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Gray Plant Mooty Reorganization & Bankruptcy Group

September, 2005


I. AMENDMENTS AFFECTING SECURED CREDITORS Code Section1 Stay Relief in Single Asset Real Estate Cases and Schemes to Hinder, Delay or Defraud Creditors Secured by Real Estate §§ 362(d)(3) and (4) Amendment The definition of “single asset real estate” has been modified to eliminate the $4 million secured debt cap applicable under current law. The effect is to expand the situations in which expedited relief from the automatic stay under § 362(d)(3) may be available. This provision permits the Court to terminate the stay with respect to single asset real estate as to a creditor whose claim is secured by such real estate unless within (generally) 90 days after the case is filed, the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time, or the debtor has commenced monthly payments equal to the applicable non-default contract rate of interest on the value of the creditor’s interest in the property. The amended provision expressly authorizes the debtor to make the required payments from rents or other income generated by the property, notwithstanding the Bankruptcy Code’s restrictions on use of cash collateral. New § 362(d)(4) permits the Court to terminate the stay with respect to real property on the request of a creditor secured by such property if the Court finds that the filing of the bankruptcy petition was part of a scheme to delay, hinder and defraud creditors that involved either the transfer of all or part ownership of such property without the consent of the secured creditor or Court approval, or involved multiple bankruptcy filings affecting such property. If recorded in compliance with state law, the order is binding in any subsequent case affecting the real estate for two years.


Unless otherwise indicated, references are to the Bankruptcy Code, 11 U.S.C. §§ 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

PMSI in Personal Property § 521(a)(6)

In individual Chapter 7 cases, the debtor must reaffirm, redeem or surrender personal property subject to a PMSI within 45 days after the section 341 meeting of creditors. If the debtor does not comply, the property is no longer property of the estate or protected by the automatic stay. This provision is intended to address case law which permitted the debtor to retain such property by merely continuing to make regular payments.

Secured Claims in Chapter 13 § 1325(a)(5)(B)

In order for the debtor to confirm a Chapter 13 plan, secured creditors must retain their security interests until paid the balance due under applicable non-bankruptcy law or the discharge is entered. The debtor may not strip down a PMSI in a motor vehicle if the debt secured was incurred within 910 days of the date the petition was filed, or in other collateral if the debt was incurred within one year of the petition date.

Time of Transfer § 547(e)(2)

For preference purposes, a transfer is deemed to have been made:    At the time the transfer takes effect if perfected within 30 days after the transfer; At the time the transfer is perfected if perfected more than 30 days after the transfer, or Immediately before the petition date if not perfected at the later of (i) the petition date or (ii) 30 days after the transfer takes effect.

Where the claimed preferential transfer is the grant of a security interest, this amendment expands (from 10 to 30 days) the safe harbor period within which perfection will relate back to the effective date of the transaction.

Deprizio Fix § 547(i)

The amendment precludes avoidance as to non-insider creditor of a transfer by the debtor to an entity that is not an insider for the benefit of an insider creditor between 90 days and one year before bankruptcy. 1994 amendments to the Bankruptcy Code precluded recovery of such transfers from the non-insider creditor; this amendment bars avoidance and should protect the non-insider creditor where the transfer at issue is a security interest. This provision is effective upon


enactment and applies to both pending and later commenced cases. Warehouseman’s Lien § 546(i)

New § 546(i) provides that the trustee may not avoid a statutory lien for storage, transportation or incidental charges for storage or handling of goods.


Prepetition Suppliers of Goods § 503(b)(9)

A supplier of goods received by the debtor in the ordinary course of the debtor’s business within 20 days before commencement of the bankruptcy case is entitled to an administrative expense for the value of such goods. This entitlement is not dependent upon a timely reclamation notice being given.

Reclamation § 546(c)

Reclamation rights are preserved and are not subject to avoidance by the trustee if (a) the goods are received by the debtor within 45 days preceding the petition date and (b) the seller makes a written demand with 45 days after receipt of the goods by the debtor (or within 20 days after the petition date if the 45-day period expires post-petition). Such reclamation rights are expressly subject to the rights of a holder of a security interest in such goods or the proceeds thereof. The rights created by this section appear to be independent of UCC or other state law reclamation rights.

Ordinary Course of Business Defense § 547(c)(2)

The trustee may not avoid a transfer by the debtor if made (i) in the ordinary course of business between the debtor and the transferee or (ii) according to ordinary business terms. Prior law required both subjective and objective tests be met. This should benefit transferees in establishing the defense.

