Provisions in New Bankruptcy Law Relevant to Public Companies and Claims Traders
by Glenn E. Siegel, Dechert LLP and Andrea Pincus, Anderson Kill & Olick PC
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) (the “New Bankruptcy Law”), was signed into law by President George W. Bush on Thursday, April 20, 2005, significantly modifying and amending the United States Bankruptcy Code, 11 U.S.C. §101, et seq (the “Code”). While the New Bankruptcy Law focuses primarily on the procedures and practices for consumer bankruptcies, it also contains several provisions which effect business bankruptcies and may be of particular interest to Committee Members. Highlights include the following provisions which apply in business bankruptcies:
- Section 401, Adequate Protection for Investors, adds a definition to the Code for a “securities self regulatory organization” at §101(48A) of the Code and then exempts such organizations (which would include all relevant stock exchanges and NASDAQ) from the automatic stay to the extent they impose non-monetary sanctions against a debtor or seek to delist, delete, or refuse to permit quotation of a debtor’s stock pursuant to their rules. This provision seeks to make clear that the exemption enjoyed by governmental entities, including the SEC, to take action pursuant to their police and regulatory powers extends to securities based self regulatory organizations.
- Section 404, Executory Contracts and Unexpired Leases, amends §365(d)(4)to provide that unexpired leases of non-residential real estate in which the debtor is the lessee are deemed rejected and must be immediately surrendered by the lessor the earlier of 120 days after the commencement of the case, or the date of confirmation of a plan. While the court may extend the period for an additional 90 days, any further extension requires the consent of the lessor. While this change potentially provides landlords with increased leverage over debtors with respect to the timing of assumptions and rejections of leases, the modifications to §365(d)(4) extensions may soon be the target of the lenders if this change proves to be problematic in extracting enterprise value in certain cases, especially retail bankruptcies. For that reason also, we may see an increase in retail filings before the effective date of this provision of the New Bankruptcy Law.
- Section 405(b), Information, adds a new §1102(b)(3) to the Code, which requires an official committee to provide access to information to creditors represented by their committee who are not on the committee, take comments from such creditors, and be subject to a court order requiring the disclosure of additional information. It is unclear whether this provision would require that committees make available information to holders without the signing of a confidentiality agreement or other safeguards related to the use of such information since many committee based communications with the debtor and other parties in interest are shared based upon the assumption that they will be held confidential. To the extent that courts do not allow committees to condition the receipt of such information subject to confidentiality restrictions, the extent to which debtors will refuse to share confidential information with committees remains to be seen. Moreover, it is unclear whether this provision is intended to deal only with individual creditor inquiries (which could potentially create disparities in the amount available to creditors trading claims) or instead requires committees to file (or otherwise make generally available, perhaps through a press release) periodic reports to creditors.
- Section 408, Post Petition Disclosure and Solicitation, adds new §1125(g) to the Code, which allows the solicitation of acceptances or rejections post-filing from creditors who were properly solicited pre-filing under applicable non bankruptcy law. This appears intended to allow debtors to continue the process begun in pre-packed bankruptcies to obtain acceptances of a plan without the necessity of obtaining approval of a new disclosure document.
- Section 409, Preferences, amends §547(c)(2) of the Code, restructuring the provisions concerning preferences, such that among other things, the “and” between subsections (B) and (C) has been changed to “or”, effectively expanding the defenses to preference recoveries.
- Section 411, Period for Filing a Plan Under Chapter 11, limits absolutely the deadline for the exclusivity period for filing a plan pursuant to §1211 of the Code, such that exclusivity cannot be extended beyond 18 months from the date of the order for relief commencing a bankruptcy case. Current law has no cap on the extensions which a court may grant to extend the exclusivity period. The new provision may well change the dynamic between creditors and debtors—particularly when a debtor needs more time in which to develop and propose a viable plan—and may be seen as playing into hands of committee that may decline a debtor’s plan proposal and further negotiations, and instead wait for termination of exclusivity. Committees which do that, however, may find themselves losing control of own constituency by forcing debtors to file within the exclusive period plans which are less advantageous to the creditor body than a more fully negotiated plan. Moreover, upon the termination of exclusivity at the 18 month mark, all constituencies in a Chapter 11 case may find themselves racing against one another for the finish line in a full blown cavalry charge, rather than marching toward an orderly reorganization or liquidation.
- Section 419, More Complete Information Regarding Assets of the Estate, directs the Judicial Conference of the United States, in consultation with the Executive Office of the United States Trustee, to propose changes to the bankruptcy rules and forms to require debtors to disclose “the value, operations, and profitability of any closely held corporation, partnership, or of any other entity in which the debtor holds a substantial or controlling interest.” The purpose of this new reporting requirement is to “assist parties in interest taking steps to ensure that the debtor’s interest in [such entity]… is used for the payment of allowed claims against debtor.” The bill does not define what it means to have a substantial or controlling interest in an entity. This provision does not change existing law regarding the definition of property of the estate nor does it grant new avoiding powers to trustee and it appears to only more specifically require disclosure of information that debtors were already at least arguable required to provide. Accordingly, the question that remains to be answered is whether courts will view this provision as an invitation to more broadly interpret precedent regarding substantive consolidation or make easier recovery of such assets under other legal theories.
Most of the provisions in the New Bankruptcy Law do not go into effect until October 2005 (although some are retroactive and others became effective upon execution). While the full impact of these changes upon the actual practice of business bankruptcies remains to be seen, the New Bankruptcy Law promises to provide a boon in bankruptcy litigation, as all affected constituencies seek to define its scope and portent.