FINANCIER
WORLDWIDEcorporatefinanceintelligence
BANKRUPTCY Proposals to repeal certain provisions of BAPCPA
BY MUAZZIN MEHRBAN
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I n 2009, the US House of Representatives
introduced the Business Reorganisation and
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Job Preservation Act, aimed at improving the
impact of reorganisation efforts taking place
under the Bankruptcy Abuse Prevention and
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Consumer Protection Act (BAPCPA). The
proposal, set out in April 2009, was designed
to repeal selected BAPCPA provisions, as
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well as support distressed companies in the
management of their bankruptcy proceedings.
Experts envisage that the new rules will iron
out inefficiencies and generally improve the
quality of restructuring procedures.
It is arguable that several recent retail liqui-
dations can be partly attributed to BAPCPA.
“BAPCPA certainly had a negative impact on
the reorganisation process as it gave less time
for retailers to reorganise, required greater
debtor-in-possession financings and overly
empowered landlords due to the seven-month
time limit to sumo-reject leases,” asserts James
H.M. Sprayregen, a partner at Kirkland & Ellis
LLP. “As a result, DIP lenders and other finan-
ciers were less inclined to give retailers time
to reorganise.” Two provisions, in particular,
are thought to have overly constrained retail-
ers’ abilities to reorganise. Firstly, BAPCPA
gave administrative priority status to claims of
suppliers’ goods shipped within 20 days before
bankruptcy. “This puts a new tax on a retail-
REPRINT | FW February 2010 | www.financierworldwide.com
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ers’ ability to exit bankruptcy because it can-
not consummate a reorganisation plan without
paying such claims in full,” asserts Gregg
Galardi, a partner at Skadden, Arps, Slate,
Meagher & Flom LLP. “Further, a retailer has
a maximum of 270 days within which to de-
termine which stores to maintain and which
stores to close. This is simply too short a time
for a retailer to make such decisions and post-
bankruptcy lenders have been unwilling to al-
low retailers even that long in order to make
the decisions before their financing will come
due,” he adds. The maturity of such financ-
ing has been a significant cause of liquidation
since BAPCPA took effect.
However, exactly how the BAPCPA pro-
visions have contributed to liquidations or
forced sales of businesses is less than clear.
Barry A. Chatz, a partner at Arnstein & Lehr
LLP, believes that the provisions hold, at best,
minimal responsibility for the current rate on
bankruptcies. “The deterioration in values of
non-residential real estate, including retail cen-
tres, has just as much to do with the reduction
in demand by consumers and the lack of traffic
in retail centres. The provision has certainly
played a strong part in the decision making
for debtors and their lenders as to whether to
pursue a reorganisation strategy,” he explains,
adding that a bigger issue is the deterioration
of value in leasehold interest. In the absence
of value, a lack of willingness from leasehold-
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ers to negotiate new rates based on new valua-
tions, and deteriorating traffic counts, debtors
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will reject leases and consolidate operations
to locations where landlords are willing to ne-
gotiate, provided that the company is salvage-
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able.
Revising certain provisions
Since the enactment of BAPCPA, there has not
been a noticeable increase in the number of
retail restructuring cases. The cases that have
occurred, for the most part, have been liqui-
dations – and most of these have been among
the weakest players, and have not come as a
surprise. Many experts argue that even in the
absence of BAPCPA legislation, retailers who
filed for Chapter 11 would still have liquidat-
ed. However, due to the hastily prepared and
poorly drafted provisions of BAPCPA, many
participants’ distressed industries have, in re-
cent months, raised issues with the original
legislation. Firstly, it has been proposed that
the special priority afforded to suppliers for
shipments in the 20 days prior to the filing
should be eliminated. Secondly, the proposed
limit on the extension of a debtor’s exclusivity
period beyond 18 months should be amended.
Indeed, certain debtors require more than 270
days to make decisions regarding their leases.
Finally, the provisions concerning employee
incentives and retention programs also require
revision, as they are not conducive to a com-
petitive working environment. These changes
are likely to improve the ability of companies
to reorganise via Chapter 11.
In the US, it is not yet clear whether the revi-
sion of BAPCPA will have a material impact on
the reorganisation process. They may provide
a certain degree of comfort to lenders under a
debtor-in-possession (DIP) scenario, particu-
larly with regards to the reclamation process,
which previously saw lenders unwilling to
facilitate DIP facilities if they were subject to
disputes with reclamation claimants. “Howev-
er, there remain real issues with regards to lack
of equity available, demand for goods, over-
leveraged balance sheets and, at times, inept 8
 This article first appeared in Financier Worldwide’s February 2010 Issue.
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management,” asserts Mr Chatz. “Until the is-
sues relating to the current economic crisis are
dealt with, the changes will make little impact
on debtors and their lenders, as they determine
how to deal with deteriorating collateral val-
ues,” he says. So in spite of the general back-
ing for the amendments to current legislation,
changes to bankruptcy laws alone will not help
to cure the underlying financial issues facing
businesses.
Indeed, the bottom line is that changes to leg-
islation cannot stimulate demand in isolation.
