April 20, 2005, President George W. Bush signed into law the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 (the “Bankruptcy
Abuse Act” hereafter referred to as the BAA), making sweeping changes to
the United States Bankruptcy Code. The majority of the Act is composed of
reforms designed to prevent perceived abuses by consumers. There are,
however, a few changes that will likely have significant impact on
commercial creditors whose customers file for bankruptcy protection.
The Bankruptcy Code previously recognized the
right of sellers of goods to reclaim their goods in certain circumstances.
Prior to the BAA, the Bankruptcy Code, permitted the seller, under the
seller’s state reclamation law, to make written demand for goods received
by the buyer within 10 days prior to the buyer’s bankruptcy filing. The
demand had to be made within that 10day period. However, if the bankruptcy
was filed before the 10day period expired the demand could be made up to 20
days after the bankrupt buyer’s receipt of the goods.
debtor than had the option to: A) return the goods; B) grant the seller a
lien on other property to secure the value of the goods; or C) grant the
seller an administrative priority claim. The seller’s rights, however,
were subordinate to the rights of any secured creditor with a valid lien on
the goods. Accordingly, many reclamation demands were of no benefit to the
BAA now provides seller’s specific Federal rights of reclamation
eliminating the seller’s, who sell in multiple jurisdictions, need to be
aware of individual state law.
the BAA, a seller may reclaim goods received by the buyer within 45 days of
the buyer’s receipt. If the 45-day period expires after the buyer’s
bankruptcy filing, the seller must make a written demand for the goods
within 20 days from the petition date (found on the 341, 1st
meeting of creditors, notice). The BAA eliminates the buyer’s option of
retaining the goods in return for granting the seller either a lien or an
administrative claim. The buyer must return any goods still in their
possession on the date of the written demand. The seller’s reclamation
rights, however, remain subject to any rights of a buyer’s secured
any seller that ships goods to the buyer in the ordinary course of business
in the 20 days prior to the buyer’s bankruptcy filing is entitled to an
administrative expense claim for any portion of the purchase price that
remains unpaid. An administrative expense claim is senior in priority to a
general unsecured claim and, generally, must be paid in full in order for
the bankrupt to confirm a plan of reorganization. This administrative claim
right is independent of the seller’s reclamation rights, and is not
subject to the requirement of a written demand within 20 days of the
it is too early to know for certain, the language of the Act makes it appear
that the seller would be entitled to assert an administrative claim even
when the goods sold is covered under a lien by a secured creditor.
BAA unlike the old Act favors creditors who receive pre-bankruptcy payments.
Under the Bankruptcy Code, “preferences” are generally defined as
payments made: (1) to or for
the benefit of a creditor; (2) for or on account of an antecedent debt; and
(3) made while the debtor was insolvent either within 90 days of the
petition date (to a general creditor) or within 12 months of the petition
date (to an insider). The debtor or bankruptcy trustee can avoid such
transfers on the grounds that the creditor received preferential treatment
to the detriment of the debtor’s other creditors who did not receive a
payment during the “preference period”.
BAA makes it easier for the creditor to defend itself against a preference
action. Under the old law, a preference defendant could avoid preference
liability by proving (among other defenses) that the challenged payment was
made in payment of a debt incurred in the “ordinary course of business”
of the debtor and creditor, provided that the transfer was actually made in
the ordinary course of business of the parties (the so-called “subjective
test”) AND made according to ordinary business terms (the “objective
test”). The latter often times requires costly expert testimony regarding
general industry practice, which is impractical except in large cases.
the BAA, the creditor only needs to show that the payment was either made in
the ordinary course of business of the parties or according to ordinary
business terms, making the ordinary course of business defense much easier
BAA also bars pursuit of a preference action by debtor or trustee where the
aggregate value of payments to the creditor is less than $5000.00. Also, a
debtor or trustee seeking to recover alleged preference payments totaling
less than $10,000.00 for any one creditor must bring suit in the District
Court in the defendant creditor’s jurisdiction instead of the in the
Bankruptcy Court where the case is pending.
changes to the preference rules should significantly aid creditors in
avoiding and defending against costly preference actions.
The BAA streamlines the procedure for a small
business debtor seeking to confirm a plan of organization. A qualifying
“small business” debtor generally is one whose aggregate non-contingent
liquidated debts do not exceed $2 million.
Under the old Act, a debtor had to prepare a
disclosure statement tailored to the specific case; submit the disclosure
statement for formal court approval; and, upon obtaining court approval,
solicit creditor votes in favor of a proposed plan of reorganization.
The BAA makes the process for small business
easier and less expensive. For example, if the court finds that a plan of
reorganization provides creditors with “adequate information” then it
may not require the filing of a disclosure statement. The small business
debtor may also solicit acceptance of its plan prior to the final approval
of the plan, so long as the court has “conditionally” approved the
In addition to the above there are several additional
changes that will have a positive effect on commercial credit grantors.
Those who sell on a "purchase money" basis now have 30 days to
perfect their filing an increase of 20 days. Also, small business creditors
may request to be added to the creditor committee whereas under the old law
it was limited to the 7 largest creditors.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or