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New Bankruptcy Reform Legislation

on .

The following bill, introduced on Thursday, April 2, 2009, is currently under review by the NACM Government Affairs Bankruptcy Legislation Work Group:

Congressman Jerrold Nadler Introduces Bankruptcy Reform Legislation

Congressman Jerrold Nadler (NY-08), Chairman of the House Judiciary Subcommittee on the Constitution, Civil Rights and Civil Liberties, introduced the Business Reorganization and Job Preservation Act of 2009, which would amend federal Bankruptcy Code to repeal provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Congressman Nadler says that, “as BAPCPA currently stands, many businesses nationwide have been unable to reorganize successfully in bankruptcy and have been pushed into liquidation, at the cost of thousands of jobs. Circuit City, for example, was unable to secure financing to complete its reorganization last year and was forced to liquidate, sacrificing 34,000 jobs across the country.”


"In an economy as depressed as ours, we must be cognizant of the many difficulties facing American businesses and avoid placing unnecessary hurdles in their paths," said Rep. Nadler. "The Business Reorganization and Job Preservation Act of 2009 will remove some of obstacles now hindering struggling businesses and inject a much-needed economic boost during this time of severe recession. It's essential that we give retailers, which are often the job-providers of our communities, the means to reorganize and stay in business."

The present law gives landlords and lenders the ability to make tougher demands on businesses filing for bankruptcy and, in many cases, locks tenants into new leases while they face reorganization procedures. In 2008, two dozen major national retailers sought bankruptcy. If passed, the Business Reorganization and Job Preservation Act would stem that tide and offer crucial assistance to retailers suffering major losses in the current economic recession.

on the Business Reorganization and Job Preservation Act

Specifically, the Business Reorganization and Job Preservation Act would make the following changes to the Bankruptcy Code:

Amendment to Section 365(d)(4) of the Bankruptcy Code - Deadline for Assuming or Rejecting Nonresidential Leaseholds.

As a result of the 2005 Act, Bankruptcy Code section 365(d)(4) was amended to fix a firm deadline by which an unexpired lease of nonresidential real property must be assumed or rejected. If the lease is not assumed or rejected by the stated deadline, then the lease is deemed rejected and the property must immediately be surrendered to the landlord. Section 365(d)(4) permits a chapter 11 debtor to assume or reject a lease on a date which is the earlier of the date of confirmation of a plan or the date which is 120 days after the date of the order for relief. A further extension of time may be granted, within the 120 day period, for an additional 90 days, for cause. Any subsequent extension can only be granted by the judge upon the prior written consent of the lessor. This provision was designed to remove the bankruptcy judge's discretion to grant extensions of the time for a retail debtor to decide whether to assume or reject a lease after a maximum possible period of 210 days from the time of entry of the order of relief. Beyond that maximum period, the judge has no authority to grant further time unless the lessor has agreed in writing to the extension.

Would amend Bankruptcy Code section 365(d)(4) to establish a 60-day deadline or, alternatively, such additional time as the bankruptcy court for cause (within such 60-day period) fixes, by which an unexpired lease of nonresidential real property must be assumed or rejected. If the lease is not assumed or rejected by the stated deadline or the fixed term of the court, then the lease is deemed rejected and the property must immediately be surrendered to the landlord.

Amendment to Section 366 of the Bankruptcy Code - Utility Service.

Repeal changes to section 366 of the Bankruptcy Code so that a utility may not discontinue service to a company solely on the basis that it filed for bankruptcy relief, even if the company owes the utility for service rendered pre-bankruptcy. Nevertheless, the utility may discontinue service 20 days after the debtor files for bankruptcy relief if the company does not provide "adequate assurance of payment, in the form of a deposit or other security." Prior to the 2005 Act, a chapter 11 debtor often could meet this requirement by ensuring that the unpaid amount of any postpetition obligations for service provided by the utility would be accorded administrative expense priority without the debtor having to post a cash deposit. The 2005 Act added new requirements as set forth in Bankruptcy Code section 366(c). This provision requires the debtor to provide either a cash deposit, letter
of credit, certificate of deposit, surety bond, prepayment of utility consumption, or other form of security that is mutually agreed upon between the debtor and the utility. And, section 366(c) explicitly provides that an administrative expense priority may not constitute adequate assurance of payment. Although the court may modify the amount of such assurance of payment, section 366(c) prohibits the court from considering the fact that the debtor, before filing for bankruptcy, was not required to provide a deposit or that the debtor, before filing for bankruptcy, had timely paid the utility for service provided. As a result, in large chapter 11 reorganizations with various utility providers, section 366 can impose major cash demands, which divert funds from operations. The bill strikes section 366(c).

Amendment to Section 503(b) - Allowance of Administrative Expenses.

Under the Bankruptcy Code, creditors are entitled to be paid in accordance with a hierarchal order of payment priorities. Accordingly, after payment of secured claims, those creditors that hold claims for administrative expenses are entitled to be paid ahead of all other creditors, including priority creditors (e.g., certain tax claims) and general unsecured creditors. Administrative expenses in a chapter 11 case typically consist of the actual and necessary costs incurred to facilitate the debtor's reorganization, such as attorney's fees and postpetition wages earned by the debtor's employees. A chapter 11 debtor must pay these expenses as they come due, but no later than upon the effective date of the reorganization. The 2005 Act amended the Bankruptcy Code to add section 503(b)(9) to accord administrative expense priority to a vendor for the value of goods received by the debtor within the 20-day period proceeding the bankruptcy filing. Prior to the 2005 Act, the vendor would have had a general unsecured claim for such goods. Particularly for an inventory-dependent retailer, section 503(b)(9) can result in a substantial capital expenditure that may impact on their ability to reorganize. The bill strikes section 503(b)(9).

Section 2(4). Amendment to Section 546(c) - Limitations on Avoiding Powers.

Under bankruptcy law prior to the 2005 Act, a vendor generally had the right under Bankruptcy Code section 546(c) to reclaim goods shipped to a debtor within ten days of the debtor's receipt of such goods (or within 20 days, if the ten-day period expired after the debtor filed for bankruptcy relief), under certain conditions. The 2005 Act amended Bankruptcy Code section 546(c) to lengthen the applicable time periods for reclamation from ten days to 45 days from when the debtor received the goods (or if the 45-day period expires after the commencement of the case, the vendor 20 days after the bankruptcy case is filed to demand reclamation). The bill restores section 546(c) to the form it was in prior to the enactment of the 2005 Act.

Jerrold Nadler has served in Congress since 1992. He represents New York's 8th Congressional District, which includes parts of Manhattan and Brooklyn.

Click here to view this bill.

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