Tuesday, April 21, 2009

What's Wrong With the Bankruptcy Code?

There was a hearing held on March 11th by the House Subcommittee on Commercial and Administrative Law (they called it "Circuit City Unplugged: Why Did Chapter 11 Fail To Save 34,000 Jobs?") to discuss whether the changes made in the bankruptcy laws in 2005 are partially responsible for the large number of liquidations that are happening these days. You can read the prepared testimony of the witnesses and watch the hearing.

Harvey Miller, of Weil Gotshal, was one voice arguing that the combination of the changes in the law and the changes in DIP availability are leading companies to delay filing until there is no choice. Among the 2005 law changes cited were:

  • the requirement to specify the leases to be retained by the debtor within 210 days [Section 365(d)(4)] - a particular problem for retailers who have used their inventory as security since the secured lenders will want the inventory liquidated while all the stores are open - and this seems to be the only contract, subject to the automatic stay, that has a time limit on the stay;

  • the requirement to provide "assurance of payment," generally through a deposit, to each utility that the debtor does business with [Section 366(c)], which is particularly difficult for retailers who, by definition, have relationships with numerous utilities. Furthermore, there is no guidance towards the calculation of the amount of the deposit; and

  • the reclassification of trade payables relating to goods received within twenty days of the commencement of the bankruptcy to Administrative status (meaning that those obligations must be paid in full at emergence from bankruptcy rather than being unsecured obligations or obligations to be paid over time) [Section 503(b)(9)]. Again, this has been a significant burden on retailers when they have filed shortly after receiving large shipments of inventory.

The limited availability of DIP is less related to the changes in the law than to matters that I will discuss in future posts.

The limitation on the exclusive right of the debtor to file a plan was mentioned, but not discussed in depth.

Under the prior law, the bankruptcy judge had the ability to extend the exclusivity indefinitely, which provided the debtor in possession with negotiating leverage. It also allowed the court to avoid the distraction (and possible nuisance) of having to consider multiple plans from multiple parties at interest.

Under the new law, the Court can only extend exclusivity until 18 months after the filing [Section 1121(d)(1)].

Interestingly, a bill that addresses the points discussed by Mr. Miller (H.R. 1942) was introduced by Representative Jerrold Nadler and Representative Steve Cohen on April 2nd. It has not, as of yet, been discussed (according to the House website).

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