Significant changes Featured

8:00pm EDT June 23, 2005

Business transactions will be significantly affected by the recent passage of the Bankruptcy Abuse Prevention and Consumer Act of 2005 when most of the provisions go into effect on October 17, 2005. While many of the provisions affect consumers, there are some that could have a significant impact on businesses. The following are some of the most important business-changing provisions.

Reclamation rights. Under the New Act, reclaiming creditors will be entitled to reclaim goods shipped and received by the debtor/buyer 45 days prior to a bankruptcy if notice is given in writing to the debtor/buyer. Previously, the sellers of goods, under most state laws and under the current bankruptcy code, were entitled to a reclamation claim for goods delivered to the debtor/buyer 10 days prior to written notice to the debtor/buyer.

In addition, under the new act, the reclaiming creditor is entitled to an administrative claim for all goods received by the debtor/buyer 20 days prior to the bankruptcy petition. The administrative claim must be paid at or before confirmation of the plan of reorganization. If the administrative claims are not paid, the debtor cannot confirm its plan. Administrative claims must be filed with the bankruptcy court and a motion must be made for payment. Administrative claims are not sufficient if filed on a "proof of claim" form.

Warehouseman's liens. Under the new act, a trustee may not avoid a lien for storage, transportation or other charges for the storage and handling of goods.

Creditors' committees. The bankruptcy court may now order the U.S. trustee to adjust the number of members and the makeup of committees in Chapter 11 cases. So, if a small business has a "large" claim against the debtor, it may be added to the committee, and can then play an active role in the case.

Preferences. Under the old act, bankruptcy attorneys or trustees could file a preference action, and business owners were forced to return all payments received in the 90 days prior to the debtor filing for bankruptcy, unless the defendant could successfully assert certain defenses. One of the most common defenses was that the payment was made in the ordinary course of business. Under the old act, the "ordinary course of business" defense required that the creditor prove that the payment was ordinary between the creditor and the debtor and that it was ordinary in the industry of the creditor. Under the new act, the defendant, usually a business owner, must only prove that the payment was made in the ordinary course between the debtor and creditor or in the ordinary course of the creditor's industry. This may make it more difficult for bankruptcy attorneys or trustees to recover preferential payments in many situations and easier for creditors to defend.

In addition, plaintiffs may not sue a business creditor in a preference case if the amount at stake is $5,000 or less. If the amount at stake is $10,000 or less, the plaintiff must bring the action where the defendant/creditor is doing business. Thus, if the bankruptcy case is filed in another jurisdiction (most business bankruptcy cases are filed in Delaware and New York), creditors with small amounts at stake will only be required to defend a preference action in a court near where they are doing business.

Deborah L. Thorne is a partner in the Chicago office of Barnes & Thornburg LLP. She concentrates her practice in the areas of creditors' rights, bankruptcy, financial restructurings and commercial transactions. Reach her at (312) 214-8307 or deborah.thorne@btlaw.com.