Selected Business Provisions of the
2005 Bankruptcy Code Amendments
Amended Provision
Prior Provision
Effect of Amendment
Prior to the amendments, section 365(b)(1)(A)
prohibited a trustee or debtor from assuming an
unexpired lease of real property if the debtor could
not cure all defaults, even nonmonetary defaults
that were impossible to cure. For example, if a
debtor was in default under a "going dark"
provision by closing a store prior to assumption, it
would be impossible for the debtor to go back in
time and cure the default. Accordingly, the debtor
would not be able to assume the lease.
Under the amendment, a debtor may assume a real
property lease even if noncurable nonmonetary
defaults exist. The debtor, however, cannot be in
default at or after the time of assumption and must
compensate the lessor for the actual economic loss
sustained as a result of the default.
REAL PROPERTY LEASES
Cure of Nonmonetary Defaults Upon Assumption
Section 365(b)(1)(A) of the Bankruptcy Code is
amended to provide that a debtor may assume an
unexpired lease of real property without curing
defaults of nonmonetary obligations if it is
impossible to cure such defaults by performing
nonmonetary acts. At the time of assumption,
however, the debtor will be required on a goingforward basis to perform in accordance with the
lease terms and will be required to compensate
the lessor for any pecuniary losses resulting from
past defaults (other than defaults under
provisions imposing a penalty).
Deadline for Assumption or Rejection of Unexpired Leases of Nonresidential Real Property
An unexpired lease of nonresidential real property
under which the debtor is the lessee will be
deemed rejected pursuant to section 365(d)(4) of
the Bankruptcy Code if the debtor does not
assume or reject the lease by the earlier of 120
days after the bankruptcy filing or the entry of an
order confirming a plan. The bankruptcy court
may extend the 120-day period prior to its
expiration for 90 days, but any additional
extension requires the prior written consent of the
lessor.
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Prior to the amendments, deemed rejection
occurred if the lease was not assumed or rejected
within 60 days after the petition date, unless the
court extended the time to assume or reject prior
to the expiration of the 60-day period. The
bankruptcy court had the authority, however, to
grant unlimited extensions of time to assume or
reject leases up to the time of plan confirmation.
Debtors will have a hard deadline of 210 days to
decide whether to assume or reject their real property
leases, except to the extent that landlords consent to
a further extension.
Amended Provision
Prior Provision
Effect of Amendment
Administrative Claims for Rejection of Assumed Real Property Leases
New section 503(b)(7) of the Bankruptcy Code
specifically grants administrative expense priority
status to claims arising under nonresidential real
property leases that the debtor assumes and then
later rejects during the bankruptcy case. The
amount of this administrative expense claim
generally is limited to the amount of monetary
obligations due, excluding those arising from or
relating to a failure to operate or a penalty
provision, for the two-year period following the
later of the rejection date or the date of the
turnover of the premises. The lessor's claim for
the remaining amounts due under the lease after
the two-year period will be a nonpriority claim
subject to the section 502(b)(6) cap on lease
claims.
The Bankruptcy Code previously did not include
any limit on the amount of an administrative
expense claim that resulted from assuming and
later rejecting a nonresidential real property lease.
Accordingly, some courts held that lessors had an
uncapped administrative expense claim for
rejection damages if a lease was rejected after it
had been assumed.
Some commentators have suggested that this cap on
administrative expense claims on account of the
rejection of assumed leases was added in light of the
210-day deadline imposed on debtors to assume or
reject real property leases, which in many cases will
require debtors to assume or reject leases prior to
plan confirmation.
VENDOR CLAIMS
Administrative Claims for Goods Received 20 Days Prior to Petition Date
New section 503(b)(9) of the Bankruptcy Code
provides administrative expense priority for the
value of any goods received by the debtor within
20 days before the date of commencement of a
case, so long as the goods have been sold to the
debtor in the ordinary course of the debtor's
business.
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None.
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This amendment benefits vendors making
shipments in the 20 days before the petition date by
allowing administrative expense priority for the
value of the goods provided to the debtor. This
provision, together with the expansion of
reclamation rights (see below), will affect vendors'
practices of shipping goods to debtors on the eve of
bankruptcy and asserting reclamation claims.
Amended Provision
Prior Provision
Effect of Amendment
Vendors were required to make reclamation
demands for goods no later than 10 days after
delivery or, if the 10-day period expired after the
bankruptcy filing, no later than 20 days after the
debtor's receipt of such goods. In addition, a court
could deny a seller its reclamation right pursuant
to section 546(c)(2) by giving the seller a claim
that was entitled to administrative priority or
secured by a lien.
This amendment significantly expands the time
during which vendors may reclaim goods. It also no
longer allows the debtor to deny a seller its
reclamation right by providing the seller with an
administrative or secured claim.
Section 547(c)(3)(B) previously allowed a holder
of a purchase money security interest only 20 days
to perfect its security interest as a defense to
preference actions, and perfection was considered
contemporaneous with a transfer pursuant to
section 547(e)(2) only if completed within 10 days
after the transfer.
