The adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) sparked a considerable measure of consternation among bankruptcy professionals who represent corporate chapter 11 debtors. The initial consensus appeared to be that BAPCPA would dramatically (and, from a debtor's perspective, negatively) change the chapter 11 landscape, so much so that many observers predicted a tidal wave of filings to beat its Oct. 17 general effective date. But now that Oct. 17 has come and gone, will life really be that bad for a chapter 11 debtor? Life certainly will be somewhat different, but whether it will be markedly worse is a question open to debate.

Most professionals agree that the business provisions of BAPCPA assist certain creditor groups, perhaps at the direct expense of the chapter 11 debtor. Nonetheless, an argument can be made that with more advanced planning, careful analysis and effective lawyering, life may not be so different, or at least all that bad, for a chapter 11 debtor under BAPCPA. For example, encouraging a debtor to complete its court-supervised restructuring in 18 months (i.e., the debtor's maximum exclusive period to file a plan under BAPCPA) may not necessarily be a bad thing; it may just mean that we see more "pre-packaged" and "pre-arranged" bankruptcies, which could lead to more cost-effective restructurings. Granted, there are always exceptions to the rule, and there no doubt will be cases where 18 months are simply not long enough or where there simply was not sufficient time pre-petition to plan effectively for the restructuring generally and dealing in particular with certain key provisions of BAPCPA, such as those addressing reclamation rights, administrative claims, nonresidential real property leases, utilities, key-employee retention programs and exclusivity.² As discussed below, however, in the majority of cases, there likely will be ways to mitigate the impact of these provisions, and a chapter 11 debtor's life under the BAPCPA likely will be manageable.

Reclamation Claims and Administrative Claims for Goods

Revised Code §546(c) expands the universe of goods subject to reclamation to include all goods received by the debtor in the 45 days prior to the petition date and requires the debtor either to return any goods subject to valid reclamation claims (explicitly) or pay for them in cash (implicitly). Section 503(b)(9) of the Code complements §546(c) by providing suppliers with an administrative claim equal to the value of any goods received by the debtor in the ordinary course of its business within 20 days prior to the petition date. These enhanced reclamation rights and administrative claims also may provide suppliers with additional protection against preference actions on account of payments made to such suppliers in the 45 days preceding the petition date.

Before suppliers begin celebrating, however, they should consider that (a) revised §546(c) of the Code does not call for reclamation claims to be resolved on a shortened timeline, (b) there are no exemptions from the automatic stay for reclamation claimants, (c) there are no provisions expressly negating established case law governing what constitutes a valid reclamation claim,³ (d) any reclamation rights that they may have are expressly subject to the prior rights of a holder of a security interest in the goods to be reclaimed and (e) there is no requirement that administrative claims be paid other than in connection with a confirmed plan. In fact, some commentators have argued that the impact of revised §546(c) likely will be mitigated completely by the liens of the debtor's pre-petition lenders.⁴ Accordingly, although suppliers arguably have more rights, they do not necessarily have a better platform from which to enforce them.⁵

Nonetheless, because reclamation claimants now have the potential to recover cash from a debtor (rather than just an administrative claim or a replacement lien), a debtor should assume that its reclamation claimants will pursue their claims aggressively. Accordingly, a debtor should consider (a) pre-petition, establishing a reclamation monitoring program to assist it in (i) gauging the amount of cash needed to satisfy reclamation claims at any given time and (ii) determining the validity of reclamation claims; and (b) post-petition, filing a first-day motion establishing reclamation procedures to permit the debtor to control the reclamation process and the timing of any payments. Because the total amount of cash that may be needed to satisfy valid reclamation claims may be in flux at the beginning of a case, a debtor may want to consider seeking a debtor-in-possession (DIP) financing facility that provides for incremental increases in loan availability without incurring costs for unused availability until those additional funds are needed.⁶ Finally, the debtor should consider what impact, if any, increased reclamation rights and administrative claims will have on the need for a critical-vendor motion. That is, to the extent vendor claims would be valid reclamation claims or administrative claims, it may be possible to reduce or eliminate any request for critical vendor relief.⁷

