Legal News

Pre-Gaming a Possible Makeover of Restructuring Laws

By Dan Slater

In this era of restructuring, bankruptcy experts tell the Journal, new laws designed to ease the process could aide in an economic recovery.

Changes made to the U.S. Bankruptcy Code three years ago have made it more difficult to restructure. Jay Westbrook, a law prof at the University of Texas, said lawmakers focused on changing the consumer provisions and didn’t “carefully” work through the business amendments. As a result, provisions were added that gave companies less time and money to reorganize their businesses.

But some experts, the Journal reports, believe relief could be on the way. Obama has vowed to change bankruptcy laws to help struggling Americans stay in their homes. And Jack Williams, resident scholar at the nonpartisan American Bankruptcy Institute, says bankruptcy reformists believe the new administration will be receptive to the idea of bankruptcy reform for businesses.

Here are some areas that experts say could use reform:

• Cooley Godward’s Lawrence Gottlieb said the 210-day deadline for companies to assume or terminate store leases has put retailers in a bind. Most retailers, notes the Journal, make their profits during the holiday shopping season and need to go through at least one to determine which stores to close. But under the new deadline, a retailer that files for bankruptcy protection in the beginning of the year doesn’t have that luxury.
• A provision added to the Bankruptcy Code in 2005 that requires companies to provide utility providers with adequate assurance of future payment within 20 days of entering Chapter 11 has also hurt retailers and other struggling companies.

  Gottlieb told the Journal that bankruptcy courts have interpreted this provision as requiring debtor companies to give each utility provider a cash deposit at the beginning of the case for each of its locations to keep the power on. “That is dragging liquidity out of the debtor when they can least afford it,” he said.

• Another 2005 change that has come under the microscope is the amendment that put a huge swath of financial contracts outside of the purview of bankruptcy law. In 2005, credit-default swaps, repurchase agreements, mortgage-backed securities and other derivatives were added to the list of financial contracts exempted from the Bankruptcy Code’s automatic stay, which blocks creditors from immediately seizing property for the payment of a debt.

  Jay Westbrook, a law prof at UT, told lawmakers last fall that they should roll back that change, pointing to the impact it had when Lehman Brothers collapsed in September. “Much of its asset base no doubt consisted of financial assets exempt from the automatic stay,” Westbrook said. “Thus it is highly likely that many of its assets, probably overvalued to start, walked out the door just before or shortly after its bankruptcy filing, leaving only the dregs, relatively speaking, for the other creditors and stakeholders.”

Full post as published by Law Blog - WSJ.com on January 21, 2009 (boomark / email).