The length of time that holders of purchase money
security interests and other liens are provided to
perfect their liens without the act of perfection
resulting in a preferential transfer has been
increased to 30 days after the transfer, from the 20day period previously provided for purchase money
security interests and the 10-day period provided for
other types of liens.
Expanded Reclamation Rights
Vendors will be permitted under amended
section 546(c) of the Bankruptcy Code to reclaim
goods delivered to an insolvent debtor during the
45 days prior to the petition date, subject to the
prior rights of a holder of a security interest in the
goods or proceeds thereof. A vendor must make a
written reclamation demand no later than 45 days
after the debtor's receipt of the goods or, if the 45day period expires after the bankruptcy filing, no
later than 20 days after the petition date.
Expansion of Time to Perfect Liens
For purposes of asserting a defense against
preference actions, a secured creditor is given
30 days after the transfer pursuant to amended
section 547(c)(3)(B) of the Bankruptcy Code to
perfect its purchase money security interest. The
perfection of a lien (including but not limited to
purchase money security interests) is deemed to
have been contemporaneous with the underlying
transfer for purposes of the "contemporaneous
exchange for value" defense under
section 547(e)(2) if the perfection occurs no later
than 30 days after the transfer.
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Amended Provision
Prior Provision
Effect of Amendment
ADEQUATE ASSURANCE FOR UTILITY SERVICES
New section 366(c) of the Bankruptcy Code
defines the "adequate assurance" that a debtor is
required to provide to a utility in order to continue
to receive service from the utility during the
bankruptcy. Specifically, adequate assurance is
defined to mean: (a) a cash deposit; (b) a letter of
credit; (c) a certificate of deposit; (d) a surety
bond; (e) a prepayment of utility consumption; or
(f) another form of security that is mutually
acceptable among the parties. The debtor's
provision of "an administrative expense priority
shall not constitute an assurance of payment." In
addition, a utility may discontinue utility service
if, during the 30-day period following the petition
date, the utility does not consent to the form of
adequate assurance provided by the debtor,
although the debtor or another party may seek a
determination by the bankruptcy court whether a
particular assurance of payment is adequate. In
making such determination, the court may not
consider (a) the absence of a prepetition security
deposit, (b) the debtor's timely prepetition
payment history or (c) the availability of
administrative expense priority. Finally, a utility
may setoff its prepetition deposit without notice or
order of the Court, notwithstanding any other
provision of law.
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Utilities were previously entitled to receive
adequate assurance of future payment in order to
continue to provide services to debtors, but
section 366 did not define or limit the concept of
adequate assurance. Also, utilities generally were
required to seek relief from the automatic stay in
order to set off a prepetition deposit.
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New section 366(c) sets forth definitive guidance
regarding what constitutes adequate assurance of
future payment for utilities and permits utilities to
terminate service unilaterally if they do not accept
the form of adequate assurance they receive. The
amended statute provides utilities with greater
leverage to demand cash deposits or similar
"adequate assurance" from debtors upon a
bankruptcy filing.
Amended Provision
Prior Provision
Effect of Amendment
None.
This amendment limits the circumstances in which
an insider may receive retention payments during a
bankruptcy case and limits the amount of any such
retention payments.
None.
This amendment limits the circumstances in which
an insider may receive severance payments during
a bankruptcy case and limits the amount of any
such severance payments.
EMPLOYEE PAYMENTS AND CLAIMS
Limits on Retention Payments to Insiders
New section 503(c)(1) of the Bankruptcy Code
prohibits a debtor from making payments to, or
incurring obligations for the benefit of, an insider
of the debtor (e.g., a director or officer) for the
purpose of inducing the insider to remain with the
debtor's business, unless the bankruptcy court
finds on the record that: (a) the transfer or
obligation is essential to retain the insider because
the insider has a bona fide job offer at the same or
a greater rate of compensation; (b) the insider's
services are essential to the survival of the
business; and (c) either (i) the amount of the
transfer or obligation is not greater than 10 times
the average transfer or obligation of a similar kind
given to nonmanagement employees during the
same calendar year or (ii) if no such
nonmanagement transfers or obligations were
made or incurred, then the transfer or obligation is
no greater than 25% of the amount of any similar
transfer made to or obligation incurred for the
benefit of the insider for the prior year.
Limits on Severance Payments to Insiders
New section 503(c)(2) of the Bankruptcy Code
prohibits a debtor from making a severance
payment to an insider unless (a) the payment is
part of a program that is generally applicable to all
full-time employees and (b) the amount of the
payment is not greater than 10 times the average
severance pay given to nonmanagement
employees during the calendar year in which the
payment is made.
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Amended Provision
Prior Provision
Effect of Amendment
Limits on Other Payments
New section 503(c)(3) of the Bankruptcy Code
prohibits a debtor from making transfers or
incurring obligations to insiders and other parties
that are "outside the ordinary course of business"
and "not justified by the facts and circumstances
of the case." This includes, but is not limited to,
transfers made to officers, managers or
consultants hired postpetition.
