business as an administrative expense.
(2) After notice and the opportunity for a hearing, the court may authorize the debtor to incur unsecured debt outside the ordinary course of its business as an administrative expense.
(3) If the debtor cannot obtain unsecured credit, only after notice and the opportunity for a hearing, the Court may authorize the debtor to obtain credit:
(a) With priority over all administrative expenses provided in § 503(b) or § 507;
(b) Secured by a lien on unencumbered property; or
(c) Secured by a junior lien on property of the estate that is already encumbered.
(4) Only if the debtor cannot otherwise obtain credit, the Court may authorize obtaining credit secured by a senior or equal lien on property of the estate already subject to a lien and only if adequate protection of the existing lienholder is guaranteed. (“Priming” the existing lients).
(5) Adequate protection [§ 361] of an interest in property may be provided by:
(a) Requiring the debtor/trustee to make a lump sum or periodic cash payments to the extent that there is a decrease in the value of the entity’s interest in property;
(b) Providing the interest holder an additional or replacement lien to the extent that there is a decrease in the value of the entity’s interest in the property; or
(c) Granting such other relief as would result in the realization by the interest holder of “the indubitable equivalent of such entity’s interest in such property”.
7. USE, SALE AND LEASE OF PROPERTY [§ 363]
a. The debtor may use, sell or lease property of the estate in the ordinary course of business without notice or hearing in most circumstances.
b. Other than in the ordinary course of business, the trustee after notice and an opportunity for a hearing, may use, sell and lease property of the estate outside the debtor’s ordinary course of business with court authority.
c. Under BAPACPA, the use, sale or lease must be in accordance with applicable non-bankruptcy law that governs the transfer of property.
d. The debtor or trustee may sell property free and clear of liens claims or interests, including security interests, only if:
(1) applicable non-bankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
e. When the Court orders a sale of property free and clear of liens, claims or interests, it typically orders that the proceeds be placed into escrow. Thereafter, litigation will ensue to determine the extent, validity, and priority of liens, claims and interests in the proceeds of the property.
8. CASH COLLATERAL
a. An exception to the debtor’s ability to use, sell or lease property of the estate involves “cash collateral.”
b. Cash collateral includes cash, negotiable instruments, securities, deposit accounts or other cash equivalents in which the debtor and another entity have an interest. It includes the products, offspring, profits and proceeds of collateral, as well as rents from property, hotels and motels.
c. The debtor may not use cash collateral unless:
(1) Any entity with an interest in the cash collateral consents; or
(2) The court authorizes the debtor’s use of the cash collateral in accordance with the provisions of the Bankruptcy Code. Those provisions include a requirement that the other entity have adequate protection for its interest in the cash collateral.
d. The Bankruptcy Code requires the trustee/debtor to segregate and account for any cash collateral in its possession, custody or control.
e. Post-Petition Effect of Security of Interest [§ 552]
(1) Property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case. [§ 552(a)]; and
(2) If the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, [or to and to amounts paid as rents of such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties,] then such security interest extends to such proceeds, product, offspring, or profits [or to such rents and such fees, charges, accounts, or other payments] acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. [§ 552(b)(1)]
f. Typically, the Debtor’s Motion to Authorize Use of Cash Collateral is met by a motion from the secured creditor to prohibit use of cash collateral.
g. While a Court will occasionally conduct a contested hearing and grant authorization to use cash collateral with adequate protection to the other entity, these motions are typically resolved by a consent order that extends the creditor’s lien to Post-Petition collateral, allows the debtor to make controlled use of the cash collateral to fund its ongoing operation and provides for monitoring of the debtor’s business operations by the secured creditor.
9. EXECUTORY CONTRACTS AND UNEXPIRED LEASES (§ 365)
a. The Bankruptcy Code gives a debtor/trustee, subject to court approval, the authority to assume or reject an executory contract or unexpired lease and, in some cases, the authority to assign the contract or lease to a third party.
b. The term “executory contract” is not defined in the bankruptcy code. The most prominent definition, propounded by Professor Vern Countryman, is a contract so far unperformed that a breach by either party would allow the other party to suspend its performance of the contract. Courts have adopted this and a number of other definitions, so the law is fragmented.
c. If there has been a default in an executory contract or unexpired lease, the debtor/trustee may not assume the contract or lease unless it:
(1) cures or provides adequate assurance that it will promptly cure the default;
(2) compensates or provides adequate assurance of compensation for any actual pecuniary loss resulting from the default; and
(3) provides adequate assurance of future performance under the contract or lease.
