Friday, September 22, 2006

Preference and Assumption or Rejection of Commercial Leases and BAPCPA

Dear Clients,

As you may be aware, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law on April 20, 2005. The bill is scheduled to take effect on or about October 17, 2005 and will apply only to cases commenced after that date. The purpose of this email is to discuss two noteworthy features of the bill that affect commercial bankruptcy cases. The first pertains to Preferences and the second pertains to the Assumption and Rejection of Commercial Leases in Chapter 11 Cases.

Preference Actions

• The Act modifies section 547(c) of the Bankruptcy Code which relates
to the "ordinary course of business defense" for preference avoidance actions.
(Creditors\Defendants often rely on this defense as a means of shielding a transfer from avoidance and recovery by a trustee or a debtor in bankruptcy.) Generally speaking under the old law, in order for a creditor to successfully assert this defense they needed to demonstrate that the transfer was made 1) in the "ordinary course of business" between the debtor and creditor, and 2) according to industry terms. Under the new law, creditors will only need to prove either that the transfer was made in the ordinary course of business according to the parties' past dealings with each other or that it was made according to relevant industry standards.

• Also under the new law, transfers of less than $5,000.00 are exempt from preference recovery.

The net result of these changes will be to aid creditors or suppliers who do business with a debtor close to the date of the bankruptcy filing and hurt unsecured creditors due to the fact that there will be less money available to the debtor to distribute to creditors upon plan confirmation.

Executory Contracts and Unexpired Commercial Leases:

• The new law curtails the time a debtor has to decide whether to assume or reject commercial real property lease(s). Under the old law, a debtor-lessee initially had 60 days after the bankruptcy filing to make this decision and the court had the power to indefinitely extend the deadline for cause. Under the new law, a debtor-lessee will have 120 days to assume or reject a non-residential lease but while the court can still grant a debtor's request for a 90-day extension, further extensions are prohibited without the written consent of the non-debtor lessor.

This change will aid landlords and possibly burden the bankruptcy estate with increased administrative expenses, leaving less money available for distribution to unsecured creditors.

If you have any questions regarding the new Bankruptcy Law and how it might affect you, please do not hesitate to contact us at the number provided below.


Jim Shenwick

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