De Minimis Defense § 547(c)(9)

This provision affords an additional affirmative defense in preference actions by providing that the trustee may not avoid a transfer by a nonconsumer debtor if “the aggregate value of all property that constitutes or is affected by such transfer” is less than $5,000. This is not likely to be of significant benefit to most creditors/preference defendants.


Venue of Small Collection and (potentially) Preference Actions 28 U.S.C. § 1409(b)

This provision amends the bankruptcy venue statute to provide that a trustee may commence a proceeding “arising in or related to” a bankruptcy case to recover a nonconsumer debt of less than $10,000 only in the district court for the district in which the defendant resides. Query whether this provision applies to preference actions which “arise under” the Bankruptcy Code. If not, such smaller preference actions will remain subject to the general bankruptcy venue provision of 28 U.S.C. § 1409(a), which would permit commencement in the bankruptcy court for the district in which the bankruptcy case is venued.


Assumption or Rejection of Nonresidential Real Property Leases § 365(d)(4)

Current law provides that if the trustee or debtor in possession does not assume a nonresidential lease of real property under which the debtor is the lessee within 60 days after the order for relief, the lease is deemed rejected. The 60-day period may be extended “for cause” and, in large Chapter 11 cases often was extended many times for lengthy periods. As amended, § 365(d)(4) provides that a lease of nonresidential real property is deemed rejected if not assumed by the earlier of (i) 120 days after the petition date or (ii) the date a plan is confirmed. The Court may extend the 120-day period for only an additional 90 days, unless the lessor consents in writing to a subsequent extension.

Assumption of Real Property Leases; Nonmonetary Defaults § 365(b)

The debtor in possession or trustee need not cure a nonmonetary default that is impossible to cure under an unexpired lease of real property in order to assume the lease, except a failure to operate in accordance with the terms of a nonresidential real property lease, in which case the default must be cured at the time of assumption, by post-assumption performance, and the lessor must be compensated for any pecuniary loss resulting from such breach.


Cap on Administrative Expense for Assumed Leases Later Rejected § 503(b)(7)

If the trustee or debtor in possession first assumes and later rejects a nonresidential real property lease, the lessor will have an administrative expense claim for all monetary obligations due under the lease (excluding those relating to a failure to operate or a penalty provision) for a period of two years after rejection or the date the premises are turned over, whichever is later. The balance of the lessor’s claim, if any, will be an unsecured, non-priority claim subject to the limitations of § 502(b)(6).


Employee Wage and Benefit Claims §§ 507(a)(4) and (a)(5)

The lookback provision for priority employee wage and benefit claims is extended to 180 days and the amount increased to $10,000. These provisions are effective upon enactment for cases filed on or after that date.

KERP Limitations § 503(c)

New § 503(c) imposes stringent limitations on key employee retention plans (“KERPs”) under which debtors promise bonuses and severance payments to officers and other members of senior management who agree to stay with the company through confirmation of a plan. For example, a retention bonus claim will be allowable only if (a) the individual has a bona fide job offer from another business at the same or greater rate of compensation, (b) the services of the individual are essential to the survival of the business of the debtor, and (c) the amount of the retention bonus (i) is not greater than ten times the amount of the mean retention incentive given or promised to nonmanagement employees for any purpose during the same calendar year in which the bonus is paid, or (ii) if no such similar incentive was given or promised to non-management employees, then not greater than 25% of any similar incentive given or promised to such individual during the preceding calendar year. Similarly, a severance claim to an insider will only be allowable if it is (a) part of a program that is generally applicable to all full-time employees, and (b) not greater than ten times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.


Repayment of Retirement Plan Loans § 1325(f)

New § 1322(f) provides that a Chapter 13 plan may not materially alter the repayment terms of a loan made by an employer-sponsored retirement plan. This resolves confusion under former law.


Chapter 11 Disclosure Statement § 1125(a)

In order to be approved by the Court as containing “adequate information”, the disclosure statement must include a discussion of potential material Federal tax consequences of the plan to the debtor, any successor and hypothetical investors typical of the holders of claims or interests in the case.