None.
This amendment prohibits unjustified payments
made outside the ordinary course of the debtor's
business, including those made to officers,
managers or consultants hired after a bankruptcy
filing.
Increase in Cap on Priority of Employee and Independent Contractor Claims
Pursuant to amended section 507(a)(4) of the
Bankruptcy Code, claims against the debtor for
employee wages, salaries or commissions earned
within 180 days before the petition date are
entitled to priority up to $10,000 per individual.
Similarly, claims for contributions to an employee
benefit plan are entitled to priority pursuant to
section 507(a)(5) to the extent of the number of
employees covered by such plan times $10,000,
less the aggregate amount paid to such employees
in priority claims under section 507(a)(4).
Prior to the amendments, the priority cap for
employee wages, salaries or commissions and
benefits was $4,925 per employee and limited, in
the case of wages, salaries and commissions, to
those earned within 90 days before the petition
date.
The cap on the amount of priority claims for
employee wages, salaries, commissions and
benefits has been increased from $4,925 per
employee to $10,000 per employee and now
includes wages, salaries and commissions earned in
the 180 days prior to the petition date.
Priority Claims for Certain Back Pay Awards
Amended section 503(b)(1)(A)(ii) of the
Bankruptcy Code provides administrative expense
priority for claims for back pay awards for a
debtor's violation of federal and state law where:
(a) the award is attributable to postpetition
periods, regardless of the time of the occurrence
of the unlawful conduct or whether any services
were rendered; and (b) the court determines that
granting the administrative expense will not
increase the probability that current employees
will be laid off or terminated.
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None.
6
To protect employees of troubled companies, the
amendment provides administrative expense
priority for certain back pay awards attributable to
postpetition periods, where such status would not
have been granted previously.
Amended Provision
Prior Provision
Effect of Amendment
Reinstatement of Certain Retiree Benefits
New section 1114(l) of the Bankruptcy Code
provides that if a debtor modified retiree benefits
within 180 days before the petition date and did so
while insolvent, then the court, on motion of a
party in interest, is required to reinstate the retiree
benefits as of the date the modification was made
unless the court finds that the balance of the
equities clearly favors the modification.
None.
The debtor is required to reinstate retiree benefits
that were modified prior to the bankruptcy filing
unless the court finds that the balance of equities
favor such modifications. According to the
legislative history, this amendment is meant to
prevent debtors from evading the prohibition on
modifying retiree benefits during the case by
terminating benefits on the eve of bankruptcy.
Retiree Committees
Amended section 1114(d) of the Bankruptcy Code
requires the court to order the appointment of an
official committee of retired employees if the
debtor seeks to modify or eliminate retiree
benefits, and the United States trustee is required
to appoint the members of the committee.
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Previously, the court itself was required to appoint
any retiree committee.
7
This amendment shifts the responsibility to appoint
the members of a retiree committee from the
bankruptcy court to the United States trustee.
Amended Provision
Prior Provision
Effect of Amendment
Sections 555, 556, 559 and 560 previously allowed
non-debtor parties to securities contracts,
commodities contracts, forward contracts,
repurchase agreements and swap agreements the
right to terminate and close out their positions
without the application of the automatic stay, the
prohibition against ipso facto clauses or various
avoidance provisions of the Bankruptcy Code.
The protections afforded to nondebtor parties to
securities contracts, commodities contracts,
forward contracts, repurchase agreements and swap
agreements have been extended to additional
parties and transactions.
FINANCIAL DERIVATIVES
Expansion of Covered Parties and Transactions
The amendments broaden the scope of parties and
transactions that are subject to sections 555, 556,
559 and 560 of the Bankruptcy Code, which allow
nondebtor parties to certain financial derivative
contracts, including securities contracts,
commodities contracts, forward contracts,
repurchase agreements and swap agreements, to
terminate and close out their positions without the
application of the automatic stay, the prohibition
against ipso facto clauses or various avoidance
provisions of the Bankruptcy Code. The
amendments extend those protections to all
"financial participants," which include clearing
organizations and any entity with total gross
dollar value of over $1 billion in financial
contracts or mark-to-market value of at least
$100 million. The amendments also modify the
Federal Deposit Insurance Act to expand the
definitions of forward contracts, commodity
contracts, securities contracts, repurchase
agreements and swap agreements, and add
section 561 of the Bankruptcy Code to include
master netting agreements among the types of
contracts to which the protections described above
apply.
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Amended Provision
Prior Provision
Effect of Amendment
None.
New section 562 specifies the date(s) as of which
damages for the rejection, liquidation, termination
or acceleration of various financial derivative
contracts are to be measured.
