Sunday, July 31, 2005

New law may trigger bankruptcy surge

Many companies will want to take advantage of the old statute before the new one takes effect, expert says.

By Marilyn Adams / USA TODAY

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Looming changes in corporate bankruptcy law could prompt a rush to the courthouse by ailing companies in search of easier treatment.

Starting Oct. 17, new creditor protections in the law will make bankruptcy reorganizations harder and more expensive for companies seeking protection under Chapter 11.

Congress included the provisions in the bankruptcy law enacted in April. Lawmakers tightened the law in response to concerns that management has been too quick to use bankruptcy as just another financial tool, to the detriment of creditors and shareholders.

New restrictions on personal bankruptcies grabbed the attention then, but bankruptcy experts say the new rules could have widespread impact.

"There's probably going to be a raft of filings in September to avoid this new law," says bankruptcy lawyer Jon Schneider of Goodwin Procter in Boston.

Under the new rules, fewer companies that go into Chapter 11 will ever come out, experts say.

"Taken together, these changes will doom some companies to fail in Chapter 11," says New York lawyer D.J. Baker of Skadden Arps, who is representing supermarket chain Winn-Dixie in its reorganization.

Bankruptcy lawyer James Sprayregen of Kirkland & Ellis in Chicago predicts the new rules will make it harder to raise enough financing in bankruptcy. "There will be more liquidations."

Key changes:

• Management exclusivity. Companies entering Chapter 11 will have just 18 months during which management alone can present a plan for operating a reorganized company. Now, judges can extend exclusivity almost indefinitely, blocking creditors and outside investors from presenting alternative plans.

• Retention bonuses. Without evidence of actual job offers, companies won't be allowed to pay officers bonuses to keep them from quitting.

• Store closings. As a protection for landlords, companies will have just 210 days -- about seven months -- to decide which leased locations to keep open or to close. Now, a bankruptcy judge can repeatedly extend the deadline.

• Utility deposits. Utilities will be allowed to charge companies big security deposits while they're in Chapter 11.