(4) The requirement that the debtor cure the default is not applied to a provision relating to the:
(a) the insolvency or financial condition of the debtor;
(b) the commencement of the case;
(c) the appointment of the trustee; and
(d) the satisfaction of a penalty provision.
d. BAPACPA now provides that a debtor does not have to cure a default of the provision relating to a failure to perform non-monetary obligations under unexpired leases of real property, if it is impossible for the trustee/debtor to cure the default by performing non-monetary acts at the time of the assumption.
e. However, if the default arises from a failure to operate in accordance with a non-residential real property lease, this default shall be cured by performance at and after assumption.
f. In addition, any pecuniary losses resulting from this type of operational default shall be compensated to the non-breaching party.
g. The trustee/debtor may not assume or assign any executory contract or unexpired lease if:
(1) Applicable law excuses a party other than the debtor to such contract from accepting performance or rendering performance to a party other than the debtor (i.e. a personal services contract);
(2) The contract is a contract to make a loan or extend financing; or
(3) The lease is of a non-residential real property and has been terminated under an applicable nonbankruptcy law prior to the bankruptcy filing.
h. In a Chapter 7 case, the trustee must assume or reject a lease or executory contract of residential real property or personal property of the debtor within 60 days after filing (or within such additional time as the Court within the 60 days fixes) or the contract or lease is deemed rejected.
i. The non-debtor party to a lease or executory contract may request that the Court set a deadline by which the trustee/debtor must determine whether to assume or reject the lease or contract.
j. In a major shift in favor of non-residential landlords, BAPACPA provides that an unexpired lease of non-residential real property under which the debtor is the tenant shall be deemed rejected if the trustee/debtor does not assume or reject the lease by the earlier of:
(1) 120 days after filing; or
(2) The entry of an order confirming the plan.
k. The Court may extend the 120 day period for up to an additional 90 days for cause. Any further extensions may only be granted with the written consent of the landlord.
l. Under current practice, many courts give debtors nearly unlimited extensions of the deadline to assume or reject.
m. Section 365(n) governs the trustee’s/debtor’s rejection of the executory contract under which the debtor is a licensor of a right to intellectual property. This section provides considerable protection to the rights of the licensor of intellectual property.
n. Numerous specific provisions relating to specific types of property and the consequences of rejection on timeshares, shopping centers, contracts of sale or rental of specific types of property and the like are beyond the scope of this outline.
10. CRITICAL VENDORS
a. Occasionally there are vendors deemed so critical to the debtor’s operation that it seeks court authority to violate the basic tenant of equal treatment of all creditors and to pay their pre-bankruptcy debts after the filing of a bankruptcy petition so that the vendor will continue to deal with the debtor.
b. This is a very unsettled area of the law and it is unclear whether this practice will continue to be available to debtors.
11. AVOIDANCE ACTIONS
The Bankruptcy Code provides the debtor in possession or the trustee with significant power to avoid fraudulent conveyances of the debtor’s property, recover transfers made to prefer one creditor over others, avoid improperly perfected liens on the debtor’s property and set aside unauthorized post-bankruptcy transactions.
a. Preferences [§ 547]:
(1) At common law a debtor could use its property to pay any bona fide creditor. One of the basic premises of the bankruptcy code is equal treatment of similarly situated creditors. Thus the code sought to prevent the debtor from preferring one creditor over another.
(2) BAPACPA also features a new provision allowing the trustee to avoid any transfer made within 10 years before the filing of the petition that was to a self-settled trust or similar device of which the debtor is a beneficiary if certain criteria are met
(3) The Bankruptcy Code provides that the debtor or trustee “may avoid any transfer of an interest of the debtor in property:
(a) to or for the benefit of a creditor;
(b) for or on account of an antecedent debt;
(c) made while the debtor was insolvent;
(d) made on or within 90 days before the filing of the petition; (or between 90 days one year before the date of the filing of the petition if such creditor was an insider); and
(e) that enables such creditor to receive more than it would have had the transfer not been made, or if the debtor were liquidated under Chapter 7.