Damage Calculations
New section 562 of the Bankruptcy Code provides
that when a debtor rejects a swap agreement,
securities contract, forward contract, commodity
contract, repurchase agreement or master netting
agreement, or a nondebtor counterparty thereto
liquidates, terminates or accelerates such a
contract, the contract termination or rejection
damages are calculated as of the earlier of the date
of (a) rejection or (b) liquidation, termination or
acceleration by the counterparty. If there are no
commercially reasonable determinants of value on
any such date, damages are measured as of the
earliest subsequent date on which there are
commercially reasonable determinants of value.
DEBTORS' EXCLUSIVE PERIOD TO FILE CHAPTER 11 PLAN
Section 1121(c) of the Bankruptcy Code initially
provides a chapter 11 debtor the exclusive right
for 120 days and 180 days, respectively, after the
petition date to file a chapter 11 plan and solicit
acceptances thereof. Amended section 1121(d)
will limit extensions of those periods to the dates
that are 18 and 20 months, respectively, after the
petition date.
A debtor previously could request unlimited
extensions of the exclusive periods to file a
chapter 11 plan and solicit acceptances thereof.
By establishing maximum time periods of 18 and
20 months, respectively, after the petition date in
which a debtor has rights of exclusivity, creditor
groups and other stockholders will be provided a
greater voice in the chapter 11 plan process in
cases that have been pending for more than 18
months.
The Bankruptcy Code previously did not
expressly authorize retention of professionals on a
fixed or percentage fee basis.
The amendment recognizes the common nature of
fixed or percentage fee arrangements in the
bankruptcy setting.
ESTATE PROFESSIONALS
Professional Compensation Standards
Amended section 328 of the Bankruptcy Code
will allow professional compensation to be
awarded on a retainer, an hourly fee basis, a fixed
or percentage fee basis or a contingency fee basis.
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Amended Provision
Prior Provision
Effect of Amendment
Section 101(14) previously required that
investment bankers retained by a debtor during
bankruptcy must not have served as an investment
banker for any security of the debtor during the
three years prior to the petition date or for any
outstanding securities of the debtor.
This amendment greatly expands the opportunities
for a debtor's prepetition investment bankers to be
retained by the debtor in a bankruptcy case.
Retention of Prepetition Investment Bankers
Amended section 101(14) of the Bankruptcy Code
eliminates the requirement that investment
bankers retained by a debtor during bankruptcy
must not have served as an investment banker for
any security of the debtor during the three years
prior to the petition date or for any outstanding
securities of the debtor.
CHAPTER 11 TRUSTEES
Grounds for Appointment of Trustee or Conversion or Dismissal of Cases
New section 1104(a)(3) of the Bankruptcy Code
provides that a chapter 11 trustee or examiner
may be appointed if grounds exist to convert or
dismiss a case under section 1112 but that the
court determines that appointing a trustee or
examiner instead will be in the best interests of
creditors and the estate. The list of factors set
forth in section 1112 that constitute cause to
convert or dismiss a case has been expanded to
include gross mismanagement, failure to maintain
insurance, unauthorized use of cash collateral,
failure to comply with court orders, failure to
meet bankruptcy reporting requirements, failure to
attend a section 341 meeting of creditors, failure
to comply with a Rule 2004 exam or failure to pay
postpetition taxes.
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Section 1104 previously provided for the
appointment of a chapter 11 trustee "for cause"
but did not expressly reference the standards for
conversion or dismissal set forth in section 1112.
Section 1112 previously identified a more limited
list of grounds to convert or dismiss a chapter 11
case.
10
These amendments increase the circumstances in
which a trustee may be appointed in a chapter 11
case or in which the case may be dismissed or
converted to chapter 7.
Amended Provision
Prior Provision
Effect of Amendment
Requirement for U.S. Trustee to Move for Appointment of Trustee
New section 1104(e) of the Bankruptcy Code
requires the United States trustee to move for the
appointment of a chapter 11 trustee if there are
reasonable grounds to suspect that the board of a
debtor, the debtor's chief executive officer or chief
financial officer or the members of the board that
selected the chief executive officer or chief
financial officer participated in actual fraud,
dishonesty or criminal conduct in the management
of the debtor or the debtor's public financial
reporting.
None.
This amendment is consistent with other postEnron reforms by requiring a motion for the
removal of the debtor's management when it is
suspected of participating in fraud or other
misconduct related to the debtor's financial
reporting.
OFFICIAL COMMITTEES OF CREDITORS AND EQUITY SECURITY HOLDERS
Composition of Official Committees
New section 1102(a)(4) of the Bankruptcy Code
allows the bankruptcy court to order the United
States trustee to change the membership of any
appointed official committee to ensure adequate
representation of creditors or equity security
holders. The court also may require the United
States trustee to increase the number of committee
members to include a creditor that is a small
business concern if the court finds that the
creditor holds claims against the debtor that are
disproportionately large in comparison to the
creditor's annual gross revenue.
None.
This amendment provides the bankruptcy court
greater authority to order a change in the
membership of committees to ensure that all
creditors, including small business concerns, are
adequately represented. In the past, these matters
have been largely in the discretion of the United
States trustee.
