More than a year and a half has passed since the Bankruptcy Code was significantly revised pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which became effective (with some exceptions) on October 17, 2005. While the full impact of BAPCPA will not be fully realized for years to come, it is already apparent that trade creditors stand to benefit significantly as a result of these amendments.
Expanded Administrative Expense and Reclamation Rights
Pursuant to BAPCPA's amendments to sections 546(c) and 503(b)(9) of the Bankruptcy Code, trade creditors were given increased rights with respect to goods sold by a vendor prior to the filing of a bankruptcy petition. Reclamation is the seller's right to recover possession of goods delivered to an insolvent buyer. Among other changes, BAPCPA expanded the period within which a vendor can recover such goods from 10 to 45 days after receipt of the goods. However, at least one court has ruled that creditors must continue to meet the requirements of the UCC in order to establish a valid reclamation claim; and that a prior lien on a debtor's assets may render a reclamation claim valueless (thus dispelling the speculation that BAPCPA created a new federal reclamation right). See In re Dana Corp., 2007 WL 1199221 (Bankr. S.D.N.Y. 2007).
Perhaps even more important for many trade creditors, particularly in light of the Dana Corp. decision, are BAPCPA's changes with respect to § 503(b)(9) of the Bankruptcy Code. Section 503(b)(9) now includes an additional category of administrative expenses (post-petition obligations that are afforded priority treatment) for "the value of any goods received by the debtor within 20 days before the date of the commencement of [the chapter 11] case...." Prior to BAPCPA, outstanding amounts owed for goods delivered prior to the filing of the bankruptcy petition were treated simply as general unsecured claims to be paid pro rata with the rest of the unsecured claims. The new amendments enable creditors to assert a priority claim, which must be paid in full in order for a bankruptcy plan to be confirmed, for the value of the goods delivered 20 days prior to filing. Trade creditors who timely assert valid § 503(b)(9) claims will thus be afforded priority treatment for goods delivered prior to the filing of the bankruptcy petition—a significant departure from the general unsecured status typically reserved for pre-petition claims. However, if a §503(b)(9) claim is not asserted before the deadline established by the court, a creditor's entitlement to such priority may be waived.
Favorable Changes Regarding Defenses to Avoidable Preference Actions
A preference action is typically brought by the debtor in possession or trustee of a bankruptcy estate seeking to recover payments made by the debtor to a creditor prior to the filing of the bankruptcy petition. While most creditors are understandably dismayed to discover that they may be obligated to disgorge a payment made on account of a valid debt (especially when the debtor still owes other outstanding amounts), the new law provides trade creditors with at least some relief from the burdens of defending against preference claims.
First, BAPCPA expressly provides that de minimis payments of less than $5,000 are not recoverable in business cases. If a payment is less than $10,000, the debtor in possession or trustee must file the preference action in the jurisdiction where the defendant resides. Finally, and perhaps most important, BAPCPA amended one of the most important defenses relied upon by creditors in defeating preference claims: the ordinary course of business defense.
Under the prior law, a creditor was required to establish three elements in order to successfully assert the ordinary course of business defense to an avoidable preference action: (1) that the payment was made on account of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and creditor; (2) that the payment was made in the ordinary course of business or financial affairs of the debtor and the creditor (the "ordinary course defense"); and (3) that the payment was made according to ordinary business terms (the "ordinary business terms defense"). The second prong of the test was often difficult to establish, particularly where the parties had only recently begun to transact business. The third prong of the test was often considered the most onerous for the creditor in that it required the creditor to establish that the payment met ordinary business terms with respect to the relevant industry standard (that of either the debtor or the creditor, depending on the jurisdiction). Expert testimony was often required in order to establish the industry standard. Under BAPCPA a preference defendant must satisfy only one of the last two prongs of the test.
At least one court has already confirmed that the amendments in fact provide for either the ordinary course defense or the ordinary business terms defense to stand on its own. Specifically, the Bankruptcy Court for the Eastern District of North Carolina has ruled that the new "ordinary business terms defense" may be invoked by a creditor even in cases where the parties have a history or course of dealing—and even though the payments at issue deviate from that course of dealing. See In re Nat'l Gas Distrib., 346 B.R. 394 (Bank. E.D.N.C. 2006). Note, however, that the Nat'l Gas Distributors court also found that the new "ordinary business terms" defense now requires consideration of both the industries of the debtor and the creditor, as well as general business standards common to all business transactions. Trade creditors that assert the ordinary business terms defense must be prepared to establish industry standards for both parties, as well as general business standards.
While the full extent of the impact of the amendments remains to be seen, the changes to the ordinary course defense, along with the aforementioned changes regarding de minimis amounts and venue restrictions, should generally make it at least a bit easier and less expensive for trade creditors to defend against unwelcome preference actions.
While the extent of BAPCPA's impact will be determined only upon judicial interpretation of the recent amendments, BAPCPA has the potential to significantly increase the rights of trade creditors in future bankruptcy cases. From increasing administrative and reclamation claim rights to making it easier and less expensive to defend against preference claims, BAPCPA should be viewed as a welcome change for many trade creditors.