(4) The Code presumes that the debtor was insolvent at the time the transfer was made.
(5) The posture of preference litigation is such that the trustee has to show only the elements outlined above and the burden then shifts to the creditor to prove one of several defenses to defeat the preference action.
(6) The creditor may defeat a preference claim, in whole or in part, if it can prove:
(a) The transfer was a contemporaneous exchange for new value given the debtor;
(b) The transfer was an ordinary course of business transaction;
(c) The transfer was a purchase money transaction perfected within 20 days (30 days under BAPACPA) after the debtor receives possession of the property;
(d) After the transfer, the creditor gave new value to or for the benefit of the debtor;
(e) The transfer was for a domestic support obligation;
(f) The transfer is for less than $600 for a consumer debt (or, new under BAPACPA, $5,000 for a non-consumer debtor); or
(g) The debtor was not insolvent of the time of the transfer.
b. Fraudulent Conveyances [§ 548]
(1) The debtor/trustee may avoid: (i) any transfer of an interest of the debtor in property; or (ii) debt incurred by the debtor within one year (2 years starting in October of 2006 under BAPACPA) before the filing of the petition if:
(a) the transfer was made with actual intent to hinder delay or defraud a present or future creditor; or
(b) the debtor received less than equivalent value in exchange for the transfer and:
(i) was insolvent or was rendered insolvent;
(ii) was engaged in business without adequate capital;
(iii) intended to incur debts beyond its ability to repay; or
(iv) (new under BAPACPA) made the transfer to or for the benefit of an insider under an employment contract and not in the ordinary course of business.
c. Lien Avoidance [§ 544]:
(1) The lien avoidance or “strong arm” powers of the Bankruptcy Code give the trustee/debtor-in-possession the right to avoid improperly perfected liens on the debtor’s property.
d. Statutory Liens [§ 545]
(1) The Bankruptcy Code also gives the trustee/debtor in possession the right to avoid the fixing of statutory liens on property of the estate, including liens:
(a) That first become effective against the debtor when the debtor becomes insolvent, the subject of a receivership, bankruptcy proceeding or falls below a certain financial standard;
(b) That are not perfected or enforceable at the time of filing of the case against a bona fide purchaser; or
(c) That are for rental obligations.
e. Post Bankruptcy Transfers [§ 549]
(1) The trustee or debtor-in-possession may avoid an unauthorized post-bankruptcy transfer of the debtor’s property.
f. Preservation of an Avoided Transfers [§ 551]
(1) The Bankruptcy Code provides that whenever the debtor or trustee avoids a lien or transfer, the benefit of that avoidance is preserved for the bankruptcy estate and does not directly benefit junior lien creditors.
12. CHAPTER 11 CASE MANAGEMENT, PLAN CONFIRMATION, VOTING AND CRAMDOWN.
a. BAPACPA provides that the United States Trustee shall move for an appointment of a Chapter 11 Trustee if there are reasonable grounds to suspect that the debtor’s executives or board of directors participated in an actual fraud, dishonesty or criminal conduct in the management of the debtor’s public financial reporting.
b. BAPACPA provides that the Court shall order the appointment of the trustee in circumstances in which grounds exist to convert or dismiss the case, but the best interest of the creditors and the estate will be served by the appointment of a Trustee and continuation of the case.
c. BAPACPA makes numerous changes to the provisions governing motions to convert or dismiss a Chapter 11 case, including:
(1) Absent compelling circumstances or the agreement of the moving party, the Court must commence a hearing on any motion to dismiss or convert within 30 days and render a decision within 15 days after commencement of the hearing.