Previously, the United States trustee was required
to convene a meeting of creditors in all cases.
This amendment recognizes that, in prepackaged
cases where creditors have already voted on a
chapter 11 plan, a formal meeting of creditors is
frequently not necessary.
Lack of 341 Meeting in Prepackaged Cases
New section 341(e) of the Bankruptcy Code
authorizes the bankruptcy court to order, for
cause, that the United States trustee not convene a
meeting of creditors in "prepackaged cases" (i.e.,
cases in which the debtor has solicited
acceptances of a chapter 11 plan prior to the
commencement of the case).
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11
Amended Provision
Prior Provision
Effect of Amendment
None.
These amendments appear to require official
committees to share information broadly with their
non-member constituent creditors (which
frequently number in the thousands) and solicit and
receive comments from those creditors.
A "small business debtor" was defined as an entity
engaged in commercial or business activities with
less than $2,000,000 in total noncontingent
liquidated unsecured and secured debts.
The small business debtor definition now
aggregates the debt of affiliates, which will reduce
the number of entities meeting the definition. The
definition also excludes debtors in cases in which
an active and representative committee of
unsecured creditors has been appointed.
Disclosure Requirements for Official Committees
New section 1102(b)(3) of the Bankruptcy Code
requires appointed official committees to provide
"access to information" for creditors who hold
claims of the kind represented by the committee
and are not members of the committee. Official
committees also must solicit and receive
comments from the creditors that it represents.
SMALL BUSINESS BANKRUPTCIES
Definition of Small Business Debtor
The definition of a "small business debtor" has
been changed to include generally any entity
engaged in commercial or business activities that,
together with affiliated debtors, has less than
$2,000,000 in total noncontingent liquidated
unsecured and secured debts, in a case where
either (a) no official committee of unsecured
creditors has been appointed or (b) the court has
determined that the committee is not sufficiently
active and representative to provide effective
oversight of the debtor.
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12
Amended Provision
Prior Provision
Effect of Amendment
Financial Reporting Obligations
New section 1116 of the Bankruptcy Code
provides that a small business debtor must: (a) file
its most recent balance sheet, statement of
operations, cash-flow statements and federal
income tax returns within seven days after the
commencement of its case; (b) attend, through its
senior management, certain meetings scheduled
by the court or the United States trustee, including
initial debtor interviews, scheduling conferences
and the section 341 creditors meeting; (c) timely
file all financial schedules, statements, reports and
tax returns; (d) maintain appropriate insurance;
and (e) allow the United States trustee to inspect
its books and records.
None.
These additional requirements imposed on small
business debtors are intended to provide the court
and the United States trustee additional oversight
over the debtor's finances and operations.
Altered Disclosure Statement Requirement
Amended section 1125(f) of the Bankruptcy Code
allows a bankruptcy court to waive the
requirement of a disclosure statement if it
determines that the small business debtor's chapter
11 plan contains "adequate information." Also,
the court may conditionally approve a disclosure
statement in a small business case and combine
the hearing on the disclosure statement with the
plan confirmation hearing.
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Section 1125(f) previously allowed the court to
conditionally approve a disclosure statement, but
did not provide for a waiver of the disclosure
statement requirement in its entirety.
13
This amendment recognizes that the requirement of
a disclosure statement in a small business debtor
case in some instances may be superfluous.
Amended Provision
Prior Provision
Effect of Amendment
Section 1121(e) of the Bankruptcy Code
previously provided a small business debtor the
exclusive right to file a plan for 100 days after the
petition date and required a plan to be filed within
160 days. Section 1121(e) also allowed a
reduction in these time periods for cause and an
increase in the 100-day exclusive filing period for
circumstances for which the debtor could not be
held accountable. The 160-day deadline could not
be increased under any circumstances.
This amendment provides small business debtors a
longer period of exclusivity to file a plan and a
later deadline for filing a plan. In addition, these
periods may be extended if the applicable standards
have been met.
Debtor Exclusivity in Small Business Cases
Amended section 1121(e) of the Bankruptcy Code
initially gives a small business debtor the
exclusive right to file a plan for 180 days after the
petition date and requires that any plan and related
disclosure statement of the debtor be filed within
300 days after the petition date. These periods
may be extended only if the debtor shows that it is
likely that the court will confirm a plan within a
reasonable period of time, and the court enters an
extension order before the applicable period
expires.
Automatic Stay Exception for Repeat Small Business Filers
New section 362(n) of the Bankruptcy Code
provides that the automatic stay does not apply to a
small business debtor that (a) has another case
pending, (b) had a case dismissed for any reason
during the prior two years, (c) had a plan
confirmed in another small business case during
the prior two years or (d) is an entity that acquired
substantially all of the assets of a small business
debtor for the purpose of evading these restrictions.
None.
This amendment reduces the protection of the
automatic stay for certain small business debtors
that have filed or been recently involved in one or
more other small business cases.
