BAPCPA: Changes to the Reclamation and Utility Provisions to the Reclamation and Utility Provisions
By: Douglas E. Deutsch
Chadbourne & Parke, LLP; New York
BAPCPA Reclamation Provision Changes
State law reclamation rights allow a seller to recover goods shipped to and received by an insolvent buyer within a defined period if the seller shipped without knowledge of the buyer’s insolvency. Pre-BAPCPA, the Bankruptcy Code protected those state law rights but limited the time the seller was able to exercise those rights to 10 days after a debtor’s receipt of the goods (unless the 10-day period ended after the bankruptcy filing, in which case, the seller had 20 days after receipt of the goods to make a reclamation demand).
BAPCPA modified Bankruptcy Code §546 to establish reclamation as a substantive bankruptcy law right, rather than a mere recognition of state law rights, and substantially increased the period in which a seller may reclaim goods – up to 45 days prior to the bankruptcy case filing – unless, as we read it, the 45-day period ends after the filing of the bankruptcy case, in which case the seller has 20 days after the bankruptcy filing to make a reclamation demand. (An alternative interpretation of the deadline in §546(c) is possible. As highlighted in Norton Bankruptcy Law and Practice 2d §56.4 (Dec. 2006), “Congress may have intended to allow reclamation within 20 days or the remainder of a 45-day reclamation window, whichever deadline occurs last. The language does not clearly say ‘whichever occurs later,’ however, and therefore some courts may conclude that the smaller window applies.” The safest route, therefore, is to file your reclamation demand within 20 days of the bankruptcy filing.)
Additionally, where pre-BAPCPA §546(c) granted a bankruptcy court the authority to deny reclamation and instead grant the seller an administrative-priority claim or a lien, revised §546(c) removes this provision, arguably abrogating the court’s discretion in this regard. Finally, while former §546(c) was silent as to the rights of secured creditors, bankruptcy courts generally held that the interests of a reclaiming seller were subject to the prior interests of secured lenders. Revised §546(c) now expressly acknowledges this limitation on the seller’s reclamation remedy.
In another provision created to benefit sellers of goods, BAPCPA amends §503 to provide a seller who fails to make a reclamation demand (or who otherwise cannot establish a reclamation remedy) an administrative-expense claim for the value of the goods received by the debtor within 20 days of the bankruptcy filing.
It appears, in short, that the amended Bankruptcy Code seems to now include a federal reclamation right that is more powerful than any state law right to reclamation, exposing more shipments to reclamation demands than ever before. This is a real benefit to providers of goods and creates new challenges in, among other types of cases, retail bankruptcies. In such cases, because a bankruptcy court now apparently lacks the authority to grant an administrative claim in lieu of reclamation, it appears likely that a bankruptcy court will be much more inclined to grant debtors the authority to pay the pre-petition claims of vendors who have the right to compel the return of goods. We note that the effect of the amendment on practice may be muted by the fact that in many, if not most cases, the debtor has financed its working capital with loans secured by inventory and a reclaiming seller’s rights remain subject to the interests of such secured lenders. Even in this case, however, a seller still has new, valuable rights derived from the BAPCPA’s creation of §503(b)(9).
New §503(b)(9) entitles a seller of goods to an administrative priority if (1) the debtor has received the goods within the 20-day period preceding the case, and (2) the goods were sold to the debtor in the ordinary course of the debtor’s business. Unlike reclamation, there is no requirement that the goods still be in the possession of the debtor. It is also clear that §503(b)(9) creditors need not be paid immediately, and that this timing issue provides real benefit to debtors. See Gretchko, Lisa S. “The Bankruptcy Reform Act One Year Later: A Disappointment for Trade Creditors,”26 Am. Bankr. Inst. J. 18 (Feb. 2006).
Although we have yet to see many issues arise in practice with respect to §503(b)(9), future disputes seem likely. These disputes will probably include valuation questions as §503(b)(9) provides an administrative claim for the “value of the goods received.” This means, of course, that the seller’s invoice price is not necessarily the controlling price. Questions will also likely arise as to issues relating to whether the administrative expense claim is automatic or must be affirmatively asserted by the seller of the goods. Skirmishes are also likely over whether the goods were sold to the debtor in the ordinary course of the debtor’s business.
