This memo briefly highlights significant recent changes in the Bankruptcy Code which affect businesses:

1. Repeat Filers
To avoid the abuse of repeated filings, the law now provides that if a new case is filed within one year after an earlier dismissed case, the automatic stay under the Code terminates 30 days after the new case is filed, unless the Court extends the stay because the case is found to be filed in good faith.

2. Reclamation
Sellers of goods seeking reclamation must have delivered the goods within 45 days of the bankruptcy and must have made written demand within 45 days of receipt. The debtor is required to either pay for or return the goods. A sellers reclamation is expressly subject to prior perfected security interests in the goods. Any seller delivering goods within 20 days of the petition date shall be entitled to an administrative expense claim regardless of whether or not it makes written demand. This will substantially increase the cash requirements of a debtor at the beginning of the case, assuming the court directs immediate payment of these claims.

3. Fraudulent Transfers
Subsequent to April 21, 2006, the look back period for fraudulent transfers increases from one to two years. Asset protection trusts now have a ten-year look back period. The state law fraudulent transfer rules remain unchanged. Transfers to insiders outside of the ordinary course of business pursuant to employment contracts are subject to avoidance as fraudulent transfers.

4. Preferences
Payments made in the ordinary course of business will be easier for creditors to defend in preference litigation. The creditor being asked to return a payment within 90 days of the bankruptcy will have the option to defend either on the basis that the payment was within the ordinary course of business developed between the parties or that the payment was according to ordinary business terms of the particular industry within which they operated. Business preference cases of less than $10,000 must be brought in the district where the defendant resides. This should discourage the filing of small preference cases and make it less costly for those creditors to defend those cases. Additionally, in a case in which the debts are not primarily consumer debts, the trustee may not avoid transfers to one creditor aggregating less than $5,000.

5. Insider Preferences
If a trustee avoids a transfer made between 90 days and one year of the bankruptcy to an entity that is not an insider but benefits the insider, the transfer is only avoided as to the insider.

6. Plan Exclusivity
The debtors exclusive time period to file a plan is now 18 months from the bankruptcy filing. The court cannot extend the exclusivity to file a plan beyond that date. This will prevent the debtor from indefinitely blocking creditors from filing competing plans, and tend to level the playing field between the debtor and its creditors.

7. Insider Preferences
In single asset real estate cases, the automatic stay will be continued against the mortgagee only if interest payments are made during the Chapter 11 at the non-default rate, the debtor has filed a plan within 90 days of the Chapter 11 filing, and such plan has a reasonable chance of being confirmed within a reasonable time.

8. Taxes Under the Plan
Taxes under a plan may be paid over a period not exceeding five years from the bankruptcy filing, in regular periodic payments, at an interest rate determined under non-bankruptcy law. For the purposes of plan payments, secured tax and priority tax claims are treated the same. The debtor also must pay taxing authorities the equivalent of what the most favorable general unsecured claims are being paid under the plan. If the debtor does not file the requested return or obtain an extension, the court shall convert or dismiss the case.

9. Employee Priority Claims
Priority employee claims for wages (including vacation, severance and sick pay) increases to $10,000 earned within 180 days of the bankruptcy filing or the date of the cessation of the debtors business, whichever occurs first.

10. KEY EMPLOYEE RETENTION PROGRAMS
Key Employee Retention Programs to "insiders", as defined in the Bankruptcy Code, have been severely limited. Chapter 11 debtors can only provide payments to key employees to stay on if the employee has a bona fide job offer of equal or greater compensation and the services are essential to the survival of the debtors business. The new law creates specific formulas to make sure that insiders are not overly compensated through these programs. Additionally, any severance payment may not be paid or allowed to an insider unless it is part of a program that is generally applicable to all full time employees and the amount does not exceed ten times the mean severance pay given to non-managerial employees during the calendar year.

11. Utilities
Utilities will now have greater leverage in Chapter 11 cases. A utility company is now permitted to terminate service if it does not receive adequate assurance of payment within 30 days of the bankruptcy filing. Adequate assurance is defined as a cash deposit, letter of credit, surety bond or the like. The idea that the utility would have an administrative claim for post-petition services is not enough.

12. Small Business Cases
A small business case is now one that involves $2 million or less of debt and in which the U.S. Trustee does not appoint a creditors committee or the court determines the committee has become inactive. A small business debtor must file a plan within 180 days and have its plan confirmed within 300 days of the Chapter 11 filing. The court has flexibility to dispense with the filing of disclosure statements in small business cases if it finds that the plan provides sufficient information.

13. Foreign Cases
Foreign proceedings are now governed by new Chapter 15. There is full recognition of foreign cases and they are now easier to administer. Foreign representatives are given greater rights to protect and administer assets.

14. Health Care
In health care cases, an ombudsman will be appointed to review quality of patient care. There are new rules on maintaining patient records. The trustee must give one year notice by publication before he can dispose of such records.

15. Automatic Stay in Landlord/Tenant Cases
The automatic stay does not go into effect in cases of eviction of residential tenants if the landlord has obtained a judgment prior to the bankruptcy filing. In those cases where judgment of possession has been rendered in favor of the landlord, the debtor must reference such judgment in his petition and further state his intention to cure defaults in order to get the benefit of the automatic stay.

16. Non-Residential and Real Property Leases
The debtor/trustee has 120 days to assume or reject non-residential real property leases. The court may extend this election for an additional 90 days for cause, but any further extension may only be given with the lessors written consent. This provision will greatly benefit landlords and encourage debtors to expedite decisions on leases.

The foregoing is meant as a summary only and should not be used as a substitute for obtaining competent legal counsel. If you would like to discuss the foregoing, please contact Ted Tashlik or Martin Goldwyn.