Family farmers previously were not excluded
from the definition of "single asset real estate" and
the definition also applied only to debtors having
aggregate noncontingent liquidated secured debts
not exceeding $4,000,000.
Family farmers are now excluded from the single
asset real estate provisions of the Bankruptcy
Code, and the $4,000,000 debt limit on this
category has been removed.
SINGLE ASSET REAL ESTATE CASES
Definition of Single Asset Real Estate Debtor
The definition of "single asset real estate" has
been changed to real property constituting a single
property or project, other than residential real
property with fewer than four units, that 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 operating the real property.
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Amended Provision
Prior Provision
Effect of Amendment
Section 362(d)(3) previously imposed a stay on
foreclosure actions for 90 days and did not include
a provision extending this period to 30 days after
the bankruptcy court determined the debtor was
subject to the single asset real estate provision. The
statute also did not expressly waive the cash
collateral restrictions of section 363(c)(2) to allow
a debtor to pay its income to a secured creditor.
Finally, section 362(d)(3) stated that a secured
creditor was only entitled to interest payments at
the current fair market rate, rather than the
contractual rate.
These amendments (a) potentially lengthen the
time the debtor has to file a plan of reorganization
from 90 days after the petition date until 30 days
after the court determines that the debtor is subject
to the single asset real estate provisions,
(b) expressly allow the debtor to use cash collateral
to pay mortgage obligations and (c) allow the
secured creditor to collect interest at the contractual
rate rather than the fair market rate.
Application of Automatic Stay
Amended section 362(d)(3) of the Bankruptcy
Code provides that relief from the automatic stay
may be granted to allow foreclosure on single
asset real estate by a secured creditor unless, by
the later of either 90 days after the petition date
(subject to extension) or 30 days after the
bankruptcy court determines a debtor is subject to
the single asset real estate provisions, the debtor
(a) files a plan of reorganization that has a
reasonable possibility of being confirmed or
(b) begins making monthly interest payments at
the contractual rate on the value of the mortgage
holder's interest in the property. The debtor may,
notwithstanding the cash collateral restrictions of
section 363(c)(2) of the Bankruptcy Code, use
rental or other income from the property to satisfy
the secured lien.
AUTOMATIC STAY EXCEPTION FOR CERTAIN SECURITIES INVESTIGATIONS
New section 362(b)(25) of the Bankruptcy Code
exempts from the automatic stay:
(a) investigations or actions by securities selfregulatory organizations (defined as securities
associations or securities exchanges) to enforce
their regulatory powers; (b) the enforcement of
any related order or decision by any such
organization, other than for monetary sanctions;
and (c) any action by any such organization to
delist any stock that does not meet applicable
regulatory requirements.
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None.
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By this amendment, securities associations and
securities exchanges are permitted to exercise their
regulatory powers against debtors without seeking
relief from the automatic stay, including
conducting investigations, enforcing orders (other
than monetary sanctions) and delisting stocks.
Amended Provision
Prior Provision
Effect of Amendment
PREFERENCE AND OTHER AVOIDANCE ACTIONS
Expansion of Ordinary Course of Business Defense
The ordinary course defense to preference actions
set forth in amended section 547(c)(2) of the
Bankruptcy Code will require a showing by the
defendant that the alleged preferential transfer
was (a) in payment of a debt incurred by the
debtor in the ordinary course of business or
financial affairs of the debtor and the transferee
and (b) either (i) made in the ordinary course of
business or financial affairs of the debtor and the
transferee or (ii) made according to ordinary
business terms.
Section 547(c)(2) previously required a showing
by defendant that the alleged preferential transfer
was (a) in payment of a debt incurred by the
debtor in the ordinary course of business or
financial affairs of the debtor and the transferee,
(b) made in the ordinary course of business or
financial affairs of the debtor and the transferee
and (c) made according to ordinary business
terms.
This amendment will make assertion of the
ordinary course defense easier for preference
action defendants because they will no longer be
required to establish that the alleged preferential
transfer was (a) made in the ordinary course of
business or financial affairs of the debtor and the
transferee and (b) made according to ordinary
business terms.
Prohibition of Preference Actions Under $5,000
New section 547(c)(9) of the Bankruptcy Code
prohibits preference actions by a non-consumer
debtor for transfers of property with an aggregate
value of less than $5,000.
None.
This amendment will eliminate the ability of nonconsumer debtors to bring preference actions
against parties for transfers aggregating less than
$5,000.
Venue for Adversary Proceedings Under $10,000
28 U.S.C. § 1409(b) is amended to provide that a
debtor may commence an adversary proceeding
seeking to collect a non-consumer debt of less
than $10,000 against a non-insider only in the
district in which the defendant resides.
Previously, 28 U.S.C. § 1409(b) limited venue to
the defendant's district only in cases to recover
property worth less than $1,000 or to collect a
consumer debt of less than $5,000.
This amendment will ease the hardship on
defendants who would otherwise be required to
travel to the district where the debtor's case is
pending in adversary proceedings involving less
than $10,000.