(2) The cause for conversion or dismissal now includes:
(a) A substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation;
(b) Gross mismanagement of the estate;
(c) Failure to maintain appropriate insurance that poses a risk to the estate or the public;
(d) Unauthorized use of cash collateral substantially harmful to one or more creditors;
(e) Failure to comply with an order of the Court;
(f) Unexcused failure to timely satisfy any filing or reporting requirement;
(g) Failure to attend the meeting of creditors or a 2004 examination;
(h) Failure to timely provide information or attend meetings requested by the United States Trustee;
(i) Failure to timely pay taxes owed after the date of filing or to file tax returns due after the date of filing;
(j) Failure to timely file a disclosure statement or to file or confirm a plan; and
(k) Failure to pay any domestic support obligation first payable after the date of filing.
d. Upon a showing of cause, the court shall convert or dismiss the case (or appoint a Trustee) unless the debtor shows that there is a reasonably likelihood a plan would be confirmed within the time frame established by the Code or there is a reasonable justification for the act or failure and it will be cured within a reasonable period of time.
e. BAPACPA provides that in cases involving an individual debtor, property of the estate does include similar property acquired by the debtor after commencement of the case, but before the case is closed, dismissed or converted, including earnings.
f. Limitations on exclusivity.
(1) Under existing law, parties other than the debtor may file a Chapter 11 Plan only if the debtor has not filed a plan before 120 days from filing or the debtor has not filed the plan that has been accepted before 180 days after filing.
(2) Previously, there is no limitation on the extensions, which a court might give the debtor on these time periods.
(3) BAPACPA provides that the 120 day period may not be extended beyond 18 months. The 180 day period may not be extended beyond 20 months.
g. BAPACPA provides that the disclosure statement must now include a discussion of potential material federal tax consequences of the plan to the debtor and any successor to the debtor.
h. BAPACPA also now requires the Court to balance the complexity of the case, with the benefit of additional information, and the cost of providing such additional information in determining whether a disclosure statement is sufficient.
i. BAPACPA also provides that the plan of an individual debtor may be modified at anytime after confirmation, but before completion of payments on the request of the debtor, the trustee, the U. S. trustee or the holder of an unsecured claim to increase or reduce an amount or duration of payments or alter the amount of distribution to a creditor.
j. Under BAPACPA, in order for a plan to be confirmable, the debtor must pay the total value of a tax claim over a period not to exceed 5 years with certain additional restrictions.
k. In addition, BAPACPA requires that the debtor be current on all Post-Petition child support. The debtor must pay in full all domestic support obligations and must pay all disposable income for a 5 year period into the plan if domestic support obligations are not paid in full.
l. Under BAPACPA in a case involving an individual debtor, the debtor does not receive a discharge until the Court grants such discharge upon completion of all payments under the plan. At any time after confirmation and after notice and opportunity for a hearing, the Court may grant a discharge to a debtor who has not completed all payments called for under a plan if the debtor has paid more under the plan than would have been received by creditors under Chapter 7. The Court must also determine that modification of the plan is not practicable. Not more than 10 days before the date of entry of the discharge order, the Court must determine that there is no reasonable cause to believe that §522(q)(1) may be applicable to the debtor.
m. In addition, §1141(d)(6) provides that confirmation of a plan does not discharge a corporate debtor from any debt:
(1) Obtained by false pretenses, false representation, or actual fraud or through the use of a false statement, if such debt is owed to a domestic governmental unit, or to a person under certain specific circumstances; or
(2) For a tax or customs duty with respect to which the debtor either made a fraudulent return or willfully attempted to evade or defeat such tax or customs duty.
n. Except in a small business Chapter 11 case, the debtor typically files a plan of reorganization and a disclosure statement. After notice and opportunity for a hearing the Court approves the disclosure statement. Once the disclosure statement has been approved, it and the plan are circulated to all creditors. Creditors have an opportunity to vote for or against the plan. At a confirmation hearing, the Court receives a report on balloting in favor of or against the plan. If at least one class of impaired creditors has voted for the plan, the debtor can obtain confirmation more easily than if all classes of impaired creditors have opposed the plan.
o. The Court may reject the plan or proceed to confirm it over the objection of impaired creditors, a confirmation sometimes known as a “cramdown”.
13. MISCELLANEOUS COMMERCIAL PROVISIONS OF BAPACPA.
a. Reclamation Claims
(1) BAPACPA authorizes vendors who have shipped goods to a debtor shortly before the filing of a bankruptcy petition the opportunity to reclaim those goods more easily, or alternatively, to obtain an administrative claim against the bankruptcy estate.
