President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on April 20, 2005. While most attention has been directed to the Act's impact on individuals with consumer debts, the Act also addresses a number of issues relevant to business liquidations and reorganizations. With very few exceptions, the Act is effective on October 17, 2005. The following highlights a few changes that should be of particular importance to real property owners and lessors.
1. Time Limit to Assume or Reject Non-Residential Real Property Lease
Section 365(d)(4) of the Code has been amended to cap the length of time a business debtor has to assume or reject its nonresidential real property lease(s). Under current law, the debtor/lessee has 60 days to assume or reject the lease, unless that period is extended by order of the Bankruptcy Court. Prior to the Act, there were no limits on the number of extensions that could be granted.
Courts have usually granted the extension requests, reasoning that the debtor needs time to analyze the profitability of its various locations or to otherwise revamp its business model, and accordingly should not be rushed in its decision whether it should shutter some of its locations. Also, lease assumption can create administrative priority claims in favor of the landlord if the debtor assumes and then later defaults.
The Act gives leverage to the landlord by providing that the time within which a debtor may assume, assume and assign, or reject the commercial lease is the earlier of (a) 120 days after filing the bankruptcy case, or (b) the date of the entry of an order confirming the Ch. 11 plan.
The 120-day period may be extended on the debtor's motion, for cause, for up to an additional 90 days (total of 210 days). Thereafter there can be no extensions unless there is prior written consent from the landlord. As a practical matter, this shifts negotiating leverage to the lessor during the early months of the bankruptcy case. This portion of the Act will likely have an immediate impact on large retail entities contemplating bankruptcy reorganization.
2. Residential Eviction
Landlords of residential property will now have two exceptions from Bankruptcy Code's automatic stay in order to complete evictions. Prior to the Act, a residential landlord would have to apply to the Bankruptcy Court for permission to complete an eviction. Now, in certain circumstances, the landlord may proceed without the Bankruptcy Court's permission.
First, if prior to the bankruptcy case the landlord obtains a state court judgment of possession of the leased premises, then the landlord need not obtain relief from the automatic stay in the Bankruptcy Court in order to complete the eviction. 11 USC § 362(b)(22).
Second, the landlord may commence or continue an eviction action based on the tenant's endangerment of the property or the illegal use of controlled substances on the property. 11 USC § 362(b)(23). For this section to apply the landlord must file with the Bankruptcy Court, and serve on the tenant, a sworn certificate that the eviction action has been filed, or that the tenant, during the 30-day period preceding the date of the filing of the certificate, has endangered the property or illegally used or allowed to be used a controlled substance on the property.
3. Warehouser's Lien
In addition, the Act limits a bankruptcy trustee's ability to avoid a statutory warehouser's lien. Before the Act, the Bankruptcy Code authorized a trustee to avoid certain warehouser's liens. 11 USC § 545(2) and (3). Newly enacted Section 546(i)(1) prevents a trustee from avoiding a warehouser's lien for storage, transportation, or other costs incidental to the storage and handling of goods, notwithstanding the provisions of Section 545.
This provision is to be applied consistent with State warehouser's lien laws, such as the Uniform Commercial Code's Section 7-209 (Oregon Revised Statute § 77.2090).