Limitation on Avoidance of Warehouseman's Liens
New section 546(i) of the Bankruptcy Code
provides that the debtor or trustee may not avoid a
warehouseman's lien for storage, transportation or
other costs incidental to the storage and handling
of goods.
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None.
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This amendment protects the liens of
warehousemen consistent with UCC § 7-209.
Amended Provision
Prior Provision
Effect of Amendment
Extended Two Year Reach-Back Period for Fraudulent Transfers and Obligations
Amended section 548 of the Bankruptcy Code
allows the debtor or trustee to avoid any
fraudulent transfer of property or incurrence of an
obligation by the debtor within two years prior to
the petition date, expressly including any transfer
to or obligation for the benefit of an insider under
an employment contract.
Section 548 previously allowed the debtor to
avoid fraudulent transfers made during the oneyear period prior to the bankruptcy filing.
The "reach-back" period for fraudulent transfers
and obligations has been increased from one year
to two years, and fraudulent transfers to insiders
are expressly identified as subject to this provision.
HEALTH CARE BUSINESSES
Appointment of Ombudsman to Monitor Quality of Patient Care
New section 333 of the Bankruptcy Code requires
the court, no later than 30 days after the
commencement of a bankruptcy case involving a
health care business, to order the appointment by
the United States trustee of an ombudsman to
monitor the quality of patient care and represent
the interests of patients, unless the court finds that
such an appointment is not necessary. The
ombudsman must monitor patient care and report
to court at least once every 60 days regarding the
quality of patient care.
None.
As part of the effort by Congress to protect the
patients of bankrupt health care providers, this
amendment imposes a new requirement for the
appointment of an ombudsman in health care
business cases, at the expense of the bankruptcy
estate.
None.
This amendment imposes new requirements on
health care business debtors in disposing of any
patient records.
Disposal of Patient Records
New section 351 of the Bankruptcy Code sets
forth required procedures for a health care
business in bankruptcy to dispose of patient
records if the debtor does not have sufficient
funds to pay for the storage of such records.
Generally, the debtor must notify the patients and
appropriate insurers that the debtor intends to
dispose of the records. If the records are not
claimed within 365 days and no federal agency is
willing to accept such records, the debtor may
destroy the records.
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Amended Provision
Prior Provision
Effect of Amendment
None.
This amendment imposes new requirements on
health care business debtors in transferring patients
from a facility that is closing to a suitable
replacement facility.
None.
In connection with imposing new requirements on
health care business debtors with respect to closing
facilities, this amendment grants administrative
expense claim priority for the costs incurred in
meeting these requirements.
None.
This amendment will require the payment of
interest on tax claims at the statutory rate
established by applicable nonbankruptcy law.
These rates are typically substantially higher than
the market or judgment rates often used by
bankruptcy courts.
Relocation of Patients
Pursuant to amended sections 1106(a)(1) and
704(a)(12) of the Bankruptcy Code, a health care
business debtor or trustee must use all reasonable
efforts to transfer patients from a health care
business that is closing to an appropriate health
care business that is close in proximity, provides
substantially similar services and maintains a
reasonable quality of care.
Administrative Claims for Costs of Closing a Health Care Business
New section 503(b)(8) of the Bankruptcy Code
provides administrative expense priority for the
costs of closing a health care business incurred by
the debtor or a federal or state agency, including
the costs of disposing of patient records in
accordance with section 351 and transferring
patients to replacement facilities.
TAX PROVISIONS
Interest Rate on Tax Claims
New section 511 of the Bankruptcy Code requires
that the rate of interest on tax claims shall be
determined under applicable nonbankruptcy law.
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Amended Provision
Prior Provision
Effect of Amendment
Section 1129(a)(9) previously required only that
priority tax claims be paid over six years from the
date of assessment of the claim and did not
(a) require regular installments or treatment as
favorable as the most favored nonpriority
unsecured claim or (b) apply to secured tax claims
that otherwise would be priority tax claims.
This amendment requires a debtor's plan to pay
priority tax claims over a different time period than
before, in regular installments and subject to the
most favorable terms provided to unsecured
nonpriority claims.
None.
Governmental units are no longer required to seek
relief from the automatic stay to set off a
prepetition income tax refund owed to a debtor
against a prepetition income tax liability that is
owed by the debtor.
None.
These amendments clarify that debtors are required
to pay postpetition taxes as they come due, without
any need for the applicable governmental units to
file a formal claim in the bankruptcy court for the
taxes.
Payment of Priority Claims
Amended section 1129(a)(9) of the Bankruptcy
Code requires that a chapter 11 plan provide for
the payment of tax claims entitled to priority
under section 507(a)(8) (and tax claims that would
be entitled to such priority but for the fact that
they are secured) in regular installments in cash of
a total value, as of the effective date of the plan,
of the allowed amount of the claim over a period
ending no later than five years after the petition
date and in a manner not less favorable than the
most favored nonpriority unsecured claim
provided for by the plan (other than convenience
class claims).