The inability of companies to refinance their
debts, maintain their operations and retain
staff slows in the economy and damages con-
fidence. But the notion that Chapter 11 allows
too many poorly-run companies to survive
temporarily only to fail later, is one that could
apply to all reorganisation schemes. “Support-
ers of Chapter 11 would argue that the process
depends primarily upon consensus and it is
only through consensus that companies are
allowed to reorganise,” says Mr Galardi. “In
other words, the system does not allow a par-
ticular company to survive. Rather its constit-
uencies, through a negotiated process, decide
to allow it to survive so that more of them may
achieve greater recoveries than if they simply
liquidated the company.” He believes that the
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extra time is both warranted and, potentially,
very valuable.
Nonetheless, long-term survival could also
depend on whether the amendments to BAP-
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CPA are made permanent. Suggested changes
would be a throwback to the original provi-
sions of the Bankruptcy Reform Act of 1978,
P R Barry A. Chatz, Esq.
Partner
T: 312.876.6670
E: bachatz@arnstein.com
www.arnstein.com
Mr. Chatz is a partner with the firm and is the
chair of the Bankruptcy, Creditors’ Rights, and
Restructuring practice group. He represents
lenders, unsecured creditors, corporate debtors
and trustees in numerous matters around the
country.
Professional Activities and Achievements
Mr. Chatz is an active member of the Illinois,
California, and American Bar Associations, and
the American Bankruptcy Institute. He serves
as a panel bankruptcy trustee for the U.S.
Bankruptcy Court for the Northern District of
REPRINT | FW February 2010 | www.financierworldwide.com
and are expected to readdress the balance of
the reorganisation process. Some analysts rea-
son that BAPCPA resulted from a perception
of abuse, which has now led to an overreac-
tion. “While the wholesale repeal of certain
provisions of BAPCPA would be beneficial
to the reorganisation of companies in Chap-
ter 11, Congress could certainly implement
compromise measures to maintain the balance
between creditors and the strong public policy
favouring reorganisation,” says Mr Galardi.
“If Congress takes that course, I would expect
the changes to be long-lasting, as has much of
the Bankruptcy Code been since 1978.” How-
ever, others warn that any amendments to the
US Bankruptcy Code are not easy to make,
and inertia could see the initial BAPCPA leg-
islation remain.
Debate over whether further changes to the
bankruptcy process in the US will take place
remains divided. For his part, Mr Sprayregen
believes that change is inevitable to some de-
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gree, as restructuring practitioners look to-
wards innovative ways of reviving companies
in distress. “Every period of economic calm or
lack of calm seems to engender a significant
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push by some special interest constituency as
well as politicians seeking the favour of spe-
cial interests to change, repeal, increase or
decrease some aspect of the protection of the
current bankruptcy code,” he says. However
other experts, like Mr Chatz, are less certain of
any forthcoming changes. He reasons that the
BAPCPA has already had its material impact
on the availability of bankruptcy to consumers,
in particular through the extension of the length
Illinois. Mr. Chatz served with the Office of the
United States Trustee for the Central District of
California from 1987-1990 through the United
States Attorney General’s Honors Program.
Recent Publications
Mr. Chatz has authored bankruptcy-related
articles in numerous trade publications. He
has spoken before many legal organizations
including the Commercial Law League of
America and Committees of the American Bar
Association as well as private businesses.
of time allowed for application to Chapter 7
– from six to eight years. “However, with the
erosion of real estate values, the high amount
of credit card debt that exists in many middle
income families, and job losses relating to one
or two income family earners, many are still in-
eligible for Chapter 7 bankruptcy protection,”
notes Mr Chatz. “In such circumstance, those
debtors may find themselves in a prison of
sorts where they are unable to obtain discharge
of their indebtedness, as Chapter 13 may not
be a viable alternative either.” The inability of
consumers to refinance could negatively im-
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pact an economic recovery, as their spending
plays a vital role in fuelling growth.
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As such, any hopes of an immediate econom-
ic recovery could be hampered by the lack of
available credit for middle-income consumers
and the higher cost of credit. Together with the
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amendments to bankruptcy law, this has led to
a substantial reduction in the demand curve.
Many analysts believe that both business and
consumer provisions of the current bankruptcy
law should be reviewed as a means of facilitat-
ing higher growth. Ultimately, BAPCPA is the
most complicated overhaul of the bankruptcy
code for several decades, and despite it being
four years since its implementation, certain ar-
eas of the law remain hazy. Judges, trustees and
lawyers continue to disagree on how the new
laws should be interpreted and applied. As of
yet, judges in particular do not have a set agree-
ment on court rulings, which continue to vary
drastically under the current rules. This indi-
cates that there are still problems, which will
need to be addressed in the near future.
Education
DePaul University College of Law (J.D., 1987)
University of Wisconsin (B.A., 1984)
Bar Admissions
State of Illinois; U.S. District Court, Northern
District of Illinois; State of California; U.S. District
Court, Central District of California; U.S. Court
of Appeals, Seventh Circuit; State Courts of the
State of Illinois and the State of California