Chapter 11 Plan Exclusivity § 1121(d)

Current law provides that the debtor in a Chapter 11 case (absent the appointment of a Chapter 11 trustee) is the only party who may file a plan within the first 120 days of the case and, so long as the debtor files a plan within such period, no other party may file a plan thereafter unless the debtor fails to obtain confirmation of its plan within 180 days after commencement of the case. Such “exclusivity” periods may be reduced or extended for cause and, in large cases, they were routinely extended for lengthy periods. The amendment modifies these provisions to limit the maximum time such exclusivity periods may extended. Under the amendment, the 120-day exclusivity period cannot be extended beyond 18 months and the 180-day period may not be extended beyond 20 months from the date the case is commenced. This amendment substantially reduces the Court’s discretion in ruling on motions to convert or dismiss Chapter 11 cases. It provides that the Court “shall” convert or dismiss a Chapter 11 case for cause “absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interest of creditors and the estate”. The amendment expands the non-exclusive list of factors constituting “cause” (including, for example, gross mismanagement, failure to maintain appropriate insurance, unauthorized use of cash collateral, failure to comply with an order of the Court, an unexcused

Conversion or Dismissal of Chapter 11 Cases § 1112(b)


failure to satisfy timely any filing or reporting requirement, failure to timely pay post-petition taxes or to file postpetition tax returns, etc.). If grounds exist to convert or dismiss a case, an amendment to § 1104(a) permits the Court to order the appointment of a trustee or examiner instead if the Court determines that such appointment is in the best interests of creditors and the estate. An exception to the otherwise mandatory conversion or dismissal requirement exists if the debtor or another interested party objects and establishes that there is a reasonable likelihood that a plan will be confirmed within a reasonable time (or, if a small business case, within the time frames applicable to such cases), and the grounds for converting or dismissing the case include an act or ommission for which there is a reasonable justification and that will be cured within a reasonable time fixed by the Court. Finally, the amendment requires the Court to commence the hearing on a motion seeking conversion or dismissal not later than 30 days after its filing, and to decide the motion not later than 15 days after the commencement of such hearing, unless the moving party expressly consents to a continuance, or “compelling circumstances” prevent the Court from meeting the prescribed time limits.

Small Business Debtors Chapter 11

A small business debtor is engaged in commercial or business activity, other than the business of owning or operating real property, that does not have aggregate liquidated secured and unsecured debts of more than $2 million (excluding insider debt) as of the petition date and in whose Chapter 11 case no committee of unsecured creditors has been appointed or the Court has determined that the committee is not sufficiently active to provide effective oversight of the debtor. Debtors that qualify as small business debtors are subject to numerous reporting requirements and a streamlined plan confirmation process.



Health Care Closing Costs § 503(b)(8)

New section 503(b)(8) creates a new category of administrative expense for the actual, necessary costs and expenses incurred by the trustee or a governmental agency in closing a health care business, including costs attributable to disposing of patient records and transferring patients to another health care facility.

Sales of Personally Identifiable Information § 363(b)(1)

If a business debtor that collects personally identifiable information on individuals publishes a policy that prohibits the transfer of such information to non-affiliates, and that policy is in effect when its bankruptcy case is commenced, then the trustee or debtor in possession may not sell that personal information unless the sale is consistent with the debtor’s policy. Alternatively, the Court may approve a sale of such personally identifiable information after the appointment of a consumer privacy ombudsman and a hearing if the Court finds that the sale does not violate applicable nonbankruptcy law. The ombudsman is expected to provide the Court with information concerning the facts and circumstances of the proposed sale, including the debtor’s privacy policy, the potential effects of the sale on the consumers, and alternatives that may reduce those effects.

Fraudulent Transfer Lookback Period § 548(a)(1)

The lookback period for fraudulent transfers is extended to two years. Current law is one year, although the trustee could use applicable state fraudulent transfer law (and its longer lookback periods) as well. This provision is effective one year after enactment and applies to cases filed after that date. A new Chapter 15, entitled “Ancillary and Other CrossBorder Cases”, has been added that is intended to facilitate multi-national bankruptcy proceedings. The new Chapter 15 incorporates the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade (“UNCITRAL”) in 1997. Chapter 15 addresses topics that include access of foreign bankruptcy

Cross-Border Cases Chapter 15


estate representatives to U.S. courts, recognition of foreign bankruptcy proceedings in the U.S., cooperation between U.S. and foreign courts in cross-border bankruptcy cases, and concurrent U.S. and foreign bankruptcy proceedings.

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