(2) Under § 546(c) of the current Bankruptcy Code, reclamation rights under section 8.2-702 of the Virginia Uniform Commercial Code are protected and recognized in bankruptcy cases so long as written notice is provided to the seller no later than 10 days after receipt of the goods, or, if the 10-day period runs after the filing of a bankruptcy petition, within 20 days of the date on which the goods were received.
(3) Under Va. Code § 8.2-702(3), a seller’s right of reclamation is subject to the rights of a buyer in the ordinary course, or other good faith purchaser, including a creditor holding a security interest or lien against the goods.
(a) As a result, reclaiming creditors often find that their valid claims for reclamation are subordinated to the debtor’s secured creditors.
(b) Under the current code, a reclamation claim is entitled to treatment as an administrative claim or a junior lien, however, in most larger cases, the Debtor establishes reclamation procedures that effectively avoid payment, do not require the marshalling of assets or the liquidation of non-inventory assets. Thus, the Debtor is able to create a situation where the reclamation claims are compromised.
(4) Under BAPACPA, sellers will be able to reclaim goods sold on credit during the 45-day period immediately preceding the bankruptcy filing.
(5) In order to reclaim, the seller will be required to make a written demand within 45 days of receipt of the goods, or, if the 45-day period runs after the bankruptcy filing, then written notice must be given within 20 days after the date on which the bankruptcy case commences.
(6) The problem of reclaiming goods that have been consumed or sold in the debtor’s ordinary course of business will still be a problem, just as it is under current law, however, creditors will now have greater access to payment as an administrative claimant.
(7) BAPACPA gives the reclaiming creditor the rights to an administrative claim for goods delivered within 20 days of the commencement of the bankruptcy case, so long as the goods were sold in the ordinary course of the debtor’s business.
(a) Under this provision, the reclaiming creditor will not have to provide written notice of the reclamation, and will have an administrative claim entitled to payment prior to any unsecured creditors receiving distribution under a Chapter 11 plan of reorganization or liquidation.
(b) The creditor holding an administrative claim of this type will have the right to seek immediate payment or adequate assurance of payment of its claim, or the case may be converted.
(c) There is no requirement that the creditor making the administrative claim prove that the goods are still in the possession of the buyer/debtor or that the goods have not been consumed.
(d) The reclaiming creditor must merely show proof that the goods were delivered within 20 days before the commencement of the bankruptcy case.
(e) In order to receive payment on this type of claim, the reclaiming creditor must file an administrative claim and seek payment.
(8) The right to an administrative claim for goods received during the 20 days immediately preceding the commencement of the case should eliminate much of the expense incurred by creditors in pursuing reclamation claims under current law.
(9) This right to an administrative claim may prove particularly valuable for creditors that hold a claim for an amount that is too small to justify incurring substantial legal fees to pursue reclamation and prove that the goods are still in the possession of the debtor and that the goods have not been consumed.
b. BAPACPA contains numerous provisions affecting the commercial practice of bankruptcy law, including:
(1) Foreign Proceedings:
(a) BAPACPA deletes an old Code provision dealing with United States Bankruptcy proceedings ancillary to foreign insolvency proceedings and inserts a new chapter, Chapter 15 of the Bankruptcy Code.
(2) Utility Services [§ 366]
(a) Congress has significantly strengthened the standards for determining when utilities are adequately protected and therefore must provide services to a debtor.
(3) Single Asset Real Estate Bankruptcy:
(a) The term “single asset real estate” is defined [§ 101(51b)] as:
Real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto having aggregate noncontingent liquidated secured debts in an amount of no more than $4,000,000.
(b) Upon enactment of BAPACPA, the four million dollar cap will be removed.
(c) The current Bankruptcy Code provides protection for lenders against a single asset real estate debtor particularly in relief from stay proceedings. Those protections have been strengthened.
(4) Professional Compensation and Employment
(a) Congress has provided that one of the criteria a court may consider in determining compensation for a professional employed by the bankruptcy estate, is whether that individual is board certified or otherwise has special expertise in bankruptcy matters.
(5) Sale of Consumer Debt
(a) Under BAPACPA a bankruptcy court ordered sale of consumer debt may not extinguish a consumer debtor’s claims or defenses arising out of the underlying consumer transaction against the new holder of the debt.