Commercial Real Estate Property Leases

Perhaps one of the most constraining provisions of BAPCPA, particularly for retail debtors, is revised Code §365(d)(4), which provides a debtor with a maximum of 210 days to assume or reject nonresidential real property leases, subject to extension only with the consent of individual lessors. The impact of this provision, however, may be limited with advance planning and creativity. For example, a debtor might develop a strategy that (a) pre-petition, classifies its leases into the following three categories: (i) leased properties that are vital to the reorganization (which might be the subject of renegotiation efforts) and should be assumed,⁸ (ii) leased properties that are unnecessary to the reorganization and unlikely candidates for an assignment/sale (e.g., above-market leases) and should be rejected as soon as possible, and (iii) leased properties that are unnecessary to the reorganization but likely candidates for an assignment/sale (e.g., below-market leases) that either will be assumed or rejected during the applicable period; and (b) post-petition, involves the filing of a motion to establish procedures for the assumption, assignment and rejection of leases.

Any post-petition procedures motion should seek to clarify the debtor's ability to assume a lease during the §365(d)(4) period and then subsequently assign the lease in accordance with §365(f). The ability to assign assumed leases may assist the debtor in complying with the deadline set forth in revised §365(d)(4) while still developing and then implementing a business plan that maximizes the value of its leaseholds. In addition, a debtor whose business is seasonal should consider when the applicable period will expire in connection with the needs of its business and, to the extent possible, time its filing accordingly to avoid or mitigate any related interruption of its business.

Another possible strategy often mentioned by commentators would involve moving leases into a special-purpose vehicle that could be placed into bankruptcy at a later date by the debtor, thereby maintaining control of when the §365(d)(4) period commences. Although facially appealing, this latter strategy has the potential to raise fraudulent-conveyance and financing issues, among others, and would require careful planning and implementation.

Adequate Assurance for Utilities

Although revised §366 of the Code ups the ante when it comes to adequate assurance for utilities by (a) requiring a debtor to provide cash, letters of credit, surety bonds or similar security (potentially at great expense to the debtor) and (b) permitting a utility to terminate service within 30 days after the petition date if the utility does not receive acceptable adequate assurance, utilities likewise do not hold all of the cards. Revised §366 permits a party in interest to request that the bankruptcy court determine the appropriate amount of adequate assurance for a utility. Accordingly, a debtor should consider filing a first-day motion (a) proposing adequate assurance, establishing procedures for resolving any disputes regarding the appropriate amount of adequate assurance for a utility and barring utilities from terminating service unless they have complied with the proposed procedures; and (b) requesting a hearing on the motion as soon as possible.⁹ One possible proposal of adequate assurance might be a standby letter of credit or other collateral, equal to one or two months of utility service for all utilities, naming each utility as a beneficiary, with a draw conditioned on the satisfaction of certain notice provisions. The benefit of this approach to the debtor is that it is minimally invasive on the debtor's cash-management system (unlike prepaying), does not involve a significant outflow of cash (unlike deposits) and provides a centralized system of dealing with utilities' requests for adequate assurance.

Key Employee Retention and Severance Plans

Perhaps the most newsworthy business provisions of BAPCPA are those designed to stop perceived windfalls to executives of troubled companies. Appearances, however, can be deceiving. Although revised Code §503(c) essentially eliminates key-employee retention plans for insiders (e.g., directors and officers), it does not necessarily bar the implementation of a key-employee retention plan for noninsiders (e.g., lower key management) or performance-incentive bonuses for noninsiders and insiders alike. Similarly, although §503(c) prohibits the adoption of a severance plan for insiders alone, it does not bar the creation of a severance plan for all full-time employees of a company, including insiders, subject to certain monetary limits. Accordingly, although some might argue that revised §503(c) is a good test of whether key-employee retention plans were ever necessary, creative debtors still have the ability to develop and implement retention and incentive plans that will aid them in retaining "key employees."

Exclusivity and the Need for Planning

Section 1121(c) of the Code 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 §1121(d) limits extensions of those periods to dates that are 18 and 20 months, respectively, after the petition date. As noted above, this shortened timeline arguably will encourage more pre-packaged and pre-arranged chapter 11 cases.¹⁰ In those chapter 11 cases where a consensus is difficult or impossible to achieve, however, this shortened timeline potentially gives creditors significantly more leverage in negotiating a plan. That is, if a creditor group (e.g., unsecured noteholders) desires a different reorganization strategy, it may seek to drag out the plan process to permit the filing of a competing plan. Still, as a practical matter, only those creditors with sufficient financial wherewithal (other than official committees) will be able to fund a competing plan process. Moreover, a bankruptcy court could manage its own docket to delay consideration of a competing plan and establish procedures to level the playing field between the competing parties, thereby limiting the delay and confusion that might otherwise occur.

