A relief for creditors Featured

8:00pm EDT June 29, 2005

The much-anticipated and highly publicized bill to reform the federal bankruptcy law -- the Bankruptcy Abuse, Prevention and Consumer Protection Act of 2005 -- was approved by Congress and signed by President Bush on April 20th. Although attention has been focused on its effect on consumers, the act contains many provisions that impact creditors in commercial settings.

Reclamation rights

The Bankruptcy Code recognizes the rights afforded by state law (the Uniform Commercial Code) to an unpaid vendor to reclaim goods sold to a buyer who is insolvent. Under the Bankruptcy Code, the vendor is entitled to exercise a reclamation right or receive certain compensation in the debtor's bankruptcy case, provided that the vendor complies with state law and certain notice and timing requirements.

Nevertheless, it has been very difficult for a reclaiming vendor to satisfy all of the reclamation requirements for a variety of reasons, including the fact that the vendor's rights in many cases are subordinate to the rights of the debtor's secured lender(s), and the time period to assert a reclamation demand was narrow.

The act affords some relief to vendors by enlarging the time period they have to assert a reclamation demand from 10 days to 45 days. A vendor is entitled to reclaim goods sold on credit to a debtor within the 45-day period prior to the bankruptcy filing, provided the required written notice is given. If the 45-day period expires after the bankruptcy filing, the vendor has 20 days from the bankruptcy petition date to assert a reclamation demand.

While this increases a vendor's chances of recovering its goods or, alternatively, receiving certain preferred status in the debtor's bankruptcy case, it does not entirely solve the vendor's problems. The vendor's claim is often still a lesser priority than the debtor's secured lenders' claims.

However, the act does grant the vendor an administrative claim for goods delivered within the 20-day period prior to the commencement of the bankruptcy case, provided that the goods were purchased by the debtor in the ordinary course of its business.

As a result, a reclaiming vendor may be more likely to receive payment on its claim because an administrative claim has priority over the debtor's pre-petition unsecured creditors' claims. In addition, as an administrative creditor, a reclaiming vendor may demand immediate payment from the debtor.

Nonresidential leases

Prior to the act, a debtor had until 60 days after the date of the filing of the bankruptcy petition to assume or reject its nonresidential real property leases, though a bankruptcy court was permitted to enlarge that time period for cause. The intent of this provision was to place limitations on the time period within which a debtor could decide whether to assume the lease and remain in possession or reject the lease and surrender possession.

However, in practice, bankruptcy courts routinely extended the 60-day period, and in many situations, did not require a decision by the debtor until the debtor confirmed its reorganization plan. This extended period forced commercial landlords to wait long periods of time before the fate of their property was determined.

The act provides relief to landlords by imposing strict deadlines and time periods for assumption or rejection of nonresidential leases. Under the act, a debtor has, at most, seven months to assume or reject its nonresidential leases. If the debtor has not made a decision about its leases within 120 days of filling for bankruptcy, the debtor must show cause for an extension. Then, after another 90 days, the debtor may only assume the lease if it obtains the prior written consent of the lessor.

The act also affords landlords protection from the loss of rent during the seven-month time period by elevating certain amounts of the rent for a lease that a debtor assumes, but subsequently rejects, to an administrative priority.

Jami B. Nimeroff, a shareholder, and Magdeline D. Coleman, a senior attorney, are members of the Bankruptcy and Creditors' Rights Group at Buchanan Ingersoll. For more information on creditors' rights matters, contact Nimeroff at nimeroffjb@bipc.com or Coleman at colemanmd@bip.com.