BAPCPA Utility Provision Changes
As many utilities are monopolies that provide services that a debtor could not survive without,1 §366 has always required a utility to continue to provide service to the debtor immediately after it files for bankruptcy and requires the utility to continue service on an ongoing basis if the utility is provided “adequate assurance of payment” for future services. Under the pre-BAPCPA law, courts generally found that a projection of strong post-petition cash flow, a history of timely pre-petition payments and the assurance of an administrative expense for post-petition services constituted “adequate assurance of payment” and often did not require the debtor to make a cash deposit or post additional security. Congress sought to a limit a court’s discretion in determining “adequate assurance” by amending the relevant section of the Bankruptcy Code.
BAPCPA made a significant change to §366 by bifurcating the statute into a 20-day “adequate assurance” analysis (found in §366(b)), seemingly applicable in all cases, and a more stringent 30-day “adequate assurance” analysis (found in §366(c)), applicable only in chapter 11 cases. See, also, In re Astle, 338 B.R. 855 (Bankr. D. Idaho 2006) (holding that §366(c) only applied in chapter 11 cases). The 20-day analysis allows a utility to discontinue service if, within 20 days of the entry of the order for relief, “adequate assurance of payment” in the form of a deposit or other security is not provided. Adequate assurance of payment for this test is not further defined. The 30-day analysis still requires adequate assurance of payment, but limits the form of assurance to include only a cash deposit, letter of credit, certificate of deposit, surety bond, prepayment or similar security satisfactory to the utility. Importantly, BAPCPA also specifically precludes a court from considering, among other things, payment history or the availability of an administrative expense claim in its evaluation of the adequacy of the assurance of payment.
One published opinion, In re Lucre Inc., 333 B.R. 151 (Bankr. W.D. Mich. 2005), suggests the real hurdles that a careful application of the changes to §366(c) could create for debtors. Lucre highlights that §366(c)(2) requires the debtor to provide adequate assurance within 30 days that is “satisfactory to the utility” or risk losing utility service. Furthermore, according to the opinion, the court has no discretion thereafter to modify the amount of an assurance of payment (as contemplated by §366(c)(3)(A)) unless and until the utility has first determined that the assurance originally provided is “satisfactory” to it. In other words, and although somewhat counterintuitive, the debtor “has no recourse to modify the adequate assurance payment the utility is demanding until [the debtor] … actually accepts what the utility proposes.” Since most local tariffs require deposits of three months or more, making utilities the arbiter of not only the form of deposit but the amount as well could sound the death knell for utility-dependent manufacturing concerns. Actual practice since passage of the Reform Act suggests that most courts will be less demanding than the Lucre opinion would seem to require.
Somewhat surprisingly, the post-BAPCPA utility orders to date look remarkably like the pre-BAPCPA utility orders, despite the change in the law. As indicated in the cases cited, procedures seem to have been adopted in the major Delaware and New York cases that have been approved by courts with little variation. See, e.g., In re Refco Inc., No. 05-60006 (Bankr. S.D.N.Y. Dec. 9, 2005) (unreported) (court approved debtor’s (non-objected to) requested utility procedures which provided, inter alia, that a sum equal to 50 percent of the estimated costs for utilities for one month deposited into an interest bearing escrow account constituted “adequate assurance”); In re Calpine Corp., No. 05-60200 (Bankr. S.D.N.Y. Jan. 18, 2006) (unreported); In re Copelands’ Enterprises Inc., No. 06-10853 (Bankr. D. Del. Sept. 8, 2006) (unreported); In re 1945 Route 23 Associates Inc., No. 06-17475 (Bankr. D. N.J. Aug. 10, 2006) (unreported).
In each of the noted cases, the debtor proposed a detailed process for utilities to contest a deposit equal to two weeks of utility service charges (or, in some cases, 50 percent of the total monthly invoices) as “adequate assurance.” Among other things, for the utility to challenge what is effectively a presumption of “adequate assurance,” the procedures require the utility to serve a written request that sets forth a summary of the debtors’ payment history – despite that fact that new §366(c)(3) expressly prohibits a court from considering payment history in evaluating adequate assurance – and, while the challenge is being considered, the utility is required to continue to provide service. Although utilities objected in many of the cases, each bankruptcy court, with little fanfare and even less in terms of a written explanation, granted the debtor’s motion.
1 In an amusing recent consumer case, Darby v. Time Warner Cable Inc. (In re Darby), 470 F.3d 573 (5th Cir. 2006), the Fifth Circuit determined (in part) that an individual can live without cable and, therefore, that cable is not a utility.