(6) Taxes
(a) BAPACPA contains numerous provisions effecting federal, state and local taxes, their collectability and enforceability in bankruptcy proceedings.
(7) Transfer defined [§ 101(54)]
(a) The creation of a lien;
(b) The retention of title as a security interest;
(c) The foreclosure of a debtor’s equity of redemption; or
(d) Each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or any interest in property.
(8) The automatic stay.
(a) BAPACPA makes numerous changes to the automatic stay and the standards for obtaining relief from the automatic stay.
(9) Loans from pension, profit sharing and other retirement savings funds [§ 362(2)(b)(19)]
14. LANDLORD RELATED PROVISIONS
a. Executory contracts and unexpired leases [§ 365]
b. Going out of business sales
(1) Under BAPACPA, the debtor shall have no more than 7 months to complete a going out of business sale, unless the landlord agrees to allow a longer period.
c. Section 503(7) non-residential leases: expenses of post assumption breach or administrative expenses.
d. Non-monetary obligations [§ 365]
e. Residential evictions and the automatic stay [§ 362(b)(22) and (23); 362(l) and (m)]
(1) Under certain circumstances, the filing of a bankruptcy petition will not act as a stay on the efforts of a landlord to evict a tenant from residential property.
15. SMALL BUSINESS CASES
a. BAPACPA includes significant changes aimed at small businesses that file for bankruptcy.
b. A “Small Business Case” is defined [§ 101(51C)] as:
(1) A case filed under Chapter 11 in which the debtor is a Small Business Debtor.
c. “Small Business Debtor” is defined [§101(51D)] as:
(1) A person engaged in commercial or business activities (including any affiliate of such person that is also a debtor, excluding a person whose primary activity is the business of owning or operating real property or activities incidental thereto) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition, or the date of the order for relief in an amount not more than $2,000,000 (excluding debts owed to affiliates or insiders) for a case in which the U.S. Trustee has not appointed under section 1102(a)(1) a committee of unsecured creditors or where the court has determined that the committee of unsecured creditors is not sufficiently active and representative to provide effective oversight of the debtor.
(2) A Small Business Debtor does not include any member of a group of affiliated debtors that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $2,000,000 (excluding debts owed to affiliates or insiders).
d. Additional duties of Trustee or Debtor in Small Business Cases [§ 1116]
(1) The Trustee or Debtor shall be subject to all duties and requirements set forth in chapter 11 cases.
(2) Additionally, Debtor must file its most recent:
(a) Balance sheet;
(b) Statement of operations;
(c) Cash-flow statement; and
(d) Federal income tax return.
(3) Alternatively, Debtor may file statement made under penalty of perjury that no balance sheet, statement of operations or cash-flow statement have been prepared, and that no Federal income tax return has been filed.
(4) These documents must be attached to a voluntary petition or filed within seven (7) days of the order for relief in an involuntary case.
(5) The Debtor must attend 341 meeting of creditors, unless the Court waives the meeting.
(6) The Debtor must file Schedules and a Statement of Financial Affairs no later than 30 days after the order for relief is entered. No extensions of this deadline will be granted, absent extraordinary and compelling circumstances, as determined by the Court.
(7) The Debtor must file all post-petition financial reports required by the Federal Rules of Bankruptcy Procedure or local rules.
(8) Subject to the terms of § 363(c)(2), the Debtor must maintain insurance customary and appropriate to the industry.
(9) The Debtor must timely file tax returns and all other required governmental filings.
(10) Subject to the terms of § 363(c)(2), the Debtor must timely pay all taxes entitled to administrative priority except those being contested by appropriate proceedings that are being diligently prosecuted.
(11) Debtor must allow the U.S. Trustee or a designated representative of the U.S. Trustee to inspect the Debtor’s business premises, books, and records at reasonable times, upon reasonable prior written notice, unless the Debtor has waived notice.
e. Failure of Debtor to Comply with Additional Duties
(1) Pursuant to § 1112, a Small Business Debtor will be subject to dismissal of its case if it fails to comply with all of the additional requirements imposed by § 1116.
For more information or to request a presentation regarding BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III (804) 697-2025 or Jennifer J. West (804) 697-2094.
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