While the headlines and the punditry surrounding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 signed by the President into law on April 20, 2005 focus on the drastic remake of the Bankruptcy Code’s consumer provisions, several significant changes are included with respect to Chapter 11 corporate debtors, many of which may be welcome news for trade vendors, commercial landlords and others with a stake in the bankruptcy of a corporation.

Among the highlights of the recently enacted changes to the Bankruptcy Code, as it relates to corporate debtors, are:

Expanded Priority for Trade Creditors and Reclamation Claimants

  • Goods received within the 20 days preceding the bankruptcy filing that were sold to the Debtor in the ordinary course of business are entitled to post-petition administrative expense priority.Previously, a trade creditor could only receive administrative expense priority for pre-petition deliveries if it met the requirements of reclamation under the Uniform Commercial Code, which limited such priority to goods received within 10 days of the filing and provided significant defenses even in the event of such deliveries.
  • Goods received within the 45 days preceding the bankruptcy filing are subject to a new statutorily-created right of reclamation.The prior reclamation rights recognized under the Bankruptcy Code are extended from 10 days to 45 days prior to the filing.

Increased Protection from Preference Claims

  • Preference actions cannot be brought in amounts less than $5,000, and an action less than $10,000 must be brought in the district in which the defendant resides.These changes are designed to prevent a debtor or a subsequent trustee from bringing nuisance preference actions against creditors.
  • A preference defendant, in order to establish an ordinary course of business defense, need only demonstrate that either the transfers were ordinary as between the defendant and the debtor or that the transfers were ordinary for the debtor’s industry, not both.This change should make it easier for preference defendants to establish the ordinary course of business defense, and should prevent the requirement in some jurisdictions for expert testimony to establish this defense.

Enhanced Rights of Real Property Lessors

  • Nonresidential real property leases are deemed rejected if not assumed within 210 days.Previously, many courts permitted a debtor to extend the time to assume or reject nonresidential real property leases indefinitely.For debtors with significant real estate holdings, the change will require timely decisions as to a debtor’s strategy with respect to those leases.

Increased Leverage for Creditors Against Bad Faith Debtors

  • The period during which a debtor has the exclusive right to file a bankruptcy plan may not be extended beyond 18 months.In some cases, debtors had received extensions for years, preventing other constituencies from putting forward their own plans.
  • Grounds for appointment of a Chapter 11 trustee, and for conversion or dismissal of a pending Chapter 11 case, are expanded.This change should provide additional leverage for creditors to force a debtor to make decisions about the direction of the pending Chapter 11 case.