BUSINESS WATCH

New Bankruptcy Act Not Just for Consumers — Legislation Will Impact Small Businesses

By Thomas R. Ostdiek

 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) (the “Act”), was signed into law by President George W. Bush on Thursday, April 20, 2005, significantly modifying and amending the United States Bankruptcy Code, 11 U.S.C. §101, et seq. (the “Code”). While most media coverage of the Act focuses primarily on changes affecting consumer bankruptcies, the Act also contains several provisions which affect small business transactions with debtors (those filing for bankruptcy protection) as well as small business bankruptcies.  The following is a brief summary of several changes made by the Act that may have an impact on your small business.

 

Lessors of Nonresidential Property

 

There are some adjustments to the treatment of unexpired leases of nonresidential property which affect the rights of lessors.  Former section 365(d)(4) provided, regarding debtors with an unexpired lease of nonresidential property, that the lease was deemed rejected and must immediately be surrendered by the debtor if it was not assumed or rejected within 60 days of the order for relief or filing with the court.  However, the trustee or debtor in possession could request from the court, for cause, such additional time as was needed.  Occasionally, the process could drag out for months on end before the trustee or debtor made its election.  Under the amendments, an unexpired lease of nonresidential property is now deemed rejected and must immediately be surrendered by the lessee on the earlier of 120 days after the commencement of the case, or the date of confirmation of a plan.  Even though the time for rejection has been extended from 60 to 120 days, a court may only further extend the period for one additional 90 day period.  The Court cannot grant further extensions without the written consent of the lessor.

 

Small Business Creditors

 

Prior to the changes under the Act, the committee of creditors consisted of the 20 largest creditors of the debtor in terms of the amount owed each creditor.  The attorney representing a creditors committee is often paid from assets of the bankruptcy estate.  However, until passage of the Act, a “small business concern” had little say in the decisions made by the creditors committee.  A “small business concern” is defined as a business which is independently owned and operated and which is not dominant in its field of operation, including but not limited to enterprises that are engaged in the business of production of food and fiber, ranching and raising of livestock, aquaculture, and all other farming and agricultural related industries (with annual receipts not exceeding $750,000), which was not one of the 20 largest creditors.  To protect its own interests, a small business concern is often required to hire and pay for its own attorney.  Under the amendments, the Court may order the United States trustee to increase the number of members of the committee of creditors to include a creditor that is a small business concern holding a claim the amount of which, in comparison to the annual gross revenue of that creditor, is disproportionately large.  Thus, a small business concern that has a disproportionately large claim against the debtor with respect to its overall operations can be added to the creditors committee and thereby play an active role in the case while holding down their costs.

 

Preference Recoveries

 Several changes affecting preference actions should greatly benefit small business creditors.  The first change relates to a creditor’s burden of proof in defending a preference claim.  In a preference action, the trustee sues a creditor to recover certain payments made to the creditor

 

 

Continued

 

 

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