To combat the potential timing issues posed by revised §1121(d), a potential debtor should, pre-petition, analyze its plan alternatives on parallel tracks—trying to negotiate a pre-packaged or pre-arranged plan with its major creditor groups, while also developing a standalone plan that could be proposed early and pursued aggressively once the case is filed. Advanced planning (including a careful and realistic pre-petition analysis of a debtor's financial and operational alternatives) may allow a debtor to maintain much of the control and leverage over the plan process that it enjoyed prior to BAPCPA.¹¹

Conclusion

Reorganizations after BAPCPA certainly will be different than those that came before. Will they be markedly worse? Maybe, maybe not. Certain provisions of the BAPCPA (such as those discussed above) have the potential to enhance the efficiency of the chapter 11 process and thereby maximize the value ultimately distributed to stakeholders. Whether this potential will be realized, of course, remains to be seen, but with some careful planning and good advice, a chapter 11 debtor's life under BAPCPA may not be as miserable as the naysayers have predicted.

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Footnotes

¹ The views set forth in this article are the personal views of the authors and do not necessarily reflect those of Jones Day. The authors would like to thank their colleagues Jeffrey Ellman, Paul Harner, Heather Lennox and Charles Oellermann for their comments on this article. Return to article

² There also, of course, is the practical problem that the management of troubled companies often is in denial until the last possible moment, which can make advanced planning difficult. Return to article

³ Although revised §546(c) does delete the reference to "statutory or common law," there is no indication that this deletion was intended to void the body of established case law dealing with reclamation claims. This deletion, however, may engender some litigation regarding the applicability of pre-BAPCPA reclamation case law to post-BAPCPA reclamation disputes. Return to article

⁴ An interesting issue created by the new reclamation provision is what position secured lenders will take with respect to the value of their collateral. To the extent that a secured lender has a security interest in the goods subject to a reclamation claim, such interest will defeat the reclamation claim. If, however, the secured lender takes the position that it is oversecured and entitled to post-petition interest, it may be difficult to argue that the reclamation claimants are not entitled to payment on account of their valid reclamation claims. Accordingly, a secured lender may be faced with the difficult choice of arguing that it is oversecured and entitled to post-petition interest, thereby allowing existing collateral to be depleted, or arguing that it is only fully secured and entitled to an interest in all goods subject to reclamation, thereby forgoing post-petition interest at the onset of the case. Return to article

⁵ Moreover, these enhanced rights may provide minimal benefit to those suppliers who (a) provide goods to seasonal businesses that hold inventory over long periods of time or (b) have payment terms longer than 45 days. Return to article

⁶ Although not necessarily an issue for debtor-in-possession (DIP) financing, a debtor also will have to consider the amount of administrative claims in connection with its exit financing facility. Return to article

⁷ Alternatively, the expansion of reclamation rights and administrative claims might provide a statutory basis for the establishment of a critical-vendor program that could permit a debtor to seek enhanced payment terms and trade credit. Return to article

⁸ A debtor likely will want to delay any assumption decisions until immediately prior to the expiration of the §365(d)(4) period to maintain as much flexibility as possible regarding the treatment of its leases under its business plan. Return to article

⁹ Given the competing deadlines in §§366(b) and (c) of the Code, a prudent debtor arguably should request a hearing no later than 20 days after the petition date. Return to article

¹⁰ In fact, revised §1125(g) of the Code appears to encourage pre-packaged and pre-arranged chapter 11 cases by permitting the pre-petition solicitation of the acceptance or rejection of the plan to continue post-petition without the requirement of a bankruptcy court-approved disclosure statement. Return to article

¹¹ Unfortunately, this advanced planning may suggest no (or few) viable alternatives for a potential debtor, thereby making troubled companies face the reality of a sale or liquidation earlier in the process. Again, however, accelerating this result where it otherwise is inevitable may not be a bad thing for stakeholders (or even the company, if a going-concern sale is accomplished), as it arguably preserves value that otherwise might have been depleted in a prolonged and unsuccessful chapter 11 case. Return to article