HCMP’s Lender Services & Finance attorneys strive to ensure that you are aware of important new legislation and decisions. The American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 published its report recently, proposing several important changes that could affect landlords’ and  lenders’ rights in large Chapter 11 bankruptcy cases.

Secured Lenders
Under the ABI’s proposal, a bankruptcy judge would determine a debtor’s “reorganization value” based on either: (a) its post-reorganization enterprise value plus the net value of assets outside the reorganization; or, (b) if the debtor sells its assets using Section 363 of the Bankruptcy Code, the net sale price plus the net value of assets not sold. Debtors would be allowed to pay secured lenders based on the reorganization value attributable to their collateral whether or not the actual debt or collateral value is greater.

The Institute has also proposed altering the Absolute Priority Rule (the rule requiring senior secured lenders to be paid in full before a junior secured lender receives any value from liquidated collateral) to allow junior secured creditors some recovery in situations where they would currently receive none on account of their junior lien. Under current rules, collateral value is generally determined on a plan’s effective date or the date of a sale order. The Institute’s proposal would provide a mechanism for paying junior lienholders based on the possibility that their collateral would have been valued higher at a different point in time, and would allow plan proponents to cram down an objecting senior secured creditor to allow such a payment.

These provisions, if adopted by Congress, could expand a debtor’s ability to cram down objecting lenders and diminish their ability to negotiate during the plan-confirmation process. While there is no current legislative proposal on point, the Commission plans to present its report to the next Congress.

Landlords
Among other things, the report proposes extending the trustee’s deadline for assuming or rejecting a lease from 120 days (with a possible 90 day extension) to one year after the petition date or the date of the order for relief. This proposal would give debtor-tenant’s additional time to decide what they want to do with a lease, thereby extending the limbo in which landlord’s find themselves when a tenant files for bankruptcy. The Commission also proposed restricting a landlord’s claim for unperformed post-petition obligations to monetary obligations only. This would give trustees leeway to stop performing on other critical lease obligations, including maintenance obligations.

While there is no current legislative proposal on point, the Commission plans to present its complete report to the next Congress.

HCMP’s bankruptcy team will continue to monitor activity around this report, and we stand ready to help you better understand its potential implications for your business.