Setoff of Income Tax Refunds
New section 362(b)(26) of the Bankruptcy Code
provides an exception from the automatic stay for
the setoff by a governmental unit under applicable
nonbankruptcy law of an income tax refund with
respect to a taxable period that ended before the
petition date against an income tax liability for a
taxable period that also ended prior to the petition
date.
Payment of Postpetition Taxes When Due
New 28 U.S.C. § 960(b) and section 503(b)(1)(D)
of the Bankruptcy Code require a debtor to pay all
postpetition taxes when due, without the
requirement of the governmental unit to file an
administrative expense request, except for taxes on
abandoned property or for which payment is
otherwise excused under the Bankruptcy Code.
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Amended Provision
Prior Provision
Effect of Amendment
Section 507(a)(8)(A) previously did not limit
priority status for income and gross receipts tax
claims to those for a tax year ending on or before
the petition date. Accordingly, bankruptcy courts
often would prorate income and gross receipts taxes
for "straddle years" (the tax year ended during
which the bankruptcy case was commenced) and
would give taxes that accrued prior to the petition
date priority status and taxes that accrued after the
petition date administrative expense status.
These amendments result in income and gross
receipts taxes for straddle years being treated as
administrative expenses that must be paid by the
debtor in full as they become due, rather than being
prorated between priority and administrative
expense status.
Ad valorem property tax liens previously were not
excluded from the taxes subject to subordination
to senior liens and priority claims pursuant to
section 724(b). In addition, section 506(c) did not
expressly allow a debtor to recover the payment of
ad valorem property taxes from a secured
creditor's collateral.
These amendments eliminate the subordination of
ad valorem property tax liens to senior secured
claims and certain priority claims in chapter 7
cases and expressly allow debtors to surcharge
collateral for the payment of ad valorem property
tax liens.
None.
This amendment provides that corporate debtors
cannot receive a discharge for taxes with respect to
which fraudulent returns were filed or there was
other willful misconduct.
Priority Status of Straddle Year Tax Claims
Section 507(a)(8)(A) of the Bankruptcy Code has
been amended to classify as an unsecured priority
claim a tax measured by income or gross receipts
"for a taxable year ending on or before the date of
the filing of the petition." Conversely, all income
and gross receipts taxes for taxable years that end
after the petition date must be paid immediately in
full when they become due by the debtor as an
administrative expense pursuant to 28 U.S.C.
§ 960(b) and section 503(b)(1)(D) of the
Bankruptcy Code, as described above.
Treatment of Ad Valorem Tax Liens
Amended section 724(b) of the Bankruptcy Code
provides that the general rule demoting the status
of secured tax claims to the status of priority
unsecured tax claims does not apply to ad valorem
real and personal property tax liens. In addition,
amended section 506(c) now expressly provides
that a debtor may surcharge a secured creditor's
collateral to pay all ad valorem property taxes
with respect to the collateral.
No Discharge of Fraudulent Tax
New section 1141(d)(6) of the Bankruptcy Code
provides that confirmation of a chapter 11 plan
does not discharge a corporate debtor from taxes
with respect to which the debtor made a
fraudulent return or willfully attempted in any
manner to evade or defeat such tax.
INTERNATIONAL INSOLVENCIES
A new chapter 15 has been added to the
Bankruptcy Code, entitled "Ancillary and Other
Cross-Border Cases."
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Previously, section 304 of the Bankruptcy Code
governed cases ancillary to a foreign proceeding
and authorized the filing of a petition by a foreign
representative of the debtor.
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New chapter 15 of the Bankruptcy Code is based
on the Model Law of Cross-Border Insolvency.
EFFECTIVE DATE OF AMENDMENTS
Generally, the Amendments apply to all bankruptcy cases filed on or after October 17, 2005, which is 180 days after the date of the enactment. Notable
exceptions include the following:
Code Provision
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Effective Date Exception
Sections 507(a)(4) and (5) — increasing amount of priority
wage, salary and benefit claims to $10,000
Applies to all cases filed on or after the date of enactment
Section 541(f) — transfers of tax exempt property
Applies to all cases as of the date of the enactment
Section 548(a)(1) — express inclusion among fraudulent
transfers of transfers to insiders pursuant to an employment
agreement
Applies to all cases filed on or after the date of enactment
Section 548(a)(1) — increase of reach-back period for
fraudulent transfers to two years
Two-year provision only applies to cases filed one year after
the date of enactment
Section 1104(e) — requirement for United States trustee to
move for chapter 11 trustee in cases of suspected fraud by
debtor's management
Applies to all cases filed on or after the date of enactment
Section 1114(l) — reinstatement of modified retiree benefits
Applies to all cases filed on or after the date of enactment
28 U.S.C. § 1334(e) — exclusive jurisdiction of district court
over matters relating to professional retention or disclosures
under section 327 of the Bankruptcy Code
Applies to all cases filed on or after the date of enactment
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